NEW MEDIA INVESTMENT GROUP INC. AND SUBSIDIARIES
Condensed Consolidated Balance Sheets
(In thousands, except share data)
|
|
|
|
|
|
|
|
|
|
June 26, 2016
|
|
December 27, 2015
|
|
(unaudited)
|
|
|
ASSETS
|
|
|
|
Current assets:
|
|
|
|
Cash and cash equivalents
|
$
|
60,689
|
|
|
$
|
146,638
|
|
Restricted cash
|
3,200
|
|
|
6,967
|
|
Accounts receivable, net of allowance for doubtful accounts of $4,810 and $4,479 at June 26, 2016 and December 27, 2015, respectively
|
125,566
|
|
|
136,249
|
|
Inventory
|
17,033
|
|
|
15,744
|
|
Prepaid expenses
|
19,307
|
|
|
14,549
|
|
Other current assets
|
18,286
|
|
|
11,763
|
|
Total current assets
|
244,081
|
|
|
331,910
|
|
Property, plant, and equipment, net of accumulated depreciation of $107,745 and $85,038 at June 26, 2016 and December 27, 2015, respectively
|
371,718
|
|
|
384,824
|
|
Goodwill
|
214,270
|
|
|
171,119
|
|
Intangible assets, net of accumulated amortization of $32,797 and $23,122 at June 26, 2016 and December 27, 2015, respectively
|
350,830
|
|
|
303,575
|
|
Other assets
|
7,926
|
|
|
5,692
|
|
Total assets
|
$
|
1,188,825
|
|
|
$
|
1,197,120
|
|
LIABILITIES AND STOCKHOLDERS’ EQUITY
|
|
|
|
Current liabilities:
|
|
|
|
Current portion of long-term debt
|
$
|
13,509
|
|
|
$
|
3,509
|
|
Accounts payable
|
11,395
|
|
|
9,571
|
|
Accrued expenses
|
74,759
|
|
|
100,173
|
|
Deferred revenue
|
72,798
|
|
|
62,294
|
|
Total current liabilities
|
172,461
|
|
|
175,547
|
|
Long-term liabilities:
|
|
|
|
Long-term debt
|
340,100
|
|
|
350,266
|
|
Long-term liabilities, less current portion
|
11,819
|
|
|
9,192
|
|
Deferred income taxes
|
5,121
|
|
|
3,988
|
|
Pension and other postretirement benefit obligations
|
26,359
|
|
|
11,054
|
|
Total liabilities
|
555,860
|
|
|
550,047
|
|
Stockholders’ equity:
|
|
|
|
Common stock, $0.01 par value, 2,000,000,000 shares authorized at June 26, 2016 and December 27, 2015; 44,911,003 and 44,710,497 issued at June 26, 2016 and December 27, 2015, respectively
|
445
|
|
|
445
|
|
Additional paid-in capital
|
606,495
|
|
|
605,033
|
|
Accumulated other comprehensive loss
|
(3,117
|
)
|
|
(3,158
|
)
|
Retained earnings
|
29,495
|
|
|
44,753
|
|
Treasury stock, at cost, 30,422 and 0 shares at June 26, 2016 and December 27, 2015, respectively
|
(353
|
)
|
|
—
|
|
Total stockholders’ equity
|
632,965
|
|
|
647,073
|
|
Total liabilities and stockholders’ equity
|
$
|
1,188,825
|
|
|
$
|
1,197,120
|
|
See accompanying notes to unaudited condensed consolidated financial statements.
NEW MEDIA INVESTMENT GROUP INC. AND SUBSIDIARIES
Unaudited Condensed Consolidated Statements of Operations and Comprehensive Income
(In thousands, except share and per share data)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three months ended June 26, 2016
|
|
Three months ended June 28, 2015
|
|
Six months ended June 26, 2016
|
|
Six months ended June 28, 2015
|
Revenues:
|
|
|
|
|
|
|
|
Advertising
|
$
|
174,153
|
|
|
$
|
177,344
|
|
|
$
|
337,791
|
|
|
$
|
321,140
|
|
Circulation
|
104,094
|
|
|
91,763
|
|
|
207,971
|
|
|
172,814
|
|
Commercial printing and other
|
36,583
|
|
|
30,386
|
|
|
69,172
|
|
|
56,156
|
|
Total revenues
|
314,830
|
|
|
299,493
|
|
|
614,934
|
|
|
550,110
|
|
Operating costs and expenses:
|
|
|
|
|
|
|
|
Operating costs
|
172,557
|
|
|
160,360
|
|
|
347,010
|
|
|
301,073
|
|
Selling, general, and administrative
|
106,029
|
|
|
99,667
|
|
|
206,113
|
|
|
188,797
|
|
Depreciation and amortization
|
17,258
|
|
|
17,387
|
|
|
33,349
|
|
|
33,088
|
|
Integration and reorganization costs
|
1,409
|
|
|
1,656
|
|
|
2,335
|
|
|
3,583
|
|
Loss on sale or disposal of assets
|
831
|
|
|
925
|
|
|
2,351
|
|
|
1,470
|
|
Operating income
|
16,746
|
|
|
19,498
|
|
|
23,776
|
|
|
22,099
|
|
Interest expense
|
7,524
|
|
|
7,623
|
|
|
14,878
|
|
|
16,615
|
|
Other income
|
(90
|
)
|
|
(19
|
)
|
|
(254
|
)
|
|
(18
|
)
|
Income before income taxes
|
9,312
|
|
|
11,894
|
|
|
9,152
|
|
|
5,502
|
|
Income tax (benefit) expense
|
(71
|
)
|
|
699
|
|
|
(5,198
|
)
|
|
373
|
|
Net income
|
$
|
9,383
|
|
|
$
|
11,195
|
|
|
$
|
14,350
|
|
|
$
|
5,129
|
|
Income per share:
|
|
|
|
|
|
|
|
Basic:
|
|
|
|
|
|
|
|
Net income
|
$
|
0.21
|
|
|
$
|
0.25
|
|
|
$
|
0.32
|
|
|
$
|
0.12
|
|
Diluted:
|
|
|
|
|
|
|
|
Net income
|
$
|
0.21
|
|
|
$
|
0.25
|
|
|
$
|
0.32
|
|
|
$
|
0.12
|
|
Dividends declared per share
|
$
|
0.33
|
|
|
$
|
0.33
|
|
|
$
|
0.66
|
|
|
$
|
0.63
|
|
Comprehensive income
|
$
|
9,400
|
|
|
$
|
11,218
|
|
|
$
|
14,391
|
|
|
$
|
5,175
|
|
See accompanying notes to unaudited condensed consolidated financial statements.
NEW MEDIA INVESTMENT GROUP INC. AND SUBSIDIARIES
Unaudited Condensed Consolidated Statement of Stockholders’ Equity
(In thousands, except share data)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Common stock
|
|
Additional
paid-in capital
|
|
Accumulated
other
comprehensive
income (loss)
|
|
Retained earnings
|
|
Treasury stock
|
|
Total
|
|
Shares
|
|
Amount
|
|
Shares
|
|
Amount
|
Balance at December 27, 2015
|
44,710,497
|
|
|
$
|
445
|
|
|
$
|
605,033
|
|
|
$
|
(3,158
|
)
|
|
$
|
44,753
|
|
|
—
|
|
|
$
|
—
|
|
|
$
|
647,073
|
|
Net income
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
14,350
|
|
|
—
|
|
|
—
|
|
|
14,350
|
|
Net actuarial loss and prior service cost, net of income taxes of $0
|
—
|
|
|
—
|
|
|
—
|
|
|
41
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
41
|
|
Restricted share grants
|
200,506
|
|
|
—
|
|
|
225
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
225
|
|
Non-cash compensation expense
|
—
|
|
|
—
|
|
|
1,237
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
1,237
|
|
Purchase of treasury stock
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
30,422
|
|
|
(353
|
)
|
|
(353
|
)
|
Common stock cash dividend
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
(29,608
|
)
|
|
—
|
|
|
|
|
(29,608
|
)
|
Balance at June 26, 2016
|
44,911,003
|
|
|
$
|
445
|
|
|
$
|
606,495
|
|
|
$
|
(3,117
|
)
|
|
$
|
29,495
|
|
|
30,422
|
|
|
$
|
(353
|
)
|
|
$
|
632,965
|
|
See accompanying notes to unaudited condensed consolidated financial statements.
NEW MEDIA INVESTMENT GROUP INC. AND SUBSIDIARIES
Unaudited Condensed Consolidated Statements of Cash Flows
(In thousands)
|
|
|
|
|
|
|
|
|
|
Six months ended June 26, 2016
|
|
Six months ended June 28, 2015
|
Cash flows from operating activities:
|
|
|
|
Net income
|
$
|
14,350
|
|
|
$
|
5,129
|
|
Adjustments to reconcile net income to net cash provided by operating activities:
|
|
|
|
Depreciation and amortization
|
33,349
|
|
|
33,088
|
|
Non-cash compensation expense
|
1,237
|
|
|
515
|
|
Non-cash interest expense
|
1,392
|
|
|
1,391
|
|
Deferred income taxes
|
(5,527
|
)
|
|
299
|
|
Loss on sale or disposal of assets
|
2,351
|
|
|
1,470
|
|
Pension and other postretirement benefit obligations
|
(973
|
)
|
|
(657
|
)
|
Changes in assets and liabilities:
|
|
|
|
Accounts receivable, net
|
20,494
|
|
|
6,467
|
|
Inventory
|
(1,166
|
)
|
|
713
|
|
Prepaid expenses
|
(3,087
|
)
|
|
(172
|
)
|
Other assets
|
(2,763
|
)
|
|
(1,301
|
)
|
Accounts payable
|
(1,164
|
)
|
|
(12,237
|
)
|
Accrued expenses
|
(28,693
|
)
|
|
17,260
|
|
Deferred revenue
|
268
|
|
|
(2,111
|
)
|
Other long-term liabilities
|
756
|
|
|
1,333
|
|
Net cash provided by operating activities
|
30,824
|
|
|
51,187
|
|
Cash flows from investing activities:
|
|
|
|
Purchases of property, plant, and equipment
|
(5,443
|
)
|
|
(3,886
|
)
|
Proceeds from sale of publications and other assets
|
3,076
|
|
|
717
|
|
Acquisitions, net of cash acquired
|
(82,819
|
)
|
|
(425,534
|
)
|
Net cash used in investing activities
|
(85,186
|
)
|
|
(428,703
|
)
|
Cash flows from financing activities:
|
|
|
|
Payment of debt issuance costs
|
—
|
|
|
(525
|
)
|
Borrowings under term loans
|
—
|
|
|
122,872
|
|
Borrowings under revolving credit facility
|
—
|
|
|
84,000
|
|
Repayments under term loans
|
(1,755
|
)
|
|
(1,381
|
)
|
Repayments under revolving credit facility
|
—
|
|
|
(60,000
|
)
|
Payment of offering costs
|
—
|
|
|
(1,343
|
)
|
Issuance of common stock, net of underwriter’s discount
|
—
|
|
|
150,866
|
|
Purchase of treasury stock
|
(353
|
)
|
|
—
|
|
Payment of dividends
|
(29,479
|
)
|
|
(28,008
|
)
|
Net cash (used in) provided by financing activities
|
(31,587
|
)
|
|
266,481
|
|
Net decrease in cash and cash equivalents
|
(85,949
|
)
|
|
(111,035
|
)
|
Cash and cash equivalents at beginning of period
|
146,638
|
|
|
123,709
|
|
Cash and cash equivalents at end of period
|
$
|
60,689
|
|
|
$
|
12,674
|
|
See accompanying notes to unaudited condensed consolidated financial statements.
NEW MEDIA INVESTMENT GROUP INC. AND SUBSIDIARIES
Notes to Unaudited Condensed Consolidated Financial Statements
(In thousands, except share and per share data)
(1) Unaudited Financial Statements
The accompanying unaudited condensed consolidated financial statements of New Media Investment Group Inc. and its subsidiaries (together, the “Company” or “New Media”) have been prepared in accordance with U.S. generally accepted accounting principles (“GAAP”) for interim financial information and the instructions to Form 10-Q and applicable provisions of Regulation S-X, each as promulgated by the Securities and Exchange Commission (the “SEC”). Certain information and note disclosures normally included in comprehensive annual financial statements presented in accordance with GAAP have generally been condensed or omitted pursuant to SEC rules and regulations.
Management believes that the accompanying condensed consolidated financial statements contain all adjustments (which include normal recurring adjustments) that, in the opinion of management, are necessary to present fairly the Company’s consolidated financial condition, results of operations and cash flows for the periods presented. The results of operations for interim periods are not necessarily indicative of the results that may be expected for the full year. These condensed consolidated financial statements should be read in conjunction with the audited consolidated financial statements and accompanying notes for the year ended December 27, 2015, included in the Company’s Annual Report on Form 10-K.
The preparation of financial statements in conformity with GAAP requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent 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 from those estimates.
New Media was formed as a Delaware corporation on June 18, 2013. New Media was capitalized by and issued
1,000
common shares to Newcastle Investment Corp. (“Newcastle”). New Media had no operations until November 26, 2013, when it assumed control of GateHouse Media, Inc. ("GateHouse") and Local Media Group Holdings LLC. Gatehouse was determined to be the predecessor to New Media, as the operations of GateHouse comprise substantially all of the business operations of the combined companies. Newcastle owned approximately
84.6%
of New Media until February 13, 2014, upon which date Newcastle distributed the shares that it held in New Media to its shareholders on a pro rata basis.
The Company’s operating segments (Eastern US Publishing, Central US Publishing, Western US Publishing, and Business Publications) are aggregated into
one
reportable segment.
The newspaper industry and the Company have experienced declining revenue and profitability over the past several years. As a result, the Company has implemented, and continues to implement, plans to reduce costs and preserve cash flow. This includes cost reduction programs and the sale of non-core assets. The Company believes these initiatives along with cash provided by operating activities will provide it with the financial resources necessary to invest in the business and provide sufficient cash flow to enable the Company to meet its commitments.
Accumulated Other Comprehensive Income (Loss)
The changes in accumulated other comprehensive income (loss) by component for the
six
months ended
June 26, 2016
and
June 28, 2015
are outlined below.
|
|
|
|
|
|
Net actuarial loss
and prior service
cost
(1)
|
For the six months ended June 26, 2016:
|
|
Balance at December 27, 2015
|
$
|
(3,158
|
)
|
Other comprehensive income before reclassifications
|
—
|
|
Amounts reclassified from accumulated other comprehensive income
|
41
|
|
Net current period other comprehensive income, net of taxes
|
41
|
|
Balance at June 26, 2016
|
$
|
(3,117
|
)
|
For the six months ended June 28, 2015:
|
|
Balance at December 28, 2014
|
$
|
(4,469
|
)
|
Other comprehensive income before reclassifications
|
—
|
|
Amounts reclassified from accumulated other comprehensive income
|
46
|
|
Net current period other comprehensive income, net of taxes
|
46
|
|
Balance at June 28, 2015
|
$
|
(4,423
|
)
|
|
|
(1)
|
This accumulated other comprehensive income (loss) component is included in the computation of net periodic benefit cost. See Note 10.
|
The following table presents reclassifications out of accumulated other comprehensive income (loss) for the
three and six
months ended
June 26, 2016
and
June 28, 2015
.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Amounts Reclassified from Accumulated
Other Comprehensive Loss
|
|
|
|
Three months ended June 26, 2016
|
|
Three months ended June 28, 2015
|
|
Six months ended June 26, 2016
|
|
Six months ended June 28, 2015
|
|
Affected Line Item in the
Consolidated Statements of
Operations and Comprehensive
Income
|
Amortization of unrecognized loss
|
$
|
17
|
|
|
$
|
23
|
|
|
$
|
41
|
|
|
$
|
46
|
|
(1)
|
|
Amounts reclassified from accumulated other comprehensive loss
|
17
|
|
|
23
|
|
|
41
|
|
|
46
|
|
|
Income before income taxes
|
Income tax expense
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
Income tax (benefit) expense
|
Amounts reclassified from accumulated other comprehensive loss, net of taxes
|
$
|
17
|
|
|
$
|
23
|
|
|
$
|
41
|
|
|
$
|
46
|
|
|
Net income
|
|
|
(1)
|
This accumulated other comprehensive income (loss) component is included in the computation of net periodic benefit cost. See Note 10.
|
Reclassifications
Certain amounts in the prior period's condensed consolidated financial statements have been reclassified to conform to the current year presentation.
Recently Issued Accounting Pronouncements
In May 2014, the Financial Accounting Standards Board (“FASB”) issued Accounting Standards Update (“ASU”) No. 2014-09, “Revenue from Contracts with Customers” (Topic 606). ASU No. 2014-09 will replace all current U.S. GAAP guidance on this topic and eliminate all industry-specific guidance. The new revenue recognition standard provides a unified model to determine when and how revenue is recognized. The core principle is that a company should recognize revenue to depict the transfer of promised goods or services to customers in an amount that reflects the consideration to which the entity expects to be entitled in exchange for those goods or services. This guidance would have been effective for annual and interim reporting periods beginning after December 15, 2016. In August 2015, the FASB issued ASU No. 2015-14, “Revenue from Contracts with Customers: Deferral of the Effective Date” which defers for one year the effective date of the new revenue standard (ASU No. 2014-09) for public and non-public entities reporting under U.S. GAAP. The standard is to be applied using one of two retrospective application methods. The FASB is permitting entities to adopt the standard as of the original effective date. In March 2016, the FASB issued ASU No. 2016-08, “Revenue from Contracts with Customers - Principal versus Agent Considerations” (Topic 606), which clarifies the implementation guidance on principal versus agent considerations. The Company is currently reviewing these amendments and application methods but does not expect them to have a material impact on the financial statements.
In April 2015, the FASB issued ASU No. 2015-03, “Interest-Imputation of Interest” (Topic 835), which requires that debt issuance costs related to a recognized debt liability be presented in the balance sheet as a direct deduction from the carrying amount of that debt liability, consistent with debt discounts. The recognition and measurement guidance of debt issuance costs are not affected by the amendments in this update. The standard is effective for the Company beginning in the first quarter of 2016 and requires the Company to apply the new guidance on a retrospective basis on adoption. In August 2015, the FASB issued ASU No. 2015-15, “Presentation and Subsequent Measurement of Debt Issuance Costs Associated with Line-of-Credit Arrangements”, which addresses the presentation of debt issuance costs related to line-of-credit arrangements. As a result of these amendments, the Company’s deferred financing costs of
$3,143
were reclassified from long-term assets to long-term debt as of December 27, 2015, on the Company’s consolidated balance sheet.
In July 2015, the FASB issued ASU No. 2015-11, “Simplifying the Measurement of Inventory” (Topic 330), which 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.” The standard will be effective for the Company beginning in the first quarter of 2017. Entities should adopt the guidance prospectively, and early adoption is permitted. The amendments in ASU No. 2015-11 are not expected to have a material impact on the financial statements.
In February 2016, the FASB issued ASU No. 2016-02, “Leases” (Topic 842), which revises the accounting related to lessee accounting. Under the new guidance, lessees will be required to recognize a lease liability and a right-of-use asset for all leases with terms greater than 12 months. Leases will be classified as either finance or operating, with classification affecting the pattern of expense recognition in the income statement. The provisions of ASU 2016-02 are effective for fiscal years beginning after December 15, 2018 and should be applied through a modified retrospective transition approach for leases existing at, or entered into after, the beginning of the earliest comparative period presented in the financial statements. Early adoption is permitted. The Company is currently evaluating the impact this accounting standard will have on the Company’s consolidated financial statements.
In March 2016, the FASB issued ASU No. 2016-09, “Compensation - Stock Compensation” (Topic 718), which addresses several aspects of accounting for share-based payment transactions, including the income tax consequences, classification of awards as either equity or liabilities, and classification on the statement of cash flows. The provisions are effective for fiscal years beginning after December 15, 2016, and there are various adoptions methods. Early adoption is permitted. The Company is currently evaluating the impact this accounting standard will have on the Company’s consolidated financial statements.
(2) Acquisitions and Dispositions
Acquisitions
2016 Other Acquisitions
The Company acquired substantially all the assets, properties and business of certain publications and businesses on December 31, 2015, January 12, 2016, March 18, 2016, April 22, 2016, and April 29, 2016 (“2016 Other Acquisitions”), which included
72
business publications,
one
daily newspaper,
two
shoppers, a marketing software business, and a cloud solutions partner for an aggregate purchase price of
$82,516
, including estimated working capital. The acquisitions were financed from
cash on hand. The rationale for the acquisitions was primarily due to the attractive nature, as applicable, of the newspaper assets, digital marketing technology platform, ability to support implementation of cloud solutions, and cash flows combined with cost saving and revenue-generating opportunities available.
The Company accounted for the 2016 Other Acquisitions under the acquisition method of accounting. The net assets, including goodwill, have been recorded in the consolidated balance sheet at their fair values in accordance with Accounting Standards Codification (“ASC”) Topic 805, "Business Combinations" (“ASC 805”). The fair value determination of the assets acquired and liabilities assumed are preliminary based upon all information available to us at the present time and are subject to working capital and other adjustments. The value assigned to property, plant and equipment, intangible assets, liabilities and goodwill is preliminary and subject to the completion of valuations to determine the fair market value of the tangible and intangible assets. The final calculation of working capital and other adjustments and determination of fair values for tangible and intangible assets may result in different allocations among the various asset classes from those set forth below and any such differences could be material.
The following table summarizes the preliminary fair values of the assets and liabilities:
|
|
|
|
|
Current assets
|
$
|
11,843
|
|
Other assets
|
4,195
|
|
Property, plant and equipment
|
7,925
|
|
Noncompete agreements
|
670
|
|
Advertiser relationships
|
28,360
|
|
Subscriber relationships
|
11,360
|
|
Customer relationships
|
3,054
|
|
Software
|
5,783
|
|
Trade names
|
1,128
|
|
Mastheads
|
6,790
|
|
Goodwill
|
43,151
|
|
Total assets
|
124,259
|
|
Current liabilities
|
16,960
|
|
Pension
|
16,299
|
|
Other long-term liabilities
|
8,484
|
|
Total liabilities
|
41,743
|
|
Net assets
|
$
|
82,516
|
|
The Company obtained third party independent valuations or performed similar calculations internally to assist in the determination of the fair values of certain assets acquired and liabilities assumed. Three basic approaches were used to determine value: the cost approach (used for equipment where an active secondary market is not available, building improvements, and software), the direct sales comparison (market) approach (used for land and equipment where an active secondary market is available) and the income approach (used for intangible assets). The obligation assumed for the defined benefit pension plan was measured in accordance with ASC 715-20, "Compensation-Retirement Benefits".
The Company recorded approximately
$424
and
$692
of selling, general and administrative expense for acquisition-related costs for the 2016 Other Acquisitions during the
three and six
months ended
June 26, 2016
, respectively.
For tax purposes, the amount of goodwill that is expected to be deductible is
$18,640
.
Stephens Media, LLC
On March 18, 2015, a wholly owned subsidiary of the Company completed its acquisition of the assets of Stephens Media, LLC (“Stephens Media”) for an aggregate purchase price of
$110,767
, including working capital. The Stephens Media acquisition was financed with cash on hand. The purchase price was allocated to the fair value of the net assets acquired and any excess value over the tangible and identifiable intangible assets was recorded as goodwill. The acquisition includes
nine
daily newspapers,
thirty-five
weekly publications and
fifteen
shoppers serving communities throughout the United States with a combined average daily circulation of approximately
221
and
244
on Sunday. The acquisition was completed because of the attractive nature of the newspaper assets and cash flows as well as the cost saving opportunities. The purchase price reflects a working capital adjustment of
$312
paid in July 2015.
The Company accounted for the material business combination of Stephens Media under the acquisition method of accounting. The net assets, including goodwill, have been recorded in the consolidated balance sheet at their fair values in accordance with ASC 805.
The following table summarizes the fair values of Stephens Media assets and liabilities:
|
|
|
|
|
Current assets
|
$
|
16,187
|
|
Property, plant and equipment
|
55,453
|
|
Licensing agreements
|
18,150
|
|
Advertiser relationships
|
8,090
|
|
Subscriber relationships
|
3,070
|
|
Customer relationships
|
610
|
|
Mastheads
|
8,890
|
|
Goodwill
|
9,525
|
|
Total assets
|
119,975
|
|
Current liabilities
|
9,208
|
|
Total liabilities
|
9,208
|
|
Net assets
|
$
|
110,767
|
|
The Company obtained a third party independent valuation to assist in the determination of the fair values of certain assets acquired and liabilities assumed. The property, plant and equipment valuation includes an analysis of recent comparable sales and offerings of land parcels in each of the subject’s markets. The estimated fair value is supported by the consideration paid and was determined using standard generally accepted appraisal practices and valuation procedures. The valuation firm used the three basic approaches to value: the cost approach (used for equipment where an active secondary market is not available and building improvements), the direct sales comparison (market) approach (used for land and equipment where an active secondary market is available) and the income approach (used for intangible assets). These approaches used are based on the cost to reproduce assets, market exchanges for comparable assets and the capitalization of income. Useful lives range from
1
to
15
years for personal property and
9
to
29
years for real property.
The valuation utilized a relief from royalty method, an income approach, to determine the fair value of mastheads. Key assumptions utilized in this valuation include revenue projections, a royalty rate of
2.0%
, a long-term growth rate of
0.0%
, a tax rate of
40.0%
and a discount rate of
22.0%
. The following intangible assets were valued using the income approach, specifically the excess earnings method: subscriber relationships, advertiser relationships and customer relationships. In determining the fair value of these intangible assets, the excess earnings approach values the intangible asset at the present value of the incremental after-tax cash flows attributable only to the asset after deducting contributory asset charges. The incremental after-tax cash flows attributable to the subject intangible asset are then discounted to their present value. A static pool approach using historical attrition rates was used to estimate attrition rates of
5.0%
to
10.0%
for advertiser relationships, subscriber relationships and customer relationships. The long term growth rate was estimated to be
0.0%
and the discount rate was estimated at
23.0%
. The licensing agreement asset was valued using a discounted cash flow analysis, an income approach. In determining the fair value of this intangible asset, the discounted cash flow approach values the intangible asset at the present value of the incremental after-tax cash flows attributable to the asset. The terms of the licensing agreement provide for a
$2,500
annual payment. A discount rate of
10.0%
and income tax rate of
40.0%
were used in the discounted cash flow calculation. Amortizable lives range from
14
to
16
years for subscriber relationships, advertiser relationships and customer relationships, while mastheads are considered a non-amortizable intangible asset and the licensing agreement is amortized over the remaining contract life of approximately
25
years.
Trade accounts receivable, having an estimated fair value of
$13,177
, were included in the acquired assets. The gross contractual amount of these receivables was
$14,398
and the contractual cash flows not expected to be collected were estimated at
$1,221
as of the acquisition date.
For tax purposes, the amount of goodwill that is expected to be deductible is
$3,082
, after the allocation of goodwill to the Review Journal (as defined below).
Halifax Media Group
On January 9, 2015, the Company completed its acquisition of substantially all of the assets from Halifax Media Group for an aggregate purchase price of
$285,369
, including working capital and net of assumed debt. Of the purchase price,
$17,000
was being held in an escrow account, to be available for application against indemnification and certain other obligations of the sellers arising during the first twelve months following the closing, with the remainder not so applied or subject to claims being delivered to the sellers. Subsequently, the escrow has been released. The acquisition includes
twenty-four
daily publications,
thirteen
weekly publications, and
five
shoppers serving areas of Alabama, Florida, Louisiana, Massachusetts, North Carolina, and South Carolina with a daily circulation of approximately
635
and
752
on Sunday. The acquisition was completed because of the attractive nature of the newspaper assets and cash flows as well as the cost saving opportunities. The purchase price reflects a working capital adjustment of
$750
received in August 2015.
In conjunction with the acquisition on January 9, 2015, the New Media Credit Agreement (as defined below) was amended to provide for the 2015 Incremental Term Loan (as defined below) under the Incremental Facility (as defined below) in an aggregate principal amount of
$102,000
, the 2015 Incremental Revolver (as defined below) under the Incremental Facility (as defined below) in an aggregate principal amount of
$50,000
and to make certain amendments to the Revolving Credit Facility (as defined below) in connection with the acquisition of the assets of Halifax Media Group. In addition, the New Media Borrower (as defined below) was required to pay an upfront fee of
1.00%
of the aggregate amount of the 2015 Incremental Term Loan and 2015 Incremental Revolver as of the effective date of the amendment. The remaining amount of the purchase price was funded by cash on hand. On January 20, 2015, the Company repaid the outstanding loans under the 2015 Incremental Revolver and the 2015 Incremental Revolver commitments were terminated.
The Company accounted for the material business combination of Halifax Media Group under the acquisition method of accounting. The net assets, including goodwill have been recorded in the consolidated balance sheet at their fair values in accordance with ASC 805.
The following table summarizes the fair values of Halifax Media Group assets and liabilities:
|
|
|
|
|
Current assets
|
$
|
42,114
|
|
Property, plant and equipment
|
95,369
|
|
Advertiser relationships
|
74,300
|
|
Subscriber relationships
|
36,200
|
|
Customer relationships
|
11,800
|
|
Mastheads
|
32,900
|
|
Goodwill
|
31,744
|
|
Total assets
|
324,427
|
|
Liabilities
|
39,058
|
|
Debt assumed
|
18,000
|
|
Total liabilities
|
57,058
|
|
Net assets
|
$
|
267,369
|
|
The Company obtained a third party independent valuation to assist in the determination of the fair values of certain assets acquired and liabilities assumed. The property, plant and equipment valuation included an analysis of recent comparable sales and offerings of land parcels in each of the subject’s markets. The estimated fair value is supported by the consideration paid and was determined using standard generally accepted appraisal practices and valuation procedures. The valuation firm used three basic approaches to value: the cost approach (used for equipment where an active secondary market is not available and building improvements), the direct sales comparison (market) approach (used for land and equipment where an active secondary market is available) and the income approach (used for intangible assets). The approaches used are based on the cost to reproduce assets, market exchanges for comparable assets and the capitalization of income. Useful lives range from
1
to
17
years for personal property and
8
to
22
years for real property.
The valuation utilized a relief from royalty method, an income approach, to determine the fair value of mastheads. Key assumptions utilized in this valuation include revenue projections, a royalty rate of
2.0%
, long-term growth rate of
0.0%
, tax rate of
40.0%
and discount rate of
16.0%
. The Company valued the following intangible assets using the income approach, specifically the excess earnings method: subscriber relationships, advertiser relationships and customer relationships. In determining the fair value of these intangible assets, the excess earnings approach will value the intangible asset at the present
value of the incremental after-tax cash flows attributable only to the asset after deducting contributory asset charges. The incremental after-tax cash flows attributable to the subject intangible asset are then discounted to their present value. A static pool approach using historical attrition rates was used to estimate attrition rates of
5.0%
to
10.0%
for advertiser relationships, subscriber relationships and customer relationships. The long-term growth rate was estimated to be
0.0%
and the discount rate was estimated at
16.5%
. Amortizable lives range from
14
to
17
years for subscriber relationships, advertiser relationships and customer relationships, while mastheads are considered a non-amortizable intangible asset.
Trade accounts receivable, having an estimated fair value of
$34,255
, were included in the acquired assets. The gross contractual amount of these receivables was
$36,266
and the contractual cash flows not expected to be collected were estimated at
$2,011
as of the acquisition date.
For tax purposes, the amount of goodwill that is expected to be deductible is
$31,744
.
2015 Other Acquisitions
The Company acquired substantially all the assets, properties and business of publishing/operating certain newspapers on June 15, 2015 and September 23, 2015 (“2015 Other Acquisitions”), which included
two
daily newspapers,
twenty-eight
weekly publications, and
two
shoppers serving Central Ohio and Southern Michigan for an aggregate purchase price, including estimated working capital, of
$52,021
. The acquisition completed on June 15, 2015 was financed with
$25,000
of additional term debt under the New Media Credit Agreement and the remaining amount from cash on hand. The acquisition completed on September 23, 2015 was financed with cash on hand. The rationale for the acquisitions was primarily due to the attractive nature of the newspaper assets and cash flows combined with cost saving opportunities available by clustering with the Company’s nearby newspapers.
The Company has accounted for these transactions under the acquisition method of accounting. The net assets, including goodwill, have been recorded in the consolidated balance sheet at their fair values in accordance with ASC 805.
The following table summarizes the fair values of the assets and liabilities:
|
|
|
|
|
Current assets
|
$
|
20,863
|
|
Property, plant and equipment
|
40,006
|
|
Noncompete agreements
|
3
|
|
Advertiser relationships
|
554
|
|
Subscriber relationships
|
1,159
|
|
Customer relationships
|
37
|
|
Mastheads
|
3,991
|
|
Goodwill
|
2,193
|
|
Total assets
|
68,806
|
|
Liabilities
|
16,785
|
|
Total liabilities
|
16,785
|
|
Net assets
|
$
|
52,021
|
|
The Company obtained third party independent valuations or performed similar calculations internally to assist in the determination of the fair values of certain assets acquired and liabilities assumed. The three basic approaches were used to estimate the fair values: the cost approach (used for equipment where an active secondary market is not available and building improvements), the direct sales comparison (market) approach (used for land and equipment where an active secondary market is available) and the income approach (used for subscriber relationships, advertiser relationships, customer relationships and mastheads).
For tax purposes, the amount of goodwill that is expected to be deductible is
$2,193
.
Dispositions
On December 10, 2015, the Company completed its sale of the
Las Vegas Review-Journal
and related publications (“Review-Journal”) (initially acquired in the Stephens Media acquisition), which are located in Las Vegas, Nevada, for an aggregate sale price of
$140,000
plus working capital adjustment of
$1,000
. As a result, a pre-tax gain of
$57,072
, net of selling expenses, is included in (gain) loss on sale or disposal of assets on the consolidated statement of operations and comprehensive
income (loss) for this period, since the disposition did not qualify for treatment as a discontinued operation under ASU No. 2014-08.
The carrying amount of assets and liabilities included as part of the disposal group were:
|
|
|
|
|
Current assets
|
$
|
13,372
|
|
Property, plant and equipment
|
39,783
|
|
Intangible assets
|
31,180
|
|
Goodwill
|
6,385
|
|
Total assets
|
90,720
|
|
Current liabilities
|
6,846
|
|
Total liabilities
|
6,846
|
|
Net assets
|
$
|
83,874
|
|
The Company entered into a Management and Advisory Agreement with DB Nevada Holdings, Inc. in conjunction with the sale of the Review-Journal on December 10, 2015. Under the terms of the agreement, the Company is authorized to manage and conduct business and oversee the assets and operations. The Company analyzed the terms of the agreement based on the guidance in ASU No. 2015-02 and concluded that the fees received from the Review-Journal do not represent a variable interest. On February 23, 2016, the Company received notification of termination of the Management and Advisory Agreement, which subsequently terminated May 23, 2016.
Pro-Forma Results
The unaudited pro forma condensed consolidated statement of operations information for 2015, set forth below, presents the results of operations as if the consolidation of the newspapers from Halifax Media Group and Stephens Media had occurred on December 29, 2014. The pro forma information excludes results of operations of the Review-Journal, as well as the gain on sale of assets. The results of operations of the 2016 and 2015 Other Acquisitions are not material to the Company’s results of operations and have been excluded from the pro-forma results.
These amounts are not necessarily indicative of future results or actual results that would have been achieved had the acquisitions occurred as of the beginning of such period. There are no pro-forma adjustments needed for the three and six months ended June 26, 2016 and three months ended June 28, 2015.
|
|
|
|
|
|
Six months ended June 28, 2015
|
Revenues
|
$
|
541,076
|
|
Income from continuing operations
|
$
|
1,118
|
|
Income from continuing operations per common share:
|
|
Basic
|
$
|
0.03
|
|
Diluted
|
$
|
0.03
|
|
(3) Share-Based Compensation
The Company recognized compensation cost for share-based payments of
$618
,
$374
,
$1,237
, and
$515
during the
three and six
months ended
June 26, 2016
and
June 28, 2015
, respectively. The total compensation cost not yet recognized related to non-vested awards as of
June 26, 2016
was
$5,168
, which is expected to be recognized over a weighted average period of
2.15
years through April 2019.
On February 3, 2014, the Board of Directors of New Media (the “Board” or “Board of Directors”) adopted the New Media Investment Group Inc. Nonqualified Stock Option and Incentive Award Plan (the “Incentive Plan”) that authorized up to
15,000,000
shares that can be granted under the Incentive Plan. On the same date, the New Media Board adopted a form of the New Media Investment Group Inc. Non-Officer Director Restricted Stock Grant Agreement (the “Form Grant Agreement”) to govern the terms of awards of restricted stock (“New Media Restricted Stock”) granted under the Incentive Plan to directors who are not officers or employees of New Media (the “Non-Officer Directors”). On February 24, 2015, the New Media Board
adopted a form of the New Media Investment Group Inc. Employee Restricted Stock Grant Agreement (the “Form Employee Grant Agreement”) to govern the terms of awards of New Media Restricted Stock granted under the Incentive Plan to employees of New Media and its subsidiaries (the “Employees”). Both the Form Grant Agreement and the Form Employee Grant Agreement provide for the grant of New Media Restricted Stock that vests in equal annual installments on each of the first, second and third anniversaries of the grant date, subject to continued service, and immediate vesting in full upon death or disability. If service terminates for any other reason, all unvested shares of New Media Restricted Stock will be forfeited. Any dividends or other distributions that are declared with respect to the shares of New Media Restricted Stock will be paid at the time such shares vest. During the period prior to the lapse and removal of the vesting restrictions, a grantee of a restricted stock grant (“RSG”) will have all the rights of a stockholder, including without limitation, the right to vote and the right to receive all dividends or other distributions. As a result, the RSGs are reflected as outstanding common stock. The value of the RSGs on the date of issuance is recognized as selling, general and administrative expense over the vesting period with an increase to additional paid-in-capital.
On March 14, 2014, a grant of restricted shares totaling
15,870
shares was made to the Company’s Non-Officer Directors, of which
5,280
and
5,289
vested on March 14, 2016 and March 14, 2015, respectively. During the year ended December 27, 2015, grants of restricted shares totaling
234,267
shares were made to the Company’s Employees, of which
66,645
vested on February 24, 2016. During the three months ended March 27, 2016, a grant of restricted shares totaling
175,650
shares was made to the Company’s Employees. During the three months ended June 26, 2016, a grant of restricted shares totaling
10,864
shares was made to the Company’s Employees and
7,313
restricted shares were forfeited.
As of
June 26, 2016
and
June 28, 2015
, there were
352,124
and
210,673
RSGs, respectively, issued and outstanding with a weighted average grant date fair value of
$18.20
and
$22.50
, respectively. As of
June 26, 2016
, the aggregate intrinsic value of unvested RSGs was
$6,190
.
RSG activity during the
six
months ended
June 26, 2016
was as follows:
|
|
|
|
|
|
|
|
|
Number of RSGs
|
|
Weighted-Average
Grant Date
Fair Value
|
Unvested at December 27, 2015
|
244,848
|
|
|
$
|
21.67
|
|
Granted
|
186,514
|
|
|
15.29
|
|
Vested
|
(71,925
|
)
|
|
22.30
|
|
Forfeited
|
(7,313
|
)
|
|
19.83
|
|
Unvested at June 26, 2016
|
352,124
|
|
|
$
|
18.20
|
|
FASB ASC Topic 718, “Compensation – Stock Compensation”, requires the recognition of share-based compensation for the number of awards that are ultimately expected to vest. The Company’s estimated forfeitures are based on the Company’s historical forfeiture rates. Estimated forfeitures are reassessed periodically and the estimate may change based on new facts and circumstances.
(4) Restructuring
Over the past several years, and in furtherance of the Company’s cost reduction and cash preservation plans outlined in Note 1, the Company has engaged in a series of individual restructuring programs, designed primarily to right size the Company’s employee base, consolidate facilities and improve operations, including those of recently acquired entities. These initiatives impact all of the Company’s geographic regions and are often influenced by the terms of union contracts within the region. All costs related to these programs, which primarily reflect involuntary severance expense, are accrued at the time of announcement or over the remaining service period.
A rollforward of the accrued restructuring costs for the
six
months ended
June 26, 2016
is outlined below.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Severance and
Related Costs
|
|
Other
Costs
(1)
|
|
Total
|
December 27, 2015
|
$
|
2,199
|
|
|
$
|
322
|
|
|
$
|
2,521
|
|
Restructuring provision included in Integration and Reorganization
|
1,690
|
|
|
645
|
|
|
2,335
|
|
Restructuring accrual assumed from acquisition
|
52
|
|
|
43
|
|
|
95
|
|
Cash payments
|
(3,242
|
)
|
|
(641
|
)
|
|
(3,883
|
)
|
June 26, 2016
|
$
|
699
|
|
|
$
|
369
|
|
|
$
|
1,068
|
|
|
|
(1)
|
Other costs primarily included costs to consolidate operations.
|
The restructuring reserve balance is expected to be paid out over the next twelve months.
The following table summarizes the costs incurred and cash paid in connection with these restructuring programs for the
three and six
months ended
June 26, 2016
and
June 28, 2015
.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three months ended June 26, 2016
|
|
Three months ended June 28, 2015
|
|
Six months ended June 26, 2016
|
|
Six months ended June 28, 2015
|
Severance and related costs
|
$
|
822
|
|
|
$
|
1,638
|
|
|
$
|
1,690
|
|
|
$
|
3,563
|
|
Severance and other costs assumed from acquisition
|
—
|
|
|
—
|
|
|
95
|
|
|
—
|
|
Other costs
|
587
|
|
|
18
|
|
|
645
|
|
|
20
|
|
Cash payments
|
(1,578
|
)
|
|
(2,090
|
)
|
|
(3,883
|
)
|
|
(3,266
|
)
|
(5) Goodwill and Intangible Assets
Goodwill and intangible assets consisted of the following:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
June 26, 2016
|
|
Gross carrying
amount
|
|
Accumulated
amortization
|
|
Net carrying
amount
|
Amortized intangible assets:
|
|
|
|
|
|
Advertiser relationships
|
171,086
|
|
|
18,937
|
|
|
152,149
|
|
Customer relationships
|
22,880
|
|
|
2,323
|
|
|
20,557
|
|
Subscriber relationships
|
88,732
|
|
|
10,837
|
|
|
77,895
|
|
Other intangible assets
|
8,244
|
|
|
700
|
|
|
7,544
|
|
Total
|
$
|
290,942
|
|
|
$
|
32,797
|
|
|
$
|
258,145
|
|
Nonamortized intangible assets:
|
|
|
|
Goodwill
|
$
|
214,270
|
|
|
Mastheads
|
92,685
|
|
|
Total
|
$
|
306,955
|
|
|
|
|
|
December 27, 2015
|
|
Gross
Carrying
Amount
|
|
Accumulated
Amortization
|
|
Net
Carrying
Amount
|
Amortized intangible assets:
|
|
|
|
|
|
Advertiser relationships
|
$
|
143,002
|
|
|
$
|
13,453
|
|
|
$
|
129,549
|
|
Customer relationships
|
19,829
|
|
|
1,667
|
|
|
18,162
|
|
Subscriber relationships
|
77,385
|
|
|
7,897
|
|
|
69,488
|
|
Other intangible assets
|
473
|
|
|
105
|
|
|
368
|
|
Total
|
$
|
240,689
|
|
|
$
|
23,122
|
|
|
$
|
217,567
|
|
Nonamortized intangible assets:
|
|
|
|
Goodwill
|
$
|
171,119
|
|
|
Mastheads
|
86,008
|
|
|
Total
|
$
|
257,127
|
|
|
As of
June 26, 2016
, the weighted average amortization periods for amortizable intangible assets are
15.2
years for advertiser relationships,
15.6
years for customer relationships,
14.6
years for subscriber relationships and
4.4
years for other intangible assets. The weighted average amortization period in total for all amortizable intangible assets is
14.8
years.
Amortization expense for the
three and six
months ended
June 26, 2016
and
June 28, 2015
was
$5,291
,
$4,160
,
$9,690
, and
$7,958
, respectively. Estimated future amortization expense as of
June 26, 2016
, is as follows:
|
|
|
|
|
For the years ending the Sunday closest to December 31:
|
|
2016
|
$
|
10,731
|
|
2017
|
21,462
|
|
2018
|
21,458
|
|
2019
|
19,817
|
|
2020
|
19,243
|
|
Thereafter
|
165,434
|
|
Total
|
$
|
258,145
|
|
The changes in the carrying amount of goodwill for the period from
December 27, 2015
to
June 26, 2016
are as follows:
|
|
|
|
|
Balance at December 27, 2015
|
$
|
171,119
|
|
Goodwill acquired in business combinations
|
43,151
|
|
Balance at June 26, 2016
|
$
|
214,270
|
|
The Company’s annual impairment assessment is made on the last day of its fiscal second quarter.
The carrying value of goodwill and indefinite-lived intangible assets are evaluated for possible impairment on an annual basis or between annual tests if an event occurs or circumstances change that would more likely than not reduce the fair value of a reporting unit or indefinite-lived intangible asset below its carrying value. The Company is required to determine its goodwill impairment using a two-step process. The first step is used to identify potential impairment by comparing the fair value of a reporting unit with its carrying amount. If the carrying amount of a reporting unit exceeds its fair value, the second step of the impairment test is performed to measure the amount of impairment loss, if any. If the carrying amount of the reporting unit’s goodwill exceeds the implied fair value of that goodwill, an impairment loss is recognized in an amount equal to that excess.
As part of the annual impairment assessments, as of June 26, 2016, the fair values of the Company’s reporting units for goodwill impairment testing, which include East, West and Central, and indefinite-lived intangible assets, which include newspaper mastheads, were estimated using the expected present value of future cash flows, recent industry multiples and using estimates, judgments and assumptions that management believes were appropriate in the circumstances. The estimates and judgments used in the assessment included multiples for EBITDA, the weighted average cost of capital and the terminal growth rate. The Company determined that the future cash flow and industry multiple analysis provided the best estimate of the fair value of its reporting units. As a result of the annual assessment’s Step 1 analysis that was performed, no impairment of goodwill was identified. The Company uses a “relief from royalty” approach which utilizes a discounted cash flow model to determine the fair value of each masthead. Additionally, the estimated fair value exceeded carrying value for all mastheads. The Company performed a qualitative assessment for the Business Publications reporting unit and masthead and concluded that it is not more likely than not that the goodwill and indefinite-lived intangible assets are impaired. As a result, no quantitative impairment testing was performed for this reporting unit. The total Company’s estimate of reporting unit fair value was reconciled to its then market capitalization (based upon the stock market price and fair value of debt) plus an estimated control premium.
The newspaper industry and the Company have experienced declining same store revenue and profitability over the past several years. Should general economic, market or business conditions decline, and have a negative impact on estimates of future cash flow and market transaction multiples, the Company may be required to record impairment charges in the future.
(6) Indebtedness
New Media Credit Agreement
On June 4, 2014, New Media Holdings II LLC (the “New Media Borrower”), a wholly owned subsidiary of New Media, entered into a credit agreement (the “New Media Credit Agreement”) among the New Media Borrower, New Media Holdings I LLC (“Holdings I”), the lenders party thereto, RBS Citizens, N.A. and Credit Suisse Securities (USA) LLC as joint lead arrangers and joint bookrunners, Credit Suisse AG, Cayman Islands Branch as syndication agent and Citizens Bank of Pennsylvania as administration agent which provides for (i) a
$200,000
senior secured term facility (the “Term Loan Facility” and any loan thereunder, including as part of the Incremental Facility, “Term Loans”) and (ii) a
$25,000
senior secured revolving credit facility, with a
$5,000
sub-facility for letters of credit and a
$5,000
sub-facility for swing loans, (the “Revolving Credit Facility” and together with the Term Loan Facility, the “Senior Secured Credit Facilities”). In addition, the New Media Borrower may request one or more new commitments for term loans or revolving loans from time to time up to an aggregate total of
$75,000
(the “Incremental Facility”) subject to certain conditions. On June 4, 2014, the New Media Borrower borrowed
$200,000
under the Term Loan Facility (the “Initial Term Loans”). As of
June 26, 2016
,
$0
was drawn under the Revolving Credit Facility. The Term Loans mature on
June 4, 2020
and the maturity date for the Revolving Credit Facility is
June 4, 2019
. The New Media Credit Agreement was amended;
•
on September 3, 2014, to provide for additional term loans under the Incremental Facility in an aggregate principal amount of
$25,000
(the "2014 Incremental Term Loan");
•
on November 20, 2014, to increase the amount of the Incremental Facility that may be requested after the date of the amendment from
$75,000
to
$225,000
;
•
on January 9, 2015, to provide for
$102,000
in additional term loans (the "2015 Incremental Term Loan") and
$50,000
in additional revolving commitments (the "2015 Incremental Revolver") under the Incremental Facility and to make certain amendments to the Revolving Credit Facility in connection with the Halifax Media acquisition;
•
on February 13, 2015, to provide for the replacement of the existing term loans under the Term Loan Facility (including the 2014 Incremental Term Loan and the 2015 Incremental Term Loan) with a new class of replacement term loans. This amendment was considered a modification, and the related
$104
of fees were expensed during the first quarter of 2015;
•
on March 6, 2015, to provide for
$15,000
in additional revolving commitments under the Incremental Facility and in connection with this transaction, the Company incurred approximately
$237
of fees and expenses which were capitalized as deferred financing costs; and
•
on May 29, 2015, to provide for
$25,000
in additional term loans under the Incremental Facility.
Borrowings under the Term Loan Facility bear interest, at the New Media Borrower’s option, at a rate equal to either (i) an adjusted Eurodollar rate, plus an applicable margin equal to
6.25%
per annum (subject to a floor of
1.00%
) or (ii) an adjusted base rate, plus an applicable margin equal to
5.25%
per annum (subject to a floor of
2.00%
). The New Media Borrower currently uses the Eurodollar rate option.
Borrowings under the Revolving Credit Facility bear interest, at the New Media Borrower’s option, at a rate equal to either (i) an adjusted Eurodollar rate, plus an applicable margin equal to
5.25%
per annum or (ii) an adjusted base rate, plus an applicable margin equal to
4.25%
per annum, with a step down based on achievement of a certain total leverage ratio. The New Media Borrower currently uses the Eurodollar rate option.
As of
June 26, 2016
the New Media Credit Agreement had a weighted average interest rate of
7.2%
.
The Senior Secured Credit Facilities are unconditionally guaranteed by Holdings I and certain subsidiaries of the New Media Borrower (collectively, the “Guarantors”) and is required to be guaranteed by all future material wholly-owned domestic subsidiaries, subject to certain exceptions. All obligations under the New Media Credit Agreement are secured, subject to certain exceptions, by substantially all of the New Media Borrower’s assets and the assets of the Guarantors.
Repayments made under the Term Loans are equal to
1.0%
annually of the original principal amount in equal
quarterly
installments for the life of the Term Loans, with the remainder due at maturity. The New Media Borrower is permitted to make voluntary prepayments at any time without premium or penalty.
The New Media Credit Agreement contains customary representations and warranties affirmative covenants, negative covenants (including, among other things, restrictions on indebtedness, liens, investments, fundamental changes, dispositions, and dividends and other distributions) and events of default. The New Media Credit Agreement contains a financial covenant that requires Holdings I, the New Media Borrower and the New Media Borrower’s subsidiaries to maintain a maximum total leverage ratio of
3.25
to 1.00.
As of
June 26, 2016
, the Company is in compliance with all of the covenants and obligations under the New Media Credit Agreement.
Advantage Credit Agreements
In connection with the purchase of the assets of Halifax Media, which closed on January 9, 2015, certain subsidiaries of the Company (the "Advantage Borrowers") agreed to assume all of the obligations of Halifax Media and its affiliates in respect of each of (i) that certain Consolidated Amended and Restated Credit Agreement dated January 6, 2012 among Halifax Media Acquisition LLC, Advantage Capital Community Development Fund XXVIII, L.L.C., and Florida Community Development Fund II, L.L.C. (as amended, the “Halifax Florida Credit Agreement”) and (ii) that certain Credit Agreement dated June 18, 2013 between Halifax Alabama, LLC and Southeast Community Development Fund V, L.L.C. (the “Halifax Alabama Credit Agreement” and, together with the Halifax Florida Credit Agreement, the “Advantage Credit Agreements”), respectively (the debt under the Halifax Florida Credit Agreement, the “Advantage Florida Debt”; the debt under the Halifax Alabama Credit Agreement, the “Advantage Alabama Debt”; and the Advantage Florida Debt and the Advantage Alabama Debt, collectively, the “Advantage Debt”).
The Halifax Florida Credit Agreement is in the principal amount of
$10,000
and bears interest at the rate of
5.25%
per annum, payable quarterly in arrears, maturing on December 31, 2016. The Halifax Alabama Credit Agreement is in the principal amount of
$8,000
and bears interest at the rate of LIBOR plus
6.25%
per annum (with a minimum of
1%
LIBOR) payable quarterly in arrears, maturing on March 31, 2019. The Advantage Debt is secured by a perfected second priority security interest in all the assets of the Advantage Borrowers and certain other subsidiaries of the Company, subject to the limitation that the maximum amount of secured obligations is
$15,000
. The Advantage Credit Facilities are unconditionally guaranteed by Holdings I and certain subsidiaries of the New Media Borrowers and are required to be guaranteed by all future material wholly-owned domestic subsidiaries, subject to certain exceptions. The Advantage Debt is subordinated to the New Media Credit Facilities pursuant to an intercreditor agreement.
The Advantage Credit Agreements contain covenants substantially consistent with those contained in the New Media Credit Facilities in addition to those required for compliance with the New Markets Tax Credit program. The Advantage Borrowers are permitted to make voluntary prepayments at any time without premium or penalty and are subject to customary mandatory prepayment events including from proceeds from asset sales and certain debt obligations.
The Advantage Credit Agreements contain customary representations and warranties and customary affirmative and negative covenants applicable to the Advantage Borrowers and certain of the Company subsidiaries, including, among other things, restrictions on indebtedness, liens, investments, fundamental changes, dispositions, and dividends and other distributions. The Advantage Credit Agreements contain a financial covenant that requires Holdings I, the New Media Borrower and the New Media Borrower’s subsidiaries to maintain a maximum total leverage ratio of
3.75
to 1.00. The Advantage Credit Agreements contain customary events of default.
As of
June 26, 2016
, the Company is in compliance with all of the covenants and obligations under the Advantage Credit Agreements.
Fair Value
The fair value of long-term debt under the Senior Secured Credit Facilities and the Advantage Credit Agreements was estimated at
$364,548
as of
June 26, 2016
, based on discounted future contractual cash flows and a market interest rate adjusted for necessary risks, including the Company’s own credit risk as there are no rates currently observable in publicly traded debt markets of risk with similar terms and average maturities. Accordingly, the Company’s long-term debt under the Senior Secured Credit Facilities is classified within Level 3 of the fair value hierarchy.
Payment Schedule
As of
June 26, 2016
, scheduled principal payments of outstanding debt are as follows:
|
|
|
|
|
2016
|
1,755
|
|
2017
|
13,509
|
|
2018
|
3,509
|
|
2019
|
11,509
|
|
2020
|
334,266
|
|
|
$
|
364,548
|
|
Less:
|
|
Short-term debt
|
13,509
|
|
Remaining original issue discount
|
8,322
|
|
Deferred financing costs
|
2,617
|
|
Long-term debt
|
$
|
340,100
|
|
|
|
For further information, see Note 10 to the Consolidated Financial Statements, “Indebtedness,” in our Annual Report on Form 10-K for the fiscal year ended December 27, 2015.
(7) Related Party Transactions
As of December 29, 2013, Newcastle (an affiliate of FIG LLC (the "Manager") beneficially owned approximately
84.6%
of the Company’s outstanding common stock. On February 13, 2014, Newcastle completed the spin-off of the Company. On February 14, 2014 New Media became a separate, publicly traded company trading on the NYSE under the ticker symbol “NEWM”. As a result of the spin-off, the fees included in the Management Agreement with the Company’s Manager became effective. As of
June 26, 2016
, Fortress and its affiliates owned approximately
1.5%
of the Company’s outstanding stock and approximately
39.5%
of the Company’s outstanding warrants. The Company’s Manager holds
1,445,062
stock options of the Company’s stock as of
June 26, 2016
. During the
three and six
months ended
June 26, 2016
and
June 28, 2015
, Fortress and its affiliates were paid
$225
,
$225
,
$450
,
$430
in dividends, respectively.
In addition, the Company’s Chairman, Wesley Edens, is also the Co-Chairman of the board of directors of Fortress. The Company does not pay Mr. Edens a salary or any other form of compensation.
The Company’s Chief Operating Officer owns an interest in a company, from which the Company recognized revenue of
$135
,
$119
,
$233
, and
$191
during the
three and six
months ended
June 26, 2016
and
June 28, 2015
, respectively, for commercial printing services and managed information technology services which is included in commercial printing and other on the Unaudited Condensed Consolidated Statement of Operations and Comprehensive Income.
The Company’s Chief Executive Officer and Chief Financial Officer are employees of Fortress, and their salaries are paid by Fortress.
Management Agreement
On November 26, 2013, the Company entered into a management agreement with the Manager (as amended and restated, the “Management Agreement”). The Management Agreement requires the Manager to manage the Company’s business affairs subject to the supervision of the Company’s Board of Directors. On March 6, 2015, the Company’s independent directors on the Board approved an amendment to the Management Agreement.
The initial term of our Management Agreement will expire on March 6, 2018 and will be automatically renewed for one-year terms thereafter unless terminated either by the Company or the Manager. From the commencement date of the Company’s Common Stock trading on the “regular way” market on a major U.S. national securities exchange (the “Listing”), the Manager is (a) entitled to receive from the Company a management fee, (b) eligible to receive incentive compensation that is based on the Company’s performance and (c) eligible to receive options to purchase New Media Common Stock upon the successful completion of an offering of shares of the Company’s Common Stock or any shares of preferred stock with an exercise price equal to the price per share paid by the public or other ultimate purchaser in the offering, see Note 9. In addition, the Company is obligated to reimburse certain expenses incurred by the Manager. The Manager is also entitled to receive a termination fee from the Company under certain circumstances.
The Company recognized
$2,390
,
$2,390
,
$4,779
, and
$4,659
for management fees and
$3,507
,
$4,997
,
$3,706
, and
$5,264
for incentive compensation within selling, general and administrative expense during the
three and six
months ended
June 26, 2016
and
June 28, 2015
, respectively. The Company paid to FIG LLC
$2,388
,
$2,899
,
$3,185
, and
$3,530
in management fees and
$0
,
$267
,
$20,938
, and
$379
in incentive compensation during the
three and six
months ended
June 26, 2016
and
June 28, 2015
, respectively. The Company had an outstanding liability for management fees and incentive compensation of
$6,714
and
$22,353
at
June 26, 2016
and
December 27, 2015
, respectively, included in accrued expenses. In addition, Fortress charged the Company for expenses of approximately
$620
,
$0
,
$1,023
, and
$0
during the
three and six
months ended
June 26, 2016
and
June 28, 2015
, respectively.
Registration Rights Agreement with Omega
The Company entered into a registration rights agreement (the “Omega Registration Rights Agreement”) with Omega Advisors, Inc. and its affiliates (collectively, “Omega”). Under the terms of the Omega Registration Rights Agreement, upon request by Omega the Company is required to use commercially reasonable efforts to file a resale shelf registration statement providing for the registration and sale on a continuous or delayed basis by Omega of its New Media Common Stock acquired pursuant to the Plan (the “Registrable Securities”) (the “Shelf Registration”), subject to customary exceptions and limitations. Omega is entitled to initiate up to three offerings or sales with respect to some or all of the Registrable Securities pursuant to the Shelf Registration.
Omega may only exercise its right to request Shelf Registrations if Registrable Securities to be sold pursuant to such Shelf Registration are at least
3%
of the then-outstanding New Media Common Stock.
(8) Income Taxes
The Company performs a quarterly assessment of its deferred tax assets and liabilities. ASC Topic 740, “Income Taxes” (“ASC 740”) limits the ability to use future taxable income to support the realization of deferred tax assets when a company has experienced a history of losses even if future taxable income is supported by detailed forecasts and projections.
In assessing the realizability of deferred tax assets, the Company considers whether it is more likely than not that some portion or all of the deferred tax assets will not be realized. The ultimate realization of deferred tax assets is dependent upon the generation of future taxable income during the periods in which those temporary differences become deductible. The Company considers the scheduled reversal of deferred tax liabilities, projected future taxable income, and tax planning strategies in making this assessment. The Company concluded that during the
six
months ended
June 26, 2016
, a net decrease to the valuation allowance of
$8,748
was available to offset deferred tax assets against deferred tax liabilities as noted further below. The
$8,748
decrease to the valuation allowance was recognized through the Unaudited Condensed Consolidated Statement of Operations and Comprehensive Income (Loss).
The realization of the remaining deferred tax assets is primarily dependent on the scheduled reversals of deferred taxes. Any changes in the scheduled reversals of deferred taxes may require an additional valuation allowance against the remaining deferred tax assets. Any increase or decrease in the valuation allowance could result in an increase or decrease in income tax expense in the period of adjustment.
The computation of the annual expected effective tax rate at each interim period requires certain estimates and assumptions including, but not limited to, the expected operating income (loss) for the year, projections of the proportion of income (or loss), permanent and temporary differences, including the likelihood of recovering deferred tax assets generated in the current year. The accounting estimates used to compute the provision for income taxes may change as new events occur, more experience is acquired, or as additional information is obtained. To the extent that the estimated annual effective tax rate changes during a quarter, the effect of the change on prior quarters is included in tax expense for the current quarter.
For the
six
months ended
June 26, 2016
, the expected federal tax at
34%
is
$3,112
. The difference between the expected tax and the effective tax benefit of
$5,198
is primarily attributable to the tax effect of the valuation allowance release of
$8,748
, the tax effect related to non-deductible expenses of
$96
, state taxes of
$196
, interest accrued on uncertain tax positions of
$129
, and other adjustments of
$17
.
The Company recorded an income tax benefit of
$5,119
and
$991
during the three months ended March 27, 2016 and June 26, 2016, respectively, related to its acquisition of certain legal entities acquired during those quarters. In accordance with ASC 805, the Company released a portion of its valuation allowance, since it is able to utilize deferred tax assets against the deferred tax liabilities reflected in purchase accounting for the acquired entities.
The Company and its subsidiaries file a U.S. federal consolidated income tax return. The U.S. federal and state statute of limitations generally remains open for the 2012 tax year and beyond. The Company’s 2013 short tax year Federal returns are under examination by the Internal Revenue Service. We do not anticipate any material adjustments related to this examination.
(9) Earnings Per Share
The following table sets forth the computation of basic and diluted earnings (loss) per share (“EPS”):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three months ended June 26, 2016
|
|
Three months ended June 28, 2015
|
|
Six months ended June 26, 2016
|
|
Six months ended June 28, 2015
|
Numerator for earnings per share calculation:
|
|
|
|
|
|
|
|
Net income
|
$
|
9,383
|
|
|
$
|
11,195
|
|
|
$
|
14,350
|
|
|
$
|
5,129
|
|
Denominator for earnings per share calculation:
|
|
|
|
|
|
|
|
Basic weighted average shares outstanding
|
44,528,457
|
|
|
44,465,646
|
|
|
44,505,991
|
|
|
43,612,661
|
|
Effect of dilutive securities:
|
|
|
|
|
|
|
|
Stock Options and Restricted Stock
|
384,237
|
|
|
412,106
|
|
|
384,931
|
|
|
456,190
|
|
Diluted weighted average shares outstanding
|
44,912,694
|
|
|
44,877,752
|
|
|
44,890,922
|
|
|
44,068,851
|
|
For the
three and six
months ended
June 26, 2016
, the Company excluded
1,362,479
and
1,362,479
common stock warrants and
700,000
and
700,000
stock options, respectively, from the computation of diluted income per share because their effect would have been antidilutive. For the
three and six
months ended
June 28, 2015
, the Company excluded
1,362,479
and
1,362,479
common stock warrants and
700,000
and
0
stock options, respectively, from the computation of diluted income per share because their effect would have been antidilutive.
Equity
In January 2015, the Company issued
7,000,000
shares of its common stock in a public offering at a price to the public of
$21.70
per share for net proceeds of approximately
$150,129
. Certain principals of Fortress and certain of the Company’s officers and directors participated in this offering and purchased an aggregate of
104,400
shares at a price of
$21.70
per share. For the purpose of compensating the Manager for its successful efforts in raising capital for the Company, in connection with this offering, the Company granted options to the Manager to purchase
700,000
shares of the Company’s common stock at a price of
$21.70
, which had an aggregate fair value of approximately
$4,144
as of the grant date. The assumptions used in valuing the options were: a
2.0%
risk-free rate, a
3.4%
dividend yield,
36.8%
volatility and a
10
year term.
In March 2015, the Company issued
9,735
shares of its common stock to its Non-Officer Directors to settle a liability of
$225
for 2014 services.
In March 2016, the Company issued
13,992
shares of its common stock to its Non-Officer Directors to settle a liability of
$225
for 2015 services.
Dividends
On April 30, 2015, the Company announced a first quarter 2015 cash dividend of
$0.33
per share of Common Stock, par value
$0.01
per share, of New Media. The dividend was paid on
May 21, 2015
, to shareholders of record as of the close of business on
May 13, 2015
.
On July 30, 2015, the Company announced a second quarter 2015 cash dividend of
$0.33
per share of Common Stock, par value
$0.01
per share, of New Media. The dividend was paid on
August 20, 2015
, to shareholders of record as of the close of business on
August 12, 2015
.
On October 29, 2015, the Company announced a third quarter 2015 cash dividend of
$0.33
per share of Common Stock, par value
$0.01
per share, of New Media. The dividend was paid on
November 19, 2015
, to shareholders of record as of the close of business on
November 12, 2015
.
On February 25, 2016, the Company announced a fourth quarter 2015 cash dividend of
$0.33
per share Common Stock, par value
$0.01
per share, of New Media. The dividend was paid on
March 17, 2016
, to shareholders of record as of the close of business on
March 9, 2016
.
On April 28, 2016, the Company announced a first quarter 2016 cash dividend of
$0.33
per share of Common Stock, par value
$0.01
per share, of New Media. The dividend was paid on
May 19, 2016
, to shareholders of record as of the close of business on
May 11, 2016
.
(10) Pension and Postretirement Benefits
As a result of the Enterprise News Media LLC, Copley Press, Inc., and Times Publishing Company acquisitions, the Company maintains two pension plans and several postretirement medical and life insurance plans which cover certain employees. The Company uses the accrued benefit actuarial method and best estimate assumptions to determine pension costs, liabilities and other pension information for defined benefit plans.
The Enterprise News Media, LLC pension plan was amended to freeze all future benefit accruals as of December 31, 2008, except for a select group of union employees whose benefits were frozen during 2009. Also, during 2008, the medical and life insurance benefits were frozen, and the plan was amended to limit future benefits to a select group of active employees under the Enterprise News Media, LLC postretirement medical and life insurance plan. The Times Publishing pension plan was frozen prior to the acquisition date.
The following provides information on the pension plans and postretirement medical and life insurance plans for the
three and six
months ended
June 26, 2016
and
June 28, 2015
:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three months ended June 26, 2016
|
|
Three months ended June 28, 2015
|
|
Six months ended June 26, 2016
|
|
Six months ended June 28, 2015
|
|
Pension
|
|
Postretirement
|
|
Pension
|
|
Postretirement
|
|
Pension
|
|
Postretirement
|
|
Pension
|
|
Postretirement
|
Components of net periodic benefit costs:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Service cost
|
$
|
75
|
|
|
$
|
4
|
|
|
$
|
75
|
|
|
$
|
5
|
|
|
$
|
150
|
|
|
$
|
10
|
|
|
$
|
150
|
|
|
$
|
9
|
|
Interest cost
|
814
|
|
|
56
|
|
|
289
|
|
|
55
|
|
|
1,618
|
|
|
111
|
|
|
578
|
|
|
111
|
|
Expected return on plan assets
|
(1,044
|
)
|
|
—
|
|
|
(397
|
)
|
|
—
|
|
|
(2,089
|
)
|
|
—
|
|
|
(821
|
)
|
|
—
|
|
Amortization of unrecognized loss
|
17
|
|
|
—
|
|
|
23
|
|
|
—
|
|
|
41
|
|
|
—
|
|
|
46
|
|
|
—
|
|
Total
|
$
|
(138
|
)
|
|
$
|
60
|
|
|
$
|
(10
|
)
|
|
$
|
60
|
|
|
$
|
(280
|
)
|
|
$
|
121
|
|
|
$
|
(47
|
)
|
|
$
|
120
|
|
For the
three and six
months ended
June 26, 2016
and
June 28, 2015
, the Company recognized a total of
$(78)
,
$50
,
$(159)
, and
$73
in pension and postretirement (benefit) expense, respectively. During the
three and six
months ended
June 26, 2016
, the Company contributed
$339
and
$644
to the pension plans, respectively. The Company is expected to pay an additional
$878
in employer contributions to the pension plans during the second half of the current fiscal year.
(11) Fair Value Measurement
The Company measures and records in the accompanying condensed consolidated financial statements certain assets and liabilities at fair value on a recurring basis. ASC Topic 820 “Fair Value Measurements and Disclosures” establishes a fair value hierarchy for those instruments measured at fair value that distinguishes between assumptions based on market data (observable inputs) and the Company’s own assumptions (unobservable inputs). These inputs are prioritized as follows:
|
|
•
|
Level 1: Observable inputs such as quoted prices in active markets for identical assets or liabilities;
|
|
|
•
|
Level 2: Inputs other than quoted prices included within Level 1 that are observable, either directly or indirectly, such as quoted prices for similar assets or liabilities or market corroborated inputs; and
|
|
|
•
|
Level 3: Unobservable inputs for which there is little or no market data and which require the Company to develop their own assumptions about how market participants price the asset or liability.
|
The valuation techniques that may be used to measure fair value are as follows:
|
|
•
|
Market approach – Uses prices and other relevant information generated by market transactions involving identical or comparable assets or liabilities;
|
|
|
•
|
Income approach – Uses valuation techniques to convert future amounts to a single present amount based on current market expectation about those future amounts;
|
|
|
•
|
Cost approach – Based on the amount that currently would be required to replace the service capacity of an asset (replacement cost).
|
The following table provides information for the Company’s major categories of financial assets and liabilities measured or disclosed at fair value on a recurring basis:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Fair Value Measurements at Reporting Date Using
|
|
|
|
Quoted Prices in
Active Markets for
Identical Assets
(Level 1)
|
|
Significant Other
Observable
Inputs
(Level 2)
|
|
Significant
Unobservable
Inputs
(Level 3)
|
|
Total
Fair Value
Measurements
|
As of June 26, 2016
|
|
|
|
|
|
|
|
Assets
|
|
|
|
|
|
|
|
Cash and cash equivalents
|
$
|
60,689
|
|
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
60,689
|
|
Restricted cash
|
3,200
|
|
|
—
|
|
|
—
|
|
|
3,200
|
|
As of December 27, 2015
|
|
|
|
|
|
|
|
Assets
|
|
|
|
|
|
|
|
Cash and cash equivalents
|
$
|
146,638
|
|
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
146,638
|
|
Restricted cash
|
6,967
|
|
|
—
|
|
|
—
|
|
|
6,967
|
|
Certain assets are measured at fair value on a nonrecurring basis; that is, the instruments are not measured at fair value on an ongoing basis but are subject to fair value adjustments only in certain circumstances (for example, when there is evidence of impairment).
For the acquisitions during the quarters ended March 29, 2015, June 28, 2015, September 27, 2015, March 27, 2016, and June 28, 2016, the Company consolidated the assets and liabilities under the acquisition method of accounting. Accordingly, the assets acquired and liabilities assumed were recorded at their fair value. Property, plant and equipment was valued using Level 2 inputs and intangible assets were valued using Level 3 inputs. Refer to Note 2 for discussion of the valuation techniques, significant inputs, assumptions utilized, and the fair value recognized.
Refer to Note 6 for the discussion on the fair value of the Company’s total long-term debt.
(12) Commitments and Contingencies
The Company is and may become involved from time to time in legal proceedings in the ordinary course of its business, including but not limited to with respect to such matters as libel, invasion of privacy, intellectual property infringement, wrongful termination actions and complaints alleging employment discrimination, and regulatory investigations and inquiries. In addition, the Company is involved from time to time in governmental and administrative proceedings concerning employment, labor, environmental and other claims. Insurance coverage mitigates potential loss for certain of these matters. Historically, such claims and proceedings have not had a material adverse effect on the Company’s consolidated results of operations or financial position. Although the Company is unable to predict with certainty the eventual outcome of any litigation, regulatory investigation or inquiry, in the opinion of management, the Company does not expect its current and any threatened legal proceedings to have a material adverse effect on the Company’s business, financial position or consolidated results of operations. Given the inherent unpredictability of these types of proceedings, however, it is possible that future adverse outcomes could have a material effect on the Company’s financial results.
Restricted cash at
June 26, 2016
and
December 27, 2015
, in the aggregate amount of
$3,200
and
$6,967
, respectively, is used to collateralize standby letters of credit in the name of the Company’s insurers in accordance with certain insurance policies and as cash collateral for certain business operations.
(13) Subsequent Events
Dividends
On July 28, 2016, the Company announced a
second
quarter
2016
cash dividend of
$0.33
per share of Common Stock, par value
$0.01
per share, of New Media. The dividend will be paid on
August 18, 2016
, to shareholders of record as of the close of business on
August 10, 2016
.
Fayetteville Publishing Company
The Company reached an agreement to acquire substantially all of the assets of the Fayetteville Publishing Company for
$18,000
, plus working capital.
The Fayetteville Observer,
is the flagship newspaper of the Fayetteville Publishing Company, serving communities in Cumberland County, NC with a daily and Sunday circulation of approximately
36
and
45
, respectively.
The Company anticipates the acquisition of the Fayetteville Publishing Company will close in the third quarter of 2016 subject to customary closing conditions.
|
|
|
Item 2.
|
Management’s Discussion and Analysis of Financial Condition and Results of Operations
|
Management’s discussion and analysis of financial condition and results of operations is intended to help the reader understand the results of operations and financial condition of New Media Investment Group Inc.’s and its subsidiaries’ (“New Media”, “Company”, “we”, “us” or “our”). The following should be read in conjunction with the unaudited consolidated financial statements and notes thereto included herein, and with Part II, Item 1A, “Risk Factors.”
Overview
New Media, formerly known as GateHouse Media, Inc. (“GateHouse”), is a company that owns, operates and invests in high quality local media assets. We have a particular focus on owning and acquiring strong local media assets in small to mid-size markets. With our collection of assets, we focus on two large business categories; consumers and small to medium size businesses (“SMBs”).
Our portfolio of media assets today spans across 530 markets and 36 states. Our products include 630 publications, 530 websites, 429 mobile sites and six yellow page directories. We reach over 20 million people per week and serve over 200,000 business customers.
We are focused on growing our consumer revenues primarily through our penetration into the local consumer market that values comprehensive local news and receives their news primarily from our products. We believe our rich local content, our strong media brands, and multiple platforms for delivering content will impact our reach into the local consumers leading to growth in subscription income. We also believe our focus on smaller markets will allow us to be a dominant provider of valuable, unique local news to consumers in those markets. We believe that one result of our local consumer penetration in these smaller markets will be transaction revenues as we link consumers with local businesses. For our SMB business category, we focus on leveraging our strong local media brands, our in-market sales force and our high consumer penetration rates with a variety of products and services that we believe will help SMBs expand their marketing, advertising and other digital lead generation platforms. We also believe our strong position in our local markets will allow us to develop other products that will be of value to our SMBs in helping them run and grow their businesses.
Our business strategy is to be the preeminent provider of local news, information, advertising and digital services in the markets we operate in today. We aim to grow our business organically through both our consumer and SMB strategies. We also plan to pursue strategic acquisitions of high quality local media and digital marketing assets at attractive valuation levels. Finally, we intend to distribute a substantial portion of our free cash flow generated from operations or other sources as a dividend to stockholders through a quarterly dividend, subject to satisfactory financial performance and approval by our board of directors (the “Board of Directors”) and dividend restrictions in the New Media Credit Agreement (as defined below). The Board of Directors’ determinations regarding dividends will depend on a variety of factors, including the Company’s U.S. generally accepted accounting principles (“GAAP”) net income, free cash flow generated from operations or other sources, liquidity position and potential alternative uses of cash, such as acquisitions, as well as economic conditions and expected future financial results.
Our focus on owning and operating dominant local content oriented media properties in small to mid-size markets, we believe, puts us in a position to better execute on our strategy. We believe that being the leading provider of local news and information in the markets in which we operate and distributing that content across multiple print and digital platforms, gives us an opportunity to grow our audiences and reach. Further, we believe our strong local media brands and our markets presence gives us the opportunity to expand our advertising and lead generation products with local business customers.
Central to our business strategy are our digital marketing services products called Propel Marketing (“Propel”). We launched the products in 2012 and have seen rapid growth since then. We believe Propel and our digital marketing service products, combined with our strong local brands and in market sales force, position this business to be a key component to our overall organic growth strategy.
The opportunity Propel aims to seize upon is as follows:
There are approximately 27.9 million SMBs in the U.S. according to the 2011 U.S. Census data. Of these, approximately 26.7 million have 20 employees or less.
Many of the owners and managers of these SMBs do not have the bandwidth, expertise or resources to navigate the fast evolving digital marketing sector, but they increasingly know they have to be present there to stay connected with current and future customers.
Propel is designed to offer a complete set of digital marketing services to SMBs that are turn-key with results that are transparent to the business owners. In a recent acquisition we acquired a turnkey proprietary software that enables SMB owners to run their own digital and contact marketing campaigns; Propel can now meet the needs of the full spectrum of SMBs. Propel provides four broad categories of services: building businesses a presence, helping businesses to be located by consumers online, engaging with consumers, and growing their customer base.
We believe our local media properties and local sales infrastructure are uniquely positioned to sell these digital marketing services to local business owners and give us distinct advantages, including:
|
|
•
|
our strong and trusted local brands, with 85% of our daily newspapers having been publishing local content for more than 100 years;
|
|
|
•
|
our ability to market through our print and online properties, driving branding and traffic; and
|
|
|
•
|
our more than 1,580 local, direct, in-market sales professionals with long standing relationships with small businesses in the communities we serve.
|
Our core products include:
|
|
•
|
125 daily newspapers with total paid circulation of approximately 1.4 million;
|
|
|
•
|
316 weekly newspapers (published up to three times per week) with total paid circulation of approximately 321,000 and total free circulation of approximately 1.9 million;
|
|
|
•
|
117 “shoppers” (generally advertising-only publications) with total circulation of approximately 2.9 million;
|
|
|
•
|
530 locally focused websites and 429 mobile sites, which extend our businesses onto the internet and mobile devices with approximately 232 million page views per month;
|
|
|
•
|
six yellow page directories, with a distribution of approximately 348,000, that covers a population of approximately 620,000 people;
|
|
|
•
|
72 business publications; and
|
|
|
•
|
Propel digital marketing services.
|
In addition to our core products, we also opportunistically produce niche publications that address specific local market interests such as recreation, sports, healthcare and real estate. Similarly, GateHouse Live, our event production business, specializes in delivering world-class events for the media industry and the communities they serve.
Our advertising revenue tends to follow a seasonal pattern, with higher advertising revenue in months containing significant events or holidays. Accordingly, our first quarter and our third quarter, historically, are our weakest quarters of the year in terms of revenue. Correspondingly, our second and fourth fiscal quarters, historically, are our strongest quarters. We expect that this seasonality will continue to affect our advertising revenue in future periods.
We have experienced on-going declines in same store print advertising revenue streams and increased volatility of operating performance, despite our geographic diversity, well-balanced portfolio of products, broad customer base and reliance on smaller markets. We may experience additional declines and volatility in the future. These declines in print advertising revenue have come with the shift from traditional media to the internet for consumers and businesses. We believe our local advertising tends to be less sensitive to economic cycles than national advertising because local businesses generally have fewer advertising channels through which to reach their target audience. We are making investments in digital platforms, such as Propel, as well as online, and mobile applications, to support our print publications in order to capture this shift as witnessed by our digital advertising revenue growth, which doubled between 2013 and 2015.
Our operating costs consist primarily of labor, newsprint and delivery costs. Our selling, general and administrative expenses consist primarily of labor costs.
Compensation represents just under 50% of our operating expenses. Over the last few years, we have worked to drive efficiencies and centralization of work throughout our Company. Additionally, we have taken steps to cluster our operations thereby increasing the usage of facilities and equipment while increasing the productivity of our labor force. We expect to continue to employ these steps as part of our business and clustering strategy.
The Company’s operating segments (Eastern US Publishing, Central US Publishing, Western US Publishing, and Business Publications) are aggregated into one reportable business segment.
Acquisitions
On December 31, 2015, January 12, 2016, March 18, 2016, April 22, 2016 and April 29, 2016, we acquired substantially all the assets, properties and business of certain publications/businesses, which included 72 niche publications, one
daily newspaper, two shoppers, a marketing software business, and a cloud solutions partner for an aggregate purchase price of $82.5 million, including estimated working capital.
On June 15, 2015 and September 23, 2015, we acquired substantially all the assets, properties and business of publishing/operating certain newspapers for an aggregate purchase price of $52.0 million, including estimated working capital. The acquisitions included two
daily newspapers, twenty-eight weekly publications and two shoppers serving Central Ohio and Southern Michigan.
During the quarter ended March 29, 2015, we completed the acquisition of Halifax Media Group with a total purchase price, including working capital, of $285.4 million. The acquisition included twenty-four daily publications, thirteen weekly publications and five shoppers serving areas of Alabama, Florida, Louisiana, Massachusetts, North Carolina and South Carolina with a daily circulation of approximately 635,000 and 752,000 on Sunday. We also completed the acquisition of Stephens Media, LLC (“Stephens Media”) with a total purchase price, including working capital, of $110.8 million. Stephens Media included nine daily newspapers, thirty-five weekly publications and fifteen shoppers serving communities throughout the United States with a combined average daily circulation of approximately 221,000 and 244,000 on Sunday.
Dispositions
On December 10, 2015, we completed the sale of the
Las Vegas Review-Journal
and related publications (“Review-Journal”) (initially acquired in the Stephens Media acquisition), which are located in Las Vegas, Nevada for an aggregate sale price of $140.0 million plus working capital adjustment of $1.0 million. As a result, a gain of $57.0 million was included in (gain) loss on sale or disposal of assets on the consolidated statement of operations and comprehensive income during the year ended December 27, 2015.
Restructuring
New Media was formed as a Delaware corporation on June 18, 2013. New Media was capitalized by and issued 1,000 common shares to Newcastle Investment Corp. (“Newcastle”). New Media had no operations until November 26, 2013, when it assumed control of GateHouse Media, Inc. ("GateHouse") and Local Media Group Holdings LLC. Gatehouse was determined to be the predecessor to New Media, as the operations of GateHouse comprises substantially all of the business operations of the combined companies. Newcastle owned approximately 84.6% of New Media until February 13, 2014, upon which date Newcastle distributed the shares that it held in New Media to its shareholders on a pro rata basis.
Management Agreement
On November 26, 2013, New Media entered into a management agreement with FIG LLC (the “Manager”), as amended and restated (the “Management Agreement”) pursuant to which the Manager manages the operations of New Media. Commencing from the Listing, New Media pays the Manager a management fee equal to 1.5% of New Media’s Total Equity (as defined in the Management Agreement) and the Manager is eligible to receive incentive compensation.
Industry
The newspaper industry and the Company have experienced declining revenue and profitability over the past several years. As a result, the Company has implemented, and continues to implement, plans to reduce costs and preserve cash flow. This includes cost reduction programs and the sale of non-core assets. The Company believes these initiatives along with cash provided by operating activities will provide it with the financial resources necessary to invest in the business and provide sufficient cash flow to enable the Company to meet its commitments.
General economic conditions, including declines in consumer confidence, continued high unemployment levels, declines in real estate values, and other trends, have also impacted the markets in which we operate. Additionally, media companies continue to be impacted by the migration of consumers and businesses to an internet and mobile-based, digital medium. These conditions may continue to negatively impact print advertising and other revenue sources as well as increase operating costs in the future, even after an economic recovery. We expect that we will have adequate capital resources and liquidity to meet our working capital needs, borrowing obligations and all required capital expenditures for at least the next twelve months.
We periodically perform testing for impairment of goodwill and newspaper mastheads in which the fair value of our reporting units for goodwill impairment testing and individual newspaper mastheads were estimated using the expected present value of future cash flows and recent industry transaction multiples, using estimates, judgments and assumptions, that we believe were appropriate in the circumstances. Should general economic, market or business conditions decline, and have a negative impact on estimates of future cash flow and market transaction multiples, we may be required to record additional impairment charges in the future.
Critical Accounting Policy Disclosure
The preparation of financial statements in conformity with U.S. generally accepted accounting principles (“GAAP”) requires management to make decisions based on estimates, assumptions and factors it considers relevant to the circumstances. Such decisions include the selection of applicable principles and the use of judgment in their application, the results of which could differ from those anticipated.
A summary of our significant accounting policies are described in Note 1 of our consolidated financial statements for the year ended
December 27, 2015
, included in our Annual Report on Form 10-K.
There have been no changes in critical accounting policies in the current year from those described in our Annual Report on Form 10-K for the year ended
December 27, 2015
.
Results of Operations
The following table summarizes our historical results of operations for New Media for the
three and six
months ended
June 26, 2016
and
June 28, 2015
. References to “same store” results take into account material acquisitions and divestitures of the company by adjusting prior year performance to include or exclude financial results as if the company had owned or divested a business for the comparable period. The results of several acquisitions (“tuck-in acquisitions”) were funded from the Company's available cash and are not considered material.
NEW MEDIA INVESTMENT GROUP INC. AND SUBSIDIARIES
Unaudited Condensed Consolidated Statements of Operations
(In thousands, except share and per share data)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three months ended June 26, 2016
|
|
Three months ended June 28, 2015
|
|
Six months ended June 26, 2016
|
|
Six months ended June 28, 2015
|
Revenues:
|
|
|
|
|
|
|
|
Advertising
|
$
|
174,153
|
|
|
$
|
177,344
|
|
|
$
|
337,791
|
|
|
$
|
321,140
|
|
Circulation
|
104,094
|
|
|
91,763
|
|
|
207,971
|
|
|
172,814
|
|
Commercial printing and other
|
36,583
|
|
|
30,386
|
|
|
69,172
|
|
|
56,156
|
|
Total revenues
|
314,830
|
|
|
299,493
|
|
|
614,934
|
|
|
550,110
|
|
Operating costs and expenses:
|
|
|
|
|
|
|
|
Operating costs
|
172,557
|
|
|
160,360
|
|
|
347,010
|
|
|
301,073
|
|
Selling, general, and administrative
|
106,029
|
|
|
99,667
|
|
|
206,113
|
|
|
188,797
|
|
Depreciation and amortization
|
17,258
|
|
|
17,387
|
|
|
33,349
|
|
|
33,088
|
|
Integration and reorganization costs
|
1,409
|
|
|
1,656
|
|
|
2,335
|
|
|
3,583
|
|
Loss on sale or disposal of assets
|
831
|
|
|
925
|
|
|
2,351
|
|
|
1,470
|
|
Operating income
|
16,746
|
|
|
19,498
|
|
|
23,776
|
|
|
22,099
|
|
Interest expense
|
7,524
|
|
|
7,623
|
|
|
14,878
|
|
|
16,615
|
|
Other income
|
(90
|
)
|
|
(19
|
)
|
|
(254
|
)
|
|
(18
|
)
|
Income before income taxes
|
9,312
|
|
|
11,894
|
|
|
9,152
|
|
|
5,502
|
|
Income tax (benefit) expense
|
(71
|
)
|
|
699
|
|
|
(5,198
|
)
|
|
373
|
|
Net income
|
$
|
9,383
|
|
|
$
|
11,195
|
|
|
$
|
14,350
|
|
|
$
|
5,129
|
|
Three Months Ended
June 26, 2016
Compared To Three Months Ended
June 28, 2015
Revenue
. Total revenue for the three months ended
June 26, 2016
increased by $15.3 million, or 5.1%, to $314.8 million from $299.5 million for the three months ended
June 28, 2015
. The increase in total revenue was comprised of a $12.3 million, or 13.4%, increase in circulation revenue, and a $6.2 million, or 20.4%, increase in commercial printing and other revenue, which was partially offset by a $3.2 million, or 1.8%, decrease in advertising revenue. The increase in revenue includes revenues from our Dolan, LLC, Times Publishing Company, and Columbus Dispatch acquisitions and is partially offset by the loss of revenue as a result of the Review Journal divestiture. The net increase from material acquisitions of $22.0 million is comprised of $10.5 million from advertising, $9.8 million from circulation and $1.7 million from commercial printing and other.
Same store revenue for the three months ended
June 26, 2016
decreased by $10.5 million, or 3.2%, from the three months ended
June 28, 2015
. The decrease in same store revenue was comprised of a $17.1 million, or 9.0%, decrease in same store advertising revenue which was partially offset by a $2.0 million, or 2.0%, increase in same store circulation revenue and a $4.6 million, or 14.6%, increase in same store commercial printing and other revenue. Same store advertising revenue declines were primarily driven by declines on the print side of our business in the local retail and preprint categories due to secular pressures and a continuing uncertain economic environment. These secular trends and economic conditions have also led to a decline in our print circulation volumes, which have been more than offset by price increases in select locations. The majority of the increase in same store commercial printing and other revenue is due to digital marketing services and events revenue.
Operating Costs.
Operating costs for the three months ended
June 26, 2016
increased by $12.2 million, or 7.6%, to $172.6 million from $160.4 million for the three months ended
June 28, 2015
. The increase in operating costs includes operating costs from all acquisitions and is partially offset by the decrease in expenses resulting from the Review-Journal divestiture. The net increase of $23.7 million was partially offset by an $11.5 million decrease in the costs related to the remaining operations. This decline in operating costs related to the remaining operations was primarily due to a decrease in compensation, newsprint expenses, hauling and delivery, and building maintenance expenses of $3.6 million, $3.1 million, $2.6 million and $0.9 million, respectively.
Selling, General and Administrative.
Selling, general and administrative expenses for the three months ended
June 26, 2016
increased by $6.4 million, or 6.4%, to $106.0 million from $99.6 million for the three months ended
June 28, 2015
. The increase includes selling, general and administrative expenses from all acquisitions and is partially offset by the decrease in expenses resulting from the Review-Journal divestiture. The net increase of $14.2 million was partially offset by a $7.8 million decrease in the costs related to the remaining operations. This decline in selling, general and administrative expenses related to the remaining operations was primarily due to a decrease in compensation expenses, outside services, and postage expenses of $3.9 million, $2.5 million and $0.7 million, respectively.
Integration and Reorganization Costs.
During the three months ended
June 26, 2016
and
June 28, 2015
, we recorded integration and reorganization costs of $1.4 million and $1.7 million, respectively, primarily resulting from severance costs related to acquisition-related synergies and the continued consolidation of our operations resulting from our ongoing implementation of our plans to reduce costs and preserve cash flow.
Income Tax (Benefit) Expense.
During the three months ended
June 26, 2016
and
June 28, 2015
, we recorded an income tax benefit of $0.1 million and an income tax expense of $0.7 million, respectively. The increase in income tax benefit is primarily due to the discrete income tax benefit recognized during the three months ended
June 26, 2016
, attributable to the release of a portion of the valuation allowance as deferred tax assets were utilized to offset deferred tax liabilities of an acquired entity.
Net Income.
Net income for the three months ended
June 26, 2016
and
June 28, 2015
was $9.4 million and $11.2 million, respectively. Our net income decreased due to the factors noted above.
Six
Months Ended
June 26, 2016
Compared To
Six
Months Ended
June 28, 2015
Revenue
. Total revenue for the
six
months ended
June 26, 2016
increased by $64.8 million, or 11.8%, to $614.9 million from $550.1 million for the
six
months ended
June 28, 2015
. The increase in total revenue was comprised of a $16.7 million, or 5.2%, increase in advertising revenue, a $35.1 million, or 20.3%, increase in circulation revenue, and a $13.0 million, or 23.2%, increase in commercial printing and other revenue. The increase in revenue of $64.8 million includes revenues from our Dolan, LLC, Times Publishing Company, Columbus Dispatch, Stephens Media (excluding the Review-Journal divestiture) and Halifax Media Group acquisitions of $83.2 million, which is comprised of $44.3 million from advertising, $30.9 million from circulation and $8.0 million from commercial printing and other.
Same store revenue for the
six
months ended
June 26, 2016
decreased by $26.7 million, or 4.1%, from the
six
months ended
June 28, 2015
. The decrease in same store revenue was comprised of a $34.6 million, or 9.3%, decrease in same store advertising revenue, which was partially offset by a $3.4 million, or 1.7%, increase in same store circulation revenue and a $4.5 million, or 7.1%, increase in same store commercial printing and other revenue. Same store advertising revenue declines were primarily driven by declines on the print side of our business in the local retail and preprint categories due to secular pressures and a continuing uncertain economic environment. These secular trends and economic conditions have also led to a decline in our print circulation volumes, which have been more than offset by price increases in select locations. The majority of the increase in same store commercial printing and other revenue is due to digital marketing services and events revenue.
Operating Costs.
Operating costs for the
six
months ended
June 26, 2016
increased by $45.9 million, or 15.3%, to $347.0 million from $301.1 million for the
six
months ended
June 28, 2015
. The increase in operating costs of $45.9 million includes operating costs from all acquisitions (excluding the Review-Journal divestiture) of $51.6 million, which were partially offset by a $5.7 million decrease in the costs related to the remaining operations. This decline in operating costs related to the remaining operations was primarily due to a decrease in newsprint, postage, and utility expenses of $4.7 million, $0.6 million, and $0.5 million, respectively.
Selling, General and Administrative.
Selling, general and administrative expenses for the
six
months ended
June 26, 2016
increased by $17.3 million, or 9.2%, to $206.1 million from $188.8 million for the
six
months ended
June 28, 2015
. The
increase of $17.3 million includes selling, general and administrative expenses from all acquisitions (excluding the Review-Journal divestiture) of $26.9 million, which were partially offset by a $9.6 million decrease in the costs related to the remaining operations. This decline in selling, general and administrative expenses related to the remaining operations was primarily due to a decrease in compensation expenses and outside services of $7.5 million and $2.9 million, respectively.
Integration and Reorganization Costs.
During the
six
months ended
June 26, 2016
and
June 28, 2015
, we recorded integration and reorganization costs of $2.3 million and $3.6 million, respectively, primarily resulting from severance costs related to acquisition-related synergies and the continued consolidation of our operations resulting from our ongoing implementation of our plans to reduce costs and preserve cash flow.
Interest Expense.
Interest expense for the
six
months ended
June 26, 2016
decreased by $1.7 million to $14.9 million from $16.6 million for the
six
months ended
June 28, 2015
. The decrease in interest expense was primarily due to the write-off of deferred financing costs related to the 2015 Incremental Revolver (as defined below) and a decrease in our total outstanding debt.
Income Tax (Benefit) Expense.
During the
six
months ended
June 26, 2016
and
June 28, 2015
, we recorded an income tax benefit of $5.2 million and an income tax expense of $0.4 million, respectively. The increase in income tax benefit is primarily due to the discrete income tax benefit recognized during the
six
months ended
June 26, 2016
, attributable to the release of a portion of the valuation allowance as deferred tax assets were utilized to offset deferred tax liabilities of two acquired entities.
Net Income.
Net income for the
six
months ended
June 26, 2016
and
June 28, 2015
was $14.4 million and $5.1 million, respectively. Our net income increased due to the factors noted above.
Liquidity and Capital Resources
Our primary cash requirements are for working capital, debt obligations and capital expenditures. We have no material outstanding commitments for capital expenditures. We expect our 2016 capital expenditure to total between $10 million and $12 million. The 2016 capital expenditures will be primarily comprised of projects related to the consolidation of print operations and system upgrades. For more information on our long term debt and debt service obligations, see Note 6 to the unaudited condensed consolidated financial statements, “Indebtedness”. Our principal sources of funds have historically been, and are expected to continue to be, cash provided by operating activities.
As a holding company, we have no operations of our own and accordingly we have no independent means of generating revenue, and our internal sources of funds to meet our cash needs, including payment of expenses, are dividends and other permitted payments from our subsidiaries.
We expect to fund our operations through cash provided by our subsidiaries’ operating activities, the incurrence of debt or the issuance of additional equity securities. We expect that we will have adequate capital resources and liquidity to meet our working capital needs, borrowing obligations and all required capital expenditures for at least the next twelve months.
Our leverage may adversely affect our business and financial performance and restricts our operating flexibility. The level of our indebtedness and our on-going cash flow requirements may expose us to a risk that a substantial decrease in operating cash flows due to, among other things, continued or additional adverse economic developments or adverse developments in our business, could make it difficult for us to meet the financial and operating covenants contained in our credit facilities. In addition, our leverage may limit cash flow available for general corporate purposes such as capital expenditures and our flexibility to react to competitive, technological and other changes in our industry and economic conditions generally.
Dividends
On July 28, 2016, the Company announced a third quarter 2016 cash dividend of $0.33 per share of Common Stock, par value $0.01 per share, of New Media. The dividend will be paid on August 18, 2016, to shareholders of record as of the close of business on August 10, 2016.
On April 28, 2016, the Company announced a first quarter 2016 cash dividend of $0.33 per share of Common Stock, par value $0.01 per share, of New Media. The dividend was paid on May 19, 2016, to shareholders of record as of the close of business on May 11, 2016.
On February 25, 2016, the Company announced a fourth quarter 2015 cash dividend of $0.33 per share of Common Stock, par value $0.01 per share, of New Media. The dividend was paid on March 17, 2016, to shareholders of record as of the close of business on March 9, 2016.
On October 29, 2015, the Company announced a third quarter 2015 cash dividend of $0.33 per share of Common Stock, par value $0.01 per share, of New Media. The dividend was paid on November 19, 2015, to shareholders of record as of the close of business on November 12, 2015.
On July 30, 2015, the Company announced a second quarter 2015 cash dividend of $0.33 per share of Common Stock, par value $0.01 per share, of New Media. The dividend was paid on August 20, 2015, to shareholders of record as of the close of business on August 12, 2015.
On April 30, 2015, the Company announced a first quarter 2015 cash dividend of $0.33 per share of Common Stock, par value $0.01 per share, of New Media. The dividend was paid on May 21, 2015, to shareholders of record as of the close of business on May 13, 2015.
New Media Credit Agreement
On June 4, 2014, New Media Holdings II LLC (the “New Media Borrower”), a wholly owned subsidiary of New Media, entered into a credit agreement (the “New Media Credit Agreement”) among the New Media Borrower, New Media Holdings I LLC (“Holdings I”), the lenders party thereto, RBS Citizens, N.A. and Credit Suisse Securities (USA) LLC as joint lead arrangers and joint bookrunners, Credit Suisse AG, Cayman Islands Branch as syndication agent and Citizens Bank of Pennsylvania as administration agent which provides for (i) a $200 million senior secured term facility (the “Term Loan Facility” and any loan thereunder, including as part of the Incremental Facility, “Term Loans”) and (ii) a $25 million senior secured revolving credit facility, with a $5 million sub-facility for letters of credit and a $5 million sub-facility for swing loans, (the “Revolving Credit Facility” and together with the Term Loan Facility, the “Senior Secured Credit Facilities”). In addition, the New Media Borrower may request one or more new commitments for term loans or revolving loans from time to time up to an aggregate total of $75 million (the “Incremental Facility”) subject to certain conditions. On June 4, 2014, the New Media Borrower borrowed $200 million under the Term Loan Facility (the “Initial Term Loans”). As of June 26, 2016, $0 was drawn under the Revolving Credit Facility. The Term Loans mature on June 4, 2020 and the maturity date for the Revolving Credit Facility is June 4, 2019. The New Media Credit Agreement was amended;
•
on September 3, 2014, to provide for additional term loans under the Incremental Facility in an aggregate principal amount of $25 million (the “2014 Incremental Term Loan”);
•
on November 20, 2014, to increase the amount of the Incremental Facility that may be requested after the date of the amendment from $75 million to $225 million;
•
on January 9, 2015, to provide for $102 million in additional term loans (the “2015 Incremental Term Loan”) and $50 million in additional revolving commitments (the “2015 Incremental Revolver”) under the Incremental Facility and to make certain amendments to the Revolving Credit Facility in connection with the Halifax Media acquisition;
•
on February 13, 2015, to provide for the replacement of the existing term loans under the Term Loan Facility (including the 2014 Incremental Term Loan and the 2015 Incremental Term Loan) with a new class of replacement term loans. This amendment was considered a modification, and the related $0.1 million of fees were expensed during the first quarter of 2015;
•
on March 6, 2015, to provide for $15 million in additional revolving commitments under the Incremental Facility and in connection with this transaction, the Company incurred approximately $0.2 million of fees and expenses which were capitalized as deferred financing costs; and
•
on May 29, 2015, to provide for $25 million in additional term loans under the Incremental Facility.
The New Media Credit Agreement contains customary representations and warranties and customary affirmative and negative covenants applicable to Holdings, the New Media Borrower and the New Media Borrower’s subsidiaries, including, among other things, restrictions on indebtedness, liens, investments, fundamental changes, dispositions, and dividends and other distributions. The New Media Credit Agreement contains a financial covenant that requires Holdings I, the New Media Borrower and the New Media Borrower’s subsidiaries to maintain a maximum total leverage ratio of 3.25:1.00.
As of
June 26, 2016
, we are in compliance with all of the covenants and obligations under the New Media Credit Agreement.
Refer to Note 6 to the unaudited condensed consolidated financial statements, “Indebtedness,” and to “Management’s Discussion and Analysis of Financial Condition and Results of Operations - Liquidity and Capital Resources,” in our Annual Report on Form 10-K for the fiscal year ended December 27, 2015, for further discussion of the New Media Credit Agreement.
Advantage Credit Agreements
In connection with the purchase of the assets of Halifax Media, which closed on January 9, 2015, certain subsidiaries of the Company (the "Advantage Borrowers") agreed to assume all of the obligations of Halifax Media and its affiliates in respect of each of (i) that certain Consolidated Amended and Restated Credit Agreement dated January 6, 2012 among Halifax Media Acquisition LLC, Advantage Capital Community Development Fund XXVIII, L.L.C., and Florida Community Development Fund II, L.L.C. (as amended, the “Halifax Florida Credit Agreement”) and (ii) that certain Credit Agreement dated June 18, 2013 between Halifax Alabama, LLC and Southeast Community Development Fund V, L.L.C. (the “Halifax Alabama Credit Agreement” and, together with the Halifax Florida Credit Agreement, the “Advantage Credit Agreements”), respectively (the debt under the Halifax Florida Credit Agreement, the “Advantage Florida Debt”; the debt under the Halifax Alabama Credit Agreement, the “Advantage Alabama Debt”; and the Advantage Florida Debt and the Advantage Alabama Debt, collectively, the “Advantage Debt”).
The Halifax Florida Credit Agreement is in the principal amount of $10 million and bears interest at the rate of 5.25% per annum, payable quarterly in arrears, maturing on December 31, 2016. The Halifax Alabama Credit Agreement is in the principal amount of $8 million and bears interest at the rate of LIBOR plus 6.25% per annum (with a minimum of 1% LIBOR) payable quarterly in arrears, maturing on March 31, 2019. The Advantage Debt is secured by a perfected second priority security interest in all the assets of the Advantage Borrowers and certain other subsidiaries of the Company, subject to the limitation that the maximum amount of secured obligations is $15 million. The Advantage Credit Facilities are unconditionally guaranteed by Holdings I and certain subsidiaries of the New Media Borrowers and are required to be guaranteed by all future material wholly-owned domestic subsidiaries, subject to certain exceptions. The Advantage Debt is subordinated to the New Media Credit Facilities pursuant to an intercreditor agreement.
The Advantage Credit Agreements contain covenants substantially consistent with those contained in the New Media Credit Facilities in addition to those required for compliance with the New Markets Tax Credit program. The Advantage Borrowers are permitted to make voluntary prepayments at any time without premium or penalty and are subject to customary mandatory prepayment events including from proceeds from asset sales and certain debt obligations.
The Advantage Credit Agreements contain customary representations and warranties and customary affirmative and negative covenants applicable to the Advantage Borrowers and certain of the Company subsidiaries, including, among other things, restrictions on indebtedness, liens, investments, fundamental changes, dispositions, and dividends and other distributions. The Advantage Credit Agreements contain a financial covenant that requires Holdings I, the New Media Borrower and the New Media Borrower’s subsidiaries to maintain a maximum total leverage ratio of 3.75 to 1.00. The Advantage Credit Agreements contain customary events of default.
As of
June 26, 2016
, we are in compliance with all of the covenants and obligations under the Advantage Credit Agreements.
Refer to Note 6 to the unaudited condensed consolidated financial statements, “Indebtedness,” and to “Management’s Discussion and Analysis of Financial Condition and Results of Operations - Liquidity and Capital Resources,” in our Annual Report on Form 10-K for the fiscal year ended December 27, 2015, for further discussion of the Advantage Credit Agreements.
Cash Flows
The following table summarizes our historical cash flows.
|
|
|
|
|
|
|
|
|
|
Six months ended June 26, 2016
|
|
Six months ended June 28, 2015
|
Cash provided by operating activities
|
$
|
30,824
|
|
|
$
|
51,187
|
|
Cash used in investing activities
|
(85,186
|
)
|
|
(428,703
|
)
|
Cash (used in) provided by financing activities
|
(31,587
|
)
|
|
266,481
|
|
The discussion of our cash flows that follows is based on our historical cash flows for the
six
months ended
June 26, 2016
and
June 28, 2015
.
Cash Flows from Operating Activities.
Net cash provided by operating activities for the
six
months ended
June 26, 2016
was
$30.8 million
, a decrease of
$20.4 million
when compared to
$51.2 million
of cash provided by operating activities for the
six
months ended
June 28, 2015
. This
$20.4 million
decrease was the result of a decrease in cash provided by working capital of $25.3 million and a decrease in adjustments for non-cash charges of $4.3 million, which was partially offset by an increase in net income of $9.2 million.
The $25.3 million decrease in cash provided by working capital for the
six
months ended
June 26, 2016
when compared to the
six
months ended
June 28, 2015
, is primarily attributable to a decrease in accrued expenses, which was partially offset by an increase in accounts payable and a decrease in accounts receivable.
The $4.3 million decrease in adjustments to net income for non-cash charges when compared to the six months ended June 28, 2015, primarily consisted of a $5.8 million decrease in non-cash deferred income tax benefit and a $0.3 million increase in pension and other postretirement benefit obligations, which was partially offset by an increase in loss on sale of assets of $0.9 million, an increase in non-cash compensation expense of $0.7 million, and an increase in depreciation and amortization of $0.3 million.
Cash Flows from Investing Activities.
Net cash used in investing activities for the
six
months ended
June 26, 2016
was
$85.2 million
. During the
six
months ended
June 26, 2016
, we used $82.8 million, net of cash acquired, for acquisitions and $5.4 million for capital expenditures, which was partially offset by $3.1 million we received from the sale of publications and other assets.
Net cash used in investing activities for the
six
months ended
June 28, 2015
was
$428.7 million
. During the
six
months ended
June 28, 2015
, we used $425.5 million, net of cash acquired, for acquisitions and $3.9 million for capital expenditures, which was partially offset by $0.7 million we received from the sale of publications and other assets.
Cash Flows from Financing Activities.
Net cash used in financing activities for the
six
months ended
June 26, 2016
was
$31.6 million
primarily due to the payment of dividends of $29.5 million, repayments under term loans of $1.8 million, and a $0.4 million purchase of treasury stock.
Net cash provided by financing activities for the
six
months ended
June 28, 2015
was
$266.5 million
due to the issuance of common stock of $149.5 million from the public offering, net of underwriters’ discount and offering costs, borrowings under term loans of $122.9 million, and borrowings under the revolving credit facility of $84.0 million, which were offset by repayments under the revolving credit facility of $60.0 million, payment of dividends of $28.0 million, repayments under term loans of $1.4 million, and the payment of debt issuance costs of $0.5 million.
Changes in Financial Position
The discussion that follows highlights significant changes in our financial position and working capital from
December 27, 2015
to
June 26, 2016
.
Restricted Cash.
Restricted cash decreased $3.8 million from
December 27, 2015
to
June 26, 2016
, which primarily relates to our reduction of standby letters of credit in the name of our insurers that were fully collateralized with cash.
Accounts Receivable.
Accounts receivable decreased $10.7 million from December 27, 2015 to
June 26, 2016
, which primarily relates the timing of cash collections and lower same store revenue recognized in the 2016 six month period compared to 2015, which was partially offset by $9.9 million of assets acquired in the six month period ending
June 26, 2016
.
Prepaid Expenses.
Prepaid expenses increased $4.8 million from
December 27, 2015
to
June 26, 2016
, which primarily relates to the timing of payments and the remainder is due to acquisitions during the first six months of 2016.
Other Current Assets.
Other current assets increased $6.5 million from
December 27, 2015
to
June 26, 2016
, primarily due to increased collateral required by our insurers in accordance with certain insurance policies.
Property, Plant, and Equipment.
Property, plant, and equipment decreased $13.1 million from
December 27, 2015
to
June 26, 2016
, of which $23.7 million relates to depreciation and $2.8 million relates to assets sold or disposed of, which was partially offset by $7.9 million of assets acquired and $5.4 million of capital expenditures.
Goodwill.
Goodwill increased $43.2 million from
December 27, 2015
to
June 26, 2016
, which relates to acquisitions during the first six months of 2016.
Intangible Assets.
Intangible assets increased $47.3 million from
December 27, 2015
to
June 26, 2016
, of which $57.1 million relates to acquisitions during the first six months of 2016, which was offset by $9.7 million of amortization and $0.2 million from the sale of intangible assets.
Other Assets.
Other assets increased $2.2 million from
December 27, 2015
to
June 26, 2016
, of which $4.2 million relates to acquisitions during the first six months of 2016, which was partially offset by $2.4 million of assets sold or disposed of.
Current Portion of Long-term Debt.
Current portion of long-term debt increased $10.0 million from
December 27, 2015
to
June 26, 2016
, due to debt that was assumed in the Halifax acquisition in 2015 having a $10 million value that is due December 31, 2016.
Accrued Expenses.
Accrued expenses decreased $25.4 million from
December 27, 2015
to
June 26, 2016
, which primarily relates to a decrease in the management and incentive fee accrual of $15.6 million, a decrease in accrued bonuses of $5.2 million, a decrease in accrued accounts payable of $2.5 million, a decrease in accrued restructuring of $1.8 million, and a decrease in accrued income taxes of $1.7 million, which was partially offset by an increase of $3.6 million from acquisitions during the first six months of 2016.
Deferred Revenue.
Deferred revenue increased $10.5 million from
December 27, 2015
to
June 26, 2016
, which relates primarily to acquisitions during the first six months of 2016.
Long-term Debt.
Long-term debt decreased $10.2 million from
December 27, 2015
to
June 26, 2016
, due to a $10.0 million reclassification from long-term debt to current portion of long-term debt and a repayment of long-term debt of $1.8 million, which was partially offset by $1.4 million of non-cash interest expense.
Long-term Liabilities, Less Current Portion.
Long-term liabilities, less current portion increased $2.6 million from
December 27, 2015
to
June 26, 2016
, which relates primarily to acquisitions during the first six months of 2016.
Pension and other postretirement benefit obligations.
Pension and other postretirement benefit obligations increased $15.3 million from
December 27, 2015
to
June 26, 2016
, which relates primarily to pension liabilities assumed in the Times Publishing Company acquisition during the first six months of 2016.
Retained Earnings.
Retained earnings decreased $15.2 million from
December 27, 2015
to
June 26, 2016
, due to dividends of $29.6 million, which was partially offset by net income of $14.4 million.
Summary Disclosure About Contractual Obligations and Commercial Commitments
There have been no significant changes to our contractual obligations previously reported in our Annual Report on Form 10-K for the year ended
December 27, 2015
.
Off-Balance Sheet Arrangements
We do not have any off-balance sheet arrangements reasonably likely to have a current or future effect on our financial statements.
Contractual Commitments
There were no material changes made to our contractual commitments during the period from
December 27, 2015
to
June 26, 2016
.
Non-GAAP Financial Measures
A non-GAAP financial measure is generally defined as one that purports to measure historical or future financial performance, financial position or cash flows, but excludes or includes amounts that would not be so adjusted in the most comparable GAAP measure. We define and use Adjusted EBITDA, a non-GAAP financial measure, as set forth below.
Adjusted EBITDA
We define Adjusted EBITDA as follows:
Income (loss) from continuing operations
before
:
|
|
•
|
income tax expense (benefit);
|
|
|
•
|
interest/financing expense;
|
|
|
•
|
depreciation and amortization; and
|
Management’s Use of Adjusted EBITDA
Adjusted EBITDA is not a measurement of financial performance under GAAP and should not be considered in isolation or as an alternative to income from operations, net income (loss), cash flow from continuing operating activities or any other measure of performance or liquidity derived in accordance with GAAP. We believe this non-GAAP measure, as we have defined it, is helpful in identifying trends in our day-to-day performance because the items excluded have little or no significance on our day-to-day operations. This measure provides an assessment of controllable expenses and affords management the ability to make decisions which are expected to facilitate meeting current financial goals as well as achieve optimal financial performance.
Adjusted EBITDA provides us with a measure of financial performance, independent of items that are beyond the control of management in the short-term, such as depreciation and amortization, taxation, non-cash impairments and interest expense associated with our capital structure. This metric measures our financial performance based on operational factors that management can impact in the short-term, namely the cost structure or expenses of the organization. Adjusted EBITDA is one of the metrics we use to review the financial performance of our business on a monthly basis.
Limitations of Adjusted EBITDA
Adjusted EBITDA has limitations as an analytical tool. It should not be viewed in isolation or as a substitute for GAAP measures of earnings or cash flows. Material limitations in making the adjustments to our earnings to calculate Adjusted EBITDA and using this non-GAAP financial measure as compared to GAAP net income (loss), include: the cash portion of interest/financing expense, income tax (benefit) provision and charges related to impairments of long lived assets, which may significantly affect our financial results.
A reader of our financial statements may find this item important in evaluating our performance, results of operations and financial position. We use non-GAAP financial measures to supplement our GAAP results in order to provide a more complete understanding of the factors and trends affecting our business.
Adjusted EBITDA is not an alternative to net income, income from operations or cash flows provided by or used in operations as calculated and presented in accordance with GAAP. Readers of our financial statements should not rely on Adjusted EBITDA as a substitute for any such GAAP financial measure. We strongly urge readers of our financial statements to review the reconciliation of income (loss) from continuing operations to Adjusted EBITDA, along with our consolidated financial statements included elsewhere in this report. We also strongly urge readers of our financial statements to not rely on any single financial measure to evaluate our business. In addition, because Adjusted EBITDA is not a measure of financial performance under GAAP and is susceptible to varying calculations, the Adjusted EBITDA measure, as presented in this report, may differ from and may not be comparable to similarly titled measures used by other companies.
We use Adjusted EBITDA as a measure of our day-to-day operating performance, which is evidenced by the publishing and delivery of news and other media and excludes certain expenses that may not be indicative of our day-to-day business operating results. We consider the unrealized (gain) loss on derivative instruments and the loss on early extinguishment of debt to be financing related costs associated with interest expense or amortization of financing fees. Accordingly, we exclude financing related costs such as the early extinguishment of debt because they represent the write-off of deferred financing costs and we believe these non-cash write-offs are similar to interest expense and amortization of financing fees, which by definition are excluded from Adjusted EBITDA. Additionally, the non-cash gains (losses) on derivative contracts, which are related to interest rate swap agreements to manage interest rate risk, are financing costs associated with interest expense. Such charges are incidental to, but not reflective of, our day-to-day operating performance and it is appropriate to exclude charges related to financing activities such as the early extinguishment of debt and the unrealized (gain) loss on derivative instruments which,
depending on the nature of the financing arrangement, would have otherwise been amortized over the period of the related agreement and does not require a current cash settlement. Such charges are incidental to, but not reflective of our day-to-day operating performance of the business that management can impact in the short term.
The table below shows the reconciliation of net income to Adjusted EBITDA for the periods presented:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three months ended June 26, 2016
|
|
Three months ended June 28, 2015
|
|
Six months ended June 26, 2016
|
|
Six months ended June 28, 2015
|
|
|
(in thousands)
|
|
Net income
|
$
|
9,383
|
|
|
$
|
11,195
|
|
|
$
|
14,350
|
|
|
$
|
5,129
|
|
|
Income tax (benefit) expense
|
(71
|
)
|
|
699
|
|
|
(5,198
|
)
|
|
373
|
|
|
Interest expense
|
7,524
|
|
|
7,623
|
|
|
14,878
|
|
|
16,615
|
|
|
Depreciation and amortization
|
17,258
|
|
|
17,387
|
|
|
33,349
|
|
|
33,088
|
|
|
Adjusted EBITDA from continuing operations
|
$
|
34,094
|
|
(a)
|
$
|
36,904
|
|
(b)
|
$
|
57,379
|
|
(c)
|
$
|
55,205
|
|
(d)
|
|
|
(a)
|
Adjusted EBITDA for the three months ended
June 26, 2016
included net expenses of $5,990, related to transaction and project costs, non-cash compensation, and other expense of $3,750, integration and reorganization costs of $1,409 and a $831 loss on the sale or disposal of assets.
|
|
|
(b)
|
Adjusted EBITDA for the three months ended
June 28, 2015
included net expenses of $5,485, related to transaction and project costs, non-cash compensation, and other expense of $2,904, integration and reorganization costs of $1,656 and a $925 loss on the sale or disposal of assets.
|
|
|
(c)
|
Adjusted EBITDA for the
six
months ended
June 26, 2016
included net expenses of $11,799, related to transaction and project costs, non-cash compensation, and other expense of $7,113, integration and reorganization costs of $2,335 and a $2,351 loss on the sale or disposal of assets.
|
|
|
(d)
|
Adjusted EBITDA for the
six
months ended
June 28, 2015
included net expenses of $12,459, related to transaction and project costs, non-cash compensation, and other expense of $7,406, integration and reorganization costs of $3,583 and a $1,470 loss on the sale or disposal of assets.
|