NEW MEDIA INVESTMENT GROUP INC. AND SUBSIDIARIES
Condensed Consolidated Balance Sheets
(In thousands, except share data)
|
|
|
|
|
|
|
|
|
|
June 25, 2017
|
|
December 25, 2016
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|
(unaudited)
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|
|
ASSETS
|
|
|
|
Current assets:
|
|
|
|
Cash and cash equivalents
|
$
|
154,327
|
|
|
$
|
172,246
|
|
Restricted cash
|
3,406
|
|
|
3,406
|
|
Accounts receivable, net of allowance for doubtful accounts of $5,652 and $5,478 at June 25, 2017 and December 25, 2016, respectively
|
125,631
|
|
|
138,115
|
|
Inventory
|
17,218
|
|
|
18,167
|
|
Prepaid expenses
|
22,824
|
|
|
18,720
|
|
Other current assets
|
20,869
|
|
|
19,694
|
|
Total current assets
|
344,275
|
|
|
370,348
|
|
Property, plant, and equipment, net of accumulated depreciation of $149,026 and $130,839 at June 25, 2017 and December 25, 2016, respectively
|
361,529
|
|
|
381,319
|
|
Goodwill
|
200,735
|
|
|
227,954
|
|
Intangible assets, net of accumulated amortization of $54,864 and $43,632 at June 25, 2017 and December 25, 2016, respectively
|
340,790
|
|
|
351,477
|
|
Other assets
|
5,991
|
|
|
4,932
|
|
Total assets
|
$
|
1,253,320
|
|
|
$
|
1,336,030
|
|
LIABILITIES AND STOCKHOLDERS’ EQUITY
|
|
|
|
Current liabilities:
|
|
|
|
Current portion of long-term debt
|
$
|
4,387
|
|
|
$
|
14,387
|
|
Accounts payable
|
25,492
|
|
|
19,105
|
|
Accrued expenses
|
70,483
|
|
|
84,389
|
|
Deferred revenue
|
78,658
|
|
|
77,987
|
|
Total current liabilities
|
179,020
|
|
|
195,868
|
|
Long-term liabilities:
|
|
|
|
Long-term debt
|
338,498
|
|
|
338,860
|
|
Long-term liabilities, less current portion
|
13,640
|
|
|
12,597
|
|
Deferred income taxes
|
8,877
|
|
|
7,786
|
|
Pension and other postretirement benefit obligations
|
25,038
|
|
|
25,946
|
|
Total liabilities
|
565,073
|
|
|
581,057
|
|
Stockholders’ equity:
|
|
|
|
Common stock, $0.01 par value, 2,000,000,000 shares authorized at June 25, 2017 and December 25, 2016; 53,350,746 and 53,543,226 issued at June 25, 2017 and December 25, 2016, respectively
|
527
|
|
|
531
|
|
Additional paid-in capital
|
719,957
|
|
|
742,543
|
|
Accumulated other comprehensive loss
|
(3,921
|
)
|
|
(3,977
|
)
|
(Accumulated deficit) retained earnings
|
(27,272
|
)
|
|
16,293
|
|
Treasury stock, at cost, 112,809 and 46,438 shares at June 25, 2017 and December 25, 2016, respectively
|
(1,044
|
)
|
|
(417
|
)
|
Total stockholders’ equity
|
688,247
|
|
|
754,973
|
|
Total liabilities and stockholders’ equity
|
$
|
1,253,320
|
|
|
$
|
1,336,030
|
|
See accompanying notes to unaudited condensed consolidated financial statements.
NEW MEDIA INVESTMENT GROUP INC. AND SUBSIDIARIES
Unaudited Condensed Consolidated Statements of Operations and Comprehensive (Loss) Income
(In thousands, except per share data)
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|
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Three months ended June 25, 2017
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Three months ended June 26, 2016
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|
Six months ended June 25, 2017
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|
Six months ended June 26, 2016
|
Revenues:
|
|
|
|
|
|
|
|
Advertising
|
$
|
167,381
|
|
|
$
|
174,153
|
|
|
$
|
322,946
|
|
|
$
|
337,791
|
|
Circulation
|
110,563
|
|
|
104,094
|
|
|
221,368
|
|
|
207,971
|
|
Commercial printing and other
|
44,929
|
|
|
36,583
|
|
|
86,083
|
|
|
69,172
|
|
Total revenues
|
322,873
|
|
|
314,830
|
|
|
630,397
|
|
|
614,934
|
|
Operating costs and expenses:
|
|
|
|
|
|
|
|
Operating costs
|
177,020
|
|
|
172,557
|
|
|
354,811
|
|
|
347,010
|
|
Selling, general, and administrative
|
106,497
|
|
|
106,029
|
|
|
212,529
|
|
|
206,113
|
|
Depreciation and amortization
|
18,760
|
|
|
17,258
|
|
|
36,364
|
|
|
33,349
|
|
Integration and reorganization costs
|
2,237
|
|
|
1,409
|
|
|
4,607
|
|
|
2,335
|
|
Impairment of long-lived assets
|
—
|
|
|
—
|
|
|
6,485
|
|
|
—
|
|
Goodwill and mastheads impairment
|
27,448
|
|
|
—
|
|
|
27,448
|
|
|
—
|
|
(Gain) loss on sale or disposal of assets
|
(2,634
|
)
|
|
831
|
|
|
(2,546
|
)
|
|
2,351
|
|
Operating (loss) income
|
(6,455
|
)
|
|
16,746
|
|
|
(9,301
|
)
|
|
23,776
|
|
Interest expense
|
7,217
|
|
|
7,524
|
|
|
14,435
|
|
|
14,878
|
|
Other expense (income)
|
60
|
|
|
(90
|
)
|
|
12
|
|
|
(254
|
)
|
(Loss) income before income taxes
|
(13,732
|
)
|
|
9,312
|
|
|
(23,748
|
)
|
|
9,152
|
|
Income tax expense (benefit)
|
7,955
|
|
|
(71
|
)
|
|
1,624
|
|
|
(5,198
|
)
|
Net (loss) income
|
$
|
(21,687
|
)
|
|
$
|
9,383
|
|
|
$
|
(25,372
|
)
|
|
$
|
14,350
|
|
(Loss) income per share:
|
|
|
|
|
|
|
|
Basic:
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|
|
|
|
|
|
|
Net (loss) income
|
$
|
(0.41
|
)
|
|
$
|
0.21
|
|
|
$
|
(0.48
|
)
|
|
$
|
0.32
|
|
Diluted:
|
|
|
|
|
|
|
|
Net (loss) income
|
$
|
(0.41
|
)
|
|
$
|
0.21
|
|
|
$
|
(0.48
|
)
|
|
$
|
0.32
|
|
Dividends declared per share
|
$
|
0.35
|
|
|
$
|
0.33
|
|
|
$
|
0.70
|
|
|
$
|
0.66
|
|
Comprehensive (loss) income
|
$
|
(21,659
|
)
|
|
$
|
9,400
|
|
|
$
|
(25,316
|
)
|
|
$
|
14,391
|
|
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)
|
|
|
|
|
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|
|
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|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Common stock
|
|
Additional
paid-in capital
|
|
Accumulated
other
comprehensive
income (loss)
|
|
(Accumulated deficit) retained
earnings
|
|
Treasury stock
|
|
Total
|
|
Shares
|
|
Amount
|
|
Shares
|
|
Amount
|
Balance at December 25, 2016
|
53,543,226
|
|
|
$
|
531
|
|
|
$
|
742,543
|
|
|
$
|
(3,977
|
)
|
|
$
|
16,293
|
|
|
46,438
|
|
|
$
|
(417
|
)
|
|
$
|
754,973
|
|
Net loss
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
(25,372
|
)
|
|
—
|
|
|
—
|
|
|
(25,372
|
)
|
Net actuarial loss and prior service cost, net of income taxes of $0
|
—
|
|
|
—
|
|
|
—
|
|
|
56
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
56
|
|
Restricted share grants
|
198,640
|
|
|
—
|
|
|
225
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
225
|
|
Non-cash compensation expense
|
—
|
|
|
—
|
|
|
1,595
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
1,595
|
|
Offering costs
|
—
|
|
|
—
|
|
|
(111
|
)
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
(111
|
)
|
Purchase of treasury stock
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
66,371
|
|
|
(627
|
)
|
|
(627
|
)
|
Repurchase of common stock
|
(391,120
|
)
|
|
(4
|
)
|
|
(4,997
|
)
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
(5,001
|
)
|
Common stock cash dividend
|
—
|
|
|
—
|
|
|
(19,298
|
)
|
|
—
|
|
|
(18,193
|
)
|
|
—
|
|
|
—
|
|
|
(37,491
|
)
|
Balance at June 25, 2017
|
53,350,746
|
|
|
$
|
527
|
|
|
$
|
719,957
|
|
|
$
|
(3,921
|
)
|
|
$
|
(27,272
|
)
|
|
112,809
|
|
|
$
|
(1,044
|
)
|
|
$
|
688,247
|
|
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 25, 2017
|
|
Six months ended
June 26, 2016
|
Cash flows from operating activities:
|
|
|
|
Net (loss) income
|
$
|
(25,372
|
)
|
|
$
|
14,350
|
|
Adjustments to reconcile net (loss) income to net cash provided by operating activities:
|
|
|
|
Depreciation and amortization
|
36,364
|
|
|
33,349
|
|
Non-cash compensation expense
|
1,595
|
|
|
1,237
|
|
Non-cash interest expense
|
1,392
|
|
|
1,392
|
|
Deferred income taxes
|
1,091
|
|
|
(5,527
|
)
|
(Gain) loss on sale or disposal of assets
|
(2,546
|
)
|
|
2,351
|
|
Non-cash charge to investments
|
250
|
|
|
—
|
|
Impairment of long-lived assets
|
6,485
|
|
|
—
|
|
Goodwill and mastheads impairment
|
27,448
|
|
|
—
|
|
Pension and other postretirement benefit obligations
|
(877
|
)
|
|
(973
|
)
|
Changes in assets and liabilities:
|
|
|
|
Accounts receivable, net
|
15,519
|
|
|
20,494
|
|
Inventory
|
1,043
|
|
|
(1,166
|
)
|
Prepaid expenses
|
(4,012
|
)
|
|
(3,087
|
)
|
Other assets
|
(1,865
|
)
|
|
(2,763
|
)
|
Accounts payable
|
6,001
|
|
|
(1,164
|
)
|
Accrued expenses
|
(13,619
|
)
|
|
(28,693
|
)
|
Deferred revenue
|
(301
|
)
|
|
268
|
|
Other long-term liabilities
|
1,043
|
|
|
756
|
|
Net cash provided by operating activities
|
49,639
|
|
|
30,824
|
|
Cash flows from investing activities:
|
|
|
|
Purchases of property, plant, and equipment
|
(4,824
|
)
|
|
(5,443
|
)
|
Proceeds from sale of publications and other assets
|
14,663
|
|
|
3,076
|
|
Acquisitions, net of cash acquired
|
(22,060
|
)
|
|
(82,819
|
)
|
Net cash used in investing activities
|
(12,221
|
)
|
|
(85,186
|
)
|
Cash flows from financing activities:
|
|
|
|
Repayments under term loans
|
(11,754
|
)
|
|
(1,755
|
)
|
Payment of offering costs
|
(431
|
)
|
|
—
|
|
Purchase of treasury stock
|
(627
|
)
|
|
(353
|
)
|
Repurchase of common stock
|
(5,001
|
)
|
|
—
|
|
Payment of dividends
|
(37,524
|
)
|
|
(29,479
|
)
|
Net cash used in financing activities
|
(55,337
|
)
|
|
(31,587
|
)
|
Net decrease in cash and cash equivalents
|
(17,919
|
)
|
|
(85,949
|
)
|
Cash and cash equivalents at beginning of period
|
172,246
|
|
|
146,638
|
|
Cash and cash equivalents at end of period
|
$
|
154,327
|
|
|
$
|
60,689
|
|
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 25, 2016
, 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 ("East"), Central US Publishing ("Central"), Western US Publishing ("West"), and BridgeTower) 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. However, the Company did recognize goodwill and mastheads impairments during the second quarter of 2017. Refer to Note 5 for further discussion.
Long-Lived Asset Impairment
As part of the ongoing cost reduction programs, the Company is consolidating print facilities, and during the six months ended June 25, 2017, the Company ceased printing operations at eleven facilities. As a result, the Company recognized an impairment charge of
$6,485
and accelerated depreciation of
$1,216
during the six months ended June 25, 2017. The Company will accelerate depreciation of approximately
$1,400
related to machinery and equipment in the third quarter of 2017.
Dispositions
On June 2, 2017, the Company completed its sale of the
Mail Tribune,
located in Medford, Oregon, for approximately
$14,700
, including estimated working capital. As a result, a pre-tax gain of approximately
$5,400
, net of selling expenses, is included in (gain) loss on sale or disposal of assets on the Consolidated Statement of Operations and Comprehensive (Loss) Income since the disposition did not qualify for treatment as a discontinued operation.
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. 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. During 2016, the Company established a project team to identify potential differences that would result from the application of this standard. The Company is in the process of reviewing customer contracts, identifying contractual provisions that may result in a change in the timing or the amount of revenue recognized and assessing the enhanced disclosure requirements of the new guidance. The Company will adopt the requirements of the new standard on January 1, 2018 and anticipates using the modified retrospective transition method.
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 November 2016, the FASB issued ASU No. 2016-18, “Restricted Cash” (Topic 230), which requires that a statement of cash flows explain the change during the period in the total of cash, cash equivalents, and amounts generally described as restricted cash and restricted cash equivalents. The provisions of ASU 2016-18 are effective for fiscal years beginning after December 15, 2017 and should be applied using a retrospective transition method. Early adoption is permitted. Other than the revised statement of cash flows presentation, the adoption of ASU 2017-07 is not expected to have a material impact on the Company’s consolidated financial statements.
In January 2017, the FASB issued ASU No. 2017-01, “Business Combinations - Clarifying the Definition of a Business” (Topic 805), which clarifies the definition of a business for determining whether transactions should be accounted for as acquisitions (or disposals) of assets or businesses. The new standard is effective for annual periods beginning after December 15, 2017 with early adoption permitted for transactions that occurred before the issuance date or effective date of the standard if the transactions were not reported in financial statements that have been issued or made available for issuance. The standard must be applied prospectively. The Company is currently evaluating the impact this accounting standard will have on the Company’s consolidated financial statements.
In January 2017, the FASB issued ASU No. 2017-04 “Intangibles - Goodwill and Other - Simplifying the Test for Goodwill Impairment” (Topic 350), which simplifies subsequent goodwill measurement by eliminating Step 2 from the goodwill impairment test. Under this update, an entity should perform its annual, or interim, goodwill impairment test by comparing the fair value of a reporting unit with its carrying amount. An entity should recognize an impairment charge for the amount by which the carrying amount exceeds the reporting unit’s fair value; however, the loss recognized should not exceed the total amount of goodwill allocated to that reporting unit. The new standard is effective for annual periods, and interim periods within those annual periods, beginning after December 15, 2019 with early adoption permitted for annual goodwill impairment tests performed after January 1, 2017. The standard must be applied prospectively. The Company early-adopted the guidance of this accounting standard during the second quarter of fiscal 2017 in connection with its annual impairment testing to reduce the complexity and costs of evaluating goodwill for impairment. It was adopted on a prospective basis. As a result of the adoption, a single step quantitative test was performed. Refer to Note 5 for further discussion.
In March 2017, the FASB issued ASU No. 2017-07 “Compensation-Retirement Benefits: Improving the Presentation of Net Periodic Pension Cost and Net Periodic Postretirement Benefit Cost” (Topic 715), which provides guidance that requires an employer to report the service cost component separate from the other components of net benefit pension costs. The employer is
required to report the service cost component in the same line item or items as other compensation costs arising from services rendered by the pertinent employees during the period. The other components of net benefit cost are required to be presented in the income statement separately from the service cost component and outside the subtotal of income from operations, if one is presented. If a separate line item is not used, the line item used in the income statement must be disclosed. The new standard is effective for annual reporting periods beginning after December 15, 2017 and interim periods within those years. Early adoption is permitted. Other than the revised statement of operations presentation, the adoption of ASU 2017-07 is not expected to have a material impact on the Company’s consolidated financial statements.
All other issued and not yet effective accounting standards are not relevant to the Company.
(2) Acquisitions
2017 Acquisitions
The Company acquired substantially all the assets, properties and business of certain publications and businesses on January 31, 2017 and February 10, 2017 (“2017 Acquisitions”), which included
five
daily newspapers,
fifteen
weekly publications,
eleven
shoppers, and an event production business for an aggregate purchase price of
$21,430
, 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 and event production business, and cash flows combined with cost saving and revenue-generating opportunities available.
The Company accounted for the 2017 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
|
$
|
2,823
|
|
Property, plant and equipment
|
17,610
|
|
Noncompete agreements
|
230
|
|
Advertiser relationships
|
790
|
|
Subscriber relationships
|
320
|
|
Customer relationships
|
202
|
|
Mastheads
|
810
|
|
Goodwill
|
1,381
|
|
Total assets
|
24,166
|
|
Current liabilities
|
2,736
|
|
Total liabilities
|
2,736
|
|
Net assets
|
$
|
21,430
|
|
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 Company recorded approximately
$25
and
$178
of selling, general and administrative expense for acquisition-related costs for the 2017 Acquisitions during the
three and six
months ended
June 25, 2017
.
For tax purposes, the amount of goodwill that is expected to be deductible is
$1,381
.
2016 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, April 29, 2016, June 29, 2016, August 1, 2016, September 30, 2016, and November 30, 2016 (“2016 Acquisitions”), which included
68
business publications,
seven
daily newspapers,
seven
weekly publications,
eleven
shoppers, and digital platforms for an aggregate purchase price of
$135,908
, including 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 and digital platforms, and cash flows combined with cost saving and revenue-generating opportunities available.
The Company accounted for the 2016 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 ASC 805. The fair value determination of the assets acquired and liabilities assumed are subject to working capital and other adjustments. The final calculation of working capital and other adjustments 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 fair values of the assets and liabilities:
|
|
|
|
|
Current assets
|
$
|
20,820
|
|
Other assets
|
4,195
|
|
Property, plant and equipment
|
36,105
|
|
Noncompete agreements
|
886
|
|
Advertiser relationships
|
32,312
|
|
Subscriber relationships
|
13,696
|
|
Customer relationships
|
5,113
|
|
Software
|
5,783
|
|
Trade names
|
2,448
|
|
Mastheads
|
9,217
|
|
Goodwill
|
56,749
|
|
Total assets
|
187,324
|
|
Current liabilities
|
26,532
|
|
Pension obligations
|
16,299
|
|
Other long-term liabilities
|
8,585
|
|
Total liabilities
|
51,416
|
|
Net assets
|
$
|
135,908
|
|
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
$2,048
of selling, general and administrative expense for acquisition-related costs for the 2016 Acquisitions.
In a 2016 stock acquisition, the Company acquired goodwill with a tax cost basis of
$50,325
and a net tax basis of
$10,746
. As a result, for tax purposes, the amount of goodwill that is expected to be deductible for the 2016 Acquisitions is
$43,103
.
(3) Share-Based Compensation
The Company recognized compensation cost for share-based payments of
$764
,
$618
,
$1,595
, and
$1,237
during the
three and six
months ended
June 25, 2017
and
June 26, 2016
, respectively. The total compensation cost not yet recognized related to non-vested awards as of
June 25, 2017
was
$4,904
, which is expected to be recognized over a weighted average period of
1.96
years through May 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 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 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. 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. 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. 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.
During the three months ended March 26, 2017, grants of restricted shares totaling
182,035
shares were made to the Company’s Employees, and
24,976
shares were forfeited. There were no grants or forfeited restricted shares during the three months ended
June 25, 2017
.
As of
June 25, 2017
and
June 26, 2016
, there were
372,166
and
352,124
RSGs, respectively, issued and outstanding with a weighted average grant date fair value of
$16.87
and
$18.20
, respectively. As of
June 25, 2017
, the aggregate intrinsic value of unvested RSGs was
$4,968
.
RSG activity during the
six
months ended
June 25, 2017
was as follows:
|
|
|
|
|
|
|
|
|
Number of RSGs
|
|
Weighted-Average
Grant Date
Fair Value
|
Unvested at December 25, 2016
|
335,593
|
|
|
$
|
18.18
|
|
Granted
|
182,035
|
|
|
15.89
|
|
Vested
|
(120,486
|
)
|
|
19.04
|
|
Forfeited
|
(24,976
|
)
|
|
16.89
|
|
Unvested at June 25, 2017
|
372,166
|
|
|
$
|
16.87
|
|
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 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 severance expense, are accrued at the time of announcement or over the remaining service period.
A rollforward of the accrued restructuring costs, included in accrued expenses on the balance sheet, for the
six
months ended
June 25, 2017
is outlined below.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Severance and
Related Costs
|
|
Other
Costs
(1)
|
|
Total
|
Balance at December 25, 2016
|
$
|
1,178
|
|
|
$
|
356
|
|
|
$
|
1,534
|
|
Restructuring provision included in Integration and Reorganization
|
4,082
|
|
|
525
|
|
|
4,607
|
|
Cash payments
|
(3,379
|
)
|
|
(805
|
)
|
|
(4,184
|
)
|
Balance at June 25, 2017
|
$
|
1,881
|
|
|
$
|
76
|
|
|
$
|
1,957
|
|
|
|
(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 25, 2017
and
June 26, 2016
.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three months ended June 25, 2017
|
|
Three months ended June 26, 2016
|
|
Six months ended June 25, 2017
|
|
Six months ended June 26, 2016
|
Severance and related costs
|
$
|
1,857
|
|
|
$
|
822
|
|
|
$
|
4,082
|
|
|
$
|
1,690
|
|
Severance and other costs assumed from acquisition
|
—
|
|
|
—
|
|
|
—
|
|
|
95
|
|
Other costs
|
380
|
|
|
587
|
|
|
525
|
|
|
645
|
|
Cash payments
|
(2,070
|
)
|
|
(1,578
|
)
|
|
(4,184
|
)
|
|
(3,883
|
)
|
(5) Goodwill and Intangible Assets
Goodwill and intangible assets consisted of the following:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
June 25, 2017
|
|
Gross carrying
amount
|
|
Accumulated
amortization
|
|
Net carrying
amount
|
Amortized intangible assets:
|
|
|
|
|
|
Advertiser relationships
|
$
|
175,708
|
|
|
$
|
30,510
|
|
|
$
|
145,198
|
|
Customer relationships
|
25,140
|
|
|
4,030
|
|
|
21,110
|
|
Subscriber relationships
|
91,264
|
|
|
17,081
|
|
|
74,183
|
|
Other intangible assets
|
9,819
|
|
|
3,243
|
|
|
6,576
|
|
Total
|
$
|
301,931
|
|
|
$
|
54,864
|
|
|
$
|
247,067
|
|
Nonamortized intangible assets:
|
|
|
|
Goodwill
|
$
|
200,735
|
|
|
Mastheads
|
93,723
|
|
|
Total
|
$
|
294,458
|
|
|
|
|
|
December 25, 2016
|
|
Gross carrying
amount
|
|
Accumulated
amortization
|
|
Net carrying
amount
|
Amortized intangible assets:
|
|
|
|
|
|
Advertiser relationships
|
$
|
174,918
|
|
|
$
|
24,618
|
|
|
$
|
150,300
|
|
Customer relationships
|
24,938
|
|
|
3,153
|
|
|
21,785
|
|
Subscriber relationships
|
90,944
|
|
|
13,911
|
|
|
77,033
|
|
Other intangible assets
|
9,589
|
|
|
1,950
|
|
|
7,639
|
|
Total
|
$
|
300,389
|
|
|
$
|
43,632
|
|
|
$
|
256,757
|
|
Nonamortized intangible assets:
|
|
|
|
Goodwill
|
$
|
227,954
|
|
|
Mastheads
|
94,720
|
|
|
Total
|
$
|
322,674
|
|
|
As of
June 25, 2017
, the weighted average amortization periods for amortizable intangible assets are
15.2
years for advertiser relationships,
15.2
years for customer relationships,
14.5
years for subscriber relationships and
5.0
years for other intangible assets. The weighted average amortization period in total for all amortizable intangible assets is
14.6
years.
Amortization expense for the
three and six
months ended
June 25, 2017
and
June 26, 2016
was
$5,630
,
$5,291
,
$11,232
, and
$9,690
, respectively. Estimated future amortization expense as of
June 25, 2017
, is as follows:
|
|
|
|
|
For the following fiscal years:
|
|
2017
|
$
|
11,272
|
|
2018
|
22,539
|
|
2019
|
20,881
|
|
2020
|
20,182
|
|
2021
|
20,176
|
|
Thereafter
|
152,017
|
|
Total
|
$
|
247,067
|
|
The changes in the carrying amount of goodwill for the period from
December 25, 2016
to
June 25, 2017
are as follows:
|
|
|
|
|
Balance at December 25, 2016
|
$
|
227,954
|
|
Goodwill acquired in business combinations
|
1,217
|
|
Goodwill impairment
|
(25,641
|
)
|
Goodwill from divestitures
|
(2,795
|
)
|
Balance at June 25, 2017
|
$
|
200,735
|
|
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 adopted ASU No. 2017-04 in the second quarter and performed a quantitative goodwill impairment test to identify the existence of impairment, if any, and the amount of impairment loss. If the fair value of a reporting unit exceeds its carrying amount, goodwill of the reporting unit is considered not impaired. If the carrying amount of a reporting unit exceeds its fair value, an impairment loss shall be recognized in an amount equal to that excess, limited to the total amount of goodwill allocated to that reporting unit.
As part of the annual impairment assessments, as of June 25, 2017, the fair values of the Company’s reporting units, which include East, West, Central and BridgeTower, for goodwill impairment testing 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 analyses provided the best estimate of the fair value of its reporting units. As a result of the annual assessment, the Company recorded a goodwill impairment in two of its reporting units, Central and West, for a total of
$25,641
. The impairment is primarily due to continuing economic pressures in the newspaper industry and a decline in the Company's stock price. Key assumptions in the impairment analysis include revenue and EBITDA projections, discount rates, long-term growth rates and the effective tax rate that the Company determined to be appropriate. Revenue projections reflected slight declines in the current and next year, and revenues are expected to moderate to a terminal growth rate of
1%
. Discount rates ranged from
16%
to
17%
. The effective tax rate was
40%
.
The total Company’s estimate of reporting unit fair values was reconciled to its then market capitalization (based upon the stock market price and fair value of debt) plus an estimated control premium.
The Company uses a “relief from royalty” approach, a discounted cash flow model, to determine the fair value of each reporting units' mastheads. The estimated fair value exceeded carrying value for mastheads except in the West reporting unit, which recognized an impairment charge of
$1,807
. This is primarily due to a decrease in sales, mostly related to the sale of the
Mail Tribune
in Medford, Oregon, and declining profitability. The fair value of mastheads exceeded carrying value by less than
10%
in the East and Central reporting units. Key assumptions within the masthead analysis included revenue projections, discount rates, royalty rates, long-term growth rates and the effective tax rate that the Company determined to be appropriate. Revenue projections reflected declines in the current and next year, and revenues are expected to moderate to a terminal growth rate of
1%
. Discount rates ranged from
16%
to
17%
, and royalty rates ranged from
1.25%
to
1.75%
. The effective tax rate was
40%
.
The Company considered the impairment of goodwill to be a potential indicator of impairment under ASC 360. The Company determined that the long-lived asset groups were the same as its reporting units. The Company performed an analysis of its undiscounted cash flows in the Central and West reporting units to determine if there was an impairment of long-lived assets. The sum of undiscounted cash flows over the primary asset’s weighted-average remaining useful life exceeded the groups’ carrying value, so there was no impairment.
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 25, 2017
,
$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 purchase of the assets of Halifax Media;
•
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;
•
on March 6, 2015, to provide for
$15,000
in additional revolving commitments under the Incremental Facility; 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 25, 2017
the New Media Credit Agreement had a weighted average interest rate of
7.29%
.
The Senior Secured Credit Facilities are unconditionally guaranteed by Holdings I and certain subsidiaries of the New Media Borrower (collectively, the “Guarantors”) and are 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 and affirmative covenants and negative covenants applicable to Holdings I, 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, 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 25, 2017
, 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”; and the debt under the Halifax Alabama Credit Agreement, the “Advantage Alabama Debt”).
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 Alabama 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 Alabama Debt is unconditionally guaranteed by Holdings I and certain subsidiaries of the New Media Borrowers and is required to be guaranteed by all future material wholly-owned domestic subsidiaries, subject to certain exceptions. The Advantage Alabama Debt is subordinated to the New Media Credit Agreement pursuant to an intercreditor agreement. The Halifax Florida Credit Agreement was in the principal amount of
$10,000
, bore interest at the rate of
5.25%
per annum, payable quarterly in arrears, and matured on December 31, 2016. On December 30, 2016, the Company paid the outstanding balance under the Advantage Florida Debt in the amount of
$10,000
with cash on hand.
The Halifax Alabama Credit Agreement contains covenants substantially consistent with those contained in the New Media Credit Agreement 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 Halifax Alabama Credit Agreement contains 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 Halifax Alabama 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
3.75
to 1.00. The Halifax Alabama Credit Agreement contains customary events of default.
As of
June 25, 2017
, the Company is in compliance with all of the covenants and obligations under the Halifax Alabama Credit Agreement.
Fair Value
The fair value of long-term debt under the Senior Secured Credit Facilities and the Advantage Credit Agreements was estimated at
$351,039
as of
June 25, 2017
, 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 25, 2017
, scheduled principal payments of outstanding debt are as follows:
|
|
|
|
|
2017
|
$
|
2,632
|
|
2018
|
2,632
|
|
2019
|
11,509
|
|
2020
|
334,266
|
|
|
$
|
351,039
|
|
Less:
|
|
Short-term debt
|
4,387
|
|
Remaining original issue discount
|
6,197
|
|
Deferred financing costs
|
1,957
|
|
Long-term debt
|
$
|
338,498
|
|
|
|
For further information, see Note 9 to the Consolidated Financial Statements, “Indebtedness,” in the Annual Report on Form 10-K for the fiscal year ended
December 25, 2016
.
(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 and listing, the fees included in the Management Agreement with the Company’s Manager became effective. As of
June 25, 2017
, Fortress and its affiliates owned approximately
1.3%
of the Company’s outstanding stock and approximately
39.5%
of the Company’s outstanding warrants. The Company’s Manager (or its affiliates) hold
2,307,562
stock options of the Company’s stock as of
June 25, 2017
. During the
three and six
months ended
June 25, 2017
and
June 26, 2016
, Fortress and its affiliates were paid
$239
,
$225
,
$477
, and
$450
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
$172
,
$135
,
$312
, and
$233
during the
three and six
months ended
June 25, 2017
and
June 26, 2016
, respectively, which is included in commercial printing and other on the Unaudited Condensed Consolidated Statements 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 Management Agreement had an initial three-year term and will be automatically renewed for one-year terms thereafter unless terminated either by the Company or the Manager. From the commencement date of "regular way" trading of the Company’s Common Stock 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
$2,422
,
$2,390
,
$5,318
, and
$4,779
for management fees and
$1,866
,
$3,507
,
$1,866
, and
$3,706
for incentive compensation within selling, general and administrative expense during the
three and six
months ended
June 25, 2017
and
June 26, 2016
, respectively. The Company paid to FIG LLC
$1,930
,
$2,388
,
$6,280
, and
$3,185
in management fees and
$0
,
$0
,
$5,915
, and
$20,938
in incentive compensation during the
three and six
months ended
June 25, 2017
and
June 26, 2016
, respectively. In addition, the Company recognized expense reimbursement amounts of approximately
$342
,
$620
,
$892
, and
$1,023
during the
three and six
months ended
June 25, 2017
and
June 26, 2016
, respectively. The Company had an outstanding liability for all management agreement related fees of
$4,736
and
$10,080
at
June 25, 2017
and
December 25, 2016
, respectively, included in accrued expenses.
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 in connection with the restructuring of GateHouse (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 25, 2017
, a net increase to the valuation allowance of
$8,632
would be necessary to offset additional deferred tax assets. Of this amount, a
$8,632
increase was recognized through the Unaudited Condensed Consolidated Statements of Operations and Comprehensive (Loss) Income.
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.
The tax effects resulting from utilizing the annual effective tax rate for the
six
months ended
June 25, 2017
was determined to not be an effective method to determine the tax expense for that period. Therefore, the Company calculated its tax provision based upon year-to-date results.
For the
six
months ended
June 25, 2017
, the expected federal tax benefit at
34%
is
$8,074
. The difference between the expected tax benefit and the year-to-date tax expense of
$1,624
is primarily attributable to the tax effect of the federal valuation allowance of
$8,632
, state taxes of
$522
and a tax charge related to non-deductible expenses of
$544
.
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 was 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 2013 tax year and beyond. The Company’s 2013 short tax year Federal returns were examined by the Internal Revenue Service with no changes made to the returns filed.
(9) Equity
(Loss) Earnings Per Share
The following table sets forth the computation of basic and diluted (loss) earnings per share (“EPS”):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three months ended
June 25, 2017
|
|
Three months ended
June 26, 2016
|
|
Six months ended
June 25, 2017
|
|
Six months ended
June 26, 2016
|
Numerator for earnings per share calculation:
|
|
|
|
|
|
|
|
Net (loss) income
|
$
|
(21,687
|
)
|
|
$
|
9,383
|
|
|
$
|
(25,372
|
)
|
|
$
|
14,350
|
|
Denominator for earnings per share calculation:
|
|
|
|
|
|
|
|
Basic weighted average shares outstanding
|
53,119,530
|
|
|
44,528,457
|
|
|
53,153,138
|
|
|
44,505,991
|
|
Effect of dilutive securities:
|
|
|
|
|
|
|
|
Stock Options and Restricted Stock
|
—
|
|
|
384,237
|
|
|
—
|
|
|
384,931
|
|
Diluted weighted average shares outstanding
|
53,119,530
|
|
|
44,912,694
|
|
|
53,153,138
|
|
|
44,890,922
|
|
For the
three and six
months ended
June 25, 2017
, the Company excluded
1,362,479
and
1,362,479
common stock warrants,
372,166
and
372,166
RSGs, and
2,307,562
and
2,307,562
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 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.
Equity
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.
During the fourth quarter of 2016, the Company issued
8,625,000
shares of its common stock in a public offering at a price to the public of
$16.00
per share for net proceeds of approximately
$134,818
. Certain of the Company’s officers and directors participated in this offering and purchased an aggregate of
20,000
shares at a price of
$16.00
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
862,500
shares of the Company’s common stock at a price of
$16.00
, which had an aggregate fair value of approximately
$2,288
as of the grant date. The assumptions used in the Black-Scholes model to value the options were: a
2.2%
risk-free rate, a
8.3%
dividend yield,
36.1%
volatility and an expected life of
10
years. The fair value of the options issued as compensation to the Manager was recorded as an increase in equity with an offsetting reduction in capital.
On May 17, 2017, the Board of Directors authorized the repurchase of up to
$100,000
of the Company's common stock ("Share Repurchase Program") over the next
12 months
. Under the Share Repurchase Program, the Company may purchase its shares from time to time in the open market or in privately negotiated transactions. During the three months ended June 25, 2017, the Company repurchased
391,120
shares at a weighted average price of $
12.77
per share for a total cost, including transaction costs, of
$5,001
. The shares were subsequently retired. The cost paid to acquire the shares in excess of par was recorded in additional paid-in capital in the consolidated balance sheet.
Pursuant to the anti-dilution provisions of the Incentive Plan, the exercise price on the
745,062
options granted to the Manager in 2014 were equitably adjusted from $
15.71
to
$14.37
as a result of the 2016 return of capital distributions.
Pursuant to the anti-dilution provisions of the Incentive Plan, the exercise price on the
700,000
options granted to the Manager in 2015 were equitably adjusted from
$21.70
to
$20.36
as a result of the 2016 return of capital distributions.
During the three months ended June 25, 2017, the Company issued
16,605
shares of its common stock to its Non-Officer Directors to settle a liability of
$225
for 2016 services.
The following table includes additional information regarding the Manager stock options:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Number of Options
|
|
Weighted-Average Grant Date Fair Value
|
|
Weighted-Average Exercise Price
|
|
Weighted-Average Remaining Contractual Term (Years)
|
|
Aggregate Intrinsic Value ($000)
|
Outstanding at December 25, 2016
|
2,307,562
|
|
|
$
|
4.07
|
|
|
$
|
17.64
|
|
|
8.7
|
|
$
|
186
|
|
Outstanding at June 25, 2017
|
2,307,562
|
|
|
$
|
4.07
|
|
|
$
|
16.80
|
|
|
8.2
|
|
$
|
—
|
|
|
|
|
|
|
|
|
|
|
|
Exercisable at June 25, 2017
|
1,619,229
|
|
|
|
|
$
|
17.07
|
|
|
7.6
|
|
$
|
—
|
|
Accumulated Other Comprehensive Loss
The changes in accumulated other comprehensive loss by component for the
six
months ended
June 25, 2017
and
June 26, 2016
are outlined below.
|
|
|
|
|
|
Net actuarial loss
and prior service
cost
(1)
|
For the six months ended June 25, 2017:
|
|
Balance at December 25, 2016
|
$
|
(3,977
|
)
|
Other comprehensive income before reclassifications
|
—
|
|
Amounts reclassified from accumulated other comprehensive loss
|
56
|
|
Net current period other comprehensive income, net of taxes
|
56
|
|
Balance at June 25, 2017
|
$
|
(3,921
|
)
|
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 loss
|
41
|
|
Net current period other comprehensive income, net of taxes
|
41
|
|
Balance at June 26, 2016
|
$
|
(3,117
|
)
|
|
|
(1)
|
This accumulated other comprehensive 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 loss for the
three and six
months ended
June 25, 2017
and
June 26, 2016
.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Amounts Reclassified from Accumulated
Other Comprehensive Loss
|
|
|
|
Three months ended June 25, 2017
|
|
Three months ended June 26, 2016
|
|
Six months ended June 25, 2017
|
|
Six months ended June 26, 2016
|
|
Affected Line Item in the
Consolidated Statements
of Operations and
Comprehensive (Loss) Income
|
Amortization of unrecognized loss
|
$
|
28
|
|
|
$
|
17
|
|
|
$
|
56
|
|
|
$
|
41
|
|
(1)
|
|
Amounts reclassified from accumulated other comprehensive loss
|
28
|
|
|
17
|
|
|
56
|
|
|
41
|
|
|
(Loss) income before income taxes
|
Income tax expense
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
Income tax benefit
|
Amounts reclassified from accumulated other comprehensive loss, net of taxes
|
$
|
28
|
|
|
$
|
17
|
|
|
$
|
56
|
|
|
$
|
41
|
|
|
Net (loss) income
|
|
|
(1)
|
This accumulated other comprehensive loss component is included in the computation of net periodic benefit cost. See Note 10.
|
Dividends
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 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 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 was paid on
August 18, 2016
, to shareholders of record as of the close of business on
August 10, 2016
.
On October 27, 2016, the Company announced a third quarter 2016 cash dividend of
$0.35
per share of Common Stock, par value
$0.01
per share, of New Media. The dividend was paid on
November 17, 2016
, to shareholders of record as of the close of business on
November 9, 2016
.
On February 21, 2017, the Company announced a fourth quarter 2016 cash dividend of
$0.35
per share of Common Stock, par value
$0.01
per share, of New Media. The dividend was paid on
March 16, 2017
, to shareholders of record as of the close of business on
March 8, 2017
.
On April 27, 2017, the Company announced a first quarter 2017 cash dividend of
$0.35
per share of Common Stock, par value
$0.01
per share, of New Media. The dividend was paid on
May 18, 2017
, to shareholders of record as of the close of business on
May 10, 2017
.
(10) Pension and Postretirement Benefits
As a result of the Enterprise News Media LLC (in 2005), Copley Press, Inc. (in 2007), and Times Publishing Company (in 2016) acquisitions, the Company maintains
two
pension 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. Benefits under the postretirement medical and life insurance plan assumed with the Copley Press, Inc. acquisition are only available to Brush-Moore employees hired before January 1, 1976. The Times Publishing pension plan was frozen prior to the acquisition.
The following provides information on the pension plans and postretirement medical and life insurance plans for the
three and six
months ended
June 25, 2017
and
June 26, 2016
:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three months ended
June 25, 2017
|
|
Three months ended
June 26, 2016
|
|
Six months ended
June 25, 2017
|
|
Six months ended
June 26, 2016
|
|
Pension
|
|
Postretirement
|
|
Pension
|
|
Postretirement
|
|
Pension
|
|
Postretirement
|
|
Pension
|
|
Postretirement
|
Components of net periodic benefit costs:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Service cost
|
$
|
157
|
|
|
$
|
1
|
|
|
$
|
75
|
|
|
$
|
4
|
|
|
$
|
314
|
|
|
$
|
2
|
|
|
$
|
150
|
|
|
$
|
10
|
|
Interest cost
|
780
|
|
|
27
|
|
|
814
|
|
|
56
|
|
|
1,560
|
|
|
54
|
|
|
1,618
|
|
|
111
|
|
Expected return on plan assets
|
(1,045
|
)
|
|
—
|
|
|
(1,044
|
)
|
|
—
|
|
|
(2,090
|
)
|
|
—
|
|
|
(2,089
|
)
|
|
—
|
|
Amortization of unrecognized loss (gain)
|
44
|
|
|
(16
|
)
|
|
17
|
|
|
—
|
|
|
88
|
|
|
(32
|
)
|
|
41
|
|
|
—
|
|
Total
|
$
|
(64
|
)
|
|
$
|
12
|
|
|
$
|
(138
|
)
|
|
$
|
60
|
|
|
$
|
(128
|
)
|
|
$
|
24
|
|
|
$
|
(280
|
)
|
|
$
|
121
|
|
For the
three and six
months ended
June 25, 2017
and
June 26, 2016
, the Company recognized a total of
$(52)
,
$(78)
,
$(104)
and
$(159)
in pension and postretirement benefit, respectively. During the
three and six
months ended
June 25, 2017
, the Company contributed
$349
and
$663
to the pension plans, respectively. The Company is expected to pay an additional
$852
in employer contributions to the pension plans during the remainder 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 25, 2017
|
|
|
|
|
|
|
|
Assets
|
|
|
|
|
|
|
|
Cash and cash equivalents
|
$
|
154,327
|
|
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
154,327
|
|
Restricted cash
|
3,406
|
|
|
—
|
|
|
—
|
|
|
3,406
|
|
As of December 25, 2016
|
|
|
|
|
|
|
|
Assets
|
|
|
|
|
|
|
|
Cash and cash equivalents
|
$
|
172,246
|
|
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
172,246
|
|
Restricted cash
|
3,406
|
|
|
—
|
|
|
—
|
|
|
3,406
|
|
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 2017 acquisitions and 2016 acquisitions the Company recorded 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.
During the quarter ended June 25, 2017, certain goodwill and mastheads were written down to their implied fair value using Level 3 inputs. The valuation techniques and significant inputs and assumptions utilized to measure fair value are discussed in Note 5.
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 25, 2017
and
December 25, 2016
, in the aggregate amount of
$3,406
and
$3,406
, respectively, is used as cash collateral for certain business operations.
(13) Subsequent Events
New Media Credit Agreement
On July 14, 2017, the New Media Credit Agreement was amended to, among other things, (i) extend the maturity date of the outstanding term loans to
July 14, 2022
(the “Extended Term Loans”), (ii) provide for a
1.00%
prepayment premium for any prepayments of the Extended Term Loans made in connection with certain repricing transactions effected within six months of the date of the amendment, (iii) extend the maturity date of the revolving credit facility to
July 14, 2021
, (iv) provide for additional dollar-denominated term loans in an aggregate principal amount of
$20,000
(the “2017 Incremental Term Loans”) on the same terms as the Extended Term Loans and (v) increase the amount of the incremental facility that may be requested on or after the date of the amendment (inclusive of the 2017 Incremental Term Loans) to
$100,000
.
Acquisition
On June 30, 2017, the Company completed the acquisition of several newspapers and related assets from Calkins Media, Inc. (“Calkins”) for
$17,500
, in cash, plus working capital. We funded the acquisition with cash on hand. Calkins is comprised of
four
daily and
one
weekly publications in the Philadelphia and Pittsburgh, Pennsylvania suburbs with an average daily and Sunday circulation of over
75
and
108
, respectively.
Dividends
On
July 27, 2017
, the Company announced a
second
quarter
2017
cash dividend of
$0.35
per share of Common Stock, par value
$0.01
per share, of New Media. The dividend will be paid on
August 17, 2017
, to shareholders of record as of the close of business on
August 9, 2017
.
|
|
|
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. 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 supports small to mid-size communities by providing locally-focused print and digital content to its consumers and premier marketing and technology solutions for our small and medium businesses partners. 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 555 markets and 36 states. Our products include 636 community print publications, 555 websites and two yellow page directories. As of March 26, 2017 and June 25, 2017, we reach over 21 million people per week and serve over 225,000 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 leading 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 and business services in the markets we operate in. We aim to grow our business organically through both our consumer and SMB strategies. We also plan to continue 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” or "Board") 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.
We believe that our focus on owning and operating leading local content oriented media properties in small to mid-size markets 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 market presence gives us the opportunity to expand our advertising and lead generation products with local business customers. For our SMB
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 lead generation platforms.
Central to this business strategy is our wholly-owned subsidiary formerly known as Propel Business Services, the Company's SMB solutions provider, which has been rebranded as UpCurve, Inc. ("UpCurve"). In addition, the digital marketing services of UpCurve, previously known as Propel Marketing, will be marketed under the ThriveHive name. We launched the products in 2012 and have seen rapid growth since then. We believe UpCurve, combined with our strong local brands and in-market sales force, is in a position to continue as a key component to our overall organic growth strategy.
The opportunity UpCurve 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 resources or expertise to navigate the fast evolving digital marketing sector, but are increasingly aware of the need to establish and maintain a digital presence in order to stay connected with current and future customers.
UpCurve is designed to offer a complete set of turn-key digital marketing and business services to SMBs that provide transparent results to the business owners. UpCurve's products include marketing technology, business management solutions, IT/Infrastructure, voice and email communication offerings and small business financing. In a recent acquisition we acquired a turn-key proprietary software that enables SMB owners to run their own digital and contact marketing campaigns; UpCurve continues to evolve to meet the needs of the full spectrum of SMBs. UpCurve 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.
Similarly, GateHouse Live, our event production business, specializes in delivering world class events for the media industry.
We believe our local media properties and local sales infrastructure are uniquely positioned to sell these digital marketing and business 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 1,350 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 as of June 25, 2017 with total paid circulation of approximately 1.5 million and 1.3 million as of March 26, 2017 and June 25, 2017, respectively;
|
|
|
•
|
313 weekly newspapers (published up to three times per week) with total paid circulation of approximately 329,000 and total free circulation of approximately 2.0 million;
|
|
|
•
|
130 “shoppers” (generally advertising-only publications) with total circulation of approximately 3.1 million;
|
|
|
•
|
555 locally focused websites, which extend our businesses onto the internet and mobile devices with approximately 258 million page views per month;
|
|
|
•
|
two yellow page directories, with a distribution of approximately 230,000, that covers a population of approximately 411,000 people;
|
|
|
•
|
68 business publications; and
|
|
|
•
|
UpCurve business services and ThriveHive digital marketing.
|
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. We also have a number of local and regional business-oriented publications that provide relevant and actionable news and analysis.
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 ongoing 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 UpCurve, as well as online, and mobile applications, to support our print publications in order to capture this shift as witnessed by our digital advertising and business services revenue growth, which more than doubled between 2013 and 2016.
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 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 strategy.
The Company’s operating segments (Eastern US Publishing, Central US Publishing, Western US Publishing, and BridgeTower) are aggregated into one reportable business segment.
Acquisitions
On January 31, 2017 and February 10, 2017, we acquired substantially all the assets, properties, and business of certain publications/businesses, which included five
daily newspapers, fifteen weekly publications, eleven shoppers, and an event production business for an aggregate purchase price of $21.4 million, including estimated working capital.
During 2016, we acquired substantially all the assets and assumed substantially all the liabilities of certain businesses, which included 68 niche publications, seven daily newspapers, seven weekly publications, eleven shoppers, and digital platforms for an aggregate purchase price of $135.9 million, including working capital.
Management Agreement
On November 26, 2013, New Media entered into the management agreement (as amended and restated, the “Management Agreement”) with FIG LLC (the “Manager”), an affiliate of Fortress Investment Group LLC ("Fortress"), pursuant to which the Manager manages the operations of New Media. We pay 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.
On February 14, 2017, Fortress announced that it had entered into the Merger Agreement with SB Foundation Holdings LP, a Cayman Islands exempted limited partnership (“SoftBank Parent”) and an affiliate of SoftBank Group Corp. (“SoftBank”), and Foundation Acquisition LLC, a Delaware limited liability company and wholly owned subsidiary of SoftBank Parent (“SoftBank Merger Sub”), pursuant to which SoftBank Merger Sub will merge with and into Fortress, with Fortress surviving as a wholly owned subsidiary of SoftBank Parent. While Fortress’s senior investment professionals are expected to remain in place, including those individuals who perform services for us, there can be no assurance that the SoftBank merger will not have an impact on us or our relationship with the Manager. Fortress informed the Company that it believes that under the Investment Advisers Act of 1940, as amended, the change of ownership resulting from the completion of the SoftBank merger will result in a deemed assignment of the Management Agreement, and that as a result, the Manager is required to obtain the Company’s consent to the assignment. On April 27, 2017, the disinterested members of our board of directors unanimously approved the consent to the assignment. The disinterested members of our board of directors were advised by outside independent counsel.
Long-Lived Asset Impairment
As part of the ongoing cost reduction programs, we are consolidating print facilities, and during the six months ended June 25, 2017, the Company ceased printing operations at eleven facilities. As a result, we recognized an impairment charge of
$6.5 million
and accelerated depreciation of
$1.2 million
during the six months ended June 25, 2017. We will accelerate depreciation of approximately
$1.4 million
related to machinery and equipment in the third quarter of 2017.
Dispositions
On June 2, 2017, we completed the sale of the
Mail Tribune,
located in Medford, Oregon, for approximately
$14.7 million
, including estimated working capital. As a result, a pre-tax gain of approximately
$5.4 million
, net of selling expenses, is included in (gain) loss on sale or disposal of assets on the consolidated statement of operations and comprehensive (loss) income.
Industry
The newspaper industry and the Company have experienced declining same store revenue and profitability over the past several years. As a result, we have implemented, and continue to implement, plans to reduce costs and preserve cash flow. We have also invested in potential growth opportunities, primarily in the digital space. We believe the cost reductions and the new digital initiatives will provide the appropriate capital structure and financial resources necessary to invest in the business and ensure our future success and provide sufficient cash flow to enable us to meet our commitments for the next year.
General economic conditions, including declines in consumer confidence, high unemployment levels in certain local markets, 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 are estimated using the expected present value of future cash flows and recent industry transaction multiples, using estimates, judgments and assumptions, that we believe are 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, "Description of Business, Basis of Presentation, and Summary of Significant Accounting Policies", for the year ended
December 25, 2016
, included in our Annual Report on Form 10-K.
With the exception of the adoption of Accounting Standards Update No. 2017-04 “Intangibles - Goodwill and Other - Simplifying the Test for Goodwill Impairment” (Topic 350) described in Note 1 to the unaudited condensed consolidated financial statements, "Unaudited Financial Statements", there have been no other material 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 25, 2016
.
Results of Operations
The following table summarizes our historical results of operations for New Media for the
three and six
months ended
June 25, 2017
and
June 26, 2016
. 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.
The same store results for the three months ended June 25, 2017 are the same as reported, and the year-to-date same store results are not significantly different from actual results. Therefore, the revenue discussion below will focus on the as reported amounts only.
NEW MEDIA INVESTMENT GROUP INC. AND SUBSIDIARIES
Unaudited Condensed Consolidated Statements of Operations
(In thousands)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three months ended June 25, 2017
|
|
Three months ended June 26, 2016
|
|
Six months ended June 25, 2017
|
|
Six months ended June 26, 2016
|
Revenues:
|
|
|
|
|
|
|
|
Advertising
|
$
|
167,381
|
|
|
$
|
174,153
|
|
|
$
|
322,946
|
|
|
$
|
337,791
|
|
Circulation
|
110,563
|
|
|
104,094
|
|
|
221,368
|
|
|
207,971
|
|
Commercial printing and other
|
44,929
|
|
|
36,583
|
|
|
86,083
|
|
|
69,172
|
|
Total revenues
|
322,873
|
|
|
314,830
|
|
|
630,397
|
|
|
614,934
|
|
Operating costs and expenses:
|
|
|
|
|
|
|
|
Operating costs
|
177,020
|
|
|
172,557
|
|
|
354,811
|
|
|
347,010
|
|
Selling, general, and administrative
|
106,497
|
|
|
106,029
|
|
|
212,529
|
|
|
206,113
|
|
Depreciation and amortization
|
18,760
|
|
|
17,258
|
|
|
36,364
|
|
|
33,349
|
|
Integration and reorganization costs
|
2,237
|
|
|
1,409
|
|
|
4,607
|
|
|
2,335
|
|
Impairment of long-lived assets
|
—
|
|
|
—
|
|
|
6,485
|
|
|
—
|
|
Goodwill and mastheads impairment
|
27,448
|
|
|
—
|
|
|
27,448
|
|
|
—
|
|
(Gain) loss on sale or disposal of assets
|
(2,634
|
)
|
|
831
|
|
|
(2,546
|
)
|
|
2,351
|
|
Operating (loss) income
|
(6,455
|
)
|
|
16,746
|
|
|
(9,301
|
)
|
|
23,776
|
|
Interest expense
|
7,217
|
|
|
7,524
|
|
|
14,435
|
|
|
14,878
|
|
Other expense (income)
|
60
|
|
|
(90
|
)
|
|
12
|
|
|
(254
|
)
|
(Loss) income before income taxes
|
(13,732
|
)
|
|
9,312
|
|
|
(23,748
|
)
|
|
9,152
|
|
Income tax expense (benefit)
|
7,955
|
|
|
(71
|
)
|
|
1,624
|
|
|
(5,198
|
)
|
Net (loss) income
|
$
|
(21,687
|
)
|
|
$
|
9,383
|
|
|
$
|
(25,372
|
)
|
|
$
|
14,350
|
|
Three Months Ended
June 25, 2017
Compared To Three Months Ended
June 26, 2016
Revenue
. Total revenue for the three months ended
June 25, 2017
increased by $8.1 million, or 2.6%, to $322.9 million from $314.8 million for the three months ended
June 26, 2016
. The increase in total revenue was comprised of a $6.5 million, or 6.2%, increase in circulation revenue and an $8.4 million, or 22.8%, increase in commercial printing and other revenue, which was partially offset by a $6.8 million, or 3.9%, decrease in advertising revenue.
Advertising revenue declines were primarily driven by declines on the print side of our business in the local retail, classified, 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 partially offset by price increases in select locations. The majority of the increase in commercial printing and other revenue is due to digital marketing services and events revenue.
Operating Costs.
Operating costs for the three months ended
June 25, 2017
increased by $4.4 million, or 2.5%, to $177.0 million from $172.6 million for the three months ended
June 26, 2016
. Operating costs include costs from acquisitions of $17.2
million, which was partially offset by a $12.8 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, hauling and delivery, newsprint and ink, outside services and postage expenses of $6.5 million, $2.0 million, $1.8 million, $1.4 million and $0.7 million, respectively. There were no other decreases greater than $0.5 million.
Selling, General and Administrative.
Selling, general and administrative expenses for the three months ended
June 25, 2017
increased by $0.6 million, or 0.6%, to $106.6 million from $106.0 million for the three months ended
June 26, 2016
. The increase includes selling, general and administrative expenses from acquisitions of $8.5 million, which was partially offset by a $7.9 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 outside services, compensation, travel and entertainment, and telephone expenses of $2.8 million, $1.6 million, $1.0 million and $0.5 million, respectively. There were no other decreases greater than $0.5 million.
Integration and Reorganization Costs.
During the three months ended
June 25, 2017
and
June 26, 2016
, we recorded integration and reorganization costs of $2.2 million and $1.4 million, respectively, primarily resulting from severance costs related to acquisition-related synergies and the continued consolidation of our operations resulting from ongoing implementation of our plans to reduce costs and preserve cash flow.
Goodwill and Mastheads Impairment.
During the three months ended
June 25, 2017
, we recorded a $27.4 million goodwill and mastheads impairment due to softening business conditions and the related impact on the fair value of our reporting units. No such charge was recorded during the three months ended
June 26, 2016
.
Income Tax Expense (Benefit).
During the three months ended
June 25, 2017
and
June 26, 2016
, we recorded an income tax expense of $8.0 million and an income tax benefit of $0.1 million, respectively. The increase in income tax expense is due to our tax provision being calculated based upon year-to-date results and reversal of the income tax benefit of $6.3 million recorded in the first three months of 2017 where the Company calculated the tax provision using the full year effective tax rate.
Net (Loss) Income.
Net loss for the three months ended
June 25, 2017
was $21.7 million and net income for the three months ended
June 26, 2016
was $9.4 million. The difference is related to the factors noted above.
Six
Months Ended
June 25, 2017
Compared To
Six
Months Ended
June 26, 2016
Revenue
. Total revenue for the
six
months ended
June 25, 2017
increased by $15.5 million, or 2.5%, to $630.4 million from $614.9 million for the
six
months ended
June 26, 2016
. The increase in total revenue was comprised of a $13.4 million, or 6.4%, increase in circulation revenue and a $16.9 million, or 24.4%, increase in commercial printing and other revenue, which was partially offset by a $14.8 million, or 4.4%, decrease in advertising revenue.
Advertising revenue declines were primarily driven by declines on the print side of our business in the local retail, classified, 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 partially offset by price increases in select locations. The majority of the increase in commercial printing and other revenue is due to digital marketing services and events revenue.
Operating Costs.
Operating costs for the
six
months ended
June 25, 2017
increased by $7.8 million, or 2.2%, to $354.8 million from $347.0 million for the
six
months ended
June 26, 2016
. Operating costs include costs from acquisitions of $34.2 million, which was partially offset by a $26.4 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, hauling and delivery, newsprint and ink, outside services, postage and travel and entertainment expenses of $14.8 million, $3.5 million, $3.2 million, $2.3 million, $1.5 million and $1.0 million, respectively.
Selling, General and Administrative.
Selling, general and administrative expenses for the
six
months ended
June 25, 2017
increased by $6.5 million, or 3.2%, to $212.6 million from $206.1 million for the
six
months ended
June 26, 2016
. The increase includes selling, general and administrative expenses from acquisitions of $19.2 million and an increase
in bad debt expense of $0.8 million, which was partially offset by a $13.5 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, outside services, travel and entertainment, web hosting and domain expense, telephone expenses, advertising
and promotions, bank and credit card fees and business insurance of $3.6 million, $3.0 million, $1.6 million, $1.1 million, $0.9 million, $0.9 million, $0.8 million and $0.5 million, respectively.
There were no other decreases greater than $0.5 million.
Integration and Reorganization Costs.
During the
six
months ended
June 25, 2017
and
June 26, 2016
, we recorded integration and reorganization costs of $4.6 million and $2.3 million, respectively, primarily resulting from severance costs related to acquisition-related synergies and the continued consolidation of our operations resulting from ongoing implementation of our plans to reduce costs and preserve cash flow.
Impairment of Long-lived Assets.
During the
six
months ended
June 25, 2017
, we recorded a $6.4 million impairment of long-lived assets due to eleven printing facilities ceasing operations during the
six
months ended
June 25, 2017
, and additional shut downs expected in the third quarter of 2017. No such charge was recorded during the
six
months ended
June 26, 2016
.
Goodwill and Mastheads Impairment.
During the
six
months ended
June 25, 2017
, we recorded a $27.4 million goodwill and mastheads impairment due to softening business conditions and the related impact on the fair value of our reporting units. No such charge was recorded during the
six
months ended
June 26, 2016
.
Income Tax Expense (Benefit).
During the
six
months ended
June 25, 2017
, we recorded an income tax expense of $1.6 million based upon year-to-date results. During the
six
months ended
June 26, 2016
, we recorded an income tax benefit of $5.2 million which was 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 (Loss) Income.
Net loss for the
six
months ended
June 25, 2017
was $25.4 million and net income for the
six
months ended
June 26, 2016
was $14.4 million. The difference is related 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 2017 capital expenditures to total between $11 million and $13 million. The 2017 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 27, 2017
, we announced a
second
quarter
2017
cash dividend of
$0.35
per share of Common Stock, par value
$0.01
per share, of New Media. The dividend will be paid on
August 17, 2017
, to shareholders of record as of the close of business on
August 9, 2017
.
On April 27, 2017, we announced a first quarter 2017 cash dividend of $0.35 per share of Common Stock, par value $0.01 per share, of New Media. The dividend was paid on May 18, 2017, to shareholders of record as of the close of business on May 10, 2017.
On February 21, 2017, we announced a fourth quarter 2016 cash dividend of $0.35 per share of Common Stock, par value $0.01 per share, of New Media. The dividend was paid on March 16, 2017, to shareholders of record as of the close of business on March 8, 2017.
On October 27, 2016, we announced a third quarter 2016 cash dividend of $0.35 per share of Common Stock, par value $0.01 per share, of New Media. The dividend was paid on November 17, 2016, to shareholders of record as of the close of business on November 9, 2016.
On July 28, 2016, we 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 was paid on August 18, 2016, to shareholders of record as of the close of business on August 10, 2016.
On April 28, 2016, we 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, we 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.
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 purchase of the assets of Halifax Media;
•
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 affirmative covenants and negative covenants applicable to Holdings I, 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, 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 25, 2017
, we are in compliance with all of the covenants and obligations under the New Media Credit Agreement.
On July 14, 2017, the New Media Credit Agreement was amended to, among other things, (i) extend the maturity date of the outstanding term loans to July 14, 2022 (the “Extended Term Loans”), (ii) provide for a 1.00% prepayment premium for any prepayments of the Extended Term Loans made in connection with certain repricing transactions effected within six months of the date of the amendment, (iii) extend the maturity date of the revolving credit facility to July 14, 2021, (iv) provide for additional dollar-denominated term loans in an aggregate principal amount of $20 million (the “2017 Incremental Term Loans”) on the same terms as the Extended Term Loans and (v) increase the amount of the incremental facility that may be requested on or after the date of the amendment (inclusive of the 2017 Incremental Term Loans) to $100 million.
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 25, 2016
, 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”; and the debt under the Halifax Alabama Credit Agreement, the “Advantage Alabama Debt”).
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 Alabama 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 Alabama Debt is unconditionally guaranteed by Holdings I and certain subsidiaries of the New Media Borrowers and is required to be guaranteed by all future material wholly-owned domestic subsidiaries, subject to certain exceptions. The Advantage Alabama Debt is subordinated to the New Media Credit Agreement pursuant to an intercreditor agreement. The Halifax Florida Credit Agreement was in the principal amount of $10 million, bore interest at the rate of 5.25% per annum, payable quarterly in arrears, and matured on December 31, 2016. On December 30, 2016, we paid the outstanding balance under the Advantage Florida Debt in the amount of $10 million with cash on hand.
The Halifax Alabama Credit Agreement contains covenants substantially consistent with those contained in the New Media Credit Agreement 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 Halifax Alabama Credit Agreement contains 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 Halifax Alabama 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 3.75 to 1.00. The Halifax Alabama Credit Agreement contains customary events of default.
As of
June 25, 2017
, we are in compliance with all of the covenants and obligations under the Halifax Alabama Credit Agreement.
Refer 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 25, 2016
, for further discussion of the Advantage Credit Agreements.
Cash Flows
The following table summarizes our historical cash flows.
|
|
|
|
|
|
|
|
|
|
Six months ended June 25, 2017
|
|
Six months ended June 26, 2016
|
Cash provided by operating activities
|
$
|
49,639
|
|
|
$
|
30,824
|
|
Cash used in investing activities
|
(12,221
|
)
|
|
(85,186
|
)
|
Cash used in financing activities
|
(55,337
|
)
|
|
(31,587
|
)
|
The discussion of our cash flows that follows is based on our historical cash flows for the
six
months ended
June 25, 2017
and
June 26, 2016
.
Cash Flows from Operating Activities.
Net cash provided by operating activities for the
six
months ended
June 25, 2017
was
$49.6 million
, an increase of
$18.8 million
when compared to
$30.8 million
of cash provided by operating activities for the
six
months ended
June 26, 2016
. This
$18.8 million
increase was the result of an increase in adjustments for non-cash charges of $39.3 million and an increase in cash provided by working capital of $19.2 million, which was partially offset by a decrease in operating results of $39.7 million.
The $19.2 million increase in cash provided by working capital for the
six
months ended
June 25, 2017
when compared to the
six
months ended
June 26, 2016
, is primarily attributable to an increase in accrued expenses, an increase in accounts payable, and a decrease in inventory, which was partially offset by an increase in accounts receivable.
The $39.3 million increase in adjustments to net income for non-cash charges when compared to the
six
months ended
June 26, 2016
, primarily consisted of a $27.4 million goodwill and mastheads impairment, a $6.6 million increase in deferred income taxes, a $6.5 million increase in impairment of long-lived assets, a $3.0 million increase in depreciation and amortization, a $0.4 million increase in non-cash compensation expense, a $0.2 million increase in non-cash charge to investments, and a $0.1 million increase in pension and other postretirement benefit obligations, which was partially offset by a $4.9 million increase in gain on sale or disposal of assets.
Cash Flows from Investing Activities.
Net cash used in investing activities for the
six
months ended
June 25, 2017
was
$12.2 million
. During the
six
months ended
June 25, 2017
, we used $22.1 million, net of cash acquired, for acquisitions and $4.8 million for capital expenditures, which was partially offset by $14.7 million we received from the sale of publications and other assets.
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.
Cash Flows from Financing Activities.
Net cash used in financing activities for the
six
months ended
June 25, 2017
was
$55.3 million
primarily due to the payment of dividends of $37.5 million, repayments under term loans of $11.8 million, $5.0 million in repurchases of common stock under the Share Repurchase Program, a $0.6 million purchase of treasury stock, and $0.4 million payment of offering costs.
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, and repayments under term loans of $1.8 million, and a $0.4 million purchase of treasury stock.
Changes in Financial Position
The discussion that follows highlights significant changes in our financial position and working capital from
December 25, 2016
to
June 25, 2017
.
Accounts Receivable.
Accounts receivable decreased $12.5 million from
December 25, 2016
to
June 25, 2017
, which primarily relates to seasonality and the timing of cash collections, which was partially offset by $2.4 million of assets acquired in the six month period ending
June 25, 2017
.
Prepaid Expenses.
Prepaid expenses increased $4.1 million from
December 25, 2016
to
June 25, 2017
, which primarily relates to the timing of payments.
Property, Plant, and Equipment.
Property, plant, and equipment decreased $19.8 million from
December 25, 2016
to
June 25, 2017
, of which $25.1 million relates to depreciation, $10.5 million relates to assets sold or disposed of during the first six months of 2017, and $6.4 million relates to an impairment of long-lived assets, which was partially offset by $17.4 million of assets acquired in 2017 and $4.8 million of capital expenditures.
Goodwill.
Goodwill decreased $27.2 million from
December 25, 2016
to
June 25, 2017
, which is primarily due to a $25.6 million goodwill impairment and $2.8 million relates to assets sold, which was partially offset by $1.4 million of assets acquired in 2017.
Intangible Assets.
Intangible assets decreased $10.7 million from
December 25, 2016
to
June 25, 2017
, of which $11.2 million relates to amortization, and $1.8 million relates to a mastheads impairment, which was partially offset by $2.4 million of assets acquired in 2017.
Current Portion of Long-term Debt.
Current portion of long-term debt decreased $10.0 million from
December 25, 2016
to
June 25, 2017
, due to $10.0 million repayment of debt that was assumed in the Halifax Media acquisition in 2015.
Accounts Payable.
Accounts payable increased $6.4 million from
December 25, 2016
to
June 25, 2017
, which relates primarily to the timing of vendor payments and acquisitions in 2017.
Accrued Expenses.
Accrued expenses decreased $13.9 million from
December 25, 2016
to
June 25, 2017
, which primarily relates to a decrease in the accrual for all management agreement related fees of $5.3 million, accrued bonuses of $5.0 million, and a $4.4 million decrease in accrued interest due to the timing of interest payments.
Deferred Income Taxes.
Deferred income taxes increased $1.1 million from
December 25, 2016
to
June 25, 2017
, which primarily relates to deferred taxes attributable to indefinite lived intangible assets.
Additional Paid-In Capital.
Additional paid-in capital decreased $22.6 million from
December 25, 2016
to
June 25, 2017
, due to dividends of $19.3 million and $5.0 million in repurchases of common stock under the Share Repurchase Program, which was partially offset by non-cash compensation expense of $1.6 million.
(Accumulated Deficit) Retained Earnings.
Accumulated deficit increased $43.6 million from
December 25, 2016
to
June 25, 2017
, due to a net loss of $25.4 million and dividends of $18.2 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 25, 2016
.
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 25, 2016
to
June 25, 2017
.
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 impairment 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 (gain) 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 (loss) income to Adjusted EBITDA for the periods presented:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three months ended June 25, 2017
|
|
Three months ended June 26, 2016
|
|
Six months ended June 25, 2017
|
|
Six months ended June 26, 2016
|
|
|
(in thousands)
|
|
Net (loss) income
|
$
|
(21,687
|
)
|
|
$
|
9,383
|
|
|
$
|
(25,372
|
)
|
|
$
|
14,350
|
|
|
Income tax expense (benefit)
|
7,955
|
|
|
(71
|
)
|
|
1,624
|
|
|
(5,198
|
)
|
|
Interest expense
|
7,217
|
|
|
7,524
|
|
|
14,435
|
|
|
14,878
|
|
|
Impairment of long-lived assets
|
—
|
|
|
—
|
|
|
6,485
|
|
|
—
|
|
|
Goodwill and mastheads impairment
|
27,448
|
|
|
—
|
|
|
27,448
|
|
|
—
|
|
|
Depreciation and amortization
|
18,760
|
|
|
17,258
|
|
|
36,364
|
|
|
33,349
|
|
|
Adjusted EBITDA from continuing operations
|
$
|
39,693
|
|
(a)
|
$
|
34,094
|
|
(b)
|
$
|
60,984
|
|
(c)
|
$
|
57,379
|
|
(d)
|
|
|
(a)
|
Adjusted EBITDA for the three months ended
June 25, 2017
included net expenses of $3,583, related to transaction and project costs, non-cash compensation, and other expense of $3,980, integration and reorganization costs of $2,237 and a $2,634 gain on the sale or disposal of assets.
|
|
|
(b)
|
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.
|
|
|
(c)
|
Adjusted EBITDA for the
six
months ended
June 25, 2017
included net expenses of $8,983, related to transaction and project costs, non-cash compensation, and other expense of $6,922, integration and reorganization costs of $4,607 and a $2,546 gain on the sale or disposal of assets.
|
|
|
(d)
|
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.
|