THE MCCLATCHY COMPANY Forward-Looking Information
This quarterly report on Form 10-Q contains forward-looking statements within the meaning of the Private Securities Litigation Reform Act of 1995, as amended, including statements relating to future financial performance and operations, trends in advertising, uses of cash, and the outcome of the Chapter 11 Cases. These statements are based upon our current expectations and knowledge of factors impacting our business and are generally preceded by, followed by or are a part of sentences that include the words "believes," "expects," "anticipates," "estimates" or similar expressions. All statements, other than statements of historical fact, are statements that could be deemed forward-looking statements. For all of those statements, we claim the protection of the safe harbor for forward-looking statements contained in the Private Securities Litigation Reform Act of 1995. Such statements are subject to risks, trends and uncertainties. These risks and uncertainties include, but are not limited to:
? the effects of the
in Note 2) and the outcome of the proceedings in general;
? the length of time the Company will operate while in the Chapter 11 Cases;
? our restructuring efforts rely on coming to terms with multiple parties
have conflicting interests;
the potential adverse effects of Chapter 11 Cases on the Company's liquidity or
? results of operations or its ability to pursue its business strategies,
maintain business and operational relationships and retain key executives;
our ability to complete definitive documentation in connection with any Chapter
11 transaction satisfactory to the Company and our stakeholders, and our
? ability to obtain requisite support for any proposed transaction from various
stakeholders and confirm and consummate that transaction in accordance with its
terms;
? the sufficiency of the DIP Facility (as defined below) to allow the Company to
operate as usual and fulfill ongoing commitments to stakeholders;
our ability to successfully emerge from Chapter 11 via a plan of reorganization
or to successfully consummate the proposed sale of the business pursuant to
? Section 363 of the Bankruptcy Code, which will be contingent upon numerous
factors, including obtaining the
plan of reorganization or sale agreement, and certain closing conditions;
? our ability to obtain a new credit facility, or "exit financing" upon our
emergence from Chapter 11;
? increased levels of employee attrition during the Chapter 11 Cases;
? our reliance on third party vendors and the impact of the Chapter 11 filing on
such relationships;
? our ability to continue as a going concern;
? the continued trading of our securities on the OTC Pink Market;
? significant competition in the market for news and advertising;
? general economic and business conditions;
continued diminished revenues from advertising as a result of the COVID-19
? pandemic and increased costs, ability to collect on some of our accounts
receivable or other disruptions as a result of COVID-19;
? changes in technology, services and standards, and changes in consumer
behavior;
? ability to grow and manage our digital businesses;
? our ability to successfully execute cost-control measures, including selling
excess assets;
? any changes to our business and operations that may result in goodwill and
masthead impairment charges;
? any harm to our reputation, business and results of operations resulting from
data security breaches and other threats and disruptions;
? fluctuating price of newsprint or disruptions in newsprint supply chain;
? any labor unrest;
? accelerated decline in print circulation volume;
? developments in the laws and regulations to which we are subject resulting in
increased costs and lower revenues; and
? adverse results from litigation or governmental investigations.
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Although the forward-looking statements in this report reflect the good faith
judgment of our management, such statements can only be based on facts and
factors currently known by them. In light of these risks and uncertainties, you
are cautioned not to place undue reliance on these forward-looking statements.
Except as required by law, we undertake no obligation to announce publicly
revisions we make to these forward-looking statements to reflect the effect of
events or circumstances that may arise after the date of this report. All
written and oral forward-looking statements made subsequent to the date of this
report and attributable to us or persons acting on our behalf are expressly
qualified in their entirety by this section.
The following Management's Discussion and Analysis of Financial Condition and
Results of Operations ("MD&A") is intended to help the reader understand our
results of operations and financial condition. This MD&A should be read in
conjunction with our unaudited condensed consolidated financial statements and
accompanying notes to the financial statements ("Notes") as of and for the six
months ended June 28, 2020 , included in Item 1 of this Quarterly Report on
Form 10-Q, as well as with our audited consolidated financial statements and
accompanying notes to the financial statements and MD&A contained in our 2019
Annual Report filed on Form 10-K with the Securities and Exchange Commission on
March 30, 2020 . All period references are to our fiscal periods unless otherwise
indicated.
Overview
We operate 30 media companies in 14 states, each providing its community with
high-quality news and advertising services in a wide array of digital and print
formats. We are a publisher of brands such as the Miami Herald , The Kansas City
Star , The Sacramento Bee , The Charlotte Observer , The (Raleigh) News &
Observer , and the Fort Worth Star-Telegram . We are headquartered in Sacramento,
California , and as of February 14, 2020 , our Class A Common Stock is listed on
the OTC Pink Market under the symbol MNIQQ.
The following table reflects our sources of revenues as a percentage of total revenues for the periods presented:
Quarters Ended Six Months Ended
June 28, June 30, June 28, June 30,
2020 2019 2020 2019
Revenues:
Advertising 34.9 % 47.8 % 37.6 % 47.5 %
Audience 56.4 % 45.0 % 53.8 % 45.5 %
Other 8.7 % 7.2 % 8.6 % 7.0 %
Total revenues 100.0 % 100.0 % 100.0 % 100.0 %
Our primary sources of revenues are digital and print advertising and audience
subscriptions. Advertising revenues include advertising delivered digital-only,
advertising carried digitally and bundled as a part of newspapers (run of press
("ROP") advertising), and/or advertising inserts placed in newspapers
("preprint" advertising). Audience revenues include either digital-only
subscriptions, or bundled subscriptions, which include digital and print. Our
print newspapers are delivered by large distributors and independent
contractors. Other revenues include commercial printing and distribution
revenues.
See "Results of Operations" below for a discussion of our revenue and expense
performance for the quarters and six months ended
Recent Developments
Bankruptcy Filing and Going Concern
As a result of the commencement of the Chapter 11 Cases onFebruary 13, 2020 , we are operating as a debtor-in-possession pursuant to the authority granted under Chapter 11 of the Bankruptcy Code. Pursuant to the Chapter 11 Cases, we intend to restructure our balance sheet and reduce overall indebtedness. Additionally, as a debtor-in-possession, certain of our activities are subject to review and approval by theBankruptcy Court , including, among other things, the incurrence of secured indebtedness, material asset dispositions, and other transactions outside the ordinary course of business. There can be no guarantee we will successfully consummate a sale of our assets or agree upon a viable Chapter 11 plan with our various stakeholders, or that any such agreement will be reached in the time frame that is acceptable to theBankruptcy Court . 31
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We have concluded that our financial condition and projected operating results, contribution amounts required on our Pension Plan, defaults under our debt agreements, and the risks and uncertainties surrounding our Chapter 11 Cases raise substantial doubt as to our ability to continue as a going concern.
See Note 2 for further discussion.
Asset Sale
OnMay 11, 2020 , theBankruptcy Court approved our motion for an auction process through which we were authorized to determine the highest or otherwise best offer for the sale of all or substantially all of our assets pursuant to Section 363 of the Bankruptcy Code or for sponsorship proposals with respect to a Chapter 11 plan of reorganization. The auction process concluded onJuly 10, 2020 , andChatham was identified as the successful bidder. OnJuly 24, 2020 , we entered into an Asset Purchase Agreement, pursuant to which the Purchaser has agreed to acquire substantially all of our assets for a purchase price of approximately$312.0 million , comprised of (i) a credit bid of our first lien notes of an aggregate principal amount of approximately$262.9 million and (ii) approximately$49.1 million in cash. OnAugust 4, 2020 , theBankruptcy Court approved the Asset Purchase Agreement. The Asset Sale remains subject to customary closing conditions, including HSR Act approval, and is expected to close inSeptember 2020 . After the closing of the Asset Sale, the Debtors' estates will wind down in accordance with a plan of distribution.
Debtor-In-Possession Financing
To ensure sufficient liquidity throughout the Chapter 11 Cases, we obtained a$50.0 million DIP Credit Agreement. This DIP Credit Agreement, coupled with our normal operating cash flows, is providing liquidity for McClatchy and all of our local news outlets to operate as usual and fulfill ongoing commitments to stakeholders. The DIP Credit Agreement, which replaces our former ABL Credit Agreement. (see Note 7 for further discussion of our debt), provides for a DIP Facility consisting of a new revolving loan facility in an aggregate principal amount up to$50 million , which is in the form of revolving loans that are subject to borrowing base limitations or, subject to a sub-limit of$3.5 million , in the form of letters of credit. Our obligations under the DIP Facility will be secured by all of our assets, whether now existing or hereafter acquired. The maturity date of the DIP Facility is no later thanAugust 12, 2021 .
Delisting of our Common Stock from the NYSE American
Our Class A Common Stock was previously listed on the NYSE American under the symbol MNI. OnFebruary 13, 2020 , the NYSE American suspended the trading of our Class A Common Stock upon our filing the Chapter 11 Cases, and our Class A Common Stock has been quoted "over-the-counter" on the OTC Pink Market under the symbol MNIQQ. OnFebruary 21, 2020 , the NYSE American filed a Form 25 with theSEC to delist our Class A Common Stock from the NYSE American. The delisting was effective 10 days after the Form 25 was filed. The deregistration of the Common Stock under Section 12(b) of the Exchange Act became effective onMay 21, 2020 , 90 days after the filing date of the Form 25.
Coronavirus (COVID-19) Pandemic
In early 2020, theWorld Health Organization declared that the recent COVID-19 outbreak was a global health emergency and then inMarch 2020 , they raised the COVID-19 outbreak to "pandemic" status. Our advertising revenues are dependent on general economic and business conditions in our markets or those impacting our customers, including from natural disasters and public health emergencies, such as COVID-19. Early on, the transmission of COVID-19 and efforts to contain its spread resulted in international, national and local border closings and other significant travel restrictions and disruptions, significant disruptions to business operations, supply chains and customer activity, event cancellations and restrictions, service cancellations, reductions and other changes, significant challenges in healthcare service preparation and delivery, quarantines and related government actions and policies, as well as general concern and uncertainty that has negatively affected the economic environment.
More recently, state and local jurisdictions started to lift mandatory
stay-at-home or shelter-in-place orders and started gradually to ease
restrictions. However, as cases have resurged in parts of the
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we have seen governments slow or reverse efforts to reopen or shift into later phases of recovery, which increased risks to our operations. Additionally, we have not previously experienced such a significant portion of our workforce working remotely for a prolonged period, and therefore, its effects on our long-term operations are unknown. The impact of COVID-19 could worsen depending on the duration and spread of the COVID-19 outbreak or resurgences of COVID-19 cases in affected regions after they have begun to experience improvement. These recent developments have caused challenges to our business operations and have increased the risk factors listed above. And while the news media industry has generally been designated as essential businesses thus far, if significant portions of our workforce are unable to work effectively, our operations, including the printing and delivery of print newspapers, will likely be impacted. We may be unable to perform fully on our contracts and our costs may increase. These cost increases may not be fully recoverable or adequately covered by insurance. Furthermore, the outbreak of COVID-19 has severely impacted global economic activity and caused significant volatility and negative pressure in the financial markets. The majority of the COVID-19 pandemic impacts have been to total advertising revenues (37.6% of total revenues in the first six months of 2020), the collectability of some of our accounts receivables, single copy newspaper revenues (4.5% of total revenues in the first six months of 2020), and employee costs. We continue to monitor the situation, to assess further possible implications to our business and customers, including the status of state and local government reopening plans and any potential recurrence of illness, and to take actions in an effort to mitigate adverse consequences.
On
While we do not qualify for any of the business loans or grants under the CARES Act, modifications to the tax rules for the carryback of net operating losses and business interest limitations allowed us to file for a federal tax refund of$11.7 million , which we received during the second quarter of 2020. In addition, section 2302 of the CARES Act allows us to delay the payment of our share of certain payroll taxes incurred fromMarch 27, 2020 , throughDecember 31, 2020 . As ofJune 28, 2020 , we have deferred$2.8 million of these certain payroll taxes. For all amounts deferred throughDecember 31, 2020 , one half of the amount is due inDecember 2021 and the remaining balance is due inDecember 2022 . Non-Cash Impairment Charges During the quarter endedMarch 29, 2020 , we performed an interim testing of impairment of goodwill and intangible newspaper mastheads due to the continuing challenging business conditions and changes in our assessment of profitability in future years. As a result, during the quarter endedMarch 29, 2020 , we recorded impairment charges to goodwill and intangible newspaper mastheads of$59.0 million and$4.8 million , respectively. See Notes 3 and 6 for further discussion. Results of Operations
The following table reflects our financial results on a consolidated basis for
the quarters and six months ended
Quarters Ended Six Months Ended
June 28, June 30, June 28, June 30,
(in thousands, except per share amounts) 2020 2019 2020 2019
Net loss $ (34,731) $ (17,531) Net loss per diluted common share$ (4.38) $ (2.21) $ (26.89) $ (7.54) The increase in the net loss in the quarter and six months endedJune 28, 2020 , compared to the same periods in 2019, was primarily due to the recognition of$12.0 million and$107.2 million , respectively, of reorganizational items related to the Chapter 11 Cases. In addition, during the quarter and six months endedJune 28, 2020 , we recognized$0.3 million and$64.0 million , respectively, of goodwill and other asset write-downs compared to$0.7 million in the first six months of 2019. Advertising revenues were lower during the quarter and six months endedJune 28, 2020 , compared to the same periods in 2019. The lower revenues were partially offset by lower operating expenses, excluding goodwill and other asset write-downs. 33
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Revenues
During the quarter and six months ended June 28, 2020 , total revenues decreased
26.7% and 20.0%, respectively, compared to the same periods in 2019, primarily
due to the continued decline in demand for advertising. Specifically, in the
second quarter of 2020 and in the last few weeks of the first quarter of 2020,
we saw advertising revenues decline at an accelerated pace as stay-at-home
orders were issued, and many businesses closed temporarily due to the COVID-19
pandemic. The category most impacted by the COVID-19 pandemic is print
advertising revenues. The print advertising category has been in decline as
large retail advertisers continue to reduce preprinted inserts and in-newspaper
ROP advertising in favor of digital products. We expect this trend to continue
for the foreseeable future.
The following table summarizes our revenues by category:
Quarters Ended Six Months Ended
June 28, June 30, $ % June 28, June 30, $ %
(in thousands) 2020 2019 Change Change 2020 2019 Change Change
Advertising
Digital-only $ 19,725 $ 31,250 $ (11,525) (36.9) $ 44,275 $ 65,683 $ (21,408) (32.6)
Digital bundled with print 4,476 6,506 (2,030) (31.2) 10,626 12,620 (1,994) (15.8)
Total digital 24,201 37,756 (13,555) (35.9) 54,901 78,303 (23,402) (29.9)
Print 14,516 32,539 (18,023) (55.4) 35,125 63,748 (28,623) (44.9)
Direct marketing 7,021 15,160 (8,139) (53.7) 17,807 28,599 (10,792) (37.7)
Total advertising 45,738 85,455 (39,717) (46.5) 107,833 170,650 (62,817) (36.8)
Total audience 73,910 80,292 (6,382) (7.9) 154,602 163,404 (8,802) (5.4)
Other revenues 11,366 12,915 (1,549) (12.0) 24,604 24,932 (328) (1.3)
Total revenues $ 131,014 $ 178,662 $ (47,648) (26.7) $ 287,039 $ 358,986 $ (71,947) (20.0)
Advertising Revenues
Total advertising revenues decreased 46.5% and 36.8% during the quarter and six
months ended June 28, 2020 , respectively, compared to the same periods in 2019.
We experienced declines in both advertising on our owned and operated products
as well as on advertising placed on our third-party partner's products, as
discussed below.
The following table reflects the category of advertising revenue as a percentage of total advertising revenue for the periods presented:
Quarters Ended Six Months Ended
June 28, June 30, June 28, June 30,
2020 2019 2020 2019
Advertising:
Total digital 52.9 % 44.2 % 50.9 % 45.9 %
Print 31.7 % 38.1 % 32.6 % 37.3 %Direct marketing and other 15.4 % 17.7 % 16.5 %
16.8 %
Total advertising 100.0 % 100.0 % 100.0 % 100.0 %
We categorize advertising revenues as follows:
Digital advertising - can come in many forms, including banner ads, video,
? search advertising and/or liner ads, while print advertising is typically
display advertising, or in the case of classified, display and/or liner
advertising.
? Print advertising - directly in the newspaper is considered ROP advertising.
Direct Marketing and Other - primarily preprint advertisements in direct mail,
shared mail and niche publications, events programs, total market coverage
? publications and other miscellaneous advertising not included in the daily
newspaper. These products are generally delivered to non-subscribers of our
daily newspapers.
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Table of Contents Digital: Total digital advertising revenues decreased 35.9% and 29.9% during the quarter and six months endedJune 28, 2020 , respectively, compared to the same periods in 2019. Digital advertising constituted 52.9% and 50.9% of total advertising revenues in the quarter and six months endedJune 28, 2020 , respectively, compared to 44.2% and 45.9% for the same periods in 2019. Total digital advertising includes digital-only advertising and digital advertising bundled with print. Digital-only advertising is defined as digital advertising sold on a stand-alone basis or as the primary advertising buy. Digital-only advertising revenues decreased 36.9% and 32.6% in the second quarter and first six months of 2020 compared to the same periods in 2019, largely due to display advertising and a loss of an affiliate agreement that ended inDecember 2019 . In addition, inMarch 2020 we started experiencing decreases in advertising buys as a result of the COVID-19 pandemic and the temporary closure of businesses throughout the country. Digital advertising revenues bundled with print products decreased 31.2% and 15.8% in the second quarter and first six months of 2020, respectively, compared to the same periods in 2019 due mainly to the COVID-19 pandemic that affected all advertising categories. The newspaper industry continues to experience a secular shift in advertising demand from print to digital products as advertisers look for multiple advertising channels to reach their customers and are increasingly focused on online customers. While our product offerings and collaboration efforts in digital advertising have steadily grown, we expect to continue to face intense competition in the digital advertising space. We will continue to adjust our content, targeting and paywalls as we pursue the best experience for our digital customers, knowing that it may impact the mix of digital advertising and digital audience revenues. Print:
Print advertising decreased 55.4% and 44.9% during the quarter and six months
ended
In the second quarter of 2020, the decreases in print advertising were primarily due to the declines in ROP advertising revenues of 53.8% and preprint advertising revenues of 59.1% compared to the same period in 2019. For the first six months of 2020, the decreases in print advertising revenues were primarily due to decreases of 45.7% in ROP advertising revenues and 43.1% in preprint advertising revenues compared to the same period in 2019. Print advertising results were also impacted by the COVID-19 pandemic and temporary closure of businesses. We expect to continue to see significant decreases in print revenues in the future periods while businesses are still subject to social distancing and other COVID-related restrictions and are not able to fully allow customers back into their establishments. Direct Marketing: Direct marketing and other advertising revenues decreased 53.7% and 37.7% during the quarter and six months endedJune 28, 2020 , respectively, compared to the same periods in 2019. The decrease was largely due to declines in insert advertising in our total market coverage ("TMC") products by large retail customers. Audience Revenues Total audience revenues decreased 7.9% and 5.4% during the quarter and six months endedJune 28, 2020 , respectively, compared to the same periods in 2019. Total audience revenues represented 53.8% of the total revenues during the first six months of 2020 compared to 45.5% in the same period of 2019. Total digital audience revenues were relatively flat for the quarter and six months endedJune 28, 2020 , compared to the same periods in 2019. Digital audience revenues that were bundled with print decreased 9.6% and 10.7% during the second quarter and first six months of 2020, respectively, but were partially offset by a 57.2% and 52.2% increase in digital-only audience revenues in the quarter and six months endedJune 28, 2020 , respectively, compared to the same periods in 2019. 35
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The increase in digital-only audience revenues during 2020 was a result of a 40.9% increase in our digital-only subscribers to 261,300 as of the end of the second quarter of 2020 compared to 185,500 as of the end of the second quarter in 2019. Print audience revenues decreased 12.3% and 7.4% in the quarter and six months endedJune 28, 2020 , respectively, compared to the same periods in 2019, primarily due to lower print circulation volumes that were partially offset by pricing adjustments. Print circulation volumes continue to decline as a result of fragmentation of audiences faced by our industry as available media outlets proliferate and readership trends change. While the COVID-19 pandemic negatively impacted advertising, audience revenues were not as sensitive to the COVID-19 pandemic. Specifically, as compared to the same periods in 2019, digital-only subscriptions saw greater increases during the month ofMarch 2020 and the second quarter of 2020, while single copy sales saw a significant decline in the second quarter due to the COVID-19 pandemic. Operating Expenses Total operating expenses decreased 18.9% in the quarter endedJune 28, 2020 , compared to the same period in 2019. In the six months endedJune 28, 2020 , total operating expenses increased 2.5% compared to the same period in 2019, primarily due to increases in goodwill and other asset write-downs. The total operating expenses for the first six months of 2020, excluding goodwill and other asset write-downs, decreased 15.0%. The operating expense declines, when adjusting for goodwill and other asset write-downs, reflects our continued effort to reduce costs through streamlining processes to gain efficiencies.
The following table summarizes operating expenses:
Quarters Ended Six Months Ended
June 28, June 30, $ % June 28, June 30, $ %
(in thousands) 2020 2019 Change Change 2020 2019 Change Change
Compensation expenses $ 54,509 $ 61,456 $ (6,947) (11.3) $ 112,951 $ 130,891 $ (17,940) (13.7)
Newsprint, supplements
and printing expenses 7,040 11,229 (4,189) (37.3) 15,920 22,925 (7,005) (30.6)
Depreciation and
amortization expenses 11,324 17,411 (6,087) (35.0) 26,316 34,929 (8,613) (24.7)
Other operating expenses 67,397 83,087 (15,690) (18.9) 150,725 171,291 (20,566) (12.0)
Goodwill and other asset
write-downs 261 - 261 nm 64,023 739 63,284 nm
$ 140,531 $ 173,183 $ (32,652) (18.9) $ 369,935 $ 360,775 $ 9,160 2.5
_____________________
nm - not meaningful
Compensation expenses, which included both payroll and fringe benefit costs,
decreased 11.3% and 13.7% in the quarter and six months ended June 28, 2020 ,
respectively, compared to the same periods in 2019. Payroll expenses declined
10.6% and 13.0% during the quarter and six months ended June 28, 2020 ,
respectively, compared to the same periods in 2019, primarily due to the
reduction in headcount. Average full-time equivalent employees declined 18.1%
and 17.2% in the quarter and six months ended June 28, 2020 , respectively,
compared to the same periods in 2019, partially reflecting the COVID-19 pandemic
furloughs that were effective during the second quarter of 2020. Fringe benefit
costs decreased 16.6% and 18.2% in the quarter and six months ended June 28,
2020 , respectively, compared to the same periods in 2019, which is consistent
with the decreases in payroll expenses.
Newsprint, supplements and printing expenses decreased 37.3% and 30.6% in the
quarter and six months ended June 28, 2020 , respectively, compared to the same
periods in 2019. Newsprint expense declined 45.3% and 40.7% during the second
quarter and first six months of 2020, respectively, compared to the same periods
in 2019. The newsprint expense decline reflects a decrease in newsprint tonnage
used of 36.9% and 31.0%, in second quarter and first six months of 2020.
Newsprint prices decreased 13.3% and 14.0% during the second quarter and first
six months of 2020, respectively, compared to the same periods in 2019. During
these same periods, printing expenses, which are primarily costs associated with
outsourced printing to third-parties, decreased 40.7% and 33.2% due to decreases
in volume printed.
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Depreciation and amortization expenses decreased 35.0% and 24.7% in the quarter and six months endedJune 28, 2020 , respectively, compared to the same periods in 2019. The decreases are primarily related to amortization expense that decreased$23.3 million throughout the first six months of 2020 compared to the same period in 2019. A majority of the intangible assets subject to amortization became fully amortized in the second quarter of 2019. This decrease in amortization expense was partially offset by an increase in depreciation expense of$5.6 million and$14.7 million in the second quarter and first six months of 2020 compared to the same periods in 2019, primarily as a result of accelerated depreciation. During the second quarter and first six months of 2020, we recorded accelerated depreciation expenses of$6.9 million and$16.9 million primarily related to the print production equipment inMiami, Florida , where print production was outsourced in the first quarter of 2020. There was no comparable accelerated depreciation in the second quarter and first six months of 2019. Other operating expenses decreased 18.9% and 12.0% in the quarter and six months endedJune 28, 2020 , respectively, compared to the same periods in 2019. The decrease was primarily a result of cost savings initiatives and other efforts to reduce operational costs. During the second quarter and first six months of 2020 compared to the same periods in 2019, we had decreases in various categories, such as marketing, third-party related fees for interactive services, circulation delivery costs, professional fees and other miscellaneous expenses. These decreases were partially offset by increases in bad debt and other miscellaneous expenses.Goodwill and other asset write-downs include charges of$0.3 million and$64.0 million in the second quarter and first six months of 2020, respectively, compared to zero and$0.7 million in the same periods in 2019. The write-downs in the second quarter of 2020 and in the first six months of 2019 result from impairment charges recorded on certain land and buildings that are classified as assets held for sale. The write-downs in the first six months of 2020 are due to impairment charges to goodwill of$59.0 million and intangible newspaper mastheads of$4.8 million that were recorded in the first quarter of 2020. Non-Operating Expenses Interest Expense: Total interest expense decreased 51.4% and 38.0% in the quarter and six months endedJune 28, 2020 , respectively, compared to the same periods in 2019. In the second quarter and first six months of 2020, interest expense related to debt balances decreased$10.2 million and$15.8 million , respectively, compared to the same periods in 2019. The decrease in each period is attributable to the cessation of interest accruals on outstanding pre-petition debt beginningFebruary 13, 2020 , in accordance with ASC 852. As such, we stopped accruing interest expense on all of our long-term debt except for the first lien 2026 Notes. To a lesser extent, the decline in interest expense is due to the lower overall debt balances resulting from redemptions made during the first half of 2019. Reorganizational items, net: Reorganizational items, net, totaled$12.0 million and$107.2 million for the quarter and six months endedJune 28, 2020 , respectively, and include charges and gains incurred since the Petition Date related to the Chapter 11 Cases. See Note 2 for a detailed description of the charges and offsetting gains. We expect professional fees to continue to be substantial until the conclusion of the Chapter 11 Cases. Income Taxes: In the quarter and six months endedJune 28, 2020 , we recorded an income tax benefit of$0.3 million and$9.0 million , respectively. As discussed more fully in Note 3 under Income Taxes, during the second quarter and first six months of 2020, we recorded charges of$4.9 million and$13.4 million , respectively, related to the current period impact of the valuation allowance on deferred tax assets. The remaining income tax benefit differed from the expected federal tax amounts primarily due to the inclusion of state income taxes, certain permanently non-deductible expenses, the impact of non-tax deductible charges related to intangibles and goodwill, and the ability to carryback our net operating loss generated in 2019 resulting in an income tax benefit for the receivable due to changes in the tax laws from the CARES Act. 37
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Liquidity and Capital Resources
As a result of the commencement of the Chapter 11 Cases on February 13, 2020 , we
are operating as a debtor-in-possession pursuant to the authority granted under
Chapter 11 of the Bankruptcy Code. As a debtor-in-possession, certain of our
activities are subject to review and approval by the Bankruptcy Court ,
including, among other things, the incurrence of secured indebtedness, material
asset dispositions, and other transactions outside the ordinary course of
business. There can be no guarantee we will successfully consummate a sale of
our assets or agree upon a viable Chapter 11 plan with our various stakeholders
or reach any such agreement in the time frame that is acceptable to the
Bankruptcy Court . See Note 2 for additional information.
We have entered into a $50.0 million DIP Credit Agreement with Encina which,
coupled with our normal operating cash flows, is providing liquidity for
McClatchy and all of our local news outlets to operate as usual and fulfill
ongoing commitments to stakeholders. The proceeds of the loans extended under
the DIP Credit Agreement may be used for purposes permitted by orders of the
Bankruptcy Court , including (i) for working capital and other general corporate
purposes, (ii) to pay transaction costs, professional fees and other obligations
and expenses incurred in connections with the DIP Facility, the Chapter 11 Cases
and the transactions contemplated thereunder, and (iii) to pay adequate
protection expenses, if any to the extent set forth in any order entered by the
Bankruptcy Court .
As a result of the substantial doubt about our ability to continue as a going
concern for the next twelve months, and the associated steps that have been
undertaken to restructure our balance sheet, our expected cash outflows related
to interest payments on our debt in 2020 are difficult to predict at this time.
We expect to make adequate protection payments on our DIP Credit Agreement and
our first lien notes during 2020 in accordance with the Bankruptcy Court order
approving the DIP Credit Agreement, but we do not expect to make interest
payments on our other loans, notes and debentures. We plan to fund our ongoing
operations through available borrowings under our DIP Credit Agreement as well
as cash generated from operations.
We are unable to predict when we will emerge from Chapter 11 because it is
contingent upon numerous factors, many of which are out of our control.
Emergence from bankruptcy is contingent upon several factors, which includes
obtaining the Bankruptcy Court's approval of (i) a Chapter 11 plan of
reorganization, which will enable us to transition from Chapter 11 into ordinary
course operations outside of bankruptcy, or (ii) a sale of our assets pursuant
to Section 363 of the Bankruptcy Code. We also may need to obtain a new credit
facility, or "exit financing." Our ability to obtain such approval and financing
will depend on, among other things, the timing and outcome of various ongoing
matters related to the Chapter 11 Cases as well as the general global economic
downturn due to the COVID-19 pandemic. If approved, a sale of our assets or a
Chapter 11 plan will determine the rights and satisfaction of claims of various
creditors and security holders, and is subject to the ultimate outcome of
negotiations and Bankruptcy Court decisions ongoing through the date on which
such plan is confirmed. See Note 2 for additional discussion regarding the
Chapter 11 Cases status.
We are a highly leveraged company. Our primary sources of liquidity are cash
flows generated from operations and availability under our DIP Credit Agreement.
Subsequent to and during pendency of the Chapter 11 Cases, we expect that our
primary liquidity requirements will be to fund operations and make required
payments under our DIP Credit Agreement. Our ability to meet the requirements of
our DIP Credit Agreement will be dependent on our ability to generate sufficient
cash flows from operations.
In addition, while we do not qualify for any of the business loans or grants
under the CARES Act, modifications to the tax rules for the carryback of net
operating losses and business interest limitations allowed us to file for a
federal tax refund of $11.7 million , which we received during the second quarter
of 2020. In addition, section 2302 of the CARES Act allows us to delay the
payment of our share of certain payroll taxes incurred from March 27, 2020 ,
through December 31, 2020 . As of June 28, 2020 , we have deferred $2.8 million of
these certain payroll taxes. For all amounts deferred through December 31, 2020 ,
one half of the amount is due in December 2021 and the remaining balance is due
in December 2022 .
Based on current financial projections, we expect to be able to continue to
generate cash flows from operations and through availability on our DIP Credit
Agreement, in amounts sufficient to fund our operations, satisfy our interest
payment obligations on our DIP Credit Agreement and pay administrative expenses
including professional fees while under Chapter
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11. However, should the Chapter 11 Cases take longer than anticipated or should our financial results be materially and negatively impacted by the COVID-19 pandemic, we may be required to seek additional sources of liquidity. There can be no assurance that we will be able to obtain such liquidity on terms favorable to us, if at all. We continue to monitor the impacts of the COVID-19 pandemic on our customers' liquidity and capital resources and therefore our ability to collect, or the timeliness of collection of our accounts receivable. As ofJune 28, 2020 , we had$703.3 million aggregate principal amount of outstanding debt consisting of$262.9 million of our 2026 Notes,$157.1 million of our Junior Term Loan,$268.4 million of our senior secured junior lien 2031 Notes and$14.9 million of our unsecured Debentures.
Pension Matters:
For our Pension Plan, the net retirement obligations in excess of the retirement plan assets were$650.2 million as ofDecember 29, 2019 , consisting of$124.2 million of current pension liabilities and$526.0 million of long-term pension and postretirement obligations. We will seek theBankruptcy Court's authority to terminate our Pension Plan, and appoint the PBGC as the plan's trustee. Under a plan termination, the PBGC would continue to pay the Pension Plan participants their benefits, subject to federal statutory limits. Under current regulations, we believe that such a solution would not have an adverse impact on qualified pension benefits for substantially all plan participants.
Sources and Uses of Liquidity and Capital Resources:
Our cash and cash equivalents were$20.1 million as ofJune 28, 2020 , compared to$19.6 million and$10.5 million as ofJune 30, 2019 , andDecember 29, 2019 , respectively.
The following table summarizes our cash flows:
Six Months Ended
June 28, June 30,
(in thousands) 2020 2019
Cash flows provided by (used in)
Operating activities $ 19,557 $ 1,971
Investing activities (1,407) 1,668
Financing activities (1,941) (7,945)
Increase (decrease) in cash, cash equivalents and
restricted cash $ 16,209 $ (4,306)
Operating Activities:
We generated $19.6 million of cash from operating activities in the six months
ended June 28, 2020 , compared to generating $2.0 million in the six months ended
June 30, 2019 . The increase in operating cash flows primarily reflects lower
accounts payable payments in 2020 compared to 2019 due to the Chapter 11 Cases
which limits our ability to pay pre-petition amounts, the timing of income tax
payments or refunds, and the change in our accrued interest balances in the
first six months of 2020 compared to the same period in 2019. In the first six
months of 2020, we had income tax refunds of $12.2 million compared to income
tax payments of $7.1 million in the same period in 2019. In the first six months
of 2020, we had interest payments of $8.0 million compared to interest payments
of $29.8 million during the same period in 2019. The remaining changes in
operating activities relate to miscellaneous timing differences in various
payments and receipts.
Investing Activities:
We used $1.4 million of cash from investing activities in the six months ended
June 28, 2020 , primarily for the purchase of property, plant and equipment
("PP&E"). We expect total capital expenditures for the full year of 2020 to be
approximately $4.0 million .
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We generated$1.7 million of cash from investing activities in the six months endedJune 30, 2019 . We received proceeds from the sale of PP&E of$3.3 million . These amounts were offset by the purchase of PP&E for$1.2 million and contributions to equity investments of$0.4 million . Financing Activities: We used$1.9 million of cash for financing activities in the six months endedJune 28, 2020 , compared to using$7.9 million in the six months endedJune 30, 2019 . In 2020, the net cash used was partially related to$0.8 million for the debt issuance costs related to the DIP financing. During the six months endedJune 30, 2019 , we redeemed$36.6 million principal amount of our 2026 Notes at par. These redemptions were partially offset by the$29.7 million increase in our financial obligations as a result of the sale and leaseback of one of our real properties. Off-Balance-Sheet Arrangements
As of
Critical Accounting Policies
Critical accounting policies are those accounting policies that we believe are
important to the portrayal of our financial condition and results and require
our most difficult, subjective or complex judgments, often as a result of the
need to make estimates about the effect of matters that are inherently
uncertain. Our 2019 Annual Report on Form 10-K includes a description of certain
critical accounting policies, including those with respect to goodwill and
intangible impairment, pension and post-retirement benefits and income taxes.
There have been no material changes to our critical accounting policies
described in our 2019 Annual Report on Form 10-K.
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