ITEM 1B.
UNRESOLVED STAFF COMMENTS
None.
We operate in 14 markets in the United States. We believe all properties we own are well maintained, are in good condition and suitable for our operations. There are no material encumbrances on any of these properties. We own substantially all of the facilities and equipment used in our operations.
ITEM 3.
ITEM 3.
LEGAL PROCEEDINGS
See Note 16 - Commitments and Contingencies of this Annual Report on Form 10-K for information on legal proceedings.
ITEM 4.
ITEM 4.
MINE SAFETY DISCLOSURES
None.
PART II
ITEM 5.
ITEM 5.
MARKET FOR REGISTRANT'S COMMON EQUITY, RELATED STOCKHOLDER MATTERS AND ISSUER PURCHASES OF EQUITY SECURITIES
We are authorized to issue 100 million shares of common stock and 10 million shares of preferred stock and each share of our common stock is entitled to one vote. Our common stock has traded on the New York Stock Exchange (the “NYSE”), under the symbol "JMG," since we began operations as a separate company on April 1, 2015. The following table sets forth, for the periods indicated, the high and low sale prices per share of our common stock as reported on the NYSE.
As of March 23, 2016, there were approximately 1,693 registered holders of our common stock. We have no outstanding shares of preferred stock.
Dividends
We currently intend to distribute a portion of our free cash flow to our common shareholders, through a quarterly dividend, subject to satisfactory financial performance, approval of our board of directors and dividend restrictions in our credit agreement (for additional information, see Note 11 - Long-Term Debt). Our board of directors’ determination regarding dividends will depend on a variety of factors, including earnings, free cash flow generated from operations or other sources, liquidity position and potential alternative uses of cash, as well as economic conditions and expected future financial results. The Merger Agreement with Gannett, effective October 7, 2015, limits our quarterly dividends to $0.06 per share.
Since we began operations as a separate company on April 1, 2015, we paid cash dividends of $0.04 per share on June 5, 2015 and cash dividends of $0.06 per share on September 4, 2015, December 4, 2015 and March 1, 2016.
Securities Authorized For Issuance Under Equity Compensation Plans
See Part III, Item 12, "Security Ownership of Certain Beneficial Owners and Management and Related Shareholder Matters," of this Annual Report on Form 10-K for certain information regarding our equity compensation plans.
Purchases of Equity Securities
On August 13, 2015, our board of directors authorized a share repurchase program of up to $25 million of our outstanding common stock over 36 months. Under the program, share repurchases may be made at our discretion, from time to time, in the open market and/or in private transactions. Share purchases by us will depend on market conditions, share price, trading volume and other factors. The Merger Agreement with Gannett precludes us from repurchasing shares.
Stock Performance Information
The following information in this Item 5 of this Annual Report on Form 10-K is not deemed to be “soliciting material” or to be “filed” with the SEC or subject to Regulation 14A or 14C under the Securities Exchange Act of 1934 or to the liabilities of Section 18 of the Securities Exchange Act of 1934, and will not be deemed to be incorporated by reference into any filing under the Securities Act of 1933 or the Securities Exchange Act of 1934, except to the extent we specifically incorporate it by reference into such a filings.
The following graph compares, on a cumulative basis, changes in the total return on our common stock with the total return on the Standard & Poor’s 500 Stock Index and the total return on a peer group comprised of six corporations that concentrate on newspaper publishing in local markets. Our peer group is comprised of A.H. Belo Corp., Gannett Co. Inc., Lee Enterprises Inc., McClatchy Co., New Media Investment Group, Inc., and Tribune Publishing Co. This graph assumes the investment of $100.00 on April 1, 2015, the first day our common stock traded publicly, and the reinvestment of any dividends since that date.
ITEM 6.
ITEM 6.
SELECTED FINANCIAL DATA
The selected statement of operations data for 2015, 2014 and 2013, and the selected balance sheet data at December 31, 2015 and 2014 are derived from, and are qualified by reference to, the audited consolidated and combined financial statements included elsewhere in this Annual Report on Form 10-K. The selected statement of operations data for 2012 and 2011, and the selected balance sheet data at December 31, 2013, 2012, and 2011, are derived from the audited combined financial statements of Scripps Newspapers (the predecessor of Journal Media Group) and not included herein. Periods beginning April 1, 2015 are of the consolidated Company. You should read this information in conjunction with the other financial information and "Management's Discussion and Analysis of Financial Condition and Results of Operations" and the consolidated and combined financial statements, including the notes thereto, included in this Annual Report on Form 10-K. See also "Index to Consolidated and Combined Financial Statements."
ITEM 7.
ITEM 7.
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
Background
Journal Media Group was incorporated in Wisconsin on July 25, 2014. From our incorporation until the consummation of the newspaper mergers and separation on April 1, 2015, Scripps and Journal each owned 50% of our common stock. As of April 1, 2015, we own and operate the former newspaper publishing businesses of Scripps and Journal. In this Annual Report on Form 10-K, we refer to the newspapers published by subsidiaries of Scripps as the “Scripps Newspapers” and to the newspapers published by subsidiaries of Journal as the “Journal Newspapers" or "JRN Newspapers,” and we also sometimes refer to the April 1, 2015 newspaper mergers that created Journal Media Group as the "separation."
Since our inception, and until April 1, 2015, our activities were limited to our organization, the preparation of our registration statement on Form S-4 and other matters related to the transactions. Throughout 2014 and the first quarter of 2015, we conducted no business operations or owned or leased any real estate or other property. Accordingly, our only assets prior to the consummation of the newspaper mergers and separation on April 1, 2015 arose from the issuance at inception of two shares of our common stock, one to Scripps and one to Journal. We did not have any costs or liabilities arising out of our operations prior to the consummation of the newspaper mergers and separation on April 1, 2015. As a result, the financial statements and related disclosures (including Management’s Discussion and Analysis of Financial Condition and Results of Operations) included in this Annual Report on Form 10-K for periods prior to April 1, 2015 are those of our predecessor, Scripps Newspapers. All financial statements and related disclosures for the period April 1, 2015 to December 31, 2015 consist of financial condition and results of operations of Journal Media Group.
Scripps Newspapers combined financial statements, for periods prior to April 1, 2015, have been “carved-out” from the consolidated financial statements of Scripps and reflect assumptions and allocations made by Scripps. Scripps Newspapers carve-out financial statements include all revenues, costs, assets and liabilities that are directly attributable to the business. In addition, certain expenses reflected in Scripps Newspapers carve-out financial statements are an allocation of corporate expenses from Scripps. Such expenses include, but are not limited to, centralized support functions including finance, legal, information technology, human resources, and insurance as well as stock-based compensation. These expenses have been allocated to Scripps Newspapers on the basis of direct usage when identifiable and allocated based upon on a number of utilization measures including headcount, square footage, and proportionate effort. Where determinations based on utilization are impracticable, Scripps used other methods and criteria that are believed to be reasonable estimates of costs attributable to the companies, such as revenues.
The actual costs that may have been incurred if Scripps Newspapers had been a stand-alone company would depend on a number of factors, including the chosen organizational structure and strategic decisions made as to information technology and infrastructure requirements. As such, Scripps Newspapers combined financial statements do not necessarily reflect what the financial condition and results of operations would have been had Scripps Newspapers operated as a stand-alone company during the periods or at the date presented.
Newspaper Mergers
On July 30, 2014, Scripps and Journal entered into the master transaction agreement with Scripps Media, Inc., Desk Spinco, Inc., Scripps NP Operating, LLC (f/k/a Desk NP Operating, LLC), Desk BC Merger, LLC, Boat Spinco, Inc., Journal Media Group
(f/k/a Boat NP Newco, Inc.), Desk NP Merger Co., and Boat NP Merger Co.
Following certain internal contributions and distributions by Scripps and Journal, Scripps spun-off Scripps Spinco to its shareholders and Journal spun-off Journal Spinco to its shareholders on April 1, 2015. Pursuant to the master transaction agreement, the shares of Scripps Spinco and Journal Spinco were not distributed to Scripps shareholders or Journal shareholders, but were held by the exchange agent for the benefit of Scripps and Journal shareholders until those shares were exchanged for shares of common stock of Journal Media Group in connection with the newspaper mergers on April 1, 2015. In the Scripps newspaper merger, each share of common stock of Scripps Spinco was automatically converted into 0.2500 shares of common stock of Journal Media Group. In the Journal newspaper merger, each share of Journal Spinco common stock was converted into 0.1950 shares of common stock of Journal Media Group.
Each share of Journal Media Group stock was issued in accordance with, and subject to the rights and obligations set forth in the articles of incorporation of Journal Media Group.
Upon completion of the newspaper mergers and separation on April 1, 2015, Journal Media Group's common stock was listed for trading on the NYSE under ticker symbol "JMG." The former Scripps shareholders held approximately 59% and the former Journal shareholders held approximately 41% of the outstanding common stock of Journal Media Group, calculated on a fully-diluted basis, immediately following the newspaper mergers and separation on April 1, 2015.
Overview of Journal Media Group
Following completion of the transactions and separation on April 1, 2015, Journal Media Group is a media enterprise with interests in newspapers and local digital media sites. With the ultimate goal of informing, engaging, and empowering readers in the communities we serve, we provide news, information and value to customers, employees and advertisers. We serve audiences and businesses through a portfolio of print and digital media brands, including 17 daily newspapers in 14 markets across the United States, and operate an expanding collection of local digital journalism and information businesses.
We have a bundled-subscription model in all of our newspaper markets. Under the bundled model, subscribers receive access to all newspaper content on all platforms. Only limited digital content is available to non-subscribers after free article thresholds are met. We also offer digital-only subscriptions.
We expect to face continued challenges from declines in demand for our printed products. We expect print subscriptions will continue to face pressure as readers find alternative sources to obtain news and information content, including on mobile and other digital platforms. This expected decline in circulation may impact revenue as subscription price increases are unlikely to offset declining subscription volumes and advertising revenue may decline as fewer newspaper inserts are delivered with the printed newspaper. In an effort to minimize customer churn and maximize profitability, we have and will continue to use analysis of customer price sensitivity.
In addition, advertising revenue is expected to face continued challenges as advertisers become more targeted with their spending on marketing, either narrowing their geographic distribution to focus on certain areas or shifting their spending to digital media. We will continue to engage our advertisers to determine their needs and leverage our expertise in the markets in which we operate to maximize our share of advertising revenue and look at opportunities to create new products and services and efficient marketplaces connecting advertisers with current and prospective customers.
A portion of our revenue is based on commercial printing and the delivery of other publications, which have experienced the same challenges that our newspapers experience. As our commercial customers reduce page counts and experience declines in circulation, our revenue may also decline. We expect to continue exploring new commercial print and delivery opportunities as our potential customers explore ways to defer capital expenditures for print facilities and explore other cost reduction strategies.
Following the April 1, 2015 separation, we started operating on a number of different front-end / business systems. We expect that, over time, we will be able to standardize many of these systems (advertising, circulation, editorial, etc.) and harmonize related business processes. Support and other system functions can also be centralized and managed with fewer employees and other related costs. We can also continue to explore changes to our products, such as reduced page size and other efficiencies such as combining sections to drive newsprint and production savings.
Basis of Presentation
The accompanying combined financial information for periods prior to April 1, 2015 are those of our predecessor, Scripps Newspapers. The accompanying financial information for the period April 1, 2015 to December 31, 2015 consist of the financial condition and results of operations of Journal Media Group.
Journal Media Group operations consist of daily and community newspapers in 14 markets across the United States. The newspapers earn revenue primarily from the sale of advertising to local and national advertisers and newspaper subscription fees. The newspapers operate in small and mid-size markets, focusing on news coverage within their local markets. Advertising and subscription revenues provide substantially all of the operating revenues for each newspaper market, and employee, newspaper distribution and newsprint costs are the primary expenses at each newspaper. The daily newspapers published by Journal Media Group are the Milwaukee (WI) Journal Sentinel, the Abilene (TX) Reporter-News, the Anderson (SC) Independent-Mail, the Corpus Christi (TX) Caller-Times, the Evansville (IN) Courier & Press, the Henderson (KY) Gleaner, the Kitsap (WA) Sun, the Knoxville (TN) News Sentinel, the Memphis (TN) Commercial Appeal, the Naples (FL) Daily News, the Redding (CA) Record-Searchlight, the San Angelo (TX) Standard-Times, the Treasure Coast (FL) News/Press/Tribune, the Ventura County (CA) Star and the Wichita Falls (TX) Times Record News. The business also includes a 40% ownership in the Albuquerque Publishing Company, which publishes the Albuquerque Journal (NM).
Historically, separate financial statements have not been prepared for Scripps Newspapers. These combined financial statements reflect the historical financial position, results of operations, changes in parent company equity and cash flows of Scripps Newspapers for the periods presented prior to April 1, 2015, as Scripps Newspapers was historically managed within Scripps (the "Parent"). The combined financial statements have been prepared on a “carve-out” basis and are derived from the consolidated financial statements and accounting records of Scripps. The combined financial statements are prepared in accordance with generally accepted accounting principles in the United States of America ("GAAP"). Management believes that assumptions and methodologies underlying the allocation of general corporate expenses are reasonable (see Note 15 to the consolidated and combined financial statements). However, such expenses may not be indicative of the actual level of expense that would have been incurred had Scripps Newspapers operated as a separate stand-alone entity, and, accordingly, may not necessarily reflect Scripps Newspapers' combined financial position, results of operations and cash flows had Scripps Newspapers operated as a stand-alone entity during the periods presented prior to April 1, 2015.
Results of operations are not necessarily indicative of the results that may be expected for future interim periods or for the full year.
Results of Operations
2015 Compared to 2014
The following table summarizes our results of operations for the years ended December 31, 2015 and 2014:
F - Greater than 100% favorable variance
U - Greater than 100% unfavorable variance
Revenue
Our revenue for the year ended December 31, 2015 was $441.0 million, an increase of $70.7 million, or 19.1%, compared to $370.3 million for the year ended December 31, 2014. The increase in revenue of $70.7 million includes revenue from our Journal Newspapers acquisition of $100.5 million, which is comprised of $53.1 million from advertising and marketing services, $33.6 million from subscription revenue, and $13.8 million from other revenue. The increase from the Journal Newspapers acquisition was partially offset by declines of $22.3 million in our advertising and marketing services and a $4.8 million decline in our
subscription revenue. The decline in our advertising and marketing revenue was primarily driven by a decrease in our local retail and preprint categories due to secular pressures and changes in the demand for print advertising. The continued shift in consumer preferences from print to digital platforms for news consumption coupled with our subscribers’ response to price increases also led to a decline in our subscription volumes, which has been partially offset by price increases.
Subscriptions include fees paid by readers for access to content in print and digital formats. We offer bundled subscriptions where our subscribers receive access to all of our newspaper content on all platforms. Only limited digital content is available to non-subscribers after free article thresholds are met. We also offer digital-only subscriptions. As of December 31, 2015, we had approximately 50,000 digital-only subscribers across all of our markets.
Cost of Sales
Our cost of sales for the year ended December 31, 2015 was $231.9 million, an increase of $27.0 million, or 13.2%, compared to $204.9 million for the year ended December 31, 2014. The increase was primarily driven by $58.4 million of additional expenses for Journal Newspapers, partially offset by a $14.5 million decline in employee expenses, a $6.0 million decline in newsprint expenses and other cost savings.
Selling, General and Administrative
Our selling and administrative expenses for the year ended December 31, 2015 was $176.8 million, an increase of $11.0 million, or 6.6%, compared to $165.8 million for the year ended December 31, 2014. The increase was primarily driven by $5.5 million of additional expenses for Journal Newspapers and $8.1 million of transition and integration costs, partially offset by cost savings initiatives.
For periods prior to April 1, 2015, the consolidated and combined financial statements include expense allocations from the Parent of Scripps Newspapers for certain corporate support services, which are recorded within selling, general and administrative expense in the Consolidated and Combined Statements of Operations. Management believes that the basis used for the allocations is reasonable and reflects the portion of such costs attributed to Scripps Newspapers operations; however, the amounts may not be representative of the costs necessary to operate as a separate stand-alone company. Management is unable to determine what such costs would have been had Scripps Newspapers been independent.
The corporate allocation included costs related to support Scripps Newspapers received from its Parent for certain corporate activities including: (i) executive management, (ii) corporate development, (iii) corporate relations, (iv) legal, (v) human resources, (vi) internal audit, (vii) financial reporting, (viii) tax, (ix) treasury, (x) centralized accounting, and (xi) other Parent corporate and infrastructure costs. For these services, actual costs incurred by the Parent were allocated to Scripps Newspapers based upon on a number of utilization measures including headcount, square footage, and proportionate effort. Where determinations based on utilization were impracticable, Scripps Newspapers used other methods and criteria that are believed to be reasonable estimates of costs attributable to the Scripps Newspapers, such as net sales.
Defined Pension and Benefit Plan Expense
Defined pension and benefit plan expense of $1.9 million in 2015 decreased by $4.9 million from $6.8 million in 2014 principally due to Scripps assuming defined pension plan obligations as of April 1, 2015.
Depreciation and Amortization
Depreciation and amortization expense of $21.1 million in 2015 increased by $4.2 million from $16.9 million in 2014 principally due to the acquisition of Journal Newspapers.
Other Expense, Net
Other expense, net was $0.6 million and $1.5 million for the years ended December 31, 2015 and 2014, respectively. The 2015 expense includes partnership losses related to our investment in Albuquerque Publishing Company ("APC") and the 2014 expense includes losses on the disposal of property, plant and equipment.
Income Taxes
Our effective tax rate for the years ended December 31, 2015 and 2014 was 65.4% and (1.6)%, respectively. Our higher effective tax rate for the year ended December 31, 2015 is attributable primarily to the Scripps Newspaper loss in the first quarter of 2015
(which is a non-deductible permanent difference because, for tax purposes, the loss will be claimed by Scripps and not Journal Media Group) and state income taxes. The effective tax rate for the year ended December 31, 2014 was attributable to the full valuation allowance recorded by Scripps Newspapers.
Net Income (Loss)
Our net income for the year ended December 31, 2015 was $3.0 million, an improvement of $29.0 million compared to a net loss of $26.0 million for the year ended December 31, 2014. The improvement was due to the factors noted above.
Income (loss) per Share
Basic and diluted net income (loss) per share were $0.12 and $(1.78) in the years ended December 31, 2015 and 2014, respectively.
EBITDA
EBITDA for the year ended December 31, 2015 was $30.4 million, an improvement of $37.6 million compared to $(7.2) million for the year ended December 31, 2014. We define EBITDA as net earnings (loss) excluding earnings from discontinued operations, net, provision (benefit) for income taxes, total other (income) expense, net, depreciation and amortization. Management primarily uses EBITDA, among other things, to evaluate our operating performance compared to our operating plans and/or prior years and to value prospective acquisitions. We believe the presentation of this measure is relevant and useful for investors because it allows investors to view performance in a manner similar to the method used by management, helps to improve their ability to understand our operating performance and makes it easier to compare our results with other companies that have different financing and capital structures or tax rates. EBITDA is also a primary measure used externally by our investors and our peers in our industry for purposes of valuation and comparing our operating performance to other companies in the industry. EBITDA is not a measure of performance calculated in accordance with GAAP. EBITDA should not be considered in isolation of, or as a substitute for, net income as an indicator of operating performance. EBITDA, as we calculate it, may not be comparable to EBITDA measures reported by other companies.
The following table presents a reconciliation of our consolidated net income (loss) to EBITDA for the years ended December 31, 2015 and 2014:
(1) Included in net income for the year ended December 31, 2015 are transition and integration costs of $8.1 million, workforce reduction charges of $2.5 million and impairment charges of $0.3 million. Included in the net loss for the year ended December 31, 2014 are workforce reduction charges of $2.3 million and impairment charges of $0.5 million.
The increase in EBITDA is consistent with the increase in operating earnings for the reasons described above.
2014 Compared to 2013
The following table summarizes our results of operations for the years ended December 31, 2014 and 2013:
F - Greater than 100% favorable variance
U - Greater than 100% unfavorable variance
Revenue
Advertising and marketing services revenue decreased by $17.3 million, or 7.1%, for the year ended December 31, 2014 compared to the year ended December 31, 2013 as a result of continued secular changes in the demand for print advertising.
Subscriptions include fees paid by readers for access to content in print and digital formats. We offer bundled subscriptions where our subscribers receive access to all of our newspaper content on all platforms. Only limited digital content is available to non-subscribers. We also offer digital-only subscriptions. As of December 31, 2014, we had approximately 34,000 digital-only subscribers across all of our markets. Subscription revenue increased by $4.1 million, or 3.5%, in the year ended December 31, 2014 compared to the year ended December 31, 2013, driven by the roll-out of our bundled subscription model, increases in single-copy prices and digital-only subscriptions.
Other revenues, including commercial printing and distribution services, decreased by $0.7 million, or 3.1%, for the year ended December 31, 2014 compared to the year ended December 31, 2013 as a result of a decrease in distribution services.
Cost of Sales
Our cost of sales for the year ended December 31, 2014 was $204.9 million, a decrease of $8.6 million, or 4.0%, compared to $213.5 million for the year ended December 31, 2013 as a result of declines in employee costs, newsprint, and other variable production and distribution costs.
Selling, General and Administrative
Our selling and administrative expenses for the year ended December 31, 2014 was $165.8 million, a decrease of $2.0 million, or 1.2%, compared to $167.8 million for the year ended December 31, 2013 as a result of declines in employee costs and other variable production and distribution costs.
Other Expense, Net
Other expense, net was $1.5 million and $0.3 million for the years ended December 31, 2014 and 2013, respectively. The increase was due to losses on the disposal of property, plant and equipment.
Income Taxes
Our effective tax rate for the years ended December 31, 2014 and 2013 was (1.6)% and 11.0%, respectively. The effective tax rate for the year ended December 31, 2014 was attributable to the full valuation allowance recorded by Scripps Newspapers.
Net Loss
Our net loss for the year ended December 31, 2014 was $26.0 million, a decline of $9.2 million compared to a net loss of $16.8 million for the year ended December 31, 2013. The decline was due to a decrease in revenue for the reasons described above.
Loss per Share
Basic and diluted net loss per share were $1.78 and $1.16 in the years ended December 31, 2014 and 2013, respectively.
EBITDA
EBITDA for the year ended December 31, 2014 was $(7.2) million, a decline of $5.8 million compared to $(1.4) million for the year ended December 31, 2013.
The following table presents a reconciliation of our consolidated net earnings to EBITDA for the years ended December 31, 2014 and 2013:
(1) Included in net loss for the year ended December 31, 2014 are workforce reduction charges of $2.3 million and impairment charges of $0.5 million. Included in net loss for the year ended December 31, 2013 are workforce reduction charges of $1.3 million.
The decrease in EBITDA is consistent with the decrease in operating earnings for the reasons described above.
Liquidity and Capital Resources
Prior to April 1, 2015, Scripps Newspapers participated in its Parent's controlled disbursement system, pursuant to which the bank sent daily notifications of checks presented for payment and transferred funds from other sources to cover the checks. Scripps Newspapers cash balance held by its Parent was reduced as checks were issued. Accordingly, none of the Parent's cash and cash equivalents has been assigned to Scripps Newspapers in the combined financial statements. Further, outstanding checks issued by the Parent were not recorded as a liability when the check was signed, as the obligation became tied to the central cash management arrangement.
Beginning April 1, 2015, our capital structure and sources of liquidity were significantly different from Scripps Newspapers historical capital structure. If our cash flows from operating activities are lower than expected, we may need to borrow under our line of credit, incur debt or issue additional equity. Although we have a credit facility to finance our operations, our access to, and the availability of, financing on acceptable terms and conditions in the future will be impacted by many factors, including (i) our credit rating or absence of a credit rating, (ii) the liquidity of the overall capital markets and (iii) the current state of the economy. We expect our future cash needs will be for working capital, capital expenditures, dividends, contractual commitments and strategic investments.
On April 1, 2015, we entered into a five-year credit agreement maturing on April 1, 2020. The credit agreement provides for a revolving credit facility with total aggregate commitments of $50 million. As of December 31, 2015, there were no borrowings outstanding. For additional information, see Note 11 - Long-Term Debt.
We expect that cash provided by operating activities and the available capacity under our line of credit will provide sufficient funds to operate our business and meet our other liquidity needs for at least the next twelve months.
Workforce Reductions
We expect that our liability for workforce reduction costs of $1.5 million as of December 31, 2015 will be paid by the first half of 2016. The activity associated with our liability for workforce reduction costs during the years ended December 31, 2015 and 2014 was as follows (in millions):
Dividends Declared
During 2015, the Board of Directors declared cash dividends of $0.16 per share using $4.0 million of cash. On February 8, 2016, the Company announced a first quarter 2016 cash dividend of $0.06 per share of Journal Media Group Common Stock. The dividend was paid on March 1, 2016 to shareholders of record as of the close of business on February 19, 2016 using $1.5 million of cash.
Share Repurchase Program
On August 13, 2015, the Board of Directors authorized a share repurchase program of up to $25 million of our outstanding common stock over 36 months. Under the program, share repurchases may be made at the discretion of the Company, from time to time, in the open market and/or in private transactions. Share purchases by the Company will depend on market conditions, share price, trading volume and other factors. The Merger Agreement with Gannett precludes us from repurchasing shares.
Cash Flows
Operating Activities
2015 to 2014
Cash provided by operating activities was $24.7 million in the year ended December 31, 2015 compared to cash used in operating activities of $1.9 million in the year ended December 31, 2014. The increase was primarily due to cash provided by improved operating results, and $2.0 million that we owe to Scripps as of December 31, 2015 for payroll processing and other payments made on our behalf, which was subsequently paid in the first quarter of 2016.
2014 to 2013
The $0.1 million increase in cash used in operating activities was attributable to an increase in our pretax loss, offset by changes in working capital and our withdrawal from one of the multi-employer pension plans. Changes in working capital increased $2.6 million compared to prior year, primarily as a result of an increase in collections of accounts receivable year over year, partially offset by a decrease in accounts payable due to timing of payments. In 2014, we recorded a $4.1 million liability related to the withdrawal from one of the multi-employer pension plans which was not settled during the year.
Investing Activities
2015 to 2014
Cash provided by investing activities was $7.8 million in the year ended December 31, 2015 compared to cash used in investing activities of $1.6 million in the year ended December 31, 2014, primarily driven by $10.5 million in cash contributed by Journal as part of the Journal Newspapers acquisition, partially offset by capital expenditures and a $0.5 million capital contribution to our APC partnership. Capital expenditures were $4.3 million in the year ended December 31, 2015 compared to $2.7 million in the year ended December 31, 2014. Our capital expenditures in the year ended December 31, 2015 were primarily for information technology and production equipment.
2014 to 2013
In 2014 and 2013 we used $1.6 million and $3.3 million, respectively, in cash for investing activities.
Financing Activities
2015 to 2014
Cash used in financing activities was $3.5 million in the year ended December 31, 2015 compared to cash provided by financing activities of $3.5 million in the year ended December 31, 2014. Financing activities for the year ended December 31, 2015 included dividend payments totaling $4.0 million and $0.6 million in financing costs related to the credit facility entered into on April 1, 2015. We have not drawn on our credit facility.
2014 to 2013
Cash provided by financing activities was $3.5 million and $5.2 million in 2014 and 2013, respectively. Our Parent provided cash as needed to fund our operating activities and retained any excess cash flow.
Contractual Obligations
A summary of contractual cash commitments as of December 31, 2015 is as follows:
Deferred compensation and other post employment benefits - We have deferred compensation agreements in effect with certain prior and current employees. Other post employment benefits includes obligations under our Journal Media Group postretirement plan ("JMG OPEB"). Unfunded JMG OPEB plan obligations are expected to be funded directly from Company assets through 2025. While benefit payments under these benefit plans are expected to continue beyond 2025, we believe that an estimate beyond this period is unreasonable and consequently, such payments beyond 2025 have been excluded in their entirety from the table above.
Operating Leases - We obtain certain office and warehouse space under multi-year lease agreements. Leases for office and warehouse space are generally not cancellable prior to their expiration.
Leases for operating and office equipment are generally cancellable by either party with 30 to 90 days notice. However, such contracts are expected to remain in force throughout the terms of the leases. The amounts included in the table above represent the amounts due under the agreements assuming the agreements are not canceled prior to their expiration.
It is expected that the operating leases will be renewed or replaced with similar agreements upon their expiration.
SERP Funding - We sponsor a non-qualified Supplemental Executive Retirement Plan ("JMG SERP"), which covers certain executive employees. Payments for the JMG SERP plan have been estimated over a 10-year period. Accordingly, amounts in the "over 5 years" column include estimated payments for the periods of 2021-2025. While benefit payments under these plans are expected to continue beyond 2025, we do not believe it is practicable to estimate payments beyond this period.
Purchase Commitments - We obtain certain other services under multi-year agreements. These agreements are generally not cancellable prior to expiration of the service agreement. It is expected that such agreements will be renewed or replaced with similar agreements upon their expiration.
We may also enter into contracts with certain vendors and suppliers, including most of our newsprint vendors. These contracts typically do not require the purchase of fixed or minimum quantities and generally may be terminated at any time without penalty. Included in the table of contractual obligations are purchase orders placed as of December 31, 2015. Purchase orders placed with vendors, including those with whom we maintain contractual relationships, are generally cancellable prior to shipment. While these vendor agreements do not require the purchase of a minimum quantity of goods or services, and generally the orders can be canceled prior to shipment, we expect expenditures for goods and services in future periods will approximate those in prior years.
Critical Accounting Policies and Estimates
The preparation of financial statements in accordance with GAAP requires us to make a variety of decisions that affect reported amounts and related disclosures, including the selection of appropriate accounting principles and the assumptions on which to base accounting estimates. In reaching such decisions, we apply judgment based on our understanding and analysis of the relevant circumstances, including its historical experience, actuarial studies and other assumptions. We are committed to incorporating accounting principles, assumptions and estimates that promote the representational faithfulness, verifiability, neutrality and transparency of the accounting information included in the consolidated and combined financial statements.
The Notes to the Consolidated and Combined Financial Statements describes the significant accounting policies that have been selected for use in the preparation of our financial statements and related disclosures. We believe the following to be the most critical accounting policies, estimates and assumptions affecting its reported amounts and related disclosures.
Goodwill and Long-Lived Assets - Goodwill for each reporting unit must be tested for impairment on an annual basis or when events occur or circumstances change that would indicate the fair value of a reporting unit is below its carrying value. At December 31, 2015, we had $9.2 million of goodwill, all related to our JRN Newspapers reporting unit. JRN Newspapers is the only reporting unit for goodwill impairment testing purposes. If the fair value of the reporting unit is less than its carrying value, an impairment loss is recorded to the extent that the fair value of the goodwill for the reporting unit is less than its carrying value.
For our annual impairment testing, we have utilized the Step 1, quantitative approach for performing our annual goodwill test. Under that approach, we determine the fair value of our reporting unit generally using market data, comparable merger and acquisition values and discounted cash flow analyses. The use of a discounted cash flow analysis requires significant judgment to estimate the future cash flows derived from the asset or business and the period of time over which those cash flows will occur and to determine an appropriate discount rate. While we believe the estimates and judgments used in determining the fair values were appropriate, different assumptions with respect to future cash flows, long-term growth rates and discount rates could produce a different estimate of fair value. The estimate of fair value assumes certain growth of our businesses, which if not achieved could impact the fair value and possibly result in an impairment of the goodwill. Our annual impairment testing for goodwill indicated that the fair value of the JRN Newspapers reporting unit exceeded the carrying value by over 10%.
Long-lived assets (primarily property, plant and equipment and amortizable intangible assets) must be tested for impairment whenever events occur or circumstances change that indicate that the carrying value of an asset or asset group may not be recoverable. A long-lived asset group is determined not to be recoverable if the estimated future undiscounted cash flows of the asset group are less than the carrying value of the asset group.
Estimating undiscounted cash flows requires significant judgments and estimates. We continually monitor the estimated cash flows of our newspaper properties and may incur impairment charges if future cash flows are less than current estimates.
Income Taxes - The accounting for uncertain tax positions and the application of income tax law is inherently complex. As such, we are required to make many assumptions and judgments regarding our income tax positions and the likelihood of whether such tax positions would be sustained if challenged. Interpretations and guidance surrounding income tax laws and regulations change over time. As such, changes in our assumptions and judgments can materially affect amounts recognized in the consolidated and combined financial statements.
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. Management considers the scheduled reversal of deferred tax liabilities, projected future taxable income and tax planning strategies in making this assessment. Based upon the level of historical taxable losses and projections for future taxable loss over the periods in which the net deferred tax assets are deductible in certain jurisdictions, management believes it is more likely that we will not realize the benefit of most of its net deferred tax assets. As of December 31, 2015 and 2014, in jurisdictions in which there is a net deferred tax asset, we have established a full valuation allowance.
We are required to assess the likelihood that our deferred tax assets, which include net operating loss carryforwards and temporary differences that are expected to be deductible in future years, will be recoverable from the carryback to prior years, carryforward to future years or through other prudent and feasible tax planning strategies. If recovery is not likely, we have to provide a valuation allowance based on our estimates of future taxable income in the various taxing jurisdictions, and the amount of deferred taxes that are ultimately realizable. The provision for current and deferred taxes involves evaluations and judgments of uncertainties in the interpretation of complex tax regulations by various taxing authorities. Actual results could differ from our estimates and if we determine that the deferred tax asset we would realize would be greater or less than the net amount recorded, an adjustment would be made to the tax provision in that period.
Pension and other Post Retirement Benefit Plans -
The measurement of our defined benefit obligation and related expense is dependent on a variety of estimates, including: discount rates; expected long-term rate of return on plan assets (prior to April 1, 2015); and employee turnover, mortality and retirement ages. We review these assumptions on an annual basis and makes modifications to the assumptions based on current rates and trends when appropriate. In accordance with accounting principles, we record the effects of these modifications currently or amortize them over future periods. We consider the most critical of our pension estimates to be the discount rate and the expected long-term rate of return on plan assets.
The assumptions used in accounting for our defined benefit plans for 2015 and 2014 are as follows:
The discount rate used to determine our future pension obligations is based upon a dedicated bond portfolio approach that includes securities rated Aa or better with maturities matching our expected benefit payments from the plans. The rate is determined each year at the plan measurement date and affects the succeeding year’s pension cost. Discount rates can change from year to year based on economic conditions that impact corporate bond yields. A decrease in the discount rate increases pension obligations and pension expense.
The methodology for selecting the year-end 2015 weighted-average discount rate for the Company’s domestic postretirement plans was to match the plans’ yearly projected cash flows for benefits and service costs to those of hypothetical bond portfolios using bonds with an AA average rating in the Aon Hewitt universe as of the measurement date. The Company uses the calendar year end as the measurement date for its plans.
For 2016, the actuarial calculations assume a pre-65 health care cost trend rate of 8.5% and a post-65 health care cost trend rate of 8.7%, both decreasing gradually to 5.00% in 2038 and thereafter. As of 2015 year end, a one-percentage-point increase in the health care cost trend rate for future years would increase the accumulated postretirement benefit obligation by approximately$44. Conversely, a one-percentage-point decrease in the health care cost trend rate for future years would decrease the accumulated postretirement benefit obligation by $43. As of 2015 year end, a one-percentage-point increase in the OPEB discount rate would decrease the projected benefit obligation by approximately $487. A one-percentage-point decrease in the OPEB discount rate for future years would increase the projected benefit obligation by $546.
As of 2015 year end, a one-percentage-point increase in the SERP discount rate would decrease the projected benefit obligation by approximately $390. A one-percentage-point decrease in the SERP discount rate for future years would increase the projected benefit obligation by $458.
Business Combinations - We allocate the fair value of purchase consideration to the tangible assets acquired, liabilities assumed and intangible assets acquired based on their estimated fair values. The excess of the fair value of purchase consideration over the fair values of these identifiable assets and liabilities is recorded as goodwill. When determining the fair values of assets acquired and liabilities assumed, management makes significant estimates and assumptions, especially with respect to intangible assets.
Critical estimates in valuing certain intangible assets include, but are not limited to, future expected cash flows from customer relationships, trade names and developed technology and discount rates. Management's estimates of fair value are based upon assumptions believed to be reasonable, but which are inherently uncertain and unpredictable and, as a result, actual results may differ from estimates.
Other estimates associated with the accounting for acquisitions may change as additional information becomes available regarding the assets acquired and liabilities assumed.
Recently Issued Accounting Standards
A summary of the recently issued accounting standards are described in Note 3 - Recently-Issued Accounting Standards of this Form 10-K.
ITEM 7A.
ITEM 7A.
QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
Price fluctuations for newsprint may have a significant effect on our results of operations. We have not entered into derivative instruments to manage our exposure to newsprint price risk.
ITEM 8.
ITEM 8.
FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
JOURNAL MEDIA GROUP, INC.
Consolidated and Combined Balance Sheets
(in thousands, except share and per share amounts)
See notes to consolidated and combined financial statements.
JOURNAL MEDIA GROUP, INC.
Consolidated and Combined Statements of Operations
(in thousands, except per share amounts)
See notes to consolidated and combined financial statements.
JOURNAL MEDIA GROUP, INC.
Consolidated and Combined Statements of Comprehensive Income (Loss)
(in thousands)
See notes to consolidated and combined financial statements.
JOURNAL MEDIA GROUP, INC.
Consolidated and Combined Statements of Equity
(in thousands)
JOURNAL MEDIA GROUP, INC.
Consolidated and Combined Statements of Equity
(in thousands)
See notes to consolidated and combined financial statements.
JOURNAL MEDIA GROUP, INC.
Consolidated and Combined Statements of Cash Flows
(in thousands)
See notes to consolidated and combined financial statements.
JOURNAL MEDIA GROUP, INC.
Notes to Consolidated and Combined Financial Statements
(in thousands, except per share amounts)
1. FORMATION OF THE COMPANY AND BASIS OF PRESENTATION
The Separation - Journal Media Group, Inc. (the "Company" or "Journal Media Group") was incorporated in Wisconsin on July 25, 2014. On April 1, 2015, the transactions contemplated by the master transaction agreement, dated July 30, 2014, by and among The E.W. Scripps Company ("Scripps") and Journal Communications, Inc. ("Journal") were completed. On April 1, Scripps and Journal (1) separated their newspaper businesses and then combined them through two mergers, resulting in each of them becoming a wholly owned subsidiary of Journal Media Group, and (2) merged their broadcast businesses. Journal Media Group combines the 13 Scripps newspaper markets (collectively the "Scripps Newspapers") with Journal's Milwaukee Journal Sentinel and Journal Community Publishing Group, Inc., which publishes several community publications principally in southeastern Wisconsin (collectively the "JRN Newspapers") .
Basis of Presentation - The consolidated financial statements as of December 31, 2015 include the accounts of the Company and its wholly owned subsidiaries. All significant intercompany balances and transactions have been eliminated. The financial statements for periods prior to April 1, 2015 reflect the combined financial statements of Scripps Newspapers, a business representing the principal publishing operations of Scripps, as described below. Various agreements between the Company and Scripps became effective as of April 1, 2015 as further described in Note 15 - Transactions with Scripps.
The Company's operations consist of daily and community newspapers in 14 markets across the United States. The newspapers earn revenue primarily from the sale of advertising to local and national advertisers and newspaper subscription fees. Employee related costs, newspaper distribution and newsprint costs are the primary expenses at each newspaper. The newspapers operate in small and mid-size markets, focusing on news coverage within their local markets. The daily newspapers published by the Company are the Abilene (TX) Reporter-News, the Anderson (SC) Independent-Mail, the Corpus Christi (TX) Caller-Times, the Evansville (IN) Courier & Press, the Henderson (KY) Gleaner, the Kitsap (WA) Sun, the Knoxville (TN) News Sentinel, the Memphis (TN) Commercial Appeal, the Milwaukee (WI) Journal Sentinel, the Naples (FL) Daily News, the Redding (CA) Record-Searchlight, the San Angelo (TX) Standard-Times, the Treasure Coast (FL) News/Press/Tribune, the Ventura County (CA) Star and the Wichita Falls (TX) Times Record News. The business also includes a 40% ownership in the Albuquerque Publishing Company, which publishes the Albuquerque Journal (NM).
Historically, separate financial statements have not been prepared for Scripps Newspapers. For periods prior to April 1, 2015, the combined financial statements reflect the historical financial position, results of operations, changes in parent company equity and cash flows of the Scripps Newspapers, as Scripps Newspapers was historically managed within Scripps (the "Parent"). The combined financial statements have been prepared on a “carve-out” basis and are derived from the consolidated financial statements and accounting records of Scripps. The consolidated and combined financial statements have been prepared in accordance with generally accepted accounting principles in the United States of America ("GAAP"). Management believes that assumptions and methodologies underlying the allocation of general corporate expenses are reasonable. However, such expenses may not be indicative of the actual level of expense that would have been incurred had the Company operated as a separate stand-alone entity, and, accordingly, may not necessarily reflect the Company's combined financial position, results of operations and cash flows had the Company operated as a stand-alone entity during the periods presented.
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. We have reclassified certain prior year financial statement amounts to conform to the current year presentation.
The Company is an "emerging growth company," as defined in the Jumpstart Our Business Startups Act. For as long as the Company continues to be an emerging growth company, we may take advantage of exemptions from various reporting requirements that are applicable to other public companies that are not "emerging growth companies," including the exemption from compliance with the auditor attestation requirements of Section 404 of the Sarbanes-Oxley Act.
As used in the Notes to Consolidated and Combined Financial Statements, the terms “Company,” “we,” “our,” or “us” may, depending on the context, refer to the carve-out newspaper business of Scripps for periods prior to April 1, 2015 and to Journal Media Group as a whole for all other periods presented.
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Notes to Consolidated and Combined Financial Statements
(in thousands, except per share amounts)
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Nature of Operations - We are a diverse media enterprise with a portfolio of print and digital media brands. All of our media businesses provide content and advertising services via digital platforms, including the Internet, smartphones and tablets. The Company has aggregated its operating segments into one reportable segment since all of its newspapers sell similar products created with the same production process and which have similar economic characteristics.
Concentration Risks - Our operations are geographically dispersed and we have a diverse customer base. We believe bad debt losses resulting from default by a single customer, or defaults by customers in any depressed region or business sector, would not have a material effect on our financial position, results of operations or cash flows. We derive approximately 60% of our operating revenues from advertising and marketing services. Changes in the demand for such services both nationally and in individual markets can affect operating results.
Use of Estimates - Preparing financial statements in accordance with GAAP requires us to make a variety of decisions that affect the reported amounts and the related disclosures. Such decisions include the selection of accounting principles that reflect the economic substance of the underlying transactions and the assumptions on which to base accounting estimates. In reaching such decisions, we apply judgment based on our understanding and analysis of the relevant circumstances, including our historical experience, actuarial studies and other assumptions.
Our consolidated and combined financial statements include estimates and assumptions including: the periods over which long-lived assets are depreciated or amortized, the evaluation of recoverability of long-lived assets, valuation allowances against deferred income tax assets, corporate allocations for periods prior to April 1, 2015, and self-insured risks.
While we reevaluate our estimates and assumptions on an ongoing basis, actual results could differ from those estimated at the time of preparation of the financial statements.
Investments and Minority Interest - Investments in 20%-to-50%-owned corporations where we exert significant influence and all 50%-or-less-owned partnerships and limited liability companies are accounted for using the equity method. We do not hold any interests in variable interest entities. All intercompany transactions have been eliminated.
Losses attributable to noncontrolling interests in subsidiary companies is included in net loss attributable to noncontrolling interest in the Consolidated and Combined Statements of Operations.
Revenue Recognition - We recognize revenue when persuasive evidence of a sales arrangement exists, delivery occurs or services are rendered, the sales price is fixed or determinable and collectability is reasonably assured. We report revenue net of sales and other taxes collected from our customers. Our primary sources of revenue are from the sale of print and digital advertising and newspaper subscription fees.
Revenue recognition policies for each source of revenue are as follows.
Advertising and marketing services - Print advertising revenue is recognized when we display the advertisements. Digital advertising includes time-based, impression-based, and click-through campaigns. We recognize digital advertising revenue from fixed duration campaigns over the period in which the advertising appears. We recognize digital advertising revenue that is based upon the number of impressions delivered or the number of click-throughs as impressions are delivered or as click-throughs occur. We recognize marketing services revenue when the service is performed.
Subscriptions - We recognize newspaper subscription revenue upon the publication date of the newspaper. We defer revenues from prepaid newspaper subscriptions and recognize subscription revenue on a pro-rata basis over the term of the subscription.
We base subscription revenue for newspapers sold directly to subscribers on the retail rate. We base subscription revenue for newspapers sold to independent newspaper distributors, which are subject to returns, upon the wholesale rate. We estimate returns based on historical return rates and adjust our estimates based on the actual returns.
Other Revenues - We also derive revenues from printing and distribution of other publications. We recognize printing revenues and third-party distribution revenue when the product is delivered in accordance with the customer’s instructions.
Shipping and handling costs - Shipping and handling costs, including postage, billed to customers are included in revenue and the related costs are included in cost of sales.
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Notes to Consolidated and Combined Financial Statements
(in thousands, except per share amounts)
Advertising expense - We expense our advertising costs as incurred. Advertising expense totaled $7,600, $7,024 and $8,778 in 2015, 2014 and 2013, respectively.
Cash and Cash Equivalents - Cash and cash equivalents include cash and liquid investments with original maturities of three months or less. Cash and cash equivalents includes credit and debit card sales transactions that are settled generally within three days after the period.
Accounts Receivable - We extend credit to customers based upon our assessment of the customer’s financial condition. Collateral is generally not required from customers. We base allowances for credit losses upon trends, economic conditions, review of aging categories, specific identification of customers at risk of default and historical experience. We require advance payment from certain transient advertisers.
A rollforward of the allowance for doubtful accounts is as follows:
Inventories - Inventories are stated at the lower of cost or market. We determine the cost of inventories using the first in, first out (“FIFO”) method.
Property, Plant and Equipment - Property, plant and equipment is carried at cost, or in the case of assets acquired in a business acquisition, at fair value as of the acquisition date, less accumulated depreciation. Property, plant and equipment includes internal use software, mobile app development and digital site development cost, which is carried at cost less amortization. We expense costs incurred in the preliminary project stage to develop or acquire internal use software, and to develop mobile apps or digital sites. Upon completion of the preliminary project stage and upon management authorization of the project, we capitalize costs to acquire or develop internal use software, mobile apps or digital sites, which primarily include coding, designing system interfaces, and installation and testing, if it is probable the project will be completed and the software will be used for its intended function. We expense costs incurred after implementation, such as maintenance and training.
We compute depreciation and amortization using the straight-line method over estimated useful lives as follows:
Goodwill - Goodwill represents the cost of acquisitions in excess of the acquired businesses’ tangible assets, identifiable intangible assets and liabilities assumed. All goodwill relates to the acquisition of JRN Newspapers on April 1, 2015 as described in Note 6 - Acquisitions.
We test goodwill for impairment annually on October 1 at the reporting unit level using a fair value approach. For purposes of testing the carrying value of goodwill, we determine the fair value of the applicable reporting unit using an income and a market valuation approach. The income approach uses expected cash flows of the reporting unit. The cash flows are discounted for risk and time value. In addition, the present value of the projected residual value is estimated and added to the present value of the
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Notes to Consolidated and Combined Financial Statements
(in thousands, except per share amounts)
cash flows. The market approach to estimate fair value is based on the estimated value allocable to the reporting unit for the proposed merger (see Note 4), stock price multiples (based on revenue and EBITDA) of publicly traded stocks of comparable companies, and merger and acquisition values of comparable companies.
Amortizable Intangible Assets - We amortize using the straight-line method trade names, customer lists and other intangible assets in relation to their expected future cash flows over estimated useful lives of 3 to 25 years.
Impairment of Long-Lived Assets - We review long-lived assets (primarily property, plant and equipment and amortizable intangible assets) for impairment whenever events or circumstances indicate the carrying amounts of the assets may not be recoverable. Recoverability is determined by comparing the forecasted undiscounted cash flows of the operation to which the assets relate to the carrying amount of the assets. If the undiscounted cash flow is less than the carrying amount of the assets, then amortizable intangible assets are written down first, followed by other long-lived assets, to fair value. We determine fair value based on discounted cash flows or appraisals. We report long-lived assets to be disposed of at the lower of carrying amount or fair value less costs to sell.
Self-Insured Risks - We are self-insured, up to certain limits, for general and automobile liability, employee health, disability and workers’ compensation claims and certain other risks. Estimated liabilities for unpaid claims totaled $8,855 and $8,686 as of December 31, 2015 and 2014, respectively. We estimate liabilities for unpaid claims using actuarial methodologies and our historical claims experience. While we re-evaluate our assumptions and review our claims experience on an ongoing basis, actual claims paid could vary significantly from estimated claims, which would require adjustments to expense.
Income Taxes - Historically, the Company was included in the Scripps federal and state tax filings with other Scripps entities. The income tax provisions in these consolidated and combined financial statements prior to April 1, 2015 have been prepared on a separate return basis as if the Company was a stand-alone entity. For jurisdictions where the Company filed returns as part of Scripps, the stand alone provision will present taxes payable as a component of equity since the Company will never actually be liable for the payable.
We recognize deferred income taxes for temporary differences between the tax basis and reported amounts of assets and liabilities that will result in taxable or deductible amounts in future years. We establish a valuation allowance if we believe that it is more likely than not that we will not realize some or all of the deferred tax assets.
We record a liability for unrecognized tax benefits resulting from uncertain tax positions taken or that we expect to take in a tax return. Interest and penalties associated with such tax positions are included in the tax provision.
Parent Company Equity - Parent Company Equity on the Consolidated and Combined Balance Sheets represents Scripps' historical investment of capital into the Company, the Company's accumulated earnings after taxes, and the net effect of transactions with and allocations of corporate expenses from Scripps.
Stock-Based Compensation - On March 30, 2015, our board of directors and shareholders approved the Journal Media Group Long-Term Incentive Plan (the "2015 Plan") authorizing the award of non-qualified stock options, incentive stock options, stock appreciation rights, restricted share awards, restricted share units, performance shares, performance units, other stock-based awards or dividend equivalents. The 2015 Plan also provides for the issuance of cash-based awards. We value unrestricted stock awards at the closing market price of our common stock on the grant date. We value restricted stock units at the closing market price of our common stock on the grant date. We recognize stock-based compensation expense on a straight-line basis over the service period based upon the fair value of the award on the grant date. Stock-based compensation expense is reported in selling, general and administrative expenses in our consolidated statements of operations.
For periods prior to the April 1, 2015 separation date, certain employees were eligible to participate in the Scripps Long-Term Incentive Plan (the "Scripps Plan"). The Scripps Plan provided for the granting of non-qualified stock options, restricted stock units and restricted common shares of Scripps. Stock-based compensation expense for participants in the Scripps Plan who were solely dedicated to newspapers operations were allocated to the Company and included within selling, general and administrative expense in our consolidated and combined financial statements. Such expense was recognized on a straight-line basis over the requisite service period of the award based on the grant date fair value of the award.
Pension - Prior to April 1, 2015, retirement benefits were provided to eligible employees of the Company, primarily through defined benefit plans sponsored by Scripps. The Company has accounted for its participation in the Scripps Pension Plan as a participant in a multi-employer plan. Expense has been determined on a participant basis and included in the combined financial
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Notes to Consolidated and Combined Financial Statements
(in thousands, except per share amounts)
statements of the Company. As a participant in a multi-employer plan, no assets or liabilities are included in the Consolidated and Combined Balance Sheets of the Company other than contributions currently due and unpaid to the plan.
Prior to December 31, 2014, the Company also had four plans that were sponsored directly by the Company's Memphis and Knoxville newspapers. On September 30, 2014, the plan sponsored by the Knoxville newspaper with an unfunded liability of $3,000 was merged into the Scripps sponsored plan. On December 31, 2014, the plans sponsored by the Memphis newspaper with an unfunded liability of $14,600 was merged into the Scripps sponsored plan.
Prior to April 1, 2015, the Company participated in the Scripps Supplemental Executive Retirement Plan ("SERP") which the Company accounted for as a separate stand alone defined benefit plan. The Company accounted for the allocation of the benefit obligations specifically related to its employees and its estimated portion of the plan assets, if any. The total SERP pension expense was allocated to the Company based on the Company's share of the service cost and benefit obligations, in addition to its expected return on its portion of the SERP assets.
Effective April 1, 2015, the Company established the JMG Supplemental Executive Retirement Plan ("JMG SERP") which is a mirror plan of the former Scripps and Journal plans. The JMG SERP is an unfunded non-qualified defined benefit pension plan providing retirement benefits to certain executive employees.
Other Postretirement Benefits - Prior to April 1, 2015, certain health care and life insurance benefits for retired employees of the Company were provided through postretirement plans ("OPEB") sponsored by Scripps. The expected cost of providing these benefits was accrued over the years that the employees render services. A portion of the Scripps OPEB liability and corresponding expense has been allocated specifically to the Company and included in these consolidated and combined financial statements. The amounts included in these consolidated and combined financial statements were actuarially determined based on amounts allocable to eligible employees of the Company.
Effective April 1, 2015, the Company established the Journal Media Group postretirement plan ("JMG OPEB") which is a mirror plan of the former Scripps and Journal plans. It is the Company's policy to fund postretirement benefits as claims are incurred.
3. RECENTLY-ISSUED ACCOUNTING STANDARDS
In February 2016, the Financial Accounting Standards Board ("FASB") issued Accounting Standards Update ("ASU") No. 2016-02, "Leases" (ASU 2016-02). The core principle of ASU 2016-02 is that an entity should recognize on its balance sheet assets and liabilities arising from a lease. In accordance with that principle, ASU 2016-02 requires that a lessee recognize a liability to make lease payments (the lease liability) and a right-of-use asset representing its right to use the underlying leased asset for the lease term. The recognition, measurement, and presentation of expenses and cash flows arising from a lease by a lessee will depend on the lease classification as a finance or operating lease. This new accounting guidance is effective for public companies for fiscal years beginning after December 15, 2018 under a modified retrospective approach and early adoption is permitted. We are currently evaluating the impact the adoption of ASU 2016-02 will have on our consolidated and combined financial statements.
In November 2015, the FASB issued ASU 2015-17, "Balance Sheet Classification of Deferred Taxes." This ASU simplifies the presentation of deferred income taxes by requiring that deferred tax assets and liabilities be classified as noncurrent in a classified balance sheet, as opposed to the previous guidance, which required entities to separately present deferred tax assets and liabilities as current and noncurrent. This guidance is effective for financial statements issued for annual periods beginning after December 15, 2016, and interim periods within those annual periods. Earlier application is permitted and entities can apply the amendments either prospectively or retrospectively. We have adopted this guidance for our December 31, 2015 balance sheet and we are applying the guidance prospectively.
In September 2015, the FASB issued ASU 2015-16, "Business Combinations." This guidance simplifies the accounting for adjustments made to provisional amounts recognized in a business combination by eliminating the requirement to retrospectively account for those adjustments. Instead, the acquirer must recognize adjustments to provisional amounts that are identified during the measurement period in the reporting period in which the adjustment amounts are determined. This guidance is effective prospectively for fiscal years beginning after December 15, 2015, including interim periods within those fiscal years. We are currently in the process of evaluating the impact of the adoption on our consolidated financial statements, but we do not expect it to have a material impact on our financial statements.
In July 2015, the FASB issued ASU 2015-11 "Simplifying the Measurement of Inventory." The ASU applies to all inventory that is not measured using the last-in, first-out or retail inventory methods. Under the guidance, an entity should measure inventory at the lower of cost and net realizable value. This guidance is effective prospectively for fiscal years beginning after December 15,
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Notes to Consolidated and Combined Financial Statements
(in thousands, except per share amounts)
2016, with early adoption permitted. We are currently in the process of evaluating the impact of the adoption on our consolidated financial statements, but we do not expect it to have a material impact on our financial statements.
In April 2015, the FASB issued ASU 2015-05 "Intangibles - Goodwill and Other - Internal-Use Software." The ASU provides guidance to customers about whether a cloud computing arrangement contains a software license. If a cloud computing arrangement includes a software license, then the customer should account for the software license element of the arrangement consistent with the acquisition of other software licenses. If a cloud computing arrangement does not include a software license, the customer should account for the arrangement as a service contract. This guidance is effective prospectively or retrospectively for fiscal years beginning after December 15, 2015, with early adoption permitted. We are currently in the process of evaluating the impact of the adoption on our consolidated financial statements, but we do not expect it to have a material impact on our financial statements.
In April 2015, the FASB issued ASU 2015-03 "Interest - Imputation of Interest." The ASU simplifies the presentation of debt issuance costs. Under the new guidance, debt issuance costs should be presented in the balance sheet as a direct deduction from the carrying amount of debt liability. This guidance is effective retrospectively for fiscal years beginning after December 15, 2015, with early adoption permitted. ASU 2015-15 was issued in August 2015 and clarifies the SEC staff's position on presenting and measuring debt issuance costs incurred in connection with line-of-credit arrangements as an asset due to the lack of guidance in ASU 2015-03. We are currently in the process of evaluating the impact of the adoption on our consolidated financial statements, but we do not expect it to have a material impact on our financial statements.
In February 2015, the FASB issued ASU 2015-02 "Consolidation." The ASU updates the consolidation process entities consider when evaluating whether to consolidate certain legal entities. This guidance is effective using a modified or full retrospective approach for fiscal years beginning after December 15, 2015, with early adoption permitted. We are currently in the process of evaluating the impact of the adoption on our consolidated financial statements, but we do not expect it to have a material impact on our financial statements.
In May 2014, the FASB issued new guidance on revenue recognition. Under this new standard, an entity shall recognize revenue when it transfers 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. The standard creates a five-step process that requires entities to exercise judgment when considering the terms of the contract(s) and all relevant facts and circumstances. This standard permits the use of either the retrospective or cumulative effect transition method and will be effective for us beginning in 2018. Early adoption is permitted in 2017. We are currently assessing the impact this new guidance will have on our consolidated financial statements and have not yet determined a transition method.
4. PROPOSED MERGER WITH GANNETT
On October 7, 2015, we entered into an Agreement and Plan of Merger (the “Merger Agreement”) with Gannett Co., Inc. (“Gannett”) and Jupiter Merger Sub, Inc., a wholly owned subsidiary of Gannett (“Merger Sub”). The Merger Agreement provides that, subject to the satisfaction or waiver of specified conditions, Merger Sub will merge with and into us and we will become a wholly owned subsidiary of Gannett (the “merger”). If the merger is completed, our shareholders will receive $12.00 in cash, without interest and less any applicable withholding taxes (the “Merger Consideration”), for each share of our common stock owned. In addition, under the Merger Agreement all of our unvested restricted stock units outstanding immediately prior to the effective time of the merger will become vested, and, as a result, such restricted stock units will become shares of our common stock that will be converted into the right to receive the Merger Consideration.
This transaction was unanimously approved by the boards of directors of both companies and was also approved by our shareholders (Gannett’s shareholders are not required to vote on this transaction). The closing of the merger remains subject to customary closing conditions, including antitrust regulatory clearance. We and Gannett are continuing to work through the review process with the U.S. Department of Justice and look forward to closing the transaction on a timely basis.
5. EARNINGS PER SHARE
The Company computes earnings per share in accordance with FASB Accounting Standards Codification ("ASC") 260. Under this guidance, our unvested restricted share units issued in 2015 that contain non-forfeitable rights to dividends or dividend equivalents are participating securities and, therefore, are included in computing basic earnings per share pursuant to the two-class method. The two-class method determines earnings per share for each class of common stock and participating securities according to dividends or dividend equivalents and their respective participation rights in undistributed earnings.
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Notes to Consolidated and Combined Financial Statements
(in thousands, except per share amounts)
Basic earnings per share has been computed using the weighted average number of common shares outstanding during each period. Diluted earnings per share attributable to common stockholders is computed by dividing the earnings attributable to common stockholders by the weighted-average number of shares of common stock outstanding, including potential dilutive shares of common stock assuming the dilutive effect of outstanding restricted stock units using the treasury stock method or if-converted method, whichever is more dilutive. The Company issued 24,378 shares of Journal Media Group common stock upon the completion of the separation on April 1, 2015, 14,450 of which was converted from shares of Scripps common stock. The weighted average number of common shares outstanding assumes the 14,450 shares of Journal Media Group common stock issued to Scripps shareholders were outstanding as of January 1, 2013. For 2015, the restricted share units (representing 559 potentially dilutive shares) were anti-dilutive.
The following table sets forth the computation of basic and diluted earnings per share for the year ended December 31, 2015 under the two-class method:
The following table sets for the computation of basic and diluted loss per share for the years ended December 31, 2014 and 2013:
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Notes to Consolidated and Combined Financial Statements
(in thousands, except per share amounts)
6. ACQUISITIONS
On April 1, 2015, we completed the acquisition of JRN Newspapers by issuing 9,928 common shares to Journal shareholders in exchange for their interest in JRN Newspapers. The purchase price of $87,362 reflects the fair value of the common shares issued to Journal shareholders based on the closing market price of our common stock on the acquisition date.
The fair values of assets acquired and liabilities assumed for JRN Newspapers are preliminary based upon all information available to us at the present time and are subject to working capital and post-closing adjustments and are as follows:
The intangible assets are trade names with an amortization period of 25 years.
Goodwill of $9,157 arising from the acquisition is attributable to cost and revenue synergies expected to be realized. The goodwill which we acquired is not subject to amortization for financial reporting purposes, but is expected to be entirely deductible for income tax purposes. Goodwill and current liabilities increased $127, from amounts previously reported in our September 30, 2015 Form 10-Q, for certain liabilities due to Scripps per the master transaction agreement.
Transition and integration related costs with respect to the foregoing transaction were $7,616 for the year ended December 31, 2015, and are included in selling, general and administrative expenses in the Consolidated and Combined Statement of Operations.
The acquisition has been accounted for under the acquisition method of accounting, which requires the total purchase price to be allocated to the assets acquired and liabilities assumed based on their estimated fair values, which is a level 3 valuation in the GAAP valuation hierarchy. A level 3 valuation includes pricing inputs that are unobservable for the asset or liability and include situations where there is little, if any, market activity for the asset or liability. The excess purchase price over the amounts assigned to tangible and intangible assets acquired and liabilities assumed is recognized as goodwill. The operating results and cash flows of the acquired business are included in our consolidated financial statements from April 1, 2015, the effective date we acquired control of JRN Newspapers.
JRN Newspapers contributed revenue of $100,486 and net earnings of $4,348 for the period from April 1, 2015 to December 31, 2015. The following pro forma information presents the combined results of operations as if the acquisition of JRN Newspapers had occurred on January 1, 2014:
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Notes to Consolidated and Combined Financial Statements
(in thousands, except per share amounts)
The pro forma results reflect certain adjustments related to the acquisition. The 2015 pro forma revenue and net earnings (loss) were adjusted to exclude the $1,257 revenue ($754 after-tax) reduction related to the fair value deferred revenue valuation. The 2015 results also exclude $4,570 in after-tax transition and integration costs. The 2014 pro forma revenue was adjusted to include the $1,257 revenue reduction related to the fair value deferred revenue valuation. The 2014 results include $4,570 in after-tax transition and integration costs. The pro forma results exclude any planned revenue or cost synergies or other effects of the planned integration of JRN Newspapers. The pro forma results are for comparative purposes only and may not be indicative of the results that would have occurred if we had completed this acquisition as of the date indicated above or the results that will be attained in the future.
7. INCOME TAXES
The Company is included in Scripps' consolidated federal tax return and in unitary returns in certain states for periods prior to April 1, 2015. The Company also files separate state returns for its Memphis and Evansville newspapers. For periods ending on or before April 1, 2015, the Company accounts for income taxes under the separate return basis. Under this approach, the Company determines its current tax liability and its deferred tax assets and liabilities as if it were filing a separate tax return. Current tax is considered paid as incurred and settled through parent company equity. Effective April 1, 2015 the Company will no longer be included in the Scripps federal return, but will instead file its own federal return and all applicable unitary and separate state returns, as well as contining to file separate state returns for its Memphis and Evansville newspapers.
The provision for income taxes consisted of the following:
Prior to April 1, 2015, Scripps Newspapers recorded minimal state taxes and a valuation allowance against its net deferred tax assets for federal and certain state income taxes as it was more likely than not that it would not realize these benefits as a result of its history of losses over the past three years. We have treated the Scripps Newspapers loss in the first quarter of 2015 as a non-deductible permanent difference because, for tax purposes, the loss will be claimed by Scripps, not Journal Media Group. In accordance with the intraperiod tax allocation rules, in 2013, we allocated $2,303 of tax benefit to other comprehensive income and treated the corresponding offset as an allocation to tax benefit from operations.
For the remainder of 2015, we have recorded a valuation allowance against certain of our net deferred tax assets primarily attributable to state net operating loss carryovers. As a result of the negative evidence presented by our history of losses over the past three years, we have concluded that it is more likely than not that we will not realize these benefits.
The difference between the statutory rate for federal income tax and the effective income tax rate was as follows:
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Notes to Consolidated and Combined Financial Statements
(in thousands, except per share amounts)
For 2015 the non deductible expenses are primarily composed of the first quarter pre-tax loss from Scripps Newspapers and transaction costs, both of which are not deductible by the Company for tax purposes.
The approximate effect of the temporary differences giving rise to deferred income tax assets (liabilities) were as follows:
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. Management considers all available positive and negative evidence, including the scheduled reversal of deferred tax liabilities, projected future taxable income and tax planning strategies in making this assessment. Based upon the level of historical pre-tax losses, GAAP prevents the Company from using projections for future taxable income to support the realization of its deferred tax assets. Accordingly, management believes it is more likely than not that the Company will not realize the benefit of most of its net deferred tax assets. As of December 31, 2015 and 2014, in jurisdictions in which there is a net deferred tax asset, the Company has established a full valuation allowance.
As of April 1, 2015, state net operating losses for our Memphis and Evansville subsidiaries of $44,202 were transferred to the Company. These losses will expire at various times through 2035. As of April 1, 2015, a federal net operating loss of $5,422 generated by Scripps prior to April 1, 2015 and allocable to the Memphis and Evansville subsidiaries was transferred to the Company. This loss will be fully utilized on our 2015 federal income tax return.
The Company files tax returns in the United States federal jurisdiction, as well as in approximately 18 state and local jurisdictions. The statute of limitations for assessing additional taxes is three years for federal purposes and typically between three and four years for state and local purposes. As a newly formed public company which began filing federal tax returns in 2014, the Company's 2014-2015 tax returns are open for federal purposes. For state purposes, our 2011-2015 separate company state tax returns for the Evansville and Memphis entities remain open, unless the statute of limitations has been previously extended. Currently, Journal Communications is under audit by the IRS for the 2013 tax year. Under the terms of the Tax Matters Agreement signed with Scripps, we are only liable for any tax assessment which is allocable to the newspaper business. In addition, we are under audit in Mississippi for our 2010-2012 tax returns.
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Notes to Consolidated and Combined Financial Statements
(in thousands, except per share amounts)
As of December 31, 2015, our liability for unrecognized tax benefits was $17, which, if recognized, would have an impact on our effective tax rate. As of December 31, 2015, it is reasonably possible for $32 of unrecognized tax benefits and related interest to be recognized within the next 12 months due to settlements with taxing authorities.
We recognize interest income, interest expense and penalties related to unrecognized tax benefits in our provision for income taxes. As of December 31, 2015 and December 31, 2014, we had $15 and $0, respectively, accrued for interest expense and penalties. During 2015 and 2014, we recognized $15 and $0, respectively, related to unrecognized tax benefits.
8. PROPERTY, PLANT AND EQUIPMENT
Property, plant and equipment consisted of the following (with the amounts as of December 31, 2015 reflecting the acquisition of JRN Newspapers):
We recorded accelerated depreciation of $1,315 in the year ended December 31, 2015 related to certain assets that were removed from service or will be replaced by a press project when it is completed in 2016.
During the second quarter of 2015, we recorded an impairment of $265 for land and a building based on an accepted offer to sell the property. The fair value measurement is considered a level 3 measurement in the GAAP valuation hierarchy. The charge is recorded in selling, general and administrative expense.
9. GOODWILL AND OTHER INTANGIBLE ASSETS
Goodwill
Goodwill was as follows:
There were no accumulated impairment losses as of December 31, 2015.
2015 Annual Impairment Test
Our annual impairment test on goodwill as of October 1, 2015 indicated there was no impairment of our goodwill.
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Notes to Consolidated and Combined Financial Statements
(in thousands, except per share amounts)
For purposes of testing the carrying value of goodwill, we determine the fair value of the applicable reporting unit using an income and a market valuation approach. The income approach uses expected cash flows of the reporting unit. The cash flows are discounted for risk and time value. In addition, the present value of the projected residual value is estimated and added to the present value of the cash flows. The market approach to estimate fair value is based on the estimated value allocable to the reporting unit for the proposed merger (see Note 4), stock price multiples (based on revenue and EBITDA) of publicly traded stocks of comparable companies, and merger and acquisition values of comparable companies. Each approach estimated a fair value exceeding carrying value. We base our fair value estimates on various assumptions about our projected operating results, including continuing declines in revenues as well as an expectation that we will achieve cash flow benefits from our continuing cost cutting measures. The valuation methodology used to estimate the fair value of our reporting unit requires inputs and assumptions (i.e., market growth, operating cash flow margins and discount rates) that reflect current market conditions as well as management judgment. These assumptions may change due to changes in market conditions and such changes may result in an impairment of our goodwill. Actual operating results may not achieve these assumptions in the near term and such results may result in future impairment.
Other Intangible Assets
Other intangible assets consisted of the following:
Weighted average amortization lives (years) for each class of intangible assets and in total are as follows:
Estimated amortization expense of intangible assets for each of the next five years is as follows:
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Notes to Consolidated and Combined Financial Statements
(in thousands, except per share amounts)
10. NONCONTROLLING INTEREST
Individuals and other entities own a 4% noncontrolling interest in the capital stock of the subsidiary company that publishes our Memphis newspaper and a 6% noncontrolling interest in the capital stock of the subsidiary company that publishes our Evansville newspaper. We are not required to redeem the noncontrolling interests in these subsidiary companies.
11. LONG-TERM DEBT
On April 1, 2015, we entered into a five-year credit agreement maturing on April 1, 2020. The credit agreement provides for a revolving credit facility with total aggregate commitments of $50,000. As of December 31, 2015, there were no borrowings outstanding.
The proceeds of the facility will be used by us for general corporate purposes. At our option, the commitments under the credit agreement may be increased from time to time in the form of additional revolving commitments and/or incremental term loans to an aggregate amount not to exceed $75,000. The increase option is subject to the satisfaction of certain conditions, including, without limitation, the identification of lenders (which may include existing lenders or new lenders) willing to provide the additional commitments. Borrowings under the credit agreement incur interest, at our option, at either (a) the London Interbank Offered Rate ("LIBOR") plus a margin that ranges from 125 basis points to 200 basis points, depending on the net debt ratio, or (b) (i) the base rate, which equals the highest of the prime rate set by U.S. Bank National Association, the Federal Funds Rate plus 50 basis points or one-month LIBOR plus 100 basis points, plus (ii) a margin that ranges from 25 basis points to 100 basis points, depending on the net debt ratio. As of December 31, 2015, the margin above LIBOR was 125 basis points.
Our obligations under the credit agreement are currently guaranteed by certain of our subsidiaries. Subject to certain exceptions, the credit agreement is secured by liens on our assets and contains affirmative, negative and financial covenants which are customary for financings of this type, including, among other things, limits on the creation of liens, limits on the incurrence of indebtedness, restrictions on dispositions and restrictions on the payment of dividends. Under the credit agreement, dividends and share repurchases paid from borrowed funds may not exceed $10,000 in any fiscal year. The credit agreement also includes the following financial covenants:
•
A consolidated total debt ratio of not greater than 3-to-1, as of the end of each fiscal quarter, as determined for the four fiscal quarters then ended. This ratio compares, as of the last day of any fiscal quarter, our consolidated total debt on such date to consolidated EBITDA, defined in the credit agreement as earnings before interest, taxes, depreciation, amortization, restructuring charges, gains/losses on asset disposals, non-cash charges and certain other adjustments, for the period of four consecutive fiscal quarters ending on such date.
•
A minimum interest coverage ratio of not less than 3-to-1, as of the end of each fiscal quarter, as determined for the four fiscal quarters then ended. This ratio compares, for any period, our consolidated EBIT, defined in the credit agreement as earnings before interest, taxes, restructuring charges, gains/losses on asset disposals, non-cash charges and certain other adjustments, for the four fiscal quarters then ended to the Company’s consolidated interest expense for such four fiscal quarters then ended.
12. WORKFORCE REDUCTIONS
During 2015, we recorded a pre-tax charge of $2,517 for workforce reduction costs. Of the costs recorded for the year ended December 31, 2015, $1,180 is included in cost of sales and $1,337 is included in selling, general and administrative expenses. We expect payments of all such costs to be completed during the first half of 2016. During 2014, we recorded a pre-tax charge to cost of sales of $2,336 for workforce reduction costs.
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Notes to Consolidated and Combined Financial Statements
(in thousands, except per share amounts)
The activity associated with our liability for workforce reduction costs during the years ended December 31, 2015 and 2014 was as follows:
13. GUARANTEE
We guarantee a Scripps loan of $1,400 made to Albuquerque Publishing Company ("APC"), which we account for as an equity method investment, to fund the purchase of a printing press. The loan will be amortized in equal payments, including interest and principal, commencing January 31, 2016 and concluding on December 31, 2020. As of December 31, 2015, our potential obligation pursuant to the guarantee, including accrued interest, was $1,466. As part of the loan agreement, we received a full guarantee from Journal Publishing Company, our partner in APC. The consolidated and combined balance sheets do not include any liabilities related to this guarantee as of December 31, 2014 or 2015.
14. EMPLOYEE BENEFIT PLANS
We use a December 31 measurement date for our retirement plans. Retirement plans expense is based on valuations as of the beginning of each fiscal year.
Journal Media Group Defined Benefit Plans:
Effective April 1, 2015, the Company established the JMG SERP, which is a mirror plan of the former Scripps and Journal SERP. The JMG SERP is an unfunded non-qualified pension plan providing retirement benefits to certain executive employees. We also provide certain health care and life insurance benefits for retired employees of the Company through the Company sponsored JMG OPEB, a mirror plan of the former Scripps and Journal OPEB. It is the Company's policy to fund postretirement benefits as claims are incurred.
The components of the defined pension and benefit plan expense for the JMG SERP and JMG OPEB plans consist of the following:
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Notes to Consolidated and Combined Financial Statements
(in thousands, except per share amounts)
For the JMG SERP and JMG OPEB retirement plans sponsored by the Company other changes in plan assets and benefit obligations recognized in other comprehensive loss were as follows:
Assumptions used in determining the annual JMG SERP and JMG OPEB retirement plans expense for the year ended December 31, 2015 were as follows:
Obligations and Funded Status - The defined benefit pension plan obligations and funded status are actuarially valued as of the end of each year. The following table presents information for the plans sponsored by the Company of employee benefit plan assets and obligations:
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Notes to Consolidated and Combined Financial Statements
(in thousands, except per share amounts)
The methodology for selecting the year-end 2015 weighted-average discount rate for the company’s postretirement plans was to match the plans’ yearly projected cash flows for benefits and service costs to those of hypothetical bond portfolios using bonds with an AA average rating in the Aon Hewitt universe as of the measurement date. The Company uses the calendar year end as the measurement date for its plans.
For 2016, the actuarial calculations assume a pre-65 health care cost trend rate of 8.5% and a post-65 health care cost trend rate of 8.7%, both decreasing gradually to 5.00% in 2024 and thereafter. As of 2015 year end, a one-percentage-point increase in the health care cost trend rate for future years would increase the accumulated postretirement benefit obligation by approximately$44. Conversely, a one-percentage-point decrease in the health care cost trend rate for future years would decrease the accumulated postretirement benefit obligation by $43. As of 2015 year end, a one-percentage-point increase in the JMG OPEB discount rate would decrease the projected benefit obligation by approximately $487. A one-percentage-point decrease in the JMG OPEB discount rate for future years would increase the projected benefit obligation by $546.
As of 2015 year end, a one-percentage-point increase in the JMG SERP discount rate would decrease the projected benefit obligation by approximately $390. A one-percentage-point decrease in the JMG SERP discount rate for future years would increase the projected benefit obligation by $458.
The following benefit payments, which reflect expected future service, are expected to be paid as follows:
Scripps defined benefit pension plans and defined contribution plan:
Prior to April 1, 2015, certain of the Company's employees participated in the Scripps defined benefit pension plans, its non-qualified SERP and its defined contribution plan. Scripps sponsored various noncontributory defined benefit pension plans covering substantially all full-time Scripps employees that began employment prior to June 30, 2008. Benefits earned by employees were generally based upon employee compensation and years of service credits. Effective June 30, 2009, Scripps froze the accrual of benefits under its defined benefit pension plans and its SERP that cover the majority of its employees. As of April 1, 2015, the defined tax qualified benefit pension plans became an obligation of Scripps as part of the transactions and we retained non-tax qualified SERP and OPEB liabilities of newspaper employees.
Prior to April 1, 2015, the Company accounted for its participation in the Scripps pension plans as a participant in a multi-employer plan. Expense was determined on a participant basis and included in the combined financial statements of the Company. As a participant in a multi-employer plan, no assets or liabilities were included in the Combined Balance Sheets of the Company other than contributions currently due and unpaid to the plans.
In the second quarter of 2014, unions ratified our plan to withdraw from the Graphics Communication International Union (GCIU) Employer Retirement Fund. Upon ratification of the agreement, we estimated the undiscounted liability to be approximately $6,500 and in the second quarter of 2014 recorded a liability of $4,100 for the present value withdrawal liability. Pursuant to the master transaction agreement, the withdrawal liability will be paid by Scripps and has been recorded in the statement of equity as a contribution from Parent in 2015. We continue to participate in one multi-employer plan known as the CWA/ITU Negotiated Pension Plan as discussed below.
Prior to April 1, 2015, the Company had accounted for its participation in the Scripps SERP as a separate stand-alone plan. Under this method, the Company has accounted for the allocation of the benefit obligations specifically related to its employees and its estimated portion of the plan assets, if any. The total SERP pension expense was allocated to the Company based on the Company's share of the service cost and benefit obligations, in addition to the expected return on its portion of the SERP assets. Effective
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Notes to Consolidated and Combined Financial Statements
(in thousands, except per share amounts)
April 1, 2015, the Company established a mirror plan and has recorded the liability and expenses for current and former newspaper employees in the consolidated and combined financial statements.
Prior to April 1, 2015, Scripps also sponsored a defined contribution plan covering substantially all non-union and certain union employees. Scripps matched a portion of employees' voluntary contributions to this plan. In connection with freezing the accrual of service credits under certain of our defined benefit pension plans, Scripps began contributing additional amounts to certain employees' defined contribution retirement accounts in 2011. These transition credits were determined based upon the employee’s age, compensation and years of service. The Company allocated the expense for this plan on an individual participant basis and it is included in the consolidated and combined financial statements of the Company. Effective April 1, 2015, the Company established a mirror plan and has recorded the liability and expenses for current and former newspaper employees. Expense related to the defined contribution plan was $2,683, $4,410 and $4,536 for the years ended December 31, 2015, 2014 and 2013, respectively.
The components of Scripp's defined pension and benefit plan expense consists of the following:
For the plans sponsored by Scripps, other changes in plan assets and benefit obligations recognized in other comprehensive loss were as follows:
Assumptions used in determining the Scripps annual retirement plans expense were as follows:
The discount rate used to determine our future pension obligations is based on a dedicated bond portfolio approach that includes securities rated Aa or better with maturities matching our expected benefit payments from the plans.
The expected long-term rate of return on plan assets is based upon the weighted-average expected rate of return and capital market forecasts for each asset class employed. Our expected rate of return on plan assets also considers our historical compounded return on plan assets for 10 and 15 year periods.
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Notes to Consolidated and Combined Financial Statements
(in thousands, except per share amounts)
Obligations and Funded Status - The defined benefit pension plan obligations and funded status are actuarially valued as of the end of each year. The following table presents information for the plans sponsored by Scripps of employee benefit plan assets and obligations:
Multi-employer plans
The Company had four multi-employer plans that were historically sponsored directly by the Company's Memphis and Knoxville newspapers. On September 30, 2014, the plan sponsored by the Knoxville newspaper was merged into the Scripps sponsored plans. On December 31, 2014, the plans sponsored by the Memphis newspaper were merged into the Scripps sponsored plan. Since the Memphis and Knoxville plans are no longer directly sponsored by the Company, no liabilities of the four plans are recorded on the Company's balance sheet as of December 31, 2015 or 2014. Expense included in selling, general and administrative expense related to the multi-employer plans (which includes the CWA/ITU plan discussed below) was $47, $246 and $269 for the years ended December 31, 2015, 2014 and 2013, respectively.
We continue to participate in one multi-employer pension plan that covers certain employees that are members of unions that have a collective bargaining agreement with us. We represent fewer than 5% of the total contributions made to the plan. The following table summarizes the plan:
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Notes to Consolidated and Combined Financial Statements
(in thousands, except per share amounts)
The CWA/ITU Negotiated Pension Plan has a withdrawal liability of approximately $4,800. Contribution rates are scheduled to remain consistent with current rates for the foreseeable future. A rehabilitation plan was adopted in 2010 related to pension vesting and early retirement, however, mandatory increases in contributions or surcharges were not implemented.
15. TRANSACTIONS WITH SCRIPPS
Corporate-wide programs
Prior to the April 1, 2015 separation, Scripps Newspapers participated in a number of corporate-wide programs administrated by Scripps. These included participation in Scripps' centralized treasury function, insurance programs, employee benefit programs, workers' compensation programs and centralized service centers and other corporate functions.
Equity - Prior to April 1, 2015, equity in the consolidated and combined balance sheets included the accumulated balance of transactions between Scripps and the Company including Scripps' investment and Scripps' interest in our cumulative retained earnings and are presented within parent company investment and combined with accumulated other comprehensive loss to total Parent company equity. The amounts comprising the accumulated balance of transactions between us and Scripps include (i) the cumulative net assets attributed to us by Scripps, (ii) the cumulative net advances to Scripps representing our cumulative funds swept (net of funding provided by Scripps to us) as part of the centralized cash management program described further below, (iii) the cumulative charges (net of credits) allocated by Scripps to us for certain support services received by us, (iv) the transfer of defined benefit plans in 2014 and (v) the transfer of net deferred tax liabilities to us in 2015.
Centralized Cash Management - Prior to the separation, Scripps Newspapers participated in Scripps’ controlled disbursement system. The bank sent Scripps daily notifications of checks presented for payment and Scripps transferred funds from other sources to cover the checks. Our cash balance held by Scripps was reduced as checks were issued. Accordingly, none of Scripps' cash and cash equivalents had been assigned to us in the combined financial statements. Further, outstanding checks issued by Scripps were not recorded as a liability once the check was signed, as the obligation became tied to the central cash management arrangement.
Corporate Allocation from Scripps - The Company was allocated estimates of Scripps Newspaper's portion of Scripps' corporate expenses for periods prior to the separation. The corporate allocation included costs related to support received from Scripps for certain corporate activities including: (i) executive management, (ii) corporate development, (iii) corporate relations, (iv) legal, (v) human resources, (vi) internal audit, (vii) financial reporting, (viii) tax, (ix) treasury, (x) centralized accounting, and (xi) other Scripps corporate and infrastructure costs. For these services, actual costs incurred by Scripps were allocated to us based upon on a number of utilization measures including headcount, square footage, and proportionate effort. Where determinations based on utilization are impracticable, Scripps used other methods and criteria that are believed to be reasonable estimates of costs attributable to the Company, such as revenues.
In 2015, 2014 and 2013 the combined financial statements include $11,717, $50,673 and $40,421, respectively, in expense allocations from Scripps for certain corporate support services, which are recorded within selling, general and administrative expense in our Consolidated and Combined Statements of Operations. Management believes that the basis used for the allocations are reasonable and reflect the portion of such costs attributed to our operations; however, the amounts may not be representative of the costs necessary for us to operate as a separate stand-alone company. The Company is unable to determine what such costs would have been had the Company been independent. After April 1, 2015, the Company performed these functions using its own resources, Transition Services Agreements with Scripps, or purchased services.
Insurance - General insurance costs related to the Scripps Newspapers' participation in Scripps-sponsored risk management plans for (i) general liability, (ii) auto liability, and (iii) other insurance, such as property and media, were allocated, depending upon insurance type, prior to the separation. Total insurance costs allocated to the Company were $275, $1,344 and $1,361 in 2015, 2014 and 2013, respectively, and are allocated to selling, general and administrative expense in the consolidated and combined statements of operations. The allocated amounts were based on actuarially determined historical loss experience, vehicle count, headcount or proportional insured values for real and personal property replacement costs and business interruption.
Medical and Workers’ Compensation Benefit Plans - The Company participated in Scripps-sponsored employee benefit plans, including medical and workers’ compensation, prior to the separation. Allocations of benefit plan costs varied by plan type and were based on actuarial valuations of cost and/or liability, premium amounts and payroll. Total benefit plan costs allocated to the Company amounted to $4,738, $18,956 and $18,212 in 2015, 2014 and 2013, respectively, and are allocated to cost of sales and selling, general and administrative expense in the consolidated and combined statements of operations. While management believes
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Notes to Consolidated and Combined Financial Statements
(in thousands, except per share amounts)
the cost allocation methods utilized for the benefit plans were reasonable and reflect the portion of such costs attributed to the Company, the amounts may not be representative of the costs necessary for the Company to operate as a stand-alone business.
Other - We purchased newsprint and other items from Scripps prior to the separation. The prices charged were generally equal to prices that we would have been able to negotiate directly with unrelated parties. The total newsprint purchased was $6,497, $28,691 and $31,600 in 2015, 2014 and 2013, respectively.
Agreements with Scripps
In connection with the separation, the following agreements became effective on or before April 1, 2015:
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Transition Services Agreement
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Employee Matters Agreement
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Tax Matters Agreements
Transition Services Agreement
The Transition Services Agreement provides for Scripps and Journal Media Group to provide services to each other on a compensated arms-length basis for a period of up to one year following the separation. The Company has incurred expenses of $3,381 for the year ended December 31, 2015 related to these services, which is reported in cost of sales and selling, general and administrative costs in the consolidated and combined statements of operations. Journal Media Group provides payroll, broadcast billing, and information technology support and services to Scripps. The Company has recorded $1,530 of revenue related to these services for the year ended December 31, 2015, which is reported in other revenues in the consolidated and combined statements of operations.
In addition to these services, Scripps continued to process and fund payroll for its former newspaper employees and Journal Media Group continued to process and fund payroll for the former broadcast employees of Journal. Also, each has paid various invoices on behalf of one another. As of December 31, 2015, we owe a net amount of $1,986 to Scripps for payroll and other payments made on our behalf and services provided related to the Transition Service Agreement. This amount is recorded in other current liabilities and was paid in the first quarter of 2016.
Employee Matters Agreement
The Employee Matters Agreement provided for the allocation of the liabilities and responsibilities relating to employee compensation and benefit plans and programs, including the treatment of outstanding incentive awards, deferred compensation obligations and retirement and welfare benefit obligations between Scripps and the Company. The agreement provided that Scripps and the Company would each be responsible for all employment and benefit related obligations and liabilities for employees that worked for the respective companies. The agreement also provided that Journal Media Group employees participate in mirror plans of the Scripps benefit plans through December 31, 2015.
Tax Matters Agreements
The Tax Matters Agreements set forth the allocations and responsibilities of Scripps and Journal Media Group with respect to liabilities for federal, state and local income taxes for periods before and after the separation, tax deductions related to compensation arrangements, preparation of income tax returns, disputes with taxing authorities and indemnification of income taxes that would become due if the separation was taxable. Generally, Scripps is responsible for taxes for periods prior to the separation and we are responsible for taxes for our operations after the separation. On April 1, 2015, in connection with the retention of the prior net operating loss carryforward by Scripps, the Company was allocated a net deferred tax liability of $14,537 related to the Scripps Newspapers.
The Company will indemnify Scripps for all damages, liabilities and expenses arising out of any tax imposed with respect to either the Scripps or Journal newspaper spin-off if such tax is attributable to any act, any failure to act or any omission by us or any of our subsidiaries. Scripps will indemnify the Company for all damages, liabilities and expenses relating to pre-closing taxes or taxes imposed on us or our subsidiaries because Scripps Spinco or Journal Spinco was part of the consolidated return of the applicable parent company, and the Company will indemnify Scripps for all damages, liabilities and expenses relating to post-closing taxes of us or our subsidiaries. The Merger Agreement with Gannett is not expected to disturb the tax-free treatment of the prior transaction between Scripps and Journal. Prior to entering the Merger Agreement with Gannett we delivered an unqualified tax opinion from our law firm to Scripps, which opinion Scripps has deemed to be acceptable in form and substance.
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Notes to Consolidated and Combined Financial Statements
(in thousands, except per share amounts)
16. COMMITMENTS AND CONTINGENCIES
We are subject to various legal actions, administrative proceedings and claims arising out of the ordinary course of business. We do not believe that any such unresolved legal actions and claims will materially adversely affect our consolidated results of operations, financial condition or cash flows.
Members of our board of directors (the “Board”), and the parties to the Merger Agreement, including us and Gannett, are defendants in two class action lawsuits filed in the Circuit Court of Milwaukee County, Wisconsin that have been consolidated into a single lawsuit. The first lawsuit, captioned Seifert v. Aitken, et al., No. 2015-CV-009686, was filed by a purported Company shareholder on November 24, 2015, and the second lawsuit, captioned Sabattini v. Aitken, et al., No. 2015-CV-010003, was filed by a purported Company shareholder on December 4, 2015. The lawsuits have been consolidated into a single action captioned In re Journal Media Group, Inc. Shareholder Litigation, No. 15-CV-009686 (the “Consolidated Action”). The plaintiffs in the Consolidated Action allege that our directors breached their fiduciary duties to the Company’s shareholders in connection with the merger contemplated by the Merger Agreement and that Gannett and its affiliate aided and abetted such alleged breaches of fiduciary duty. The plaintiffs seek, among other relief, declaratory and injunctive relief enjoining the merger, and rescissory damages in an unspecified amount.
As discussed in our Current Report on Form 8-K filed with the Securities and Exchange Commission on February 16, 2016, the parties to the Consolidated Action entered into a memorandum of understanding (the “MOU”), dated February 16, 2016, providing for the settlement of all claims, including those in the Consolidated Action, that were or could have been brought in connection with the merger. Pursuant to the terms of the MOU, the Consolidated Action is currently stayed pending finalization of proposed settlement documentation, confirmatory discovery and a decision by the relevant court regarding approval of the proposed settlement. If the settlement is finally approved by the court, it will resolve and release all claims in all actions that were or could have been brought challenging any aspect of the proposed merger, the Merger Agreement, and any disclosure made in connection therewith, pursuant to terms that will be disclosed to shareholders prior to final approval of the settlement. In addition, in connection with the settlement, the parties contemplate that plaintiffs’ counsel will file a petition in the Circuit Court of Milwaukee County, Wisconsin for an award of attorneys’ fees and expenses to be paid by us or our successor. The settlement, including the payment by us or any successor of ours of any such attorneys’ fees, is also contingent upon, among other things, the merger becoming effective under Wisconsin law.
There can be no assurance that the parties to the MOU will ultimately enter into a settlement agreement or that the Circuit Court of Milwaukee County, Wisconsin will approve the settlement even if the parties were to enter into a settlement agreement. If for any reason the Consolidated Action is not settled or the settlement is not approved, the Company and its board will continue to vigorously defend against the allegations in the Consolidated Action, which the Company and its board believe are without merit.
As of December 31, 2015, our future minimum rental payments under noncancellable operating lease agreements for buildings, office and warehouse space, and office equipment consist of the following:
Table of Contents JOURNAL MEDIA GROUP, INC.
Notes to Consolidated and Combined Financial Statements
(in thousands, except per share amounts)
We lease delivery trucks accounted for as capital leases. As of December 31, 2015, our future minimum rental payments due under capital lease agreements consist of the following:
Rent expense for cancellable and noncancellable leases charged to operations for 2015, 2014 and 2013 was $1,919, $1,901 and $1,863, respectively. We amortize rent expense on a straight-line basis for leases with rent escalation clauses. Rental income from subleases included in operating income for 2015, 2014 and 2013 was $27, $0 and $0, respectively.
17. STOCK-BASED COMPENSATION
On March 30, 2015, our board of directors and shareholders approved the 2015 Plan for the purpose of attracting and retaining directors, officers and other key employees of the Company and its subsidiaries and to provide to such persons incentives and rewards for performance. Subject to adjustment as provided in the 2015 Plan, the aggregate number of shares of common stock reserved and available for issuance pursuant to awards granted under the 2015 Plan is 2,000 shares, which may be awarded in the form of non-qualified stock options, incentive stock options, stock appreciation rights, restricted share awards, restricted share units, performance shares, performance units, other stock-based awards or dividend equivalents. The 2015 Plan also provides for the issuance of cash-based awards. As of December 31, 2015, there are 1,411 shares available for issuance under the 2015 Plan. However, we are precluded from issuing additional stock-based awards per the Merger Agreement with Gannett effective October 7, 2015.
On May 11, 2015, the compensation committee of our board of directors approved the grant of common stock to non-employee directors under our 2015 Plan, which was made without any restrictions. We value unrestricted stock at the closing market price of our common stock on the grant date. In the second quarter of 2015, we granted 30 unrestricted shares at a weighted average fair value of $9.06.
On May 11, 2015, the compensation committee of our board of directors approved the grant of restricted share units ("RSUs") to employees under our 2015 Plan. The RSUs vest over a period of three years, and are subject to forfeiture risk and other restrictions. Upon vesting, the employee is entitled to receive one share of the Company’s common stock for each RSU. The RSUs do not have voting rights; however, they do have the right to receive dividend equivalents. We value RSUs at the closing market price of our common stock on the grant date. In the second quarter of 2015, we granted 564 RSUs at a weighted average fair value of $7.98, of which 5 have been forfeited and 559 remain unvested as of December 31, 2015.
We recognize stock-based compensation expense on a straight-line basis over the service period based upon the fair value of the award on the grant date. During the year ended December 31, 2015, we recognized $1,125 in stock-based compensation expense. As of December 31, 2015, total unrecognized compensation cost related to stock based awards was $3,585, which we expect to recognize over the remaining vesting period of 2.4 years. Stock-based compensation expense is reported in selling, general and administrative expenses in our consolidated statements of operations.
For periods prior to the April 1, 2015 separation date, certain employees were eligible to participate in the Scripps Plan. The Scripps Plan provided for the granting of non-qualified stock options, RSUs and restricted common shares of Scripps. Stock-based compensation expense for participants in the Scripps Plan who were solely dedicated to newspapers operations are included within selling, general and administrative expense in our consolidated and combined financial statements. Stock based compensation attributable to the Scripps Plan and allocated to the Company was $216, $1,426 and $1,368 for the years ended December 31, 2015, 2014 and 2013, respectively. Scripps assumed liability for the unrecognized compensation expense under this plan as of April 1, 2015.
Table of Contents JOURNAL MEDIA GROUP, INC.
Notes to Consolidated and Combined Financial Statements
(in thousands, except per share amounts)
Incentive Plans - Prior to the separation date, the employees of the Scripps newspapers participated in the Scripps 2010 Long-Term Incentive Plan (the “Plan”). The Plan permitted the granting of incentive and nonqualified stock options, stock appreciation rights, RSU's, restricted and unrestricted common shares of Scripps and performance units to key employees and non-employee directors.
All of the information that follows represents the activity for Scripps newspaper employees in the Scripps Plan.
The following table summarizes information about stock option transactions for the Scripps newspaper employees' participation in the Scripps Plan prior to April 1, 2015:
*Scripps assumed liability for the unrecognized compensation expense under this plan as of April 1, 2015.
The following table presents additional information about exercises of stock options:
Restricted Stock and Restricted Stock Units - Awards of restricted class A common shares of Scripps (restricted stock) and restricted stock units generally require no payment by the employee. RSUs are converted into an equal number of common shares when vested. These awards generally vest over a three or four year period, conditioned upon the individual’s continued employment through that period. Awards vest immediately upon the retirement, death or disability of the employee or upon a change in control of Scripps or in the business in which the individual is employed. Unvested awards may be forfeited if employment is terminated for other reasons. Awards are nontransferable during the vesting period, but the awards are entitled to all the rights of an outstanding share. There are no post-vesting restrictions on awards granted to employees and non-employee directors.
Long-term incentive compensation includes performance share awards. Performance share awards represent the right to receive an award of RSUs if certain performance measures are met. Each award specifies a target number of shares to be issued and the specific performance criteria that must be met. The number of shares that an employee receives may be less than the target number of shares depending on the extent to which the specified performance measures are met.
Table of Contents JOURNAL MEDIA GROUP, INC.
Notes to Consolidated and Combined Financial Statements
(in thousands, except per share amounts)
Information and activity for transactions for the Scripps newspaper employees' participation in the Scripps Plan for restricted stock and RSUs is presented below:
The fair value of the shares and RSU's that vested was $5,241, $2,921 and $3,538 in 2015, 2014 and 2013.
18. ACCUMULATED OTHER COMPREHENSIVE LOSS
Changes in accumulated other comprehensive loss ("AOCL") by component, including items reclassified out of AOCL, were as follows:
Table of Contents JOURNAL MEDIA GROUP, INC.
Notes to Consolidated and Combined Financial Statements
(in thousands, except per share amounts)
19. QUARTERLY FINANCIAL INFORMATION (UNAUDITED)
Summarized quarterly financial information is as follows:
On April 1, 2015 we acquired the JRN Newspapers.
20. SUBSEQUENT EVENTS
On March 1, 2016, the Company held a special meeting of its shareholders (the “Special Meeting”). At the Special Meeting, the Company’s shareholders approved the Merger Agreement and the merger with Gannett as discussed in Note 4.
On February 8, 2016, the Board of Directors declared a cash dividend of $0.06 per share, payable on March 1, 2016, to shareholders of record as of the close of business on February 19, 2016.
Report of Independent Registered Public Accounting Firm
To the Board of Directors and Shareholders of
Journal Media Group, Inc.
We have audited the accompanying consolidated and combined (a combination of subsidiaries and operations of the newspaper business of The E.W. Scripps Company) balance sheets of Journal Media Group, Inc. and subsidiaries (the "Company") as of December 31, 2015 and 2014, and the related consolidated and combined statements of operations, comprehensive income (loss), cash flows, and equity for each of the three years in the period ended December 31, 2015. These consolidated and combined financial statements are the responsibility of the Company’s management. Our responsibility is to express an opinion on these consolidated and combined financial statements based on our audits.
We conducted our audits in accordance with the standards of the Public Company Accounting Oversight Board (United States). Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the consolidated and combined financial statements are free of material misstatement. The Company is not required to have, nor were we engaged to perform, an audit of its internal control over financial reporting. Our audits included consideration of internal control over financial reporting as a basis for designing audit procedures that are appropriate in the circumstances, but not for the purpose of expressing an opinion on the effectiveness of the Company's internal control over financial reporting. Accordingly, we express no such opinion. An audit also includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements, assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion.
In our opinion, such consolidated and combined financial statements present fairly, in all material respects, the financial position of Journal Media Group, Inc. and subsidiaries as of December 31, 2015 and 2014, and the results of their operations and their cash flows for each of the three years in the period ended December 31, 2015, in conformity with accounting principles generally accepted in the United States of America.
As discussed in Note 1, the accompanying combined financial statements have been derived from the consolidated financial statements and accounting records of The E.W. Scripps Company. The combined financial statements include allocations of certain costs from The E.W. Scripps Company. As a result, these allocations may not be reflective of the actual costs that would have been incurred had Scripps Newspapers operated as a separate entity apart from The E.W. Scripps Company.
/s/ Deloitte & Touche LLP
Milwaukee, Wisconsin
March 30, 2016
ITEM 9.
ITEM 9.
CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE
None.
ITEM 9A.
ITEM 9A.
CONTROLS AND PROCEDURES
Conclusion Regarding the Effectiveness of Disclosure Controls and Procedures
We carried out an evaluation, under the supervision and with the participation of our Disclosure Committee, including our Chief Executive Officer and our Chief Financial Officer, of the effectiveness of the design and operation of our disclosure controls and procedures (as such term is defined in Rules 13a-15(e) and 15d-15(e) under the Exchange Act) as of the end of the period covered by this Annual Report on Form 10-K. Based on that evaluation, the Chief Executive Officer and Chief Financial Officer concluded that our disclosure controls and procedures were effective.
There were no changes in our internal control over financial reporting (as such term is defined in Rules 13a-15(f) and 15d-15(f) under the Exchange Act) that occurred during the quarter ended December 31, 2015 that have materially affected, or are reasonably likely to materially affect, our internal control over financial reporting.
Management’s Report on Internal Control over Financial Reporting
We are responsible for establishing and maintaining adequate internal control over financial reporting, as such term is defined in Rule 13a-15(f) under the Exchange Act. Our internal control over financial reporting is designed to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles. Under the supervision and with the participation of our management, including our Chief Executive Officer and our Chief Financial Officer, we conducted an evaluation of the effectiveness of our internal control over financial reporting based on the framework in Internal Control-Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission (2013 framework). Based on our evaluation under this framework, our management concluded that our internal control over financial reporting was effective as of December 31, 2015.
ITEM 9B.
ITEM 9B.
OTHER INFORMATION
None.
PART III
ITEM 10.
ITEM 10.
DIRECTORS, EXECUTIVE OFFICERS AND CORPORATE GOVERNANCE
Directors and Executive Officers
Our directors and executive officers as of March 23, 2016 are as set forth below.
Name
Age
Position
Steven J. Smith
Chairman of the Board
Stuart Aitken
Director
Jonathan Newcomb
Director
Brian Ross
Director
Mary Ellen Stanek
Director
Timothy E. Stautberg
President and Chief Executive Officer, Director
Jason R. Graham
Senior Vice President, Chief Financial Officer and Treasurer
Marty V. Ozolins
Vice President and Controller
Hillary Ebach
Vice President, General Counsel and Corporate Secretary
Trina Jashinsky
Vice President, Human Resources
Libby Averyt
Vice President, Regional Publisher
William R. Barker
Vice President, Regional Publisher
Elizabeth Brenner
Vice President, Regional Publisher
George H. Cogswell III
Vice President, Regional Publisher
Directors
In addition to Timothy E. Stautberg, directors of the company include:
Steven J. Smith, is currently the non-executive Chairman of the Board. From 1998 until the formation of our company in April, 2015, he was Chairman of the Board and Chief Executive Officer of Journal Communications, Inc. Mr. Smith is also a director of Badger Meter, Inc. Mr. Smith’s long history with Journal Communications and his skills and executive experience within all of the industries in which we operate qualify him to serve as director and the non-executive Chairman of the Board of our company.
Stuart Aitken, has been Chief Executive Officer of 84.51° and its predecessor company, dunnhumbyUSA, since 2010. He joined the data analytics and customer insights company serving retailers and consumer brands as its Chief Operating Officer in 2009. Prior to joining dunnhumbyUSA, he was for two years Executive Vice President and Chief Marketing Officer for Michael’s Stores, an arts and crafts retailer. From 1999 to 2007, Mr. Aitken managed loyalty marketing, data analytics, innovation and category management for grocery retailer Safeway. Mr. Aitken’s knowledge and experience in marketing, information technology and consumer sales qualify him to serve as a director of our company.
Jonathan Newcomb, is currently a Managing Director at the New York investment firm Berenson & Company, with which he first became affiliated in 2012. Prior to that, he was a Managing Director at the New York investment firm Coady Diemar Partners from 2004 to 2012. Mr. Newcomb served sequentially as President, Chief Executive Officer and Chairman at Simon & Schuster from 1994 until 2002. Mr. Newcomb served as a director of Journal Communications, Inc. from 2005 until the formation of our company in April, 2015. Mr. Newcomb’s knowledge of and expertise in the publishing industry, as well as his executive experience and financial expertise, qualify him to serve as a director of our company.
Brian Ross, is Principal, Mid-Market Growth Partners LLC. Mr. Ross established Mid-Market Growth Partners in 2014 to help companies optimize their business models and founded AssuredMedPay in 2013 to provide a streamlined on-line payment system for employees of corporate-sponsored healthcare plans to simplify medical bill payment. Prior to these ventures he served for two years as President and CEO of KnowledgeWorks, an education-focused non-profit, from 2010 to 2012. Previously, he served in various financial and operating roles in a 13-year career at Cincinnati Bell, a diversified telecommunications company, including serving as Chief Financial Officer and Chief Operating Officer for this publicly traded company. Mr. Ross currently serves on the board of directors Alaska Communications and Otelco. Mr. Ross’s knowledge and experience in financial management and operating in an industry going through dramatic transformation qualify him to serve as a director of our company.
Mary Ellen Stanek, is President of Baird Funds, Inc., a registered investment company, and Managing Director and Chief Investment Officer of Baird Advisors, Robert W. Baird & Co. Inc., since 2000. Previously, Ms. Stanek was President of Firstar Funds, Inc., also a registered investment company, President and Chief Executive Officer of Firstar Investment Research & Management Company, LLC from 1998 to 2000, and was its President and Chief Operating Officer from 1994 to 1998. She is also a director of Baird Financial Group and Wisconsin Energy Corporation, and a member of the Board of Trustees at Northwestern Mutual Life Insurance Company. Ms. Stanek served as a director of Journal Communications, Inc. from 2003 until the formation of our company in April, 2015. Ms. Stanek’s knowledge of and experience in the financial services industry, as well as her executive experience and long-standing relationship with and knowledge of Journal Communications, Inc., qualify her to serve as a director of our company.
Executive Officers
Timothy E. Stautberg, has served as President and Chief Executive Officer of the company since March, 2015. Previously, he was Senior Vice President, Newspapers for The E.W. Scripps Company. From 2008 to 2011, Mr. Stautberg served as Senior Vice President, Chief Financial Officer and Treasurer of Scripps and for nine years as its Vice President of Corporate Communications and Investor Relations starting in 1999.
Jason R. Graham, has served as Senior Vice President, Chief Financial Officer and Treasurer since February, 2015. Previously he served for one year as Senior Vice President of Finance and Chief Financial Officer of Journal Communications, Inc. He joined Journal Communications in 2012 as Vice President and Controller. Prior thereto, Mr. Graham held various financial leadership positions with Brookdale Senior Living, Inc., a national owner and operator of senior living communities, where he was serving as Vice President and Corporate Controller prior to joining Journal Communications.
Marty V. Ozolins, has served as Vice President and Controller since February, 2015. Previously he served for one year as Vice President and Corporate Controller of Journal Communications, Inc. He joined Journal Communications in 1997 as a staff auditor and since then has held a series of finance and accounting roles with increasing responsibility.
Hillary Ebach, has served as Vice President, General Counsel and Corporate Secretary since May, 2015. Prior to joining the company, she served two years as Executive Vice President, Legal and Administration for Chicago-based Wrapports, LLC, owner of the Chicago Sun-Times and a portfolio of digital businesses. From 2007 to 2013, Ms. Ebach was Executive Vice President of Lurie Investments, Inc.
Trina Jashinsky, has served as Vice President, Human Resources since April, 2015. Ms. Jashinsky previously served for one year as Senior Vice President, Human Resources for the Credit Union Solutions and Open Solutions divisions of Fiserv, Inc. Prior to her tenure at Fiserv, she spent seven years with Johnson Controls, Inc., with her final role as Vice President, Corporate Human Resources, Global.
Libby Averyt, has served as Vice President, Regional Publisher since April, 2015 in addition to her role as President and Publisher of the Corpus Christi Caller-Times, a position she has held since 2014. Ms. Averyt has spent her career with the Caller-Times, including serving as Editor and also Vice President, Advertising.
William R. Barker, has served as Vice President, Regional Publisher since April, 2015 in addition to his role as President and Publisher of the Naples Daily News, a position he has held since 2013. Previously, he spent more than a decade leading Tampa Bay-area media publications for Media General and private equity firm Revolution Capital.
Elizabeth F. Brenner, has served as Vice President and Regional Publisher since April, 2015 in addition to her role as President and Publisher of the Milwaukee Journal Sentinel, a position she has held since 2005. She also served as Executive Vice President
of Journal Communications, Inc. from 2005 to March, 2015. Previously, Ms. Brenner was Publisher of The News Tribune in Tacoma, Washington from 1998 until 2004.
George H. Cogswell III, has served as Vice President, Regional Publisher since April, 2015 in addition to his role as President and Publisher of The Commercial Appeal in Memphis, a position he has held since 2012. Previously, for five years he was President and Publisher of the Ventura County Star in California.
There are no family relationships between any of the executive officers. There is no arrangement or understanding between any executive officer and any other person pursuant to which he or she was elected as an officer.
Board Meetings and Committees
In 2015, our board of directors met seven times. The Board currently maintains three standing committees: an Audit Committee, a Compensation Committee and a Nominating and Corporate Governance Committee. The following table sets forth the names of our directors who served on each of the standing committees of the Board during 2015, as well as how many times each committee met in 2015.
Audit Committee. Our Audit Committee assists the board in fulfilling the oversight responsibilities the board has with respect to (i) the integrity of our financial statements, (ii) our compliance with legal and regulatory requirements; (iii) the qualifications and independence of our independent registered public accounting firm; and (iv) the performance of our independent registered public accounting firm and our internal audit function. The Audit Committee has direct responsibility and the sole authority for the appointment, compensation, retention, termination, replacement and oversight of our independent registered public accounting firm, which reports directly to the Audit Committee. The Audit Committee is also responsible for preparing an audit committee report to be included in our company’s annual proxy statement, and reviews and approves on an on-going basis any related party transactions. The Audit Committee has adopted a policy for the review and pre-approval of all audit and non-audit services to be provided to us by our independent registered public accounting firm. The Audit Committee establishes procedures for the receipt, retention and treatment of complaints received by the Company regarding accounting and auditing matters.
Each member of our Audit Committee has been determined by our board to meet the independence, experience and financial literacy (i.e., to be "audit committee financial experts") requirements of the NYSE and the federal securities laws.
Compensation Committee. The purposes of our Compensation Committee are to (i) assist the board in discharging its responsibilities relating to the compensation of our Chief Executive Officer and other executive officers; (ii) administer our equity compensation plans; and (iii) produce an annual report on executive compensation for inclusion in our proxy statement in accordance with applicable rules and regulations.
Our Compensation Committee reviews, recommends and approves policies relating to compensation and benefits for our directors and employees and is responsible for approving the compensation of our Chief Executive Officer and other executive officers. It has authority to retain compensation consultants to assist in the evaluation of compensation for directors, the Chief Executive Officer and other senior executives.
Our Compensation Committee administers our compensation plans. Our Compensation Committee is also responsible for reviewing and recommending for inclusion in our proxy statement the compensation discussion and analysis section required to be included in our annual proxy statement under federal securities laws. For additional information regarding the Compensation Committee’s processes and procedures for the consideration and determination of executive compensation, including the role of executive officers of the Company in making recommendations to the Compensation Committee regarding executive compensation and the
role of compensation consultants in assisting the Compensation Committee in its functions, please see “Compensation Discussion and Analysis” in Item 11
ITEM 12.
SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT AND RELATED STOCKHOLDER MATTERS
Stock Ownership of Management and Others
The following table sets forth the beneficial ownership of our common stock as of March 23, 2016 held by (i) each of our directors and nominees and those of our currently serving executive officers who are named in the Summary Compensation Table in Item 11 above under “Executive Compensation-2015 Summary Compensation Table,” (ii) all of our current directors and executive officers as a group, and (iii) each person or entity that we know beneficially owns more than 5% of our common stock. We believe that all of the people and entities listed below have sole voting and investment power over the listed shares, except as we have indicated otherwise in the footnotes. The address of each individual named below is c/o Corporate Secretary, 333 West State Street, Milwaukee, Wisconsin 53203.
Equity Compensation Plan Information
The following table gives information about our common stock that may be issued under all of our equity compensation plans as of December 31, 2015.
(1)
Consists of the 2015 Plan. Awards under the 2015 Plan may consist of non-qualified stock options, incentive stock options, stock appreciation rights, restricted share awards, restricted share units, performance shares, performance units, other stock-based awards or dividend equivalents.
ITEM 13.
ITEM 13.
CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS, AND DIRECTOR INDEPENDENCE
Our board of directors has adopted standards to assist it in making determinations regarding whether our directors are independent as that term is defined in the listing standards of the NYSE. The current version of our standards is available on our website at www.journalmediagroup.com/investors. Based on these standards, the Board determined that Messrs. Smith, Aitken, Newcomb, and Ross, and Ms. Stanek are independent as that term is defined in the listing standards of the NYSE and the director independence standards adopted by the Board.
Our Board of Directors adopted in March 2015 written policies and procedures regarding transactions with related persons. For purposes of the policy:
•
a “related person” means any of our directors, executive officers, nominees for director, five percent or greater shareholder or any of their immediate family members; and
•
a “related person transaction” generally means a transaction (including any indebtedness or a guarantee of indebtedness) in which we were or are to be a participant and the amount involved exceeds $120,000, and in which a related person had or will have a direct or indirect material interest.
Each executive officer, director or nominee for director is required to disclose to the Nominating and Corporate Governance Committee certain information relating to related person transactions for review and approval or ratification by the Nominating and Corporate Governance Committee. The Nominating and Corporate Governance Committee is required to disclose any material related person transactions to the full Board.
Disclosure to the Nominating and Corporate Governance Committee is required to be made before, if possible, or as soon as practicable after the related person transaction is effected, but in any event as soon as practicable after the executive officer, director or nominee for director becomes aware of the transaction or of a material change to such a transaction. Under the policy, the Nominating and Corporate Governance Committee’s decision to approve or ratify a related person transaction is to be based on the Nomination and Corporate Governance Committee’s determination that consummation of the transaction is in, or was not contrary to, our best interests.
There have been no related persons transactions to date.
ITEM 14.
ITEM 14.
PRINCIPAL ACCOUNTING FEES AND SERVICES
INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM DISCLOSURE
From our inception on July 25, 2014, and until the consummation of the newspaper mergers on April 1, 2015, our activities were limited to our organization, the preparation of our registration statement on Form S-4 and other matters related to the transactions. Throughout 2014 and until April 1, 2015, we conducted no business operations. Accordingly, we did not engage an independent registered public accounting firm for any services in 2014. Scripps and Journal, however, retained independent registered public accounting firms to audit and/or review the financial statements of Scripps Newspapers and Journal Newspapers, respectively, included in our registration statement on Form S-4 (Registration No. 333-201540) and prepare to audit the financial statements of Scripps Newspapers, our predecessor, included in this Annual Report on Form 10-K.
The Audit Committee of the Board appointed Deloitte & Touche LLP as our independent registered public accounting firm for 2015. In 2015, Deloitte & Touche LLP performed an annual audit of our consolidated and combined financial statements for inclusion in our 2015 annual report to shareholders and required filings with the SEC for our fiscal year ended December 31, 2015.
Audit Fees. The aggregate audit fees billed by Deloitte & Touche LLP for our fiscal year ended December 31, 2015 were $936,825. Audit fees include fees billed for professional services rendered for the audit of our annual financial statements, the review of quarterly financial statements, statutory and regulatory filings and SEC registration statements.
Audit-Related Fees. The aggregate audit-related fees billed by Deloitte & Touche LLP for our fiscal year ended December 31, 2015 were $3,800. Audit-related fees include fees billed for assurance and related services for attest services and consultations concerning financial accounting and reporting matters not classified as audit.
Tax Fees. The aggregate tax fees billed by Deloitte & Touche, LLP for our fiscal year ended December 31, 2015 were $45,600.
All Other Fees. All other fees for products and services other than those in the above three categories billed by Deloitte & Touche LLP for our fiscal year ended December 31, 2015 were $0, respectively.
Our Audit Committee does not consider the provision of non-audit services by Deloitte & Touche LLP to be incompatible with maintaining auditor independence. Pursuant to the provisions of the Audit Committee charter, all audit services and all permitted non-audit services (unless de minimis) provided by our independent auditors, as well as the fees and other compensation to be paid to them, must be approved in advance by our Audit Committee. All audit, audit-related, tax and other services, if any, provided by Deloitte & Touche LLP during 2015 were approved by our Audit Committee in accordance with 17 CFR 210.2-01(c)(7)(i) and the terms of the Audit Committee charter.
PART IV
ITEM 15.
ITEM 15.
EXHIBITS AND FINANCIAL STATEMENT SCHEDULES
Financial Statements, Financial Statement Schedule and Exhibits
Signatures
Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized.
Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed below by the following persons on behalf of the registrant in the capacities indicated, on March 30, 2016.
Signature
Title
/s/ Timothy E. Stautberg
President, Chief Executive Officer and Director
(Principal Executive Officer)
Timothy E. Stautberg
/s/ Jason R. Graham
Senior Vice President, Chief Financial Officer and Treasurer
(Principal Financial Officer)
Jason R. Graham
/s/ Marty V. Ozolins
Vice President and Controller
(Principal Accounting Officer)
Marty V. Ozolins
/s/ Steven J. Smith
Chairman of the Board
Steven J. Smith
/s/ Jonathan Newcomb
Director
Jonathan Newcomb
/s/ Mary Ellen Stanek
Director
Mary Ellen Stanek
/s/ Stuart Aitken
Director
Stuart Aitken
/s/ Brian Ross
Director
Brian Ross
JOURNAL MEDIA GROUP, INC.
EXHIBIT INDEX