Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations
Item 3. Quantitative and Qualitative Disclosures About Market Risk
Item 4. Controls and Procedures
Part II. Other Information
Item 1. Legal Proceedings
Item 1A. Risk Factors
Item 2. Unregistered Sales of Equity Securities and Use of Proceeds
Item 3. Defaults Upon Senior Securities
Item 4. Mine Safety Disclosures
Item 5. Other Information
Item 6. Exhibits
Exhibits
EX-31.1
q32018-ex_311.htm
EX-31.2
q32018-ex_312.htm
EX-32.1
q32018-ex_321.htm
EX-32.2
q32018-ex_322.htm
Tribune Media Earnings 2018-09-30
TRCO 10Q Quarterly Report
Balance Sheet
Income Statement
Cash Flow
10-Q 1 a10-q_q32018.htm 10-Q Document
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
______________________________
FORM 10-Q
_______________________________
ý
QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended September 30, 2018
OR
o
TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
Commission file number 1-8572
___________________________
TRIBUNE MEDIA COMPANY
(Exact name of registrant as specified in its charter)
___________________________
Delaware
36-1880355
(State or other jurisdiction of incorporation or organization)
(I.R.S. Employer Identification No.)
515 North State Street, Chicago, Illinois
60654
(Address of principal executive offices)
(Zip Code)
Registrant’s telephone number, including area code: (312) 222-3394.
Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes ý No o
Indicate by check mark whether the registrant has submitted electronically every Interactive Data File required to be submitted pursuant to Rule 405 of Regulation S-T during the preceding 12 months (or for such shorter period that the registrant was required to submit such files). Yes ý No o
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, a smaller reporting company or an emerging growth company. See definitions of “large accelerated filer,” “accelerated filer,” “smaller reporting company,” and “emerging growth company” in Rule 12b-2 of the Exchange Act. (Check one):
Large Accelerated Filer
ý
Accelerated Filer
o
Non-Accelerated Filer
o
Smaller Reporting Company
o
Emerging Growth Company
o
If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act. o
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act):
Yes o No ý
As of October 31, 2018, 87,651,327 shares of the registrant’s Class A Common Stock and 5,557 shares of the registrant’s Class B Common Stock were outstanding.
TRIBUNE MEDIA COMPANY
FORM 10-Q
FOR THE QUARTER ENDED SEPTEMBER 30, 2018
INDEX TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
Pension and other postretirement periodic benefit credit, net
7,035
5,703
21,104
17,111
Loss on extinguishments and modification of debt
—
(1,435
)
—
(20,487
)
(Loss) gain on investment transactions, net
(5,001
)
5,667
(1,113
)
10,617
Write-downs of investment
—
—
—
(180,800
)
Other non-operating (loss) gain, net
(38
)
—
53
45
Reorganization items, net
(244
)
(753
)
(1,822
)
(1,452
)
Income (Loss) from Continuing Operations Before Income Taxes
31,654
(38,774
)
346,793
(231,328
)
Income tax (benefit) expense
(22,422
)
(20,087
)
67,096
(81,606
)
Income (Loss) from Continuing Operations
54,076
(18,687
)
279,697
(149,722
)
Income from Discontinued Operations, net of taxes (Note 2)
—
—
—
15,039
Net Income (Loss)
$
54,076
$
(18,687
)
$
279,697
$
(134,683
)
Net loss from continuing operations attributable to noncontrolling interests
23
—
33
—
Net Income (Loss) attributable to Tribune Media Company
$
54,099
$
(18,687
)
$
279,730
$
(134,683
)
Basic Earnings (Loss) Per Common Share Attributable to Tribune Media Company from:
Continuing Operations
$
0.62
$
(0.21
)
$
3.19
$
(1.72
)
Discontinued Operations
—
—
—
0.17
Net Earnings (Loss) Per Common Share
$
0.62
$
(0.21
)
$
3.19
$
(1.55
)
Diluted Earnings (Loss) Per Common Share Attributable to Tribune Media Company from:
Continuing Operations
$
0.61
$
(0.21
)
$
3.17
$
(1.72
)
Discontinued Operations
—
—
—
0.17
Net Earnings (Loss) Per Common Share
$
0.61
$
(0.21
)
$
3.17
$
(1.55
)
See Notes to Unaudited Condensed Consolidated Financial Statements
2
TRIBUNE MEDIA COMPANY AND SUBSIDIARIES CONDENSED CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME (LOSS)
(In thousands of dollars)
(Unaudited)
Three Months Ended
Nine Months Ended
September 30, 2018
September 30, 2017
September 30, 2018
September 30, 2017
Net Income (Loss)
$
54,076
$
(18,687
)
$
279,697
$
(134,683
)
Less: Income from Discontinued Operations, net of taxes
—
—
—
15,039
Income (Loss) from Continuing Operations
54,076
(18,687
)
279,697
(149,722
)
Other Comprehensive Income (Loss) from Continuing Operations, net of taxes
Pension and other post-retirement benefit items:
Change in unrecognized benefit plan gains and losses arising during the period, net of taxes of $(1,327) and $(285) for the nine months ended September 30, 2018 and September 30, 2017, respectively
—
—
(3,827
)
(442
)
Adjustment for previously unrecognized benefit plan gains and losses included in net income, net of taxes of $(15) and $(26) for the three months ended September 30, 2018 and September 30, 2017, respectively, and $(44) and $(77) for the nine months ended September 30, 2018 and September 30, 2017, respectively
(41
)
(40
)
(124
)
(120
)
Change in unrecognized benefit plan gains and losses, net of taxes
(41
)
(40
)
(3,951
)
(562
)
Marketable securities:
Change in unrealized holding gains and losses arising during the period, net of taxes of $(60) for the nine months ended September 30, 2017
—
—
—
(95
)
Adjustment for loss (gain) on investment sale included in net income, net of taxes of $40 and $(1,921) for the three and nine months ended September 30, 2017
—
62
—
(2,980
)
Change in marketable securities, net of taxes
—
62
—
(3,075
)
Cash flow hedging instruments:
Unrealized gains and losses, net of taxes of $812 and $(497) for the three months ended September 30, 2018 and September 30, 2017, respectively, and $4,383 and $(3,950) for the nine months ended September 30, 2018 and September 30, 2017, respectively
2,342
(769
)
12,639
(6,126
)
Gains and losses reclassified to net income, net of taxes of $58 and $509 for the three months ended September 30, 2018 and September 30, 2017, respectively, and $384 and $1,638 for the nine months ended September 30, 2018 and September 30, 2017, respectively
167
789
1,108
2,540
Change in unrecognized gains and losses on cash flow hedging instruments, net of taxes
2,509
20
13,747
(3,586
)
Foreign currency translation adjustments:
Change in foreign currency translation adjustments, net of taxes of $1,044 and $42 for the three months ended September 30, 2018 and September 30, 2017, respectively, and $1,102 and $2,752 for the nine months ended September 30, 2018 and September 30, 2017, respectively
1,421
583
1,154
5,987
Other Comprehensive Income (Loss) from Continuing Operations, net of taxes
3,889
625
10,950
(1,236
)
Comprehensive Income (Loss) from Continuing Operations, net of taxes
57,965
(18,062
)
290,647
(150,958
)
Comprehensive Income from Discontinued Operations, net of taxes
—
—
—
26,810
Comprehensive Income (Loss)
$
57,965
$
(18,062
)
$
290,647
$
(124,148
)
Comprehensive loss attributable to noncontrolling interests
23
—
33
—
Comprehensive Income (Loss) Attributable to Tribune Media Company
$
57,988
$
(18,062
)
$
290,680
$
(124,148
)
See Notes to Unaudited Condensed Consolidated Financial Statements
3
TRIBUNE MEDIA COMPANY AND SUBSIDIARIES CONDENSED CONSOLIDATED BALANCE SHEETS
(In thousands of dollars, except for share and per share data)
(Unaudited)
September 30, 2018
December 31, 2017
Assets
Current Assets
Cash and cash equivalents
$
887,751
$
673,685
Restricted cash and cash equivalents
16,607
17,566
Accounts receivable (net of allowances of $6,350 and $4,814)
393,174
420,095
Broadcast rights
105,447
129,174
Income taxes receivable
57,197
18,274
Prepaid expenses
27,936
20,158
Other
11,957
14,039
Total current assets
1,500,069
1,292,991
Properties
Property, plant and equipment
667,920
673,682
Accumulated depreciation
(260,301
)
(233,387
)
Net properties
407,619
440,295
Other Assets
Broadcast rights
113,162
133,683
Goodwill
3,228,716
3,228,988
Other intangible assets, net
1,487,534
1,613,665
Assets held for sale
28,955
38,900
Investments
1,231,873
1,281,791
Other
163,565
139,015
Total other assets
6,253,805
6,436,042
Total Assets (1)
$
8,161,493
$
8,169,328
See Notes to Unaudited Condensed Consolidated Financial Statements
4
TRIBUNE MEDIA COMPANY AND SUBSIDIARIES CONDENSED CONSOLIDATED BALANCE SHEETS
(In thousands of dollars, except for share and per share data)
(Unaudited)
September 30, 2018
December 31, 2017
Liabilities and Shareholders’ Equity
Current Liabilities
Accounts payable
$
41,955
$
48,319
Income taxes payable
8,452
36,252
Employee compensation and benefits
65,602
71,759
Contracts payable for broadcast rights
264,609
253,244
Deferred revenue
13,993
11,942
Interest payable
14,473
30,525
Deferred spectrum auction proceeds (Note 8)
—
172,102
Other
38,292
30,124
Total current liabilities
447,376
654,267
Non-Current Liabilities
Long-term debt (net of unamortized discounts and debt issuance costs of $31,177 and $36,332)
2,924,340
2,919,185
Deferred income taxes
581,079
508,174
Contracts payable for broadcast rights
259,671
300,420
Pension obligations, net
325,774
396,875
Postretirement, medical, life and other benefits
9,000
9,328
Other obligations
155,695
163,899
Total non-current liabilities
4,255,559
4,297,881
Total Liabilities (1)
4,702,935
4,952,148
Commitments and Contingent Liabilities (Note 8)
Shareholders’ Equity
Preferred stock ($0.001 par value per share)
Authorized: 40,000,000 shares; No shares issued and outstanding at September 30, 2018 and at December 31, 2017
—
—
Class A Common Stock ($0.001 par value per share)
Authorized: 1,000,000,000 shares; 101,745,449 shares issued and 87,643,264 shares outstanding at September 30, 2018 and 101,429,999 shares issued and 87,327,814 shares outstanding at December 31, 2017
102
101
Class B Common Stock ($0.001 par value per share)
Authorized: 1,000,000,000 shares; Issued and outstanding: 5,557 shares at September 30, 2018 and December 31, 2017
—
—
Treasury stock, at cost: 14,102,185 shares at September 30, 2018 and December 31, 2017
(632,194
)
(632,194
)
Additional paid-in-capital
4,023,769
4,011,530
Retained earnings (deficit)
98,795
(114,240
)
Accumulated other comprehensive loss
(37,111
)
(48,061
)
Total Tribune Media Company shareholders’ equity
3,453,361
3,217,136
Noncontrolling interests
5,197
44
Total shareholders’ equity
3,458,558
3,217,180
Total Liabilities and Shareholders’ Equity
$
8,161,493
$
8,169,328
(1)
The Company’s consolidated total assets as of September 30, 2018 and December 31, 2017 include total assets of variable interest entities (“VIEs”) of $75 million and $81 million, respectively, which can only be used to settle the obligations of the VIEs. The Company’s consolidated total liabilities as of both September 30, 2018 and December 31, 2017 include total liabilities of the VIEs of $29 million, for which the creditors of the VIEs have no recourse to the Company (see Note 1).
See Notes to Unaudited Condensed Consolidated Financial Statements
5
TRIBUNE MEDIA COMPANY AND SUBSIDIARIES CONDENSED CONSOLIDATED STATEMENT OF SHAREHOLDERS' EQUITY
(In thousands, except for share data)
(Unaudited)
Retained (Deficit)
Earnings
Accumulated Other Comprehensive (Loss) Income
Additional Paid-In Capital
Common Stock
Total
Class A
Class B
Treasury Stock
Non-
controlling Interests
Amount (at Cost)
Shares
Amount (at Cost)
Shares
Balance at December 31, 2017
$
3,217,180
$
(114,240
)
$
(48,061
)
$
4,011,530
$
(632,194
)
$
44
$
101
101,429,999
$
—
5,557
Comprehensive income:
Net income (loss)
279,697
279,730
—
—
—
(33
)
—
—
—
—
Other comprehensive income, net of taxes
10,950
—
10,950
—
—
—
—
—
—
—
Comprehensive income
290,647
Regular dividends declared to shareholders and warrant holders, $0.75 per share (1)
(65,776
)
(66,695
)
—
919
—
—
—
—
—
—
Stock-based compensation
16,104
—
—
16,104
—
—
—
—
—
—
Net share settlements of stock-based awards
(4,783
)
—
—
(4,784
)
—
—
1
315,450
—
—
Contributions from noncontrolling interests, net
5,186
—
—
—
—
5,186
—
—
—
—
Balance at September 30, 2018
$
3,458,558
$
98,795
$
(37,111
)
$
4,023,769
$
(632,194
)
$
5,197
$
102
101,745,449
$
—
5,557
(1) Includes $0.9 million of granted dividend equivalent units.
See Notes to Unaudited Condensed Consolidated Financial Statements
6
TRIBUNE MEDIA COMPANY AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(In thousands of dollars)
(Unaudited)
Nine Months Ended
September 30, 2018
September 30, 2017
Operating Activities
Net income (loss)
$
279,697
$
(134,683
)
Adjustments to reconcile net income (loss) to net cash provided by operating activities:
Stock-based compensation
16,104
27,432
Pension credit and contributions
(75,790
)
(16,535
)
Depreciation
40,557
41,761
Amortization of contract intangible assets and liabilities
661
649
Amortization of other intangible assets
125,043
125,001
Income on equity investments, net
(124,086
)
(98,856
)
Distributions from equity investments
158,926
177,953
Non-cash loss on extinguishments and modification of debt
—
8,258
Original issue discount payments
—
(7,360
)
Write-downs of investment
—
180,800
Amortization of debt issuance costs and original issue discount
5,612
5,990
Gain on sales of spectrum (Note 8)
(133,197
)
—
Gain on sale of business
—
(34,510
)
Loss (gain) on investment transactions, net
1,113
(10,617
)
Gain on sales of real estate, net
—
(365
)
Other non-operating gain, net
(53
)
(45
)
Changes in working capital items:
Accounts receivable, net
25,264
39,192
Prepaid expenses and other current assets
(246
)
13,219
Accounts payable
(2,960
)
(12,001
)
Employee compensation and benefits, accrued expenses and other current liabilities
(19,481
)
(43,415
)
Deferred revenue
2,055
(1,801
)
Income taxes
(66,713
)
44,710
Change in broadcast rights, net of liabilities
15,090
61,642
Deferred income taxes
68,441
(219,236
)
Other, net
(9,188
)
24,311
Net cash provided by operating activities
306,849
171,494
Investing Activities
Capital expenditures
(47,452
)
(41,423
)
Spectrum repack reimbursements
6,967
—
Net proceeds from the sale of business
—
554,487
Proceeds from FCC spectrum auction
—
172,102
Proceeds from sales of real estate and other assets
66
61,240
Proceeds from the sales of investments
15,232
148,321
Distribution from equity investment
—
4,608
Other, net
1,529
780
Net cash (used in) provided by investing activities
(23,658
)
900,115
See Notes to Unaudited Condensed Consolidated Financial Statements
7
TRIBUNE MEDIA COMPANY AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(In thousands of dollars)
(Unaudited)
Nine Months Ended
September 30, 2018
September 30, 2017
Financing Activities
Long-term borrowings
—
202,694
Repayments of long-term debt
—
(703,527
)
Long-term debt issuance costs
—
(1,689
)
Payments of dividends
(65,776
)
(564,499
)
Tax withholdings related to net share settlements of share-based awards
(5,765
)
(8,030
)
Proceeds from stock option exercises
982
11,231
Contributions from noncontrolling interests, net
475
1,318
Net cash used in financing activities
(70,084
)
(1,062,502
)
Net Increase in Cash, Cash Equivalents and Restricted Cash
213,107
9,107
Cash, cash equivalents and restricted cash, beginning of period (1)
691,251
611,198
Cash, cash equivalents and restricted cash, end of period
$
904,358
$
620,305
Cash, Cash Equivalents and Restricted Cash are Comprised of:
Cash and cash equivalents
$
887,751
$
602,739
Restricted cash
16,607
17,566
Total cash, cash equivalents and restricted cash
$
904,358
$
620,305
Supplemental Schedule of Cash Flow Information
Cash paid during the period for:
Interest
$
135,810
$
130,694
Income taxes, net
$
66,642
$
105,678
(1)
Cash, cash equivalents and restricted cash at the beginning of the nine months ended September 30, 2017 of $611 million are comprised of $595 million of cash, cash equivalents and restricted cash from continuing operations as reflected in the Company’s unaudited Condensed Consolidated Balance Sheets and $16 million of cash, cash equivalents and restricted cash reflected in total assets of discontinued operations.
See Notes to Unaudited Condensed Consolidated Financial Statements
8
TRIBUNE MEDIA COMPANY AND SUBSIDIARIES NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
NOTE 1: BASIS OF PRESENTATION AND SIGNIFICANT ACCOUNTING POLICIES
Presentation—All references to Tribune Media Company or Tribune Company in the accompanying unaudited condensed consolidated financial statements encompass the historical operations of Tribune Media Company and its subsidiaries (collectively, the “Company”).
The accompanying unaudited condensed consolidated financial statements of the Company have been prepared in accordance with accounting principles generally accepted in the United States of America (“U.S. GAAP”) for interim financial reporting. The year-end condensed balance sheet data was derived from audited financial statements, but does not include all disclosures required by U.S. GAAP. These unaudited condensed consolidated financial statements should be read in conjunction with the Company’s audited consolidated financial statements for the fiscal year ended December 31, 2017 included in the Company’s Annual Report on Form 10-K.
In the opinion of management, the financial statements contain all adjustments necessary to state fairly the financial position of the Company as of September 30, 2018 and the results of operations and cash flows for the three and nine months ended September 30, 2018 and September 30, 2017. All adjustments reflected in the accompanying unaudited condensed consolidated financial statements, which management believes necessary to state fairly the financial position, results of operations and cash flows, have been reflected and are of a normal recurring nature. Results of operations for interim periods are not necessarily indicative of the results to be expected for the full year.
On January 31, 2017, the Company completed the Gracenote Sale (as defined below). The historical results of operations for the businesses included in the Gracenote Sale are presented in discontinued operations for all periods presented (see Note 2). Unless indicated otherwise, the information in the notes to the accompanying unaudited condensed consolidated financial statements relates to the Company’s continuing operations.
Termination of Sinclair Merger Agreement—On May 8, 2017, the Company entered into an Agreement and Plan of Merger (the “Merger Agreement”) with Sinclair Broadcast Group, Inc. (“Sinclair”), providing for the acquisition by Sinclair of all of the outstanding shares of the Company’s Class A common stock (“Class A Common Stock”) and Class B common stock (“Class B Common Stock” and, together with the Class A Common Stock, the “Common Stock”) by means of a merger of a wholly owned subsidiary of Sinclair, with and into the Company (the “Merger”), with Tribune Media Company surviving the Merger as a wholly owned subsidiary of Sinclair. The consummation of the Merger was subject to the satisfaction or waiver of certain important conditions, including, among others the receipt of approval from the Federal Communications Commission (the “FCC”) and the expiration or termination of the waiting period applicable to the Merger under the Hart-Scott-Rodino Antitrust Improvements Act of 1976, as amended (the “HSR Act”). Pursuant to the Merger Agreement, the Company had the right to terminate the Merger Agreement if Sinclair failed to perform in all material respects its covenants, and such failure was not cured by the end date of August 8, 2018. Additionally, either party could terminate the Merger Agreement if the Merger was not consummated on or before August 8, 2018 (and the failure for the Merger to have been consummated by such date was not primarily due to a breach of the Merger Agreement by the party terminating the Merger Agreement). On August 9, 2018, the Company provided notification to Sinclair that it had terminated the Merger Agreement, effective immediately, on the basis of Sinclair’s willful and material breaches of its covenants and the expiration of the end date thereunder. Additionally, on August 9, 2018, the Company filed a complaint in the Delaware Court of Chancery against Sinclair (the “Complaint”), alleging that Sinclair willfully and materially breached its obligations under the Merger Agreement to use its reasonable best efforts to promptly obtain regulatory approval of the Merger so as to enable the Merger to close as soon as reasonably practicable. The lawsuit seeks damages for all losses incurred as a result of Sinclair’s breach of contract under the Merger Agreement. On August 29, 2018, Sinclair filed an answer to the Company’s Complaint and a counterclaim (the “Counterclaim”). The Counterclaim alleges that the Company materially and willfully breached the Merger Agreement by failing to use reasonable best efforts to obtain regulatory approval of the Merger. On September 18, 2018, the Company filed an answer to the Counterclaim. The Company believes the Counterclaim is without merit and intends to defend it vigorously.
9
TRIBUNE MEDIA COMPANY AND SUBSIDIARIES NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)
(Unaudited)
See Note 1 to the Company’s unaudited condensed consolidated financial statements for the three and six months ended June 30, 2018 included in the Company’s Form 10-Q filed on August 9, 2018 for additional information regarding the Merger and the Merger Agreement.
On May 8, 2018, the Company, Sinclair Television Group, Inc. (“Sinclair Television”) and Fox Television Stations, LLC (“Fox”) entered into an asset purchase agreement (the “Fox Purchase Agreement”) to sell the assets of seven network affiliates of the Company for $910 million in cash, subject to post-closing adjustments. The network affiliates subject to the Fox Purchase Agreement were: KCPQ (Tacoma, WA); KDVR (Denver, CO); KSTU (Salt Lake City, UT); KSWB-TV (San Diego, CA); KTXL (Sacramento, CA); WJW (Cleveland, OH); and WSFL-TV (Miami, FL). The closing of the sale pursuant to the Fox Purchase Agreement (the “Closing”) was subject to approval of the FCC and clearance under the HSR Act, as well as the satisfaction or waiver of all conditions of the consummation of the Merger, which was scheduled to occur immediately following the Closing. In connection with the termination of the Merger Agreement on August 9, 2018, the Company provided notification to Fox that it has terminated the Fox Purchase Agreement, effective immediately. Under the terms of each of the Merger Agreement and the Fox Purchase Agreement, no termination fees were payable by any party.
Change in Accounting Principles—In May 2014, the Financial Accounting Standards Board (“FASB”) issued Accounting Standard Update (“ASU”) No. 2014-09, “Revenue from Contracts with Customers” (“Topic 606”). The amendments in ASU 2014-09 created Topic 606 and superseded the revenue recognition requirements in Topic 605, “Revenue Recognition.” The Company adopted the new revenue guidance in the first quarter of 2018 using the modified retrospective transition method applied to those contracts which were not completed as of December 31, 2017. Results for reporting periods prior to adoption continue to be presented in accordance with the Company’s historic accounting under Topic 605.
The only identified impact to the Company’s financial statements relates to barter revenue and expense as well as barter-related broadcast rights and contracts payable for broadcast rights, which are no longer recognized. On January 1, 2018, the Company recorded an adjustment to remove the offsetting barter-related broadcast rights and contracts payable for broadcast rights. If accounted for under Topic 605, barter revenue and expense would have been $7 million and $21 million for the three and nine months ended September 30, 2018, respectively, and barter-related broadcast rights and contracts payable for broadcast rights would have been $51 million as of September 30, 2018. For the three and nine months ended September 30, 2017, barter revenue was $7 million and $21 million, respectively. Barter-related broadcast rights and contracts payable for broadcast rights were each $45 million as of December 31, 2017. Other than the impact to the accounting for barter arrangements described above, the adoption of Topic 606 did not impact the timing and amount of revenue recognized. See the Revenue Recognition accounting policy below for additional information.
In March 2018, the FASB issued ASU No. 2018-05, “Income Taxes (Topic 740)” which was effective in the first quarter of 2018. The standard provides guidance for situations where the accounting under Accounting Standards Codification (“ASC”) Topic 740 is incomplete for certain income tax effects of the Tax Cuts and Jobs Act (“Tax Reform”) upon issuance of an entity’s financial statements for the reporting period in which Tax Reform was enacted. Any provisional amounts or adjustments to provisional amounts as a result of obtaining, preparing or analyzing additional information about facts and circumstances related to the provisional amounts should be included in income (loss) from continuing operations as an adjustment to income tax expense in the reporting period the amounts are determined. As discussed in Note 9, the Company notes that adjustments may be made to the provision upon issuances of clarifications to existing law or additional technical guidance from the Department of Treasury and the completion of the Company’s tax return filings. As adjustments are made to the provisional amount, the Company will record the adjustment to income tax expense in the period the adjustment is determined.
In March 2017, the FASB issued ASU 2017-07, “Compensation - Retirement Benefits (Topic 715).” Under the new guidance, employers are required to present the service cost component of net periodic benefit cost in the same statement of operations caption as other employee compensation costs arising from services rendered during the period. Employers are required to present the other components of the net periodic benefit cost separately from the caption that includes the service costs and outside of any subtotal of operating profit and are required to disclose the
10
TRIBUNE MEDIA COMPANY AND SUBSIDIARIES NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)
(Unaudited)
caption used to present the other components of net periodic benefit cost, if not presented separately on the statement of operations. The Company retrospectively adopted ASU 2017-07 effective in the first quarter of 2018. The adoption of this standard did not have an effect on the Company’s historically reported net income (loss) but resulted in a presentation reclassification which reduced the Company’s historically reported operating profit by $6 million and $17 million for the three and nine months ended September 30, 2017, respectively, and $23 million for the full year 2017.
In February 2017, the FASB issued ASU No. 2017-05, “Other Income - Gains and Losses from the Derecognition of Nonfinancial Assets (Subtopic 610-20).” As a result of the new guidance, the guidance specific to real estate sales in ASC 360-20 is eliminated. Instead, sales and partial sales of real estate are subject to the same recognition model as all other nonfinancial assets. The Company adopted ASU 2017-05 in the first quarter of 2018 using a modified retrospective transition method. The adoption of this standard did not have a material impact on the Company’s consolidated financial statements.
In November 2016, the FASB issued ASU No. 2016-18, “Statement of Cash Flows (Topic 230).” The standard requires restricted cash and restricted cash equivalents to be included with cash and cash equivalents when reconciling the beginning-of-period and end-of-period total amounts shown on the statement of cash flows. The standard also requires additional disclosures related to a reconciliation of the balance sheet line items related to cash, cash equivalents, restricted cash and restricted cash equivalents to the statement of cash flows. The Company retrospectively adopted ASU 2016-18 in the first quarter of 2018. The Company’s restricted cash and cash equivalents totaled $18 million at both December 31, 2017 and December 31, 2016. The adoption of this standard did not have a material impact on the Company’s consolidated financial statements.
In August 2016, the FASB issued ASU No. 2016-15, “Statement of Cash Flows (Topic 230).” The cash flow issues addressed include debt prepayment or extinguishment costs, settlement of debt instruments with coupon rates that are insignificant in relation to the effective interest rate of the borrowing, contingent consideration payments made after a business combination, distributions received from equity method investees and cash receipts and payments that may have aspects of more than one class of cash flows. The Company retrospectively adopted ASU 2016-15 in the first quarter of 2018. The adoption of this standard did not have a material impact on the Company’s consolidated financial statements.
In January 2016, the FASB issued ASU No. 2016-01, “Financial Instruments - Overall (Subtopic 825-10).” The new guidance requires entities to measure equity investments (except those accounted for under the equity method of accounting or those that result in consolidation of the investee) at fair value, with changes in fair value recognized in net income, and requires entities to use the exit price notion when measuring the fair value of financial instruments for disclosure purposes. Certain entities are able to elect to record equity investments without readily determinable fair values at cost, less impairment, and plus or minus subsequent adjustments for observable price changes in orderly transactions for the identical or a similar investment of the same issuer. Entities that elect this measurement alternative must report changes in the carrying value of these investments in current earnings. On February 28, 2018, the FASB issued ASU No. 2018-03, “Technical Corrections and Improvements to Financial Instruments - Overall (Subtopic 825-10): Recognition and Measurement of Financial Assets and Financial Liabilities,” which made targeted improvements to address certain aspects of recognition, measurement, presentation and disclosure of financial instruments, including clarifying certain aspects of the guidance issued in ASU 2016-01. The Company adopted ASU 2016-01 in the first quarter of 2018 using a modified retrospective transition method. Pursuant to ASU 2018-03, the Company utilized the prospective transition approach for all equity securities without a readily determinable fair value for instances in which the Company elected to apply the measurement alternative, as further discussed in Note 5. The adoption of these standards did not have a material impact on the Company’s consolidated financial statements as the Company’s equity investments under the scope of this ASU do not have readily determinable fair values because they are not publicly traded companies and do not have an active market for their securities or membership interests.
No other significant accounting policies and estimates have changed from those detailed in Note 1 to the Company’s audited consolidated financial statements for the fiscal year ended December 31, 2017.
11
TRIBUNE MEDIA COMPANY AND SUBSIDIARIES NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)
(Unaudited)
Use of Estimates—The preparation of financial statements in conformity with U.S. GAAP requires management to make estimates and assumptions that affect the amounts reported in the unaudited condensed consolidated financial statements and accompanying notes. Actual results could differ from these estimates.
Revenue Recognition—The Company recognizes revenues when control of the promised goods or services is transferred to the Company’s customers in an amount that reflects the consideration the Company expects to be entitled to in exchange for those goods or services.
The following table represents the Company’s revenues disaggregated by revenue source for the Television and Entertainment segment (in thousands):
Three Months Ended
Nine Months Ended
September 30, 2018
September 30, 2017 (1)
September 30, 2018
September 30, 2017 (1)
Advertising
$
327,248
$
295,130
$
909,118
$
899,701
Retransmission revenues
116,625
104,587
351,952
303,800
Carriage fees
40,069
30,930
122,546
96,407
Barter/trade (2)
2,660
9,559
7,142
28,052
Other
8,017
7,101
30,980
21,441
Total operating revenues
$
494,619
$
447,307
$
1,421,738
$
1,349,401
(1)
Prior period amounts have not been adjusted under the modified retrospective method.
(2)
For the three and nine months ended September 30, 2017, barter revenue totaled $7 million and $21 million, respectively.
In addition to the operating revenues included in the Television and Entertainment segment, the Company’s consolidated operating revenues include other revenue of $3 million for each of the three months ended September 30, 2018 and September 30, 2017 and $9 million and $11 million for the nine months ended September 30, 2018 and September 30, 2017, respectively, in Corporate and Other which consists of real estate revenues.
Advertising Revenues—The Company generates revenue by delivering advertising on the Company’s broadcast television, cable, radio and digital platforms. Certain of the Company’s advertising contracts have guarantees whereby the customer is guaranteed a certain level of audience viewership referred to as impressions. Contracts are typically fixed price, short term in nature and revenue is recognized over time as the advertisements are aired or the impressions are delivered. If the guaranteed impressions are not achieved through the airing of the initially agreed upon advertisements, the Company will continue to air advertisements for the customer until the guaranteed impressions are achieved. For these advertising contracts with guaranteed impressions, the Company recognizes revenue based on the proportion of the cumulative impressions achieved for the advertisements delivered in relation to the total guaranteed impressions. Under the advertising contracts, the Company is entitled to payment as advertisements are aired, and the time between invoice and payment is not significant. The Company also trades advertising for products or services. Revenue recognized under trade arrangements is valued at the estimated fair value of the products or services received and recognized as the related advertisements are aired. The Company utilizes the practical expedients provided in the guidance and does not disclose the value of unsatisfied performance obligations for advertising contracts with an original expected duration of one year or less and for contracts for which the Company recognizes revenue at the amounts to which the Company has the right to invoice for services performed.
Retransmission Revenues and Carriage Fees—The Company enters into agreements with multichannel video programming distributors (“MVPDs”) which allow the MVPDs to retransmit the Company’s television stations’ broadcast programming and/or carry the Company’s cable channel. Typically, the agreements are multi-year and generally consist of a fixed price per subscriber as well as contractually agreed annual increases. The agreements are considered functional licenses of intellectual property resulting in the Company recognizing revenue at the point-in-time the broadcast signal is delivered to the MVPDs. The typical time between the Company’s performance and
12
TRIBUNE MEDIA COMPANY AND SUBSIDIARIES NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)
(Unaudited)
customer payment is not significant. As the agreements with MVPDs are considered licenses of intellectual property, the Company applies the sales/usage based royalty exception in ASC 606 and does not disclose the value of unsatisfied performance obligations for the agreements.
Deferred Revenues—The Company records deferred revenue when cash payments are received or due in advance of the Company’s performance. For advertising, the performance primarily involves the delivery of advertisements and/or impressions to the Company’s customers. For the spectrum sharing arrangements where the Company is acting as the host, the upfront payments received from the Company’s channel-sharing customers in 2017 have been deferred and are being recognized over a 30-year term.
Contract Costs—In accordance with Topic 606, incremental costs to obtain a contract are capitalized and amortized over the contract term if the cost are expected to be recoverable. The Company does not capitalize incremental costs to obtain a contract where the contract duration is expected to be one year or less. As of September 30, 2018, the Company does not have any costs capitalized.
Arrangements with Multiple Performance Obligations—The Company’s contracts with customers may include multiple performance obligations. For such arrangements, the Company allocates revenue to each performance obligation based on its relative standalone selling price, which is generally determined based on the price charged to customers.
Dreamcatcher—Dreamcatcher Broadcasting LLC (“Dreamcatcher”) was formed in 2013 specifically to comply with the cross-ownership rules of the FCC related to the Company’s acquisition of Local TV, LLC on December 27, 2013 (the “Local TV Acquisition”). See Note 1 to the Company’s audited consolidated financial statements for the fiscal year ended December 31, 2017 for additional information. The Company’s unaudited condensed consolidated financial statements as of and for the three and nine months ended September 30, 2018 and September 30, 2017 include the results of operations and the financial position of Dreamcatcher, a fully-consolidated variable interest entity (“VIE”). Net revenues of the Dreamcatcher stations (WTKR-TV, Norfolk, VA, WGNT-TV, Portsmouth, VA and WNEP-TV, Scranton, PA) included in the Company’s unaudited Condensed Consolidated Statements of Operations for the three months ended September 30, 2018 and September 30, 2017 were $20 million and $17 million, respectively, and for the nine months ended September 30, 2018 and September 30, 2017, were $57 million and $52 million, respectively. Operating profits of the Dreamcatcher stations included in the Company’s unaudited Condensed Consolidated Statements of Operations for the three months ended September 30, 2018 and September 30, 2017 were $4 million and $3 million, respectively, and for the nine months ended September 30, 2018 and September 30, 2017 were $12 million and $8 million, respectively. In 2017, Dreamcatcher received pretax proceeds from the counterparty in a spectrum sharing arrangement of approximately $26 million as one of the Dreamcatcher stations will act as a host station. The payments have been recorded as deferred revenue and began amortizing to the unaudited Condensed Consolidated Statement of Operations upon commencement of the sharing arrangement in December 2017. See Note 8 for additional information regarding the Company’s participation in the FCC spectrum auction.
13
TRIBUNE MEDIA COMPANY AND SUBSIDIARIES NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)
(Unaudited)
The Company’s unaudited Condensed Consolidated Balance Sheets as of September 30, 2018 and December 31, 2017 include the following assets and liabilities of the Dreamcatcher stations (in thousands):
September 30, 2018
December 31, 2017
Broadcast rights
3,056
2,622
Other intangible assets, net
64,018
71,914
Other assets
7,793
6,852
Total Assets
$
74,867
$
81,388
Contracts payable for broadcast rights
2,848
2,691
Long-term deferred revenue
24,380
25,030
Other liabilities
1,333
1,017
Total Liabilities
$
28,561
$
28,738
New Accounting Standards—In August 2018, the FASB issued ASU No. 2018-15, “Intangibles - Goodwill and Other - Internal-Use Software (Subtopic 350-40).” The standard requires a customer in a hosting arrangement that is a service contract to follow the internal-use software guidance to determine which implementation costs to capitalize as an asset related to the service contract. The standard also requires a customer to expense the capitalized implementation costs over the term of the hosting arrangement and specifies presentation requirements for both the capitalized costs and the amortized expenses. The standard is effective for fiscal years beginning after December 15, 2019, and the interim periods within those fiscal years. Early adoption is permitted. The amendments in ASU 2018-15 should be applied either retrospectively or prospectively to all implementation costs incurred after the date of adoption. The Company is currently evaluating the impact of adopting ASU 2018-15 on its consolidated financial statements.
In August 2018, the FASB issued ASU No. 2018-14, “Compensation - Retirement Benefits - Defined Benefit Plans - General (Subtopic 715-20).” The standard modifies certain disclosure requirements for employers that sponsor defined benefit pension and other postretirement benefit plans by removing disclosures that are no longer considered cost beneficial, clarifying specific requirements of disclosures, and adding disclosure requirements identified as relevant. The standard is effective for fiscal years ending after December 15, 2020. Early adoption is permitted. The amendments in ASU 2018-14 should be applied retrospectively to each period presented. The Company is currently evaluating the impact of adopting ASU 2018-14 on its consolidated financial statements.
In February 2018, the FASB issued ASU No. 2018-02, “Income Statement - Reporting Comprehensive Income (Topic 220).” The standard allows entities, at their option, to reclassify from accumulated other comprehensive income (loss) (“AOCI”) to retained earnings stranded tax effects resulting from Tax Reform. See Note 9 for further details regarding Tax Reform. The standard is effective for fiscal years beginning after December 15, 2018, and the interim periods within those fiscal years. Early adoption is permitted. The amendments in ASU 2018-02 should be applied either in the period of adoption or retrospectively to each period (or periods) in which the effect of the new federal corporate income tax rate is recognized. The Company is currently evaluating the impact of adopting ASU 2018-02 on its consolidated financial statements.
In August 2017, the FASB issued ASU No. 2017-12, “Derivatives and Hedging (Topic 815).” The standard simplifies the application of the hedge accounting guidance and enables entities to better portray the economic results of their risk management activities in the financial statements. The new guidance eliminates the requirement and the ability to separately record ineffectiveness on cash flow and net investment hedges and generally requires the entire change in the fair value of a hedging instrument to be presented in the same income statement line as the hedged item. The standard requires certain additional disclosures that focus on the effect of hedge accounting whereas the disclosure of hedge ineffectiveness is eliminated. The amendments expand the types of permissible hedging strategies. Additionally, the amendment makes the hedge documentation and effectiveness assessment less complex. The standard is effective for fiscal years beginning after December 15, 2018, and the interim periods
14
TRIBUNE MEDIA COMPANY AND SUBSIDIARIES NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)
(Unaudited)
within those fiscal years. Early adoption is permitted. The amendments in ASU 2017-12 related to cash flow hedge relationships that exist on the date of adoption should be applied using a modified retrospective approach with the cumulative effect of initially applying ASU 2017-12 at the date of initial application. The presentation and disclosure requirements apply prospectively. The Company is currently evaluating the impact of adopting ASU 2017-12 on its consolidated financial statements.
In June 2016, the FASB issued ASU No. 2016-13, “Financial Instruments - Credit Losses (Topic 326).” The standard requires entities to estimate loss of financial assets measured at amortized cost, including trade receivables, debt securities and loans, using an expected credit loss model. The expected credit loss differs from the previous incurred losses model primarily in that the loss recognition threshold of “probable” has been eliminated and that expected loss should consider reasonable and supportable forecasts in addition to the previously considered past events and current conditions. Additionally, the guidance requires additional disclosures related to the further disaggregation of information related to the credit quality of financial assets by year of the asset’s origination for as many as five years. Entities must apply the standard provision as a cumulative-effect adjustment to retained earnings as of the beginning of the first reporting period in which the guidance is effective. The standard is effective for fiscal years beginning after December 15, 2019, and interim periods within those fiscal years. Early adoption is permitted for annual periods beginning after December 15, 2018, and interim periods within those fiscal years. The Company is currently evaluating the impact of adopting ASU 2016-13 on its consolidated financial statements.
In February 2016, the FASB issued ASU No. 2016-02, “Leases (Subtopic 842).” The new guidance requires lessees to recognize assets and liabilities arising from leases as well as quantitative and qualitative disclosures. A lessee will need to recognize on its balance sheet a right-of-use asset and a lease liability for the majority of its leases (other than leases with a term of less than twelve months). The lease liabilities will be equal to the present value of lease payments. The right-of-use asset will be measured at the lease liability amount, adjusted for lease prepayment, lease incentives received and the lessee’s initial direct costs. In January 2018, the FASB issued ASU No. 2018-01, “Leases (Topic 842) - Land Easement Practical Expedient for Transition to Topic 842,” which provides an optional transition practical expedient to not evaluate under Topic 842 existing or expired land easements that were not previously accounted for as leases under the current leases guidance in Topic 840. In July 2018, the FASB issued ASU No. 2018-10, “Codification Improvements to Topic 842, Leases,” and ASU No. 2018-11, “Leases (Topic 842), Targeted Improvements,” which affect certain aspects of the previously issued guidance including an additional transition method as well as a new practical expedient for lessors. These related standards are effective for fiscal years beginning after December 15, 2018, and interim periods within those fiscal years. Early adoption is permitted. The Company will adopt Topic 842 in the first quarter of 2019 utilizing the optional transition method provided in ASU No. 2018-11, which allows for a prospective adoption with a cumulative-effect adjustment to the opening balance sheet as of the adoption date. The Company continues to evaluate the impact of the adoption of the new standard on its consolidated balance sheet; however, the Company does not expect the adoption to have a material impact on the consolidated statements of operations, consolidated statements of comprehensive income (loss), consolidated statement of shareholders’ equity or consolidated statements of cash flows. The Company continues to review the lease portfolio and is in the process of implementing new lease accounting software to assist in the accounting and disclosure requirements associated with the new standard.
NOTE 2: DISCONTINUED OPERATIONS
Sale of Digital and Data Businesses—On December 19, 2016, the Company entered into a definitive share purchase agreement (the “Gracenote SPA”) with Nielsen Holding and Finance B.V. (“Nielsen”) to sell equity interests in substantially all of the Digital and Data business operations, which included Gracenote Inc., Gracenote Canada, Inc., Gracenote Netherlands Holdings B.V., Tribune Digital Ventures LLC and Tribune International Holdco, LLC (the “Gracenote Companies”), for $560 million in cash, subject to certain purchase price adjustments (the “Gracenote Sale”). The Company retained its ownership of Covers Media Group (“Covers”), which was previously included in the Digital and Data reportable segment, and reclassified Covers’ previously reported amounts into the Television and Entertainment reportable segment to conform to the current segment presentation;
15
TRIBUNE MEDIA COMPANY AND SUBSIDIARIES NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)
(Unaudited)
the impact of this reclassification was immaterial. The Gracenote Sale was completed on January 31, 2017 and the Company received gross proceeds of $581 million. In the second quarter of 2017, the Company received additional proceeds of $3 million as a result of purchase price adjustments. In the year ended December 31, 2017, the Company recognized a total net pretax gain of $33 million, of which $35 million was recognized in the nine months ended September 30, 2017, as a result of the Gracenote Sale. On February 1, 2017, the Company used $400 million of proceeds from the Gracenote Sale to prepay a portion of its Term Loan Facility (as defined and described in Note 6).
The operating results of the businesses included in the Gracenote Sale are presented as discontinued operations in the Company’s unaudited Condensed Consolidated Statements of Operations and unaudited Condensed Consolidated Statements of Comprehensive Income (Loss) for all periods presented.
The Company entered into a transition services agreement (the “Nielsen TSA”) and certain other agreements with Nielsen that governed the relationships between Nielsen and the Company following the Gracenote Sale. The transition services agreement expired on March 31, 2018. Pursuant to the Nielsen TSA, the Company provided Nielsen with certain specified services on a transitional basis, including support in areas such as human resources, treasury, technology, legal and finance. In addition, the Nielsen TSA outlined the services that Nielsen provided to the Company on a transitional basis, including in areas such as human resources, technology, and finance. The charges for the transition services generally allowed the providing company to fully recover all out-of-pocket costs and expenses it actually incurred in connection with providing the services, plus, in some cases, the allocated direct costs of providing the services, generally without profit. Based on the Company’s assessment of the specific factors identified in ASC Topic 205, “Presentation of Financial Statements,” the Company concluded that it did not have significant continuing involvement in the Gracenote Companies.
The following table shows the components of the results from discontinued operations associated with the Gracenote Sale as reflected in the unaudited Condensed Consolidated Statements of Operations (in thousands):
Nine Months Ended
September 30, 2017 (1)(2)
Operating revenues
$
18,168
Direct operating expenses
7,292
Selling, general and administrative
15,349
Operating loss
(4,473
)
Interest income
16
Interest expense (3)
(1,261
)
Loss before income taxes
(5,718
)
Pretax gain on the disposal of discontinued operations
34,510
Total pretax income on discontinued operations
28,792
Income tax expense (4)
13,753
Income from discontinued operations, net of taxes
$
15,039
(1)
Results of operations for the Gracenote Companies are reflected through January 31, 2017, the date of the Gracenote Sale.
(2)
No depreciation expense or amortization expense was recorded by the Company in 2017 as the Gracenote Companies’ assets were held for sale as of December 31, 2016.
(3)
The Company used $400 million of proceeds from the Gracenote Sale to prepay a portion of its outstanding borrowings under the Company’s Term Loan Facility (as defined and described in Note 6). Interest expense associated with the Company’s outstanding Term Loan Facility was allocated to discontinued operations based on the ratio of the $400 million prepayment to the total outstanding indebtedness under the Term Loan Facility in effect in each respective period.
(4)
The effective tax rate on pretax income from discontinued operations was 47.8% for the nine months ended September 30, 2017. The 2017 rate differs from the U.S. federal statutory rate of 35% primarily due to state income taxes (net of federal benefit), foreign tax rate differences, and an adjustment relating to the sale of the Gracenote Companies.
16
TRIBUNE MEDIA COMPANY AND SUBSIDIARIES NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)
(Unaudited)
The results of discontinued operations include selling costs and transactions costs, including legal and professional fees incurred by the Company to complete the Gracenote Sale, of $10 million for the nine months ended September 30, 2017.
The Gracenote SPA provides for indemnification against specified losses and damages which became effective upon completion of the transaction. The Company does not expect to incur material costs in connection with these indemnifications. The Company has no material contingent liabilities relating to the Gracenote Sale as of September 30, 2018.
The following table represents the components of the results from discontinued operations associated with the Gracenote Sale as reflected in the Company’s unaudited Condensed Consolidated Statements of Cash Flows (in thousands):
Nine Months Ended
September 30, 2017 (1)
Significant operating non-cash items:
Stock-based compensation
$
1,992
Significant investing items (2):
Capital expenditures
1,578
Net proceeds from the sale of business (3)
554,487
(1)
Results of operations for the Gracenote Companies are reflected through January 31, 2017, the date of the Gracenote Sale.
(2)
Non-cash investing and financing activities of Digital and Data businesses included in the Gracenote Sale were immaterial.
(3)
Net proceeds from the sale of business reflects the gross proceeds from the Gracenote sale of $584 million, net of $20 million of the Gracenote Companies’ cash, cash equivalents and restricted cash included in the sale and $9 million of selling costs.
NOTE 3: REAL ESTATE SALES AND ASSETS HELD FOR SALE
Assets Held for Sale—Assets held for sale in the Company’s unaudited Condensed Consolidated Balance Sheets consisted of the following (in thousands):
September 30, 2018
December 31, 2017
Real estate
$
28,955
$
—
FCC licenses
—
38,900
Total assets held for sale
$
28,955
$
38,900
Real Estate Assets Held for Sale—As of September 30, 2018, the Company had one real estate property held for sale.
Sales of Real Estate—As of September 30, 2018, the Company had agreements for the sales of certain properties located in Melville, NY and Hartford, CT. On October 9, 2018, the Company sold its Melville, NY property for net proceeds of $53 million. The Company expects to recognize a net pretax gain of approximately $24 million in the fourth quarter of 2018 relating to the sale. On October 23, 2018, the Company sold its Hartford, CT property for net proceeds of $6 million. The Company expects to recognize a net pretax gain of less than $1 million in the fourth quarter of 2018 relating to the sale. The Company defines net proceeds as pretax cash proceeds on the sale of properties, net of associated selling costs.
In the nine months ended September 30, 2017, the Company sold several properties for net proceeds totaling $61 million and recognized a net pretax gain of less than $1 million for the three and nine months ended September 30, 2017, as further described below.
17
TRIBUNE MEDIA COMPANY AND SUBSIDIARIES NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)
(Unaudited)
On January 26, 2017, the Company sold its Denver, CO property for net proceeds of $23 million, which approximated the carrying value, and entered into a lease for the property. On January 31, 2017, the Company sold one of its Chicago, IL properties for net proceeds of $22 million and entered into a lease with a term of 10 years, subject to renewal, retaining the use of more than a minor portion of the property. The Company recorded a deferred pretax gain of $13 million on the sale, which will be amortized over the life of the lease in accordance with sale-leaseback accounting guidance.
On April 21, 2017, the Company sold two of its Chicago, IL properties for net proceeds of less than $1 million. On May 22, 2017, the Company sold two of its Baltimore, MD properties for net proceeds of $15 million. The net proceeds on the sales of these properties approximated their respective carrying values. On August 4, 2017, the Company sold its Williamsburg, VA property for net proceeds of $1 million, which approximated its carrying value.
FCC Licenses—As of December 31, 2017, certain FCC licenses that were part of the FCC spectrum auction were included in assets held for sale. The gross proceeds received for these licenses in 2017 totaled $172 million and were reflected in current liabilities in the Company’s unaudited Condensed Consolidated Balance Sheet at December 31, 2017. The Company recognized a net gain of $133 million in the first quarter of 2018 related to the surrender of the spectrum associated with these licenses in January 2018. See Note 8 for additional information regarding the Company’s participation in the FCC spectrum auction.
NOTE 4: GOODWILL AND OTHER INTANGIBLE ASSETS
Goodwill and other intangible assets consisted of the following (in thousands):
September 30, 2018
December 31, 2017
Gross Amount
Accumulated Amortization
Net Amount
Gross Amount
Accumulated Amortization
Net Amount
Other intangible assets subject to amortization
Affiliate relationships (useful life of 16 years)
$
212,000
$
(76,188
)
$
135,812
$
212,000
$
(66,250
)
$
145,750
Advertiser relationships (useful life of 8 years)
168,000
(120,750
)
47,250
168,000
(105,000
)
63,000
Network affiliation agreements (useful life of 5 to 16 years)
362,000
(206,546
)
155,454
362,000
(175,337
)
186,663
Retransmission consent agreements (useful life of 7 to 12 years)
830,100
(444,563
)
385,537
830,100
(377,033
)
453,067
Other (useful life of 5 to 15 years)
16,138
(7,757
)
8,381
16,650
(6,565
)
10,085
Total
$
1,588,238
$
(855,804
)
732,434
$
1,588,750
$
(730,185
)
858,565
Other intangible assets not subject to amortization
FCC licenses
740,300
740,300
Trade name
14,800
14,800
Total other intangible assets, net
1,487,534
1,613,665
Goodwill
3,228,716
3,228,988
Total goodwill and other intangible assets
$
4,716,250
$
4,842,653
18
TRIBUNE MEDIA COMPANY AND SUBSIDIARIES NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)
(Unaudited)
The changes in the carrying amounts of intangible assets, which are in the Company’s Television and Entertainment segment, during the nine months ended September 30, 2018 were as follows (in thousands):
Other intangible assets subject to amortization
Balance as of December 31, 2017
$
858,565
Amortization
(125,704
)
Balance sheet reclassifications
(226
)
Foreign currency translation adjustment
(201
)
Balance as of September 30, 2018
$
732,434
Other intangible assets not subject to amortization
Balance as of September 30, 2018 and December 31, 2017
$
755,100
Goodwill
Gross balance as of December 31, 2017
$
3,609,988
Accumulated impairment losses at December 31, 2017
(381,000
)
Balance at December 31, 2017
3,228,988
Foreign currency translation adjustment
(272
)
Balance as of September 30, 2018
$
3,228,716
Total goodwill and other intangible assets as of September 30, 2018
$
4,716,250
Amortization expense relating to amortizable intangible assets is expected to be approximately $42 million for the remainder of 2018, $140 million in 2019, $134 million in 2020, $103 million in 2021, $84 million in 2022 and $57 million in 2023.
NOTE 5: INVESTMENTS
Investments consisted of the following (in thousands):
September 30, 2018
December 31, 2017
Equity method investments
$
1,205,893
$
1,254,198
Other equity investments
25,980
27,593
Total investments
$
1,231,873
$
1,281,791
Equity Method Investments—Income on equity investments, net reported in the Company’s unaudited Condensed Consolidated Statements of Operations consisted of the following (in thousands):
Three Months Ended
Nine Months Ended
September 30, 2018
September 30, 2017
September 30, 2018
September 30, 2017
Income on equity investments, net, before amortization of basis difference
$
44,850
$
33,609
$
161,493
$
139,808
Amortization of basis difference
(12,469
)
(12,551
)
(37,407
)
(40,952
)
Income on equity investments, net
$
32,381
$
21,058
$
124,086
$
98,856
As discussed in Note 8 to the Company’s audited consolidated financial statements for the fiscal year ended December 31, 2017, the carrying value of the Company’s investments was increased by $1.615 billion to a fair value
19
TRIBUNE MEDIA COMPANY AND SUBSIDIARIES NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)
(Unaudited)
aggregating $2.224 billion as a result of fresh start reporting adopted on the Effective Date (as defined in Note 8). Of the $1.615 billion increase, $1.108 billion was attributable to the Company’s share of theoretical increases in the carrying values of the investees’ amortizable intangible assets had the fair value of the investments been allocated to the identifiable intangible assets of the investees’ in accordance with ASC Topic 805 “Business Combinations.” The remaining $507 million of the increase was attributable to goodwill and other identifiable intangibles not subject to amortization, including trade names. The Company amortizes the differences between the fair values and the investees’ carrying values of the identifiable intangible assets subject to amortization and records the amortization (the “amortization of basis difference”) as a reduction of income on equity investments, net in its unaudited Condensed Consolidated Statements of Operations. The remaining identifiable net intangible assets subject to amortization of basis difference as of September 30, 2018 totaled $648 million and have a weighted average remaining useful life of approximately 15 years.
Cash distributions from the Company’s equity method investments were as follows (in thousands):
Three Months Ended
Nine Months Ended
September 30, 2018
September 30, 2017
September 30, 2018
September 30, 2017
Cash distributions from equity investments
$
—
$
32,911
$
158,926
$
182,561
TV Food Network—The Company’s 31% investment in Television Food Network, G.P. (“TV Food Network”) totaled $1.195 billion and $1.234 billion at September 30, 2018 and December 31, 2017, respectively. The Company recognized equity income from TV Food Network of $32 million and $26 million for the three months ended September 30, 2018 and September 30, 2017, respectively, and $114 million and $103 million for the nine months ended September 30, 2018 and September 30, 2017, respectively. The Company received cash distributions from TV Food Network of $17 million for the three months ended September 30, 2017 and $153 million and $167 million in the nine months ended September 30, 2018 and September 30, 2017, respectively. The Company did not receive any cash distributions from TV Food Network in the third quarter of 2018 as TV Food Network adjusted its required year-to-date cash distributions to cover the Company’s taxes on its share of partnership income based on the reduction in tax rates from Tax Reform, which resulted in no distribution required for the third quarter of 2018.
CareerBuilder—On September 13, 2018, the Company sold its remaining 6% investment (on a fully diluted basis, including CareerBuilder, LLC (“CareerBuilder”) employees’ equity awards) (through its investment in Camaro Parent, LLC) in CareerBuilder and received pretax proceeds of $11 million. The Company recognized a pretax loss of $5 million on the sale of its ownership interest in CareerBuilder in the third quarter of 2018.
As of December 31, 2017, the Company’s investment in CareerBuilder totaled $10 million. Through the date of the sale, pursuant to ASC Topic 323 “Investments - Equity Method and Joint Ventures,” the Company accounted for CareerBuilder as an equity method investment. The Company recognized equity income from CareerBuilder of $0.4 million for the three months ended September 30, 2018 and an equity loss of $5 million for the three months ended September 30, 2017. For the nine months ended September 30, 2018, the Company recognized equity income of $10 million and an equity loss, excluding impairment charges, of $3 million for the nine months ended September 30, 2017. The Company received cash distributions from CareerBuilder of $6 million for nine months ended September 30, 2018, of which $5 million related to a distribution of proceeds from CareerBuilder’s sale of one of its business operations on May 14, 2018. The Company’s share of the gain on sale was approximately $11 million, which is included in income on equity investments, net for the nine months ended September 30, 2018.
On September 7, 2016, TEGNA Inc. (“TEGNA”) announced that it began evaluating strategic alternatives for CareerBuilder, including a possible sale. In the nine months ended September 30, 2017, the Company recorded total non-cash pretax impairment charges of $181 million to write-down the Company’s investment in CareerBuilder
20
TRIBUNE MEDIA COMPANY AND SUBSIDIARIES NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)
(Unaudited)
prior to the sale. The impairment charges resulted from a decline in the fair value of the investment that the Company determined to be other than temporary.
On June 19, 2017, TEGNA announced that it entered into an agreement (the “CareerBuilder Sale Agreement”), together with the other owners of CareerBuilder, including Tribune Media Company, to sell a majority interest in CareerBuilder to an investor group led by investment funds managed by affiliates of Apollo Global Management, LLC and the Ontario Teachers’ Pension Plan Board. The transaction closed on July 31, 2017 and the Company received cash of $158 million, which included an excess cash distribution of $16 million. The Company recognized a net gain on sale of $4 million in 2017, of which $6 million was recognized in the third quarter of 2017.
The CareerBuilder investment constituted a nonfinancial asset measured at fair value on a nonrecurring basis in the Company’s unaudited Condensed Consolidated Balance Sheets and was classified as a Level 3 asset in the fair value hierarchy. See Note 7 for a description of the fair value hierarchy’s three levels.
Dose Media—As of September 30, 2018, the Company’s 25% investment in Dose Media, LLC (“Dose Media”) has a carrying value of zero as it was fully impaired as of December 31, 2017.
Summarized Financial Information—Summarized financial information for TV Food Network is as follows (in thousands):
Three Months Ended
Nine Months Ended
September 30, 2018
September 30, 2017
September 30, 2018
September 30, 2017
Revenues, net
$
294,308
$
274,754
$
924,407
$
880,868
Operating income
$
139,679
$
157,207
$
474,223
$
547,363
Net income
$
142,903
$
123,009
$
484,781
$
447,348
Summarized financial information for CareerBuilder and Dose Media is as follows (in thousands):
Three Months Ended
Nine Months Ended
September 30, 2018 (1)
September 30, 2017
September 30, 2018 (1)
September 30, 2017
Revenues, net
$
119,502
$
165,961
$
432,330
$
505,383
Operating income (loss)
$
10,698
$
(9,661
)
$
26,759
$
373
Net income (loss)
$
3,884
$
(14,090
)
$
102,541
$
(842
)
(1)
Revenues, operating income (loss) and net income (loss) that relate to CareerBuilder include results through September 13, 2018.
Other Equity Investments—Other equity investments are investments without readily determinable fair values. All of the Company’s other equity investments are in private companies and have historically been recorded at cost, net of write-downs resulting from periodic evaluations of the carrying value of the investments. Upon adoption of ASU 2016-01 and ASU 2018-03, as further described in Note 1, the Company elected to use a measurement alternative for all investments without readily determinable fair values which allows the Company to measure the value of such equity investments at cost less impairments, if any, plus or minus changes resulting from observable price changes in orderly transactions for the identical or a similar investment. Fair values associated with these investments will be remeasured either upon occurrence of an observable price change or upon identification of an impairment. Changes in the carrying value of these equity investments will be reflected in current earnings.
During the first quarter of 2018, the Company sold one of its other equity investments for $4 million and recognized a pretax gain of $4 million.
21
TRIBUNE MEDIA COMPANY AND SUBSIDIARIES NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)
(Unaudited)
Chicago Cubs Transactions—As defined and further described in Note 8 to the Company’s audited consolidated financial statements for the fiscal year ended December 31, 2017, the Company consummated the closing of the Chicago Cubs Transactions on October 27, 2009. Concurrent with the closing of the transactions, the Company executed guarantees of collection of certain debt facilities entered into by Chicago Entertainment Ventures, LLC (formerly Chicago Baseball Holdings, LLC) (“CEV LLC”), and its subsidiaries (collectively, “New Cubs LLC”). As of December 31, 2017, the guarantees were capped at $699 million plus unpaid interest. In the first quarter of 2018, New Cubs LLC refinanced a portion of the debt which was guaranteed by the Company and the Company ceased being a guarantor of the refinanced debt. As of September 30, 2018, the remaining guarantees were capped at $249 million plus unpaid interest. The guarantees are reduced as New Cubs LLC makes principal payments on the underlying loans. To the extent that payments are made under the guarantees, the Company will be subrogated to, and will acquire, all rights of the debt lenders against New Cubs LLC.
On August 21, 2018, Northside Entertainment Holdings LLC (f/k/a Ricketts Acquisition LLC) (“NEH”) provided a written notice (the “Call Notice”) to the Company that NEH was exercising its right pursuant to the Amended and Restated Limited Liability Company Agreement (the “CEV LLC Agreement”) of CEV LLC to purchase the Company’s 5% membership interest in CEV LLC. The parties are engaged in the valuation process provided for in the CEV LLC Agreement and there can be no assurance that the purchase will be completed in a timely manner or at all, or at a favorable valuation to the Company.
Marketable Equity Securities—On August 4, 2014, the Company completed a spin-off of its publishing operations and retained 381,354 shares of Tribune Publishing Company (“Tribune Publishing”) (formerly tronc, Inc.) common stock, representing at that time 1.5% of the outstanding common stock of Tribune Publishing. On January 31, 2017, the Company sold its Tribune Publishing shares for net proceeds of $5 million and recognized a pretax gain of $5 million.
Variable Interests—At September 30, 2018 and December 31, 2017, the Company held variable interests in Topix, LLC (through its investment in TKG Holdings II, LLC) (“Topix”) and TREH 200E Las Olas Venture, LLC (“Las Olas LLC”). See Note 1 to the Company’s audited consolidated financial statements for the fiscal year ended December 31, 2017 for additional information relating to these entities.
The Company has determined that it is not the primary beneficiary of Topix and therefore has not consolidated it as of and for the periods presented in the unaudited condensed consolidated financial statements. The Company’s maximum loss exposure related to Topix is limited to its equity investment, which was $6 million at both September 30, 2018 and December 31, 2017.
Las Olas LLC was determined to be a VIE where the Company is the primary beneficiary. The Company consolidates the financial position and results of operations of this VIE. The financial position and results of operations of the VIE as of and for the nine months ended September 30, 2018 were not material.
As further disclosed in Note 1, the Company consolidates the financial position and results of operations of Dreamcatcher, a VIE where the Company is the primary beneficiary.
22
TRIBUNE MEDIA COMPANY AND SUBSIDIARIES NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)
(Unaudited)
NOTE 6: DEBT
Debt consisted of the following (in thousands):
September 30, 2018
December 31, 2017
Term Loan Facility
Term B Loans due 2020, effective interest rate of 3.84%, net of unamortized discount and debt issuance costs of $1,428 and $1,900
$
188,197
$
187,725
Term C Loans due 2024, effective interest rate of 3.85%, net of unamortized discount and debt issuance costs of $19,186 and $21,783
1,646,706
1,644,109
5.875% Senior Notes due 2022, net of debt issuance costs of $10,563 and $12,649
1,089,437
1,087,351
Total debt
$
2,924,340
$
2,919,185
Secured Credit Facility—At both September 30, 2018 and December 31, 2017, the Company’s secured credit facility (the “Secured Credit Facility”) consisted of a term loan facility (the “Term Loan Facility”), under which $1.666 billion of term C loans (the “Term C Loans”) and $190 million of term B loans (the “Term B Loans”) were outstanding. At both September 30, 2018 and December 31, 2017, there were no borrowings outstanding under the Company’s $420 million revolving credit facility (the “Revolving Credit Facility”); however, there were standby letters of credit outstanding of $20 million and $21 million, respectively, primarily in support of the Company’s workers’ compensation insurance programs. See Note 9 to the Company’s audited consolidated financial statements for the fiscal year ended December 31, 2017 for further information and significant terms and conditions associated with the Term Loan Facility and the Revolving Credit Facility, including but not limited to interest rates, repayment terms, fees, restrictions and affirmative and negative covenants. The Company’s unamortized transaction costs and unamortized discount related to the Term Loan Facility were $21 million and $24 million at September 30, 2018 and December 31, 2017, respectively. These deferred costs are recorded as a direct deduction from the carrying amount of an associated debt liability in the Company’s unaudited Condensed Consolidated Balance Sheets and amortized to interest expense over the contractual term of either the Term B Loans or the Term C Loans, as appropriate.
2017 Amendment
On January 27, 2017, the Company entered into an amendment (the “2017 Amendment”) to the Secured Credit Facility to, among other things, increase the amount of outstanding term loans under the Term Loan Facility and to increase the amount of commitments under the Revolving Credit Facility. See Note 9 to the Company’s audited consolidated financial statements for the fiscal year ended December 31, 2017 for additional information.
In connection with the 2017 Amendment, the Company paid fees to certain lenders of $4 million, which are considered a debt discount, all of which were deferred, and incurred transaction costs of $13 million, of which $1 million was deferred with the remainder expensed as part of loss on extinguishment and modification of debt. On February 1, 2017, the Company used $400 million from the proceeds from the Gracenote Sale to prepay a portion of its outstanding term loans. Subsequent to this prepayment, the Company’s quarterly installments related to the remaining principal amount of Term B Loans are no longer due. As a result of the 2017 Amendment and the $400 million prepayment, the Company recorded charges of $19 million on the extinguishment and modification of debt in the Company’s unaudited Condensed Consolidated Statements of Operations in the first quarter of 2017. The loss consisted of a write-off of unamortized debt issuance costs of $6 million and an unamortized discount of $1 million associated with the Term B Loans as a portion of the Term Loan Facility was considered extinguished for accounting purposes as well as an expense of $12 million of third parties fees as a portion of the Term Loan Facility was considered a modification transaction under ASC 470, “Debt.”
During the third quarter of 2017, the Company used $102 million of after-tax proceeds received from its participation in the FCC spectrum auction to prepay outstanding loans under the Term Loan Facility. Subsequent to
23
TRIBUNE MEDIA COMPANY AND SUBSIDIARIES NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)
(Unaudited)
these payments, the Company’s quarterly installments related to the remaining principal amount of the Term C Loans are not due until the third quarter of 2022. The Company recorded charges of $1 million associated with debt extinguishment in the three months ended September 30, 2017. See Note 8 for additional information regarding the Company’s participation in the FCC’s incentive auction.
5.875% Senior Notes due 2022—The Company’s 5.875% Senior Notes due 2022 (the “Notes”) bear interest at a rate of 5.875% per annum and interest is payable semi-annually in arrears on January 15 and July 15, commencing on January 15, 2016. The Notes mature on July 15, 2022. As of September 30, 2018, $1.100 billion of Notes remained outstanding.
See Note 9 to the audited consolidated financial statements for the fiscal year ended December 31, 2017 for further information and significant terms and conditions associated with the Notes, including but not limited to repayment terms, fees, restrictions and affirmative and negative covenants. The Company’s unamortized transaction costs related to the Notes were $11 million and $13 million at September 30, 2018 and December 31, 2017, respectively.
Consent Solicitation
On June 22, 2017, the Company announced that it received consents from 93.23% of holders of the Notes outstanding as of the record date of June 12, 2017, to effect certain proposed amendments to the Indenture (as defined below). The Company undertook the consent solicitation (the “Consent Solicitation”) at the request and expense of Sinclair in accordance with the terms of the Merger Agreement. In conjunction with receiving the requisite consents, on June 22, 2017, the Company, the subsidiary guarantors party thereto and The Bank of New York Mellon Trust Company, N.A., as trustee for the Notes, entered into the fourth supplemental indenture (the “Fourth Supplemental Indenture”) to the indenture governing the Notes, dated as of June 24, 2015 (as supplemented and amended, the “Indenture”), to effect certain amendments to the Indenture to facilitate the integration of the Company and the Notes with and into Sinclair’s debt capital structure in connection with the Merger. As further described in Note 1, the Company terminated the Merger Agreement on August 9, 2018. Therefore, the amendments contemplated in the Fourth Supplemental Indenture will never become effective.
Dreamcatcher—The Company and the guarantors guaranteed the obligations of Dreamcatcher under its senior secured credit facility (the “Dreamcatcher Credit Facility”). The Company participated in the FCC spectrum auction and a Dreamcatcher station received $26 million of pretax proceeds in 2017, of which $21 million was received in the third quarter of 2017, as further described in Note 8. Any proceeds received by Dreamcatcher as a result of the incentive auction were required to be first used to repay the Dreamcatcher Credit Facility. The Company used $12.6 million of after-tax proceeds from the FCC spectrum auction to prepay the Dreamcatcher Credit Facility in August 2017. The Company made the final payment to pay off the Dreamcatcher Credit Facility in September 2017.
NOTE 7: FAIR VALUE MEASUREMENTS
The Company measures and records in its consolidated financial statements certain assets and liabilities at fair value. ASC Topic 820 “Fair Value Measurement and Disclosures,” establishes a fair value hierarchy for instruments measured at fair value that distinguishes between assumptions based on market data (observable inputs) and the Company’s own assumptions (unobservable inputs). This hierarchy consists of the following three levels:
•
Level 1 – Assets and liabilities whose values are based on unadjusted quoted prices for identical assets or liabilities in an active market.
•
Level 2 – Assets and liabilities whose values are based on inputs other than those included in Level 1, including quoted market prices in markets that are not active; quoted prices of assets or liabilities with similar attributes in active markets; or valuation models whose inputs are observable or unobservable but corroborated by market data.
•
Level 3 – Assets and liabilities whose values are based on valuation models or pricing techniques that utilize unobservable inputs that are significant to the overall fair value measurement.
24
TRIBUNE MEDIA COMPANY AND SUBSIDIARIES NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)
(Unaudited)
On January 27, 2017, concurrent with the 2017 Amendment, the Company entered into interest rate swaps with certain financial institutions for a total notional value of $500 million with a duration that matches the maturity of the Company’s Term C Loans. The interest rate swaps are designated as cash flow hedges and are considered highly effective. As a result, no ineffectiveness has been recognized in the unaudited Condensed Consolidated Statements of Operations during the three and nine months ended September 30, 2018 and September 30, 2017. Additionally, for the interest rate swaps, no amounts are excluded from the assessment of hedge effectiveness. The monthly net interest settlements under the interest rate swaps are reclassified out of AOCI and recognized in interest expense consistent with the recognition of interest expense on the Company’s Term C Loans. Realized losses of $0.2 million and $1 million were recognized in interest expense for the three months ended September 30, 2018 and September 30, 2017, respectively, and $1 million and $4 million for the nine months ended September 30, 2018 and September 30, 2017, respectively. As of September 30, 2018, the fair value of the interest rate swaps was $17 million, which is recorded in non-current assets with the unrealized gain recognized in other comprehensive income (loss). As of September 30, 2018, the Company expects $2 million to be reclassified out of AOCI as a reduction of interest expense over the next twelve months. The interest rate swap fair value is considered Level 2 within the fair value hierarchy as it includes quoted prices for similar instruments as well as interest rates and yield curves that are observable in the market.
Certain assets are measured at fair value on a nonrecurring basis; that is, the instruments are not measured at fair value on an ongoing basis, but are subject to fair value adjustments in certain circumstances (for example, when there is evidence of impairment).
The carrying values of cash and cash equivalents, restricted cash and cash equivalents, trade accounts receivable and trade accounts payable approximate fair value due to their short term to maturity. Certain of the Company’s cash equivalents are held in money market funds which are valued using net asset value (“NAV”) per share, which would be considered Level 1 in the fair value hierarchy.
Estimated fair values and carrying amounts of the Company’s financial instruments that are not measured at fair value on a recurring basis were as follows (in thousands):
September 30, 2018
December 31, 2017
Fair Value
Carrying Amount
Fair Value
Carrying Amount
Term Loan Facility
Term B Loans due 2020
$
190,455
$
188,197
$
189,704
$
187,725
Term C Loans due 2024
$
1,670,057
$
1,646,706
$
1,666,942
$
1,644,109
5.875% Senior Notes due 2022
$
1,124,310
$
1,089,437
$
1,132,417
$
1,087,351
The following methods and assumptions were used to estimate the fair value of each category of financial instruments:
Term Loan Facility—The fair value of the outstanding principal balance of the term loans under the Company’s Term Loan Facility at both September 30, 2018 and December 31, 2017 would be classified in Level 2 of the fair value hierarchy.
5.875% Senior Notes due 2022—The fair value of the outstanding principal balance of the Company’s 5.875% Senior Notes due 2022 at September 30, 2018 and December 31, 2017 would be classified in Level 2 of the fair value hierarchy.
Investments Without Readily Determinable Fair Values—Non-equity method investments in private companies are recorded at cost, less impairments, if any, plus or minus changes resulting from observable price changes in orderly transactions for the identical or a similar investment, as further described in Note 5. During the nine months ended September 30, 2018 there were no events or changes in circumstance that suggested an impairment or an observable price change to any of these investments resulting from an orderly transaction for the
25
TRIBUNE MEDIA COMPANY AND SUBSIDIARIES NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)
(Unaudited)
identical or a similar investment. The non-equity method investments would be classified in Level 3 of the fair value hierarchy.
NOTE 8: COMMITMENTS AND CONTINGENCIES
Chapter 11 Reorganization— On December 8, 2008 (the “Petition Date”), Tribune Company and 110 of its direct and indirect wholly-owned subsidiaries (collectively, the “Debtors” or “Predecessor”) filed voluntary petitions for relief (collectively, the “Chapter 11 Petitions”) under chapter 11 (“Chapter 11”) of title 11 of the United States Code (the “Bankruptcy Code”) in the U.S. Bankruptcy Court for the District of Delaware (the “Bankruptcy Court”). The Fourth Amended Joint Plan of Reorganization for Tribune Company and its Subsidiaries (as subsequently modified, the “Plan”) became effective and the Debtors emerged from Chapter 11 on December 31, 2012 (the “Effective Date”). The Bankruptcy Court has to date entered final decrees collectively closing 106 of the Debtors’ Chapter 11 cases. The remaining Debtors’ Chapter 11 proceedings continue to be jointly administered under the caption In re Tribune Media Company, et al., Case No. 08-13141. See Note 3 to the Company’s audited consolidated financial statements for the fiscal year ended December 31, 2017 for additional information regarding the Debtors’ Chapter 11 cases and for a description of the terms and conditions of the Plan.
Confirmation Order Appeals—Notices of appeal of the Bankruptcy Court’s order confirming the Plan (the “Confirmation Order”) were filed by (i) Aurelius Capital Management, LP, on behalf of its managed entities that were holders of the Predecessor’s senior notes and Exchangeable Subordinated Debentures due 2029 (“PHONES”); (ii) Law Debenture Trust Company of New York (n/k/a Delaware Trust Company) (“Delaware Trust Company”) and Deutsche Bank Trust Company Americas (“Deutsche Bank”), each successor trustees under the respective indentures for the Predecessor’s senior notes; (iii) Wilmington Trust Company, as successor indenture trustee for the PHONES, and (iv) EGI-TRB, L.L.C., a Delaware limited liability company wholly-owned by Sam Investment Trust (a trust established for the benefit of Samuel Zell and his family) (the “Zell Entity”). The appellants sought, among other relief, to overturn the Confirmation Order and certain prior orders of the Bankruptcy Court embodied in the Plan, including the settlement of certain claims and causes of action related to the series of transactions (collectively, the “Leveraged ESOP Transactions”) consummated by the Predecessor, the Tribune Company employee stock ownership plan, the Zell Entity and Samuel Zell in 2007. As of September 30, 2018, each of the Confirmation Order appeals have been dismissed or otherwise resolved by a final order, with the exception of the appeals of Delaware Trust Company and Deutsche Bank. On July 30, 2018, the United States District Court for the District of Delaware (the “District Court”) entered an order affirming (i) the Bankruptcy Court’s judgment overruling Delaware Trust Company’s and Deutsche Bank’s objections to confirmation of the Plan and (ii) the Bankruptcy Court’s order confirming the Plan. Delaware Trust Company and Deutsche Bank appealed the District Court’s order to the United States Court of Appeals for the Third Circuit (the “Third Circuit”) on August 27, 2018. That appeal remains pending before the Third Circuit. See Note 3 to the Company’s audited consolidated financial statements for the fiscal year ended December 31, 2017 for a further description of the Leveraged ESOP Transactions and the Confirmation Order appeals. If the remaining appellants succeed on their appeals, the Company’s financial condition may be adversely affected.
Resolution of Outstanding Prepetition Claims—As of the Effective Date, approximately 7,400 proofs of claim had been filed against the Debtors. Amounts and payment terms for these claims, if applicable, were established in the Plan. The Plan requires the Company to reserve cash in amounts sufficient to make certain additional payments that may become due and owing pursuant to the Plan subsequent to the Effective Date. As of September 30, 2018, restricted cash held by the Company to satisfy the remaining claim obligations was $17 million and is estimated to be sufficient to satisfy such obligations.
As of September 30, 2018, all but 403 proofs of claim against the Debtors had been withdrawn, expunged, settled or otherwise satisfied. The majority of the remaining proofs of claim were filed by certain of the Company’s former directors and officers, asserting indemnity and other related claims against the Company for claims brought against them in lawsuits arising from the Leveraged ESOP Transactions. Those lawsuits are pending in multidistrict litigation (“MDL”) before the U.S. District Court for the Southern District of New York (the “NY District Court”) in
26
TRIBUNE MEDIA COMPANY AND SUBSIDIARIES NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)
(Unaudited)
proceedings captioned In re Tribune Co. Fraudulent Conveyance Litigation. See “Certain Causes of Action Arising from the Leveraged ESOP Transactions” in Note 3 to the Company’s audited consolidated financial statements for the fiscal year ended December 31, 2017 for a description of the MDL proceedings. Under the Plan, the indemnity claims of the Company’s former directors and officers must be set off against any recovery by the litigation trust formed pursuant to the Plan (the “Litigation Trust”) against any of those directors and officers, and the Litigation Trust is authorized to object to the allowance of any such indemnity-type claims.
The ultimate amounts to be paid in resolutions of the remaining proofs of claim, including indemnity claims, will continue to be subject to uncertainty for a period of time after the Effective Date. If the aggregate allowed amount of the remaining claims exceeds the restricted cash held for satisfying such claims, the Company would be required to satisfy the allowed claims from its cash on hand from operations.
Reorganization Items, Net—ASC Topic 852, “Reorganizations,” requires that the financial statements for periods subsequent to the filing of the Chapter 11 Petitions distinguish transactions and events that are directly associated with the reorganization from the operations of the business. Reorganization items, net included in the Company’s unaudited Condensed Consolidated Statements of Operations primarily include professional advisory fees and other costs related to the resolution of unresolved claims and totaled less than $1 million for each of the three months ended September 30, 2018 and September 30, 2017, and $2 million and $1 million for the nine months ended September 30, 2018 and September 30, 2017, respectively. The Company expects to continue to incur certain expenses pertaining to the Chapter 11 proceedings throughout 2018 and potentially in future periods.
FCC Regulation—Various aspects of the Company’s operations are subject to regulation by governmental authorities in the United States. The Company’s television and radio broadcasting operations are subject to FCC jurisdiction under the Communications Act of 1934, as amended. FCC rules, among other things, govern the term, renewal and transfer of radio and television broadcasting licenses, and limit the number of media interests in a local market that a single entity can own. Federal law also regulates the rates charged for political advertising and the quantity of advertising within children’s programs. As of November 9, 2018, the Company had FCC authorization to operate 39 television stations and one AM radio station.
The Company is subject to the FCC’s “Local Television Multiple Ownership Rule” and the “National Television Multiple Ownership Rule,” among others, as further described in Note 12 to the Company’s audited consolidated financial statements for the fiscal year ended December 31, 2017.
The “National Television Multiple Ownership Rule” prohibits the Company from owning television stations that, in the aggregate, reach more than 39% of total U.S. television households, subject to a 50% discount of the number of television households attributable to UHF stations (the “UHF Discount”). In a Report and Order issued on September 7, 2016, the FCC repealed the UHF Discount but grandfathered existing station combinations (including the Company’s) that exceeded the 39% national reach cap as a result of the elimination of the UHF Discount, subject to compliance in the event of a future change of control or assignment of license. The September 7, 2016 order is subject to a petition for judicial review by the U.S. Court of Appeals for the District of Columbia Circuit that is pending in abeyance. The FCC reinstated the UHF Discount in an Order on Reconsideration adopted on April 20, 2017 (the “UHF Discount Reconsideration Order”). A petition for judicial review by the U.S. Court of Appeals for the District of Columbia Circuit was dismissed on jurisdictional grounds on July 25, 2018. On December 18, 2017, the FCC released a Notice of Proposed Rulemaking seeking comment generally, on the continuing propriety of a national cap and the Commission’s jurisdiction with respect to the cap. The Company cannot predict the outcome of these proceedings, or their effect on its business.
Federal legislation enacted in February 2012 authorized the FCC to conduct a voluntary “incentive auction” in order to reallocate certain spectrum currently occupied by television broadcast stations to mobile wireless broadband services, to “repack” television stations into a smaller portion of the existing television spectrum band and to require television stations that do not participate in the auction to modify their transmission facilities, subject to reimbursement for reasonable relocation costs up to an industry-wide total of $1.750 billion, which amount was increased by $1 billion pursuant to the adoption of an amended version of the Repack Airwaves Yielding Better
27
TRIBUNE MEDIA COMPANY AND SUBSIDIARIES NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)
(Unaudited)
Access for Users of Modern Services (RAY BAUM’S) Act of 2018 by the U.S. Congress on March 23, 2018. On April 13, 2017, the FCC announced the conclusion of the incentive auction, the results of the reverse and forward auction and the repacking of the broadcast television spectrum. The Company participated in the auction and has received approximately $191 million in pretax proceeds as of December 31, 2017 (including $26 million of proceeds received by a Dreamcatcher station, of which $21 million was received in the third quarter of 2017). The Company used $102 million of after-tax proceeds to prepay a portion of the Term Loan Facility. After-tax proceeds of $12.6 million received by a Dreamcatcher station were used to prepay a substantial portion of the Dreamcatcher Credit Facility. The Company received gross pretax proceeds of $172 million from licenses sold by the Company in the FCC spectrum auction in 2017 and recognized a net pretax gain of $133 million in the first quarter of 2018 related to the surrender of the spectrum of these television stations in January 2018. In 2017, the Company also received $84 million of pretax proceeds for sharing arrangements whereby the Company will provide hosting services to the counterparties, of which $79 million was received in the third quarter of 2017. Additionally, the Company paid $66 million of proceeds in 2017 to counterparties who will host certain of the Company’s television stations under sharing arrangements. The proceeds received by the Company for hosting the counterparties have been recorded in deferred revenue and other long-term obligations and is being amortized to other revenue over a period of 30 years starting with the commencement of each arrangement. The proceeds paid to the counterparties have been recorded in prepaid and other-long term assets and will be amortized to direct operating expense over a period of 30 years starting with the commencement of each arrangement.
Twenty-two of the Company’s television stations (including WTTK, which operates as a satellite station of WTTV) will be required to change frequencies or otherwise modify their operations as a result of the repacking. In doing so, the stations could incur substantial conversion costs, reduction or loss of over-the-air signal coverage or an inability to provide high definition programming and additional program streams.
Through September 30, 2018, the Company incurred $16 million in capital expenditures for the spectrum repack. The Company expects that the reimbursements from the FCC’s special fund will cover the majority of the Company’s costs and expenses related to the repacking. However, the Company cannot currently predict the effect of the repacking, whether the special fund will be sufficient to reimburse all of the Company’s costs and expenses related to the repacking, the timing of reimbursements or any spectrum-related FCC regulatory action.
The Company received FCC reimbursements of $5 million and $7 million during the three and nine months ended September 30, 2018, respectively. The reimbursements are included as a reduction to selling, general and administrative expense (“SG&A”) and are presented as an investing inflow in the Company’s unaudited Condensed Consolidated Statements of Cash Flows.
As described in Note 1 to the Company’s audited consolidated financial statements for the fiscal year ended December 31, 2017, the Company completed the Local TV Acquisition on December 27, 2013 pursuant to FCC staff approval granted on December 20, 2013 in the Local TV Transfer Order. On January 22, 2014, Free Press filed an Application for Review seeking review by the full Commission of the Local TV Transfer Order. The Company filed an Opposition to the Application for Review on February 21, 2014. Free Press filed a reply on March 6, 2014. The matter is pending.
From time to time, the FCC revises existing regulations and policies in ways that could affect the Company’s broadcasting operations. In addition, Congress from time to time considers and adopts substantive amendments to the governing communications legislation. The Company cannot predict such actions or their resulting effect upon the Company’s business and financial position.
Other Contingencies—The Company and its subsidiaries are defendants from time to time in actions for matters arising out of their business operations. In addition, the Company and its subsidiaries are involved from time to time as parties in various regulatory, environmental and other proceedings with governmental authorities and administrative agencies. See Note 9 for a discussion of potential income tax liabilities.
The Company does not believe that any matters or proceedings presently pending will have a material adverse effect, individually or in the aggregate, on its consolidated financial position, results of operations or liquidity.
28
TRIBUNE MEDIA COMPANY AND SUBSIDIARIES NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)
(Unaudited)
NOTE 9: INCOME TAXES
In the three months ended September 30, 2018, the Company recorded an income tax benefit from continuing operations of $22 million. The effective tax rate on pretax income from continuing operations was (70.8)%. The rate differs from the U.S. federal statutory rate of 21% due to state income taxes (net of federal benefit), non-deductible executive compensation, the deduction of certain transaction costs and other expenses previously capitalized, and a $3 million benefit related to federal and state income tax filings for the prior year. In the three months ended September 30, 2018, the Company recorded an additional income tax benefit of $24 million to revise the provisional discrete net tax benefit recorded due to Tax Reform, as further described below. In the nine months ended September 30, 2018, the Company recorded income tax expense from continuing operations of $67 million. The effective tax rate on pretax income from continuing operations was 19.3%. The rate differs from the U.S. federal statutory rate of 21% due to state income taxes (net of federal benefit), non-deductible executive compensation, the deduction of certain transaction costs and other expenses previously capitalized, a net $3 million charge related primarily to the write-off of unrealized deferred tax assets related to stock-based compensation, a $3 million benefit related to federal and state income tax filings for the prior year, and a $24 million benefit to revise the provisional discrete net tax benefit recorded due to Tax Reform, as further described below.
In the three and nine months ended September 30, 2017, the Company recorded an income tax benefit from continuing operations of $20 million and $82 million, respectively. The effective tax rate on pretax loss from continuing operations was 51.8% for the three months ended September 30, 2017. The rate differs from the U.S. federal statutory rate of 35% at the time due to state income tax (net of federal benefit), the domestic production activities deduction, certain transaction costs not fully deductible for tax purposes, a $1 million charge related to the resolution of federal and state income tax matters and other adjustments. The effective tax rate on pretax loss from continuing operations was 35.3% for the nine months ended September 30, 2017. For the nine months ended September 30, 2017, the rate differs from the U.S. federal statutory rate of 35% due to state income taxes (net of federal benefit), the domestic production activities deduction, certain transaction costs and other expenses not fully deductible for tax purposes, a $1 million charge related to the resolution of federal and state income tax matters and other adjustments, a $3 million benefit related to expected refunds of interest paid on prior tax assessments and a $1 million charge related to the write-off of unrealized deferred tax assets related to stock-based compensation.
Tax Cuts and Jobs Act—On December 22, 2017, Tax Reform was signed into law. Under ASC Topic 740, the effects of Tax Reform are recognized in the period of enactment and as such were recorded in the Company’s fourth quarter of 2017. The Company is in the process of analyzing certain provisions of Tax Reform including but not limited to the repeal of the domestic production activities deduction and changes to the deductibility of executive compensation. Consistent with the guidance under ASC Topic 740, and subject to Staff Accounting Bulletin (“SAB”) 118, which provides for a measurement period to complete the accounting for certain elements of Tax Reform, the Company recorded a provisional discrete net tax benefit of $256 million in the fourth quarter of 2017 primarily due to a remeasurement of the net deferred tax liabilities resulting from the decrease in the U.S. federal corporate income tax rate from 35% to 21%. In the three months ended September 30, 2018, the Company recorded an additional income tax benefit of $24 million to its net deferred tax liabilities, adjusting the provisional discrete net tax benefit recorded in the fourth quarter of 2017. The tax benefit was recorded as the result of new information, including higher than expected pension contributions and new filing positions reported in the Company’s income tax returns as they became due. Further impacts of Tax Reform may be reflected in the fourth quarter upon issuance of clarifications to existing law or additional technical guidance from the Department of Treasury and the completion of the Company’s tax return filings. The Company has not completed the accounting for the provisional discrete net tax benefit recorded in the fourth quarter of 2017 and the third quarter of 2018. Tax Reform also provided for a one-time deemed mandatory repatriation of post-1986 undistributed foreign subsidiary earnings and profits (“E&P”) through the year ended December 31, 2017. The Company does not have any net accumulated E&P in its foreign subsidiaries and therefore was not subject to tax for the year ended December 31, 2017. Further, the Company has analyzed the effects of new taxes due on certain foreign income, such as global intangible low-taxed income (“GILTI”), base-erosion anti-abuse tax (“BEAT”), foreign-derived intangible income (“FDII”) and limitations on
29
TRIBUNE MEDIA COMPANY AND SUBSIDIARIES NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)
(Unaudited)
interest expense deductions (if certain conditions apply) that are effective starting in fiscal 2018. The Company has determined that these new provisions are not material or applicable to the Company.
Chicago Cubs Transactions—As further described in Note 8 to the Company’s audited consolidated financial statements for the fiscal year ended December 31, 2017, the Company consummated the closing of the Chicago Cubs Transactions on October 27, 2009. As a result of these transactions, NEH owns 95% and the Company owns 5% of the membership interests in CEV LLC. The fair market value of the contributed assets exceeded the tax basis and did not result in an immediate taxable gain because the transaction was structured to comply with the partnership provisions of the Internal Revenue Code (“IRC”) and related regulations. On June 28, 2016, the IRS issued the Company a Notice of Deficiency (“Notice”) which presents the IRS’s position that the gain should have been included in the Company’s 2009 taxable income. Accordingly, the IRS has proposed a $182 million tax and a $73 million gross valuation misstatement penalty. In addition, after-tax interest on the aforementioned proposed tax and penalty through September 30, 2018 would be approximately $76 million. The Company continues to disagree with the IRS’s position that the transaction generated a taxable gain in 2009, the proposed penalty and the IRS’s calculation of the gain. During the third quarter of 2016, the Company filed a petition in U.S. Tax Court to contest the IRS’s determination. The Company continues to pursue resolution of this disputed tax matter with the IRS. If the IRS prevails in their position, the gain on the Chicago Cubs Transactions would be deemed to be taxable in 2009. The Company estimates that the federal and state income taxes would be approximately $225 million before interest and penalties. Any tax, interest and penalty due will be offset by tax payments made relating to this transaction subsequent to 2009. As of September 30, 2018, the Company has paid or accrued approximately $85 million of federal and state tax payments through its regular tax reporting process. The Company does not maintain any tax reserves relating to the Chicago Cubs Transactions. In accordance with ASC Topic 740, the Company’s unaudited Condensed Consolidated Balance Sheet at September 30, 2018 and December 31, 2017 includes a deferred tax liability of $64 million and $96 million, respectively, related to the future recognition of taxable income related to the Chicago Cubs Transactions. As further described in Note 5, on August 21, 2018, NEH provided the Call Notice to the Company that NEH was exercising its right to purchase the Company’s 5% membership interest in CEV LLC. The Call Notice and any potential future transaction with NEH have no impact on the Company’s dispute with the IRS.
Other—Although management believes its estimates and judgments are reasonable, the resolutions of the Company’s tax issues are unpredictable and could result in tax liabilities that are significantly higher or lower than that which has been provided by the Company. The Company accounts for uncertain tax positions in accordance with ASC Topic 740, which addresses the financial statement recognition and measurement of a tax position taken or expected to be taken in a tax return. The Company’s liability for unrecognized tax benefits totaled $21 million and $23 million at September 30, 2018 and December 31, 2017, respectively. The Company believes it is reasonably possible that the total amount of unrecognized tax benefits could decrease by approximately $2 million within the next twelve months due to the resolution of tax examination issues and statute of limitations expirations.
30
TRIBUNE MEDIA COMPANY AND SUBSIDIARIES NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)
(Unaudited)
NOTE 10: PENSION AND OTHER RETIREMENT PLANS
The components of net periodic benefit credit for Company-sponsored pension plans for the three and nine months ended September 30, 2018 and September 30, 2017 were as follows (in thousands):
Pension Benefits
Three Months Ended
Nine Months Ended
September 30, 2018
September 30, 2017
September 30, 2018
September 30, 2017
Service cost
$
234
$
192
$
701
$
576
Interest cost
17,784
19,549
53,353
58,646
Expected return on plans’ assets
(24,821
)
(25,281
)
(74,462
)
(75,844
)
Recognized actuarial loss
5
—
13
—
Amortization of prior service costs
35
29
105
87
Net periodic benefit credit
$
(6,763
)
$
(5,511
)
$
(20,290
)
$
(16,535
)
Net periodic benefit cost related to other post retirement benefit plans was not material for all periods presented. The service cost component of pension net periodic benefit credit is included in SG&A in the Company’s unaudited Condensed Consolidated Statements of Operations. All other components of net periodic benefit credit are included in Pension and other postretirement periodic benefit credit, net in the Company’s unaudited Condensed Consolidated Statements of Operations.
In the nine months ended September 30, 2018, the Company contributed $56 million to its qualified pension plans. For 2018, the Company expects to contribute $1 million to its other postretirement plans. In the three and nine months ended September 30, 2018 and September 30, 2017, the Company’s contributions to its other postretirement plans were not material.
NOTE 11: CAPITAL STOCK
The Company is authorized to issue up to one billion shares of Class A Common Stock, up to one billion shares of Class B Common Stock and up to 40 million shares of preferred stock, each par value $0.001 per share, in one or more series. The Class A Common Stock and Class B Common Stock generally provide identical economic rights, but holders of Class B Common Stock have limited voting rights, including that such holders have no right to vote in the election of directors. Subject to certain ownership limitations, as further described in Note 15 to the Company’s audited consolidated financial statements for the fiscal year ended December 31, 2017, each share of Class A Common Stock is convertible into one share of Class B Common Stock and each share of Class B Common Stock is convertible into one share of Class A Common Stock, in each case, at the option of the holder at any time. The Company’s Class A Common Stock is traded on the New York Stock Exchange under the symbol “TRCO.” The Company’s Class B Common Stock and Warrants are traded on the OTC Pink market under the symbols “TRBAB” and “TRBNW,” respectively. On the Effective Date, the Company entered into the Warrant Agreement, pursuant to which the Company issued 16,789,972 Warrants to purchase Common Stock (the “Warrants”). Each Warrant entitles the holder to purchase from the Company, at the option of the holder and subject to certain restrictions set forth in the Warrant Agreement and as described in Note 15 to the Company’s audited consolidated financial statements for the fiscal year ended December 31, 2017, one share of Class A Common Stock or one share of Class B Common Stock at an exercise price of $0.001 per share, subject to adjustment and a cashless exercise feature. The Warrants may be exercised at any time on or prior to December 31, 2032.
Pursuant to the Company’s amended and restated certificate of incorporation and the Warrant Agreement, in the event the Company determines that the ownership or proposed ownership of Common Stock or Warrants, as
31
TRIBUNE MEDIA COMPANY AND SUBSIDIARIES NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)
(Unaudited)
applicable, would be inconsistent with or violate any federal communications laws, materially limit or impair any business activities or proposed business activities of the Company under any federal communications laws, or subject the Company to any regulation under any federal communications laws to which the Company would not be subject, but for such ownership or proposed ownership, the Company may impose certain limitations on the rights of holders of Common Stock and Warrants, as further described in Note 15 to the Company’s audited consolidated financial statements for the fiscal year ended December 31, 2017.
There were no conversions of the Company’s Common Stock between Class A Common Stock and Class B Common Stock during the nine months ended September 30, 2018 and September 30, 2017. No Warrants were exercised for Class A Common Stock or Class B Common Stock during the nine months ended September 30, 2018. During the three and nine months ended September 30, 2017, 46,802 and 91,650 Warrants, respectively, were exercised for 46,802 and 91,650 shares, respectively, of Class A Common Stock. No Warrants were exercised for Class B Common Stock during the nine months ended September 30, 2017.
At September 30, 2018, the following amounts were issued: 30,551 Warrants, 101,745,449 shares of Class A Common Stock, of which 14,102,185 were held in treasury, and 5,557 shares of Class B Common Stock. The Company has not issued any shares of preferred stock.
On the Effective Date, the Company entered into a registration rights agreement (the “Registration Rights Agreement”) with certain entities related to Angelo, Gordon & Co., L.P. (the “AG Group”), Oaktree Tribune, L.P., an affiliate of Oaktree Capital Management, L.P. (the “Oaktree Group”) and Isolieren Holding Corp., an affiliate of JPMorgan (the “JPM Group,” and each of the JPM Group, AG Group and Oaktree Group, a “Stockholder Group”) and certain other holders of Registrable Securities who become a party thereto. See Note 15 to the Company’s audited consolidated financial statements for the fiscal year ended December 31, 2017 for additional information relating to the Registration Rights Agreement.
Common Stock Repurchases—On February 24, 2016, the Board authorized a stock repurchase program, under which the Company may repurchase up to $400 million of its outstanding Class A Common Stock. Under the stock repurchase program, the Company may repurchase shares in open-market purchases in accordance with all applicable securities laws and regulations, including Rule 10b-18 of the Securities Exchange Act of 1934, as amended. The Company did not repurchase any shares of Common Stock during 2017 or during the nine months ended September 30, 2018 due to restrictions contained in the now terminated Merger Agreement. As of September 30, 2018, the remaining authorized amount under the current authorization totaled $168 million.
Special Cash Dividend—On January 2, 2017, the Board authorized and declared a special cash dividend of $5.77 per share of Common Stock (the “2017 Special Cash Dividend”), which was paid on February 3, 2017 to holders of record of Common Stock at the close of business on January 13, 2017. In addition, pursuant to the terms of the Warrant Agreement, the Company made a cash payment of $5.77 per Warrant on February 3, 2017 to holders of record of Warrants at the close of business on January 13, 2017. The total aggregate payment on February 3, 2017 totaled $499 million, including the payment to holders of Warrants.
Quarterly Cash Dividends—The Board declared quarterly cash dividends per share on Common Stock to holders of record of Common Stock and Warrants as follows (in thousands, except per share data):
2018
2017
Per Share
Total
Amount
Per Share
Total
Amount
First quarter
$
0.25
$
21,922
$
0.25
$
21,742
Second quarter
0.25
21,925
0.25
21,816
Third quarter
0.25
21,929
0.25
21,834
Total quarterly cash dividends declared and paid
$
0.75
$
65,776
$
0.75
$
65,392
32
TRIBUNE MEDIA COMPANY AND SUBSIDIARIES NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)
(Unaudited)
On November 8, 2018, the Board declared a quarterly cash dividend on Common Stock of $0.25 per share to be paid on December 4, 2018 to holders of record of Common Stock and Warrants as of November 19, 2018. Future dividends will be subject to the discretion of the Board.
The payment of quarterly cash dividends also results in the issuance of Dividend Equivalent Units (“DEUs”) to holders of restricted stock units (“RSUs”) and performance share units (“PSUs”), as described in Note 15 and Note 16 to the Company’s audited consolidated financial statements for the fiscal year ended December 31, 2017.
NOTE 12: STOCK-BASED COMPENSATION
On May 5, 2016, the 2016 Incentive Compensation Plan (the “Incentive Compensation Plan”) and the Stock Compensation Plan for Non-Employee Directors (the “Directors Plan” and, together with the Incentive Compensation Plan, the “2016 Equity Plans”) were approved by the Company’s shareholders for the purpose of granting stock awards to officers, employees and Board members of the Company and its subsidiaries, as further described in Note 16 to the Company’s audited consolidated financial statements for the fiscal year ended December 31, 2017. There are 5,100,000 shares of Class A Common Stock authorized for issuance under the Incentive Compensation Plan and 200,000 shares of Class A Common Stock authorized for issuance under the Directors Plan, of which 2,564,359 shares and 168,049 shares, respectively, were available for grant as of September 30, 2018.
Stock-based compensation for the three months ended September 30, 2018 and September 30, 2017 totaled $6 million and $5 million, respectively. Stock-based compensation for the nine months ended September 30, 2018 and September 30, 2017 totaled $16 million and $27 million, respectively. There was no stock-based compensation expense recorded for the nine months ended September 30, 2018 attributable to discontinued operations. Stock-based compensation expense attributable to discontinued operations for the nine months ended September 30, 2017 totaled $2 million.
A summary of activity and weighted average exercise prices related to the NSOs is reflected in the table below.
Nine Months Ended September 30, 2018
Shares
Weighted Avg. Exercise Price
Outstanding, beginning of period
2,846,926
$
39.00
Granted
201,580
42.85
Exercised
(35,502
)
27.65
Forfeited
(39,527
)
30.03
Cancelled
(495,209
)
54.57
Outstanding, end of period
2,478,268
$
36.51
Vested and exercisable, end of period
1,187,590
$
40.63
33
TRIBUNE MEDIA COMPANY AND SUBSIDIARIES NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)
(Unaudited)
A summary of activity and weighted average fair values related to the RSUs is reflected in the table below.
Nine Months Ended September 30, 2018
Shares
Weighted Avg. Fair Value
Outstanding, beginning of period
1,104,792
$
32.62
Granted
447,539
41.78
Dividend equivalent units granted
23,104
37.74
Vested
(359,657
)
35.08
Dividend equivalent units vested
(17,720
)
36.04
Forfeited
(49,449
)
34.14
Dividend equivalent units forfeited
(1,920
)
37.22
Outstanding and nonvested, end of period
1,146,689
$
35.38
A summary of activity and weighted average fair values related to the restricted stock awards is as follows: