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SIGNIFICANT ACCOUNTING POLICIES (Policies)

6 Months Ended

Jun. 29, 2014

Business and Basis of Accounting

The McClatchy Company (the “Company,” “we,” “us” or “our”) is a leading news, advertising and information provider, offering a wide array of print and digital products in each of the markets we serve. As one of the largest newspaper companies in the country, based on daily circulation, our continuing operations include 29 daily newspapers, community newspapers, websites, mobile news and advertising, niche publications, direct marketing and direct mail services. Our largest newspapers include the (Fort Worth) Star-Telegram, The Sacramento Bee, The Kansas City Star, the Miami Herald, The Charlotte Observer and The (Raleigh) News & Observer. We are listed on the New York Stock Exchange under the symbol MNI.

We also own a portfolio of premium digital assets, including 15.0% of CareerBuilder LLC, which operates the nation’s largest online jobs website, CareerBuilder.com; 25.6% of Classified Ventures, LLC, which operates the auto website Cars.com; and 33.3% of HomeFinder.com, LLC, which operates the online real estate website HomeFinder.com. See Note 3, Investments in Unconsolidated Companies for further discussion.

Preparation of the financial statements in conformity with accounting principles generally accepted in the United States and pursuant to the rules and regulation of the Securities and Exchange Commission requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting period. Actual results could differ materially from those estimates. The condensed consolidated financial statements include the Company and our subsidiaries. Intercompany items and transactions are eliminated.

In our opinion, the accompanying unaudited condensed consolidated financial statements reflect all adjustments, which are of a normal recurring nature, that are necessary to present fairly our financial position, results of operations, and cash flows for the interim periods presented. The financial statements contained in this report are not necessarily indicative of the results to be expected for the full year. These unaudited condensed consolidated financial statements should be read in conjunction with the audited consolidated financial statements and notes thereto included in our Annual Report on Form 10-K for the year ended December 29, 2013 ( “Form 10-K”). The fiscal periods included herein comprise 13 weeks for the second-quarter periods and 26 weeks for the six month periods. For purposes of presentation only, we updated the term “circulation” to “audience” as it releases to our discussion of revenues. The term “circulation” was used in prior filings with the Securities and Exchange Commission and no other changes were made in conjunction with this language change.

Recent Business Developments

Recent Business Developments

Sale of Anchorage Daily News, Inc.

On May 5, 2014, we completed the sale of the outstanding capital stock of the Anchorage Daily News, Inc. (“Anchorage”) for $34 million in cash. In accordance with the Financial Accounting Standards Board (“FASB”) Accounting Standards Codification (“ASC”) 205-20, “Discontinued Operations”, the financial results of Anchorage have been reported as a discontinued operation in our condensed consolidated financial statements for the periods presented. For a more complete discussion of the transaction, refer to Note 2, Divestiture.

Investments in Unconsolidated Companies Activity

On April 1, 2014, Classified Ventures, LLC consummated the sale of its Apartments.com business for $585 million. Accordingly, during the quarter ending June 29, 2014, we recorded our share of the gain on the sale of approximately $144.2 million, before taxes. On April 1, 2014, we received a cash distribution of approximately $146.9 million from Classified Ventures, LLC, which is equal to our share of the net proceeds from the sale. See Note 3, Investments in Unconsolidated Companies.

On May 7, 2014, we transferred our partnership interest in McClatchy-Tribune Information Services (“MCT”) to TCA News Service LLC (“TCA”) for cash and for future newswire content. Concurrently, we entered into a contributor agreement with MCT pursuant to which we will continue to be a contributor of newswire content to MCT for an agreed upon rate, and we will receive newswire content from MCT or its successor at no cost for approximately 10 years. We recognized a $3.1 million intangible asset with respect to the content we will receive from MCT at no cost under these agreements and a $1.7 million gain on sale of the equity investment. See Note 3, Investments in Unconsolidated Companies.

On August 5, 2014, we, along with the remaining partners in Classified Ventures, LLC, have entered into a definitive agreement to sell all of the ownership interests in Classified Ventures, LLC to Gannett Co., Inc. for a price that values Classified Ventures, LLC at $2.5 billion. Our portion of the cash proceeds is estimated to be approximately $640 million. See Note 8, Subsequent Event for further discussion.

Reclassifications

Reclassifications

Certain prior year amounts have been reclassified to conform to the current year presentation in our condensed consolidated financial statements, which consists of the effects of reclassifications from the presentation of Anchorage as a discontinued operation.

Fair Value of Financial Instruments

Fair Value of Financial Instruments

We account for certain assets and liabilities at fair value. The hierarchy below lists three levels of fair value based on the extent to which inputs used in measuring fair value are observable in the market. We categorize each of our fair value measurements in one of these three levels based on the lowest level input that is significant to the fair value measurement in its entirety. These levels are:

Level 1 – Unadjusted quoted prices available in active markets for identical investments as of the reporting date.

Level 2 – Observable inputs to the valuation methodology are other than Level 1 inputs and are either directly or indirectly observable as of the reporting date and fair value can be determined through the use of models or other valuation methodologies.

Level 3 – Inputs to the valuation methodology are unobservable inputs in situations where there is little or no market activity for the asset or liability, and the reporting entity makes estimates and assumptions related to the pricing of the asset or liability including assumptions regarding risk.

Our policy is to recognize significant transfers between levels at the actual date of the event or circumstance that caused the transfer. The following methods and assumptions were used to estimate the fair value of each class of financial instruments:

Cash and cash equivalents, accounts receivable, and accounts payable. The carrying amount of these items approximates fair value.

Long-term debt. The fair value of our long-term debt is determined using quoted market prices and other inputs that were derived from available market information, including the current market activity of our publicly-traded notes and bank debt, trends in investor demand and market values of comparable publicly-traded debt. These are considered to be Level 2 inputs under the fair value measurements and disclosure guidance, and may not be representative of actual value. At June 29, 2014, the estimated fair value and carrying value of our long-term debt was $1.7 billion and $1.5 billion, respectively.

Certain assets are measured at fair value on a nonrecurring basis; that is, they are subject to fair value adjustments only in certain circumstances (for example, when there is evidence of impairment). Our non-financial assets measured at fair value on a nonrecurring basis in the accompanying condensed consolidated balance sheets as of June 29, 2014, were assets held for sale, goodwill, intangible assets not subject to amortization and equity method investments. All of these were measured using Level 3 inputs. We utilize valuation techniques that seek to maximize the use of observable inputs and minimize the use of unobservable inputs.

Property, plant and equipment

Property, plant and equipment

The decrease in property, plant and equipment during the six months ended June 29, 2014, is primarily related to the sale of Anchorage, which is presented as a discontinued operation. See Note 2, Divestiture, below for further discussion of the transaction. During the six months ended June 29, 2014, we also completed the acquisition of a new production facility, which was valued at $6.5 million. In addition, during the six months ended June 29, 2014, we incurred $13.5 million in accelerated depreciation (i) related to the production equipment associated with outsourcing our printing process at one newspaper and (ii) resulting from moving the printing operations for another newspaper to the new production facility. No similar transactions were recorded during the quarter ended June 29, 2014. During the quarter and six months ended June 30, 2013, we incurred $1.8 million and $3.9 million in accelerated depreciation primarily related to our Miami operations move.

Depreciation expense with respect to property, plant and equipment is summarized below:

	Quarters Ended				Six Months Ended
	June 29,		June 30,		June 29,		June 30,
(in thousands)	2014		2013		2014		2013
Depreciation expense	$	11,567	$	15,442	$	37,549	$	31,427

Assets held for sale

Assets held for sale

The increase in assets held for sale during the six months ended June 29, 2014, related primarily to identifying and beginning to actively market for sale one of our production facilities for a newspaper at which we outsourced our printing to a third-party. These assets consisted primarily of undeveloped land and buildings. In connection with the classification to assets held for sale, the carrying value of the land and office buildings were reduced to their estimated fair value less selling costs, as determined based on the current market conditions and the selling prices. As a result, an impairment charge of $0.1 million and $1.0 million was recorded in the quarter and six months ended June 29, 2014, and is included in other operating expenses on the condensed consolidated statements of operations.

Intangible Assets and Goodwill

Intangible Assets and Goodwill

Intangible assets (primarily advertiser lists, subscriber lists and developed technology), mastheads and goodwill consisted of the following:

	December 29,		Other		Amortization		June 29,
(in thousands)	2013		Adjustments		Expense		2014
Intangible assets subject to amortization	$	835,461	$	(2,207)	$	—	$	833,254
Accumulated amortization	(567,737)		5,307		(28,672)		(591,102)
	267,724		3,100		(28,672)		242,152
Mastheads	198,242		—		—		198,242
Goodwill	1,013,002		(16,887)		—		996,115
Total	$	1,478,968	$	(13,787)	$	(28,672)	$	1,436,509

During the six months ended June 29, 2014, we sold Anchorage, resulting in the removal of the applicable intangible assets subject to amortization of approximately $5.3 million, accumulated amortization of approximately $5.3 million, and goodwill of approximately $16.9 million from our condensed consolidated balance sheet. In addition, in the six months ended June 29, 2014, we acquired an intangible asset of $3.1 million related to the contributor agreement we entered into with MCT in which we will receive MCT newswire content, at no cost, over approximately 10 years. See Recent Business Developments above regarding both of these transactions.

Amortization expense with respect to intangible assets is summarized below:

	Quarters Ended				Six Months Ended
	June 29,		June 30,		June 29,		June 30,
(in thousands)	2014		2013		2014		2013
Amortization expense	$	14,359	$	14,251	$	28,672	$	28,502

The estimated amortization expense for the remainder of fiscal year 2014 and the five succeeding fiscal years is as follows:

	Amortization Expense
Year	(in thousands)
2014 (remainder)	$	24,293
2015	48,383
2016	48,012
2017	48,843
2018	47,268
2019	23,768

Accumulated Other Comprehensive Loss

Accumulated Other Comprehensive Loss

Our accumulated other comprehensive loss (“AOCL”) and reclassifications from AOCL, net of tax, consisted of the following:

(in thousands)	Minimum Pension and Post- Retirement Liability		Other Comprehensive Loss Related to Equity Investments		Total
Beginning balance - December 29, 2013	$	(296,669)	$	(8,232)	$	(304,901)
Other comprehensive income before reclassifications	—		754		754
Amounts reclassified from AOCL	3,763		—		3,763
Other comprehensive income	3,763		754		4,517
Ending balance - June 29, 2014	$	(292,906)	$	(7,478)	$	(300,384)

	Amount Reclassified from AOCL (in thousands)
	Quarters Ended				Six Months Ended
	June 29,		June 30,		June 29,		June 30,		Affected Line in the Condensed
									Consolidated Statements of
AOCL Component	2014		2013		2014		2013		Operations
Minimum pension and post-retirement liability	$	3,135	$	5,664	$	6,271	$	11,289	Compensation
	(1,254)		(2,266)		(2,508)		(4,516)		Income tax provision
	$	1,881	$	3,398	$	3,763	$	6,773	Net of tax

Income Taxes

Income Taxes

We account for income taxes using the liability method. Under this method, deferred tax assets and liabilities are determined based on differences between the financial reporting and tax bases of assets and liabilities and are measured using the enacted tax rates and laws that are expected to be in effect when the differences are expected to reverse.

We recognize accrued interest related to unrecognized tax benefits in interest expense. Accrued penalties are recognized as a component of income tax expense.

We expect to pay approximately $65 million in income taxes, as a result of the gain on sale of Apartments.com by Classified Ventures, LLC and our sale of Anchorage, primarily during the third quarter of 2014.

Earnings Per Share (EPS)

Earnings Per Share (EPS)

Basic EPS excludes dilution from common stock equivalents and reflects income divided by the weighted average number of common shares outstanding for the period. Diluted EPS is based upon the weighted average number of outstanding shares of common stock and dilutive common stock equivalents in the period. Common stock equivalents arise from dilutive stock options, restricted stock units and restricted stock and are computed using the treasury stock method. Anti-dilutive common stock equivalents are excluded from diluted EPS. The weighted average anti-dilutive stock options that could potentially dilute basic EPS in the future, but were not included in the weighted average share calculation, consisted of the following:

	Quarters Ended		Six Months Ended
	June 29,	June 30,	June 29,	June 30,
(shares in thousands)	2014	2013	2014	2013
Anti-dilutive stock options	1,612	5,619	1,659	6,048

Cash Flow Information

Cash Flow Information

Cash paid for interest and income taxes consisted of the following:

	Six Months Ended
	June 29,		June 30,
(in thousands)	2014		2013
Interest paid (net of amount capitalized)	$	61,198	$	65,736
Income taxes paid (net of refunds)	11,381		(2,861)

Other non-cash investing activities from continuing operations, related to the recognition of an intangible asset as of June 29, 2014, were $3.1 million. Other non-cash investing activities from continuing operations as of June 29, 2014, and June 30, 2013, related to purchases of property, plant and equipment (“PP&E”) on credit, were $0.4 million and $1.1 million, respectively.

Recently Issued Accounting Pronouncements

Recently Issued Accounting Pronouncements

In April 2014, the FASB issued Accounting Standards Update (“ASU”) No. 2014-08, “Presentation of Financial Statements (Topic 205) and Property, Plant, and Equipment (Topic 360): Reporting Discontinued Operations and Disclosures of Disposals of Components of an Entity”. ASU 2014-08 raises the threshold for a disposal to qualify as a discontinued operation and requires new disclosures of both discontinued operations and certain other disposals that do not meet the definition of a discontinued operation. It is effective for annual periods beginning on or after December 15, 2014. Early adoption is permitted but only for disposals that have not been reported in financial statements previously issued. We are currently in the process of evaluating the impact of the adoption on our condensed consolidated financial statements.

In May 2014, the FASB issued ASU No. 2014-09, “Revenue from Contracts with Customers”. ASU 2014-09 outlines a new, single comprehensive model from entities to use in accounting for revenue arising from contracts with customers and supersedes most current revenue recognition guidance. This new revenue recognition model provides a five-step analysis in determining when and how revenue is recognized. The new model will require revenue recognition to depict the transfer of promised goods or services to customers in an amount that reflects the consideration a company expects to receive in exchange for those goods or services. It is effective for annual periods beginning on or after December 15, 2016, and early adoption is not permitted. We are currently in the process of evaluating the impact of the adoption on our condensed consolidated financial statements.