Discontinued Operations

3 Months Ended

Mar. 29, 2015

Discontinued Operations and Disposal Groups [Abstract]

Discontinued Operations

As described in Note 1, on August 4, 2014, the Company completed the Publishing Spin-off. The Company has received a private letter ruling (“PLR”) from the Internal Revenue Service (“IRS”) which provides that the distribution and certain related transactions qualified as tax-free to the Company, Tribune Publishing and the Company’s stockholders and warrantholders for U.S. federal income tax purposes. Although a PLR from the IRS generally is binding on the IRS, the PLR does not rule that the distribution satisfies every requirement for a tax-free distribution, and the parties relied on the opinion of the Company’s special tax counsel that such additional requirements have been satisfied.

In connection with the Publishing Spin-off, the Company received a $275 million cash dividend from Tribune Publishing utilizing borrowings of $350 million under a senior secured credit facility entered into by Tribune Publishing prior to the Publishing Spin-off. The full amount of the $275 million cash dividend was used to permanently repay $275 million of outstanding borrowings under the Company’s Term Loan Facility (as defined and described in Note 6).All of the outstanding borrowings under the Tribune Publishing senior term loan facility were distributed to Tribune Publishing in connection with the Publishing Spin-off.

The Company entered into a separation and distribution agreement, a tax matters agreement, a transition services agreement (the “TSA”), an employee matters agreement and certain other agreements with Tribune Publishing that govern the relationships between Tribune Publishing and the Company following the Publishing Spin-off. See Note 2 to the Company’s audited consolidated financial statements for the fiscal year ended December 28, 2014 for further information on these agreements as well as a summary of the assets and liabilities distributed to Tribune Publishing on August 4, 2014 in connection with the Publishing Spin-off. The Company has no material contingent liabilities relating to the discontinued operations subsequent to the date of the Publishing Spin-off.

Under the TSA, the Company had gross billings to Tribune Publishing of $1 million for the three months ended March 29, 2015 primarily related to a pass-through of costs associated with providing the continuation of certain benefits to Tribune Publishing employees following the Publishing Spin-off. The Company also recognized $1 million of fees primarily related to technology and shared services provided by Tribune Publishing which are included in selling, general and administrative expenses in the Company’s condensed consolidated statement of operations for the three months ended March 29, 2015.

The results of discontinued operations for the three months ended March 30, 2014 include the historical results of Tribune Publishing prior to the Publishing Spin-off.

Summarized unaudited results of the Company’s discontinued operations and the impact of associated Publishing Spin-off adjustments are as follows (in thousands):

	Three Months Ended  March 30, 2014
Operating revenues	$	406,110
Operating profit	24,087
Loss on equity investments, net	(335		)
Interest expense (1)	(2,783		)
Reorganization items, net	(9		)
Income before income taxes	20,960
Income tax expense (2)	8,359
Income from discontinued operations, net of taxes	$	12,601

(1) In connection with the Publishing Spin-off on August 4, 2014, the Company received a $275 million cash dividend from Tribune Publishing utilizing borrowings of $350 million under a senior term loan facility entered into by Tribune Publishing prior to the Publishing Spin-off. The full amount of the $275 million cash dividend was used to permanently repay $275 million of outstanding borrowings under the Company’s Term Loan Facility (as defined and described in Note 6). Interest expense associated with the Company’s outstanding debt was allocated to discontinued operations based on the ratio of the $275 million cash dividend received from Tribune Publishing to the total outstanding indebtedness under the outstanding credit facilities in effect in each respective period prior to the Publishing Spin-off and totaled $3 million for three months ended March 30, 2014.

(2) The effective tax rate on pretax income from discontinued operations was for 39.9% for the three months ended March 30, 2014. This rate differs from the U.S. federal statutory rate of 35% primarily due to state income taxes (net of federal benefit) and the impact of certain nondeductible transaction costs.

The results of discontinued operations for the three months ended March 30, 2014 also include certain costs, including legal and professional fees, incurred by the Company to complete the Publishing Spin-off which totaled $3 million.

In conjunction with the Company’s emergence from bankruptcy, the Company consummated an internal restructuring pursuant to the terms of the Company’s plan of reorganization (see Note 8). These restructuring transactions included, among other things, establishing a number of real estate holding companies. On December 21, 2012, the majority of the land and buildings owned by Tribune Publishing were transferred to these newly established real estate holding companies. In 2013, Tribune Publishing entered into lease agreements with the real estate holding companies to lease back certain land and buildings that were transferred. The initial term of these lease agreements was either five or ten years, with two optional renewal terms. Prior to the Publishing Spin-off, the revenues and expenses related to these lease agreements were treated as intercompany transactions and were not separately reflected in the Company’s consolidated financial statements. The real estate holding companies were not included in the Publishing Spin-off. Subsequent to the Publishing Spin-off, the Company has reclassified the historical intercompany rental revenues related to these leases totaling $10 million for the three months ended March 30, 2014 into other revenues as an increase to income from continuing operations in the Company’s consolidated statements of operations due to the continuing lease arrangements between the Company and Tribune Publishing following the Publishing Spin-off. Similarly, the historical intercompany rental costs incurred by Tribune Publishing for the three months ended March 30, 2014 under these leases have been reclassified as a reduction of income from discontinued operations, net in the Company’s unaudited condensed consolidated statements of operations. There was no impact to the Company’s consolidated net income for any periods prior to the Publishing Spin-off as a result of these reclassifications. Subsequent to the Publishing Spin-off, all rental revenues earned by the Company under these leases with Tribune Publishing are reflected as other revenues in the Company’s consolidated statements of operations.