UNITED STATES SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For The Quarterly Period Ended March 25, 201831, 2019
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
Commission File Number 1-6227
LEE ENTERPRISES, INCORPORATED
(Exact name of Registrant as specified in its Charter)
|
| |
| |
Delaware | 42-0823980 |
(State or other jurisdiction of incorporation or organization) | (I.R.S. Employer Identification No.) |
201 N. Harrison Street, Suite 600, Davenport, Iowa 52801
(Address of principal executive offices)
(563) 383-2100
(Registrant's telephone number, including area code)
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 [X] No [ ]
Indicate by check mark whether the Registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (232.405 of this chapter) during the preceding 12 months (or for such shorter period that the Registrant was required to submit and post such files). Yes [X] No [ ]
Indicate by check mark whether the Registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, smaller reporting company or an emerging growth company. See definitions of “ large accelerated filer", "accelerated filer", "small reporting company” and "emerging growth company" in Rule 12b-2 of the Exchange Act.
|
| | | | |
| Large accelerated filer | [ ] | Accelerated filer | [X] |
| Non-accelerated filer | [ ] (Do not check if a smaller reporting company) | Smaller reporting company | [ ] |
| | | Emerging growth company | [ ] |
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. [ ]
Indicate by check mark whether the Registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).
Yes [ ] No [X]
As of April 30, 2018 57,039,8052019 57,722,693 shares of Common Stock of the Registrant were outstanding.
|
| | | | |
Table Of Contents | | PAGE |
| | |
FORWARD LOOKING STATEMENTS | | |
| | | |
PART I | FINANCIAL INFORMATION | | |
| | | | |
| Item 1. | Financial Statements (Unaudited) | | |
| | | | |
| | Consolidated Balance Sheets - March 25, 201831, 2019 and September 24, 201730, 2018 | | |
| | | | |
| | Consolidated Statements of IncomeOperations and Comprehensive Income (Loss) - 13 weeks and 26 weeks ended March 25, 201831, 2019 and March 26, 201725, 2018 | | |
| | | | |
| | Consolidated Statements of Stockholder's Equity - 13 weeks and 26 weeks ended March 31, 2019 and March 25, 2018 | | |
| | | | |
| | Consolidated Statements of Cash Flows - 26 weeks ended March 25, 201831, 2019 and March 26, 201725, 2018 | | |
| | | | |
| | Notes to Consolidated Financial Statements | | |
| | | | |
| 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 6. | Exhibits | | |
| | | | |
SIGNATURES | | | |
References to “we”, “our”, “us” and the like throughout this document refer to Lee Enterprises, Incorporated (the "Company"). References to "2018""2019", "2017""2018" and the like refer to the fiscal years ended the last Sunday in September.
FORWARD-LOOKING STATEMENTS
The Private Securities Litigation Reform Act of 1995 provides a “safe harbor” for forward-looking statements. This report contains information that may be deemed forward-looking that is based largely on our current expectations, and is subject to certain risks, trends and uncertainties that could cause actual results to differ materially from those anticipated. Among such risks, trends and other uncertainties, which in some instances are beyond our control, are:
•Our ability to generate cash flows and maintain liquidity sufficient to service our debt;
•Our ability to comply with the financial covenants in our credit facilities;
•Our ability to refinance our debt as it comes due;
•That the warrants issued in our refinancing will not be exercised;
•The impact and duration of adverse conditions in certain aspects of the economy affecting our business;
•Changes in advertising and subscription demand;
•Changes in technology that impact our ability to deliver digital advertising;
•Potential changes in newsprint, other commodities and energy costs;
•Interest rates;
•Labor costs;
•Significant cyber security breaches of failure of our information technology systems;
•Legislative and regulatory rulings, including the new tax legislation;2017 Tax Act;
•Our ability to achieve planned expense reductions;
•Our ability to maintain employee and customer relationships;
•Our ability to manage increased capital costs;
•Our ability to maintain our listing status on the NYSE;
•Competition; and
•Other risks detailed from time to time in our publicly filed documents.
Any statements that are not statements of historical fact (including statements containing the words “may”, “will”, “would”, “could”, “believes”, “expects”, “anticipates”, “intends”, “plans”, “projects”, “considers” and similar expressions) generally should be considered forward-looking statements. Readers are cautioned not to place undue reliance on such forward-looking statements, which are made as of the date of this report. We do not undertake to publicly update or revise our forward-looking statements, except as required by law.
PART I
FINANCIAL INFORMATION
Item 1. Financial Statements
LEE ENTERPRISES, INCORPORATED
CONSOLIDATED BALANCE SHEETS
(Unaudited)
| | (Thousands of Dollars) | March 25 2018 |
| September 24 2017 |
| March 31 2019 |
| September 30 2018 |
|
| | |
ASSETS | | |
| | |
Current assets: | | |
Cash and cash equivalents | 12,301 |
| 10,621 |
| 16,665 |
| 5,380 |
|
Accounts receivable, net | 44,711 |
| 49,469 |
| |
Accounts receivable and contract assets, net | | 43,677 |
| 43,711 |
|
Inventories | 4,044 |
| 3,616 |
| 4,068 |
| 5,684 |
|
Other | 4,104 |
| 4,132 |
| 4,240 |
| 4,567 |
|
Total current assets | 65,160 |
| 67,838 |
| 68,650 |
| 59,342 |
|
Investments: | | |
Associated companies | 27,975 |
| 29,181 |
| 29,056 |
| 29,216 |
|
Other | 10,572 |
| 9,949 |
| 10,827 |
| 10,958 |
|
Total investments | 38,547 |
| 39,130 |
| 39,883 |
| 40,174 |
|
Property and equipment: | | |
Land and improvements | 20,038 |
| 20,424 |
| 17,224 |
| 17,432 |
|
Buildings and improvements | 170,024 |
| 172,138 |
| 149,802 |
| 150,376 |
|
Equipment | 276,020 |
| 278,880 |
| 270,960 |
| 276,332 |
|
Construction in process | 1,941 |
| 752 |
| 2,255 |
| 1,710 |
|
| 468,023 |
| 472,194 |
| 440,241 |
| 445,850 |
|
Less accumulated depreciation | 360,516 |
| 357,998 |
| 352,304 |
| 353,522 |
|
Property and equipment, net | 107,507 |
| 114,196 |
| 87,937 |
| 92,328 |
|
Goodwill | 246,426 |
| 246,426 |
| 250,162 |
| 246,176 |
|
Other intangible assets, net | 127,545 |
| 136,302 |
| 115,005 |
| 119,819 |
|
Medical plan assets, net | 15,825 |
| 15,392 |
| 16,277 |
| 16,157 |
|
Other | 1,613 |
| 1,566 |
| 1,520 |
| 1,415 |
|
| | |
| | |
| | |
| | |
| | |
| | |
| | |
| | |
Total assets | 602,623 |
| 620,850 |
| 579,434 |
| 575,411 |
|
The accompanying Notes are an integral part of the Consolidated Financial Statements.
| | (Thousands of Dollars and Shares, Except Per Share Data) | March 25 2018 |
| September 24 2017 |
| March 31 2019 |
| September 30 2018 |
|
| | |
LIABILITIES AND EQUITY | | |
| | |
Current liabilities: | | |
Current maturities of long-term debt | 30,904 |
| 30,182 |
| 7,318 |
| 7,027 |
|
Accounts payable | 15,688 |
| 17,027 |
| 13,661 |
| 12,747 |
|
Compensation and other accrued liabilities | 18,824 |
| 22,423 |
| 17,198 |
| 19,641 |
|
Accrued interest | 1,607 |
| 1,512 |
| 2,224 |
| 2,031 |
|
Income taxes payable | — |
| 183 |
| |
Unearned revenue | 27,516 |
| 26,881 |
| 25,325 |
| 23,895 |
|
Total current liabilities | 94,539 |
| 98,208 |
| 65,726 |
| 65,341 |
|
Long-term debt, net of current maturities | 465,796 |
| 496,379 |
| 453,608 |
| 460,777 |
|
Pension obligations | 42,444 |
| 43,537 |
| 25,332 |
| 26,745 |
|
Postretirement and postemployment benefit obligations | 2,959 |
| 5,004 |
| 2,608 |
| 2,580 |
|
Deferred income taxes | 33,814 |
| 53,397 |
| 39,216 |
| 39,108 |
|
Income taxes payable | 6,291 |
| 5,497 |
| 7,112 |
| 6,559 |
|
Warrants and other | 10,193 |
| 10,041 |
| 13,751 |
| 10,561 |
|
Total liabilities | 656,036 |
| 712,063 |
| 607,353 |
| 611,671 |
|
Equity (deficit): | | |
Stockholders' equity (deficit): | | |
Serial convertible preferred stock, no par value; authorized 500 shares; none issued | — |
| — |
| — |
| — |
|
Common Stock, $0.01 par value; authorized 120,000 shares; issued and outstanding: | 570 |
| 567 |
| 577 |
| 572 |
|
March 25, 2018: 57,046 shares; | | |
September 24, 2017: 56,712 shares | | |
March 31, 2019: 57,730 shares; | | |
September 30, 2018: 57,141 shares | | |
Class B Common Stock, $2 par value; authorized 30,000 shares; none issued | — |
| — |
| — |
| — |
|
Additional paid-in capital | 252,302 |
| 251,790 |
| 254,185 |
| 253,511 |
|
Accumulated deficit | (291,282 | ) | (328,524 | ) | (272,008 | ) | (279,691 | ) |
Accumulated other comprehensive loss | (16,077 | ) | (16,068 | ) | (11,990 | ) | (11,746 | ) |
Total stockholders' deficit | (54,487 | ) | (92,235 | ) | (29,236 | ) | (37,354 | ) |
Non-controlling interests | 1,074 |
| 1,022 |
| 1,317 |
| 1,094 |
|
Total deficit | (53,413 | ) | (91,213 | ) | (27,919 | ) | (36,260 | ) |
Total liabilities and deficit | 602,623 |
| 620,850 |
| 579,434 |
| 575,411 |
|
The accompanying Notes are an integral part of the Consolidated Financial Statements.
LEE ENTERPRISES, INCORPORATED
CONSOLIDATED STATEMENTS OF INCOMEOPERATIONS AND COMPREHENSIVE INCOME (LOSS)
| | | 13 Weeks Ended | | 26 Weeks Ended | | 13 Weeks Ended | | 26 Weeks Ended | |
(Thousands of Dollars, Except Per Common Share Data) | March 25 2018 |
| March 26 2017 |
| March 25 2018 |
| March 26 2017 |
| March 31 2019 |
| March 25 2018 |
| March 31 2019 |
| March 25 2018 |
|
| | | | |
Operating revenue: | | |
Advertising and marketing services | 71,553 |
| 77,533 |
| 156,213 |
| 170,568 |
| 62,934 |
| 71,553 |
| 138,897 |
| 156,213 |
|
Subscription | 45,972 |
| 45,009 |
| 94,241 |
| 93,896 |
| 45,076 |
| 45,972 |
| 91,345 |
| 94,241 |
|
Other | 10,280 |
| 10,845 |
| 21,136 |
| 22,912 |
| 14,694 |
| 10,280 |
| 28,663 |
| 21,136 |
|
Total operating revenue | 127,805 |
| 133,387 |
| 271,590 |
| 287,376 |
| 122,704 |
| 127,805 |
| 258,905 |
| 271,590 |
|
Operating expenses: |
|
|
|
|
|
|
Compensation | 48,656 |
| 52,414 |
| 99,567 |
| 107,470 |
| 47,785 |
| 49,363 |
| 94,824 |
| 100,980 |
|
Newsprint and ink | 5,640 |
| 6,200 |
| 11,478 |
| 13,093 |
| 5,825 |
| 5,640 |
| 12,164 |
| 11,478 |
|
Other operating expenses | 49,315 |
| 48,756 |
| 99,671 |
| 101,533 |
| 48,016 |
| 49,315 |
| 97,758 |
| 99,671 |
|
Depreciation | 3,685 |
| 4,008 |
| 7,441 |
| 8,079 |
| |
Amortization of intangible assets | 4,331 |
| 6,310 |
| 8,627 |
| 12,619 |
| |
Gain on sales of assets and other, net | (1,300 | ) | (3,783 | ) | (1,297 | ) | (3,716 | ) | |
Workforce adjustments and other | 1,816 |
| 2,405 |
| 2,284 |
| 2,470 |
| |
Depreciation and amortization | | 7,386 |
| 8,016 |
| 14,916 |
| 16,068 |
|
Assets loss (gain) on sales, impairments and other, net | | 83 |
| (1,300 | ) | (17 | ) | (1,297 | ) |
Restructuring costs and other | | 2,759 |
| 1,816 |
| 2,820 |
| 2,284 |
|
Total operating expenses | 112,143 |
| 116,310 |
| 227,771 |
| 241,548 |
| 111,854 |
| 112,850 |
| 222,465 |
| 229,184 |
|
Equity in earnings of associated companies | 1,608 |
| 1,729 |
| 3,991 |
| 4,417 |
| 1,717 |
| 1,608 |
| 3,846 |
| 3,991 |
|
Operating income | 17,270 |
| 18,806 |
| 47,810 |
| 50,245 |
| 12,567 |
| 16,563 |
| 40,286 |
| 46,397 |
|
Non-operating income (expense): | | |
Interest expense | (13,274 | ) | (14,637 | ) | (26,924 | ) | (29,588 | ) | (12,140 | ) | (13,274 | ) | (24,397 | ) | (26,924 | ) |
Debt financing and administrative costs | (1,217 | ) | (1,075 | ) | (2,313 | ) | (2,026 | ) | (962 | ) | (1,217 | ) | (1,858 | ) | (2,313 | ) |
Other, net | 681 |
| 4,427 |
| 524 |
| 7,597 |
| (1,636 | ) | 1,388 |
| (969 | ) | 1,937 |
|
Total non-operating expense, net | (13,810 | ) | (11,285 | ) | (28,713 | ) | (24,017 | ) | (14,738 | ) | (13,103 | ) | (27,224 | ) | (27,300 | ) |
Income before income taxes | 3,460 |
| 7,521 |
| 19,097 |
| 26,228 |
| |
Income (loss) before income taxes | | (2,171 | ) | 3,460 |
| 13,062 |
| 19,097 |
|
Income tax expense (benefit) | 927 |
| 1,144 |
| (18,763 | ) | 7,410 |
| 156 |
| 927 |
| 4,670 |
| (18,763 | ) |
Net income | 2,533 |
| 6,377 |
| 37,860 |
| 18,818 |
| |
Net income (loss) | | (2,327 | ) | 2,533 |
| 8,392 |
| 37,860 |
|
Net income attributable to non-controlling interests | (294 | ) | (249 | ) | (618 | ) | (517 | ) | (351 | ) | (294 | ) | (709 | ) | (618 | ) |
Income attributable to Lee Enterprises, Incorporated | 2,239 |
| 6,128 |
| 37,242 |
| 18,301 |
| |
Other comprehensive income, net of income taxes | (36 | ) | 894 |
| (9 | ) | 949 |
| |
Comprehensive income attributable to Lee Enterprises, Incorporated | 2,203 |
| 7,022 |
| 37,233 |
| 19,250 |
| |
Income (loss) attributable to Lee Enterprises, Incorporated | | (2,678 | ) | 2,239 |
| 7,683 |
| 37,242 |
|
Other comprehensive loss, net of income taxes | | (122 | ) | (36 | ) | (244 | ) | (9 | ) |
Comprehensive income (loss) attributable to Lee Enterprises, Incorporated | | (2,800 | ) | 2,203 |
| 7,439 |
| 37,233 |
|
Earnings per common share: | | |
Basic: | 0.04 |
| 0.11 |
| 0.68 |
| 0.34 |
| (0.05 | ) | 0.04 |
| 0.14 |
| 0.68 |
|
Diluted: | 0.04 |
| 0.11 |
| 0.67 |
| 0.33 |
| (0.05 | ) | 0.04 |
| 0.14 |
| 0.67 |
|
The accompanying Notes are an integral part of the Consolidated Financial Statements.
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY (DEFICIT)
(Unaudited)
|
| | | | | | | | | | |
| |
(Thousands of Dollars) | Accumulated Deficit |
| Common Stock |
| Additional paid-in capital |
| AOCL |
| Total |
|
| | | | | |
October 1, 2018 | (279,691 | ) | 572 |
| 253,511 |
| (11,746 | ) | (37,354 | ) |
Shares issued (redeemed) | — |
| 5 |
| (453 | ) | — |
| (448 | ) |
Income attributable to Lee Enterprises, Incorporated | 10,361 |
| — |
| — |
| — |
| 10,361 |
|
Stock compensation | — |
| — |
| 385 |
| — |
| 385 |
|
Other comprehensive income | — |
| — |
| — |
| (163 | ) | (163 | ) |
Deferred income taxes, net | — |
| — |
| — |
| 41 |
| 41 |
|
December 30, 2018 | (269,330 | ) | 577 |
| 253,443 |
| (11,868) | (27,178) |
Shares issued (redeemed) | — |
| — |
| 317 |
| — |
| 317 |
|
Income attributable to Lee Enterprises, Incorporated | (2,678 | ) | — |
| — |
| — |
| (2,678 | ) |
Stock compensation | — |
| — |
| 425 |
| — |
| 425 |
|
Other comprehensive income | — |
| — |
| — |
| (163 | ) | (163 | ) |
Deferred income taxes, net | — |
| — |
| — |
| 41 |
| 41 |
|
March 31,2019 | (272,008 | ) | 577 |
| 254,185 |
| (11,990 | ) | (29,236 | ) |
|
| | | | | | | | | | |
| |
(Thousands of Dollars) | Accumulated Deficit |
| Common Stock |
| Additional paid-in capital |
| AOCL |
| Total |
|
| | | | | |
September 25, 2017 | (328,524 | ) | 567 |
| 251,790 |
| (16,068 | ) | (92,235 | ) |
Shares issued (redeemed) | — |
| 4 |
| (465 | ) | — |
| (461 | ) |
Income attributable to Lee Enterprises, Incorporated | 35,003 |
| — |
| — |
| — |
| 35,003 |
|
Stock compensation | — |
| — |
| 519 |
| — |
| 519 |
|
Other comprehensive income | — |
| — |
| — |
| 36 |
| 36 |
|
Deferred income taxes, net | — |
| — |
| — |
| (9 | ) | (9 | ) |
December 24, 2017 | (293,521 | ) | 571 |
| 251,844 |
| (16,041 | ) | (57,147 | ) |
Shares issued (redeemed) | — |
| (1 | ) | 19 |
| — |
| 18 |
|
Income attributable to Lee Enterprises, Incorporated | 2,239 |
| — |
| — |
| — |
| 2,239 |
|
Stock compensation | — |
| — |
| 439 |
| — |
| 439 |
|
Other comprehensive income | — |
| — |
| — |
| (71 | ) | (71 | ) |
Deferred income taxes, net | — |
| — |
| — |
| 35 |
| 35 |
|
March 25, 2018 | (291,282 | ) | 570 |
| 252,302 |
| (16,077 | ) | (54,487 | ) |
| | | |
|
|
|
|
| | | |
|
|
|
|
| | | | | |
The accompanying Notes are an integral part of the Consolidated Financial Statements.
LEE ENTERPRISES, INCORPORATED
CONSOLIDATED STATEMENTS OF CASH FLOWS
(Unaudited)
| | | 26 Weeks Ended | | 26 Weeks Ended | |
(Thousands of Dollars) | March 25 2018 |
| March 26 2017 |
| March 31 2019 |
| March 25 2018 |
|
| | |
Cash provided by (required for) operating activities: | | |
Net income | 37,860 |
| 18,818 |
| 8,392 |
| 37,860 |
|
Adjustments to reconcile net income to net cash provided by operating activities: | | |
Depreciation and amortization | 16,068 |
| 20,698 |
| 14,916 |
| 16,068 |
|
Curtailment gains | (2,031 | ) | (3,741 | ) | — |
| (2,031 | ) |
Stock compensation expense | 1,016 |
| 1,083 |
| 810 |
| 1,016 |
|
Distributions greater than earnings of MNI | 672 |
| 650 |
| 303 |
| 672 |
|
Deferred income taxes | (19,557 | ) | 6,181 |
| 190 |
| (19,557 | ) |
Debt financing and administrative costs | 2,313 |
| 2,026 |
| 1,858 |
| 2,313 |
|
Pension contributions | | (650 | ) | — |
|
Other, net | 169 |
| (474 | ) | (505 | ) | 169 |
|
Changes in operating assets and liabilities: | | |
Decrease in receivables | 4,758 |
| 4,245 |
| |
Decrease in receivables and contract assets | | 660 |
| 4,758 |
|
Decrease (increase) in inventories and other | (468 | ) | 433 |
| 2,039 |
| (468 | ) |
Decrease in accounts payable and other accrued liabilities | (4,367 | ) | (7,677 | ) | (3,051 | ) | (4,367 | ) |
Decrease in pension and other postretirement and postemployment benefit obligations | (1,575 | ) | (1,880 | ) | (663 | ) | (1,575 | ) |
Change in income taxes payable | 510 |
| 552 |
| 545 |
| 510 |
|
Other, including warrants | (253 | ) | (7,529 | ) | 2,989 |
| (253 | ) |
Net cash provided by operating activities | 35,115 |
| 33,385 |
| 27,833 |
| 35,115 |
|
Cash provided by (required for) investing activities: | | |
Purchases of property and equipment | (2,452 | ) | (2,079 | ) | (2,459 | ) | (2,452 | ) |
Proceeds from sales of assets | 1,989 |
| 1,078 |
| 770 |
| 1,989 |
|
Acquisitions | | (5,708 | ) | (250 | ) |
Distributions greater (less) than earnings of TNI | 535 |
| (397 | ) | (143 | ) | 535 |
|
Other, net | (995 | ) | (489 | ) | 2 |
| (745 | ) |
Net cash required for investing activities | (923 | ) | (1,887 | ) | (7,538 | ) | (923 | ) |
Cash provided by (required for) financing activities: | | |
Cash required for financing activities: | | |
Payments on long-term debt | (32,064 | ) | (32,249 | ) | (8,404 | ) | (32,064 | ) |
Debt financing costs paid | (5 | ) | — |
| (259 | ) | (5 | ) |
Common stock transactions, net | (443 | ) | (230 | ) | (347 | ) | (443 | ) |
Net cash required for financing activities | (32,512 | ) | (32,479 | ) | (9,010 | ) | (32,512 | ) |
Net increase (decrease) in cash and cash equivalents | 1,680 |
| (981 | ) | |
Net increase in cash and cash equivalents | | 11,285 |
| 1,680 |
|
Cash and cash equivalents: | | |
Beginning of period | 10,621 |
| 16,984 |
| 5,380 |
| 10,621 |
|
End of period | 12,301 |
| 16,003 |
| 16,665 |
| 12,301 |
|
The accompanying Notes are an integral part of the Consolidated Financial Statements.
LEE ENTERPRISES, INCORPORATED
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
| |
1 | BASIS OF PRESENTATION AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES |
Basis of Presentation
The accompanying unaudited, interim, Consolidated Financial Statements included herein have been prepared pursuant to the rules and regulations of the Securities and Exchange Commission for quarterly reports. In the opinion of management, these financial statements contain all adjustments (consisting of only normal recurring items) necessary to present fairly the financial position of Lee Enterprises, Incorporated and subsidiaries (the “Company”) as of March 25, 201831, 2019 and our results of operations and cash flows for the periods presented. The Consolidated Financial Statements should be read in conjunction with the Consolidated Financial Statements and Notes thereto included in the Company's 20172018 Annual Report on Form 10-K.
Because of seasonal and other factors, the results of operations for the 13 weeks and 26 weeks ended March 25, 201831, 2019 are not necessarily indicative of the results to be expected for the full year.
References to “we”, “our”, “us” and the like throughout the Consolidated Financial Statements refer to the Company. References to “2018”“2019”, “2017”“2018” and the like refer to the fiscal years ended the last Sunday in September.
The Consolidated Financial Statements include our accounts and those of our subsidiaries, all of which are wholly-owned, except for our 82.5% interest in INN Partners, L.C. ("TownNews.com"), 50% interest in TNI Partners (“TNI”), and 50% interest in Madison Newspapers, Inc. (“MNI”) and 82.5% interest in TownNews.com..
Investments in TNI and MNI are accounted for using the equity method and are reported at cost, plus our share of undistributed earnings since acquisition less, for TNI, amortization of intangible assets.
On June 26, 2018, we entered into an agreement with BH Media Group, Inc. ("BH Media") to manage Berkshire Hathaway's newspaper and digital operations in 30 2017,markets (the "Management Agreement"). The Company operates BH Media consistent with how it manages its own newspaper and digital operations. Among other decisions, Berkshire Hathaway is responsible for approving operating and capital budgets. The Management Agreement extends for a term of five years and may be extended thereafter for successive one-year terms on such terms as may be mutually agreed to by the Company and Berkshire Hathaway. The Company is paid a fixed annual fee of $5 million, payable quarterly in the Company's fourth fiscal quarter of 2017, we purchased the assets of the Dispatch-Argus serving Molinearrears, and Rock Island, Illinois for $7,150,000 plus an adjustment for working capital. The purchase included one daily newspaper, a weekly publication, two niche publications as well as the related digital platforms. The purchase was funded with cashvariable fee based on the balance sheet. Operating resultsfinancial performance of the Dispatch-Argus were consolidated beginningBH Media. The variable fees are payable annually in the 13 weeks ended September 24, 2017.arrears.
Use of Estimates
The preparation of the Consolidated Financial Statements in conformity with Generally Accepted Accounting Principles ("GAAP") requires us to make estimates and judgments that affect the reported amounts of assets, liabilities, revenue and expenses, and related disclosure of contingent assets and liabilities. We evaluate these estimates and judgments on an ongoing basis.
We base our estimates on historical experience and on various other assumptions that are believed to be reasonable under the circumstances, the results of which form the basis for making judgments about the carrying values of assets and liabilities that are not readily apparent from other sources. Actual results may differ from these estimates under different assumptions or conditions.
New accounting pronouncements
In February 2018,Between 2014 and 2017, the Financial Accounting Standards Board ("FASB")FASB issued aseveral new standard that gives entities the option to reclassify the tax effectsstandards related to items in accumulated other comprehensive income as a result of tax reform to retained earnings.revenue recognition ("the New Revenue Standard"). The new standardNew Revenue Standard supersedes existing revenue recognition requirements and is effective forin fiscal years beginning after December 15, 2017. The New Revenue Standard provides a five-step model in determining when and how revenue is recognized and requires 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. The New Revenue Standard also requires new
disclosures about the nature, amount, timing, and uncertainty of revenue and cash flows arising from contracts with customers.
We adopted the New Revenue Standard on October 1, 2018, using the modified retrospective method applied to those contracts which were not completed as of that date. We completed our assessment and interim periods within those fiscal years.did not identify
any significant changes to our revenue recognition policies. We identified similar performance obligations under the New Revenue Standard as compared with the deliverables and separate units of accounting previously identified under existing guidance. As a result, the timing and amount of our revenue recognition were not impacted and we did not make any adjustments under the modified retrospective adoption method.
We have also assessed the new accounting principles related to the deferral and amortization of contract acquisition costs and due to the short-term nature of such costs, we will utilize the practical expedient to continue to expense these costs as incurred.
See Note 2 for more information on our revenues and the application of the New Revenue Standard.
In August 2016, the FASB issued a new standard to conform the presentation in the statement of cash flows for certain transactions, including cash distributions from equity method investments, among others. There was no change to the Consolidated Statement of Cash Flows as a result of the adoption of this standard for the quarter ended December 30, 2018. Specifically, distributions received from equity method investees continue to be presented on the Consolidated Statement of Cash Flows utilizing the cumulative earnings approach.
In March 2017, the FASB issued a new standard to improve the presentation of pension and postretirement benefit expense. The new standard requires that the service cost component of pension and postretirement benefits expense is recognized as compensation expense, while the remaining components of the expense (benefit) are presented outsideas non-operating income in other, net. This new standard was adopted for the quarter ended December 30, 2018 and has been retrospectively applied to the Statement of operating income. The current presentation includesOperations for all componentscomparative periods presented. We recorded benefits of $711,000 and $1,422,000 in other, net in non-operating income (expense) for the expense (benefit) as Compensation13 and the 26 weeks ended March 31, 2019, respectively. We reclassified benefits of $708,000 and $1,416,000 from compensation to other, net in our Consolidated Statements of Incomenon-operating income (expense) for the 13 weeks and Comprehensive Incomethe 26 weeks ended March 25, 2018, respectively.
In February 2018, FASB issued new guidance to allow a reclassification from accumulated other comprehensive income (“AOCI”) to retained earnings for stranded tax effects resulting from what is commonly referred to as the periods presented. The adoptionTax Cuts and Jobs Act (the "2017 Tax Act"). In the first quarter of the new standard is required in fiscal 2019. If adopted in fiscal year 2018, compensation expense would increase $2,776,000we remeasured our deferred taxes related to unrealized gains on an annual basis.
In August 2016,our investment balances using the FASB issued a new standard to conformreduced tax rate. As required by GAAP, we recognized the presentationnet tax benefit in the statement of cash flows for certain transactions, including cash distribution from equity method investments, among others. The adoption of the new standard is required in fiscal year 2020. The adoption of this standard will reclassify certain cash receipts within the Consolidation Statements of Cash Flows.
In March 2016, the FASB issued a new standard with improvements to the accounting for employee share-based payments. The new standard simplifies several aspects of the accounting for employee share-based payment transactions, including the accountingprovision for income taxes in our consolidated operations statements, and statutorywe reclassified a $3,067,000 net tax withholding requirements, as well as classificationbenefit from AOCI to retained earnings in our consolidated balance sheets. Adoption of the statement ofstandard had no impact to our consolidated operations statements or cash flows. We adopted this new standard in 2018, as required, and the adoption did not have a material impact on the Consolidated Financial Statements.flows statements.
In February 2016, the FASB issued a new standard for the accounting treatment of leases. UnderThe new standard is based on the principle that entities should recognize assets and liabilities arising from leases. The new guidance, lessees will be requiredstandard does not significantly change the lessees’ recognition, measurement and presentation of expenses and cash flows from the previous accounting standard. Leases are classified as finance or operating. The new standard's primary change is the requirement for entities to recognize a lease liability for payments and a right-of-useright of use asset representing the right to use the leased asset during the term on most operating lease arrangements. Lessees are permitted to make an accounting policy election to not recognize the asset and liability for all leases with terms greater than 12 months. Leases will be classified as either financea term of twelve months or operating, with classification affectingless. In addition, the patternnew standard expands the disclosure requirements of expense recognitionlease arrangements. Lessees have the option to use a modified retrospective transition approach, which includes a number of practical expedients. We are currently in the statementprocess of income. We currently anticipate adoptingevaluating the impact of this guidance on our Consolidated Financial Statements.
In July 2018, the FASB issued a new standard which provides for an optional transition method that allows issuers to initially apply the new lease standard into all leases that exist as of the first quarteradoption date, with the cumulative effect of ourinitially applying the new lease standard recognized as an adjustment to retained earnings as of the adoption date. We intend to adopt the optional transition approach in fiscal year 2020. To date we have made progress in our assessment of the new lease standard. We are currently compiling an inventory of leases,
evaluating the provisions of the updated guidance and assessing the impact on our Consolidated Financial Statements.
On October 1, 2018, we adopted the FASB issued a new revenue recognition standardaccounting pronouncement, using the modified retrospective method applied to those contracts which prescribes a single comprehensive modelwere not completed as of the adoption date. Results for entities to use to account for revenue arising from contracts with customers. Thereporting periods beginning after October 1, 2018 are presented under the new guidance will supersede virtually all existing revenue guidancewhile prior period amounts are not adjusted and continue to be reported in accordance with legacy accounting under U.S. GAAP andthe old guidance. We did not record any adjustments to beginning retained earnings at October 1, 2018 as a result of adopting the new guidance.
The following table presents our revenues disaggregated by source:
|
| | | | | | | | |
| 13 Weeks Ended | | 26 Weeks Ended | |
(Thousands of Dollars) | March 31 2019 |
| March 25 2018 |
| March 31 2019 |
| March 25 2018 |
|
| | | | |
Advertising and marketing services revenues | 62,934 |
| 71,553 |
| 138,897 |
| 156,213 |
|
Subscription Revenues | 45,076 |
| 45,972 |
| 91,345 |
| 94,241 |
|
TownNews and other digital services revenues | 4,744 |
| 3,815 |
| 9,421 |
| 7,476 |
|
Other revenues | 9,950 |
| 6,465 |
| 19,242 |
| 13,660 |
|
Total operating revenue | 122,704 |
| 127,805 |
| 258,905 |
| 271,590 |
|
Recognition principles: Revenues are recognized when a performance obligation is effective for our fiscal year 2019. The core principle contemplatedsatisfied by this new standard is that an entity should recognize revenue to depict the transfer of promisedcontrol of the contracted goods or services to our customers, in an amount reflectingthat reflects the consideration we expect to which the entity expects to be entitledreceive in exchange for those goods or services. New disclosures about
Advertising and marketing services revenues:Advertising and marketing services revenues include amounts charged to customers for retail or classified advertising space purchased in our newspapers, retail or classified advertisements placed on our digital platforms, and other print advertising products such as preprint inserts and direct mail. Advertising and marketing services revenues also include amounts charged to customers for digital marketing services which include: Audience extension, Search Engine Optimization ("SEO"), Search Engine Marketing ("SEM"), web and mobile production, social media services and reputation monitoring and management. The following define the nature, amount, timing and uncertainty of revenue recognition for each general revenue category:
Print advertising revenues are recognized at the point in time the associated publication has been delivered.
Digital advertising revenues are recognized at the point in time that impressions are delivered.
Digital marketing services revenues are recognized over the period of time which the service is performed.
Advertising and cash flows arisingmarketing services contract transaction prices consist of fixed consideration. We recognize revenue when control of the related performance obligation transfers to the customer.
Payments for advertising revenues are due upon completion of our performance obligations at previously agreed upon rates. In instances where the timing of revenue recognition differs from the timing of invoicing, such timing differences are not large. As a result, we have determined that our contracts with customersdo not include a significant financing component.
Subscription revenues: Subscription revenues include revenues for content delivered to consumers via print and digital products purchased by readers or distributors. Single copy revenues are also required. In Aprilincluded in subscription revenues. Subscription revenues from single-copy and May 2016,home delivery subscriptions are recognized at the FASB also issued clarifying updates topoint in time the new standard specifically to address certain core principles including the identification ofpublications are delivered. Digital subscription revenues are recognized over time as performance obligations licensing guidance,are met via on-demand availability of online content made available to customers throughout the assessment
contract term. Payments for subscription revenues are typically collected in advance, are for contract periods of one year or less and result in an unearned revenue liability that is reduced when revenue is recognized.
Other revenues: Other revenues are primarily comprised of digital services, Management Agreement revenues, commercial printing and delivery of third party products. Digital services revenues, which are primarily delivered through TownNews, are primarily comprised of contractual agreements to provide webhosting and content management services. As such, digital services revenues are recognized over the contract period. Prices for digital services are agreed upon in advance of the collectability criterion,contract beginning and are typically billed in arrears on a monthly basis, with the presentationexception of taxesimplementation fees which are recognized as deferred revenue and amortized over the contract period. Management Agreement revenues, consisting of fees collected from customers, noncash considerations, contract modifications,our Management Agreement, are recognized based on BH Media's financial progress toward contractual performance goals related to certain financial benchmarks. BH Media provides historical and completed contracts at transition.
Weprojected financial reports, which serve as the basis for our revenue recognition. Fixed Management Agreement revenues are currently evaluatingrecognized over time and paid quarterly and variable fees are paid annually. Variable fees are recognized when the impactfees are deemed earned and it is probable that the new revenue recognition standard will have on our financial statements and related disclosures. As part of the implementation process, we are holding regular meetings with key stakeholders to discuss the impact of the standard across our organization. We are continuing to review our customer contracts, identifying contractual provisions that may resulta significant reversal in a change in the timing or the amount of cumulative revenue recognized will not occur when the uncertainty associated with the variable consideration is subsequently resolved. Commercial printing and assessingdelivery revenues are recognized when the enhanced disclosure requirements ofproduct is delivered to the new guidance. We expect to complete our assessment in the fourth quarter of fiscal year 2018.customer.
Arrangements with multiple performance obligations:We currently anticipate adoptinghave various advertising and subscription agreements which include both print and digital performance obligations. Revenues from sales agreements that contain multiple performance obligations are allocated to each obligation based on the newrelative standalone selling price. We determine standalone selling prices based on observable prices charged to customers.
Contract Assets and Liabilities: The Company’s primary source of unearned revenue recognition standard usingis from subscriptions paid in advance of the modified retrospective approachservice provided. The Company expects to recognize the revenue related to unsatisfied performance obligations over the next twelve months in accordance with the terms of the subscriptions and other contracts with customers. The unearned revenue balances described herein are the Company's only contract liability. Unearned revenues were $25,325,000 as of March 31, 2019 and $23,895,000 as of September 30, 2018. Revenues recognized in the fiscal year beginning October 1, 2018. This approach consists13 weeks and the 26 weeks ended March 31, 2019 that were included in the contract liability as of recognizing the cumulative effect, if any, of initially applying the standard as an adjustment to opening retained earnings.September 30, 2018 were $4,784,000 and $20,511,000, respectively.
NoContract asset balances relate to our Management Agreement revenues and were $3,461,000 as of March 31, 2019 and $0 as of September 30, 2018 and consisted solely of the variable portion of the contract. These contract asset balances are included in accounts receivable and contract assets, net. There are no other new accounting pronouncement issuedcontract assets recorded. Accounts receivable, excluding allowance for doubtful accounts and contract assets, was $45,689,000 and $48,517,000 as of March 31, 2019 and September 30, 2018, respectively. Allowance for doubtful accounts was $5,473,000 and $4,806,000 as of March 31, 2019 and September 30, 2018, respectively.
Practical expedients and exemptions:Sales commissions are expensed as incurred as the associated contractual periods are one year or effective duringless. These costs are recorded within compensation. The vast majority of our contracts have original expected lengths of one year or less and revenue is earned at a rate and amount that corresponds directly with the fiscal year had, or is expectedvalue to have, a material impact on our Consolidated Financial Statements.the customer.
23 INVESTMENTS IN ASSOCIATED COMPANIES
TNI Partners
In Tucson, Arizona, TNI, acting as agent for our subsidiary, Star Publishing Company (“Star Publishing”), and Citizen Publishing Company (“Citizen”), a subsidiary of Gannett Co. Inc., is responsible for printing, delivery, advertising, and subscription activities of the Arizona Daily Star as well as the related digital platforms and specialty publications. TNI collects all receipts and income and pays substantially all operating expenses incident to the partnership's operations and publication of the newspaper and other media.
Income or loss of TNI (before income taxes) is allocated equally to Star Publishing and Citizen.
Summarized results of TNI are as follows:
| | | 13 Weeks Ended | | 26 Weeks Ended | | 13 Weeks Ended | | 26 Weeks Ended | |
(Thousands of Dollars) | March 25 2018 |
| March 26 2017 |
| March 25 2018 |
| March 26 2017 |
| March 31 2019 |
| March 25 2018 |
| March 31 2019 |
| March 25 2018 |
|
| | |
Operating revenue | 11,851 |
| 12,507 |
| 25,081 |
| 25,821 |
| 11,480 |
| 11,851 |
| 23,644 |
| 25,081 |
|
Operating expenses | 9,354 |
| 9,770 |
| 19,338 |
| 19,770 |
| 8,832 |
| 9,354 |
| 17,928 |
| 19,338 |
|
Operating income | 2,497 |
| 2,737 |
| 5,743 |
| 6,051 |
| 2,648 |
| 2,497 |
| 5,716 |
| 5,743 |
|
Company's 50% share of operating income | 1,248 |
| 1,368 |
| 2,872 |
| 3,026 |
| 1,323 |
| 1,248 |
| 2,858 |
| 2,872 |
|
Less amortization of intangible assets | 104 |
| 104 |
| 209 |
| 209 |
| 105 |
| 104 |
| 209 |
| 209 |
|
Equity in earnings of TNI | 1,144 |
| 1,264 |
| 2,663 |
| 2,817 |
| 1,218 |
| 1,144 |
| 2,649 |
| 2,663 |
|
TNI makes weekly distributions of its earnings and for the 13 weeks ended March 31, 2019 and March 25, 2018 and March 26, 2017 we received $1,631,000$1,957,000 and $1,437,000$1,631,000 in distributions, respectively. In the 26 weeks ended March 31, 2019 and March 25, 2018 and March 26, 2017 we received $3,198,000$2,506,000 and $2,420,000$3,198,000 in distributions, respectively.
Star Publishing's 50% share of TNI depreciation and certain general and administrative expenses associated with its share of the operation and administration of TNI are reported as operating expenses in our Consolidated Statements of Income and Comprehensive Income. These amounts totaled $127,000 and $159,000 in the 13 weeks ended March 25, 2018 and March 26, 2017, respectively, and $261,000 and $301,000 in the 26 weeks ended March 25, 2018 and March 26, 2017, respectively.
Annual amortization of intangible assets is estimated to be $418,000 for the 52 weeks ending March 2019 and 2020, respectively, and zero thereafter.
Madison Newspapers, Inc.
We have a 50% ownership interest in MNI, which publishes daily and Sunday newspapers, and other publications in Madison, Wisconsin, and other Wisconsin locations, and operates their related digital platforms. Net income or loss of MNI (after income taxes) is allocated equally to us and The Capital Times Company (“TCT”). MNI conducts its business under the trade name Capital Newspapers.
Summarized results of MNI are as follows:
| | | 13 Weeks Ended | | 26 Weeks Ended | | 13 Weeks Ended | | 26 Weeks Ended | |
(Thousands of Dollars) | March 25 2018 |
| March 26 2017 |
| March 25 2018 |
| March 26 2017 |
| March 31 2019 |
| March 25 2018 |
| March 31 2019 |
| March 25 2018 |
|
| | |
Operating revenue | 13,838 |
| 14,382 |
| 29,903 |
| 31,424 |
| 13,092 |
| 13,838 |
| 27,918 |
| 29,903 |
|
Operating expenses, excluding workforce adjustments, depreciation and amortization | 12,016 |
| 12,548 |
| 24,948 |
| 25,928 |
| |
Workforce adjustments | 146 |
| 129 |
| 210 |
| 155 |
| |
Operating expenses, excluding restructuring costs, depreciation and amortization | | 11,579 |
| 12,016 |
| 24,272 |
| 24,948 |
|
Restructuring costs | | 38 |
| 146 |
| 68 |
| 210 |
|
Depreciation and amortization | 280 |
| 348 |
| 558 |
| 696 |
| 280 |
| 280 |
| 559 |
| 558 |
|
Operating income | 1,396 |
| 1,357 |
| 4,187 |
| 4,645 |
| 1,195 |
| 1,396 |
| 3,019 |
| 4,187 |
|
Net income | 928 |
| 929 |
| 2,656 |
| 3,200 |
| 996 |
| 928 |
| 2,394 |
| 2,656 |
|
Equity in earnings of MNI | 464 |
| 465 |
| 1,328 |
| 1,600 |
| 499 |
| 464 |
| 1,197 |
| 1,328 |
|
MNI makes quarterly distributions of its earnings and in the 13 weeks ended March 25, 201831, 2019 and March 26, 201725, 2018 we received dividends of $1,250,000$750,000 and $1,000,000,$1,250,000, respectively. In the 26 weeks ended March 25, 201831, 2019 and March 26, 201725, 2018 we received dividends of $2,000,000$1,500,000 and $2,250,000,$2,000,000, respectively.
| |
34 | GOODWILL AND OTHER INTANGIBLE ASSETS |
Changes in the carrying amount of goodwill are as follows:
|
| | |
| 26 Weeks Ended |
|
(Thousands of Dollars) | March 2531
20182019 |
|
| |
Goodwill, gross amount | 1,535,155 |
|
Accumulated impairment losses | (1,288,7291,288,979 | ) |
Goodwill, beginning of period | 246,426246,176 |
|
Goodwill acquired in business combinations | 3,986 |
|
Goodwill, end of period | 246,426250,162 |
|
Identified intangible assets consist of the following:
| | (Thousands of Dollars) | March 25 2018 |
| September 24 2017 |
| March 31 2019 |
| September 30 2018 |
|
| | |
Nonamortized intangible assets: | | |
Mastheads | 21,883 |
| 22,035 |
| 21,883 |
| 21,883 |
|
Amortizable intangible assets: | | |
Customer and newspaper subscriber lists | 692,016 |
| 691,994 |
| 696,632 |
| 692,886 |
|
Less accumulated amortization | 586,354 |
| 577,727 |
| 603,510 |
| 594,950 |
|
| 105,662 |
| 114,267 |
| 93,122 |
| 97,936 |
|
Noncompete and consulting agreements | 28,524 |
| 28,524 |
| |
Less accumulated amortization | 28,524 |
| 28,524 |
| |
| — |
| — |
| |
Other intangible assets, net | 127,545 |
| 136,302 |
| 115,005 |
| 119,819 |
|
In January 2019, we purchased the businesses of Kenosha News and Lake Geneva Regional News. In February 2019, TownNews purchased the content management system ("CMS") business from GTxcel. Both transactions were funded with cash on the balance sheet. As part of initial estimates,$3,986,000 was recorded in goodwill and $3,650,000 was recorded in other intangible assets, net. The $3,650,000 of other intangible assets, net relate to acquired customer lists, which will be amortized over a 10 year period. These initial estimates will be reviewed in subsequent quarters as more information becomes available.
Annual amortization of intangible assets for the 52 or 53 weeks endedyears ending March 20192020 to March 20232024 is estimated to be $16,992,000, $15,827,000, $15,564,000, $12,924,000$16,192,000, $15,929,000, $13,289,000, $12,384,000 and $12,019,000,$11,704,000, respectively.
On March 31, 2014, we completed a comprehensive refinancing of our debt (the"2014(the "2014 Refinancing"), which included the following:
$400,000,000 aggregate principal amount of 9.5% Senior Secured Notes (the “Notes”), pursuant to an Indenture dated as of March 31, 2014 (the “Indenture”).
| |
• | $250,000,000 first lien term loan (the "1st Lien Term Loan") and $40,000,000 revolving facility (the "Revolving Facility") under a First Lien Credit Agreement dated as of March 31, 2014 (together the “1st Lien Credit Facility”). |
| |
• | $150,000,000 second lien term loan under a Second Lien Loan Agreement dated as of March 31, 2014 (the “2nd Lien Term Loan”). |
In November 2018, we repaid, in full, the remaining balance of the 1st Lien Term Loan.
In December 2018, we amended our 1st Lien Credit Facility to amend and extend our Revolving Facility (the "Amendment"). The Amendment, among other changes, extends the maturity of the revolving loan commitments of the 1st Lien Lenders for twelve months and reduces the revolver loan commitments from $40,000,000 to $27,200,000 with a further 15% reduction to the revolving loan commitments of the 1st Lien Term Lenders effective as of July 31, 2019.
Debt is summarized as follows:
| | | | Interest Rates (%) | | Interest Rates (%) |
(Thousands of Dollars) | March 25 2018 |
| September 24 2017 |
| March 25 2018 | March 31 2019 |
| September 30 2018 |
| March 31 2019 |
| | | | |
Revolving Facility | — |
| — |
| 5.63 | — |
| — |
| 6.1 |
1st Lien Term Loan | 24,645 |
| 45,145 |
| 7.90 | — |
| 6,303 |
| 8.5 |
Notes | 385,000 |
| 385,000 |
| 9.50 | 385,000 |
| 385,000 |
| 9.5 |
2nd Lien Term Loan | 106,676 |
| 118,240 |
| 12.00 | 91,455 |
| 93,556 |
| 12.0 |
| 516,321 |
| 548,385 |
| | 476,455 |
| 484,859 |
| |
Unamortized debt issue costs | (19,621 | ) | (21,824 | ) | | (15,529 | ) | (17,055 | ) | |
Current maturities of long-term debt | 30,904 |
| 30,182 |
| | 7,318 |
| 7,027 |
| |
Total long-term debt | 465,796 |
| 496,379 |
| | 453,608 |
| 460,777 |
| |
Our weighted average cost of debt, excluding amortization of debt financing costs at March 25, 2018,31, 2019, is 9.9%10.0%.
At March 25, 2018,31, 2019, aggregate minimum required maturities of debt excluding amounts required to be paid from future excess cash flow computations total $18,759,000$7,318,000 for the remainder of 2018, $12,145,000 in 2019, $0 in 2020, $0 in 2021, $385,000,000 in 2022 and $100,417,000 thereafter.$84,137,000 in 2023.
Notes
The Notes are senior secured obligations of the Company and mature on March 15, 2022.
At March 25, 2018,31, 2019, the principal balance of the Notes totaled $385,000,000.
Interest
The Notes require payment of interest semiannually on March 15 and September 15 of each year, at a fixed annual rate of 9.5%.
Redemption
We may redeem some, or all, of the principal amount of the Notes at any time. On or after March 15, 2018, we may redeem the Notestime as follows:
|
| |
Period Beginning | Percentage of Principal Amount |
| |
March 15, 2018 | 104.75 |
March 15, 2019 | 102.38 |
March 15, 2020 | 100.00 |
If we sell certain of our assets or experience specific kinds of changes of control, we must, subject to certain exceptions, offer to purchase the Notes at 101% of the principal amount. Any redemption of the Notes must also satisfy any accrued and unpaid interest thereon.
Covenants and Other Matters
The Indenture and the 1st Lien Credit Facility containscontain restrictive covenants as discussed more fully below. However, certain of these covenants will cease to apply if the Notes are rated investment grade by either Moody’s Investors Service, Inc. or Standard & Poor’s Ratings Group and there is no default or event of default under the Indenture.
1st Lien Credit Facility
The 1st Lien Credit Facility consistsTerm Loan was paid in full in November 2018 and has no outstanding balance as of the $250,000,000March 31, 2019.
The 1st Lien Term Loan that matures in March 31, 2019 andCredit Facility consists of the $40,000,000$27,000,000 Revolving Facility that matures on December 28, 2018.2019. The 1st Lien Credit Facility documents the primary terms of the 1st Lien Term Loan and the Revolving Facility.
The Revolving Facility may
be used for working capital and general corporate purposes (including letters of credit). At March 25, 2018,31, 2019, after consideration of letters of credit, we have approximately $33,835,000$21,435,000 available for future use under the Revolving Facility.
Interest
Interest on the 1st Lien Term Loan, which has a principal balance of $24,645,000 at March 25, 2018, accrues, at our option, at either (A) LIBOR plus 6.25% (with a LIBOR floor of 1.0%) or (B) 5.25% plus the higher of (i) the prime rate at the time, (ii) the federal funds rate plus 0.5%, or (iii) one month LIBOR plus 1.0% (with a floor of 2.0%). Interest is payable quarterly.
The 1st Lien Term Loan was funded with an original issue discount of 2.0%, or $5,000,000, which is being amortized as debt financing and administration costs over the life of the 1st Lien Term Loan.
Interest on the Revolving Facility, which has a principal balance of zerois undrawn at March 25, 2018,31, 2019, accrues, at our option, at either (A) LIBOR plus 5.5%, or (B) 4.5% plus the higher of (i) the prime rate at the time, (ii) the federal funds rate plus 0.5%, or (iii) one month LIBOR plus 1.0%.
Principal Payments
Quarterly principal payments of $6,250,000 are required under the 1st Lien Term Loan, with additional payments required to be made based on 90% of excess cash flow of Lee Legacy ("Lee Legacy Excess Cash Flow"), as defined, or from proceeds of asset sales, which are not reinvested, as defined, from our subsidiaries other than Pulitzer Inc. ("Pulitzer") and its subsidiaries (collectively, the "Pulitzer Subsidiaries"). For excess cash flow calculation purposes, Lee Legacy constitutes the business of the Company, including MNI, but excluding Pulitzer and TNI. We may voluntarily prepay principal amounts outstanding or reduce commitments under the 1st Lien Credit Facility at any time without premium or penalty, upon proper notice and subject to certain limitations as to minimum amounts of prepayments.
Quarterly, the Company is required to prepare a Lee Legacy Excess Cash Flow calculation, which is generally determined as the cash earnings of our subsidiaries other than the Pulitzer Subsidiaries and includes adjustments for changes in working capital, capital spending, pension contributions, debt principal payments and income tax payments or refunds. Any excess cash flow as calculated is required to be paid to the 1st Lien lenders 45 days after the end of the quarter.For the 13 weeks ended March 25, 2018, the required Lee Legacy Excess Cash Flow payment was zero.
2018 payments made, or required to be made for the remainder of the year, under the 1st Lien Term Loan are summarized as follows:
|
| | | | | | | | |
| 13 Weeks Ended | | | 13 Weeks Ending |
|
(Thousands of Dollars) | December 24 2017 |
| March 25 2018 |
| June 24 2018 |
| September 30 2018 |
|
| | | | |
Mandatory | 6,250 |
| 6,250 |
| 6,250 |
| 6,250 |
|
Voluntary | 5,000 |
| 3,000 |
| — |
| — |
|
| 11,250 |
| 9,250 |
| 6,250 |
| 6,250 |
|
Covenants and Other Matters
The 1st Lien Credit Facility requires that we comply with certain affirmative and negative covenants customary for financing of this nature, including a maximum total leverage ratio, which is only applicable to the Revolving Facility.ratio.
The 1st Lien Credit Facility restricts us from paying dividends on our Common Stock. This restriction no longer applies if Lee Legacy leverageLeverage is below 3.25x before and after such payments. Lee Legacy leverageLeverage as defined is 3.93x4.28x at March 25, 2018.31, 2019. Further, the 1st Lien Credit Facility restricts or limits, among other things, subject to certain exceptions, the ability of the Company and its subsidiaries to: (i) incur indebtedness, (ii) enter into mergers, acquisitions and asset sales, (iii) incur or create liens and (iv) enter into transactions with certain affiliates. The 1st Lien Credit Facility contains various representations and warranties and may be terminated
upon occurrence of certain events of default. The 1st Lien Credit Facility also contains cross-default provisions tied to the terms of each of the Indenture and 2nd Lien Term Loan.
2nd Lien Term Loan
The 2nd Lien Term Loan, which has a balance of $106,676,000$91,455,000 at March 25, 2018,31, 2019, bears interest at a fixed annual rate of 12.0%, payable quarterly, and matures in December 2022.
Principal Payments
ThereExcluding excess cash flow payments, there are no scheduled mandatory amortization payments required under the 2nd Lien Term Loan.
Quarterly, we are required to prepare a calculation of excess cash flow of the Pulitzer Subsidiaries ("Pulitzer Excess Cash Flow"). Pulitzer Excess Cash Flow is generally determined as the cash earnings of the Pulitzer Subsidiaries including adjustments for changes in working capital, capital spending, pension contributions, debt principal payments and income tax payments. Pulitzer Excess Cash Flow also includes a deduction for interest costs incurred under the 2nd Lien Term Loan.
Prior to March 31, 2017, we were required to offer the Pulitzer Excess Cash Flow to the 2nd Lien Lenders to prepay the 2nd Lien Term Loan at par, which payment the 2nd Lien Lenders could accept or reject. After March 31, 2017, Pulitzer Excess Cash Flow is used to prepay the 2nd Lien Term Loan, at par. Pulitzer Excess Cash Flow payments arepar, and is required to be paid 45 days after the end of the quarter.
Payments will also be made on the 2nd Lien Term Loan, at par, with proceeds from asset sales by the Pulitzer Subsidiaries that are not reinvested subject to certain other conditions.
During the 13 and 26 weeks ended March 25, 2018,31, 2019, payments on the 2nd Lien Term Loan totaled $6,382,000 $1,377,000and $11,564,000,$2,101,000, respectively. For the 13 weeks ended March 25, 2018,31, 2019, Pulitzer Excess Cash Flow totaled $6,259,000,$7,318,000, which will be used to make a payment on the 2nd Lien Term Loan in May 2018,2019, at par.
VoluntaryBeginning March 31, 2019, voluntary payments under the 2nd Lien Term Loan are no longer subject to call premiums as follows:and are payable at par. The Indenture includes certain restrictions on voluntary payments on the 2
|
| |
Period Beginning | Percentage of Principal Amount |
| |
March 31, 2017 | 106 |
March 31, 2018 | 103 |
March 31, 2019 | 100 |
nd Lien Term Loan.
Covenants and Other Matters
The 2nd Lien Term Loan requires that we comply with certain affirmative and negative covenants customary for financing of this nature, including the negative covenants under the 1st Lien Credit Facility discussed above. The 2nd Lien Term Loan contains various representations and warranties and may be terminated upon
occurrence of certain events of default. The 2nd Lien Term Loan also contains cross-default provisions tied to the terms of the Indenture and 1st Lien Credit Facility.
In connection with the 2nd Lien Term Loan, we entered into a Warrant Agreement dated as of March 31, 2014 (the “Warrant Agreement”). Under the Warrant Agreement, certain affiliates or designees of the 2nd Lien Lenders received on March 31, 2014 their pro rata share of warrants to purchase, in cash, an initial aggregate of 6,000,000 shares of Common Stock, subject to adjustment pursuant to anti-dilution provisions (the “Warrants”). The Warrants represent, when fully exercised, approximately 10.1%10.4% of shares of Common Stock outstanding at March 30, 2014 on a fully diluted basis. The exercise price of the Warrants is $4.19 per share.
The Warrant Agreement contains provisions requiring the Warrants to be measured at fair value and included in other liabilities in our Consolidated Balance Sheets. We re-measure the fair value of the liability each reporting period, with changes reported in other, net non-operating income (expense). The initial fair value of the Warrants was $16,930,000. See Note 9.10.
In connection with the issuance of the Warrants, we entered into a Registration Rights Agreement dated as of March 31, 2014 (the “Registration Rights Agreement”). The Registration Rights Agreement requires, among other matters, that we use our commercially reasonable efforts to maintain the effectiveness for certain specified periods of a shelf registration statement related to the shares of Common Stock to be issued upon exercise of the Warrants.
Security
The Notes and the 1st Lien Credit Facility are fully and unconditionally guaranteed on a joint and several first-priority basis by each of the Company's material domestic subsidiaries, excluding MNI, the Pulitzer Subsidiaries and TNI (the "Lee Legacy Assignors"), pursuant to a first lien guarantee and collateral agreement dated as of March 31, 2014 (the "1st Lien Guarantee and Collateral Agreement").
The Notes, the 1st Lien Credit Facility and the subsidiary guarantees are secured, subject to certain exceptions, priorities and limitations, by perfected security interests in all property and assets, including certain real estate, of the Lee Legacy Assignors, other than the capital stock of MNI and any property and assets of MNI (the “Lee Legacy Collateral”), on a first-priority basis, equally and ratably with all of the Lee Legacy Assignors' existing and future obligations. The Lee Legacy Collateral includes, among other things, equipment, inventory, accounts receivables, depository accounts, intellectual property and certain of their other tangible and intangible assets.
Also, the Notes and the 1st Lien Credit Facility are secured, subject to certain exceptions, priorities and limitations in the various agreements, by first-priority security interests in the capital stock of, and other equity interests owned by, the Lee Legacy Assignors (excluding the capital stock of MNI). The Notes and 1st Lien Credit Facility are subject to a Pari Passu Intercreditor Agreement dated March 31, 2014.
The Notes, the 1st Lien Credit Facility and the subsidiary guarantees are also secured, subject to permitted liens, by a second-priority security interest in the property and assets of the Pulitzer Subsidiaries that become subsidiary guarantors (the "Pulitzer Assignors") other than assets of or used in the operations or business of TNI (collectively, the “Pulitzer Collateral”). In June 2015 the Pulitzer Assignors became a party to the 1st Lien Guarantee and Collateral Agreement on a second lien basis.
Also, the Notes and the 1st Lien Credit Facility are secured, subject to certain exceptions, priorities, and limitations in the various agreements, by second-priority security interests in the capital stock of, and other equity interests in, the Pulitzer Assignors and Star Publishing’s interest in TNI.
The 2nd Lien Term Loan is fully and unconditionally guaranteed on a joint and several first-priority basis by the Pulitzer Assignors, pursuant to a Second Lien Guarantee and Collateral Agreement dated as of March 31, 2014 (the “2nd Lien Guarantee and Collateral Agreement”) among the Pulitzer Assignors and the 2nd Lien collateral agent.
Under the 2nd Lien Guarantee and Collateral Agreement, the Pulitzer Assignors have granted (i) first-priority security interests, subject to certain priorities and limitations in the various agreements, in the Pulitzer Collateral and (ii) have granted first-priority lien mortgages or deeds of trust covering certain real estate, as collateral for the payment and performance of their obligations under the 2nd Lien Term Loan.
Also, under the 2nd Lien Guarantee and Collateral Agreement, the Lee Legacy Assignors have granted (i) second-priority security interests, subject to certain priorities and limitations in the various agreements, in the Lee Legacy Collateral, and (ii) have granted second-priority lien mortgages or deeds of trust covering certain real estate, as collateral for the payment and performance of their obligations under the 2nd Lien Term Loan. Assets of, or used in the operations or business of, MNI are excluded.
The rights of each of the collateral agents with respect to the Lee Legacy Collateral and the Pulitzer Collateral are subject to customary intercreditor and intercompany agreements.
Other
In connection with the 2014 Refinancing, we capitalized $37,819,000 of debt financing costs. Amortization of debt financing costs totaled $2,203,000$1,525,000 in the 26 weeks ended March 25, 2018.31, 2019. Amortization of such costs is estimated to total $2,029,0001,933,000 in 2018, $3,925,000 infor the remainder of 2019, $4,005,0003,989,000 in 2020, $4,175,0004,154,000 in 2021, and
$4,359,0004,332,000 in 2022.2022, and $1,121,000 in 2023. At March 25, 2018,31, 2019, we have $19,621,000$15,529,000 of unamortized debt financing costs recorded as a reduction of Long-term debt in our Consolidated Balance Sheets.
Liquidity
At March 25, 201831, 2019, after consideration of letters of credit, we have approximately $33,835,00021,435,000 available for future use under our Revolving Facility, which expires on December 28, 2018.2019. Including cash, our liquidity at March 25, 201831, 2019 totals $46,136,000.$38,100,000. This liquidity amount excludes any future cash flows. We expect all interest and principal payments due in the next twelve months will be satisfied by existing cash and our cash flows, which will allow us to maintain an adequate level of liquidity. The Warrants, if and when exercised, would provide additional liquidity in an amount up to $25,140,000 subject to a reduction for any amounts the Company may elect to use to repay our 1st Lien Term Loan and/or the Notes.
FinalExcluding our Revolving Facility, which is undrawn as of March 2019, final maturities of our debt range from December 2018March 2022 through December 2022.
There are numerous potential consequences under the Notes, 1st Lien Credit Facility and 2nd Lien Term Loan, if an event of default, as defined, occurs and is not remedied. Many of those consequences are beyond our control. The occurrence of one or more events of default would give rise to the right of the applicable lender(s) to exercise their remedies under the Notes, 1st Lien Credit Facility and 2nd Lien Term Loan, respectively, including, without limitation, the right to accelerate all outstanding debt and take actions authorized in such circumstances under applicable collateral security documents.
Our ability to operate as a going concern is dependent on our ability to remain in compliance with debt covenants and to repay, refinance or amend our debt agreements as they become due. The Notes, 1st Lien Credit Facility and 2nd Lien Term Loan have only limited affirmative covenants with which we are required to maintain compliance. We are in compliance with our debt covenants at March 25, 201831, 2019.
| |
56 | PENSION, POSTRETIREMENT AND POSTEMPLOYMENT DEFINED BENEFIT PLANS |
We have several noncontributory defined benefit pension plans that together cover selected employees. Benefits under the plans were generally based on salary and years of service. Effective in 2012, substantially all benefits are frozen and only a small amount of additional benefits are being accrued. Our liability and related expense for benefits under the plans are recorded over the service period of employees based upon annual actuarial calculations. Plan funding strategies are influenced by government regulations. Plan assets consist primarily of domestic and foreign corporate equity securities, government and corporate bonds, hedge fund investments and cash.
In addition, we provide retiree medical and life insurance benefits under postretirement plans at several of our operating locations. The level and adjustment of participant contributions vary depending on the specific plan. In addition, St. Louis Post-Dispatch LLC, provides postemployment disability benefits to certain employee groups prior to retirement. Our liability and related expense for benefits under the postretirement plans are recorded over the service period of active employees based upon annual actuarial calculations. We accrue postemployment disability benefits when it becomes probable that such benefits will be paid and when sufficient information exists to make reasonable estimates of the amounts to be paid.
We use a fiscal year end measurement date for all of our pension and postretirement medical plan obligations.
The net periodic postretirement cost (benefit) components for our postretirement plans are as follows:
| | PENSION PLANS | 13 Weeks Ended | | 26 Weeks Ended | | 13 Weeks Ended | | 26 Weeks Ended | |
(Thousands of Dollars) | March 25 2018 |
| March 26 2017 |
| March 25 2018 |
| March 26 2017 |
| March 31 2019 |
| March 25 2018 |
| March 31 2019 |
| March 25 2018 |
|
| | |
Service cost for benefits earned during the period | 12 |
| 21 |
| 24 |
| 42 |
| 9 |
| 12 |
| 18 |
| 24 |
|
Interest cost on projected benefit obligation | 1,438 |
| 1,349 |
| 2,876 |
| 2,698 |
| 1,641 |
| 1,438 |
| 3,282 |
| 2,876 |
|
Expected return on plan assets | (1,983 | ) | (1,969 | ) | (3,966 | ) | (3,938 | ) | (2,018 | ) | (1,983 | ) | (4,036 | ) | (3,966 | ) |
Amortization of net loss | 506 |
| 736 |
| 1,012 |
| 1,472 |
| 284 |
| 506 |
| 568 |
| 1,012 |
|
Amortization of prior service benefit | (34 | ) | (34 | ) | (68 | ) | (68 | ) | (25 | ) | (34 | ) | (50 | ) | (68 | ) |
Pension expense (benefit) | (61 | ) | 103 |
| (122 | ) | 206 |
| |
Pension benefit | | (109 | ) | (61 | ) | (218 | ) | (122 | ) |
| | | | |
POSTRETIREMENT MEDICAL PLANS | 13 Weeks Ended | | 26 Weeks Ended | | 13 Weeks Ended | | 26 Weeks Ended | |
(Thousands of Dollars) | March 25 2018 |
| March 26 2017 |
| March 25 2018 |
| March 26 2017 |
| March 31 2019 |
| March 25 2018 |
| March 31 2019 |
| March 25 2018 |
|
| | |
Service cost for benefits earned during the period | — |
| 9 |
| — |
| 12 |
| |
Interest cost on projected benefit obligation | 90 |
| 110 |
| 181 |
| 232 |
| 103 |
| 90 |
| 206 |
| 181 |
|
Expected return on plan assets | (270 | ) | (264 | ) | (540 | ) | (528 | ) | (270 | ) | (270 | ) | (540 | ) | (540 | ) |
Amortization of net gain | (246 | ) | (243 | ) | (492 | ) | (480 | ) | (244 | ) | (246 | ) | (488 | ) | (492 | ) |
Amortization of prior service benefit | (196 | ) | (365 | ) | (392 | ) | (730 | ) | (181 | ) | (196 | ) | (362 | ) | (392 | ) |
Curtailment gains | (2,031 | ) | (3,741 | ) | (2,031 | ) | (3,741 | ) | — |
| (2,031 | ) | — |
| (2,031 | ) |
Postretirement medical benefit | (2,653 | ) | (4,494 | ) | (3,274 | ) | (5,235 | ) | (592 | ) | (2,653 | ) | (1,184 | ) | (3,274 | ) |
AmortizationAt the beginning of net gains (losses)fiscal year 2019, we adopted the new accounting standard to improve the presentation of pension and priorpostretirement benefit expenses. As a result, the service cost for benefits are recordedearned during the period continue to be included as compensation in the Consolidated StatementsStatement of Income and Comprehensive Income.income, while the other components of the pension benefit are recorded as non-operating income in other, net. Prior period amounts have been reclassified to conform to current period presentation.
In the 26 weeks ended March 31, 2019 we contributed $650,000 to our pension plans. Based on our forecast at March 25, 2018,31, 2019, we do not expect to make contributions of $4,940,000 to our pension trust during the remainder of fiscal 2018.2019.
In March 2017, we notified certain participants in one of our post employment medical plans of changes to their plan and in December 2017 our fiscal second quarter, the plan was terminated. These changes resulted in a non-cash curtailment gain of $2,031,000 in the 13 weekssecond quarter ended March 25, 2018 and $3,741,000 in the 13 weeks ended March 26, 2017.2018. Curtailment gains are recorded in gainloss (gain) on sales of assets and other, net in the Consolidated Statements of IncomeOperations and Comprehensive income.
In the second quarter of 2019, we incurred an estimated partial liability for the CWA/ITU multi-employer plan, in the amount of $500,000, which is included in restructuring costs and other.
On December 22, 2017, comprehensive tax legislation commonly referred to as the Tax Cuts and Jobs Act (the “2017 Tax Act”) was signed into law. Among other provisions, the 2017 Tax Act reduces the federal statutory corporateWe recorded income tax rate from 35%expense of $156,000 related to 21%. The reductionloss before taxes of $2,171,000 for the corporate13 weeks ended March 31, 2019, and income tax rate caused usexpenses of $4,670,000 related to re-measure our deferredincome before taxes of $13,062,000 for the 26 weeks ended March 31, 2019. Including the transactional impact of revaluing tax assets and liabilities, we recorded income tax expense of $927,000 related to income of $3,460,000 for the lower federal base rate13 weeks ended March 25, 2018 and, including the transactional impact of 21%. The discrete adjustment from revaluing our deferred tax assets and liabilities, resulted in a provisional net decrease inwe recorded income tax expensebenefit of $24,872,000$18,763,000 related to income of $19,097,000 for the 26 weeks ended March 25, 2018.
The changes resulting from the 2017 Tax Act are complex and the final transitional impact of the 2017 Tax Act may differ from the above estimate, possibly materially, due to, among other things, changes in interpretations of the 2017 Tax Act, any legislative action to address questions that arise because of the 2017 Tax Act, changes in accounting standards for income taxes or related interpretations in response to the 2017 Tax Act and updates or changes to estimates the Company has used to calculate the transition impacts, including impacts from changes to current year earnings estimates and changes in the timing of reversals of deferredeffective income tax assets and liabilities. The Securities Exchange Commission has issued rules that allow for a measurement period of up to one year after the enactment date of the 2017 Tax Act to finalize the recording of the related transitional impact. We did not make any adjustments to the provisional amount recorded and currently anticipate finalizing the transitional impact of the 2017 Tax Act in the fourth quarter of 2018.
Including the transitional impact of revaluing deferred tax assets and liabilities, we recorded an income tax expense of $927,000 and a tax benefit of $18,763,000 related to income before taxes of $3,460,000 and $19,097,000rate for the 13 and 26 weeks ended March 25, 2018,31, 2019 was negative 7.2% and a 35.8%, respectively. We recorded income tax expense of $1,144,000 and $7,410,000 related to income before taxes of $7,521,000 and $26,228,000 for the 13 and 26 weeks ended March 26, 2017, respectively.
The effective income tax rate for the 13 and 26 weeks ended March 25, 2018 was 26.8% expense and a negative 98.3%, respectively. .
The effective income tax rate for the 13 and 26 weeks ended March 26, 2017 was 15.2% and 28.3%, respectively. The majority of theprimary differences between the effective taxthese rates and the U.S. federal statutory tax rates wererate of 21% are due to the transitionaleffect of state taxes, non-deductible expenses, adjustments fromto reserves for uncertain tax positions, including any related interest, and mark-to-market adjustments to value the 2017 Tax Act as well as the nontaxable income and nondeductible expenses related to the fair value adjustment of the warrants.Warrants.
We file a consolidated federal tax return, as well as combined and separate tax returns in approximately 27 state and local jurisdictions. We do not currently have variousany federal or state income tax examinations ongoing which are at different stages of completion, but generally ourin progress. Our income tax returns have generally been audited or closed to audit through 2009.2012. See Note 1011 for a discussion of our tax audits.
At September 25, 2017,2018, we had approximately $57,856,000$63,048,000 of state net operating loss tax benefits and abenefits. The Company consumed its federal net operating loss carryforward of approximately $6,247,000.losses in the year ended September 30, 2018.
| |
78 | EARNINGS PER COMMON SHARE |
The following table sets forth the computation of basic and diluted earnings per common share:
| | | 13 Weeks Ended | | 26 Weeks Ended | | 13 Weeks Ended | | 26 Weeks Ended | |
(Thousands of Dollars and Shares, Except Per Share Data) | March 25 2018 |
| March 26 2017 |
| March 25 2018 |
| March 26 2017 |
| March 31 2019 |
| March 25 2018 |
| March 31 2019 |
| March 25 2018 |
|
| | |
Income attributable to Lee Enterprises, Incorporated: | 2,239 |
| 6,128 |
| 37,242 |
| 18,301 |
| |
(Loss) Income attributable to Lee Enterprises, Incorporated: | | (2,678 | ) | 2,239 |
| 7,683 |
| 37,242 |
|
Weighted average common shares | 57,070 |
| 56,607 |
| 56,924 |
| 56,268 |
| 57,703 |
| 57,070 |
| 57,501 |
| 56,924 |
|
Less weighted average restricted Common Stock | (2,378 | ) | (2,552 | ) | (2,416 | ) | (2,479 | ) | (2,095 | ) | (2,378 | ) | (2,097 | ) | (2,416 | ) |
Basic average common shares | 54,692 |
| 54,055 |
| 54,508 |
| 53,789 |
| 55,608 |
| 54,692 |
| 55,404 |
| 54,508 |
|
Dilutive stock options and restricted Common Stock | 1,169 |
| 1,415 |
| 1,309 |
| 1,631 |
| — |
| 1,169 |
| 1,287 |
| 1,309 |
|
Diluted average common shares | 55,861 |
| 55,470 |
| 55,817 |
| 55,420 |
| 55,608 |
| 55,861 |
| 56,691 |
| 55,817 |
|
Earnings per common share: | | |
Basic | 0.04 |
| 0.11 |
| 0.68 |
| 0.34 |
| (0.05 | ) | 0.04 |
| 0.14 |
| 0.68 |
|
Diluted | 0.04 |
| 0.11 |
| 0.67 |
| 0.33 |
| (0.05 | ) | 0.04 |
| 0.14 |
| 0.67 |
|
For the 13 and 26 weeks ended March 31, 2019,6,000,000and6,000,000, weighted average shares, respectively, were not considered in the computation of diluted earnings per common share because the exercise prices of the related stock options and Warrants were in excess of the fair market value of our Common Stock. For the 13 and 26 weeks ended March 25, 2018, 6,500,900 and 6,706,603, weighted average shares, respectively, were not considered in the computation of diluted earnings per common share because the exercise prices of the related stock options and Warrants were in excess of the fair market value of our Common Stock. For the 13 and 26 weeks ended March 26, 2017,6,823,500, weighted average shares were not considered in the computation of diluted earnings per common share because the exercise prices of the related stock options and Warrants were in excess of the fair market value of our Common Stock.
A summary of stock option activity during the 26 weeks ended March 25, 201831, 2019 follows:
| | (Thousands of Dollars and Shares, Except Per Share Data) | Shares |
| Weighted Average Exercise Price |
| Weighted Average Remaining Contractual Term (Years) | Aggregate Intrinsic Value |
| Shares |
| Weighted Average Exercise Price |
| Weighted Average Remaining Contractual Term (Years) | Aggregate Intrinsic Value |
|
| | | | | | |
Outstanding, September 24, 2017 | 1,271 |
| 1.86 |
| | | |
Outstanding, September 30, 2018 | | 1,100 |
| 1.88 |
| | |
Exercised | (18 | ) | 1.39 |
| | | (48 | ) | 2.36 |
| | |
Cancelled | (12 | ) | 1.99 |
| | | (32 | ) | 2.04 |
| | |
Outstanding, March 25, 2018 | 1,241 |
| 1.86 |
| 3.1 | 448 |
| |
Outstanding, March 31, 2019 | | 1,020 |
| 1.86 |
| 2.1 | 1,471 |
|
| | | | | | |
Exercisable, March 25, 2018 | 1,241 |
| 1.86 |
| 3.1 | 448 |
| |
Exercisable, March 31, 2019 | | 1,020 |
| 1.86 |
| 2.1 | 1,471 |
|
Restricted Common Stock
The table below summarizes restricted Common Stock activity during the 26 weeks ended March 25, 2018:31, 2019:
| | (Thousands of Shares, Except Per Share Data) | Shares |
| Weighted Average Grant Date Fair Value |
| Shares |
| Weighted Average Grant Date Fair Value |
|
| | |
Outstanding, September 24, 2017 | 2,478 |
| 2.69 |
| |
Outstanding, September 30, 2018 | | 2,059 |
| 2.31 |
|
Vested | (644 | ) | 3.62 |
| (728 | ) | 1.53 |
|
Granted | 572 |
| 2.32 |
| 788 |
| 2.18 |
|
Cancelled | (57 | ) | 2.96 |
| (24 | ) | 2.01 |
|
Outstanding, March 25, 2018 | 2,349 |
| 2.34 |
| |
Outstanding, March 31, 2019 | | 2,095 |
| 2.53 |
|
Total unrecognized compensation expense for unvested restricted Common Stock at March 25, 201831, 2019 is $3,003,892,$2,602,633, which will be recognized over a weighted average period of 1.51.7 years.
| |
910 | FAIR VALUE MEASUREMENTS |
We utilize FASB ASC Topic 820, Fair Value Measurements and Disclosures, to measure and report fair value. FASB ASC Topic 820 defines fair value, establishes a framework for measuring fair value and expands disclosures about fair value measurements. FASB ASC Topic 820 establishes a three-level hierarchy of fair value measurements based on whether the inputs to those measurements are observable or unobservable, which consists of the following levels:
Level 1 - Quoted prices for identical instruments in active markets.
Level 2 - Quoted prices for similar instruments in active markets; quoted prices for identical or similar instruments in markets that are not active; and model-derived valuations in which all significant inputs are observable in active markets.
Level 3 - Valuations derived from valuation techniques in which one or more significant inputs are unobservable.
The following methods and assumptions are used to estimate the fair value of each class of financial instruments for which it is practicable to estimate value.
The carrying amounts of cash equivalents, accounts receivable and accounts payable approximate fair value because of the short maturity of those instruments. Investments totaling $6,318,000,$6,068,000, including our 17% ownership of the nonvoting common stock of TCT and a private equity investment, are carried at cost. As of September 30, 2017,March 31, 2019, based on the most recent data available, the approximate fair value of the private equity
investment is $9,183,000, $10,203,256which is a level 3 fair value measurement. Fair value of the remaining investments approximates book value.
The fair value of floating rate debt, which consists of our 1st Lien Term Loan, is $24,645,000, based on an average of private market price quotations. Our fixed rate debt consists of $385,000,000 principal amount of the Notes and $106,676,000$91,455,000 principal amount under the 2nd Lien Term Loan. At March 25, 2018,31, 2019, based on private market price quotations, the fair values were $401,603,000$392,311,150 and $109,876,000$91,455,213 for the Notes and 2nd Lien Term Loan, respectively. These represent level 2 fair value measurements.
As discussed more fully in Note 4,5, we recorded a liability for the Warrants issued in connection with the Warrant Agreement. The liability was initially measured at its fair value and we remeasure the liability to fair value each reporting period, with changes reported in other non-operating income (expense). The initial fair value of the Warrants was $16,930,000. The fair value of Warrants at September 2017,March 2019 and December 2017 and March 2018 is $1,580,000, $2,011,000 and $1,456,000,are $4,479,000, 1,726,000, respectively. Fair value is determined using the Black-Scholes option pricing model. These represent level 2 fair value measurements.
| |
1011 | COMMITMENTS AND CONTINGENT LIABILITIES |
Income Taxes
Commitments exclude unrecognized tax benefits to be recorded in accordance with FASB ASC Topic 740, Income Taxes. We are unable to reasonably estimate the ultimate amount or timing of cash settlements with the respective taxing authorities for such matters. See Note 6.7.
We file income tax returns with the Internal Revenue Service ("IRS") and various state tax jurisdictions. From time to time, we are subject to routine audits by those agencies and those audits may result in proposed adjustments. We have considered the alternative interpretations that may be assumed by the various taxing agencies, believe our positions taken regarding our filings are valid, and that adequate tax liabilities have been recorded to resolve such matters. However, the actual outcome cannot be determined with certainty and the difference could be material, either positively or negatively, to the Consolidated Statements of Operations and Comprehensive Income (Loss) in the periods in which such matters are ultimately determined. We do not believe the final resolution of such matters will be material to our consolidated financial position or cash flows.
We have various income tax examinations ongoing and at various stages of completion, but generally our income tax returns have been audited or closed to audit through 2009.
Legal Proceedings
We are involved in a variety of legal actions that arise in the normal course of business. Insurance coverage mitigates potential loss for certain of these matters. While we are unable to predict the ultimate outcome of these legal actions, it is our opinion that the disposition of these matters will not have a material adverse effect on our Consolidated Financial Statements, taken as a whole.
Multiemployer Pension Plans
The Company contributes to three multiemployer pension plans. In June 2017, a union contract covering certain of our employees under a multiemployer pension plan expired resulting in a partial withdrawal from one of the multiemployer plans. In 2017, the Company recorded an estimate of the partial withdrawal liability totaling $2,600,000. Once the multiemployer pension plan's administrators finalize the partial withdrawal liability, it will be paid in equal installments over a twenty year period.
In the second quarter of 2019, we recorded an estimated partial liability for the CWA/ITU multi-employer plan, in the amount of $500,000, which is included in restructuring costs and other.
Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations
The following discussion includes comments and analysis relating to our results of operations and financial condition as of and for the 13 weeks and 26 weeks ended March 25, 201831, 2019. This discussion should be read in conjunction with the Consolidated Financial Statements and related Notes thereto, included herein, and our 20172018 Annual Report on Form 10-K.
NON-GAAP FINANCIAL MEASURES
We useNo non-GAAP financial performance measuresmeasure should be considered as a substitute for purposesany related GAAP financial measure. However, we believe the use of evaluating our performance and liquidity. We believe that each of the non-GAAP measures presented provides useful information to investors by allowing them to view our businesses through the eyes of our management and Board of Directors, facilitating comparison of results across historical periods, and providing a focus on the underlying ongoing operating performance and liquidity of our businesses. The non-GAAP financial measures we useprovides meaningful supplemental information with which to evaluate our financial performance, or assist in forecasting and analyzing future periods. We also believe such non-GAAP financial measures are alternative indicators of performance used by investors, lenders, rating agencies and financial analysts to estimate the value of a publishing business and its ability to meet debt service requirements.
We define our non-GAAP measures, which may not be comparable to similarly titled measures reported by other companies, as follows:
Adjusted EBITDA is a non-GAAP financial performance measure that enhances a financial statement user'susers' overall understanding of the operating performance of the Company. The measure isolates unusual, infrequent or non-cash transactions from the operating performance of the business. This allows users to easily compare operating performance among various fiscal periods and understand how management measures the performance of the business. This measure also provides users with a benchmark that can be used when forecasting future operating performance of the Company that excludes unusual, nonrecurring or one time transactions. Adjusted EBITDA is also a component of the calculation used by stockholders and analysts to determine the value of our business when using the market approach, which applies a market multiple to financial metrics. It is also a measure used to calculate the leverage ratio of the Company, which is a key financial ratio monitored and used by the Company and its investors. Adjusted EBITDA is defined as net income (loss), plus nonoperatingnon-operating expenses, (income), net, income tax expense (benefit), depreciation and amortization, assets loss (gain) on sale of assets, impairment charges, workforce adjustmentsales, impairments and other, restructuring costs and other, stock compensation and our 50% share of EBITDA from TNI and MNI, minus equity in earnings of TNI and MNI and curtailment gains.
Adjusted Income (Loss) and Adjusted Earnings (Loss) Per Common Share are non-GAAP financial performance measures that we believe offer a useful metric to evaluate overall performance of the Company by providing financial statement users the operating performance of the Company on a per share basis excluding the impact of changes in the warrant valuation as well as unusual and infrequent transactions. It is defined as income (loss) attributable to Lee Enterprises, Incorporated and earnings (loss) per common share adjusted to exclude the impact of the warrant valuation and the impact of the 2017 Tax Act.
Cash Costs isrepresent a non-GAAP financial performance measure of operating expenses thatwhich are measured on an accrual basis and settled in cash andcash. This measure is useful to investors in understanding the components of the Company’s cashcash-settled operating costs. Generally,Occasionally, the Company provides forward-looking guidance of Cash Costs, which can be used by financial statement users to assess the Company's ability to manage and control its operating cost structure. Cash Costs isare defined as the sum of compensation, newsprint and ink and other operating expensesexpenses. Depreciation and workforce adjustmentamortization, assets loss (gain) on sales, impairments and other. Depreciation, amortization, impairment charges,other, other non-cash operating expenses and other operating expenses are excluded. Cash Costs are also presented excluding workforce adjustments,exclude restructuring costs and other, which are typically paid in cash.
Total Operating Revenue Less Cash Costs, or “margin”, represents a non-GAAP financial performance measure of revenue less total cash costs, also a non-GAAP financial measure. This measure is useful to investors in understanding the profitability of the Company after direct cash costs related to the production and delivery of products are paid. Margin is also useful in developing opinions and expectations about the Company’s ability to manage and control its operating cost structure in relation to its peers.
A table reconciling Adjustedadjusted EBITDA to net income, (loss), the most directly comparable measure under GAAP, is set forth in Item 2, included herein,below under the caption "Reconciliation of Non-GAAP Financial Measures".
Reconciliations of adjusted income (loss) and adjusted earnings (loss) per diluted common share to income (loss) attributable to Lee Enterprises, Incorporated and earnings (loss) per diluted common share, respectively, the most directly comparable measures under GAAP, are set forth in Item 2, included herein, under the caption “Overall Results”“Net Income and Earnings Per Share”.
The subtotals of operating expenses representing cash costs and the reconciliation of total revenue less cash costs excluding workforce adjustments and otherto operating income can be found in tables in Item 2, included herein, under the captions “13 Weeks Ended March 25, 2018"31, 2019" and “26 Weeks Ended March 25, 2018"31, 2019".
These non-GAAP financial measures should not be considered in isolation from or as a substitute for the related consolidated GAAP measures, and should be read together with financial information presented on a GAAP basis.
RECONCILIATION OF NON-GAAP FINANCIAL MEASURES
(UNAUDITED)
The table below reconciles the non-GAAP financial performance measure of adjusted EBITDA to net income, the most directly comparable GAAP measure:
| | | 13 Weeks Ended | | 26 Weeks Ended | | 52 Weeks Ended |
| 13 Weeks Ended | | 26 Weeks Ended | | 53 Weeks Ended |
|
(Thousands of Dollars) | March 25 2018 |
| March 26 2017 |
| March 25 2018 |
| March 26 2017 |
| March 25 2018 |
| March 31 2019 |
| March 25 2018 |
| March 31 2019 |
| March 25 2018 |
| March 31 2019 |
|
| |
|
|
|
|
|
|
|
|
|
|
Net Income | 2,533 |
| 6,377 |
| 37,860 |
| 18,818 |
| 47,647 |
| |
Net Income (loss) | | (2,327 | ) | 2,533 |
| 8,392 |
| 37,860 |
| 17,579 |
|
Adjusted to exclude | |
|
Income tax expense (benefit) | 927 |
| 1,144 |
| (18,763 | ) | 7,410 |
| (14,562 | ) | 156 |
| 927 |
| 4,670 |
| (18,763 | ) | 7,205 |
|
Non-operating expenses, net | 13,810 |
| 11,285 |
| 28,713 |
| 24,017 |
| 57,027 |
| 14,738 |
| 13,103 |
| 27,224 |
| 27,300 |
| 54,797 |
|
Equity in earnings of TNI and MNI | (1,608 | ) | (1,729 | ) | (3,991 | ) | (4,417 | ) | (7,183 | ) | (1,717 | ) | (1,608 | ) | (3,846 | ) | (3,991 | ) | (9,104 | ) |
Loss on sale of assets and other, net | (1,300 | ) | (3,783 | ) | (1,297 | ) | (3,716 | ) | (1,248 | ) | |
Impairment of intangible and other assets | — |
| — |
| — |
| — |
| 2,517 |
| |
Loss (gain) on sale of assets and other, net | | 83 |
| (1,300 | ) | (17 | ) | (1,297 | ) | 7,709 |
|
Depreciation and amortization | 8,016 |
| 10,318 |
| 16,068 |
| 20,698 |
| 36,652 |
| 7,386 |
| 8,016 |
| 14,916 |
| 16,068 |
| 30,614 |
|
Workforce adjustments and other | 1,816 |
| 2,405 |
| 2,284 |
| 2,470 |
| 7,337 |
| |
Restructuring costs and other | | 2,759 |
| 1,816 |
| 2,820 |
| 2,284 |
| 6,086 |
|
Stock compensation | 497 |
| 559 |
| 1,016 |
| 1,083 |
| 2,021 |
| 426 |
| 497 |
| 888 |
| 1,016 |
| 1,731 |
|
Add: | |
|
Ownership share of TNI and MNI EBITDA (50%) | 2,086 |
| 2,220 |
| 5,245 |
| 5,696 |
| 9,476 |
| 2,080 |
| 2,086 |
| 4,681 |
| 5,245 |
| 9,320 |
|
Adjusted EBITDA | 26,777 |
| 28,796 |
| 67,135 |
| 72,059 |
| 139,684 |
| 23,584 |
| 26,070 |
| 59,728 |
| 65,722 |
| 125,937 |
|
IMPACT OF RECENTLY ISSUED ACCOUNTING STANDARDS
In August 2018, the Financial Accounting Standards Board (“FASB”) issued a new standard which modifies the disclosure requirements for employers that sponsor defined benefit pension or other postretirement plans. The modifications remove disclosures, clarify the specific requirements of disclosures and add disclosure requirements identified as relevant. We are currently in the process of evaluating the impact of this guidance on our Consolidated Financial Statements.
In August 2018, the FASB issued a new standard which modifies the disclosure requirements on fair value measurements. The amendments on changes in unrealized gains and losses, the range and weighted average of significant unobservable inputs used to develop Level 3 fair value measurements, and the narrative description of measurement uncertainty should be applied prospectively for only the most recent interim or annual period presented in the initial fiscal year of adoption. All other amendments should be applied retrospectively to all periods presented upon their effective date. We are currently in the process of evaluating the impact of this guidance on our Consolidated Financial Statements.
CRITICAL ACCOUNTING POLICIES
Our critical accounting policies include the following:
•Intangible assets, other than goodwill;
•Pension, postretirement and postemployment benefit plans;
•Income taxes;
•Revenue recognition; and
•Uninsured risks.
Additional information regarding these critical accounting policies can be found under the caption “Management's Discussion and Analysis of Financial Condition and Results of Operations” in our 20172018 Annual Report on Form 10-K.
EXECUTIVE OVERVIEW
Lee Enterprises, Incorporated is a leading provider of high quality, trusted, local news and information, and a major platform for advertising in the markets we serve. We are located primarily in the Midwest, Mountain West and West regions of the United States, and our 49 markets (including TNI Partners ("TNI") and Madison Newspapers, Inc. ("MNI")), across 21 states areoperate 50 principally mid-sized or small. Our printed newspaperslocal media operations and manage 30 additional local media operations through an agreement with BH Media Group, Inc. (the "Management Agreement").
We reach more than 0.8 million households daily79% of all adults in our larger markets through a combination of our print and more than 1.1 million on Sunday, with estimated readership totaling three million. digital content offerings.
Our web and mobile sites are the number one digital source of local news in most of our markets, reaching more than 2730.2 million unique visitors each month.month with a monthly average of 298.2 million page views. Page views per session, one metric we use to monitor engagement, increased 14.3% in 2019.
Our products include:printed newspapers reach more than 0.7 million households daily and more than 1.0 million on Sunday, with estimated readership totaling three million. Digital only subscribers totaled approximately 65,000, a 55.5% increase over the prior year.
46Our products include daily newspapers, websites and 34 Sunday newspapers; all with relatedmobile applications, mobile news and advertising, video products, a digital operations;marketing agency, digital services including web hosting and
Nearly 300 weekly content management, niche publications and community newspapers. Our local media operations range from large daily newspapers and niche publications, mostthe associated digital products, such as the St. Louis Post-Dispatch, to non-daily newspapers with relatednews websites and digital operations.
platforms serving smaller communities.
We also operate TownNews.com,TownNews, through our 82.5% owned subsidiary INN Partners, L.C. ("TownNews.com"TownNews"). TownNews.comTownNews provides digital infrastructurestate-of-the-art web hosting, content management services and video management services to nearly 2,000 other media organizations including broadcast.
We entered into the Management Agreement to manage Berkshire Hathaway's newspaper and digital publishing services for nearly 1,600 daily and weekly newspapers as well as universities, television stations, niche publications, and Lee Enterprises properties.
Our markets have established retail bases. Most are regional shopping hubs, and we are locatedoperations in four state capitals. Six of our top ten markets, by revenue, include major universities, and seven are home to major corporate headquarters. We believe that operating the dominate provider of local news, information and advertising in these markets - combined30 markets. The Company operates BH Media consistent with our ability to distribute our content across printhow it manages its own newspaper and digital platforms - enables usoperations. Among other decisions, Berkshire Hathaway is responsible for approving operating and capital budgets. The Management Agreement extends for a term of five years and may be extended thereafter for successive one-year terms on such terms as may be mutually agreed to better execute our strategy.
We generate revenue primarily through printby the Company and digital advertising, subscriptionsBerkshire Hathaway. The Management Agreement provides for the Company to our publicationsbe paid a fixed annual fee of $5 million, payable quarterly in arrears, and digital services, primarily through TownNews.com. Our operations also provide commercial printing, distributiona variable fee based on the financial performance of third party publications and marketing services.BH Media. The variable fees are payable annually in arrears.
IMPAIRMENT OF GOODWILL AND OTHER ASSETS
We have significant amounts of goodwill and identified intangible assets. Since 2007 we have recorded impairment charges totaling almost $1.3 billion to reduce the value of certain of these assets. Should general economic,Future decreases in our market value, or business conditions decline, and have a negative impact on our stock pricesignificant differences in revenue, expenses or projected future cash flows we may be requiredfrom estimates used to recorddetermine fair value, could result in additional impairment charges in the future. Such impairment charges would not impact our reported cash flows or debt covenant compliance.
DEBT AND LIQUIDITY
We have a substantial amount of debt, as discussed more fully in Note 45 of the Notes to Consolidated Financial Statements, included herein. Since February 2009, we have satisfied all interest payments and substantially all principal payments due under our debt facilities with our cash flows and asset sales.
As of March 25, 2018,31, 2019, our debt consists of the following:
$400,000,000 aggregate principal amount of 9.5% Senior Secured Notes (the “Notes”), pursuant to an Indenture dated as of March 31, 2014 (the “Indenture”), of which $385,000,000 is outstanding at March 25, 2018;31, 2019;
| |
• | $250,000,000 first lien term loan (the "1st Lien Term Loan") and $40,000,000 revolving facility (the "Revolving Facility") under a First Lien Credit Agreement dated as of March 31, 2014 (together, the “1st Lien Credit Facility”), of which $24,645,000$0 is outstanding at March 25, 2018;31, 2019; and |
| |
• | $150,000,000 second lien term loan under a Second Lien Loan Agreement dated as of March 31, 2014 (the “ 2nd Lien Term Loan”), of which $106,676,000$91,455,000 is outstanding at March 25, 2018.31, 2019. |
In November 2018, we repaid, in full, the remaining balance of the 1st Lien Term Loan.
In December 2018 we amended our 1st Lien Credit Facility to amend and extend our Revolving Facility (the "Amendment"). The Amendment, among other changes, extends the maturity of the revolving loan commitments of the 1st Lien Lenders for twelve months, reduces the revolver loan commitments from $40,000,000 to $27,200,000 with a further 15% reduction to the revolving loan commitments of the 1st Lien Term Lenders effective as of July 31, 2019.
Our ability to make payments on our indebtedness will depend on our ability to generate future cash flows from operations. Cash generated from future asset sales could serve as an additional source of repayment. This ability, to a certain extent, is subject to general economic, financial, competitive, business, legislative, regulatory and other factors that are beyond our control.
At March 25, 2018,31, 2019, after consideration of letters of credit, we have approximately $33,835,000$21,435,000 available for future use under our Revolving Facility, which expires December 28, 2018.2019. Including cash, our liquidity at March 25, 201831, 2019 totals $46,136,000.$38,100,000. This liquidity amount excludes any future cash flows. Our adjusted EBITDA has been strong for the last seven years and totaled $139,684,000$125,937,000 for the trailing twelve months ended March 25, 2018,31, 2019, but there can be no assurance that such performance will continue. We expect all interest and principal payments due in the next twelve months will be satisfied by our cash flows from operations and certain asset sales, which will allow us to maintain an adequate level of liquidity.
At March 25, 2018,31, 2019, the principal amount of our outstanding debt totaled $516,321,000.$476,455,000. The March 25, 201831, 2019 principal amount of our debt, net of cash, is 3.613.65 times our trailing twelve months adjusted EBITDA.
FinalExcluding our Revolving Facility, which is undrawn as of March 31, 2019, final maturities of our debt range from December 2018March 2022 through December 2022.
Our Revolving Facility expires December 28, 2019.
There are numerous potential consequences under the Notes, 1st Lien Credit Facility and 2nd Lien Term Loan, if an event of default, as defined, occurs and is not remedied. Many of those consequences are beyond our control. The occurrence of one or more events of default would give rise to the right of the applicable lender(s) to exercise their remedies under the Notes, 1st Lien Credit Facility and 2nd Lien Term Loan, respectively, including, without limitation, the right to accelerate all outstanding debt and take actions authorized in such circumstances under applicable collateral security documents.
Our ability to operate as a going concern is dependent on our ability to remain in compliance with debt covenants and to repay, refinance or amend our debt agreements as they become due, if necessary. The Notes, 1st Lien Credit Facility and 2nd Lien Term Loan have only limited affirmative covenants with which we are required to maintain compliance. We are in compliance with our debt covenants at March 25, 2018.31, 2019.
13 WEEKS ENDED MARCH 25, 201831, 2019
Operating results, as reported in the Consolidated Financial Statements, are summarized below.
| | | | |
(Thousands of Dollars, Except Per Share Data) | March 25 2018 |
| March 26 2017 |
| Percent Change |
| March 31 2019 |
| March 25 2018 |
| Percent Change |
|
Advertising and marketing services revenue | 71,553 |
| 77,533 |
| (7.7 | ) | 62,934 |
| 71,553 |
| (12.0 | ) |
Subscription | 45,972 |
| 45,009 |
| 2.1 |
| 45,076 |
| 45,972 |
| (1.9 | ) |
Other | 10,280 |
| 10,845 |
| (5.2 | ) | 14,694 |
| 10,280 |
| 42.9 |
|
Total operating revenue | 127,805 |
| 133,387 |
| (4.2 | ) | 122,704 |
| 127,805 |
| (4.0 | ) |
Operating expenses: | | |
Compensation | 48,656 |
| 52,414 |
| (7.2 | ) | 47,785 |
| 49,363 |
| (3.2 | ) |
Newsprint and ink | 5,640 |
| 6,200 |
| (9.0 | ) | 5,825 |
| 5,640 |
| 3.3 |
|
Other operating expenses | 49,315 |
| 48,756 |
| 1.1 |
| 48,016 |
| 49,315 |
| (2.6 | ) |
Cash costs excluding workforce adjustments and other | 103,611 |
| 107,370 |
| (3.5 | ) | |
Workforce adjustments and other | 1,816 |
| 2,405 |
| (24.5 | ) | |
Cash costs | 105,427 |
| 109,775 |
| (4.0 | ) | 101,626 |
| 104,318 |
| (2.6 | ) |
| 22,378 |
| 23,612 |
| (5.2 | ) | |
Depreciation | 3,685 |
| 4,008 |
| (8.1 | ) | |
Amortization | 4,331 |
| 6,310 |
| (31.4 | ) | |
Gain on sales of assets and other, net | (1,300 | ) | (3,783 | ) | (65.6 | ) | |
Total operating revenue less cash costs | | 21,078 |
| 23,487 |
| (10.3 | ) |
Depreciation and amortization | | 7,386 |
| 8,016 |
| (7.9 | ) |
Assets loss (gain) on sales, impairments and other, net | | 83 |
| (1,300 | ) | NM |
|
Restructuring costs and other | | 2,759 |
| 1,816 |
| 51.9 |
|
Operating expenses | | 111,854 |
| 112,850 |
| (0.9 | ) |
Equity in earnings of associated companies | 1,608 |
| 1,729 |
| (7.0 | ) | 1,717 |
| 1,608 |
| 6.8 |
|
Operating income | 17,270 |
| 18,806 |
| (8.2 | ) | 12,567 |
| 16,563 |
| (24.1 | ) |
Non-operating income (expense): | | |
Interest expense | (13,274 | ) | (14,637 | ) | (9.3 | ) | (12,140 | ) | (13,274 | ) | (8.5 | ) |
Debt financing and administrative cost | (1,217 | ) | (1,075 | ) | 13.2 |
| (962 | ) | (1,217 | ) | (21.0 | ) |
Other, net | 681 |
| 4,427 |
| (84.6 | ) | (1,636 | ) | 1,388 |
| NM |
|
Non-operating expenses, net | (13,810 | ) | (11,285 | ) | 22.4 |
| (14,738 | ) | (13,103 | ) | 12.5 |
|
Income before income taxes | 3,460 |
| 7,521 |
| (54.0 | ) | |
Income (loss) before income taxes | | (2,171 | ) | 3,460 |
| NM |
|
Income tax expense | 927 |
| 1,144 |
| (19.0 | ) | 156 |
| 927 |
| (83.2 | ) |
Net income | 2,533 |
| 6,377 |
| (60.3 | ) | |
Net income (loss) | | (2,327 | ) | 2,533 |
| NM |
|
Net income attributable to non-controlling interests | (294 | ) | (249 | ) | 18.1 |
| (351 | ) | (294 | ) | 19.4 |
|
Income attributable to Lee Enterprises, Incorporated | 2,239 |
| 6,128 |
| (63.5 | ) | |
Other comprehensive income, net of income taxes | (36 | ) | 894 |
| NM |
| |
Comprehensive income attributable to Lee Enterprises, Incorporated | 2,203 |
| 7,022 |
| (68.6 | ) | |
Income (loss) attributable to Lee Enterprises, Incorporated | | (2,678 | ) | 2,239 |
| NM |
|
Other comprehensive loss, net of income taxes | | (122 | ) | (36 | ) | NM |
|
Comprehensive income (loss) attributable to Lee Enterprises, Incorporated | | (2,800 | ) | 2,203 |
| NM |
|
Earnings per common share: | | |
Basic | 0.04 |
| 0.11 |
| NM |
| (0.05 | ) | 0.04 |
| NM |
|
Diluted | 0.04 |
| 0.11 |
| NM |
| (0.05 | ) | 0.04 |
| NM |
|
References to the "2019 Quarter" refer to the 13 weeks ended March 31, 2019. Similarly, references to the "2018 Quarter" refer to the 13 weeks ended March 25, 2018. Similarly, references to the "2017 Quarter" refer to the 13 weeks ended March 26, 2017. Due to publications purchased in 2017 and the sale of a newspaper in 2018, certain of the revenue and operating expense trends discussed below are on a same property basis.
Advertising and Marketing ServicesOperating Revenue
In the 20182019 Quarter, advertising and marketing services revenue decreased $5,980,000,$8,619,000, or 7.7%12.0% compared to the 20172018 Quarter. On a same property basis, advertising and marketing services declined 9.9%. The decrease in advertising and marketing services revenue is due to continued softness in print advertising demand resulting in reduced advertising volume primarily from large retail, big box stores and classifieds. Digital retail advertising on a stand-alone basis increased 6.5%, representing 62.7% of total digital advertising.
Digital advertising increased 2.7%5.3% to $22,852,00024,068,000 in the 20182019 Quarter and represents 31.9%38.2% of total advertising revenue. On a same property basisDigital retail advertising, which represents 61.8% of total digital advertising, increased 2.2%.Total digital revenue including TownNews.com and all other digital business totaled $26,666,000 in the 2018 Quarter, an increase of 3.6% over the 2017 Quarter.4.9%, partially offsetting print declines.
TownNews.com generates the majority of its revenue from content management services at our properties as well as 1,600 other newspapers and other media operations.
Subscription and Other Revenue
Subscription revenue increased $963,000,decreased $896,000, or 2.1%1.9%, in the 2018 Quarter2019 Quarter. Strategic pricing programs and decreased $179,000, or 0.4% on a same property basis. Higher subscription rates and charges for premium content helped offset lower paid circulation units. Our average daily newspaper circulation, including TNI, MNI and digital subscribers, totaled 0.80.7 million in the 20182019 Quarter. Sunday circulation totaled 1.11.0 million. Digital only subscribers totaled approximately 65,000, a 55.5% increase over the prior year.
Other revenue, which consists of digital services, Management Agreement revenues, commercial printing, revenue from delivery of third party products and the sale of books, decreased 5.2%increased 42.9% in the 20182019 Quarter. The decreaseincrease was due to volume declines in commercial printing and third party delivery, partially offset by ana 30.3% increase in content management services revenue at TownNews.com.TownNews. Management fee revenue from BH Media Group was $3,850,000.
Excluding intercompany revenue,activity, revenue at TownNews.comTownNews increased 17.0% to $3,528,00030.3% in the 2018 Quarter.2019 Quarter due to a growing broadcast customer base, gaining print market share and the impact of the GTxcel acquisition. On a stand alone basis, revenue at TownNews totaled $20,881,000 over the last twelve months.
In the 20182019 Quarter, our mobile, tablet, desktop and app sites, including TNI and MNI, attracted ana monthly average of 77.530.2 million visits per month,unique visitors with 298.2 million page views, a 11.6%13.5% increase in page views compared to the 20172018 Quarter. Increased audience engagement is driving a higher number pages viewed per user session in the 20182019 Quarter. Our researchResearch in our larger markets indicates we are maintaining our share of audience in our markets through the combination of strong digital audience growth and print newspaper readership.
Operating Expenses
Operating expenses for the 20182019 Quarter decreased 3.6%0.9%. Cash costs excluding workforce adjustments decreased 3.5%2.6% compared to the prior year quarter and decreased 6.0% on a same property basis.quarter.
Compensation expense decreased $4,921,000,$1,578,000 , or 9.4% on a same property basis3.2% driven by aan 8.7% decline of 13.1% in average full-time equivalent employees.employees partially offset by unfavorable claims experience from our self insured medical plan and compensation increases. Outsourcing certain functions and continued business transformation affected the number of full-time equivalents in the 2019 Quarter.
Newsprint and ink costs decreased $566,000,increased $185,000, or 9.2% on a same property basis3.3%, due to significant increases in newsprint prices partially offset by a 15.4%10.4% reduction in newsprint volume from unit declines and using lower basis weight newsprint partially offset by higher prices.declines. See Item 3, “Commodities”, included herein, for further discussion and analysis of the impact of newsprint prices on our business.
Other operating expenses for the 20182019 Quarter decreased $940,000,$1,299,000, or 1.9% on a same property basis.2.6%. Other operating expenses include all operating costs not considered to be compensation, newsprint, depreciation and amortization, or workforce adjustmentsrestructuring costs and other. The largest components of these costs include delivery, postage, outsourced printing, digital cost of goods sold and facility expenses. Cost reductions were primarily related to lower delivery and other print-related costs offset in part by higher costs associated with growing digital revenue.revenue and outsourcing.
Workforce adjustment and otherWe expect cash costs totaled $1,816,000 and $2,405,000on a same property basis to be down 4-5% in the 2018 Quarter and 2017 Quarter, respectively.
Results of Operationsfiscal year 2019.
Depreciation expense decreased $323,000,$526,000, or 8.1%14.3%, and amortization expense decreased $1,979,000,$104,000, or 31.4%2.4%, in the 20182019 Quarter.
Sales of operating assetsAssets loss (gain) on sales, impairments and other, was a net resultedloss of $83,000 in the 2019 Quarter compared to a net gain of $1,300,000 in the 2018 Quarter compared to a net gain of $3,783,000 in the 2017 Quarter. The net gain includes a $2,031,000 and a $3,741,000 curtailment gain in the 2018 Quarter and the 2017 Quarter, respectively.includes curtailment gains of $2,031,000.
Equity in earnings of TNIRestructuring costs and MNI decreased $121,000other totaled $2,759,000 and $1,816,000 in the 2019 Quarter and 2018 Quarter.Quarter, respectively. The majority of restructuring costs relate to severance. In the 2019 Quarter, we recorded an estimated withdrawal liability of $500,000 related to one of our multi-employer plans, which is included in restructuring costs and other.
Results of Operations
The factors noted above resulted in operating income of $17,270,00012,567,000 in the 2019 Quarter compared to $16,563,000 in the 2018 Quarter compared to $18,806,000 in the 2017 Quarter.
Equity in earnings of TNI and MNI increased $109,000 in the 2019 Quarter.
Nonoperating Income and Expense
Interest expense decreased $1,363,0001,134,000, or 9.3%8.5%, to $13,274,00012,140,000 in the 20182019 Quarter due to lower debt balances. Our weighted average cost of debt, excluding amortization of debt financing costs, was 9.9%10.0% at the end of the 2018 Quarter compared to 9.8% at the end of the 2017 Quarter, as the majority of our debt repayments were made on the 1st Lien Term Loan, our lowest cost debt.2019 Quarter.
We recognized $1,217,000$962,000 of debt financing and administrative costs in the 20182019 Quarter compared to $1,075,000$1,217,000 in the 20172018 Quarter. The majority of the costs represent amortization of refinancing costs paid in 2014.
Other non-operating income and expense consists of benefits associated with our pension and other postretirement plans and the fair value adjustment of our Warrants.
We recorded $711,000 of other periodic pension benefits in the 2019 Quarter and $708,000 in the 2018 Quarter.
Due to the fluctuation in the price of our Common Stock, we recorded non-operating expense of $2,753,000 in the 2019 Quarter and non-operating income of $555,000 in the 2018 Quarter and $4,283,000 in the 2017 Quarter, related to the changes in the value of the Warrants.
Overall Results
We recorded an income tax expense of $927,000, resulting in an effective tax rate$156,000, or 7.2% of 26.8%pretax income in the 2018 Quarter compared to 15.2% in2019 Quarter. For the 2017 Quarter. See Note 6 of the Notes to the Consolidated Financial Statements, included herein, for a discussion of the difference between the expected federal13 weeks ended March 25,2018, we recognized an income tax rate and the actual tax rates.expense of $927,000, or 26.8% of pretax income.
As a resultNET INCOME AND EARNINGS PER SHARE
The following table summarizes the impact from the fair value adjustments of the factors noted above,our Warrants on income attributable to Lee Enterprises, Incorporated totaled $2,239,000 in the 2018 Quarter compared to $6,128,000 in the 2017 Quarter. We recordedand earnings per diluted common share of $0.04 in the 2018 Quarter and $0.11 in the 2017 Quarter. Excluding the warrants fair value adjustment, as detailed in the table bellow, diluted earnings per common share, as adjusted, were $0.03 in the 2018 Quarter, the same as the 2017 Quarter.share. Per share amounts may not add due to rounding.
| | | 13 Weeks Ended | | 13 Weeks Ended | |
| March 25 2018 | | March 26 2017 | | March 31 2019 | | March 25 2018 | |
(Thousands of Dollars, Except Per Share Data) | Amount |
| Per Share |
| Amount |
| Per Share |
| Amount |
| Per Share |
| Amount |
| Per Share |
|
| | |
Income attributable to Lee Enterprises, Incorporated, as reported | 2,239 |
| 0.04 |
| 6,128 |
| 0.11 |
| |
Adjustments (tax affected): | | |
Income (loss) attributable to Lee Enterprises, Incorporated, as reported | | (2,678 | ) | (0.05 | ) | 2,239 |
| 0.04 |
|
Adjustments: | | |
Warrants fair value adjustment | (555 | ) | | (4,283 | ) | | 2,753 |
| 0.05 |
| (555 | ) | (0.01 | ) |
| (555 | ) | (0.01 | ) | (4,283 | ) | (0.08 | ) | |
Income attributable to Lee Enterprises, Incorporated, as adjusted | 1,684 |
| 0.03 |
| 1,845 |
| 0.03 |
| 75 |
| — |
| 1,684 |
| 0.03 |
|
26 WEEKS ENDED MARCH 25, 201831, 2019
Operating results, as reported in the Consolidated Financial Statements, are summarized below.
| | | | |
(Thousands of Dollars, Except Per Share Data) | March 25 2018 |
| March 26 2017 |
| | March 31 2019 |
| March 25 2018 |
| Percent Change |
|
Total advertising and marketing services revenue | 156,213 |
| 170,568 |
| (8.4 | ) | 138,897 |
| 156,213 |
| (11.1 | ) |
Subscription | 94,241 |
| 93,896 |
| 0.4 |
| 91,345 |
| 94,241 |
| (3.1 | ) |
Other | 21,136 |
| 22,912 |
| (7.8 | ) | 28,663 |
| 21,136 |
| 35.6 |
|
Total operating revenue | 271,590 |
| 287,376 |
| (5.5 | ) | 258,905 |
| 271,590 |
| (4.7 | ) |
Operating expenses: | | |
Compensation | 99,567 |
| 107,470 |
| (7.4 | ) | 94,824 |
| 100,980 |
| (6.1 | ) |
Newsprint and ink | 11,478 |
| 13,093 |
| (12.3 | ) | 12,164 |
| 11,478 |
| 6.0 |
|
Other operating expenses | 99,671 |
| 101,533 |
| (1.8 | ) | 97,758 |
| 99,671 |
| (1.9 | ) |
Cash costs excluding workforce adjustments and other | 210,716 |
| 222,096 |
| (5.1 | ) | |
Workforce adjustments | 2,284 |
| 2,470 |
| (7.5 | ) | |
Cash costs | 213,000 |
| 224,566 |
| (5.2 | ) | 204,746 |
| 212,129 |
| (3.5 | ) |
| 58,590 |
| 62,810 |
| (6.7 | ) | |
Depreciation | 7,441 |
| 8,079 |
| (7.9 | ) | |
Amortization | 8,627 |
| 12,619 |
| (31.6 | ) | |
Gain on sales of assets and other, net | (1,297 | ) | (3,716 | ) | (65.1 | ) | |
Total operating revenue less cash costs | | 54,159 |
| 59,461 |
| (8.9 | ) |
Depreciation and amortization | | 14,916 |
| 16,068 |
| (7.2 | ) |
Assets loss (gain) on sales, impairments and other | | (17 | ) | (1,297 | ) | NM |
|
Restructuring costs and other | | 2,820 |
| 2,284 |
| 23.5 |
|
Equity in earnings of associated companies | 3,991 |
| 4,417 |
| (9.6 | ) | 3,846 |
| 3,991 |
| (3.6 | ) |
Operating income | 47,810 |
| 50,245 |
| (4.8 | ) | 40,286 |
| 46,397 |
| (13.2 | ) |
Non-operating income (expense): | | |
Interest expense | (26,924 | ) | (29,588 | ) | (9.0 | ) | (24,397 | ) | (26,924 | ) | (9.4 | ) |
Debt financing and administrative cost | (2,313 | ) | (2,026 | ) | 14.2 |
| (1,858 | ) | (2,313 | ) | (19.7 | ) |
Other, net | 524 |
| 7,597 |
| (93.1 | ) | (969 | ) | 1,937 |
| NM |
|
Non-operating expenses, net | (28,713 | ) | (24,017 | ) | 19.6 |
| (27,224 | ) | (27,300 | ) | (0.3 | ) |
Income before income taxes | 19,097 |
| 26,228 |
| (27.2 | ) | 13,062 |
| 19,097 |
| (31.6 | ) |
Income tax expense (benefit) | (18,763 | ) | 7,410 |
| NM |
| 4,670 |
| (18,763 | ) | NM |
|
Net income | 37,860 |
| 18,818 |
| NM |
| 8,392 |
| 37,860 |
| (77.8 | ) |
Net income attributable to non-controlling interests | (618 | ) | (517 | ) | 19.5 |
| (709 | ) | (618 | ) | 14.7 |
|
Income attributable to Lee Enterprises, Incorporated | 37,242 |
| 18,301 |
| NM |
| 7,683 |
| 37,242 |
| (79.4 | ) |
Other comprehensive loss, net of income taxes | (9 | ) | 949 |
| NM |
| |
Other comprehensive (loss), net of income taxes | | (244 | ) | (9 | ) | NM |
|
Comprehensive income attributable to Lee Enterprises, Incorporated | 37,233 |
| 19,250 |
| 93.4 |
| 7,439 |
| 37,233 |
| (80.0 | ) |
Earnings per common share: | | |
Basic | 0.68 |
| 0.34 |
| NM |
| 0.14 |
| 0.68 |
| (79.4 | ) |
Diluted | 0.67 |
| 0.33 |
| NM |
| 0.14 |
| 0.67 |
| (79.1 | ) |
References to the "2019 Period" refer to the 26 weeks ended March 31, 2019. Similarly, references to the "2018 Period" refer to the 26 weeks ended March 25, 2018. Similarly, references to the "2017 Period" refer to the 26 weeks ended March 26, 2017. Due to publications purchased in 2017 and sold in 2018, certain of the revenue and operating expense trends discussed below are on a same property basis.
Advertising and Marketing ServicesOperating Revenue
In the 20182019 Period, advertising and marketing services revenue decreased $14,355,000,$17,316,000, or 8.4%11.1%, compared to the 20172018 Period. On a same property basis, advertising services revenue decreased 10.9%. The decrease in advertising and marketing services revenue is due to continued softness in print advertising demand resulting in reduced advertising volume primarily from large retail, big box stores and classifieds. Digital retail advertising on a stand-alone basis increased 6.1%, representing 62.5% of total digital advertising.
Digital advertising increased 2.8%6.7% to $46,451,000$49,563,000 in the 20182019 Period and represents 29.7%35.7% of total advertising and marketing services revenue. On a same property basisDigital retail advertising, which represents 62.6% of total digital advertising, increased 2.1%. Total digital revenue including TownNews.com and all other digital business totaled $53,927,000 in the 2018 Period, an increase of 3.4% over the 2017 Period.7.7%, partially offsetting print declines.
TownNews.com generates the majority of its revenue from content management services at our properties as well as 1,600 other newspapers and other media operations.
Subscription and Other Revenue
Subscription revenue increased $345,000,decreased $2,896,000, or 0.4%3.1%, in the 2018 Period2019 Period. Strategic pricing programs and decreased $1,742,000 or 1.9% on a same property basis. Higher subscription rates and charges for premium content helped offset lower paid circulation units. Our average daily newspaper circulation, including TNI, MNI and digital subscribers, totaled 0.80.7 million in the 20182019 Period. Sunday circulation totaled 1.11.0 million.
Other revenue, which consists of digital services, Management Agreement revenues, commercial printing, revenue from delivery of third party products and the sale of books, decreased 7.8%increased 35.6% in the 20182019 Period. The decreaseincrease was due to volume declines in commercial printing, third party delivery and the sale of books partially offset by ana 28.0% increase in content management services revenue at TownNews.com.TownNews. We earned $6,450,000 in management fee revenue from BH Media Group.
Excluding intercompany revenue,activity, revenue at TownNews.comTownNews increased 14.8%28.0% in the 2018 Period.2019 Period, due to growing broadcast customer base, gaining print market share and the impact of the GTxcel acquisition. On a stand alone basis, revenue at TownNews.comTownNews totaled $17.3 million$20,881,000 over the last twelve months.
In the 20182019 Period, our mobile, tablet, desktop and app sites, including TNI and MNI, attracted ana monthly average of 75.029.6 million visits per month,unique visitors with 293.6 million page views, a 8.9%15.3% increase in page views compared to the 20172018 Period. Increased audience engagement is driving a higher number pages viewed per user session in the 20182019 Period. Our researchResearch in our larger markets indicates we are maintaining our share of audience in our markets through the combination of strong digital audience growth and print newspaper readership.
Operating Expenses
Operating expenses for the 20182019 Period decreased 5.7%2.9%. Cash cost excluding workforce adjustments decreased 5.1%3.5% compared to the prior year period and decreased 7.5% on the same property basis.Period.
Compensation expense decreased $10,261,000,$6,156,000, or 9.6% on a same property basis6.1%, driven by a decline of 12.5%11.4% in average full time equivalent employees.
Newsprint and ink costs decreased $1,625,000,increased $686,000, or 12.5% on a same property basis6.0%, due to significant increases in newsprint prices partially offset by a 16.1%10.6% reduction in newsprint volume from unit declines and increased use of lower basis weight newsprint partially offset by higher prices.declines. See Item 3, “Commodities”, included herein, for further discussion and analysis of the impact of newsprint on our business.
Other operating expenses for the 20182019 Period decreased $4,684,000,$1,913,000, or 4.6% on a same property basis.1.9%. Other operating expenses include all operating costs not considered to be compensation, newsprint, depreciation and amortization, or workforce adjusmentsrestructuring costs and other. The largest components of these costs include delivery, postage, outsourced printing, digital cost of goods sold and facility expenses. Cost reductions were primarily related to lower delivery and other print-related costs offset in part by higher costs associated with growing digital revenue.
Workforce adjustmentrevenue and other costs totaled $2,284,000 and $2,470,000 in the 2018 Period and 2017 Period, respectively.
For fiscal 2018, we expect cash cost excluding workforce adjustments and other, to decrease 6.0-6.5% on a same property basis.
Results of Operationsoutsourcing.
Depreciation expense decreased $638,000,$1,086,000, or 7.9%14.6%, and amortization expense decreased $3,992,000,$66,000, or 31.6%0.8%, in the 20182019 Period.
Sales of operating assetsAssets loss (gain) on sales, impairments and other, was a net includes curtailment gainsgain of $2,031,000 and $3,741,000$17,000 in the 20182019 Period and 2017 Period, respectively, and totaledcompared to a net gain of $1,297,000 in the 2018 Period compared to aPeriod. The net gain of $3,716,000 in the 2017 Period.
Equity in earnings in associated companies decreased $426,000 in the 2018 Period.Period includes curtailment gains of $2,031,000.
Restructuring costs totaled $2,820,000 and $2,284,000 in the 2019 Period and 2018 Period, respectively. The majority of restructuring costs relate to severance and a partial withdrawal liability related to one of our multi employer pension plans.
Results of Operations
The factors noted above resulted in operating income of $47,810,00040,286,000 in the 2019 Period compared to $46,397,000 in the 2018 Period compared to Period.$50,245,000
Equity in earnings in associated companies decreased $145,000 in the 20172019 Period.
Nonoperating Income and Expense
Interest expense decreased $2,664,000,$2,527,000, or 9.0%9.4%, to $26,924,000$24,397,000 in the 20182019 Period due to lower debt balances.
We recognized $2,313,000$1,858,000 of debt financing and administrative costs in the 20182019 Period compared to $2,026,000$2,313,000 in the 20172018 Period. The majority of the costs represent amortization of refinancing costs paid in 2014.
Other non-operating income and expense consists of benefits associated with our pension and other postretirement plans and the fair value adjustment of our Warrants.
We recorded $1,423,000 of other periodic pension benefits in the 2019 Period and $1,416,000 in the 2018 Period.
Due to the fluctuation in the price of our Common Stock, we recorded non-operating expense of $2,672,000 in 2019 Period and non-operating income of $124,000 in 2018 Period and $7,378,000 in the 20172018 Period, related to the changes in the value of the Warrants.
Income TaxesOverall Results
On December 22, 2017, comprehensive tax legislation commonly referred to as the 2017 Tax Cuts and Jobs Act (the “2017 Tax Act”) was signed into law. Among other provisions, the 2017 Tax Act reducesreduced the federal statutory corporate income tax rate from 35% to 21% in December 2017. As a result of the. The reduction of the corporate tax rate caused us to re-measure our deferred tax assets and liabilities were revalued to reflect the lower federal base rate of 21%. The transitional impact in the 2018 Quarter. We reported a discrete adjustment from revaluing our deferred tax assets and liabilities resultedresulting in a provisional net decrease in income tax expense of $24,872,000 forin the 2018 Quarter.
We recorded an income tax expense of $4,670,000, or 35.8%, of pretax income in the 2019 Period. For the 26 weeks ended March 25, 2018.
The changes resulting from the 2017 Tax Act are complex and the final impact of the 2017 Tax Act may differ from the above estimate, possibly materially, due to, among other things, changes in interpretations of the 2017 Tax Act, any legislative action to address questions that arise because of the 2017 Tax Act, changes in accounting standards for income taxes or related interpretations in response to the 2017 Tax Act, updates or changes to estimates the Company has used to calculate the transition impacts, including impacts from changes to current year earnings estimates. The Securities Exchange Commission has issued rules that allow for2018 , we recognized a measurement period of up to one year after the enactment date of the 2017 Tax Act to finalize the recording of the related tax impacts. We did not make any adjustments to the provisional amount recorded and currently anticipate finalizing and recording any resulting adjustments by the end of our current fiscal year ending September 30, 2018.
Overall Results
Including the transitional impact of revaluing deferred tax assets and liabilities, we recorded an$18,763,000 income tax benefit of $18,763,000 in the 2018 Period.benefit. Excluding the transitional impact from the 2017 Tax Act, the effective income tax rate for the 26 weeks ended March 25, 2018 was 32.0%. In the 2017 Period, we recognized income tax expense of $7,410,000, resulting in an effective tax rate of 28.3%.
NET INCOME AND EARNINGS PER SHARE
The following table summarizes the impact from the 2017 Tax Act as well as the warrant fair value adjustments on income attributable to Lee Enterprises, Incorporated and earnings per diluted common share. Per share amounts may not add due to rounding.
| | | | 26 Weeks Ended | | | 26 Weeks Ended | |
| March 25 2018 | | March 26 2017 | | March 31 2019 | | March 25 2018 | |
(Thousands of Dollars, Except Per Share Data) | Amount |
| Per Share |
| Amount |
| Per Share |
| Amount |
| Per Share |
| Amount |
| Per Share |
|
| | | | |
Income attributable to Lee Enterprises, Incorporated, as reported | 37,242 |
| 0.67 |
| 18,301 |
| 0.33 |
| 7,683 |
| 0.14 |
| 37,242 |
| 0.67 |
|
Adjustments (tax affected): | | |
Adjustments: | | |
Warrants fair value adjustment | (124 | ) | | (7,378 | ) | | 2,672 |
| 0.05 |
| (124 | ) | — |
|
Income tax adjustment related to the 2017 Tax Act | (24,872 | ) | | — |
| | |
| (24,996 | ) | (0.45 | ) | (7,378 | ) | (0.13 | ) | |
Income tax effect of 2017 Tax Act | | — |
| | (24,872 | ) | (0.45 | ) |
Income attributable to Lee Enterprises, Incorporated, as adjusted | 12,246 |
| 0.22 |
| 10,923 |
| 0.20 |
| 10,355 |
| 0.18 |
| 12,246 |
| 0.22 |
|
LIQUIDITY AND CAPITAL RESOURCES
Operating Activities
Cash provided by operating activities was $35,115,000$27,833,000 in the 20182019 Period and $33,385,000compared to 35,115,000 in the 20172018 Period. Net income for the 20182019 Period totaled $37,860,000, including the $24,872,000 adjustment to deferred taxes related to the 2017 Tax Act that increased net income,$8,392,000 compared to $18,818,000$37,860,000 in the 20172018 Period. The increasedecrease in cash provided by operating activities in the 20182019 Period is mainly attributed to year over year changes in operating assets and liabilities.income.
Investing Activities
Cash required for investing activities totaled $923,000$7,538,000 in the 20182019 Period compared to cash required for investing activities of $1,887,000 in the 2017 Period. The increase in the 2018 Period is due to an increase in cash distributions from TNI Partners and an increase in proceeds from sales of assets$923,000 in the 2018 Period. Capital spending totaled $2,459,000 in the 2019 Period compared to $2,452,000 in the 2018 Period compared to $2,079,000Period. We spent 5,708,000 on acquisitions in the 20172019 Period.
We anticipate that funds necessary for capital expenditures, which are expected to total up to $10,000,000$11,000,000 in 2018,2019, and other requirements, will be available from internally generated funds or available under our Revolving Facility.
Financing Activities
Cash required for financing activities totaled $9,010,000 in the 2019 Period and $32,512,000 in the 2018 Period and $32,479,000 in the 2017 Period. Debt reduction accounted for the majority of the usage of funds in both the 20182019 Period and the 20172018 Period.
Liquidity
At March 25, 201831, 2019, after consideration of letters of credit, we have approximately $33,835,00021,435,000 available for future use under our Revolving Facility which expires December 28, 2018.Facility. Including cash and availability under our Revolving Facility, our liquidity at March 25, 201831, 2019 totals $46,136,00038,100,000. This liquidity amount excludes any future cash flows. We expect all interest and principal payments due in the next twelve months will be satisfied by our cash flows, which will allow us to maintain an adequate level of liquidity. The Warrants, if and when exercised, would provide additional liquidity in an amount up to $25,140,000.
Our Revolving Facility expires December 28, 2019.
At March 25, 2018,31, 2019, the principal amount of our outstanding debt totals $516,321,000.$476,455,000. The March 25, 201831, 2019 principal amount of debt, net of cash, is 3.613.65 times our trailing 12 months adjusted EBITDA.
There are numerous potential consequences under the Notes, 1st Lien Credit Facility and 2nd Lien Term Loan, if an event of default, as defined, occurs and is not remedied. Many of those consequences are beyond our control. The occurrence of one or more events of default would give rise to the right of the applicable lender(s) to exercise their remedies under the Notes, 1st Lien Credit Facility and 2nd Lien Term Loan, respectively, including, without limitation, the right to accelerate all outstanding debt and take actions authorized in such circumstances under applicable collateral security documents.
Our ability to operate as a going concern is dependent on our ability to remain in compliance with debt covenants and repay, refinance or amend our debt agreements as they become due, if available liquidity is consumed. The Notes, 1st Lien Credit Facility and 2nd Lien Term Loan have only limited affirmative covenants with which we are required to maintain compliance. We are in compliance with our debt covenants at March 25, 201831, 2019.
In February 2017 our filing of a replacement Form S-3 registration statement ("Shelf") with the SEC, was declared effective and expires February 2020. The Shelf registration gives us the flexibility to issue and publicly distribute various types of securities, including preferred stock, common stock, warrants, secured or unsecured debt securities, purchase contracts and units consisting of any combination of such securities, from time to time, in one or more offerings, up to an aggregate amount of $750,000,000. SEC issuer eligibility rules require us to have a public float of at least $75,000,000 in order to use the Shelf. Subject to maintenance of the minimum level of equity market float and the conditions of our existing debt agreements, the Shelf may enable us to sell securities quickly and efficiently when market conditions are favorable or financing needs arise. Under our existing debt agreements, net proceeds from the sale of any securities may be used generally to reduce debt.
CHANGES IN LAWS AND REGULATIONS
Pension Plans
In 2012, the Surface Transportation Extension Act of 2012 (“STEA”) was signed into law. STEA provides for changes in the determination of discount rates that result in a near-term reduction in minimum funding requirements for our defined benefit pension plans. STEA will also result in an increase in future premiums to be paid to the Pension Benefit Guarantee Corporation ("PBGC").
In 2014, the Highway and Transportation Funding Act ("HATFA") was signed into law. HATFA generally extends the relief offered under STEA and further increases premiums to be paid to the PBGC.
Income Taxes
On December 22, 2017, comprehensive tax legislation commonly referred to as the 2017 Tax Cuts and Jobs Act (the “2017 Tax Act”) was signed into law. Among other provisions, the 2017 Tax Act reduces the federal statutory corporate income tax rate from 35% to 21%. The reduction of the corporate tax rate caused us to adjustre-measure our deferred tax assets and liabilities to the lower federal base rate of 21% in December 2017. The transitional impact. We reported a discrete adjustment from revaluing our deferred tax assets and liabilities which resulted in a provisional net decrease in income tax expense of $24,872,000 for the 26 weeks ended March 25, 2018.
The changes resulting from the 2017 Tax Act are complex and the final impact of the 2017 Tax Act may differ from the above estimate, possibly materially, due to, among other things, changes in interpretations of the 2017 Tax Act, any legislative action to address questions that arise because of the 2017 Tax Act, changes in accounting standards for income taxes or related interpretations in response to the 2017 Tax Act, updates or changes to estimates the Company has used to calculate the transition impacts, including impacts from changes to current year earnings estimates. The Securities Exchange Commission has issued rules that allow for a measurement period of up to one year after the enactment date of the 2017 Tax Act to finalize the recording of the related tax impacts. We did not maketransitional impact. Apart from any adjustments tofuture changes in interpretations, legislative action or changes in accounting standards, we finalized and recorded the provisional amount recorded and currently anticipate finalizing and recording any resulting adjustments by the endas of our current fiscal year ending September 30, 2018.
Certain states in which we operate periodically consider changes to their corporate income tax rates. Until such changes are enacted, the impact of such changes cannot be determined.
Wage Laws
The United States and various state and local governments are considering increasing their respective minimum wage rates. Most of our employees earn an amount in excess of the current United States or state minimum wage rates. However, until changes to such rates are enacted, the impact of the changes cannot be determined.
INFLATION
Price increases (or decreases) for our products or services are implemented when deemed appropriate by us. We continuously evaluate price increases, productivity improvements, sourcing efficiencies and other cost reductions to mitigate the impact of inflation.
Item 3. Quantitative and Qualitative Disclosures About Market Risk
We are exposed to market risk stemming from changes in interest rates and commodity prices. Changes in these factors could cause fluctuations in earnings and cash flows. In the normal course of business, exposure to certain of these market risks is managed as described below.
INTEREST RATES ON DEBT
Our debt structure, which is predominantlyentirely fixed rate, significantly reduceseliminates the potential impact of an increase in interest rates. At March 25, 2018, only 4.8% of the principal amount of our31, 2019, we had no floating debt is subject to floating interest rates. Our primary exposure is to LIBOR. A 100 basis point increase to LIBOR would decrease income before income taxes on an annualized basis by approximately $246,450 based on$24,645,000 of floating rate debt outstanding at March 25, 2018.
outstanding. We evaluate alternatives to hedge ourhave no interest rate risk, but have no hedging instruments in place.
COMMODITIES
Newsprint price increases are being implemented in April and Mayprices began showing signs of 2018,weakness during the March 2019 Quarter as a result of tighteningincreased supply vs demand for newsprintversus declining domestic and as a result of preliminary duties and tariffs being imposed by the United States Department of Commerce on newsprint imported from Canada. A portion of the recent price increases are expected to be offset by reduced consumption of newsprint by the Company. We also manage significant newsprint inventories, which will temporarily mitigate the impact of any price increases.export demand.
Our long termlong-term supply strategy is to align the Company with those cost effectivecost-effective suppliers most likely to continue producing and supplying newsprint to the North American market and geographically aligned with our print locations. Where possible the Company will align supply with the lowest cost material, but may be restricted due to current supply chain tightnessshipping expenses and paper production availability.
A $10 per tonne price increase for 30 pound newsprint would result in an annualized reduction in income before taxes of approximately $365,000$331,000 annualized based on anticipated consumption in 2018,2019, excluding consumption of TNI and MNI and the impact of LIFO accounting.
SENSITIVITY TO CHANGES IN VALUE
At March 25, 2018, the fair value of floating rate debt, which consists primarily of our 1st Lien Term Loan, is $24,645,000, based on an average of private market price quotations. Our fixed rate debt consists of $385,000,000 principal amount of the Notes and $106,676,000$91,455,000 principal amount under the 2nd Lien Term Loan.Loan, which are subject to fixed interest rates. At March 25, 2018,31, 2019, based on an average of private market price quotations, the fair values were $401,603,000$392,311,150 and $109,876,000$91,455,213 for the Notes and 2nd Lien Term Loan, respectively.
Item 4. Controls and Procedures
EVALUATION OF DISCLOSURE CONTROLS AND PROCEDURES
Under the supervision and with the participation of our senior management, including our chief executive officer and chief financial officer, we conducted an evaluation of the effectiveness of the design and operation of our disclosure controls and procedures, as defined in Rules 13a-15(e) and 15d-15(e) under the Exchange Act, as of the end of the period covered by this Quarterly Report on Form 10-Q (the “Evaluation Date”). Based on this evaluation, our chief executive officer and chief financial officer concluded as of the Evaluation Date that our disclosure controls and procedures were effective such that the information relating to the Company, including our consolidated subsidiaries, required to be disclosed in our SEC reports (i) is recorded, processed, summarized and reported within the time periods specified in SEC rules and forms, and (ii) is accumulated and communicated to our management, including our chief executive officer and chief financial officer, as appropriate to allow timely decisions regarding required disclosure.
CHANGES IN INTERNAL CONTROL OVER FINANCIAL REPORTING
There have been no changes in our internal control over financial reporting that occurred during the 26 weeks ended March 25, 201831, 2019 that have materially affected, or are reasonably likely to materially affect, our internal control over financial reporting.
PART II
OTHER INFORMATION
Item 1. Legal Proceedings
We are involved in a variety of legal actions that arise in the normal course of business. Insurance coverage mitigates potential loss for certain of these matters. While we are unable to predict the ultimate outcome of these legal actions, it is our opinion that the disposition of these matters will not have a material adverse effect on our Consolidated Financial Statements, taken as a whole.
Item 6. Exhibits
|
| | |
Number | | Description |
| | |
31.1 | | |
31.2 | | |
32 | | |
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the Registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.
|
| | |
| | |
LEE ENTERPRISES, INCORPORATED | | |
| | |
/s/ Timothy R. Millage | | May 4, 201810, 2019 |
Timothy R. Millage | | |
Acting PrincipalVice President, Chief Financial Officer and Accounting OfficerTreasurer | | |
(Principal Financial and Accounting Officer) | | |