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 w
eeks and 39 weeks ended
June 25, 2017
. This discussion should be read in conjunction with the Consolidated Financial Statements and related Notes thereto, included herein, and our 2016 Annual Report on Form 10-K.
NON-GAAP FINANCIAL MEASURES
We use non-GAAP financial performance measures for purposes 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 use are as follows:
Adjusted EBITDA is a non-GAAP financial performance measure that enhances a financial statement user's 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 nonoperating expenses (income), net, income tax expense (benefit), depreciation, amortization, loss (gain) on sale of assets, impairment charges, workforce adjustment costs, 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, unusual matters and those of a substantially non-recurring nature.
Cash Costs is a non-GAAP financial performance measure of operating expenses that are settled in cash and is useful to investors in understanding the components of the Company’s cash operating costs. Generally, 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 is defined as compensation, newsprint and ink, other operating expenses and certain unusual matters, such as workforce adjustment costs. Depreciation, amortization, impairment charges, other non-cash operating expenses and other unusual matters are excluded. Cash Costs are also presented excluding workforce adjustments, which are paid in cash.
We also present revenue and certain operating expense trends on a Same Property basis which excludes the operating results of the
Daily Herald
in Provo, UT, which was sold in August 2016, and the acquisition of a weekly publication in 2017. Same Property results are useful to investors in understanding the revenue and operating expense trends excluding the impact of changes due to operations no longer owned by the Company or were recently acquired.
A table reconciling Adjusted EBITDA to net income (loss), the most directly comparable measure under GAAP, is set forth in Item 2, included herein, under the caption "Reconciliation of Non-GAAP Financial Measures".
Reconciliations of adjusted income (loss) and adjusted earnings (loss) per common share to income (loss) attributable to Lee Enterprises, Incorporated and earnings (loss) per common share, respectively, the most directly comparable measures under GAAP, are set forth in Item 2, included herein, under the caption “Overall Results”.
The subtotals of operating expenses representing cash costs can be found in tables in Item 2, included herein, under the captions “13 Weeks Ended
June 25, 2017
" and "39 Weeks Ended
June 25, 2017
".
Same Property trends can be found in tables in Item 2, included herein, under the captions "13 Weeks Ended
June 25, 2017
" and "39 Weeks Ended
June 25, 2017
".
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
|
|
39 Weeks Ended
|
|
(Thousands of Dollars)
|
June 25
2017
|
|
June 26
2016
|
|
June 25
2017
|
|
June 26
2016
|
|
|
|
|
|
|
Net Income
|
6,287
|
|
4,367
|
|
25,105
|
|
35,358
|
|
Adjusted to exclude
|
|
|
|
|
Income tax expense
|
1,843
|
|
3,037
|
|
9,253
|
|
22,571
|
|
Non-operating expenses, net
|
12,433
|
|
17,251
|
|
36,447
|
|
21,877
|
|
Equity in earnings of TNI and MNI
|
(1,616
|
)
|
(1,825
|
)
|
(6,034
|
)
|
(6,633
|
)
|
Loss (gain) on sale of assets, net
|
(61
|
)
|
(354
|
)
|
(3,777
|
)
|
(1,763
|
)
|
Depreciation and amortization
|
10,296
|
|
10,868
|
|
30,993
|
|
32,752
|
|
Workforce adjustments and other
|
3,902
|
|
424
|
|
6,372
|
|
1,616
|
|
Stock compensation
|
481
|
|
550
|
|
1,564
|
|
1,714
|
|
Add:
|
|
|
|
|
Ownership share of TNI and MNI EBITDA (50%)
|
2,246
|
|
2,625
|
|
7,943
|
|
9,145
|
|
Adjusted EBITDA
|
35,811
|
|
36,943
|
|
107,866
|
|
116,637
|
|
CRITICAL ACCOUNTING POLICIES
Our discussion and analysis of results of operations and financial condition are based upon our Consolidated Financial Statements, which have been prepared in accordance with Generally Accepted Accounting Principles ("GAAP"). The preparation of these financial statements 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.
Our critical accounting policies include the following:
•
Goodwill and other intangible assets;
•
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 2016 Annual Report on Form 10-K.
IMPACT OF RECENTLY ISSUED ACCOUNTING STANDARDS
In March 2017, the Financial Accounting Standards Board ("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 are presented outside of operating income. The current presentation includes all components of the expense as Compensation in our Consolidated Statements of Income and Comprehensive Income. The adoption of the new standard is required in 2019.
In August 2016, the FASB issued a new standard to conform the presentation 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 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 accounting for income taxes and statutory tax withholding requirements, as well as classification in the statement of cash flows. The adoption of the new standard is required in 2018. We have not determined the potential effects on the Consolidated Financial Statements.
In February 2016, the FASB issued a new standard for the accounting treatment of leases. The new standard is based on the principle that entities should recognize assets and liabilities arising from leases. The new standard 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 standards primary change is the requirement for entities to recognize a lease liability for payments and a right of use asset representing the right to use the leased asset during the term on operating lease arrangements. Lessees are permitted to make an accounting policy election to not recognize the asset and liability for leases with a term of twelve months or less. Lessors’ accounting under the new standard is largely unchanged from the previous accounting standard. In addition, the new standard expands the disclosure requirements of lease arrangements. Lessees and lessors will use a modified retrospective transition approach, which includes a number of practical expedients. The adoption of this new standard is required in the first quarter of fiscal year 2020 with early adoption permitted. We have not determined the potential effects on the Consolidated Financial Statements.
In May 2014, the FASB issued new accounting requirements for the recognition of revenue from contracts with customers. The new requirements include additional disclosure about the nature, amount, timing and uncertainty of revenue and cash flows arising from customer contracts, including significant judgments and changes in judgments and assets recognized from costs incurred to obtain or fulfill a contract. In April and May 2016, the FASB also issued clarifying updates to the new standard specifically to address certain core principles including the identification of performance obligations, licensing guidance, the assessment of the collectability criterion, the presentation of taxes collected from customers, noncash considerations, contract modifications, and completed contracts at transition. The adoption of these requirements is required in 2019.
We currently anticipate adopting the new revenue recognition standard in the fiscal year beginning October 1, 2018. We are currently evaluating the impact that the updated guidance will have on our financial statements and related disclosures.
EXECUTIVE OVERVIEW
Lee Enterprises, Incorporated is a leading provider of local news and information, and a major platform for advertising, in the markets we serve, which are located primarily in the Midwest, Mountain West and West regions of the United States. With the exception of St. Louis, Missouri, our 50 markets, across 22 states, are principally midsize or small. Through our print and digital platforms, we reach an overwhelming majority of adults in our markets.
Our products include:
|
|
•
|
47 daily and 35 Sunday newspapers with print and digital subscribers totaling
0.8 million
and
1.1 million
, respectively, for the 13 weeks ended
June 25, 2017
. We estimate that almost three million people read our printed daily newspapers each day; and
|
|
|
•
|
Nearly 300 weekly newspapers and classified and niche publications.
|
Our markets have established retail bases, and most are regional shopping hubs. We are located 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 all of these factors have had a positive impact on advertising revenue. Community newspapers and their associated digital media remain a valuable source of local news and information attracting large local audiences and are an effective means for local advertisers to reach their customers. We believe our audiences across these communities tend to be loyal readers who actively seek our content and serve as an attractive target for our advertisers.
We do not face significant competition from other local daily newspapers in most of our markets, although there is competition for audience in those markets from other media. In our top ten markets by revenue, only one has significant local daily print competition.
Our primary source of revenue is advertising and marketing services, followed by subscription revenue. Over the last several years, the advertising industry has experienced a shift from print and other traditional media towards digital advertising as readership has also shifted from print to digital. In addition, our printed newspaper paid subscription and single copy unit sales have declined. We have offset some of our declines in print advertising and marketing services revenue by growing our digital advertising revenue. Subscription revenue has been maintained by increasing subscription rates which includes full access, selling premium day sections and increasing the number of paid digital subscribers.
We have a full access subscription model, which provides subscribers with complete digital access, including desktop, mobile, tablet and replica editions. These are offered as packages with print home delivery or as digital-only subscriptions, with subscription rates reflective of the expanded access.
We continue to transform our business model and carefully manage our costs to maintain strong cash flows and margins.
On June 30, 2017, in the Company's fourth fiscal quarter of 2017, the Company purchased the assets of the
Dispatch-Argus
serving Moline 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 cash on the balance sheet and will be consolidated with the Company results in the 13 weeks ended September 24, 2017.
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, market or business conditions decline, and have a negative impact on our stock price or projected future cash flows, we may be required to record 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 4 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
June 25, 2017
, 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
June 25, 2017
;
|
|
|
•
|
$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 “1
st
Lien Credit Facility”), of which
$58,984,000
is outstanding at
June 25, 2017
; and
|
|
|
•
|
$150,000,000
second lien term loan under a Second Lien Loan Agreement dated as of March 31, 2014 (the “ 2
nd
Lien Term Loan”), of which
$124,496,000
is outstanding at
June 25, 2017
.
|
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
June 25, 2017
, after consideration of letters of credit, we have approximately
$33,818,000
available for future use under our Revolving Facility. Including cash, our liquidity at
June 25, 2017
totals
$58,790,000
. This liquidity amount excludes any future cash flows. Our adjusted EBITDA has been strong for the last seven years and has exceeded $145,000,000 in each year from 2011 through the trailing twelve months ended
June 25, 2017
, 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
June 25, 2017
, the principal amount of our outstanding debt totaled
$568,480,000
. The
June 25, 2017
principal amount of our debt, net of cash, is
3.75
times our trailing twelve months adjusted EBITDA.
Final maturities of our debt range from December 2018 through December 2022.
There are numerous potential consequences under the Notes, 1
st
Lien Credit Facility and 2
nd
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, 1
st
Lien Credit Facility and 2
nd
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, 1
st
Lien Credit Facility and 2
nd
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
June 25, 2017
.
Due to our federal and state net operating loss carryforwards and based on historical levels of performance, we do not expect to make any significant income tax payments in the current year.
13 WEEKS ENDED JUNE 25, 2017
Operating results, as reported in the Consolidated Financial Statements, are summarized below.
|
|
|
|
|
|
|
|
|
|
|
13 Weeks Ended
|
|
(Thousands of Dollars, Except Per Share Data)
|
June 25
2017
|
|
June 26
2016
|
|
Percent
Change
|
|
Same Property
|
|
|
|
|
|
|
Advertising and marketing services revenue:
|
|
|
|
|
Retail
|
51,946
|
|
58,937
|
|
(11.9
|
)
|
(10.6
|
)
|
Classified
|
22,434
|
|
25,707
|
|
(12.7
|
)
|
(11.8
|
)
|
National
|
4,273
|
|
4,626
|
|
(7.6
|
)
|
(6.3
|
)
|
Niche publications and other
|
2,594
|
|
3,024
|
|
(14.2
|
)
|
(14.3
|
)
|
Total advertising and marketing services revenue
|
81,247
|
|
92,294
|
|
(12.0
|
)
|
(10.8
|
)
|
Subscription
|
47,410
|
|
47,160
|
|
0.5
|
|
1.6
|
|
Digital services
|
3,435
|
|
3,541
|
|
(3.0
|
)
|
(2.2
|
)
|
Commercial printing
|
2,521
|
|
3,116
|
|
(19.1
|
)
|
(17.6
|
)
|
Other
|
4,742
|
|
4,835
|
|
(1.9
|
)
|
(1.6
|
)
|
Total operating revenue
|
139,355
|
|
150,946
|
|
(7.7
|
)
|
(6.6
|
)
|
Operating expenses:
|
|
|
|
|
Compensation
|
51,577
|
|
57,218
|
|
(9.9
|
)
|
(9.1
|
)
|
Newsprint and ink
|
6,123
|
|
6,604
|
|
(7.3
|
)
|
(7.4
|
)
|
Other operating expenses
|
48,571
|
|
53,356
|
|
(9.0
|
)
|
(6.8
|
)
|
Workforce adjustments and other
|
3,902
|
|
424
|
|
NM
|
|
NM
|
|
Cash costs
|
110,173
|
|
117,602
|
|
(6.3
|
)
|
(4.9
|
)
|
|
29,182
|
|
33,344
|
|
(12.5
|
)
|
(12.2
|
)
|
Depreciation and amortization
|
10,296
|
|
10,868
|
|
(5.3
|
)
|
|
Gain on sales of assets and other, net
|
(61
|
)
|
(354
|
)
|
NM
|
|
|
Equity in earnings of associated companies
|
1,616
|
|
1,825
|
|
(11.5
|
)
|
|
Operating income
|
20,563
|
|
24,655
|
|
(16.6
|
)
|
|
Non-operating expense, net
|
(12,433
|
)
|
(17,251
|
)
|
(27.9
|
)
|
|
Income before income taxes
|
8,130
|
|
7,404
|
|
9.8
|
|
|
Income tax expense
|
1,843
|
|
3,037
|
|
(39.3
|
)
|
|
Net income
|
6,287
|
|
4,367
|
|
44.0
|
|
|
Net income attributable to non-controlling interests
|
(292
|
)
|
(275
|
)
|
6.2
|
|
|
Income attributable to Lee Enterprises, Incorporated
|
5,995
|
|
4,092
|
|
46.5
|
|
|
Other comprehensive income (loss), net of income taxes
|
55
|
|
(43
|
)
|
NM
|
|
|
Comprehensive income attributable to Lee Enterprises, Incorporated
|
6,050
|
|
4,049
|
|
49.4
|
|
|
Earnings per common share:
|
|
|
|
|
Basic
|
0.11
|
|
0.08
|
|
37.5
|
|
|
Diluted
|
0.11
|
|
0.08
|
|
37.5
|
|
|
References to the "2017 Quarter" refer to the 13 weeks ended
June 25, 2017
. Similarly, references to the "2016 Quarter" refer to the 13 weeks ended
June 26, 2016
. Due to the disposition of the
Daily Herald
in Provo, UT in August of 2016 and the weekly publication purchased in 2017, all of the revenue and operating expense trends discussed below are on a same property basis, unless otherwise noted.
Advertising and Marketing Services Revenue
In the 2017 Quarter, advertising and marketing services revenue decreased
$9,833,000
,
or
10.8%
, compared to the 2016 Quarter. Retail advertising decreased
10.6%
.
The decrease in advertising and marketing services revenue is due to reduced advertising volume primarily from large retailers and big box stores. Dig
ital retail advertising on a stand-alone basis, which is the largest digital advertising category, increa
sed
8.3%
,
par
tially offsetting print declines.
Classified revenue decreased
$3,004,000
, or
11.8%
, in the 2017 Quarter as we continue to experience a reduction in print advertising in automotive, employment and real estate in most of our markets which combined declined 27.4%.
While other classified revenue, which include obituaries and legal notices, declined 4.0% in the 2017 Quarter. Digital classified revenue on a stand-alone basis increased
7.3%
.
National advertising decreased
$287,000
, or
6.3%
, and digital national advertising on a stand-alone basis increased
6.1%
.
Niche publications and other decreased
$429,000
, or
14.3%
, in the 2017 Quarter. Declines were due to elimination of products that do not meet our profit margin standards.
On a stand alone basis, digital advertising and marketing services revenue increased
7.8%
to
$23,626,000
in the 2017 Quarter, representing
29.2%
of total advertising and marketing services re
venue. Total digital revenue, including, TownNews.com, advertising and marketing services and all other digital business was
$27,062,000
in the 2017 Quarter, an increase of
6.4%
over the 2016 Quarter. 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. Print advertising, including preprints and print marketing services revenue, decreased
16.7%
.
Subscription and Other Revenue
Subscription revenue increased
$755,000
, or
1.6%
, in the 2017 Quarter. The increase in the 2017 Quarter is due to sound pricing principles and additional premium content revenue.
Our average daily newspaper circulation, including TNI, MNI and digital subscribers, totaled
0.8 million
in the 2017 Quarter. Sunday circulation totaled
1.1 million
.
Digital services revenue decreased
$79,000
, or
2.2%
, due to a reduction in online surveys
. These declines are partially offset by revenue at TownNews.com which increased $0.2 million, or 5.5%. Commercial printing revenue decreased
$537,000
, or
17.6%
, in the 2017 Quarter due to decreased volume for existing customers at several of our largest markets.
In the 2017 Quarter, our mobile, tablet, desktop and app sites, including TNI and MNI, attracted an average of
225.7 million
monthly page views, a
6.5%
increase compared to the 2016 Quarter. Audience engagement is also increasing as pages per user session increased in the 2017 Quarter.
Operating Expenses
Operating expenses for the 2017 Quarter decreased
4.7%
. Excluding workforce adjustments, cash costs decreased
8.0%
in the 2017 Quarter.
Compensation expense decrea
sed
$5,158,000
, or
9.1%
, in the 2017 Quarter, driven by a decline in average full-time equivalent employees of
9.7%
.
Newsprint and ink costs decreased
$486,000
, or
7.4%
, in the 2017 Quarter,
as a result of a reduction in newsprint volume of
13.9%
from unit reductions and from basis weight changes. The declines were partially offset by higher prices.
See Item 3, “Commodities”, included herein, for further discussion and analysis of the impact of newsprint prices on our business.
Other operating expenses decreased
$3,523,000
, or
6.8%
, in the 2017 Quarter. Other operating expenses include
all operating costs not considered to be compensation, newsprint, depreciation, amortization, or workforce adjustments and other. The largest costs included are delivery, postage, outsourced printing, digital cost of goods sold, facility expenses among others.
Cost reductions were primarily related to lower subscriber delivery cost from declines in print volumes and a decrease in postage costs, primarily related to a reduction in direct mail advertising volumes.
Workforce adjustment and other costs totaled
$3,902,000
in the 2017 Quarter compare to
$424,000
in the 2016 Quarter. The 2017 Quarter includes a $2,600,000 expense to record an estimate of a partial withdrawal liability from one of our multiemployer pension plans.
For fiscal 2017, we expect cash cost excluding workforce adjustments, to decrease 6.5%.
Results of Operations
On a GAAP basis, depre
ciation expense decreased
$312,000
, or
7.2%
, and amortization expense decreased
$260,000
, or
4.0%
, in the 2017 Quarter. Sales of operating assets resulted in a net gain of
$61,000
in the 2017 Quarter compared to a
$354,000
gain in the 2016 Quarter.
Equity in earnings of TNI and MNI decreased
$209,000
in the 2017 Quarter.
The factors noted above resulted in operating income of
$20,563,000
in the 2017 Quarter compared to
$24,655,000
in the 2016 Quarter.
Nonoperating Income and Expense
Interest expense decreased
$1,452,000
, or
9.2%
, to
$14,331,000
in the 2017 Quarter due to lower debt balances.
Our weighted average cost of debt, excluding amortization of debt financing costs, increased to
9.8%
at the end of the 2017 Quarter compared to
9.6%
at the end of the 2016 Quarter, as our Notes and 2
nd
Lien Term Loan balances are now a greater percentage of our outstanding debt due to the ongoing reduction of the 1
st
Lien Term Loan, our lowest cost of debt.
We recognized $
1,438,000
of debt financing and administrative costs in the 2017 Quarter compared to $
1,196,000
in the 2016 Quarter.
Due to the fluctuation in the price of our Common Stock, we recorded non-operating income of
$3,040,000
in 2017 Quarter and a non-operating expense of
$415,000
in the 2016 Quarter, related to the changes in the value of the Warrants.
Overall Results
We recognized income tax expense of
$1,843,000
, resulting in an effective tax rate of
22.7%
in the 2017 Quarter compared to
41.0%
in the 2016 Quarter. See Note 6 of the Notes to the Consolidated Financial Statements, included herein, for a discussion of the difference between the expected federal income tax rate and the actual tax rates.
As a result of the factors noted above, income attributable to Lee Enterprises, Incorporated totaled
$5,995,000
in the 2017 Quarter compared to
$4,092,000
in the 2016 Quarter. We recorded earnings per diluted common share of
$0.11
in the 2017 Quarter and
$0.08
in the 2016 Quarter. Excluding the warrant fair value adjustment, as detailed in the table below, diluted earnings per common share, as adjusted, were
$0.05
in the 2017 Quarter, compared to
$0.08
the 2016
Quarter. Per share amounts may not add due to rounding.
|
|
|
|
|
|
|
|
|
|
|
13 Weeks Ended
|
|
|
June 25
2017
|
|
June 26
2016
|
|
(Thousands of Dollars, Except Per Share Data)
|
Amount
|
|
Per Share
|
|
Amount
|
|
Per Share
|
|
|
|
|
|
|
Income attributable to Lee Enterprises, Incorporated, as reported
|
5,995
|
|
0.11
|
|
4,092
|
|
0.08
|
|
Adjustments:
|
|
|
|
|
Warrants fair value adjustment
|
(3,040
|
)
|
|
415
|
|
|
|
(3,040
|
)
|
(0.05
|
)
|
415
|
|
0.01
|
|
Income attributable to Lee Enterprises, Incorporated, as adjusted
|
2,955
|
|
0.05
|
|
4,507
|
|
0.08
|
|
39 WEEKS ENDED JUNE 25, 2017
Operating results, as reported in the Consolidated Financial Statements, are summarized below. Certain prior period amounts have been reclassified to conform with the current year presentation.
|
|
|
|
|
|
|
|
|
|
|
39 Weeks Ended
|
|
(Thousands of Dollars, Except Per Share Data)
|
June 25
2017
|
|
June 26
2016
|
|
Percent
Change
|
|
Same Property
|
|
|
|
|
|
|
Operating revenue:
|
|
|
|
|
Retail
|
162,822
|
|
184,302
|
|
(11.7
|
)
|
(10.0
|
)
|
Classified
|
66,457
|
|
76,548
|
|
(13.2
|
)
|
(12.2
|
)
|
National
|
14,977
|
|
17,006
|
|
(11.9
|
)
|
(10.8
|
)
|
Niche publications and other
|
7,559
|
|
8,806
|
|
(14.2
|
)
|
(13.8
|
)
|
Total advertising and marketing services revenue
|
251,815
|
|
286,662
|
|
(12.2
|
)
|
(10.8
|
)
|
Subscription
|
141,306
|
|
144,249
|
|
(2.0
|
)
|
(1.0
|
)
|
Digital services
|
10,390
|
|
10,271
|
|
1.2
|
|
1.4
|
|
Commercial printing
|
7,818
|
|
9,385
|
|
(16.7
|
)
|
(15.5
|
)
|
Other
|
15,402
|
|
15,619
|
|
(1.4
|
)
|
(1.2
|
)
|
Total operating revenue
|
426,731
|
|
466,186
|
|
(8.5
|
)
|
(7.2
|
)
|
Operating expenses:
|
|
|
|
|
Compensation
|
159,047
|
|
174,733
|
|
(9.0
|
)
|
(8.0
|
)
|
Newsprint and ink
|
19,216
|
|
19,343
|
|
(0.7
|
)
|
(0.7
|
)
|
Other operating expenses
|
150,109
|
|
166,332
|
|
(9.8
|
)
|
(7.5
|
)
|
Workforce adjustments
|
6,372
|
|
1,616
|
|
NM
|
|
NM
|
|
Cash costs
|
334,744
|
|
362,024
|
|
(7.5
|
)
|
(6.0
|
)
|
|
91,987
|
|
104,162
|
|
(11.7
|
)
|
(11.4
|
)
|
Depreciation and amortization
|
30,993
|
|
32,752
|
|
(5.4
|
)
|
|
Gain on sales of assets and other, net
|
(3,777
|
)
|
(1,763
|
)
|
NM
|
|
|
Equity in earnings of associated companies
|
6,034
|
|
6,633
|
|
(9.0
|
)
|
|
Operating income
|
70,805
|
|
79,806
|
|
(11.3
|
)
|
|
Non-operating expense, net
|
(36,447
|
)
|
(21,877
|
)
|
66.6
|
|
|
Income before income taxes
|
34,358
|
|
57,929
|
|
(40.7
|
)
|
|
Income tax expense
|
9,253
|
|
22,571
|
|
(59.0
|
)
|
|
Net income
|
25,105
|
|
35,358
|
|
(29.0
|
)
|
|
Net income attributable to non-controlling interests
|
(809
|
)
|
(801
|
)
|
1.0
|
|
|
Income attributable to Lee Enterprises, Incorporated
|
24,296
|
|
34,557
|
|
(29.7
|
)
|
|
Other comprehensive loss, net of income taxes
|
1,004
|
|
(129
|
)
|
NM
|
|
|
Comprehensive income attributable to Lee Enterprises, Incorporated
|
25,300
|
|
34,428
|
|
(26.5
|
)
|
|
Earnings per common share:
|
|
|
|
|
Basic
|
0.45
|
|
0.65
|
|
(30.8
|
)
|
|
Diluted
|
0.44
|
|
0.64
|
|
(31.3
|
)
|
|
References to the "2017 Period" refer to the 39 weeks ended
June 25, 2017
. Similarly, references to the "2016 Period" refer to the 39 weeks ended
June 26, 2016
. Due to the disposition of the
Daily Herald
in Provo, UT in August of 2016 and the weekly publication purchased in 2017, all of the revenue and operating expense trends discussed below are on a same property basis, unless otherwise noted.
Advertising and Marketing Services Revenue
In the 2017 Period, advertising and marketing services revenue decreased
$30,331,000
,
or
10.8%
, compared to the 2016 Period. Retail advertising decreas
ed
10.0%
. The decrease in retail advertising revenue is due to reduced advertising volume primarily from large retail, big box stores and classifieds. Digital retail advertising on a stand-alone basis increased
9.8%
, partially offsetting print declines.
Classified revenue decreased
$9,217,000
, or
12.2%
, in the 2017 Period as we continue to experience a reduction in print advertising from automotive, employment and real estate in most of our markets which combined declined 25.0%.
While other classified revenue, which includes obituaries and legal notices, declined
$1,307,000
, or
4.2%
, in the 2017 Period, digital classified revenue on a stand-alone basis increased
7.7%
.
National advertising decreased
$1,809,000
, or
10.8%
. Digital national advertising on a stand-alone basis
increased
3.7%
.
Niche publications and other decreased
$1,205,000
, or
13.8%
, in the 2017 Period. Declines were due to elimination of products that do not meet our profit margin standards.
On a stand-alone basis, digital advertising and marketing services revenue increased
8.6%
to
$68,798,000
, in the 2017 Period, representing
27.3%
of total advertising and marketing services revenue. Total digital revenue including TownNews.com advertising and marketing services and all other digital business totaled
$79,189,000
in the 2017 Period, an increase of
7.6%
over the 2016 Period. 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. Print advertising, including preprints and print marketing services revenue, decreased
16.4%
.
Subscription and Other Revenue
Subscription revenue decreased
$1,360,000
, or
1.0%
, in the 2017 Period.
Our average daily newspaper circulation, including TNI, MNI and digital subscribers, totaled
0.9 million
in the 2017 Period. Sunday circulation totaled
1.2 million
.
Digital services revenue increased
$146,000
, or
1.4%
, due to TownNews.com, offset by a decrease in online surveys revenue. Commercial printing revenue decreased
$1,429,000
, or
15.5%
, in the 2017 Perio
d due to decreased volume from several of our existing customers.
Operating Expenses
Operating expenses for the 2017 Period decreased
5.5%
. Excluding workforce adjustments, cash costs decreased
7.4%
in the 2017 Period.
Compensation expense decreased
$13,826,000
, or
8.0%
, in the 2017 Period, driven by a decline of
8.0%
in average full time equivalent employees and lower self-insured medical costs.
Newsprint and ink costs decreased
$132,000
, or
0.7%
, in the 2017 Period
,
as a result of a
12.9%
reduction in newsprint volume partially offset by price increases. See Item 3, “Commodities”, included herein, for further discussion and analysis of the impact of newsprint on our business.
Other operating expenses decreased
$12,169,000
, or
7.5%
, in the 2017 Period. Other operating expenses include all operating costs not considered to be compensation, newsprint, depreciation, amortization, or workforce adjusments and other. The largest costs included are delivery, postage, outsourced printing, digital cost of goods sold, facility expenses among others. Cost reductions were primarily related to lower subscriber delivery cost from declines in print volumes and a decrease in postage costs, as a result to a reduction in direct mail advertising volumes.
Workforce adjustment costs totaled
$6,372,000
and
$1,616,000
in the 2017 Period and 2016 Period, respectively. The 2017 Period includes a $2,600,000 expense to record an estimate of a partial withdrawal liability from one of our multiemployer pension plans.
Results of Operations
On a GAAP basis, depreciation expense decreased
$885,000
, or
6.8%
, and amortization expense decreased
$874,000
, or
4.4%
, in the 2017 Period.
Sales of operating assets and other, net including a $3,741,000 curtailment gain resulted in a net gain of
$3,777,000
in the 2017 Period compared to a net gain of
$1,763,000
in the 2016 Period.
Equity in earnings in associated companies decreased
$599,000
in the 2017 Period.
The factors noted above resulted in operating income of
$70,805,000
in the 2017 Period compared to
$79,806,000
in the 2016 Period.
Nonoperating Income and Expense
Interest expense decreased
$5,287,000
, or
10.7%
, to
$43,919,000
in the 2017 Period due to lower debt balances.
Due to the fluctuation in the price of our Common Stock, we recorded non-operating income of
$10,418,000
in 2017 Period and non-operating expense of
$404,000
in the 2016 Period, related to the changes in the value of the Warrants.
In the 2016 Period, we recognized a
$30,646,000
gain on an insurance settlement. The settlement represents our share of a subrogation recovery arising from the settlement of claims for damages suffered as a result of a 2009 loss at one of the Lee Legacy production facilities.
We recognized
$3,463,000
of debt financing costs in the 2017 Period compared to
$4,563,000
in the 2016 Period related to our 2014 refinancing. We also recognized
$1,250,000
gain on extinguishment of debt in the 2016 Period.
Overall Results
We recognized income tax expense of
$9,253,000
, resulting in an effective tax rate of
26.9%
in the 2017 Period compared to
39.0%
in the 2016 Period. See Note 6 of the Notes to the Consolidated Financial Statements, included herein, for a discussion of the difference between the expected federal income tax rate and the actual tax rates.
As a result of the factors noted above, income attributable to Lee Enterprises, Incorporated totaled
$24,296,000
in the 2017 Period compared to
$34,557,000
in the 2016 Period. We recorded earnings per diluted common share of
$0.44
in the 2017 Period and
$0.64
in the 2016 Period. Excluding unusual matters, as detailed in the table below, diluted earnings per common share, as adjusted, were
$0.25
in the 2017 Period and
$0.28
in the 2016 Period. Per share amounts may not add due to rounding.
|
|
|
|
|
|
|
|
|
|
|
|
|
39 Weeks Ended
|
|
|
June 25
2017
|
|
June 26
2016
|
|
(Thousands of Dollars, Except Per Share Data)
|
Amount
|
|
Per Share
|
|
Amount
|
|
Per Share
|
|
|
|
|
Income attributable to Lee Enterprises, Incorporated, as reported
|
24,296
|
|
0.44
|
|
34,557
|
|
0.64
|
|
Adjustments:
|
|
|
|
|
Warrants fair value adjustment
|
(10,418
|
)
|
|
404
|
|
|
Gain on insurance settlement
|
—
|
|
|
(30,646
|
)
|
|
|
(10,418
|
)
|
|
(30,242
|
)
|
|
Income tax effect of adjustments, net
|
—
|
|
|
10,726
|
|
|
|
(10,418
|
)
|
(0.19
|
)
|
(19,516
|
)
|
(0.36
|
)
|
Income attributable to Lee Enterprises, Incorporated, as adjusted
|
13,878
|
|
0.25
|
|
15,041
|
|
0.28
|
|
LIQUIDITY AND CAPITAL RESOURCES
Operating Activities
Cash provided by operating activities was
$59,433,000
in the 2017 Period and
$65,827,000
in the 2016 Period. We recorded net income of
$25,105,000
in the 2017 Period and
$35,358,000
in the 2016 Period. Non-cash debt financing costs charged to expense totaled
$3,463,000
in the 2017 Period compared to
$4,563,000
in the 2016 Period. Changes in depreciation and amortization, deferred income taxes, and operating assets and liabilities accounted for the bulk of the change in cash provided by operating activities in the 2017 Quarter.
Investing Activities
Cash required for investing activities totaled
$2,356,000
in the 2017 Period compared to cash provided by investing activities of
$29,611,000
in the 2016 Period. In the 2016 Period, we received
$30,646,000
related to an insurance settlement. Capital spending totaled
$3,232,000
in the 2017 Period compared to
$5,793,000
in the 2016 Period. We received
$1,830,000
and
$3,983,000
of proceeds from sales of assets in the 2017 Period and the 2016 Period, respectively.
We anticipate that funds necessary for capital expenditures, which are expected to total up to $6,000,000 in 2017, and other requirements, will be available from internally generated funds or availability under our Revolving Facility.
Financing Activities
Cash required for financing activities totaled
$49,089,000
in the 2017 Period and
$84,700,000
in the 2016 Period. Debt reduction accounted for the majority of the usage of funds in both the 2017 Period and the 2016 Period.
Liquidity
At
June 25, 2017
, after consideration of letters of credit, we have approximately
$33,818,000
available for future use under our Revolving Facility. Including cash, our liquidity at
June 25, 2017
totals
$58,790,000
. 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.
The purchase of the
Dispatch-Argus,
in our fourth fiscal quarter for $7,150,000 plus an adjustment for working capital, used a portion of the available liquidity as of June 25, 2017.
At
June 25, 2017
, the principal amount of our outstanding debt totals
$568,480,000
. The
June 25, 2017
principal amount of debt, net of cash, is
3.75
times our trailing 12 months adjusted EBITDA.
The 2014 Refinancing significantly extended our debt maturity profile with final maturity of the majority of our debt in 2022. As a result, refinancing risk has been substantially reduced for the next several years.
There are numerous potential consequences under the Notes, 1
st
Lien Credit Facility and 2
nd
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, 1
st
Lien Credit Facility and 2
nd
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 refinance or amend our debt agreements as they become due, or earlier if available liquidity is consumed. The Notes, 1
st
Lien Credit Facility and 2
nd
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
June 25, 2017
.
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
Energy Costs
Energy costs can be volatile, and may increase in the future as a result of carbon emissions and other regulations being considered by the United States Environmental Protection Agency.
Health Care Costs
The Affordable Care Act was enacted into law in 2010.
We expect the requirements under the Affordable Care Act will continue to evolve. Our future health care costs are expected to increase based on analysis published by the United States Department of Health and Human Services, input from independent advisors and our understanding of the current provisions of the Affordable Care Act, such as:
•
Certain preventive services provided without additional charge to employees;
•
Automatic enrollment of new employees;
•
Higher maximum age for dependent coverage;
•
Elimination of lifetime benefit caps; and
•
Free choice vouchers for certain lower income employees.
We do not expect the Affordable Care Act will have a significant impact on our postretirement medical benefit obligation liability.
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
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
In 2016, the Department of Labor ("DOL") published its final rule updating overtime regulations and minimum pay regulations for exempt employees. Among other things, the final rule established a new minimum rate for all exempt employees of $913 per week, which is more than double the previous limit. The final rule was scheduled to be effective beginning December 1, 2016. However, a federal district court issued a preliminary injunction on the rule becoming final. The DOL recently submitted a Request for Information on the overtime rule, which is the process used by the DOL to obtain public comment. Until a final court ruling is issued or there are any changes to the regulations, the Company cannot determine what impact this rule will have, if any.
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.