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EX-32 - EXHIBIT 32 - LEE ENTERPRISES, INClee2017ex329242017.htm
EX-31.2 - EXHIBIT 31.2 - LEE ENTERPRISES, INClee2017ex3129242017.htm
EX-31.1 - EXHIBIT 31.1 - LEE ENTERPRISES, INClee2017ex3119242017.htm
EX-24 - EXHIBIT 24 - LEE ENTERPRISES, INClee2017ex24poa09242017.htm
EX-23 - EXHIBIT 23 - LEE ENTERPRISES, INClee2017ex231kpmgconsent092.htm
EX-21 - EXHIBIT 21 - LEE ENTERPRISES, INClee2017ex21subsidiaries092.htm
EX-10.32 - EXHIBIT 10.32 - LEE ENTERPRISES, INCa1032formofindemnification.htm
 
UNITED STATES SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-K
[X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For The Fiscal Year Ended September 24, 2017
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 of incorporation)
(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
Title of Each Class
Name of Each Exchange On Which Registered
Securities registered pursuant to Section 12(b) of the Act:
 
Common Stock - $0.01 par value
New York Stock Exchange
Preferred Share Purchase Rights
New York Stock Exchange

Indicate by check mark if the Registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities Act. Yes [ ] No [X]
 
Indicate by check mark if the Registrant is not required to file reports pursuant to Section 13 or Section 15(d) of the Act. Yes [ ] No [X]
 
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 such shorter period that the Registrant was required to submit and post such files). Yes [X] No [ ]
                                     
Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K (S 229.405 of this Chapter) is not contained herein, and will not be contained, to the best of Registrant's knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K. [X]
                                    
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 the definitions of “large accelerated filer," "accelerated filer," "smaller 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 Act). Yes [ ] No [X]
 
State the aggregate market value of the voting and non-voting common equity held by non-affiliates computed by reference to the price at which the common equity was last sold, or the average bid and asked price of such common equity, as of the last business day of the Registrant's most recently completed second fiscal quarter. Based on the closing price of the Registrant's Common Stock on the New York Stock Exchange on March 31, 2017, such aggregate market value is approximately $136,159,000. For purposes of the foregoing calculation only, as required, the Registrant has included in the shares owned by affiliates the beneficial ownership of Common Stock of officers and directors of the Registrant and members of their families, and such inclusion shall not be construed as an admission that any such person is an affiliate for any purpose.
 
Indicate the number of shares outstanding of each of the Registrant's classes of common stock, as of November 30, 2017. Common Stock, $0.01 par value, 56,707,972 shares.
 
DOCUMENTS INCORPORATED BY REFERENCE
 
Portions of the Lee Enterprises, Incorporated Definitive Proxy Statement to be filed in January 2018 are incorporated by reference in Part III of this Form 10-K.
 




TABLE OF CONTENTS
PAGE
 
 
 
 
 
 
 
 
 
 
 
 
Part I
 
 
 
 
 
 
Item 1
 
 
 
 
 
Item 1A
 
 
 
 
 
Item 1B
 
 
 
 
 
Item 2
 
 
 
 
 
Item 3
 
 
 
 
 
Item 4
Mine Safety Disclosures
 
 
 
 
Part II
 
 
 
 
 
 
Item 5
 
 
 
 
 
Item 6
 
 
 
 
 
Item 7
 
 
 
 
 
Item 7A
 
 
 
 
 
Item 8
 
 
 
 
 
Item 9
 
 
 
 
 
Item 9A
 
 
 
 
 
Item 9B
 
 
 
 
Part III
 
 
 
 
 
 
Item 10
 
 
 
 
 
Item 11
 
 
 
 
 
Item 12
 
 
 
 
 
Item 13
 
 
 
 
 
Item 14
Principal Accounting Fees and Services
 
 
 
 
Part IV
 
 
 
 
 
 
Item 15
 
 
 
 
 
 
 
 
 
 
 
 




References to “we”, “our”, “us” and the like throughout this document refer to Lee Enterprises, Incorporated and subsidiaries (the "Company"). References to "2017", "2016", "2015" 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 annual report ("Annual 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;
Our ability to manage declining print revenue;
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;
Change 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;
Legislative and regulatory rulings;
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, including this Annual Report and
particularly in "Risk Factors", Part I, Item 1A herein.

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 Annual Report. We do not undertake to publicly update or revise our forward-looking statements, except as required by law.

PART I
 
ITEM 1. BUSINESS
 
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 50 markets (including TNI Partners ("TNI") and Madison Newspapers, Inc. ("MNI")), across 22 states are principally mid-sized or small. Our printed newspapers reach more than 800,000 households daily and more than 1.2 million on Sunday, with estimated readership totaling three million. Our web and mobile sites are the number one digital source of local news in most of our markets, reaching more than 25 million unique visitors each month.

Our products include:

47 daily and 34 Sunday newspapers; all with related digital operations; and
Nearly 300 weekly newspapers and classified and niche publications, most with related digital operations.

We also operate TownNews.com, through our 82.5% owned subsidiary INN Partners, L.C. ("TownNews.com"). TownNews.com provides digital infrastructure and digital publishing services for nearly 1,600 daily and weekly newspapers as well as universities, television stations, niche publications, and Lee Enterprises properties.

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Our markets have established retail bases. Most are regional shopping hubs, and 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 operating the dominate provider of local news, information and advertising in these markets - combined with our ability to distribute our content across print and digital platforms - enables us to better execute our strategy.

We generate revenue primarily through print and digital advertising, subscriptions to our publications and digital services, primarily through TownNews.com. Our operations also provide commercial printing, distribution of third party publications and marketing services.

Advertising and marketing services - Approximately 58% of our 2017 revenue was derived from advertising and marketing services. We provide advertising and marketing solutions using a multi-platform sales approach that maximizes audience reach for our customers by offering multiple print and digital advertising platforms and products including: print and digital display advertising, desktop, mobile, tablet and other specialty print products.

The following broadly define major categories of advertising and marketing services revenue:
 
Retail advertising is print or digital revenue earned from sales of display advertising in the publication, or from preprinted advertising inserted in the publication, from local, regional and national businesses with local retail operations.

Classified advertising is revenue from the sale of advertising space, or from separate publications, consisting primarily of advertising categories, such as employment, automotive, real estate, legal notices, obituaries and other merchandise. Classified publications offer advertisers a cost-effective, local advertising vehicle and can be particularly effective in larger markets with higher media fragmentation.
 
National advertising is revenue earned from the sale of print or digital display advertising space, or from preprinted advertising inserted in the publication, from national accounts that do not have a local retailer representing the account in the market.
 
Digital advertising consists of display, banner, behavioral targeting, search, rich media, directories, classified or other advertising on websites or mobile applications that are integrated with our print publications, or on third party websites accessed through the extended audience network. Digital advertising is reported in combination with print advertising in the retail, classified and national categories.

Niche publications are specialty publications, such as lifestyle, business, health or home improvement publications that contain advertising.
 
Marketing services is comprised of a suite of custom digital marketing services that include: Search Engine Optimization, Search Engine Management, web and mobile production, social media services and reputation monitoring and management. Our marketing services also include media buying in audience extension networks (outside of those owned and operated by the Company) such as Centro DSP, Google Ad Exchange and Facebook.

The advertising environment is influenced by the state of the overall economy, including consumer confidence, retail sales, unemployment rates, inflation, energy prices and consumer interest rates. Our enterprises are primarily located in midsize and small markets. Historically our markets have been more stable than major metropolitan markets because our focus is on local, rather than national, advertising. More than eighty percent of our advertising revenue is derived from local and regional businesses. We believe that local advertising tends to be less sensitive to economic cycles than national advertising because local businesses generally have fewer effective advertising channels through which they may reach their customers.

Subscription - Approximately 34% of our 2017 revenue was derived from subscriptions to our printed and digital products. Subscription revenue is earned primarily from our full access subscription model, which provides subscribers print and digital access to our leading local news, information and advertising content for one price. Digital only options are also available to subscribers.

Our operating costs are primarily compensation, newsprint and delivery. Over the past several years we have adjusted our business model to create operational efficiencies and significantly reduce our cost structure.


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We have centralized or regionalized most back office functions including the design of our newspapers. The centralized design centers have enabled us to more cost effectively design and layout the newspaper. The centralized design centers - combined with a common content management system across all of our daily newspaper markets - has created additional operating efficiencies and cost savings. We have templated designs for our printed and digital editions, and we have created a national news desk that shares high quality content across all of our markets, including national news, regional news and other special sections content. We believe we will continue to create additional operational efficiencies and continue to transform our business model.

Several of our businesses operate in geographic groups of publications, or “clusters,” which provide operational efficiencies, extend sales penetration and provide broader audiences for advertisers through consolidation of sales forces and back office management of operations such as: finance, human resources, subscription management, and the production of the publications. A table under the caption “Daily Newspapers and Markets” in Item 1, included herein, identifies those groups of our newspapers operating in clusters.
 
We do not face significant daily print competition; however, our newspapers, classified and specialty publications, and digital products do compete with other forms of traditional media including: newspapers having national or regional distribution, magazines, radio, cable and satellite television, outdoor media, other classified and specialty publications, direct mail, directories, and national, regional and local advertising websites and content providers. Competition for advertising is based on audience size and composition, subscription levels, readership demographics, distribution and display mechanisms, price and advertiser results. We believe we capture a substantial share of the total advertising dollars spent in each of our markets. We also compete for circulation and readership against other news and information outlets.

The number of competitors in any given market varies, however all of the forms of competition noted above exist to some degree in our markets, including those listed in the table under the caption “Daily Newspapers and Markets” in Item 1, included herein.

Lee Enterprises, Incorporated was founded in 1890, incorporated in 1950, and listed on the New York Stock Exchange ("NYSE") in 1978.

We experienced significant net losses in 2008, 2009, 2011, 2012 and 2013 primarily due to non-cash charges for impairment of intangible and other assets and reorganization costs, and as a result, we have negative equity of $91.2 million. Our ability to operate as a going concern is dependent on our ability to repay, refinance or amend our debt agreements as they become due, and remain in compliance with debt covenants. We are in compliance with our debt covenants at September 24, 2017. The information included herein should be evaluated in that context. See Item 1A, “Risk Factors”, and Notes 3 and 4 of the Notes to Consolidated Financial Statements, included herein, for additional information.

STRATEGIC INITIATIVES

We are focused on several strategic initiatives:

Comprehensive Local News That Drives Frequency And Engagement

We drive frequency and engagement with our products by delivering valuable, intensely local, original news and information that in many cases, we believe, our audiences cannot otherwise readily obtain. Our large and talented news and editorial staff provide constant, real-time local news with significant breadth, depth and reliability. Our full access platform provides our subscribers with breaking news throughout the day on our digital platforms as well as in depth daily print and digital news and information.

We believe the strength of our local brands is the result of the quality and size of our news gathering staff. This allows us to provide the most comprehensive coverage of local news in our markets. In most of our markets, we are the leading source of print and digital news and information. As the consumption of news on digital devices has expanded, we have moved quickly to develop applications that address audience and digital advertising demands for mobile and tablet advertising platforms. As new digital technologies emerge, we expect to move rapidly to make our content available through them and monetize the audience accessing our content.

We are focused on continually improving the functionality and design of all our news platforms, providing greater depth of coverage and increasing reader engagement. We are providing our journalists with tools to give them real-time

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information about audience engagement on our digital platforms. This helps inform their decisions on both presentation and coverage.

We believe our journalists are at the forefront of gathering and producing news and information about their local community. We seek to grow our digital audience by engaging our readers with news and information that we believe stirs public awareness, advances ideas, inspires vision, creates debate and provokes action. Through our news leadership we strive to contribute to community betterment, promote education, foster commerce and help improve the quality of life in our markets.

Accelerate And Expand Digital Revenue Growth

Our digital businesses have experienced rapid growth since 2010. Digital advertising grew 8.0% and reached 28.0% of total advertising and marketing services revenue for the year ending September 24, 2017. We are growing digital revenue by offering an expansive array of digital products including video: behavioral targeting, audience retargeting, banner ads, social networking, and digital couponing.

We provide digital marketing services to small and midsized businesses ("SMBs"), including search engine marketing ("SEM"), social media, audience extension, business profiles, and website hosting and design. Amplified Local ("Amplified Local"), our marketing business aimed at the smaller SMBs, offers small business solutions including: search engine optimization (“SEO”), local online marketing, social media marketing, video advertising and web site design. Amplified Local seeks to help small businesses maximize the return on marketing dollars by increasing audience reach, expanding brands, and enhancing their web presence. We believe that these innovative solutions will continue to drive meaningful new opportunities for us to grow our digital marketing revenue. We also continue to expand our array of digital products to address advertisers evolving needs, react to competition while seeking to increase our share of advertising and marketing services spending from existing customers .

Digital national revenue grew 6.0% in 2017, driven by our sweeps program and improved inventory management and pricing. Mobile advertising increased 2.0%, and digital retail advertising, which represents more than 60% of total digital advertising, increased 9.4% in 2017.

We believe TownNews.com represents a powerful opportunity for us to drive additional digital revenue. In 2017, digital services revenue, which is primarily TownNews.com, totaled more than $14 million. Since 2011, the compounded annual growth rate of TownNews.com revenue has been 9%.

We are a member of the Local Media Consortium (the “Consortium”). The Consortium partners with companies like Google, Yahoo! and other technology companies and service providers to increase the potential share of new revenue and audience-building programs available to consortium members, as well as improve the quality of information and advertising services available from, Consortium members. The Consortium currently includes more than 1,600 local newspapers and hundreds of local broadcast outlets in the United States.

In 2017, no single advertiser accounted for more than 3% of advertising revenue and our top 10 advertisers represented 9.4% of advertising revenue.

Our local sales forces are one of our core strengths and are larger than any local competitor, and we believe they are the most highly trained and proficient sales force in our markets. We have strong relationships with businesses in our markets and offer a wide array of products to deliver the advertisers' message. Eighty percent of our advertising revenue now comes from local and regional businesses, and our sales executives pitch the power of our audiences directly to these local decision makers.

To address the evolving needs of local advertisers we changed the way we sell local advertising to maximize our opportunities with small and medium-sized businesses. Local, controllable advertising accounts - those in which our local sales teams have direct contact with the advertising decision makers - are the core of our business. To address the needs of and better serve these local advertisers we developed the Edison Project, which is directly aimed at these local advertisers.

With Edison, we completely restructured our local sales teams and simplified advertising packages, providing advertisers with an expanded robust digital presence, increased frequency in print products, and longer advertising commitments.


4


Our Big Pitch initiative targets larger, local accounts such as a large local hardware store or regional hospital group. We pair creative advertising campaigns with our broad suite of products, both digital and print. Because of the success of this program we've added creative resources and accelerated the number of pitches developed and made, providing greater creativity, faster speed to market, and more pitches closed.

In fiscal year 2017, we introduced Digital Connect, a digital services package aimed at growing digital revenue from local businesses. Digital Connect provides local businesses a turn-key package for expanding their digital presence through enhanced search engine management. Digital Connect has been the fastest growing digital category this fiscal year 2017 and is expected to be a significant contributor to our digital revenue growth in 2018.

Grow Audience Revenue And Engagement

Based on independent audience research conducted on our behalf, for the period January 2016 to January 2017, we reached 74% of all adults over the course of a seven-day period in 11 selected markets, which include most of our largest strategic business units. Forty six percent of the adults in these markets read our newspapers in print, with 19% being both newspaper readers and visitors to our digital platforms. Another 16% were digital users exclusively. The remaining 12%primarily used our newspapers to obtain advertising and other information.

As media access and delivery vehicles continue to evolve, our audiences are evolving and increasingly moving from one delivery platform to another throughout the day and accessing our content in print, on desktops and laptops, and on mobile devices. We seek to grow our audience and engagement on whatever platform they choose by, among other things, continually improving content and presentation to maximize the unique and evolving capabilities of each platform. We have a large and growing digital audience for our products. Unique visitors to our digital sites averaged 25.3 million per month in 2017, while page views totaled 244.2 million per month in 2017.

To serve our readers across all delivery platforms, we implemented a full access subscription model, which is now in place in substantially all of our markets. Full access provides subscribers complete access to our print and digital products available in their market for a single subscription rate. We also sell digital only subscriptions.

Transforming Our Business And Managing Our Costs

We are transforming our business model and reducing our costs to maintain our margins and operating cash flows. We have consolidated or regionalized many common functions; consolidated or selectively outsourced printing and ad production; discontinued unprofitable publications; reduced newsprint volume significantly; and continually seek to improve the efficiencies and reduce costs of our operation with additional consolidation and outsourcing. We have reduced personnel while protecting our strengths in news, sales and digital products. In 2017, on a same property basis we reduced cash costs(1) excluding workforce adjustments 7.7%. We continue to implement cost efficiencies while investing in revenue drivers.

Generate Strong Adjusted EBITDA(1) With A Commitment To Reduce Our Debt

Throughout the last economic downturn and ongoing recovery - at a time of unprecedented transition for our industry - we have posted strong adjusted EBITDA and consistent margins. We anticipate modest capital expenditures and pension contributions, and we expect to continue to significantly reduce our debt each year.

The principal amount of debt was reduced by $68.8 million in 2017 and totaled $548.4 million as of September 24, 2017. Since 2005, we have reduced debt by more than $1 billion and we expect to continue to significantly reduce our debt in 2018. As a result of our debt reductions, interest expense was reduced by $6.7 million in 2017 compared to 2016, providing additional free cash flow for debt service and other corporate uses such as the June 30, 2017 acquisition of the Dispatch-Argus serving Moline and Rock Island, IL ("Dispatch-Argus") for $7.2 million.

(1)     See "Non-GAAP Financial Measures: in Item 7, included herein, for additional information.


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PULITZER
 
In 2005, we acquired Pulitzer Inc. (“Pulitzer”). We currently publish 9 daily newspapers that were acquired from Pulitzer and more than 60 weekly newspapers and specialty publications. Pulitzer also includes our 50% interest in TNI, as discussed more fully below.

Pulitzer newspapers largest operations include Bloomington, IL and St. Louis, Missouri, where its subsidiary, St. Louis Post-Dispatch LLC (“PD LLC”), publishes the St. Louis Post-Dispatch, our only major daily newspaper which serves the greater St. Louis metropolitan area. St. Louis newspaper operations also include a variety of specialty publications, and supports its related digital products as well as the Suburban Journals of Greater St. Louis, a group of weekly newspapers and niche publications that focus on separate communities within the metropolitan area.
 
The 2005 acquisition was financed primarily with debt. The second lien term loan lenders have a first lien on Pulitzer assets. Excess cash flow from Pulitzer, as defined in the Second Lien Loan Agreement, and cash flow from Pulitzer asset sales are used to pay down the second lien term loan at par. On August 28, 2016 we sold substantially all of the assets of our Provo, Utah newspaper operations, a former Pulitzer newspaper, and proceeds from the sale were used to pay down the second lien term loan.

TNI Partners
 
In conjunction with the Pulitzer acquisition we obtained a 50% interest in TNI, the Tucson, Arizona newspaper partnership. TNI, acting as agent for our subsidiary, Star Publishing Company (“Star Publishing”) and Citizen Publishing Company (“Citizen”), the owner of the remaining 50%, a subsidiary of Gannett Co., Inc., (“Gannett”). TNI was responsible for printing, delivery, advertising and subscription activities of the Arizona Daily Star and the Tucson Citizen. In May 2009, Citizen discontinued print publication of the Tucson Citizen and in 2014 stopped publishing its digital product.

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. Under the amended and restated operating agreement between Star Publishing and Citizen, the Arizona Daily Star remains the separate property of Star Publishing. Results of TNI are accounted for using the equity method. Income or loss of TNI (before income taxes) is allocated equally to Star Publishing and Citizen. TNI makes weekly distributions to Star Publishing and Citizen of all available cash.
 
The TNI agency agreement (“Agency Agreement”), has governed the operation since 1940. The Agency Agreement expires in 2040, but contains an option, which may be exercised by either party, to renew the agreement for successive periods of 25 years each. Star Publishing and Citizen also have a reciprocal right of first refusal to acquire the 50% interest in TNI owned by Citizen and Star Publishing, respectively, under certain circumstances. Both the Company and Citizen incur certain administrative costs and capital expenditures that are reported by their individual companies.
 
MADISON NEWSPAPERS
 
We own 50% of the capital stock of MNI and 8.7% of the common stock of The Capital Times Company (“TCT”). TCT owns 50% of the capital stock of MNI. MNI publishes daily and Sunday newspapers, and other publications in Madison, Wisconsin, and other Wisconsin locations, and supports their related digital products. MNI conducts business under the trade name Capital Newspapers. We have a contract to furnish the editorial and news content for the Wisconsin State Journal, which is published by MNI, and periodically provide other services to MNI for a fee. Results of MNI are accounted for using the equity method. Net income or loss of MNI (after income taxes) is allocated equally to the Company and TCT. MNI makes quarterly dividend payments to the Company and TCT.
 
AUDIENCES
 
Based on independent research, we estimate that, in an average week, our newspapers and digital products reach approximately 74% of adults in our larger markets. We also measure use of our daily newspapers for advertising, sports scores and entertainment listings ("print users").
   

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Audience reach is summarized as follows:
 
All Adults
 
(Percent, Past Seven Days)
2017

2016

2015

2014

2013

 
 
 
 
 
 
Print only
27.1

26.8

31.3

33.1

36.9

Print and digital
19.0

19.3

19.3

20.0

17.8

Digital only
15.5

16.6

12.5

12.1

10.5

Total readership
61.6

62.7

63.1

65.2

65.2

Print users
12.4

11.6

12.8

13.0

13.9

Total reach
74.0

74.3

75.9

78.2

79.1

 
 
 
 




Total print reach
58.5

57.7

63.4

66.1

68.6

Total digital reach
34.5

35.9

31.8

32.1

28.3


 
Age 18-29
 
(Percent, Past Seven Days)
2017

2016

2015

2014

2013

 
 
 
 
 
 
Print only
14.8

15.3

19.5

20.3

30.7

Print and digital
15.5

16.2

20.2

18.3

15.6

Digital only
19.6

23.4

12.7

15.3

10.5

Total readership
49.9

54.9

52.4

53.9

56.8

Print users
13.9

11.2

19.5

19.5

22.0

Total reach
63.8

66.1

71.9

73.4

78.8

 
 
 
 




Total print reach
44.2

42.7

59.2

58.1

68.3

Total digital reach
35.1

39.6

32.9

33.6

26.1

Source:
Lee Enterprises Audience Report, Thoroughbred Research. January 2013-2017.
Markets:
11 largest markets in 2013-2017.
Margin of Error:
Total sample +/- 0.9%, Total digital sample +/- 1.1%
  
After advertising, subscriptions and single copy sales are our largest source of revenue. For the 13 weeks ended September 2017, our daily circulation units, which include TNI and MNI, as measured by the Alliance for Audited Media ("AAM") were 0.8 million and Sunday circulation units were 1.2 million.
 
Growth in audiences can, over time, also positively impact advertising revenue. Our strategies to grow audiences include continuous improvement of content and promotional efforts to expand our audience. Content can include focus on local news, features, scope of coverage, accuracy, presentation, writing style, tone and type style. Promotional efforts include advertising, contests and other initiatives to increase awareness of our products. Customer service can also influence print subscriptions. The continued improvement of mobile and tablet applications has positively impacted our digital audiences.
 
We have historically experienced higher retention of customers using credit cards or automatic bank account withdrawals, ("EZ pay") as the form of subscription payment. Accordingly we focus our enterprises on increasing the number of EZ pay subscribers. Other initiatives vary from location to location and are determined principally by our centralized consumer sales and marketing group in collaboration with local management. Competition for subscriptions is generally based on the content, journalistic quality and price of the publication.
 
Audience competition exists in all markets, from unpaid print and digital products, but is most significant in markets with competing local daily newspapers. These markets tend to be near major metropolitan areas, where the size of the population may be sufficient to support more than one daily newspaper.

Our subscription sales channels continue to evolve through an emphasis on targeted telemarketing, direct mail and email to acquire new subscribers and retain current subscribers.

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DAILY NEWSPAPERS AND MARKETS
 
The Company, TNI and MNI publish the following daily newspapers and maintain the following primary digital sites:
 
 
 
Average Units (1)
 
 
Newspaper
Primary Website
Location
  Daily (2) 

 
Sunday

 
 
 
 
 
 
 
 
St. Louis Post-Dispatch (3)
stltoday.com
St. Louis, MO
101,336

 
368,569

 
Arizona Daily Star (5) (3)
azstarnet.com
Tucson, AZ
49,915

 
100,886

 
Capital Newspapers (4)
 
 
 
 
 
 
Wisconsin State Journal
madison.com
Madison, WI
57,833

 
74,190

 
Daily Citizen
wiscnews.com/bdc
Beaver Dam, WI
5,458

 

 
Portage Daily Register
wiscnews.com/pdr
Portage, WI
2,775

 

 
Baraboo News Republic
wiscnews.com/bnr
Baraboo, WI
2,449

 

 
The Times
nwitimes.com
Munster, Valparaiso, and Crown Point, IN
58,081

 
68,087

 
Quad Cities Group
 
 
 
 
 
 
Quad-City Times
qctimes.com
Davenport & Muscatine, IA
34,180

 
34,141

 
Dispatch-Argus
qconline.com
Moline, IL
23,887

 
26,360

 
Central Illinois Newspaper Group
 
 
 
 
 
 
The Pantagraph (3)
pantagraph.com
Bloomington, IL
24,807

 
27,458

 
Herald & Review
herald-review.com
Decatur & Mattoon/Charleston, IL
25,845

 
22,038

 
Lincoln Group
 
 
 
 
 
 
Lincoln Journal Star
journalstar.com
Lincoln, NE
40,011

 
46,838

 
Columbus Telegram
columbustelegram.com
Columbus, NE
4,037

(6) 

 
Fremont Tribune
fremonttribune.com
Fremont, NE
3,111

(6) 

 
Beatrice Daily Sun
beatricedailysun.com
Beatrice, NE
3,184

(6) 

 
River Valley Newspaper Group
 
 
 
 
 
 
La Crosse Tribune
lacrossetribune.com
La Crosse, WI
18,782

 
23,583

 
Winona Daily News
winonadailynews.com
Winona, MN
5,583

 
6,241

 
The Chippewa Herald
chippewa.com
Chippewa Falls, WI
2,959

(6) 

 
The Courier
wcfcourier.com
Waterloo and Cedar Falls, IA
32,463

 
29,646

 
Billings Gazette
billingsgazette.com
Billings, MT
24,781

 
27,672

 
Sioux City Journal
siouxcityjournal.com
Sioux City, IA
20,917

 
23,052

 
The Bismarck Tribune
bismarcktribune.com
Bismarck, ND
18,854

 
22,683

 
The Post-Star
poststar.com
Glens Falls, NY
16,818

 
21,121

 
Missoula Group
 
 
 
 
 
 
Missoulian
missoulian.com
Missoula, MT
15,474

 
19,004


Ravalli Republic
ravallinews.com
Hamilton, MT
1,933

(6) 
1,860

(6) 
Helena/Butte Group
 
 
 
 
 
 
Independent Record
helenair.com
Helena, MT
10,306

 
10,928

 
The Montana Standard
mtstandard.com
Butte, MT
8,416

 
8,569

 
Rapid City Journal
rapidcityjournal.com
Rapid City, SD
15,608

 
19,322

 
The Journal Times
journaltimes.com
Racine, WI
16,518

 
18,927

 
The Southern Illinoisan
thesouthern.com
Carbondale, IL
12,029

 
18,378

 
Mid-Valley News Group
 
 
 
 
 
 
Albany Democrat-Herald
democratherald.com
Albany, OR
8,380

 
8,776

 
Corvallis Gazette-Times
gazettetimes.com
Corvallis, OR
6,936

 
7,187

 
Casper Star-Tribune
trib.com
Casper, WY
15,101

 
15,493

 

8


 
Average Units (1)
 
 
Newspaper
Primary Website
Location
  Daily (2)

 
Sunday

 
 
 
 
 
 
 
 
Magic Valley Group
 
 
 
 
 
 
The Times-News
magicvalley.com
Twin Falls, ID
14,455

 
12,797

 
Elko Daily Free Press
elkodaily.com
Elko, NV
3,218

 

 
Globe Gazette
globegazette.com
Mason City, IA
9,668

 
11,995

 
Santa Maria Times (3)
santamariatimes.com
Santa Maria, CA
7,784

 
11,971

 
The Daily News
tdn.com
Longview, WA
13,498

 
11,194

 
Napa Valley Register (3)
napavalleyregister.com
Napa, CA
8,519

 
8,881

 
Arizona Daily Sun (3)
azdailysun.com
Flagstaff, AZ
6,411

(6) 
7,687

 
The Citizen
auburnpub.com
Auburn, NY
5,620

 
7,148

 
The Times and Democrat
thetandd.com
Orangeburg, SC
6,460

 
6,995

 
The Sentinel
cumberlink.com
Carlisle, PA
6,780

(6) 

 
The World (3)
theworldlink.com
Coos Bay, OR
4,473

 

 
The Sentinel (3)
hanfordsentinel.com
Hanford, CA
4,575

 

 
The Ledger Independent
maysville-online.com
Maysville, KY
3,773

 

 
Daily Journal (3)
dailyjournalonline.com
Park Hills, MO
3,654

(6) 

 
 
 
 
787,655

 
1,129,677

 
(1)
Source: AAM: September 2017 Quarterly Executive Summary Data Report, unless otherwise noted.
(2)
Not all newspapers are published Monday through Saturday
(3)
Owned by Pulitzer, Inc.
(4)
Owned by MNI.
(5)
Owned by Star Publishing and published through TNI.
(6)
Source: Company statistics.
 
NEWSPRINT
 
The raw material of newspapers, and our other print publications, is newsprint. We purchase newsprint from U.S. and Canadian producers. We believe we will continue to receive a supply of newsprint adequate for our needs and consider our relationships with newsprint producers to be good. Newsprint purchase prices can be volatile and fluctuate based upon factors that include foreign currency exchange rates and both foreign and domestic production capacity and consumption. Price fluctuations can effect our results of operations. We have not entered into derivative contracts for newsprint. For the quantitative impacts of these fluctuations, see Item 7A, “Quantitative and Qualitative Disclosures about Market Risk”, included herein.
 

9


EXECUTIVE TEAM
 
The following table lists our current executive team members:
Name
Age
Service
With The
Company
Named
To Current
Position
Current Position
 
 
 
 
 
Mary E. Junck
70
June 1999
February 2016
Executive Chairman
 
 
 
 
 
Kevin D. Mowbray
55
September 1986
February 2016
President and Chief Executive Officer
 
 
 
 
 
Nathan E. Bekke
48
January 1992
February 2015
Vice President - Consumer Sales and Marketing
 
 
 
 
 
Paul M. Farrell
62
October 2013
October 2015
Vice President - Sales
 
 
 
 
 
Robert P. Fleck
55
May 2016
May 2016
Vice President - Sales and Marketing
 
 
 
 
 
Suzanna M. Frank
47
December 2003
March 2008
Vice President - Audience
 
 
 
 
 
Astrid J. Garcia
67
December 2006
December 2013
Vice President - Human Resources and Legal
 
 
 
 
 
James A. Green
51
March 2013
March 2013
Vice President - Digital
 
 
 
 
 
Michael R. Gulledge
57
October 1982
October 2015
Vice President - Advertising Sales Leadership
 
 
 
 
 
John M. Humenik
54
December 1998
February 2015
Vice President - News
 
 
 
 
 
Ronald A. Mayo
56
May 2015
June 2015
Vice President - Chief Financial Officer and Treasurer
 
 
 
 
 
Michele Fennelly White
55
June 1994
June 2011
Vice President - Information Technology and Chief Information Officer
Mary E. Junck was elected Executive Chairman in February 2016. From 2002 - February 2106 she served as President and Chief Executive Officer. She was elected to the Board of Directors of the Company in 1999.
 
Kevin D. Mowbray was elected President and Chief Executive Officer in February 2016. From April 2015 - February 2016 he was Executive Vice President and Chief Operating Officer. From May 2013 to April 2015 he served as Vice President and Chief Operating Officer. From 2004 to May 2013 he served as a Vice President - Publishing and was Publisher of the St. Louis Post-Dispatch from 2006 until May 2013. He was elected to the Board of Directors of the Company in February 2016.
 
Nathan E. Bekke was appointed Vice President - Consumer Sales and Marketing in February 2015. From 2003 to February 2015, he served as Publisher of the Casper Star-Tribune.
 
Paul M. Farrell was appointed Vice President - Sales in October 2015. From October 2013 to October 2015, he served as Vice President - Digital Sales. From September 2012 to October 2013, he served as Publisher of the Connecticut Media Group of Hearst Media Services. From May 2007 to August 2012, he served as Vice President - Sales and Marketing of the Company.

Robert P. Fleck was appointed Vice President - Sales and Marketing in May 2016 and named Publisher of the LaCrosse Tribune in 2017. Prior to joining the Company, he was with The Tribune Company. His 24-year career with Tribune included Executive Vice President of Tribune Publishing Company; General Manager and Senior Vice President for TRIBUNE365; and Senior Vice President of the Chicago Tribune Media Group.

Suzanna M. Frank was appointed Vice President - Audience in March 2008. From 2003 to March 2008 she served as Director of Research and Marketing of the Company.

10


Astrid J. Garcia was appointed Vice President - Human Resources and Legal in December 2013. From 2006 to November 2013 she served as Vice President of Human Resources, Labor Relations and Operations of the St. Louis Post-Dispatch.

James A. Green was appointed Vice President - Digital in March 2013. From June 2011 to March 2013, he served as Executive Vice President and General Manager of Travidia, Inc., a developer of newspaper digital shopping media and marketing programs. From 2004 to June 2011 he served as Chief Marketing Officer of Travidia, Inc.

Michael R. Gulledge was elected Vice President - Sales and Marketing in September 2012 and named Publisher of the Billings Gazette in 2000. From 2005 to September 2012 he served as a Vice President - Publishing.

John M. Humenik was appointed Vice President - News in February 2015.  He is also president and publisher of the Wisconsin State Journal and president of Madison Newspapers Inc., a position he has held since 2013. He was publisher and editor of the Arizona Daily Star from 2005 to 2010 and additionally served as president of Tucson Newspapers Inc. until 2013.

Ronald A. Mayo was elected Vice President, Chief Financial Officer and Treasurer in June 2015. Prior to joining the Company, he was Chief Financial Officer of Halifax Media Group from July 2014 to January 2015 and previously served as Vice President and Chief Financial Officer of MediaNews Group, Inc., for 12 years.

Michele Fennelly White was appointed Vice President - Information Technology and Chief Information Officer in June 2011. From 1999 to June 2011, she served as Director of Technical Support.
 
Ms. Junck and Messrs. Mowbray, Farrell, Green, Gulledge, and Mayo have been designated by the Board of Directors as executive officers for US Securities and Exchange Commission ("SEC") reporting purposes.

EMPLOYEES
 
At September 24, 2017, we had approximately 3,555 employees, including approximately 927 part-time employees, exclusive of TNI and MNI. Full-time equivalent employees in 2017 totaled approximately 3,626. We consider our relationships with our employees to be good.
Bargaining units represent 344, or 69%, of the total employees of the St. Louis Post-Dispatch, which has six contracts with bargaining units with expiration dates through September 2018.
Approximately 34 employees in three additional locations are represented by collective bargaining units.
CORPORATE GOVERNANCE AND PUBLIC INFORMATION
 
We have a long history of sound corporate governance practices. Our Board of Directors has a lead independent director, and has had one for many years. Currently, six of nine members of our Board of Directors are independent, as are all members of the Board's Audit, Executive Compensation and Nominating and Corporate Governance committees. The Audit Committee approves all services to be provided by our independent registered public accounting firm and its affiliates.
 
At www.lee.net, one may access a wide variety of information, including news releases, SEC filings, financial statistics, annual reports, investor presentations, governance documents, newspaper profiles and digital links. We make available via our website all filings made by the Company under the Securities Exchange Act of 1934 (the "Exchange Act"), including Forms 10-K, 10-Q and 8-K, and related amendments, as soon as reasonably practicable after they are filed with, or furnished to, the SEC. All such filings are available free of charge. The content of any website referred to in this Annual Report is not incorporated by reference unless expressly noted.
 
ITEM 1A. RISK FACTORS
 
Risk exists that our past results may not be indicative of future results. In addition, a number of other factors (those identified elsewhere in this document) may cause actual results to differ materially from expectations. Potential investors should carefully consider the following risks and other information in this Annual Report in evaluating us and our common stock. See also, “Forward-Looking Statements”, included herein.
 

11


ECONOMIC CONDITIONS
 
Our operations rely on the local economies in which we serve, and we are also susceptible to general economic downturns, which have had and could continue to have a material and adverse impact on our operating results
 
It is difficult to estimate the level of economic growth or contraction as current and future conditions in the economy have an inherent degree of uncertainty. Adverse changes may occur to our business as a result of weak global economic conditions, declining oil prices, wavering consumer confidence, unemployment, declines in stock markets, contraction of credit availability, changes in interest rates, declines in real estate values, or other factors affecting economic conditions in general. These changes may negatively affect the sales of our products, increase exposure to losses from bad debts, increase the cost and decrease the availability of financing, or increase costs associated with publishing and distributing our publications.

OPERATING REVENUE
 
Our operating revenue may be materially adversely affected if we do not successfully respond to the shift in newspaper readership and advertising expenditures away from traditional print media

A significant portion of our revenue is derived from advertising. The demand for advertising is sensitive to the overall level of economic strength, both locally and nationally. Our revenues are sensitive to economic trends and uncertainties as well as discretionary spending by advertisers and subscribers. Changes in advertising and circulation revenue could have a material effect on our results of operations.

Operating revenue in most print categories has decreased since 2007 and may decrease further in the future. Such decreases may not be offset by growth in advertising in other categories, such as digital revenue which has been rising since 2010. Historically, newspaper publishing has been viewed as a cost-effective method of delivering various forms of advertising. There can be no guarantee that this historical perception will guide future decisions on the part of advertisers. Web sites and applications for mobile devices distributing news and other content continue to gain popularity. As a result, audience attention and advertising spending are shifting and may continue to shift from traditional print media to digital media including those owned by the Company. As media audiences increasingly move to consume news and information digitally, we expect that advertisers will allocate greater portions of their future budgets to digital media advertising, which can offer more measurable returns than traditional print media. If our efforts to adapt to evolving technological developments in the media industry are unsuccessful, or if we fail to correctly anticipate shifts in audience demand and digital media trends, we may be unable to provide the services, media and content that audiences and potential audiences in our markets prefer and we may be unable to provide the returns on ad spending that our advertisers seek. This increased competition and shift to the digital consumption of news and information has had, and may continue to have, an adverse effect on our business and financial results. Significant capital investment may be required to respond to this shift.The digital media industry has greater competitive challenges than print because barriers to entry can be low and geographic location is less relevant.

Technological developments also pose additional challenges that could adversely affect our revenue and competitive position. New delivery platforms may lead to pricing restrictions and the loss of a direct relationship with consumers. We may also be adversely affected if the use of technology developed to block the display of advertising on websites and other digital platforms proliferates.

The rates we charge for advertising are, in part, related to the size of the audience of our publications and digital products. There is significant competition for readers and viewers from other media. Our business may be adversely affected to the extent individuals decide to obtain news, entertainment, classified listings and local shopping information from digital or other media, to the exclusion of our outlets for such information.

Retail Advertising

Many advertisers, including major retail store chains, automobile dealers, banks and telecommunications companies, have experienced significant merger and acquisition activity over the last several years, and some have gone out of business or closed stores. Changes in the economy and consumer shopping habits, in particular, in the brick and mortar retail sector along with the increasing use of online consumer shopping, has driven a change in advertising spending and retailers approach to advertising and marketing their goods and services.


12


Classified Advertising

Classified print and digital advertising for employment, automotive and real estate have been significantly reduced by changing trends in how our audiences access and use our products and the increase in digital/classified advertising competitors.

Subscription Revenue

Advertising and subscription revenue is affected by readership of our print publications and digital products. Although our combined print and digital audience is relatively stable, print subscription volumes have been declining for several years, reflecting general trends in the newspaper industry, including consumer migration toward digital media platforms for accessing news and information. The Company has increased its subscription rate and the possibility exists that future subscription price increases may be difficult to realize or maintain and as a result subscription sales may decline, and price decreases may be necessary to retain or grow subscription volume. We believe we are maintaining our share of audience in our local markets through digital audience growth and strong print newspaper readership.

 
As audience attention increasingly migrate to digital media, print circulation of our newspapers may be adversely affected, which may decrease subscription revenue and accelerate declines in print advertising. We face increasing competition from digital news sources which can impact subscription revenue and audience growth. This competition has increased as a result of the continued development of new digital media technologies. To maintain our subscription base, we may be required to incur additional costs that we may not be able to recover through subscription and advertising revenue. We may not be able to achieve a profitable balance between subscription levels and advertising revenue. In addition, if we are not successful in growing our digital businesses, including digital subscription revenue, to offset declines in revenue from our print products, our business, financial condition and prospects will be adversely affected.

Our ability to retain a subscriber base with all access pricing depends on market acceptance, consumer habits, cost, an adequate digital infrastructure, terms of delivery platforms and other factors. The metered paywall model and/or subscription price increases may result in fewer page views or unique visitors to our digital platforms if viewers are unwilling to pay to gain access to our digital content after reaching the maximum number of free articles in a month. Stagnation, or a decline in digital traffic levels, will adversely affect our advertiser base, advertising rates and result in a decline in digital revenue.

See "Audiences” in Item 1, included herein, for additional information on the risks associated with subscription revenue.

If we are not successful in growing our digital business, our business, financial condition, results of operations and prospects could be adversely affected

The future revenue performance of our digital business depends to a significant degree upon the growth development and management of our subscriber and advertising audiences. The growth of our digital business over the long term depends on various factors, including, among other things, the ability to:

Continue to increase digital audiences;

Attract advertisers to our digital platforms;

Tailor our products to efficiently and effectively deliver content and advertising on mobile devices;

Maintain or increase the advertising rates on our digital platforms;

 
Exploit new and existing technologies to distinguish our products and services from those of competitors and develop new content, products and services;

Invest funds and resources in digital opportunities;

Partner with, or use services from, providers that can assist us in effectively growing our digital business; and


13


Create digital content and platforms that attracts and engages audiences in our markets.

We expect that our digital business will continue to increase as a percentage of our total revenue. In 2017, total digital revenue (including revenue from advertising and marketing services and digital services, mainly TownNews.com) comprised 18.7% of total revenue, as compared to 16.4% in 2016. As our digital business becomes a greater portion of our overall business, we will face a number of increased risks from managing our digital operations, including, but not limited, to the following:

Continuing training of our sales force to more effectively sell digital only advertising, combined digital and print advertising packages versus our historical print advertising business;

Attracting and retaining employees with skill sets and the knowledge base needed to successfully operate our digital business; and

Managing the transition to a digital business from a historically print-focused business, including reducing the physical printing and distribution infrastructure cost associated with the print business.

We rely on revenue from printing and distribution of third-party publications and digital services that may be subject to many of the same business and industry risks facing us

We generate a portion of our revenue from printing and distributing third-party publications, and our relationships with these third parties are generally pursuant to short-term contracts. Typically, these third parties are operating in the same industry and a similar geographical location as us. In addition, digital services revenue is derived primarily from third-party businesses in the same industry as us. As a result, revenue from these third parties is subject to the same macroeconomic and industry trends affecting our operations. If their businesses are adversely affected by these trends, our associated revenue would be adversely affected.

OPERATING EXPENSES
 
We may not be able to reduce future expenses to offset potential revenue declines
 
We reduced cash costs(1) of our operations (compensation, newsprint and ink, other operating expenses and workforce adjustments) significantly since 2011. Such expense reductions are not expected to impact our ability to deliver advertising, news or other content to our customers. As a result of the significant cost reductions to date, future cost reductions may not be as significant. Compensation and newspaper distribution account for 63% of our cash costs excluding workforce adjustments.
 
Newsprint comprises approximately 6% of our cash costs excluding workforce adjustments. See “Newsprint” in Item 1, and “Commodities” in Item 7A, included herein, for additional information on the risks associated with changes in newsprint costs.

The technological developments and changes we need to make to our business successful, may require significant capital investments. We may be limited in our ability to invest funds and resources in digital products, services or opportunities, and we may incur costs of research and development in building and maintaining the necessary and continually evolving technology infrastructure. As a result, our digital business could suffer if we are unable to make these investments.

(1) See Non-GAAP Financial Measures: in Item 7, included herein, for additional information.

We may incur additional non-cash impairment charges

We have significant amounts of goodwill and identified intangible assets. Since 2007 we have recorded impairment charges totaling almost $1.3 billion to reflect the reduced value of these assets. Should general economic, market or business conditions decline, and cause a negative impact on our stock price or projected future cash flows, we may need to record additional impairment charges in the future. Such charges would not impact our cash flows or debt covenant compliance. See “Critical Accounting Policies” in Item 7, included herein, for additional information on the risks associated with such assets.


14


Sustained increases in costs of employee health and welfare benefits may reduce our profitability

In recent years, we experienced significant increases in the cost of employee medical benefits because of economic factors beyond our control, including increases in health care costs. At least some of these factors may continue to put upward pressure on the cost of providing medical benefits. Although we have actively sought to control increases in these costs, there can be no assurance that we will succeed in limiting cost increases, and continued upward pressure could reduce the profitability of our businesses.

Sustained increases in funding requirements of our pension and postretirement obligations may reduce the cash available for our business

Pension liabilities, net of plan assets, totaled $43.5 million at September 24, 2017. The Company expects to make pension contributions of $4.9 million in 2018. At September 24, 2017 the assets of one of our postretirement medical plans exceeded plan liabilities by $11.0 million.

Our pension and postretirement plans invest in a variety of equity and debt securities. Future volatility and disruption in the securities markets could cause declines in the asset values of our pension and postretirement plans. In addition, a decrease in the discount rates or changes to mortality estimates and other assumptions used to determine the liability could increase the benefit obligation of the plans. Unfavorable changes to the plan assets and/or the benefit obligations could increase the level of required contributions above what is currently estimated, which could reduce the cash available for our business and debt service. Legislation passed in 2012, 2014 and 2015 temporarily reduced funding requirements for our pension plans, but those payments will eventually need to be restored unless discount rates and/or plan assets increase.

We expect to be subject to withdrawal liability in connection with one multiemployer pension plan and may be subject to additional withdrawal liabilities in connection with other multiemployer pension plans, which may reduce the cash available for our business

Pursuant to our collective bargaining obligations, we contribute to three multiemployer pension plans on behalf of certain of our employees. Based on the most recent communications from the plans’ administrators, two of these plans are currently in “critical” status, as that term is used in relation to such plans under the Pension Protection Act of 2006. For plans that are in critical status, benefit reductions may apply and/or we could be required to make additional contributions.

One of our enterprise's bargaining units withdrew from representation, and as a result we are subject to a claim from the multiemployer pension plan for a withdrawal liability. The amount of such liability will be dependent on actions taken, or not taken, by the pension plan, as well as the future investment performance and funding status of the pension plan. The withdrawal liability is expected to be funded over a 20 year period.

If, we were to withdraw from one of the remaining plans or trigger a partial withdrawal due to declines in contribution base units, and the plan had unfunded vested benefits at the time of our withdrawal or partial withdrawal, we could incur a significant plan withdrawal liability, which could reduce the cash available for our business.

CAPITAL
 
We may have insufficient earnings or liquidity to meet our future debt obligations
 
We have $548.4 million of debt outstanding as of September 24, 2017, as discussed more fully below (and certain capitalized terms used below defined) in Item 7,"Liquidity" and Note 4 of the Notes to Consolidated Financial Statements, included herein. Since February 2009, we have satisfied substantially all principal and interest payments due under our debt facilities with our cash flows and asset sales.
 
As of September 24, 2017, our debt consists of the following:

$400,000,000 aggregate principal amount of 9.5% Senior Secured Notes (the “Notes”) due March 2022, pursuant to an Indenture dated as of March 31, 2014 (the “Indenture”), of which $385,000,000 is currently outstanding as of September 24, 2017;
 

15


$250,000,000 first lien term loan (the "1st Lien Term Loan") due March 2019 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 $45,145,000 is outstanding at September 24, 2017; and

$150,000,000 12.0% second lien term loan under a Second Lien Loan Agreement dated as of March 31, 2014 (the “2nd Lien Term Loan”) due December 2022, of which $118,240,000 is outstanding at September 24, 2017.

The ability to make payments on our indebtedness will depend on our ability to generate cash flows from operations in the future. Cash generated from future asset sales could serve as an additional source of debt repayment. Our ability, to a certain extent, is subject to general economic, financial, competitive, business, legislative, regulatory and other factors that are beyond our control.

At September 24, 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 September 24, 2017 totals $44,439,000. This liquidity amount excludes any future cash flows. Our adjusted EBITDA has been strong and has exceeded $144 million in each year from 2011 through 2017, but there can be no assurance that such results will continue. We expect all interest and principal payments due in the next twelve months will be satisfied by our cash flows and certain asset sales, which will allow us to maintain an adequate level of liquidity.

At September 24, 2017, the principal amount of our outstanding debt totals $548,385,000. At September 24, 2017 and September 25, 2016 our debt, net of cash, is 3.7 times and 3.9 times our adjusted EBITDA, respectively.

Final maturities of our debt are March 2019 through December 2022. As a result, we believe refinancing risk has been substantially reduced for the next several years.

There are numerous potential consequences under the Notes, 1st Lien Credit Facility, 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 lenders to exercise their remedies under the Notes, 1st Lien Credit Facility, 2nd Lien Term Loan, respectively, including, without limitation, the right to accelerate the repayment of 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, 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 September 24, 2017.

The Notes, 1st Lien Credit Facility and 2nd Lien Term Loan each contain restrictive covenants that limit our ability to grow our business or return capital to our stockholders

The Notes, 1st Lien Credit Facility and 2nd Lien Term Loan each contain various restrictions, covenants and representations and warranties. If we fail to comply with any of these covenants or breach these representations or warranties in any material respect, such noncompliance would constitute a default, and the lenders could elect to declare all amounts outstanding under the agreements related thereto to be immediately due and payable and enforce their respective interests against collateral pledged under such agreements.

The covenants and restrictions generally limit or restrict our ability to, among other things:

incur or guarantee additional debt;
make certain investments, loans or acquisitions;
transfer or sell assets; and
make certain restricted payments, including repurchases of outstanding common stock and dividends.

The restrictions described above may interfere with our ability to obtain new or additional financing or engage in other business activities, which may significantly limit or harm our results of operations, financial condition and liquidity.


16


A decrease in our stock price may limit the ability to trade our stock or for the Company to raise equity capital

Under the NYSE listing standards, if our common stock fails to maintain an adequate per share price and our total market capitalization falls below $50.0 million, our common stock could be removed from the NYSE and traded in the over the counter market. In July 2011, the NYSE notified us that our common stock did not meet the NYSE continued listing standards due to the failure to maintain an adequate share price. Under the NYSE rules, our common stock was allowed to continue to be listed during a cure period. In February 2012, after completing our debt refinancing, the NYSE notified us that we were again in compliance with the minimum closing price standard. In January 2013, the NYSE notified us that we had returned to full compliance with all continued listing standards. However, there can be no assurance that we will continue to be able to meet these listing standards, and the removal of our common stock from the NYSE could adversely affect our ability to raise equity capital.
 
OTHER

Cybersecurity risks could harm our ability to operate effectively and our reputation

In the 13-weeks ended September 24, 2017, 19.2% of our revenue was obtained from digital sources, including advertising and one of our businesses, TownNews.com, that provides digital infrastructure and digital publishing services for us and other companies.

We use technology in substantially all aspects of our business operations. Such uses give rise to cybersecurity risks, including the misappropriation of personally identifiable information that we store and manage and disabling or taking over of our websites. We have preventive systems and processes in place to protect against the risk of cyber incidents. However, the techniques used to obtain unauthorized access and to disable systems and websites change frequently and may be difficult to detect for long periods of time. There can be no assurance that we, or the security systems we implement, will protect against all of these rapidly changing risks. Prolonged system outages or a cyber incident that goes undetected could reduce our print and/or digital revenue, increase our operating costs, disrupt our operations, harm our reputation, lead to legal exposure to customers and employees as well as subject us to liability under laws and regulations that protect our customers and employees personal data. We maintain insurance coverage against certain of such risks, but cannot guarantee that such coverage will be applicable or sufficient with respect to any given incident.

We may not be able to protect our intellectual property rights, which may adversely affect our business

Our business depends on our intellectual property, including our valuable brands and content. We believe our proprietary trademarks and other intellectual property rights are important to our continued success and our competitive position.

Unauthorized parties may attempt to copy or otherwise obtain and use our content or infringe upon, dilute, reproduce, misappropriate or otherwise violate our intellectual property. There can be no assurance that the steps we have taken to protect our proprietary rights will be successful in any given case.

ITEM 1B. UNRESOLVED STAFF COMMENTS
 
None.
 
ITEM 2. PROPERTIES
 
Our executive offices are located in leased facilities at 201 North Harrison Street, Suite 600, Davenport, Iowa. The initial lease term expires April 30, 2019.

All of our principal printing facilities are owned, except Madison, Wisconsin (which is owned by MNI), Tucson (which is jointly owned by Star Publishing and Citizen), St. Louis (as described below) and leased land for the Helena, Montana plant. All facilities are well maintained, in good condition, suitable for existing office and publishing operations, as applicable, and adequately equipped. With the exception of St. Louis, none of our facilities is individually significant to our business.


17


Information related to St. Louis facilities at September 24, 2017 is as follows:
(Square Feet)
Owned

Leased

 
 
 
PD LLC
649,000

1,700

Suburban Journals
9,000

4,300

   
More than 40% of our daily newspapers, as well as many of our nearly 300 other publications, are printed at either another one of our print locations or outsourced to a third party, to enhance operating efficiency. We are continuing to evaluate additional insourcing and outsourcing opportunities in order to more effectively manage our operating and capital costs.
 
Our newspapers and other publications have formal or informal backup arrangements for printing in the event of a disruption in production capability.

ITEM 3. 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 4. MINE SAFETY DISCLOSURES

Not applicable.

PART II
 
ITEM 5. MARKET FOR THE REGISTRANT'S COMMON EQUITY,
RELATED STOCKHOLDER MATTERS AND ISSUER PURCHASES OF EQUITY SECURITIES
 
Our Common Stock is listed on the NYSE. In March 2011, in accordance with sunset provisions established in 1986, we effected conversion of all outstanding shares of Class B Common Stock to Common Stock. The table below includes the high and low prices of Common Stock for each calendar quarter during the past three years and the closing price at the end of each quarter.
 
Quarter Ended
 
(Dollars)
December

 
March

 
June

 
September

 
 
 
 
 
 
 
 
2017
 
 
 
 
 
 
 
High
3.76

 
3.30

 
3.10

 
2.40

Low
2.40

 
2.40

 
1.75

 
1.80

Closing
2.90

 
2.60

 
1.90

 
2.20

 
 
 
 
 
 
 
 
2016
 
 
 
 
 
 
 
High
2.54

 
2.20

 
2.43

 
3.92

Low
1.43

 
1.15

 
1.69

 
1.74

Closing
1.68

 
1.80

 
1.91

 
3.75

 
 
 
 
 
 
 
 
2015
 
 
 
 
 
 
 
High
3.93

 
3.73

 
3.55

 
3.40

Low
3.07

 
2.74

 
2.78

 
1.36

Closing
3.68

 
3.17

 
3.33

 
2.08

 
At September 24, 2017, we had 6,095 registered holders of record of our Common Stock.
 

18


Our debt agreements generally limit our ability to pay dividends and repurchase Common Stock unless in each case no default has occurred and we have satisfied certain financial measurements. See Note 4 of the Notes to Consolidated Financial Statements, included herein.

PERFORMANCE PRESENTATION
 
The following graph compares the percentage change in the cumulative total return of the Company, the Standard & Poor's ("S&P") 500 Stock Index, and a peer group index, in each case for the five years ended September 30, 2017 (with September 30, 2012 as the measurement point). Total return is measured by dividing (a) the sum of (i) the cumulative amount of dividends declared for the measurement period, assuming dividend reinvestment and (ii) the difference between the issuer's share price at the end and the beginning of the measurement period, by (b) the share price at the beginning of the measurement period.

performancegrapha10.jpg

Copyright© 2017 Standard & Poor's, a division of S&P Global. All rights reserved.
 
The value of $100 invested on September 30, 2012 in stock of the Company, the Peer Group Index and in the S&P 500 Stock Index, including reinvestment of dividends, is summarized in the table below.
 
September 30
 
(Dollars)
2012

 
2013

 
2014

 
2015

 
2016

 
2017

 
 
 
 
 
 
 
 
 
 
 
 
Lee Enterprises, Incorporated
100.00

 
178.38

 
228.38

 
140.54

 
253.38

 
148.65

Peer Group Index
100.00

 
131.94

 
127.30

 
120.95

 
129.33

 
200.09

S&P 500 Stock Index
100.00

 
119.34

 
142.89

 
142.02

 
163.93

 
194.44

 
The S&P 500 Stock Index includes 500 U.S. companies in the industrial, transportation, utilities and financial sectors and is weighted by market capitalization. The New Peer Group Index is comprised of three U.S. publicly traded companies with significant newspaper publishing operations (excluding the Company) and is weighted by market capitalization. The Peer Group Index includes A.H. Belo Corp., The McClatchy Company and The New York Times Company.

19


ITEM 6.  SELECTED FINANCIAL DATA
 
Selected financial data is as follows:
(Thousands of Dollars and Shares, Except Per Common Share Data)
2017

 
2016

 
2015

 
2014

 
2013

 
 
 
 

 
 

 
 

 
 
OPERATING RESULTS (1)
 
 
 

 
 

 
 

 
 
 
 
 
 
 
 
 
 
 
 
Operating revenue
566,943

 
614,364

 
648,543

 
660,877

 
677,774

Operating expenses, excluding depreciation, amortization, and impairment of intangible and other assets
441,873

 
476,413

 
501,760

 
505,822

 
517,047

Depreciation and amortization
41,282

 
43,441

 
45,563

 
48,511

 
55,527

Loss (gain) on sales of assets, net
(3,667
)
 
(3,139
)
 
106

 
(1,338
)
 
110

Impairment of intangible and other assets (1)
2,517

 
2,185

 

 
2,980

 
171,094

Equity in earnings of associated companies
7,609

 
8,533

 
8,254

 
8,297

 
8,685

Operating income (loss)
92,547

 
103,997

 
109,368

 
113,199

 
(57,319
)
Interest expense
(57,573
)
 
(64,233
)
 
(72,409
)
 
(79,724
)
 
(89,447
)
Debt financing and administration costs
(4,818
)
 
(5,947
)
 
(5,433
)
 
(22,927
)
 
(646
)
Gain on insurance settlement

 
30,646

 

 

 

Other, net
10,060

 
(6,268
)
 
6,386

 
3,413

 
8,189

 
 
 
 
 
 
 
 
 
 
Income (loss) from continuing operations
28,605

 
36,019

 
24,318

 
7,671

 
(76,478
)
Discontinued operations, net of income taxes

 

 

 

 
(1,246
)
Net income (loss)
28,605

 
36,019

 
24,318

 
7,671

 
(77,724
)
 
 
 
 
 
 
 
 
 
 
Income (loss) attributable to Lee Enterprises, Incorporated
27,481

 
34,961

 
23,316

 
6,795

 
(78,317
)
 
 
 
 
 
 
 
 
 
 
Income (loss) from continuing operations attributable to Lee Enterprises, Incorporated
27,481

 
34,961

 
23,316

 
6,795

 
(77,071
)
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Basic:
 
 
 
 
 
 
 
 
 
Continuing operations
0.51

 
0.66

 
0.44

 
0.13

 
(1.49
)
Discontinued operations

 

 

 

 
(0.02
)
 
0.51

 
0.66

 
0.44

 
0.13

 
(1.51
)
 
 
 
Diluted:
 
 
 
 
 
 
 
 
 
Continuing operations
0.50

 
0.64

 
0.43

 
0.13

 
(1.49
)
Discontinued operations

 

 

 

 
(0.02
)
 
0.50

 
0.64

 
0.43

 
0.13

 
(1.51
)
 
 
 
Weighted average common shares:
 
 
 
 
 
 
 
 
 
Basic
53,990

 
53,198

 
52,640

 
52,273

 
51,833

Diluted
55,392

 
54,224

 
53,931

 
53,736

 
51,833

 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Total assets
620,850

 
662,855

 
747,825

 
811,275

 
827,705

Debt, including current maturities (2)
548,385

 
617,167

 
725,872

 
804,750

 
847,500

Debt, net of cash and restricted cash (2)
537,764

 
600,183

 
714,738

 
787,605

 
829,938

Stockholders' deficit
(92,235
)
 
(128,485
)
 
(159,393
)
 
(178,253
)
 
(170,350
)

20


(1
)
The Company recorded pretax, non-cash impairment charges to reduce the carrying value of assets as follows:
(Thousands of Dollars)
2017

 
2016

 
2015

 
2014

 
2013

 
 
 
 
 
 
 
 
 
 
Continuing operations:
 
 
 
 
 
 
 
 
 
Goodwill

 

 

 

 

Non-amortized intangible assets
2,035

 
818

 

 
1,936

 
1,567

Amortizable intangible assets

 

 

 

 
169,041

Property, equipment and other assets
482

 
1,367

 

 
1,044

 
486

 
2,517

 
2,185

 

 
2,980

 
171,094

(2
)
Principal amount of debt, excluding fair value adjustments. See Note 4 of the Notes to Consolidated Financial Statements, included herein.
 
 
ITEM 7.  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 September 24, 2017 and for 2017, 2016 and 2015. This discussion should be read in conjunction with the Consolidated Financial Statements and related Notes thereto, included herein.
 
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 continuing 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 diluted earnings (loss) per common share adjusted to exclude the impact of the warrant valuation and the insurance settlement.

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 workforce adjustments and other. Depreciation, amortization, impairment charges, other non-cash operating expenses and other expenses are excluded. Cash Costs are also presented excluding workforce adjustments, which are paid in cash.


21


We also present revenue and certain operating expense trends on a Same Property basis which excludes results from the acquisition of the Dispatch-Argus and a small weekly publication acquired in 2017 as well as the operating results of the Daily Herald in Provo, UT, which was sold in August 2016. 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 operations that were recently acquired.

A table reconciling adjusted EBITDA to net income (loss), the most directly comparable measure under GAAP, is set forth below under the caption "Reconciliation of Non-GAAP Financial Measures".

Reconciliations of adjusted income (loss) and adjusted earnings 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 7, included herein, under the caption “Overall Results”.

The subtotals of operating expenses representing cash costs can be found in tables in Item 7, included herein, under the captions “2017 vs. 2016” and “2016 vs. 2015”.

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:
(Thousands of Dollars)
2017

2016

2015

 
 
 
 
Net Income
28,605

36,019

24,318

Adjusted to exclude
 
 
 
Income tax expense
11,611

22,176

13,594

Non-operating expenses, net
52,331

45,802

71,456

Equity in earnings of TNI and MNI
(7,609
)
(8,533
)
(8,254
)
Loss (gain) on sale of assets, net
(3,667
)
(3,139
)
106

Impairment of intangible and other assets
2,517

2,185


Depreciation and amortization
41,282

43,441

45,563

Workforce adjustments and other
7,523

1,825

3,304

Stock compensation
2,088

2,306

1,971

Add:
 
 
 
Ownership share of TNI and MNI EBITDA (50%)
9,927

11,705

11,246

Adjusted EBITDA
144,608

153,787

163,304

    
CRITICAL ACCOUNTING POLICIES
 
Our discussion and analysis 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 our estimates on an on-going 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. Additional information follows with regard to certain of the most critical of our accounting policies.

Intangible Assets, Other Than Goodwill
 
In assessing the recoverability of non-amortized intangible assets, we annually assess qualitative factors affecting

22


our business to determine if the probability of a goodwill impairment is more likely than not. Our assessment includes reviewing internal and external factors affecting our business, such as revenue projections and other industry or market considerations. This assessment is made as of the first day of our fourth fiscal quarter of each year.

We analyze non-amortized intangible assets for impairment more frequently if impairment indicators are present. Such indicators of impairment include, but are not limited to, changes in business climate and operating or cash flow losses related to such assets.

Should we determine that a non-amortized intangible asset impairment is more likely than not, we make a determination of the individual asset's fair value. Fair value is determined using the relief from royalty method, which estimates fair value based upon appropriate royalties of future revenue discounted to their present value. The impairment amount, if any, is calculated based on the excess of the carrying amount over the fair value of such asset.

We review our amortizable intangible assets for impairment when indicators of impairment are present. We assess recoverability of these assets by comparing the estimated undiscounted cash flows associated with the asset group with their carrying amount. The impairment amount, if any, is calculated based on the excess of the carrying amount over the fair value of those asset groups.

The required valuation methodology and underlying financial information that are used to determine fair value require significant judgments to be made by us and represent a Level 3 fair value measurement. These judgments include, but are not limited to, long term projections of future financial performance and the selection of appropriate discount rates used to determine the present value of future cash flows. Changes in such estimates or the application of alternative assumptions could produce significantly different results.
 
We also periodically evaluate our determination of the useful lives of amortizable intangible assets. Any resulting changes in the useful lives of such intangible assets will not impact our cash flows. However, a decrease in the useful lives of such intangible assets would increase future amortization expense and decrease future reported operating results and earnings per common share.

In 2017 and 2016, due to continuing revenue declines, we recorded non-cash charges to reduce the carrying value of non-amortized intangible assets. We also recorded pretax, non-cash charges to reduce the carrying value of property, equipment and other assets in 2017 and 2016. We recorded deferred income tax benefits related to these charges.
 
A summary of impairment charges is included in the table below:
(Thousands of Dollars)
2017

 
2016

 
2015

 
 
 
 
 
 
Continuing operations:
 
 
 
 
 
Non-amortized intangible assets
2,035

 
818

 

Property, equipment and other assets
482

 
1,367

 

 
2,517

 
2,185

 


Future decreases in our market value, or significant differences in revenue, expenses or cash flows from estimates used to determine fair value, could result in additional impairment charges in the future.

Pension, Postretirement and Postemployment Benefit Plans
 
We evaluate our liability for pension, postretirement and postemployment benefit plans based upon computations made by consulting actuaries, incorporating estimates and actuarial assumptions of future plan service costs, future interest costs on projected benefit obligations, rates of compensation increases, when applicable, employee turnover rates, anticipated mortality rates, expected investment returns on plan assets, asset allocation assumptions of plan assets, and other factors. If we used different estimates and assumptions regarding these plans, the funded status of the plans could vary significantly, resulting in recognition of different amounts of expense over future periods.
 
Increases in market interest rates, which may impact plan assumptions, generally result in lower service costs for current employees, higher interest expense and lower liabilities. Actual returns on plan assets that are lower than

23


the plan assumptions will generally result in decreases in a plan's funded status and may necessitate additional contributions.

Income Taxes
 
Deferred income taxes are provided using the asset and liability method, whereby deferred income tax assets are recognized for deductible temporary differences and loss carryforwards and deferred income tax liabilities are recognized for taxable temporary differences. Temporary differences are the difference between the reported amounts of assets and liabilities and their tax basis. We currently have recorded valuation allowances that we will maintain until, in our opinion, it is more likely than not that some portion or all of the deferred tax assets will be realized. Deferred income tax assets and liabilities are adjusted for the effects of changes in tax laws and rates on the date of enactment. Our income tax expense recorded in the future may be increased or decreased to the extent our valuation allowances change. An increase in the valuation allowance could result in additional income tax expense, while a decrease in the valuation allowance could result in a reduction to income tax expense, in such period and could have a significant impact on our future earnings.

We recognize the effect of income tax positions only if those positions are more likely than not of being sustained. Recognized income tax positions are measured at the largest amount that is greater than 50% likely of being realized. Changes in recognition or measurement are reflected in the period in which the change in judgment occurs. We record interest and penalties related to unrecognized tax benefits as a component of income tax expense. Changes in accounting for uncertain tax positions can result in additional variability in our effective income tax rate.

Our current and deferred income tax provisions are calculated based on estimates and assumptions that could differ from the actual results reflected in income tax returns filed during the subsequent year. These estimates are reviewed and adjusted, if needed, throughout the year. Adjustments between our estimates and the actual results of filed returns are recorded when identified.
 
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 Income and Comprehensive Income in the periods in which such matters are ultimately determined. See "Changes in Laws and Regulations."
 
 Revenue Recognition
 
Advertising revenue is recorded when advertisements are placed in the publication or on the related digital platform. Subscription revenue is recorded over the print or digital subscription term as the product is delivered or made available or as newspapers are individually sold. Other revenue is recognized when the related product or service has been delivered. Unearned revenue arises in the ordinary course of business from advance subscription payments for print or digital products or advance payments for advertising.
 
Uninsured Risks
 
We are self-insured for health care, workers compensation and certain long-term disability costs of our employees, subject to stop loss insurance, which limits exposure to large claims. We accrue our estimated health care costs in the period in which such costs are incurred, including an estimate of incurred but not reported claims. Other risks are insured and carry deductible losses of varying amounts.
 
Our accrued reserves for health care and workers compensation claims are based upon estimates of the remaining liability for retained losses made by consulting actuaries. The amount of workers compensation reserve has been determined based upon historical patterns of incurred and paid loss development factors from the insurance industry.

An increasing frequency of large claims, deterioration in overall claim experience or changes in federal or state laws affecting our liability for such claims could increase the volatility of expenses for such self-insured risks.


24


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. Based on 2017 results, the adoption of this standard will reduce operating income by $6,574,000, which includes the impact of a $3,741,000 curtailment gain, however net income will remain unchanged.

In August 2016, the Financial Accounting Standards Board ("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. The adoption of the new standard is required in 2019. The adoption of this standard may reclassify certain cash receipts within the Consolidated Statements of Cash Flows.

In March 2016, the FASB issued a new standard that makes 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 do not believe the impact from the adoption of this standard to have a material impact 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.

We currently anticipate adopting the new lease standard in the first quarter of fiscal year 2020. To date we have made progress in our assessment of the new lease standard. We are currently evaluating the provisions of the updated guidance and assessing the impact on our 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 using the modified retrospective approach in the fiscal year beginning October 1, 2018. This approach consists of recognizing the cumulative effect of initially applying the standard as an adjustment to opening retained earnings.

During 2017, we established a project team to identify potential differences that would result from the application of this standard. We are in the process of reviewing our customer contracts, identifying contractual provisions that may result in a change in the timing or the amount of revenue recognized and assessing the enhanced disclosure requirements of the new guidance. Based on our evaluation, we expect to adopt the requirements of the new standard in the first quarter of 2019 and anticipate using the modified retrospective transition method.


25


CONTINUING OPERATIONS

2017 vs. 2016

Operating results, as reported in the Consolidated Financial Statements, are summarized below:
(Thousands of Dollars and Shares, Except Per Share Data)
2017

 
2016

 
Percent Change

Same Property

 
 
 
 
 
 
 
Advertising and marketing services revenue:
 
 
 
 
 
 
Retail
212,737

 
238,641

 
(10.9
)
(10.0
)
Classified
88,429

 
101,077

 
(12.5
)
(12.2
)
National
20,049

 
22,114

 
(9.3
)
(8.6
)
Niche publications and other
10,145

 
11,631

 
(12.8
)
(13.9
)
Total advertising and marketing services revenue
331,360

 
373,463

 
(11.3
)
(10.6
)
Subscription
191,922

 
194,002

 
(1.1
)
(0.6
)
Digital services
14,008

 
14,240

 
(1.6
)
(1.3
)
Commercial printing
9,742

 
12,269

 
(20.6
)
(20.0
)
Other
19,911

 
20,390

 
(2.3
)
(2.3
)
Total operating revenue
566,943

 
614,364

 
(7.7
)
(7.1
)
Compensation
209,692

 
229,752

 
(8.7
)
(8.4
)
Newsprint and ink
24,904

 
26,110

 
(4.6
)
(4.7
)
Other operating expenses
199,754

 
218,726

 
(8.7
)
(7.4
)
Workforce adjustments and other
7,523

 
1,825

 
NM

NM

Cash costs
441,873

 
476,413

 
(7.3
)
(6.5
)
 
125,070

 
137,951

 
(9.3
)
(9.4
)
Depreciation
16,026

 
17,291

 
(7.3
)
 
Amortization
25,256

 
26,150

 
(3.4
)
 
Gain on sales of assets, net
(3,667
)
 
(3,139
)
 
16.8

 
Impairment of intangible and other assets
2,517

 
2,185

 
15.2

 
Equity in earnings of associated companies
7,609

 
8,533

 
(10.8
)
 
Operating income
92,547

 
103,997

 
(11.0
)
 
Non-operating expense, net
(52,331
)
 
(45,802
)
 
14.3

 
Income before income taxes
40,216

 
58,195

 
(30.9
)
 
Income tax expense
11,611

 
22,176

 
(47.6
)
 
Net income
28,605

 
36,019

 
(20.6
)
 
Net income attributable to non-controlling interests
(1,124
)
 
(1,058
)
 
6.2

 
Income attributable to Lee Enterprises, Incorporated
27,481

 
34,961

 
(21.4
)
 
Other comprehensive income (loss), net
6,710

 
(6,503
)
 
NM

 
Comprehensive income (loss) attributable to Lee Enterprises, Incorporated
34,191

 
28,458

 
20.1

 
 
 
 
 
 
 
 
Earnings per common share:
 
 
 
 
 
 
Basic
0.51

 
0.66

 
(22.7
)
 
Diluted
0.50

 
0.64

 
(21.9
)
 

All of the revenue and operating expense trends discussed below are on a Same Property basis, unless otherwise noted, to reflect the impact of the acquisitions of the Dispatch-Argus and a small weekly publication in 2017 as well as the sale of the Daily Herald in Provo, UT in 2016.

Advertising and Marketing Services Revenue

In 2017, advertising and marketing services revenue decreased $39,062,000, or 10.6%, compared to 2016. Retail advertising decreased 10.0%. The decrease in retail advertising 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 9.4%, partially offsetting print declines.

26


Classified revenue decreased $12,157,000, or 12.2%, in 2017 as we continue to experience a reduction in print advertising from automotive, employment and real estate in most of our markets which combined, declined 18.3%. While other classified revenue, which includes obituaries and legal notices, declined $1,435,000, or 3.5%, in 2017. Digital classified revenue on a stand-alone basis increased 5.8%.

National advertising decreased $1,869,000, or 8.6%. Digital national advertising on a stand-alone basis increased 6.0%.

Niche publications and other decreased $1,610,000, or 13.9%, in 2017. Declines were primarily due to elimination of products that do not meet our profit margin standards.

On a stand-alone basis, digital advertising included in advertising marketing services revenue increased 8.0% to $91,947,000, in 2017, representing 28.0% of total advertising and marketing services revenue. Total digital revenue including TownNews.com and all other digital business totaled $105,954,000 in 2017, an increase of 6.7% over 2016. 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 16.2%.

Subscription and Other Revenue

Subscription revenue decreased $1,083,000, or 0.6%, in 2017. Selective price increases mostly offset paid subscription revenue declines from reduced volume.

Our average daily newspaper circulation, including TNI, MNI and digital subscribers, totaled 0.8 million in 2017. Sunday circulation totaled 1.2 million.

Digital services revenue decreased $189,000, or 1.3%, due to a decrease in online surveys revenue, offset by revenue growth at TownNews.com. Commercial printing revenue decreased $2,420,000, or 20.0%, in 2017 Period due to decreased volume from several of our existing customers.

In 2017, our mobile, tablet, desktop and app sites, including TNI and MNI, attracted an average of 25.4 million unique visitors per month, with 227.2 million monthly page views, a 5.7% increase compared to 2016. Increased audience engagement is driving a higher number pages viewed per user session in 2017. Research in our larger markets indicates we are maintaining our share of audience in our markets through the combination of digital audience growth and strong print newspaper readership.

Operating Expenses

Operating expenses on a GAAP basis decreased 7.1% in 2017. Excluding workforce adjustments, cash costs decreased $36,004,000 or, 7.7%, in 2017.

Compensation expense decreased $19,064,000, or 8.4%, in 2017, driven by a decline of 8.5% in average full time equivalent employees and lower self-insured medical costs.

Newsprint and ink costs decreased $1,226,000, or 4.7%, in 2017, as a result of a 12.2% reduction in newsprint volume partially offset by higher prices. See Item 7A, “Commodities”, included herein, for further discussion and analysis of the impact of newsprint on our business.

Other operating expenses decreased $15,714,000, or 7.4%, in 2017. Other operating expenses include all operating costs not considered to be compensation, newsprint, depreciation, amortization, or workforce adjustments 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 subscriber delivery cost from low print distribution volumes and a decrease in postage costs, as a result of a reduction in direct mail advertising volumes.

Workforce adjustment an other costs totaled $7,523,000 and $1,825,000 in 2017 and 2016, respectively. The 2017 includes a $2,600,000 expense to record an estimate of a partial withdrawal liability from one of our multiemployer pension plans.


27


Results of Operations

On a GAAP basis, depreciation expense decreased $1,265,000, or 7.3%, and amortization expense decreased $894,000, or 3.4%, in 2017. Sales of operating assets and other, net totaled $3,667,000 in 2017 and included a $3,741,000 curtailment gain from the elimination of an unfunded employee benefit plan. Sales of operating assets in 2016 resulted in a net gain of $3,139,000, including the gain on the sale of the Provo Daily Herald.

In 2017, we recorded $2,517,000 of non-cash impairment charges compared to $2,185,000 in 2016.

Equity in earnings of TNI and MNI decreased $924,000 in 2017.

The factors noted above resulted in operating income of $92,547,000 in 2017 compared to $103,997,000 in 2016.

Nonoperating Income and Expenses

Interest expense decreased $6,660,000, or 10.4%, to $57,573,000 in 2017 due to lower debt balances. Our weighted average cost of debt, excluding amortization of debt financing cost, increased to 9.9% in 2017 compared to 9.7% in 2016, as the majority of our debt repayments in 2017 were made on the 1st Lien Term Loan, our lowest cost debt.

In 2016, 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 our production facilities.

We recognized $4,818,000 of debt financing and administrative costs in 2017 compared to $5,947,000 in 2016 related to our 2014 refinancing, the majority of which was amortization. We also recognized a $1,250,000 gain on extinguishment of debt in 2016.

As more fully discussed in Note 4 of the Notes to the Consolidated Financial Statements, included herein, we recorded a liability for the Warrants, issued in connection with the Warrant Agreement. We remeasure the liability to fair value each reporting period, with changes reported in other non-operating income (expenses). Due to the fluctuation in the price of our Common Stock the estimated fair value of the warrant liability can change each period. We recorded non-operating income of $10,181,000 in 2017 and non-operating expenses of $7,519,000, in 2016.

Overall Results

We recognized income tax expense of $11,611,000, resulting in an effective tax rate of 28.9% in 2017 compared to 38.1% in 2016. The impact of the mark-to-market adjustment for our warrants has no related tax expense or benefit. See Note 10 of the Notes to the Consolidated Financial Statements, included herein, for a discussion of the differences between the expected federal income tax rate to the actual tax rates.


28


As a result of the factors noted above, income attributable to Lee Enterprises, Incorporated totaled $27,481,000 in 2017 compared to $34,961,000 in 2016. We recorded earnings per diluted common share of $0.50 in 2017 and $0.64 in 2016. Excluding the warrants fair value adjustment and the gain on insurance settlement, as detailed in the table below, diluted earnings per common share, as adjusted, were $0.31 in 2017, compared to $0.42 in 2016. Per share amounts may not add due to rounding.
 
2017
 
2016
 
(Thousands of Dollars, Except Per Share Data)
Amount

Per Share

Amount

Per Share

 
 
 
Income attributable to Lee Enterprises, Incorporated, as reported
27,481

0.50

34,961

0.64

Adjustments:
 
 
 
 
Warrants fair value adjustment
(10,181
)
 
7,519

 
Gain on insurance settlement

 
(30,646
)
 
 
(10,181
)
 
(23,127
)
 
Income tax effect of adjustments, net

 
10,726

 
 
(10,181
)
(0.18
)
(12,401
)
(0.23
)
Income attributable to Lee Enterprises, Incorporated, as adjusted
17,300

0.31

22,560

0.42


29


2016 vs. 2015

Operating results, as reported in the Consolidated Financial Statements, are summarized below:
(Thousands of Dollars and Shares, Except Per Share Data)
2016

 
2015

 
Percent Change

 
 
 
 
 
 
Advertising and marketing services revenue:
 
 
 
 
 
Retail
238,641

 
262,079

 
(8.9
)
Classified
101,077

 
116,480

 
(13.2
)
National
22,114

 
22,422

 
(1.4
)
Niche publications and other
11,631

 
11,118

 
4.6

Total advertising and marketing services revenue
373,463

 
412,099

 
(9.4
)
Subscription
194,002

 
194,474

 
(0.2
)
Digital services
14,240

 
12,522

 
13.7

Commercial printing
12,269

 
11,875

 
3.3

Other
20,390

 
17,573

 
16.0

Total operating revenue
614,364

 
648,543

 
(5.3
)
Compensation
229,752

 
239,028

 
(3.9
)
Newsprint and ink
26,110

 
30,263

 
(13.7
)
Other operating expenses
218,726

 
229,165

 
(4.6
)
Workforce adjustments
1,825

 
3,304

 
(44.8
)
Cash costs
476,413

 
501,760

 
(5.1
)
 
137,951

 
146,783

 
(6.0
)
Depreciation
17,291

 
18,418

 
(6.1
)
Amortization
26,150

 
27,145

 
(3.7
)
Loss (gain) on sales of assets, net
(3,139
)
 
106

 
NM

Impairment of intangible and other assets
2,185

 

 
NM

Equity in earnings of associated companies
8,533

 
8,254

 
3.4

Operating income
103,997

 
109,368

 
(4.9
)
Non-operating expense, net
(45,802
)
 
(71,456
)
 
(35.9
)
Income from continuing operations before income taxes
58,195

 
37,912

 
53.5

Income tax expense
22,176

 
13,594

 
63.1

Net income
36,019

 
24,318

 
48.1

Net income attributable to non-controlling interests
(1,058
)
 
(1,002
)
 
5.6

Income attributable to Lee Enterprises, Incorporated
34,961

 
23,316

 
49.9

Other comprehensive loss, net
(6,503
)
 
(6,445
)
 
0.9

Comprehensive income attributable to Lee Enterprises, Incorporated
28,458

 
16,871

 
68.7

 
 
 
 
 
 
Earnings per common share:
 
 
 
 
 
Basic
0.66

 
0.44

 
50.0

Diluted
0.64

 
0.43

 
48.8


Advertising and Marketing Services Revenue

In 2016 advertising and marketing services revenue decreased $38,636,000, or 9.4%, compared to 2015. Retail advertising decreased 8.9%. The decrease in retail advertising revenue is due to reduced print advertising volume primarily from large retail, big box stores and classifieds. Digital retail advertising on a stand-alone basis increased 8.9%, partially offsetting print declines.

Classified revenue decreased $15,403,000, or 13.2% in 2016 as we continued to experience a reduction in print advertising from automotive, employment and real estate in most of our markets. Digital classified revenue on a stand-alone basis decreased 4.3%.

30


National advertising decreased $308,000 or 1.4%. Digital national advertising on a stand-alone basis increased 20.4% due to improved management of available ad positions offered on the national advertising exchanges and improved pricing. Revenue in niche publications and other increased $513,000, or 4.6%.

On a stand-alone basis, digital advertising included in advertising and marketing services revenue increased 5.6%, to $86,279,000 in 2016, representing 23.1% of total advertising and marketing services revenue. Mobile advertising revenue, which is included in digital advertising, increased 19.6% in 2016. Total digital revenue, including TownNews.com and all other digital business totaled $100,519,000 in 2016, an increase of 6.6% from a year ago. 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 13.1%.

Subscription and Other Revenue

Subscription revenue decreased $472,000, or 0.2% in 2016. Subscription revenue was virtually flat as price increases and the addition of premium content days with higher single day pricing almost completely offset revenue declines from print subscription unit losses.

Our average daily newspaper circulation, including TNI, MNI and digital subscribers, totaled 0.9 million in 2017. Sunday circulation totaled 1.3 million.

Digital services revenue increased $1,718,000, or 13.7%, in 2016, largely due to TownNews.com. Commercial printing revenue increased $394,000, or 3.3% in 2016, due to new customers offset by decreased volume for existing customers at several of our large markets. Other revenue increased $2,817,000, or 16.0% in 2016, due to an increase in revenue for delivery of third party newspapers.

Our mobile, tablet, desktop and app sites, including TNI and MNI, attracted an average of 26.0 million unique visitors per month, with 218.8 million page views. Research in our larger markets indicates we are maintaining our share of audience in our markets through the combination of digital audience growth and strong print newspaper readership.

Operating Expenses

Operating expenses decreased 5.2% in 2016. Excluding workforce adjustments, cash costs decreased $23,868,000, or 4.8% in 2016.

Compensation expense decreased $9,276,000, or 3.9%, in 2016, driven by a decline of 7.9% in average full-time equivalent employees. Costs associated with our self-insured medical plan increased $4.0 million in 2016 due to higher claims costs compared to 2015, offsetting some of the costs due to the reduction in full-time equivalent employees.

Newsprint and ink costs decreased $4,153,000, or 13.7%, in 2016, primarily as a result of reduction in newsprint volume of 10.7%. See Item 7A, “Commodities”, included herein, for further discussion and analysis of the impact of newsprint on our business.

Other operating expenses decreased $10,439,000, or 4.6%, in 2016. Other operating expenses include all operating costs not considered to be compensation, newsprint, depreciation, amortization, or workforce adjustments and other. The largest components of these costs included delivery, postage, outsourced printing, digital cost of good sold, facility expenses among others. Cost reduction 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 $1,825,000 and $3,304,000 in 2016 and 2015, respectively.

Results of Operations

Depreciation expense decreased $1,127,000, or 6.1%, and amortization expense decreased $995,000, or 3.7%, in 2016. Sales of operating assets including the sale of the Provo Daily Herald in August 2016, resulted in a net gain of $3,139,000 in 2016 compared to a net loss of $106,000 in 2015.

In 2016, we recorded $2,185,000 of non-cash impairment charges.


31


Equity in earnings in associated companies decreased $279,000 in 2016.

The factors noted above resulted in operating income of $103,997,000 in 2016 compared to $109,368,000 in 2015

Nonoperating Income and Expenses

Interest expense decreased $8,176,000, or 11.3%, to $64,233,000 in 2016 due to lower debt balances.

In 2016, 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 our production facilities.

We recognized $5,947,000 of debt financing and administrative costs in 2016 compared to $5,433,000 in 2015, related to our 2014 refinancing. We also recognized $1,250,000 gain on extinguishment of debt in 2016.

Due to the fluctuation in the price of our Common Stock, we recorded non-operating expenses of $7,519,000 in 2016 and non-operating income of $6,568,000 in 2015 related to the change in fair value of the warrants.

Overall Results

We recognized income tax expense at 38.1% of income before income taxes in 2016 and 35.9% in 2015. See Note 10 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 $34,961,000 in 2016 compared to $23,316,000 in 2015. We recorded earnings per diluted common share of $0.64 in 2016 and $0.43 in 2015. Excluding the warrants fair value adjustment and the gain on the insurance settlement, as detailed in the table below, diluted earnings per common share, as adjusted, were $0.42 in 2016, compared to $0.31 in 2015. Per share amounts may not add due to rounding.
 
2016
 
2015
 
(Thousands of Dollars, Except Per Share Data)
Amount

Per Share

Amount

Per Share

 
 
 
Income attributable to Lee Enterprises, Incorporated, as reported
34,961

0.64

23,316

0.43

Adjustments:
 
 
 
 
Warrants fair value adjustment
7,519

 
(6,568
)
 
Gain on insurance settlement
(30,646
)
 

 
 
(23,127
)
 
(6,568
)
 
Income tax effect of adjustments, net
10,726

 
 
 
 
(12,401
)
(0.23
)
(6,568
)
(0.12
)
Income attributable to Lee Enterprises, Incorporated, as adjusted
22,560

0.42

16,748

0.31




32


LIQUIDITY AND CAPITAL RESOURCES
 
Operating Activities
 
Cash provided by operating activities totaled $72,281,000 in 2017 compared to $79,190,000 in 2016 due to a decline in net income to $28,605,000 in 2017 from $36,019,000 in 2016. The decline in net income is primarily the result of continued softening of the print advertising environment partially offset by lower operating expenses and a decline in pension contributions.

Cash provided by operating activities totaled $79,190,000 in 2016 compared to $74,476,000 in 2015. The increase in cash flows in 2016 is due to an increase in net income of $36,019,000 in 2016 from $24,318,000 in 2015 as well as changes in operating assets and liabilities.

Pension liabilities, net of plan assets, totaled $43.5 million as of September 24, 2017. Contributions to pension plans are expected to total $4,940,000 in 2018.

Investing Activities
 
Cash required for investing activities totaled $9,455,000 in 2017 and cash provided by investing activities totaled $34,508,000 in 2016. The change in cash flows from investing activities is primarily related to a $30,646,000 insurance settlement in 2016. Proceeds from sales of assets totaled $2,582,000 and $9,878,000 in 2017 and 2016, respectively, and in 2017, $7,450,000 was used to acquire businesses. Capital spending totaled $4,078,000 and $7,091,000 in 2017 and 2016, respectively.

Cash provided by investing activities totaled $34,508,000 in 2016 and cash required for investing activities totaled $208,000 in 2015. The change in cash flows from investing activities is mainly due to a $30,646,000 insurance settlement in 2016. Proceeds from sales of assets totaled $9,878,000 in 2016 and $8,871,000 in 2015, respectively. Capital spending totaled $7,091,000 and $9,707,000 in 2016 and 2015, respectively.
 
We anticipate that funds necessary for capital expenditures, which are expected to total up to $10,000,000 in 2018, and other requirements, will be available from internally generated funds, or available under our Revolving Facility.
 
Financing Activities
 
Cash required for financing activities totaled $69,189,000 in 2017, $107,848,000 in 2016 and $79,838,000 in 2015. Debt reduction accounted for the majority of the usage of funds in all years.

Debt is summarized as follows:
 
 
 
Interest Rates (%)
(Thousands of Dollars)
September 24
2017

September 25
2016

September 24
2017
 
 
 
 
Revolving Facility


6.7
1st Lien Term Loan
45,145

101,304

7.5
Notes
385,000

385,000

9.5
2nd Lien Term Loan
118,240

130,863

12.0
 
548,385

617,167

 
Less current maturities of long-term debt
30,182

25,070

 
Total long-term debt