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EX-32 - EXHIBIT 32 - LEE ENTERPRISES, Incex_150331.htm
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EX-31.1 - EXHIBIT 31.1 - LEE ENTERPRISES, Incex_150329.htm
EX-24 - EXHIBIT 24 - LEE ENTERPRISES, Incex_150328.htm
EX-23 - EXHIBIT 23 - LEE ENTERPRISES, Incex_150327.htm
EX-21 - EXHIBIT 21 - LEE ENTERPRISES, Incex_150326.htm
 

 

Table of Contents


 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 29, 2019

 OR

[  ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE

SECURITIES EXCHANGE ACT OF 1934

 Commission File Number 1-6227

LEE ENTERPRISES, INCORPORATED

(Exact name of Registrant as specified in its Charter)

Delaware

42-0823980

(State of incorporation)

(I.R.S. Employer Identification No.)

4600 E 53rd Street, Davenport, Iowa 52807

(Address of principal executive offices)

 (563) 383-2100

Registrant's telephone number, including area code

 

Securities registered pursuant to Section 12(b) of the Act:

     

Title of Each Class

Trading Symbol(s)

Name of Each Exchange On Which Registered

Common Stock - $0.01 par value

LEE

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 every Interactive Data File required to be submitted 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). Yes [X] No [ ]

 

Indicate by check mark whether the Registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, a 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 [ ] 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]

 

As of March 31, 2019, the aggregate market value of the registrant's common stock held by non-affiliates of the registrant was $174,880,560 based on the closing sale price as reported on the New York Stock Exchange. As of November 30, 2019, Common Stock $0.01 par value were 57,609,582 shares of common stock outstanding.

 

DOCUMENTS INCORPORATED BY REFERENCE

 

Portions of the Lee Enterprises, Incorporated Definitive Proxy Statement to be filed in January 2020 are incorporated by reference in Part III of this Form 10-K. Except as expressly incorporated by reference, the Registrant's Definitive Proxy Statement shall not be deemed to be a part of this report.

 

 

 

 

 

TABLE OF CONTENTS

PAGE

 

 

 

 

 

 

 

 

Part I

 

 

 

 

 

 

Item 1

Business

1

 

 

 

 

 

Item 1A

Risk Factors

10

 

 

 

 

 

Item 1B

Unresolved Staff Comments

16

 

 

 

 

 

Item 2

Properties

16

 

 

 

 

 

Item 3

Legal Proceedings

16

 

 

 

 

 

Item 4

Mine Safety Disclosures

16

 

 

 

 

Part II

 

 

 

 

 

 

Item 5

Market for the Registrant's Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities

17

 

 

 

 

 

Item 6

Selected Financial Data

19

 

 

 

 

 

Item 7

Management's Discussion and Analysis of Financial Condition and Results of Operations

20

 

 

 

 

 

Item 7A

Quantitative and Qualitative Disclosures about Market Risk

31

 

 

 

 

 

Item 8

Financial Statements and Supplementary Data

32

 

 

 

 

 

Item 9

Changes in and Disagreements with Accountants on Accounting and Financial Disclosure

32

 

 

 

 

 

Item 9A

Controls and Procedures

32

 

 

 

 

 

Item 9B

Other Information

34

 

 

 

 

Part III

 

 

 

 

 

 

Item 10

Directors, Executive Officers and Corporate Governance

34

 

 

 

 

 

Item 11

Executive Compensation

34

 

 

 

 

 

Item 12

Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters

34

 

 

 

 

 

Item 13

Certain Relationships and Related Transactions, and Director Independence

34

 

 

 

 

 

Item 14

Principal Accounting Fees and Services

34

 

 

 

 

Part IV

 

 

 

 

 

 

Item 15

Exhibits and Financial Statement Schedules

35

 

 

 

 

Consolidated Financial Statements

36

 

 

 

 

Signatures

74

 

 

 

 

Exhibit Index

75

 

 

 

 

References to “we”, “our”, “us” and the like throughout this document refer to Lee Enterprises, Incorporated and subsidiaries (the "Company"). References to "2019", "2018", "2017" and the like refer to the fiscal years ended the last Sunday in September.

 

 

PART I

 

ITEM 1. BUSINESS

 

Lee Enterprises, Incorporated ("Company", "we" or "our") is a leading provider of high quality, trusted, local news and information, and a major platform for advertising in the markets we serve. We operate 50 principally mid-sized local media operations (including TNI Partners ("TNI") and Madison Newspapers, Inc. ("MNI")) across 20 states.

 

Our products include print and digital editions of daily, weekly and monthly newspapers and niche publications. All of our products offer print and digital editions, and our content and advertising is available in real time through our websites and mobile apps. We provide marketing services, predominately through our digital marketing agency, Amplified Agency, and through one of our subsidiaries, TownNews, we provide web hosting and content management services for our media operations and 2,000 other content producers who rely on TownNews for their web, Over-the-top display ("OTT"), mobile, video and social media products.

 

Our local media operations range from large daily newspapers and the associated digital products, such as the St. Louis Post-Dispatch, to non-daily newspapers with news websites and digital platforms serving smaller communities.

 

As the leading provider of local news, information and a major source of advertising in our markets we aim to grow our business through three main categories: subscriptions with consumers, local retail accounts and digital services.

 

 

We are committed to a business strategy that drives audience growth and engagement by delivering valuable, intensely local, original news and information to consumers.

 

 

Local, controllable retail accounts - those in which our local sales teams have direct contact with the advertising decision makers - are the core of our business. This segment represents more than 50% of advertising revenue and we believe we can improve revenue trends in this category as we have unmatched audience reach through our print and digital product offerings. 

 

 

TownNews represents a powerful opportunity for us to drive additional digital revenue by providing state-of-the-art web hosting and content management services to nearly 2,000 other media organizations including broadcast.

 

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

 

Advertising and Marketing Services - Approximately 52% of our 2019 revenue was derived from advertising and marketing services. The following broadly define major categories of advertising and marketing services revenue: 

 

Local retail advertising is revenue earned from top local accounts and Small to Medium Businesses (SMBs) in our markets and takes the form of display advertising in daily and non-daily publications, from preprinted advertising inserted in the publication, and display advertising delivered on our owned and operated websites.

 

Classified advertising includes major categories of employment, real estate, automotive, obituaries and legal notices. Advertising for classifieds is published in both the print and digital editions of our products and is also posted on our websites and mobile applications.

 

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.

 

Niche publications are specialty publications, such as lifestyle, business, health or home improvement publications that contain advertising.

 

Marketing services represents a complete suite of services including events, contests and digital promotions offered in our local markets through Amplified Agency.

 

1

 

 

Our sales force uses a multi-platform sales approach that maximizes audience reach for our advertisers by tailoring advertising and marketing services packages based on the size and scale of the advertiser. Through Amplified Agency we create sophisticated digital campaigns on our owned and operated sites and on third party inventory that give advertisers the ability to target their message. We partner with Google to provide key metrics and analytics to measure campaign effectiveness. 

 

Our advertising revenues are subject to seasonality due primarily to fluctuations in advertising spend. Advertising revenue is typically highest in our first quarter due to holiday and seasonal advertising and lowest in the second quarter following the holiday season. The volume of advertising sales in any period is also impacted by other external factors such as competitors' pricing, advertisers' decisions to increase or decrease their advertising expenditures in response to anticipated consumer demand, and general economic conditions.

 

Subscription Revenue - Approximately 37% of our 2019 revenue was derived from subscriptions to our print and digital products. Subscription revenue is earned primarily from our News+ membership platform, which offers different rewards, benefits and access to content through five different membership levels. Three levels include full access, where members receive print and digital access to our leading local news, information and advertising content, and two levels include digital-only access. We also earn subscription revenue from the sale of single copy editions.

 

We reach 77% of all adults in our larger markets through a combination of our print and digital content offerings.

 

  Our printed newspapers reach almost 700,000 households daily and more than 1 million on Sunday, and more than 265,000 users access our digital e-edition.

 

 

Our web and mobile sites are the number one digital source of local news in most of our markets, reaching more than 29.3 million unique visitors each month with a monthly average of 286.9 million page views. Page views per session, one metric we use to monitor engagement, increased 10.2in 2019.

 

 

As of September 29, 2019, we have 91,000 digital only subscribers, a 79.1% increase over 2018. News+ full access members also have access to, and use, our digital content.

 

Digital Services Revenue – Approximately 4% of our revenue is derived from digital services, most of which is revenue from TownNews. TownNews, operated through our 82.5% owned subsidiary INN Partners, L.C., is a leading provider of integrated digital publishing and content management solutions, and offers a state-of-the-art platform for creating, distributing and monetizing multimedia content.

 

 

TownNews is the engine that powers our digital products. In addition to us, TownNews services nearly 2,000 daily and weekly newspapers as well as universities, television stations and niche publications.

 

 

Including revenue generated from our markets, total revenue at TownNews grew almost 20% in 2019 and totaled $22.6 million.

 

 

With strong product offerings, investments in video and streaming technology and a diversifying customer base into broadcast, TownNews is positioned to continue to be a key component to our growth strategy.

 

Other Revenue - Other revenue, excluding digital services revenue, is comprised mainly of revenue from our management agreement with BH Media Group, Inc (“BHMG”), commercial printing and delivery of third party products. Other revenue represents 7% of our business.

 

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

 

We have centralized, or regionalized, most back office functions including the design of our newspapers. The regional design centers ("RDCs") have enabled us to more cost effectively design and layout the newspaper. The RDCs - combined with a common content management system across all of our daily newspaper markets - have 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. The national news desk allows our newsrooms to focus on high quality local content. We believe we will continue to create additional operational efficiencies and continue to transform our business model.

 

2

 

 

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. A table under the caption “Daily Newspapers and Markets” in Item 1, included herein, identifies those groups of our newspapers operating in clusters.

 

Our local media operations compete with other media and digital companies for advertising and marketing spend as well as other news and information outlets for subscription spend. While very few of our local media operations have similar daily print competitors that are published in the same city, our local media operations compete with the following types of businesses:

 

 

Other media including magazines, radio, television, outdoor/billboard advertising, other classified and specialty publications, other print publications both free and paid, direct mail, directories, and national, regional and local advertising websites and content providers. 

 

The number of competitors in any given market varies, however all of the forms of competition noted above exist to some degree in all of our markets.

 

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

 

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 as of September 29, 2019. The information included herein should be evaluated in that context. See Item 1A, “Risk Factors”, and Notes 4 and 5 of the Notes to Consolidated Financial Statements, included herein, for additional information.

 

STRATEGIC INITIATIVES

 

Key elements of our strategy are as follows:

 

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 we believe in many cases our audiences cannot otherwise readily obtain. Our talented news and editorial staff provide constant, real-time local news with significant breadth, depth and reliability. We believe the strength of our local brands is the result of the quality 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.

 

We are focused on continually improving the functionality and design of all our news platforms, allowing us to provide greater depth of coverage and increasing reader engagement. Our local news teams leverage many centralized resources including teams that are responsible for design, national news, syndicated content, digital content, video and data analytics. We are providing our journalists with tools to give them real-time information about audience engagement on our digital platforms. This helps inform their decisions on both presentation and coverage. Driving efficiencies within all of these areas allows for more robust local news content.

 

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.

 

Become Predominately Digital Revenue Driven. Our digital businesses have experienced rapid growth, and since 2011 total digital revenue, which includes digital advertising, digital only subscription revenue and digital services revenue, increased at a compound annual growth rate of 10.9%. In 2019, total digital revenue grew 4.0% and totaled $144,646,000 or 28.4% of our total operating revenue. The increase was fueled by growing our digital audiences, increases in our rates, 79.1% growth in digital only subscribers and rapid growth at TownNews.

 

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. Through Amplified Agency, we provide digital marketing services to SMBs, including Search Engine Marketing (SEM), social media, audience extension, business profiles, and website hosting and design.

 

3

 

 

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 and contend with competition while seeking to increase our share of advertising and marketing services spending from existing customers.

 

Growing digital subscribers is another key to becoming predominately digital revenue driven. Our digital audiences are comprised of full access members, digital only members and non-members who access our site subject to our paywall limits. More than 60% of our full access members have activated their digital access, and the number of digital only members increased 79.1% in 2019. In 2019, we averaged 29,334,000 monthly unique visitors across all of our digital products and as of September 29, 2019, we had 91,000 digital only members.

 

In 2020, we expect to increase our investment in growing our audiences by using data and analytics to drive our acquisition strategy. Our primary acquisition tactics include sophisticated data-mining techniques leveraging both online and offline consumer behaviors to target full access and digital-only subscription offers. These targeted offers are presented to consumers via integrated marketing campaigns including email, on-site messaging, direct mail, social media and other sales channels designed to maximize exposure and increase response rate.

 

We believe TownNews represents a powerful opportunity for us to drive additional digital revenue. In 2019, revenue at TownNews totaled almost $23,000,000 and since 2011 the compounded annual growth rate of TownNews revenue has been 10.9%.

 

In 2018, TownNews expanded its broadcast and video capabilities by acquiring an acclaimed video management and streaming solution for media operations. The investment allows TownNews’ customers to have broadcast quality video available for desktop, mobile and OTT applications. TownNews leveraged these investments to diversify its customer base to include broadcast customers.

 

In 2019, TownNews acquired a wordpress-based content management system ("CMS") business, which helped broaden product offerings and gain additional broadcast customers. In 2020, we believe TownNews is poised for continued growth.

 

Accelerate Local Retail Performance. Local, controllable retail accounts - those in which our local sales teams have direct contact with the advertising decision makers - are the core of our business. This revenue category represents more than 50% of advertising revenue and is comprised of top local accounts and SMBs. Our historical financial results for this revenue category are better than our overall results. We believe we can accelerate financial performance in this revenue category as we have unmatched audience reach in our local markets through our print and digital product offerings.

 

 

Our local sales forces 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 our advertisers' message.

 

 

Our sales executives pitch the power of our audiences directly to local decision makers. 

 

In 2020, our tactics to drive digital advertising revenue are focused on:

 

 

Top local account management. Top local accounts are a subset of local retail and this category represented 20.7% of our total advertising revenue in 2019. In 2020 we expect to better align sales management talent and resources towards these higher value local retail accounts in an effort to drive revenue.

 

  •  Drive advertiser retention among SMBs through tracking KPIs focused on customer frequency and engagement.

 

 

Expand on the success of Amplified Agency. Launched company-wide in 2019, the Amplified Agency is a sophisticated data-driven digital marketing agency. Revenue generated from the agency increased 29% in 2019 and we believe the Amplified Agency will continue to drive revenue growth in 2020.

 

4

 

 

Generate Strong Adjusted EBITDA(1) With A Commitment To Reduce Our Debt. We expect to continue to drive strong Adjusted EBITDA through steadfast focus on driving revenue and continued rationalization of our legacy cost base. In 2019, on a same property basis we reduced cash costs(1) 5.9%. With a substantial portion of our cost base tied to printing and distributing our printed products, we expect to continue to implement cost efficiencies while investing in revenue drivers.

 

We anticipate modest capital expenditures and pension contributions, and we expect to continue to use substantially all of our available cash flow to reduce debt. 

 

The principal amount of debt was reduced by $41.2 million in 2019 with a total debt balance of $443.6 million as of September 29, 2019. Since 2005, we have reduced debt by more than $1 billion and we expect to continue to significantly reduce our debt in 2020. As a result of our debt reductions, interest expense was reduced by $5.4 million in 2019 compared to 2018, providing additional free cash flow for debt service and other corporate uses.

 

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

 

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, Illinois 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.

 

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”), is 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 Madison Newspapers, Inc. (MNI) and 8.7% of the total 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.

 

5

 

 

DAILY NEWSPAPERS AND MARKETS 

 

The Company, TNI and MNI publish the following daily newspapers and maintain the following primary digital sites:

 

       

Average Units (1)

   

2019 Monthly Average ('000s) (7)

 

Newspaper

Primary Website

Location

 

Daily (2)

   

Sunday

   

Unique Visitors

   

Page Views

 
                                     

St. Louis Post-Dispatch (3)

stltoday.com

St. Louis, MO

    84,657       336,636       6,234       66,170  

Arizona Daily Star (5) (3)

azstarnet.com

Tucson, AZ

    40,593       83,454       1,603       13,310  

Capital Newspapers (4)

                                   

Wisconsin State Journal

madison.com

Madison, WI

    51,401       60,789       2,147       13,127  
Daily Citizen wiscnews.com/bdc Beaver Dam, WI     3,968             93       731  
Portage Daily Register wiscnews.com/pdr Portage, WI     2,211             246       1,307  
Baraboo News Republic wiscnews.com/bnr Baraboo, WI     2,203             128       681  

The Times

nwitimes.com

Munster, Valparaiso, and Crown Point, IN

    40,328       52,276       1,772       30,054  

Quad Cities Group

                                   

Quad-City Times

qctimes.com

Davenport, IA

    26,836       28,372       782       6,837  

Dispatch-Argus

qconline.com

Moline, IL

    50,145       17,939       357       3,353  

Muscatine Journal

muscatinejournal.com

Muscatine, IA

    3,659             80       636  

Lincoln Group

                                   

Lincoln Journal Star

journalstar.com

Lincoln, NE

    34,462       40,930       1,872       21,995  

Columbus Telegram (6)

columbustelegram.com

Columbus, NE

    3,869             164       1,198  

Fremont Tribune (6)

fremonttribune.com

Fremont, NE

    3,334             148       1,129  

Beatrice Daily Sun (6)

beatricedailysun.com

Beatrice, NE

    2,479             84       577  

Central Illinois Newspaper Group

                                 

The Pantagraph (3)

pantagraph.com

Bloomington, IL

    17,848       21,336       624       8,270  

Herald & Review

herald-review.com

Decatur, IL

    11,787       18,033       518       4,751  

Journal Gazette & Times-Courier

jg-tc.com

Mattoon/Charleston, IL

    6,236             165       1,534  

Racine/Kenosha Group

                                   

The Journal Times

journaltimes.com

Racine, WI

    14,163       15,482       512       6,594  

Kenosha News

kenoshanews.com

Kenosha, WI

    14,165       16,486       204       1,984  

Billings Gazette

billingsgazette.com

Billings, MT

    21,847       23,123       1,232       11,257  

The Courier

wcfcourier.com

Waterloo and Cedar Falls, IA

    29,016       22,443       595       5,799  

River Valley Newspaper Group

                                 

La Crosse Tribune

lacrossetribune.com

La Crosse, WI

    13,737       16,144       569       6,874  

Winona Daily News

winonadailynews.com

Winona, MN

    3,796       3,935       169       1,905  

The Chippewa Herald (6)

chippewa.com

Chippewa Falls, WI

    1,617             160       1,445  

The Bismarck Tribune

bismarcktribune.com

Bismarck, ND

    17,177       18,627       552       6,271  

Helena/Butte Group

                                   

Independent Record (6)

helenair.com

Helena, MT

    8,800       10,192       392       3,927  

Montana Standard (6)

mtstandard.com

Butte, MT

    7,424       8,310       287       2,879  
Missoula Group                                    

Missoulian (6)

missoulian.com

Missoula, MT

    13,979       16,195       650       4,765  

Ravalli Republic (6)

ravallinews.com

Hamilton, MT

    1,796       1,343       94       455  

Sioux City Journal

siouxcityjournal.com

Sioux City, IA

    16,871       17,427       550       4,010  

 

6

 

 

       

Average Units (1)

   

2019 Monthly Average ('000s) (7)

 

Newspaper

Primary Website

Location

 

Daily (2)

   

Sunday

   

Unique Visitors

   

Page Views

 
                                     

Casper Star-Tribune

trib.com

Casper, WY

    16,575       17,011       519       3,562  

Rapid City Journal

rapidcityjournal.com

Rapid City, SD

    13,817       16,853       533       4,757  

The Post-Star

poststar.com

Glens Falls, NY

    13,721       15,733       663       7,703  

Mid-Valley News Group

                                   

Albany Democrat-Herald

democratherald.com

Albany, OR

    7,743       8,020       224       2,079  

Corvallis Gazette-Times

gazettetimes.com

Corvallis, OR

    7,170       7,174       244       1,993  

The Southern Illinoisan

thesouthern.com

Carbondale, IL

    8,654       13,719       400       2,404  

Magic Valley Group

                                   

The Times-News

magicvalley.com

Twin Falls, ID

    17,492       10,978       364       2,820  

Elko Daily Free Press (6)

elkodaily.com

Elko, NV

    2,933             185       1,651  

The Daily News

tdn.com

Longview, WA

    13,587       10,608       257       1,944  

Globe Gazette

globegazette.com

Mason City, IA

    7,267       8,521       317       4,531  

Napa Valley Register (3)

napavalleyregister.com

Napa, CA

    7,965       7,903       428       3,634  

Arizona Daily Sun (3) (6)

azdailysun.com

Flagstaff, AZ

    7,011       7,072       329       1,868  

The Times and Democrat (6)

thetandd.com

Orangeburg, SC

    6,084       6,218       328       2,751  

The Citizen (6)

auburnpub.com

Auburn, NY

    5,210       5,867       298       2,925  

Santa Maria Times (3) (6)

santamariatimes.com

Santa Maria, CA

    5,206       4,460       388       2,569  

The Sentinel (6)

cumberlink.com

Carlisle, PA

    6,086             264       1,968  

The World (3)

theworldlink.com

Coos Bay, OR

    3,705             120       705  

Daily Journal (3) (6)

dailyjournalonline.com

Park Hills, MO

    2,803             226       1,901  

The Sentinel (3)

hanfordsentinel.com

Hanford, CA

    2,651             169       970  
          706,084       969,609       29,239       286,560  

 

 

(1)

 Source: AAM: September 2019 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.

  (7)  Excludes Agri-Media sites

 

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, tariffs and both foreign and domestic production capacity and consumption. Price fluctuations can affect 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.

 

7

 

 

EXECUTIVE TEAM 

 

The following table lists our current executive team members: 

 

         

Service

Named

 
         

With The

To Current

 

Name

 

Age

 

Company

Position

Current Position

               

Kevin D. Mowbray

    57  

September 1986

February 2016

President and Chief Executive Officer

Joseph J. Battistoni     36   March 2014 November 2019 Vice President - Local Advertising

Nathan E. Bekke

    50  

January 1992

February 2015

Vice President - Consumer Sales and Marketing

Ray G. Farris

    63  

October 2006

December 2018

Vice President - Group Publisher

Suzanna M. Frank

    49  

December 2003

March 2008

Vice President - Audience

Astrid J. Garcia

    69  

December 2006

December 2013

Vice President - Human Resources and Legal

James A. Green

    53  

March 2013

March 2013

Vice President - Digital

John M. Humenik

    56  

December 1998

February 2015

Vice President - News

Timothy R. Millage

    38  

March 2010

August 2018

Vice President - Chief Financial Officer and Treasurer

Douglas L. Ranes

    69  

February 2005

November 2019

Vice President - Production Operations

Michele Fennelly White

    57  

June 1994

June 2011

Vice President - Information Technology and Chief Information Officer

 

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.

 

Joseph J. Battistoni was appointed Vice President - Local Advertising in November 2019. From February 2018 to November 2019, he served as General Manager and Vice President - Sales and Marketing for The Times Media Company. From October 2015 to February 2018, he served as Vice President of Sales and Marketing. From March 2014 to October 2015, he served as Digital Advertising Director. 

 

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.

 

Ray G. Farris was appointed Vice President - Group Publisher in December 2018. From May 2013 to December 2018, he served as President and Publisher of the St. Louis Post-Dispatch. From August 2010 to May 2013, he served as General Manager and Vice President of Sales of the St. Louis Post-Dispatch. From October 2006 to August 2010, he served as Vice President of Classified Advertising of the St. Louis Post-Dispatch.

 

8

 

 

Suzanna M. Frank was appointed Vice President - Research and Metrics in November 2018. From March 2008 to November 2018 she served as Vice President - Audience. From 2003 to 2008 she served as Director of Research and Marketing of the Company.

 

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.

 

John M. Humenik was appointed Vice President - News in February 2015. He was 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.

 

Timothy R. Millage was elected Vice President, Chief Financial Officer and Treasurer in August 2018. From 2012 to 2018 he served as the corporate controller.

 

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.

 

Douglas L. Ranes was appointed Vice President - Production Operations in November 2019. From June 2014 to November 2019, he served as Director of Production. From February 2005 to June 2012 he serve as Director of Operations for The North County Times and The Northwest Indiana Times.

 

Messrs. Mowbray, Bekke, Farris, Green, Humenik and Millage have been designated by the Board of Directors as executive officers for US Securities and Exchange Commission ("SEC") reporting purposes.

 

EMPLOYEES

 

At September 29, 2019, we had approximately 2,954 employees, including approximately 622 part-time employees, exclusive of TNI and MNI. Full-time equivalent employees in 2019 totaled approximately 2,786. We consider our relationships with our employees to be good.

 

Bargaining units represent 283, or 69%, of the total employees of the St. Louis Post-Dispatch, which has six contracts with bargaining units with expiration dates from March 2020 through September 2021.

 

Approximately 55 employees in four 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, our Board of Directors has affirmatively determined that seven of its ten members are independent, including 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.

 

In 2019, the Company enhanced corporate governance practices to further increase the Board’s effectiveness and accountability to shareholders, by:

 

  Adopting a majority voting standard for the election of directors in uncontested elections; 
  Allowing proxy access, providing shareholders who satisfy the requirements specified in the amended bylaws the ability to include their own nominees in the Company’s proxy statement; 
  Allowing substantially more time for shareholders to submit proposals and director nominations for consideration at annual meetings; and 
  Demonstrating a commitment to board refreshment through the nomination of three new independent board members.

 

 

9

 

 

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.

 

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.

 

 

ITEM 1A. RISK FACTORS

 

The following material risk factors pertain to matters to which there is a substantial likelihood that a potential investor would attach importance in determining whether to purchase the Company’s stock.

 

Our advertising revenues may decline due to weakness in the brick and mortar retail sector.

 

A significant portion of our revenue is derived from advertising. The demand for advertising is sensitive to the overall level of economic strength, both in the markets in which we operate and nationally. Additionally, the decline in the financial or economic conditions of our advertisers could alter discretionary spending by advertisers. Certain segments of the economy have been challenged in recent years, particularly in the brick and mortar retail sector, and total advertising revenues have declined as a result. Advertising revenues may worsen if advertisers reduce their budgets, shift their spending priorities, are forced to consolidate or cease operations.

 

10

 

 

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 and towards digital media. Significant capital investments may be needed to respond to this shift.

 

Currently, our primary source of revenue is from advertising and marketing services, which accounts for 52% of our revenue. Subscription revenue accounts for more than 36% of our revenue. The media publishing industry has experienced rapid evolution in consumer demands and expectations due to advances in technology, which have led to a proliferation of delivery methods for news and information. The number of consumers who access online services through devices other than personal computers, such as tablets and mobile devices, has increased dramatically in recent years and likely will continue to increase. The media publishing industry also continues to be affected by demographic shifts, with older generations preferring more traditional print newspaper delivery and younger generations developing the habit of consuming news through digital media. In addition, the revenues generated by media publishing companies have been affected significantly by the shift in advertising expenditures towards digital media.
 

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

 

 

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

 

If we are unable to grow our digital audience, distinguish our products and services from those of our competitors or develop compelling new products and services that engage users across multiple platforms, then our business, financial condition, and results of operations may be adversely affected. Responding to the changes described above may require us to make significant capital investments and incur significant research and development costs related to building, maintaining, and evolving our technology infrastructure, and our ability to make the level of investments required may be limited.

 

See "Audiences” in Item 1, included herein, for additional information on about our print and digital audiences.

 

We are subject to significant financial risk as a result of our $444 million in total consolidated debt.

 

We have $443.6 million of debt outstanding as of September 29, 2019, as discussed more fully below (and certain capitalized terms used below defined) in Item 7,"Liquidity" and Note 5 of the Notes to Consolidated Financial Statements, included herein.

 

As of September 29, 2019, 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 $363,420,000 is outstanding;

 

 

$23,120,000 revolving credit facility (the "Revolving Facility") under a First Lien Credit Agreement dated as of March 31, 2014 (as amended November 1, 2019, the “1st Lien Credit Facility”), which is undrawn; 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 $80,207,000 is outstanding.

 

11

 

 

We have reduced debt by $41.2 million in 2019 and $173.5 million over the last three fiscal years. Despite the significant reduction, our debt, net of cash, is 3.6 times adjusted EBITDA of $121.5 million in 2019. This level of debt increases our vulnerability to general adverse economic and industry conditions. Higher leverage ratios, our economic performance, our credit ratings, adverse financial markets or other factors could adversely affect our future ability to refinance our maturing debt on commercially acceptable terms, or at all.

 

We may have insufficient earnings or liquidity to meet our future debt obligations.

 

At September 29, 2019, after consideration of letters of credit, we had approximately $17,644,000 available for future use under our Revolving Facility. Including cash, our liquidity at September 29, 2019 totaled $26,289,000. This liquidity amount excludes any future cash flows. Our Adjusted EBITDA has been strong and has exceeded $121 million in each year from 2011 through 2019, but there can be no assurance that such results will continue.

 

At September 29, 2019, the principal amount of our outstanding debt totaled $443,627,000. At September 29, 2019 and September 30, 2018 our debt, net of cash, was 3.6 times our Adjusted EBITDA in both years. 

 

Our 1st Lien Term Loan, entered into on March 31, 2014, was paid in full in November 2018 ahead of the original due date of March 2019. Final maturities of our other debt range from March 2022 through December 2022. The Revolving Facility matures on December 28, 2020. We expect to amend and extend our Revolving Facility prior to its maturity.

 

There are numerous potential consequences under the Notes, 1st Lien Credit Facility and 2nd Lien Term Loan if an event of default, as defined in the respective debt agreements, 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 and 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 as of September 29, 2019. The ability to make payments on our indebtedness or refinance our indebtedness prior to when it comes due may be affected by events beyond our control, including prevailing economic, financial, competitive, business, legislative, regulatory and industry conditions.

 

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.

 

Subject to certain exceptions, these covenants limit and/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.

 

12

 

 

The Company may face risk associated with the discontinuation of and transition from London Interbank Offered Rate (LIBOR) as a benchmark interest rate. 

 

It is anticipated that LIBOR will be discontinued as of the year ending 2021. The expected discontinuation of LIBOR will require lenders and their borrowers to transition from LIBOR to an alternative benchmark interest rate, which could have an impact on and risk to the Company if not completed in a timely manner. The Company has already begun to address this risk by amending its loan documents to include an alternative benchmark interest rate.

 

We compete with a large number of companies in the local media industry; if we are unable to compete effectively, our advertising and subscription revenues may decline.

 

We compete for audiences and advertising revenue with newspapers and other media such as the internet, magazines, broadcast, cable and satellite television, radio, direct mail, outdoor billboards and yellow pages. For example, as the use of the internet and mobile devices has increased, we have lost some classified advertising and subscribers to online advertising businesses and our free Internet sites that contain abbreviated versions of our publications. Some of our current and potential competitors have greater financial and other resources than we do. If we fail to compete effectively with competing newspapers and other media, our results of operations may be materially adversely affected.

 

As digital revenues increase as a proportion of our total revenues, we will become increasingly subject to risks associated with digital media operations.

 

The central component to our business strategy involves transitioning from traditional print businesses to digital media businesses and, accordingly, we expect our digital revenues to increase as a percentage of our total revenues in future periods. That transition comes with additional risk of operating mainly as a digital media company, including:

 

 

Rates we achieve in the marketplace for the advertising inventory on our digital platforms may be adversely affected by:

 

   

Customized news feeds and news aggregation websites, which are often free to users, may reduce our traffic levels by creating a disincentive for users to visit our websites or use our digital products;

 

   

Our inability to increase our digital presence and visibility, which also may reduce our traffic levels;

 

   

Our inability to maintain and improve the performance of our customers' advertising on our digital properties; and

 

   

Technology developed to block the display of advertising on websites could proliferate, impairing our ability to generate digital revenues;

 

 

Mobile devices, including smartphones and tablets, may present challenges for traditional display advertising;

 

 

Our use of subscription models (which may require users to pay for content after accessing a limited number of pages or news articles for free on our websites each month) may cause consumers to opt out of subscription offers in greater numbers than anticipated or result in fewer page views or unique visitors to our websites than projected;

 

 

New delivery platforms may lead to pricing restrictions, loss of distribution control, or loss of direct relationships with consumers;

 

 

Technical or other problems could prevent us from delivering our products in a rapid and reliable manner or otherwise affect the user experience, and users could develop negative views about the quality or usefulness of our products; and

 

 

Our inability to respond successfully to these or similar challenges could materially adversely impact our ability to maintain and grow our digital revenues.

 

Our business, reputation and results of operations could be negatively affected if we become subject to significant data security breaches or if our information technology systems fail to perform adequately.

 

In the 13-weeks ended September 29, 2019, 29.3% of our revenue was obtained from digital sources, including advertising and one of our businesses, TownNews, that provides digital infrastructure and digital publishing services for us and other companies.

 

13

 

 

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 our websites, which contain our breaking news stories. 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.

 

In addition, attempts to compromise information technology systems occur regularly across many industries and sectors, and the techniques used to perpetrate such compromises are constantly changing. Maintaining the security of our systems is critically important both due to our reliance on those systems and because they store and process confidential subscriber, employee, and other sensitive personal data. Although we and our third-party service providers have implemented security measures and other controls designed to prevent breaches, these precautions might fail to defend against future cyber-attacks or prevent breaches or other disruptions to our systems or those of our third-party providers. Because cyber-attacks evolve quickly and often are not recognized until after they are launched, we may be unable to anticipate them or implement adequate measures to prevent a breach. A significant breach could result in, among other things:

 

  Taking down our websites, as media companies have been a target of their websites being disabled;
 

Improper disclosures of personal data or confidential information;

 

Expenditures of significant resources to remedy the breach and defend against further attacks;

 

Diversion of management's attention and resources;

 

Liability under laws that protect personal data; and

 

Loss of customer trust and, as a result, revenues.

 

Consequences of these actions could result in harm to our reputation, loss of revenue, increased operating costs, 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 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 through 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.

 

We may not be able to reduce future expenses to offset potential revenue declines.

 

As a result of adverse general business conditions in our industry and our operating results, we have reduced cash costs of our operations significantly since 2011 by reducing workforce, centralizing or regionalizing operations and implementing cost-control measures. If we do not achieve expected savings from these initiatives, or if our operating costs increase, our total operating costs may be greater than anticipated and our profitability may be lower than anticipated.

 

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

 

 

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.

 

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 $47 million at September 29, 2019, an increase of $20.3 million from September 30, 2018 primarily due to unfavorable changes to discount rates used to determine our pension obligations and an increase in pension contributions.

 

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.

 

Over the last several years, federal legislation has provided for pension funding relief, temporarily reducing our pension contributions. Even with funding relief, we expect to have to make additional contributions to our plans in the future.

 

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. 

 

We contributed to three multiemployer defined benefit pension plans during the year under the terms of collective-bargaining agreements ("CBAs"). 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.

 

In 2019, we effectuated a total withdrawal from our CWA/ITU multiemployer pension plan 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.

 

In 2019, we received the final assessment for the partial withdrawal liability associated with our GCIU plan. The withdrawal liability is expected to be funded over a 20 year period.

 

A portion of our employees are members of unions, and if we experience labor unrest, our ability to produce and deliver newspapers could be impaired.

 

Our ability to produce and deliver newspapers could be impaired in some markets, if we experience labor unrest. In addition, the results of future labor negotiations could harm our operating results as a result of higher overall compensation costs. While we have not had a history of labor strikes, we cannot ensure that a strike will not occur in one or more of our markets in the future. As of September 30, 2019, approximately 11.0% of full-time and part-time employees were represented by unions. Most of our union-represented employees are currently working under labor agreements, with expiration dates through September 2021.

 

We are dependent upon newsprint for our products and we may experience additional price increases which could affect our earnings.

 

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, tariffs and both foreign and domestic production capacity and consumption. Price fluctuations can affect 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.

 

15

 

 

ITEM 1B. UNRESOLVED STAFF COMMENTS

 

None.

 

 

ITEM 2. PROPERTIES

 

Our executive offices are located in leased facilities at 4600 E. 53rd Street, Davenport, Iowa. The initial lease term expires August 1, 2029.

 

All of our principal printing facilities are owned, except for leased land for the Helena, Montana plant. Additionally, property is leased for Madison, Wisconsin (which is owned by MNI) and Tucson, Arizona (which is jointly owned by Star Publishing and Citizen). All facilities are well maintained, in good condition, suitable for existing office and publishing operations, as applicable, and adequately equipped.

 

More than 67% of our daily newspapers, as well as many of our nearly 180 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 and monetize real estate.

 

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.

 

 

16

 

 

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

 
                                 

2019

                               

High

    3.05       3.68       3.49       2.33  

Low

    1.84       2.02       2.12       1.77  

Closing

    2.13       3.30       2.24       2.01  
                                 

2018

                               

High

    2.50       2.70       3.30       3.30  

Low

    2.15       1.95       2.00       2.60  

Closing

    2.35       1.95       2.85       2.65  
                                 

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  

 

At September 29, 2019, we had 5,777 registered holders of record of our Common Stock.

 

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 5 of the Notes to Consolidated Financial Statements, included herein. 

 

17

 

 

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 29, 2019 (with September 30, 2014 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.

 

 

Copyright© 2019 Standard & Poor's, a division of S&P Global. All rights reserved.

 

The value of $100 invested on September 30, 2014 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 29

 

(Dollars)

 

2015

   

2016

   

2017

   

2018

   

2019

 
                                         

Lee Enterprises, Incorporated

    61.54       110.95       65.09       78.40       60.36  

Peer Group Index

    94.68       98.78       116.93       137.73       148.49  

S&P 500 Stock Index

    99.39       114.72       136.07       160.44       167.27  

 

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 Peer Group Index is comprised of six 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., Gannett Co. Inc, The McClatchy Company, New Media Investment Group Inc., The New York Times Company and Tribune Publishing Co.

 

 

18

 

 

ITEM 6. SELECTED FINANCIAL DATA

 

Selected financial data is as follows:

 

 

(Thousands of Dollars and Shares, Except Per Share Data)

 

2019

   

2018

   

2017

   

2016

   

2015

 
                                         

OPERATING RESULTS

                                       

Operating revenue

    509,854       543,955       566,943       614,364       648,543  

Cash Costs (1) (3)

    398,815       423,766       437,767       477,857       501,629  

Depreciation and amortization

    29,332       31,766       41,282       43,441       45,563  

Assets loss (gain) on sales, impairments and other

    2,464       6,429       (1,150 )     (954 )     106  

Restructuring costs and other

    11,635       5,550       7,523       1,825       3,304  

Equity in earnings of associated companies

    7,121       9,249       7,609       8,533       8,254  

Operating income (3)

    74,729       85,693       89,130       100,728       106,195  

Interest expense

    (47,488 )     (52,842 )     (57,573 )     (64,233 )     (72,409 )

Debt financing and administration costs

    (7,214 )     (5,311 )     (4,818 )     (5,947 )     (5,433 )

Gain on insurance settlement

                      30,646        
Other, net (3)     3,813       3,280       13,477       (9,537 )     3,213  
                                         

Net income

    15,909       47,048       28,605       36,019       24,318  
                                         

Income attributable to Lee Enterprises, Incorporated

    14,268       45,766       27,481       34,961       23,316  
                                         

Earnings per common share:

                                       

Basic

    0.26       0.84       0.51       0.66       0.44  

Diluted

    0.25       0.82       0.50       0.64       0.43  
                                         

Weighted average common shares:

                                       

Basic

    55,565       54,702       53,990       53,198       52,640  

Diluted

    56,884       55,948       55,392       54,224       53,931  
                                         

Total assets

    555,202       575,411       620,850       662,855       747,825  

Debt, including current maturities (2)

    443,627       484,859       548,385       617,167       725,872  

Debt, net of cash and restricted cash (2)

    434,982       479,479       537,764       600,183       714,738  

Stockholders' deficit

    (38,484 )     (37,354 )     (92,235 )     (128,485 )     (159,393 )

 

 

(1)

 Cash costs is a non GAAP financial measure. See Item 7.

 

 

(2)

 Principal amount of debt. See Note 5 of the Notes to Consolidated Financial Statements, included herein.

 

 

(3)

 In 2019 we reclassified all components of pension expense, except services costs, from compensation to other non-operating income. See Note 1 of the Consolidated Financial Statements, included herein.

 

19

 

 

 

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 29, 2019 and for 2018 and 2017. 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 to supplement the financial information presented on a GAAP basis. These non-GAAP financial measures should not be considered in isolation or as a substitute for the relevant GAAP measures and should be read in conjunction with information presented on a GAAP basis.

 

In this report, we present Adjusted EBITDA, adjusted income (loss), adjusted earnings (loss) per common share (EPS), and cash costs, which are non-GAAP financial performance measures that exclude from our reported GAAP results the impact of certain items consisting primarily of restructuring charges and non-cash charges. We believe such expenses, charges, and gains are not indicative of normal, ongoing operations, and their inclusion in results makes for more difficult comparisons between years and with peer group companies. In the future, however, we are likely to incur expenses, charges, and gains similar to the items for which the applicable GAAP financial measures have been adjusted and to report non-GAAP financial measures excluding such items. Accordingly, exclusion of those or similar items in our non-GAAP presentations should not be interpreted as implying the items are non-recurring, infrequent, or unusual.

 

We define our non-GAAP measures, which may not be comparable to similarly titled measures reported by other companies, as follows:

 

Adjusted EBITDA is a non-GAAP financial performance measure that enhances financial statement users overall understanding of the operating performance of the Company. The measure isolates unusual, infrequent or non-cash transactions from the operating performance of the business. This allows users to easily compare operating performance among various fiscal periods and 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 non-operating expenses, income tax expense (benefit), depreciation and amortization, assets loss (gain) on sales, impairments and other, restructuring costs and other, stock compensation and our 50% share of EBITDA from TNI and MNI, minus equity in earnings of TNI and MNI and curtailment gains.

 

Adjusted Income (Loss) and Adjusted Earnings (Loss) Per Common Share are non-GAAP financial performance measures that we believe offer a useful metric to evaluate overall performance of the Company by providing financial statement users the operating performance of the Company excluding the impact of changes in the warrant valuation, which are non-cash transactions, and the impact of the Tax Cuts and Jobs Act (the "2017 Tax Act"). 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, the impact of the 2017 Tax Act, and the gain on insurance settlement.

 

Cash Costs represent a non-GAAP financial performance measure of operating expenses which are measured on an accrual basis and settled in cash. This measure is useful to investors in understanding the components of the Company’s cash-settled 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 are defined as compensation, newsprint and ink and other operating expenses. Depreciation and amortization, assets loss (gain) on sales, impairments and other, other non-cash operating expenses and other expenses are excluded. Cash Costs also exclude restructuring costs and other, which are typically settled in cash.

 

Total Operating Revenue Less Cash Costs, or “margin”, represents a non-GAAP financial performance measure of revenue less total cash costs, also a non-GAAP financial measure. This measure is useful to investors in understanding the profitability of the Company after direct cash costs related to the production and delivery of products are paid. Margin is also useful in developing opinions and expectations about the Company’s ability to manage and control its operating cost structure in relation to its peers.

 

20

 

 

A table reconciling Adjusted EBITDA to net income, 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 (loss) per diluted common share to income (loss) attributable to Lee Enterprises, Incorporated and earnings (loss) per diluted common share, respectively, the most directly comparable measures under GAAP, are set forth in Item 7, included herein, under the caption “Net Income and Earnings Per Share”.

 

The subtotals of operating expenses representing cash costs and total operating revenue less cash costs can be found in tables in Item 7, included herein, under the caption “Continuing Operations”.

 

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)

 

2019

   

2018

   

2017

 
                         

Net Income

    15,909       47,048       28,605  

Adjusted to exclude

                       

Income tax expense (benefit)

    7,931       (16,228 )     11,611  

Non-operating expenses, net

    50,889       54,873       48,914  

Equity in earnings of TNI and MNI

    (7,121 )     (9,249 )     (7,609 )

Assets loss (gain) on sales, impairments and other

    2,464       6,429       (1,150 )

Depreciation and amortization

    29,332       31,766       41,282  

Restructuring costs and other

    11,635       5,550       7,523  

Stock compensation

    1,638       1,857       2,088  

Add:

                       

Ownership share of TNI and MNI EBITDA (50%)

    8,811       9,883       9,927  

Adjusted EBITDA

    121,488       131,929       141,191  

 

CRITICAL ACCOUNTING POLICIES

 

The preparation of financial statements in conformity with generally accepted accounting principles requires management to make estimates and assumptions about future events that affect the amounts reported in the financial statements and accompanying notes. Actual results could differ significantly from those estimates. We believe the following discussion addresses our most critical accounting policies, which are those that are important to the presentation of our financial condition and results of operations and require management's most subjective and complex judgments.

 

Intangible Assets, Other Than Goodwill

 

Local mastheads (e.g., publishing periodical titles and web site domain names) are not subject to amortization. Non-amortized intangible assets are tested for impairment annually on the first day of the fourth fiscal quarter or more frequently if events or changes in circumstances suggest the asset might be impaired.

 

The quantitative impairment test consists of comparing the fair value of each masthead or domain name with its carrying amount. We use a relief from royalty approach which utilizes a discounted cash flow model to determine the fair value of each masthead, domain name, or trade name. Management's judgments and estimates of future operating results in determining the intangibles fair values are consistently applied to each underlying business in determining the fair value of each intangible asset. No impairment was recorded in 2019 or 2018. In 2017, we recognized impairment charges of $2.0 million. These charges were to bring the recorded indefinite lived intangibles equal to their implied fair values based on future projections.

 

Our amortizable intangible assets consist mainly of customer relationships including subscriber lists and advertiser relationships. These asset values are amortized systematically over their estimated useful lives. Intangible assets subject to amortization are tested for recoverability whenever events or changes in circumstances indicate that their carrying amounts may not be recoverable. The carrying amount of each asset group is not recoverable if it exceeds the sum of the undiscounted cash flows expected to result from the use of such asset group. There were no indicators of impairment on intangible assets subject to amortization in 2019, 2018 or 2017.

 

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.

 

21

 

 

Pension, Postretirement and Postemployment Benefit Plans

 

We, along with our subsidiaries, have various defined benefit retirement plans, postretirement plans and postemployment plans, under which substantially all of the benefits have been frozen in previous years.

 

We account for our pension, postretirement and postemployment plans in accordance with the applicable accounting guidance, which requires us to include the funded status of our pension plans in our balance sheets and to recognize, as a component of other comprehensive income (loss), the gains or losses that arise during the period but are not recognized in pension expense. The service cost component of net period benefit cost is reported on the Consolidated Statements of Income and Comprehensive Income and included in Compensation while all other components are included in other non-operating income/expense.

 

The determination of pension and postretirement plan obligations and expense is based on a number of actuarial assumptions. Two critical assumptions are the discount rates applied to pension and postretirement plan obligations and the expected long-term rate of return on plan assets.

 

The discount rate assumption is based on investment yields available at year-end on corporate bonds rated AA and above with a maturity to match the expected benefit payment stream. To determine the expected long-term rate of return on pension plan assets, we consider the current and expected asset allocations, as well as historical and expected returns on various categories of plan assets, input from the actuaries and investment consultants and long- term inflation assumptions. We used an assumption of 5.5% for 2019 for our expected return on pension plan assets and a 4.5% for 2019 for our postretirement and postemployment benefits.

 

The following table illustrates the sensitivity to a 50 basis point change in:

 

   

Effect on 2019 Pension

   

Effect on September 29, 2019

 
   

Expense

   

Liability

 

Pension discount rate(1)

  $     $ 11,200,000  

Postretirement and postemployment benefits discount rate(1)

  $     $ 500,000  

Pension expected rate of return on assets

  $ 710,000     $  

Postretirement and postemployment benefits expected rate of return on assets

  $ 118,000     $  

 

  (1)

The Company's Pension and Other Postretirement Plans have been frozen as of September 29, 2019. As a result, changes in discount rates do not meaningfully impact net periodic pension expense.

 

Income Taxes

 

We are subject to income taxes in the U.S. and record our tax provision for the anticipated tax consequences in our reported results of operations. Tax laws are complex and subject to different interpretations by the taxpayer and respective government taxing authorities. Significant management judgment is required in determining our provision for income taxes, deferred tax assets and liabilities, and the valuation allowance recorded against our net deferred tax assets, if any.

 

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.

 

Deferred tax assets and liabilities are determined based on the difference between the financial statement and tax basis of assets and liabilities using currently enacted tax rates. 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. Deferred income tax assets are reduced by a valuation allowance when, in our opinion, it is more likely than not that some portion or all of the deferred income tax assets will not 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.

 

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.

 

22

 

 

IMPACT OF RECENTLY ISSUED ACCOUNTING STANDARDS

 

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's 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 most 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. In addition, the new standard expands the disclosure requirements of lease arrangements. Lessees have the option to use a modified retrospective transition approach, which includes a number of practical expedients. As a result of utilizing the modified retrospective transition approach, we will not restate prior year financial statements to conform to the new guidance. We expect to elect the package of practical expedients, which permits the Company to not reassess under the new standard the prior conclusions about lease identification, lease classification, or initial direct costs. In addition, we will not reassess whether existing land easements which were previously not accounted for as leases are or contain leases under the new guidance.

 

To date, we reviewed all existing leases and contracts, completed data entry for in-scope leases into our selected software solution which is compatible with our current financial reporting and control environment and quantified a range of expected financial impacts. We are required to and will adopt the new standard effective September 30, 2019, the first day of fiscal year 2020. We expect to recognize upon adoption, lease liabilities and right of use assets ranging from $9,600,000 to $12,600,000. Right-of-use assets have been adjusted for lease incentives and initial direct costs. We are still evaluating for potential embedded leases relating to our outsourced printing contracts, which could result in material additional lease obligations and right-of-use assets. We do not expect the adoption of the new standard will have a material impact on our Consolidated Statements of Income or Consolidated Statement of Cash Flows.

 

In June 2016, the FASB issued a new standard to replace the incurred loss impairment methodology under current GAAP with a methodology that reflects expected credit losses and requires consideration of a wider array of reasonable and supportable information to inform and develop credit loss estimates. We will be required to use a forward-looking expected credit loss model for both accounts receivables and other financial instruments. The new standard will be adopted beginning September 29, 2020 using a modified retrospective approach through a cumulative-effect adjustment to retained earnings as of the effective date to align our credit loss methodology with the new standard. We are currently evaluating the impact of this standard on our consolidated financial statements.

 

23

 

 

CONTINUING OPERATIONS

 

Operating results, as reported in the Consolidated Financial Statements, are summarized below:

 

 

(Thousands of Dollars and Shares, Except Per Share Data)

 

2019

   

2018

   

Percent Change

   

2017

   

Percent Change

 

Advertising and marketing services revenue

    265,933       303,446       (12.4 )     331,360       (8.4 )

Subscription

    186,691       195,108       (4.3 )     191,922       1.7  

Other

    57,230       45,401       26.1       43,661       4.0  

Total operating revenue

    509,854       543,955       (6.3 )     566,943       (4.1 )

Operating expenses:

                                       
Compensation     182,869       199,164       (8.2 )     213,109       (6.5 )

Newsprint and ink

    22,237       24,949       (10.9 )     24,904       0.2  

Other operating expenses

    193,709       199,653       (3.0 )     199,754       (0.1 )

Cash costs

    398,815       423,766       (5.9 )     437,767       (3.2 )

Total operating revenue less cash costs

    111,039       120,189       (7.6 )     129,176       (7.0 )

Depreciation and amortization

    29,332       31,766       (7.7 )     41,282       (23.1 )

Assets loss (gain) on sales, impairments and other

    2,464       6,429       (61.7 )     (1,150 )     NM  

Restructuring costs and other

    11,635       5,550       NM       7,523       (26.2 )

Operating expenses

    442,246       467,511       (5.4 )     485,422       (3.7 )

Equity in earnings of associated companies

    7,121       9,249       (23.0 )     7,609       21.6  

Operating income

    74,729       85,693       (12.8 )     89,130       (3.9 )

Non-operating income (expense):

                                       

Interest expense

    (47,488 )     (52,842 )     (10.1 )     (57,573 )     (8.2 )

Debt financing and administrative cost

    (7,214 )     (5,311 )     35.8       (4,818 )     10.2  
Other, net     3,813       3,280       16.3       13,477       (75.7 )

Non-operating expenses, net

    (50,889 )     (54,873 )     (7.3 )     (48,914 )     12.2  

Income before income taxes

    23,840       30,820       (22.6 )     40,216       (23.4 )

Income tax expense (benefit)

    7,931       (16,228 )     NM       11,611       NM  

Net income

    15,909       47,048       (66.2 )     28,605       64.5  

Net income attributable to non-controlling interests

    (1,641 )     (1,282 )     28.0       (1,124 )     14.1  

Income attributable to Lee Enterprises, Incorporated

    14,268       45,766       (68.8 )     27,481       66.5  

Other comprehensive (loss) income, net of income taxes

    (17,368 )     4,322       NM       6,710       (35.6 )
Comprehensive (loss) income attributable to Lee Enterprises, Incorporated     (3,100 )     50,088       NM       34,191       46.5  
                                         

Earnings per common share:

                                       

Basic

    0.26       0.84       (69.3 )     0.51      

64.7

 

Diluted

    0.25       0.82      

(69.5

)     0.50      

64.0

 

 

Due to our fiscal calendar, 2019 was comprised of 52 weeks, 2018 was comprised of 53 weeks and 2017 was comprised of 52 weeks. Additionally, we acquired or disposed of certain properties in each of 2019, 2018 and 2017.

 

To facilitate a comparison of our results to prior periods, certain revenue and expense trends, as described below, are presented on a same property basis and exclude the impact of acquisitions, dispositions and the 53rd week of revenues and expenses in the computation of the trends.

 

24

 

 

OPERATING REVENUE

 

Revenue Comparison 2019-2018

 

Total operating revenue totaled $509,854,000 in 2019, down $34,101,000, or 6.3%, attributed to a decline in same property operating revenue of 6.1% due to continued softness in the demand for print advertising, reductions in print subscription volumes reflecting general industry trends, and $7,954,000 of operating revenue from the 53rd week of operations in 2018. Increases in digital revenue, especially from TownNews, revenue from acquisitions and incremental revenue from our management agreement with BHMG helped offset the declines.

 

Advertising and marketing services revenue was $265,933,000 in 2019, down 12.4%, due to a same property basis decrease of 12.0% due to continued decline in print advertising demand, specifically among national retailers, big box stores and classifieds. Digital advertising and marketing services totaled $100,007,000 in 2019 and represented 37.6% of 2019 total advertising and marketing services revenue, partially offsetting print declines.

 

Subscription revenue totaled $186,691,000 in 2019, or down 4.3%, due to same property basis decrease of 4.3%, in 2019. The decrease is attributed to volume declines in full access subscriptions reflecting general industry trends, partially offset by strategic pricing initiatives due to our premium content and a 79.1% increase in digital only subscribers. As of September 2019, we now have 91,000 digital only subscribers. 

 

Other revenue increased $11,829,000, or 26.1%, in 2019. Management agreement revenue totaled $12,589,000 in 2019 compared to $1,331,000 in 2018 due to a full year under the agreement with BHMG. Digital services revenue, which is predominately TownNews, increased 20.3% in 2019 due to product expansion and market share gains. The increases were partially offset by revenue declines in commercial printing and third party delivery due to a reduction in print volume.

 

On a stand-alone basis, revenue at TownNews totaled $22,627,000, an increase of 20.1%, excluding the 53rd week of operations in 2018. Investments in video and streaming technology increased product offerings that helped gain market share in publishing and broadcast. Excluding intercompany activity, revenue at TownNews increased 24.0% in 2019.

 

Total digital revenue including digital advertising revenue, digital subscription revenue and digital services revenue totaled $144,646,000 in 2019, an increase of 4.0% over 2018, and represented 28.4% of our total operating revenue in 2019.

 

Equity in earnings of TNI and MNI decreased $2,128,000 in 2019.

 

Revenue Comparison 2018-2017

 

Total operating revenue was $543,955,000 in 2018 and was down $22,988,000, or 4.1%, attributed to a decline in same property operating revenue of 7.0% due to continued softness in the demand for print advertising. Increases in digital revenue, especially TownNews, and $7,954,000 of operating revenue from the 53rd week of operations in 2018 helped offset the declines.

 

Advertising and marketing services revenue was down $27,914,000, or 8.4%, attributed to an 11.4% decline in same property revenue due to continued decline in print advertising demand, specifically among national retailers, big box stores and classifieds. Digital advertising and marketing services totaled $96,498,000 in 2018, an increase of 4.7% compared to 2017, partially offsetting print declines.

 

Subscription revenue increased $3,186,000, or 1.7%, in 2018. On a same property basis, subscription revenue decreased 1.7% as strategic pricing initiatives helped partially offset volume declines in full access subscriptions, reflecting general industry trends.

 

Other revenue increased $1,740,000, or 4.0%, in 2018 and increased 2.7% on a same property basis. Digital services revenue, which is predominately TownNews, increased $2,320,000, or 16.6%, in 2018 due to an increase in customers, including broadcast, and monetizing digital audience with programmatic digital advertising. On a stand-alone basis, revenue at TownNews increased 16.0% to $18,900,000 and excluding intercompany activity, revenue at TownNews increased 19.8% in 2018. We entered into a management agreement with BHMG in July of 2018 and earned $1,331,000 in revenue from this agreement in 2018. Increases in digital services and management agreement revenue were partially offset by revenue declines in commercial printing and third party delivery due to a reduction in print volume.

 

Equity in earnings of TNI and MNI increased $1,640,000 in 2018.

 

25

 

 

OPERATING EXPENSES

 

Operating Expense Comparison 2019-2018

 

Operating expenses decreased $25,265,000, or 5.4%, in 2019 due to business transformation projects, outsourcing of certain production operations and reductions in legacy print expenses. The 53rd week of operations added $6,875,000 of operating expenses in 2018. Partially offsetting these declines were operating expenses related to acquisitions in 2019. Cash Costs on a same property basis decreased of 5.9% compared to 2018.

 

Compensation expense was down $16,295,000, or 8.2%, due to a 7.8% decline on a same property basis due to a 10.9% reduction in FTE's with compensation increases offsetting the declines in headcount. Business transformation projects and outsourcing helped drive efficiencies and reduced headcount and compensation expense.

 

Newsprint and ink costs were down $2,712,000, or 10.9%, attributed to a same property basis decrease of 8.9% due to a 12.3% reduction in newsprint volume from print volume declines partially offset by higher average prices. Average newsprint prices increased the first half of 2019 and declined the second half ending the year with prices ending 2019 at their lowest levels. See Item 7A, “Commodities”, included herein, for further discussion and analysis of the impact of newsprint on our business.

 

Other operating expenses were down $5,944,000, or 3.0%, due to a 3.7% decline on same property basis. Other operating expenses include all operating costs not considered to be compensation, newsprint, depreciation and amortization, or restructuring costs and other. The largest components are costs associated with printing and distribution of our printed products, digital cost of goods sold and facility expenses. Cost reductions were primarily related to lower delivery and other print-related costs due to lower volumes of our print editions, offset in part by higher costs associated with growing digital revenue.

 

Restructuring costs and other totaled $11,635,000 and $5,550,000 in 2019 and 2018, respectively. In 2019, restructuring costs and other include an estimate of costs related to withdrawals from certain of our multiemployer pension plans totaling $3,836,010. The remaining restructuring costs in 2019 and 2018 are predominately severance.

 

Depreciation expense decreased $2,049,000, or 14.1%, in 2019. Amortization expense decreased $385,000, or 2.2%, in 2019.

 

Assets loss (gain) on sales, impairments and other was a net expense of $2,464,000 in 2019 compared to $6,429,000 in 2018. We recognized a $2,464,000 loss on sale of assets in 2019 compared to an $8,193,000 loss in 2018. We recorded $267,000 of non-cash impairment charges in 2018, and also in 2018, we recognized curtailment gains of $2,031,000 from the elimination of an unfunded employee benefit plan.

 

The factors noted above resulted in operating income of $74,729,000 in 2019 compared to $85,693,000 in 2018.

 

In 2020, we expect Cash Costs to decline between 5.5% and 6.5% due to the flow through impact of actions taken throughout 2019, additional business transformation projects, lower production and distribution costs of our printed editions due to volume declines, and lower newsprint prices.

 

Operating Expense Comparison 2018-2017

 

Operating expenses decreased $17,911,000, or 3.7%, in 2018 due to business transformation projects, outsourcing of certain production operations and our consumer sales call center and reductions in legacy print expenses. Partially offsetting these declines were $6,875,000 of operating expenses related to the 53rd week of operations. Cash Costs were down 6.2% on a same property basis compared to 2017.

 

Compensation expense was down 13,945,000, or 6.5%, attributed to a same property decrease of 9.5% due to a 12.0% reduction in full time equivalents partially offset by higher costs associated with our self-insured medial plan. Business transformation projects and outsourcing helped drive efficiencies and reduce headcount.

 

Newsprint and ink costs were flat for 2018 and down 1.8% on a same property basis, due to a 17.9% reduction in newsprint volume from print volume declines and using a lower basis weight newsprint partially offset by significantly higher average prices. Average newsprint prices increased throughout 2018 due to significant reductions in supply by North American newsprint producers. See Item 7A, “Commodities”, included herein, for further discussion and analysis of the impact of newsprint on our business.

 

26

 

 

Other operating expenses for 2018 decreased $101,000, or 0.1%, due to a same property basis decrease of 3.3%. Other operating expenses include all operating costs not considered to be compensation, newsprint, depreciation and amortization, or restructuring costs and other. The largest components are costs associated with printing and distribution of our printed products, digital cost of goods sold and facility expenses. Cost reductions were primarily related to lower delivery and other print-related costs due to lower volumes of our print editions, offset in part by costs associated with outsourcing.

 

Restructuring costs and other totaled $5,550,000 and $7,523,000 in 2018 and 2017, respectively. 2017 restructuring costs and other includes $2,600,000 related to the withdrawal from one of our multiemployer plans. The remaining restructuring costs in 2018 and 2017 are predominately severance.

 

Depreciation expense decreased $1,482,000, or 9.2%. Amortization expense decreased $8,034,000, or 31.8%, in 2018 as certain intangible assets became fully amortized.

 

Assets loss (gain) on sales, impairments and other was a net expense of $6,429,000 in 2018 compared to a net benefit of $1,150,000 in 2017. We recognized an $8,193,000 loss on sale of assets in 2018 compared to a $74,000 loss in 2017. We recorded $267,000 of non-cash impairment charges in 2018 compared to $2,517,000 in 2017. Curtailment gains totaled $2,031,000 and $3,741,000 in 2018 and 2017, respectively, from the elimination of an unfunded employee benefit plan.

 

The factors noted above resulted in operating income of $85,693,000 in 2018 compared to $89,130,000 in 2017.

 

NON-OPERATING INCOME AND EXPENSES

 

Non-operating Income and Expense Comparison 2019-2018

 

Interest expense decreased $5,354,000, or 10.1%, to $47,488,000 in 2019 due to lower debt balances. Our weighted average cost of debt, excluding amortization of debt financing cost, was 10.0% in 2019 and 2018. We recognized $7,214,000 of debt financing and administrative costs in 2019 compared to $5,311,000 in 2018. The majority of costs represent amortization of refinancing costs paid in 2014, as well as an adjustment of $1,309,000 as discussed in Note 5 of the Notes to the Consolidated Financial Statements, included herein.

 

Included in other non-operating income and expense is income related to our defined benefit pension plans and other post-employment benefit plans, which totaled $2,847,000 and $2,830,000 in 2019 and 2018, respectively.

 

Other non-operating income/expense also includes a fair value adjustment related to the Warrants. As more fully discussed in Note 5 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 measure 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 and changes in interest rates, the estimated fair value of the warrant liability can change each period. We recorded non-operating income of $612,000 in 2019 and non-operating expense of $226,000 in 2018 due to the change in fair value of the Warrants.

 

Non-operating Income and Expense Comparison 2018-2017

 

Interest expense decreased $4,731,000, or 8.2%, to $52,842,000 in 2018 due to lower debt balances. Our weighted average cost of debt, excluding amortization of debt financing cost, increased to 10.0% in 2018 compared to 9.9% in 2017, as the majority of our debt repayments were made on our lowest cost debt.

 

We recognized $5,311,000 of debt financing and administrative costs in 2018 compared to $4,818,000 in 2017. The majority of costs represent amortization of refinancing costs paid in 2014.

 

Included in other non-operating income and expense is income related to our defined benefit pension plans and other post-retirement benefit plans, which totaled $2,830,000 and $3,417,000 in 2018 and 2017, respectively.

 

As more fully discussed in Note 5 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 re-measure 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, and changes in interest rates, the estimated fair value of the warrant liability can change each period. We recorded non-operating expense of $226,000 in 2018 and non-operating income of $10,181,000, in 2017, due to the change in fair value of the Warrants.

 

27

 

 

INCOME TAX EXPENSES

 

On December 22, 2017, comprehensive tax legislation commonly referred to as the 2017 Tax Act was signed into law. Among other provisions, the 2017 Tax Act reduces the federal statutory corporate income tax rate from 35% to 21%. The reduction of the corporate tax rate caused us to re-measure our deferred tax assets and liabilities to the lower federal base rate of 21%. We reported a discrete adjustment from revaluing our deferred tax assets and liabilities resulting in a net decrease in income tax expense of $24,872,000 for the 53 weeks ended September 30, 2018.

 

In 2019, we recorded income tax expense of $7,931,000, or 33.3% of pretax income and in 2018, we recorded an income tax benefit of $16,228,000, or 52.7% of pretax income. Excluding the impact from the 2017 Tax Act, the effective income tax rate for 2018 was 28.0%. In 2017, we recognized income tax expense of $11,611,000, resulting in an effective tax rate of 28.9%. 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.

 

NET INCOME AND EARNINGS PER SHARE

 

The following table summarizes the impact from the warrant fair value adjustments and the 2017 Tax Act on income attributable to Lee Enterprises, Incorporated and earnings per diluted common share. Per share amounts may not add due to rounding.

 

 

   

2019

   

2018

   

2017

 

(Thousands of Dollars, Except Per Share Data)

 

Amount

   

Per Share

   

Amount

   

Per Share

   

Amount

   

Per Share

 
                                                 

Income attributable to Lee Enterprises, Incorporated, as reported

    14,268       0.25       45,766       0.82       27,481       0.50  

Adjustments:

                                               

Warrants fair value adjustment

    (612 )     0.01       226             (10,181 )     (0.19 )

Adjusted income before income tax impacts

    13,656       0.24       45,992       0.82       17,300       0.31  
Income tax effect of 2017 Tax Act                 (24,872 )     (0.44 )              

Income attributable to Lee Enterprises, Incorporated, as adjusted

    13,656       0.24       21,120       0.38       17,300       0.31  

 

LIQUIDITY AND CAPITAL RESOURCES

 

Operating Activities

 

Cash provided by operating activities totaled $57,676,000 in 2019 compared to $59,296,000 in 2018 due to a decline in net income to $15,909,000 in 2019 from $22,176,000 in 2018, after adjusting 2018 for the 2017 Tax Act impact of $24,872,000. The decline in net income is primarily the result of continued softening of the print advertising environment.

 

Cash provided by operating activities totaled $59,296,000 in 2018 compared to $72,281,000 in 2017 due to a decline in net income to $22,176,000 in 2018 from $28,605,000 in 2017, after adjusting for the 2017 Tax Act impact of $24,872,000. The decline in net income is primarily a result of the continued softening of the print advertising environment. Operating cash flows were also impacted by pension contributions.

 

Pension liabilities, net of plan assets, totaled $47,037,000 as of September 29, 2019. Contributions to pension plans are expected to total $6,718,000 in 2020.

 

Investing Activities

 

Cash required for investing activities totaled $10,933,000 in 2019 and $72,000 in 2018. Capital spending totaled $5,901,000 and $6,025,000 in 2019 and 2018, respectively. Proceeds from sales of assets totaled $1,501,000 and $6,623,000 in 2019 and 2018, respectively. 2019 included $6,543,000 in spending related to acquisitions.

 

28

 

 

Cash required for investing activities totaled $72,000 in 2018 and $9,455,000 in 2017. Capital spending totaled $6,025,000 and $4,078,000 in 2018 and 2017, respectively. Proceeds from sales of assets totaled $6,623,000 in 2018 and $2,582,000 in 2017, respectively. 2017 included $7,450,000 in spending related to the acquisition of local media operations.

 

We anticipate that funds necessary for capital expenditures, which are expected to be $7,800,000 in 2020, and other requirements, will be available from internally generated funds, or available under our Revolving Facility.

 

Financing Activities

 

Cash required for financing activities totaled $43,478,000 in 2019, $64,465,000 in 2018 and $69,189,000 in 2017. Debt reduction accounted for the majority of the usage of funds in all years.

 

Debt is summarized as follows:

 

 

                   

Interest Rates (%)

 
   

September 29

   

September 30

   

September 29

 

(Thousands of Dollars)

 

2019

   

2018

   

2019

 
                         

Revolving Facility

                6.1  

1st Lien Term Loan

          6,303       8.3  

Notes

    363,420       385,000       9.5  

2nd Lien Term Loan

    80,207       93,556       12.0  
      443,627       484,859          

Unamortized debt issue costs

    (11,282 )     (17,055 )        

Less current maturities of long-term debt

    2,954       7,027          

Total long-term debt

    429,391       460,777          

 

At September 29, 2019, our weighted average cost of debt, excluding amortization of debt financing costs, is 10.0%.

 

At September 29, 2019, aggregate minimum required maturities of debt excluding amounts required to be paid from future excess cash flow computations total $2,954,000 in 2020, zero in 2021, $363,420,000 in 2022 and $77,253,000 in 2023.

 

The 2nd lien term loan requires excess cash flow payments based on calculations defined in the credit agreements. See Note 5 of the Notes to the Consolidated Financial Statements.

 

Liquidity

 

We maintain a Revolving Facility pursuant to which we may borrow up to $23,120,000. At September 29, 2019, after consideration of letters of credit, we have approximately $17,644,000 available for future use under our Revolving Facility. The Revolving Facility contains a maintenance covenant in order to borrow on the Revolving Facility. At September 29, 2019, we are in compliance with this covenant. The Revolving Facility matures on December 28, 2020. We expect to amend and extend our Revolving Facility prior to its maturity.

 

Including cash, our liquidity at September 29, 2019 totals $26,289,000. This liquidity amount excludes any future cash flows. We expect all interest and principal payments due in the next twelve months will be satisfied by our cash flows, which will allow us to maintain an adequate level of liquidity. The Warrants, if and when exercised, would provide additional liquidity in an amount up to $25,140,000.

 

At September 29, 2019, the principal amount of our outstanding debt totals $443,627,000. For the last twelve months ending September 29, 2019, the principal amount of our debt, net of cash, is 3.58 times our Adjusted EBITDA. 

 

The 2014 Refinancing significantly extended our debt maturity profile with final maturity of the majority of our debt in 2022. We expect to refinance our debt prior to maturity.

 

29

 

 

There are numerous potential consequences under the Notes, 1st Lien Credit Facility, 2nd Lien Term Loan, if an event of default, as defined in the respective debt agreements, occurs and is not remedied. Many of those consequences are beyond our control. The occurrence of one or more events of default would give rise to the right of the applicable lender(s) to exercise their remedies under the Notes, 1st Lien Credit Facility, 2nd Lien Term Loan, respectively, including, without limitation, the right to accelerate all outstanding debt and take actions authorized in such circumstances under applicable collateral security documents.

 

Our ability to operate as a going concern is dependent on our ability to remain in compliance with debt covenants and repay, refinance or amend our debt agreements as they become due, or earlier if liquidity is available. 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 29, 2019.

 

In February 2017 our filing of a replacement Form S-3 registration statement ("Shelf") with the SEC was declared effective and expires February 2020. Maintaining an effective shelf is required under our credit agreements. The Shelf registration gives us the flexibility to issue and publicly distribute various types of securities, including preferred stock, common stock, warrants, secured or unsecured debt securities, purchase contracts and units consisting of any combination of such securities, from time to time, in one or more offerings, up to an aggregate amount of $750,000,000. SEC issuer eligibility rules require us to have a public float of at least $75,000,000 in order to use the Shelf. Subject to maintenance of the minimum level of equity market float and the conditions of our existing debt agreements, the Shelf may enable us to sell securities quickly and efficiently when market conditions are favorable or financing needs arise. Under our existing debt agreements, net proceeds from the sale of any securities may be used generally to reduce debt.

 

Other Matters

 

Cash and cash equivalents increased $3,265,000 in 2019, decreased $5,241,000 in 2018 and decreased $6,363,000 in 2017.

 

SEASONALITY

 

Our largest source of publishing revenue, retail advertising, is seasonal and tends to fluctuate with retail sales in markets served. Historically, retail advertising is higher in the December and June quarters. Advertising and marketing services revenue is lowest in the March quarter.

 

Quarterly results of operations are summarized in Note 17 of the Notes to Consolidated Financial Statements, included herein.

 

INFLATION

 

Price increases (or decreases) for our products are implemented when deemed appropriate by us. We continuously evaluate price increases, productivity improvements, sourcing efficiencies and other cost reductions to mitigate the impact of inflation.

 

30

 

 

CONTRACTUAL OBLIGATIONS

 

The following table summarizes our significant contractual obligations at September 29, 2019

 

(Thousands of Dollars)

 

Payments (or Commitments) Due (Years)

 
           

Less

                   

More

 

Nature of Obligation

 

Total

   

Than 1

      1-3       3-5    

Than 5

 
                                         

Debt (Principal Amount) (1)

    443,627       2,954       440,673              

Interest expense (2)(3)

    111,093       43,840       67,253              

Operating lease obligations

    15,925       3,402       4,528       3,003       4,992  

Capital expenditure commitments

    1,642       1,642                    
      572,287       51,838       512,454       3,003       4,992  

 

 

(1)

Maturities of long-term debt are limited to mandatory payments and, accordingly, exclude excess cash flow, asset sale and other payments under the Notes and the 2nd Lien Term Loan. While excess cash flow payments are based on actual performance, we expect to make voluntary and excess cash flow payments on the 2nd lien term loan currently outstanding, in the next four years. See Note 5 of the Notes to the Consolidated Financial Statements, included herein.

 

(2)

Interest expense includes an estimate of interest expense for the Notes, 1st Lien Credit Facility, and 2nd Lien Term Loan until their maturities in March 2022, March 2019, and December 2022, respectively. Interest expense under the Notes is estimated using the 9.5% contractual rate applied to the outstanding balance as reduced by future contractual maturities of such debt. Interest expense under the Revolving Facility is estimated based on the one month LIBOR at September 29, 2019 of 1.82% as increased by our applicable margin of 5.5% applied to the outstanding balance, as reduced by future contractual maturities of such debt. Interest expense under the 2nd Lien Term Loan is estimated using the 12.0% contractual rate applied to the outstanding balance during each period. Changes in interest rates in excess of current LIBOR levels, use of borrowing rates not based on LIBOR, use of interest rate hedging instruments, and/or principal payments in excess of contractual maturities or based on other requirements of the Notes, 1st Lien Credit Facility or 2nd Lien Term Loan could significantly change this estimate. See Note 5 of the Notes to Consolidated Financial Statements, included herein.

 

(3)

Interest expense excludes non-cash present value adjustments and amortization of debt financing costs previously paid. See Note 5 of the Notes to Consolidated Financial Statements, included herein.

 

The table above excludes future cash requirements for pension, postretirement and postemployment obligations. The periods in which these obligations will be settled in cash are not readily determinable and are subject to numerous future events and assumptions. See Notes 6 and 7 of the Notes to the Consolidated Financial Statements, included herein.

 

The contractual obligations above exclude unrecognized tax benefits to be recorded in accordance with FASB ASC Topic 740, Income Taxes. We are unable to reasonably estimate the ultimate amount or timing of cash settlements with the respective taxing authorities for such matters. A substantial amount of our deferred income tax liabilities will not result in future cash payments. See Note 11 of the Notes to the Consolidated Financial Statements, included herein.

 

 

ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK

 

We are exposed to market risk stemming from changes in interest rates and commodity prices. Changes in these factors could cause fluctuations in earnings and cash flows. In the normal course of business, exposure to certain of these market risks is managed as described below.

 

INTEREST RATES ON DEBT

 

Our debt structure is entirely fixed rate as of September 29, 2019.

 

We regularly evaluate alternatives to hedge our interest rate risk, but have no hedging instruments in place.

 

COMMODITIES 

 

After experiencing a peak in the second half of 2018, newsprint prices began to decline during the 13 weeks ended March 31, 2019 and continued throughout the balance of the year. As a reaction to the 2018 North American producers’ significant capacity reduction and tight supply conditions of newsprint, consumers maintained aggressive ordering patterns despite accelerated declines in demand. High inventories combined with conservation efforts to reduce paper usage and costs caused most newsprint users to start 2019 with excess inventories leading to reduced replacement supply orders and declining supply prices. Favorable exchange rates between the U.S. dollar and the Canadian dollar likely prevented additional production capacity reduction in North American, particularly at Canadian sources, further aggravating oversupply and accelerating price declines. 

 

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Our long term supply strategy continues to align and concentrate the Company purchases with those cost effective suppliers most likely to continue producing and supplying newsprint to the North American market. Where possible the Company will align supply with the lowest cost material. 

 

A $10 per tonne price increase for 27.7 pound newsprint would result in an annualized reduction in income before taxes of approximately $213,000 based on anticipated consumption in 2020, excluding consumption of TNI and MNI and the impact of LIFO accounting.

 

SENSITIVITY TO CHANGES IN VALUE

 

Our fixed rate debt consists of $363,420,000 principal amount of the Notes and $80,207,000 principal amount under the 2nd Lien Term Loan. At September 29, 2019, based on an average of private market price quotations, the fair values were $364,328,550 and $80,207,214 for the Notes and 2nd Lien Term Loan, respectively.

 

 

ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA

 

Information with respect to this Item is included herein under the caption “Consolidated Financial Statements”.

 

 

ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS

ON ACCOUNTING AND FINANCIAL DISCLOSURE

 

Information with respect to this Item is included in our Proxy Statement to be filed in January 2020, which is incorporated herein by reference, under the caption “Relationship with Independent Registered Public Accounting Firm”.

 

 

ITEM 9A. CONTROLS AND PROCEDURES

 

EVALUATION OF DISCLOSURE CONTROLS AND PROCEDURES

 

Under the supervision and with the participation of our senior management, including our chief executive officer and chief financial officer, we conducted an evaluation of the effectiveness of the design and operation of our disclosure controls and procedures, as defined in Rules 13a-15(e) and 15d-15(e) under the Exchange Act, as of September 29, 2019, the end of the period covered by this Annual Report (the “Evaluation Date”). Based on this evaluation, our chief executive officer and chief financial officer concluded as of the Evaluation Date that our disclosure controls and procedures were effective such that the information relating to the Company, including our consolidated subsidiaries, required to be disclosed in our SEC reports (i) is recorded, processed, summarized and reported within the time periods specified in SEC rules and forms, and (ii) is accumulated and communicated to our management, including our chief executive officer and chief financial officer, as appropriate to allow timely decisions regarding required disclosure.

 

MANAGEMENT'S REPORT ON INTERNAL CONTROL OVER FINANCIAL REPORTING

 

The Company's management is responsible for establishing and maintaining adequate internal control over financial reporting as such term is defined in Rule 13a-15(f) of the Exchange Act. Any internal control system, no matter how well designed, has inherent limitations and may not prevent or detect misstatements. Accordingly, even those systems determined to be effective can provide only reasonable assurance with respect to financial statement preparation and presentation.

 

Under the supervision and with the participation of our senior management, including our chief executive officer and chief financial officer, we assessed the effectiveness of our internal control over financial reporting as of the Evaluation Date, using the criteria set forth in the Internal Control-Integrated Framework (2013) issued by the Committee of Sponsoring Organizations of the Treadway Commission. Based on this assessment, management has concluded that our internal control over financial reporting is effective as of the Evaluation Date.

 

Our independent registered public accounting firm, KPMG LLP, has issued a report on the Company's internal control over financial reporting. KPMG’s report on the audit of internal control over financial reporting appears in this Annual Report.

 

CHANGES IN INTERNAL CONTROL OVER FINANCIAL REPORTING

 

There have been no changes in our internal control over financial reporting that occurred during the 13 weeks ended September 29, 2019 that have materially affected or are reasonably likely to materially affect our internal control over financial reporting.

 

32

 

 

REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM 

 

To the Stockholders and Board of Directors
Lee Enterprises, Incorporated:

 

Opinion on Internal Control Over Financial Reporting

 

We have audited Lee Enterprises, Incorporated and subsidiaries (the Company) internal control over financial reporting as of September 29, 2019, based on criteria established in Internal Control – Integrated Framework (2013) issued by the Committee of Sponsoring Organizations of the Treadway Commission. In our opinion, the Company maintained, in all material respects, effective internal control over financial reporting as of September 29, 2019, based on criteria established in Internal Control – Integrated Framework (2013) issued by the Committee of Sponsoring Organizations of the Treadway Commission.

 

We also have audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States) (PCAOB), the consolidated balance sheets of the Company as of September 29, 2019 and September 30, 2018, the related consolidated statements of income, comprehensive income, stockholders’ equity (deficit), and cash flows for the 52-week period ended September 29, 2019, the 53-week period ended September 30, 2018 and the 52-week period ended September 24, 2017 and the related notes (collectively, the consolidated financial statements), and our report dated December 13, 2019 expressed an unqualified opinion on those consolidated financial statements.

 

Basis for Opinion

 

The Company’s management is responsible for maintaining effective internal control over financial reporting and for its assessment of the effectiveness of internal control over financial reporting, included in the accompanying Management’s Report on Internal Control Over Financial Reporting. Our responsibility is to express an opinion on the Company’s internal control over financial reporting based on our audit. We are a public accounting firm registered with the PCAOB and are required to be independent with respect to the Company in accordance with the U.S. federal securities laws and the applicable rules and regulations of the Securities and Exchange Commission and the PCAOB.

 

We conducted our audit in accordance with the standards of the PCAOB. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether effective internal control over financial reporting was maintained in all material respects. Our audit of internal control over financial reporting included obtaining an understanding of internal control over financial reporting, assessing the risk that a material weakness exists, and testing and evaluating the design and operating effectiveness of internal control based on the assessed risk. Our audit also included performing such other procedures as we considered necessary in the circumstances. We believe that our audit provides a reasonable basis for our opinion.

 

Definition and Limitations of Internal Control Over Financial Reporting

 

A company’s internal control over financial reporting is a process designed to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles. A company’s internal control over financial reporting includes those policies and procedures that (1) pertain to the maintenance of records that, in reasonable detail, accurately and fairly reflect the transactions and dispositions of the assets of the company; (2) provide reasonable assurance that transactions are recorded as necessary to permit preparation of financial statements in accordance with generally accepted accounting principles, and that receipts and expenditures of the company are being made only in accordance with authorizations of management and directors of the company; and (3) provide reasonable assurance regarding prevention or timely detection of unauthorized acquisition, use, or disposition of the company’s assets that could have a material effect on the financial statements.

 

Because of its inherent limitations, internal control over financial reporting may not prevent or detect misstatements. Also, projections of any evaluation of effectiveness to future periods are subject to the risk that controls may become inadequate because of changes in conditions, or that the degree of compliance with the policies or procedures may deteriorate.

 

 

/s/ KPMG LLP

 

Chicago, Illinois

December 13, 2019

 

33

 

 

 

ITEM 9B. OTHER INFORMATION

 

None.

 

PART III

 

 

ITEM 10. DIRECTORS, EXECUTIVE OFFICERS AND CORPORATE GOVERNANCE

 

Information with respect to this Item, except for certain information related to our executive officers included under the caption “Executive Team” in Part I of this Annual Report, is included in our Proxy Statement to be filed in January 2020, which is incorporated herein by reference, under the captions “Proposal 1 - Election of Directors” and “Section 16(a) Beneficial Ownership Reporting Compliance”. Our executive officers are those elected officers whose names and certain information are set forth under the caption “Executive Team” in Part 1 of this Annual Report.

 

We have a Code of Business Conduct and Ethics ("Code") that applies to all of our employees, including our principal executive officer, and principal financial and accounting officer. The Code is monitored by the Audit Committee of our Board of Directors and is annually affirmed by our directors and executive officers. We maintain a corporate governance page on our website which includes the Code. The corporate governance page can be found at www.lee.net by clicking on “Governance” under the "About" tab. A copy of the Code will also be provided without charge to any stockholder who requests it. Any future amendment to, or waiver granted by us from, a provision of the Code will be posted on our website.

 

 

ITEM 11. EXECUTIVE COMPENSATION

 

Information with respect to this Item is included in our Proxy Statement to be filed in January 2020, which is incorporated herein by reference, under the captions, “Compensation of Non-Employee Directors”, “Executive Compensation” and “Compensation Discussion and Analysis”; provided, however, that the subsection entitled “Executive Compensation - Executive Compensation Committee Report” shall not be deemed to be incorporated by reference.

 

 

ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT

AND RELATED STOCKHOLDER MATTERS

 

Information with respect to this Item is included in our Proxy Statement to be filed in January 2020, which is incorporated herein by reference, under the captions “Voting Securities and Principal Holders Thereof” and “Equity Compensation Plan Information”.

 

 

ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS

AND DIRECTOR INDEPENDENCE

 

Information with respect to this Item is included in our Proxy Statement to be filed in January 2020, which is incorporated herein by reference, under the caption “Directors' Meetings and Committees of the Board of Directors”.

 

 

ITEM 14. PRINCIPAL ACCOUNTING FEES AND SERVICES

 

Information with respect to this Item is included in our Proxy Statement to be filed in January 2020, which is incorporated herein by reference, under the caption “Relationship with Independent Registered Public Accounting Firm”.

 

 

PART IV

 

 

34

 

ITEM 15. EXHIBITS AND FINANCIAL STATEMENT SCHEDULES

 

The following documents are filed as part of this Annual Report:

 

FINANCIAL STATEMENTS

 

Consolidated Statements of Income and Comprehensive Income (Loss) - 52 weeks ended September 29, 2019, 53 weeks ended September 30, 2018 and 52 weeks ended September 24, 2017

Consolidated Balance Sheets - September 29, 2019 and September 30, 2018

Consolidated Statements of Stockholders' Equity (Deficit) - 52 weeks ended September 29, 2019, 53 weeks ended September 30, 2018 and 52 weeks ended September 24, 2017

Consolidated Statements of Cash Flows - 52 weeks ended September 29, 2019, 53 weeks ended September 30, 2018 and 52 weeks ended September 24, 2017

Notes to Consolidated Financial Statements

Report of Independent Registered Public Accounting Firm

 

FINANCIAL STATEMENT SCHEDULES

 

All schedules have been omitted as they are not required, not applicable, not deemed material or because the information is included in the Notes to Consolidated Financial Statements, included herein.

 

EXHIBITS

 

See Exhibit Index, included herein.

 

35

 

 

 

CONSOLIDATED FINANCIAL STATEMENTS

PAGE

 

 

 

 

Consolidated Statements of Income and Comprehensive Income (Loss)

37

 

 

Consolidated Balance Sheets

38

 

 

Consolidated Statements of Stockholders' Equity (Deficit)

40

 

 

Consolidated Statements of Cash Flows

41

 

 

Notes to Consolidated Financial Statements

42

 

 

Report of Independent Registered Public Accounting Firm

73

 

36

 

 

 

CONSOLIDATED STATEMENTS OF INCOME AND COMPREHENSIVE INCOME (LOSS)

 

 

(Thousands of Dollars, Except Per Common Share Data)

 

2019

   

2018

   

2017

 
                         

Operating revenue:

                       

Advertising and marketing services

    265,933       303,446       331,360  

Subscription

    186,691       195,108       191,922  

Other

    57,230       45,401       43,661  

Total operating revenue

    509,854       543,955       566,943  

Operating expenses:

                       

Compensation

    182,869       199,164       213,109  

Newsprint and ink

    22,237       24,949       24,904  

Other operating expenses

    193,709       199,653       199,754  

Depreciation and amortization

    29,332       31,766       41,282  

Assets loss (gain) on sales, impairments and other

    2,464       6,429       (1,150 )

Restructuring costs and other

    11,635       5,550       7,523  

Total operating expenses

    442,246       467,511       485,422  

Equity in earnings of associated companies

    7,121       9,249       7,609  

Operating income

    74,729       85,693       89,130  

Non-operating income (expense):

                       

Interest expense

    (47,488 )     (52,842 )     (57,573 )

Debt financing and administrative costs

    (7,214 )     (5,311 )     (4,818 )
Other, net     3,813       3,280       13,477  

Total non-operating expense, net

    (50,889 )     (54,873 )     (48,914 )

Income before income taxes

    23,840       30,820       40,216  

Income tax expense (benefit)

    7,931       (16,228 )     11,611  

Net income

    15,909     &n