Item 2.
Management's Discussion and Analysis of Financial Condition and Results of Operations
The following discussion includes comments and analysis relating to our results of operations and financial condition as of and for the 13 w
eeks and 39 weeks ended
June 26, 2016
. This discussion should be read in conjunction with the Consolidated Financial Statements and related Notes thereto, included herein, and our 2015 Annual Report on Form 10-K.
NON-GAAP FINANCIAL MEASURES
We use non-GAAP financial performance measures for purposes of evaluating our performance and liquidity. Therefore, we believe that each of the non-GAAP measures presented provides useful information to investors by allowing them to view our businesses through the eyes of our management and Board of Directors, facilitating comparison of results across historical periods, and providing a focus on the underlying ongoing operating performance and liquidity of our businesses. The non-GAAP financial measures we use are as follows:
Adjusted EBITDA is a non-GAAP financial performance measure that enhances 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 understand how management measures the performance of the business. This measure also provides users with a benchmark that can be used when forecasting future operating performance of the Company that excludes unusual, nonrecurring or one time transactions. Adjusted EBITDA is also a component of the calculation used by stockholders and analysts to determine the value of our business when using the market approach, which applies a market multiple to financial metrics. It is also a measure used to calculate the leverage ratio of the Company, which is a key financial ratio monitored and used by the Company and its investors. Adjusted EBITDA is defined as net income (loss), plus nonoperating expenses, net, income tax expense (benefit), depreciation, amortization, loss (gain) on sale of assets, impairment charges, workforce adjustment costs, stock compensation and our 50% share of EBITDA from TNI and MNI, minus equity in earnings of TNI and MNI and curtailment gains.
Adjusted Income (Loss) and Adjusted Earnings (Loss) Per Common Share are non-GAAP financial performance measures that we believe offer a useful metric to evaluate overall performance of the Company by providing financial statement users the operating performance of the Company on a per share basis excluding unusual and infrequent transactions. It is defined as income (loss) attributable to Lee Enterprises, Incorporated and earnings (loss) per common share adjusted to exclude both unusual matters and those of a substantially non-recurring nature.
Cash Costs is a non-GAAP financial performance measure of operating expenses that are settled in cash and is useful to investors in understanding the components of the Company’s cash operating costs. Generally, the Company provides forward-looking guidance of Cash Costs, which can be used by financial statement users to assess the Company's ability to manage and control its operating cost structure. Cash Costs is defined as compensation, newsprint and ink, other operating expenses and certain unusual matters, such as workforce adjustment costs. Depreciation, amortization, impairment charges, other non-cash operating expenses and other unusual matters are excluded. Cash Costs are also presented excluding workforce adjustments, which are paid in cash.
A table reconciling Adjusted EBITDA to net income (loss), the most directly comparable measure under GAAP, is set forth in Item 2, included herein, under the caption "Reconciliation of Non-GAAP Financial Measures".
Reconciliations of adjusted income (loss) and adjusted earnings (loss) per common share to income (loss) attributable to Lee Enterprises, Incorporated and earnings (loss) per common share, respectively, the most directly comparable measures under GAAP, are set forth in Item 2, included herein, under the caption “Overall Results”.
The subtotals of operating expenses representing cash costs can be found in tables in Item 2, included herein, under the captions “13 Weeks Ended
June 26, 2016
" and "39 Weeks Ended
June 26, 2016
".
These non-GAAP financial measures should not be considered in isolation from or as a substitute for the related consolidated GAAP measures, and should be read together with financial information presented on a GAAP basis.
RECONCILIATION OF NON-GAAP FINANCIAL MEASURES
(UNAUDITED)
The table below reconciles the non-GAAP financial performance measure of adjusted EBITDA to net income, the most directly comparable GAAP measure:
|
|
|
|
|
|
|
|
|
|
|
13 Weeks Ended
|
|
39 Weeks Ended
|
|
(Thousands of Dollars)
|
June 26
2016
|
|
June 28
2015
|
|
June 26
2016
|
|
June 28
2015
|
|
|
|
|
|
|
Net Income
|
4,367
|
|
2,135
|
|
35,358
|
|
14,184
|
|
Adjusted to exclude
|
|
|
|
|
Income tax expense
|
3,037
|
|
2,141
|
|
22,571
|
|
9,353
|
|
Non-operating expenses, net
|
17,251
|
|
20,569
|
|
21,877
|
|
59,038
|
|
Equity in earnings of TNI and MNI
|
(1,825
|
)
|
(1,705
|
)
|
(6,633
|
)
|
(6,114
|
)
|
Loss (gain) on sale of assets, net
|
(354
|
)
|
686
|
|
(1,763
|
)
|
434
|
|
Depreciation and amortization
|
10,868
|
|
11,395
|
|
32,752
|
|
34,457
|
|
Workforce adjustments
|
424
|
|
1,056
|
|
1,616
|
|
1,908
|
|
Stock compensation
|
550
|
|
562
|
|
1,714
|
|
1,645
|
|
Add:
|
|
|
|
|
Ownership share of TNI and MNI EBITDA (50%)
|
2,625
|
|
2,464
|
|
9,145
|
|
8,432
|
|
Adjusted EBITDA
|
36,943
|
|
39,303
|
|
116,637
|
|
123,337
|
|
CRITICAL ACCOUNTING POLICIES
Our discussion and analysis of results of operations and financial condition are based upon our Consolidated Financial Statements, which have been prepared in accordance with Generally Accepted Accounting Principles ("GAAP"). The preparation of these financial statements requires us to make estimates and judgments that affect the reported amounts of assets, liabilities, revenue and expenses, and related disclosure of contingent assets and liabilities. We evaluate these estimates and judgments on an ongoing basis.
We base our estimates on historical experience and on various other assumptions that are believed to be reasonable under the circumstances, the results of which form the basis for making judgments about the carrying values of assets and liabilities that are not readily apparent from other sources. Actual results may differ from these estimates under different assumptions or conditions.
Our critical accounting policies include the following:
•
Goodwill and other intangible assets;
•
Pension, postretirement and postemployment benefit plans;
•
Income taxes;
•
Revenue recognition; and
•
Uninsured risks.
Additional information regarding these critical accounting policies can be found under the caption “Management's Discussion and Analysis of Financial Condition and Results of Operations” in our 2015 Annual Report on Form 10-K.
IMPACT OF RECENTLY ISSUED ACCOUNTING STANDARDS
In March 2016, the Financial Accounting Standards Board ("FASB") issued a new standard with improvements to the accounting for employee share-based payments. The new standard simplifies several aspects of the accounting for employee share-based payment transactions, including the accounting for income taxes and statutory tax withholding requirements, as well as classification in the statement of cash flows. The adoption of the new standard is required in 2018. We have not determined the potential effects on the Consolidated Financial Statements.
In February 2016, the FASB issued a new standard for the accounting treatment of leases. The new standard is based on the principle that entities should recognize assets and liabilities arising from leases. The new standard does not significantly change the lessees’ recognition, measurement and presentation of expenses and cash flows from the previous accounting standard. Leases are classified as finance or operating. The new standards primary change is the requirement for entities to recognize a lease liability for payments and a right of use asset representing the right to use the leased asset during the term on operating lease arrangements. Lessees are permitted to make an accounting policy election to not recognize the asset and liability for leases with a term of twelve months or less. Lessors’ accounting under the new standard is largely unchanged from the previous accounting standard. In addition, the new standard expands the disclosure requirements of lease arrangements. Lessees and lessors will use a modified retrospective transition approach, which includes a number of practical expedients. The adoption of this new standard is required in the first quarter of fiscal year 2020 with early adoption permitted. We have not determined the potential effects on the Consolidated Financial Statements.
In April 2015, the FASB issued a new standard for the presentation of debt issuance costs. The new standard will streamline the balance sheet presentation of debt related valuations. Debt issuance costs are currently recognized as deferred charges and presented as an asset while debt discounts and premiums are treated as adjustments to the related debt. Under the new standard, debt issuance costs will be recognized as reductions to the related debt. The adoption of the new standard is required in 2017. The adoption of this standard will serve to reclassify certain amounts within our Consolidated Balance Sheets.
In August 2014, the FASB issued a new going concern standard. The new standard changes the period that companies use to evaluate their ability to meet obligations to a look-forward period of one year from the financial statement issuance date, from one year from the balance sheet date. The new standard also changes disclosure requirements. The adoption of the new standard is required in 2017. We do not expect the adoption of this standard to have a material impact on our Consolidated Financial Statements, taken as a whole.
In May 2014, the FASB issued new accounting requirements for the recognition of revenue from contracts with customers. The new requirements also include additional disclosure about the nature, amount, timing and uncertainty of revenue and cash flows arising from customer contracts, including significant judgments and changes in judgments and assets recognized from costs incurred to obtain or fulfill a contract. The adoption of these requirements is required in 2019. We have not yet determined the potential impact on our Consolidated Financial Statements.
EXECUTIVE OVERVIEW
Lee Enterprises, Incorporated is a leading provider of local news and information, and a major platform for advertising, in the markets we serve, which are located primarily in the Midwest, Mountain West and West regions of the United States. With the exception of St. Louis, Missouri, our 49 daily newspaper markets, across 22 states, are principally midsize or small. Through our print and digital platforms, we reach an overwhelming majority of adults in our markets.
Our products include:
|
|
•
|
49 daily and 37 Sunday newspapers with subscribers totaling
0.9 million
and
1.3 million
, respectively, which we believe are read by over three million people in print; and
|
|
|
•
|
Nearly 300 weekly newspapers and classified and niche publications.
|
Our markets have established retail bases, and most are regional shopping hubs. We are located in four state capitals. Six of our top ten markets by revenue include major universities, and seven are home to major corporate headquarters. We believe that all of these factors have had a positive impact on advertising revenue. Community newspapers and their associated digital media remain a valuable source of local news and information attracting large local audiences
and is an effective means for local advertisers to reach their customers. We believe our audiences across these communities tend to be loyal readers who actively seek our content and serve as an attractive target for our advertisers.
We do not face significant competition from other local daily newspapers in most of our markets, although there is competition for audience in those markets from other media. In our top ten markets by revenue, only two have significant local daily print competition.
Our primary source of revenue is advertising and marketing services, followed by subscription revenue. Over the last several years, the advertising industry has experienced a shift from print and other traditional media towards digital advertising as readership has also shifted from print to digital. This trend in traditional print advertising and readership was compounded by the effects of the last recession, and such trend continues to impact our print advertising and marketing services revenue. In addition, our printed newspaper paid subscription and single copy unit sales have declined. We have offset some of our declines in print advertising and marketing services revenue by growing our digital advertising revenue. Subscription revenue has been maintained by increasing subscription rates which includes full access, selling premium day sections and increasing the number of paid digital subscribers.
In April 2014, we began to implement a full access subscription model, which provides subscribers with complete digital access, including desktop, mobile, tablet and replica editions. These are offered as packages with print home delivery or as digital-only subscriptions, with subscription rates reflective of the expanded access. Due to the timing of the rollout and staggered subscriber renewal dates, the bulk of the year-over-year revenue increase from this initiative was realized in 2015.
We continue to transform our business model and carefully manage our costs to maintain high cash flows and margins.
IMPAIRMENT OF GOODWILL AND OTHER ASSETS
We have significant amounts of goodwill and identified intangible assets. Since 2007 we have recorded impairment charges totaling almost $1.3 billion to reduce the value of certain of these assets. Should general economic, market or business conditions decline, and have a negative impact on our stock price or projected future cash flows, we may be required to record additional impairment charges in the future. Such impairment charges would not impact our reported cash flows or debt covenant compliance.
DEBT AND LIQUIDITY
We have a substantial amount of debt, as discussed more fully (and certain capitalized terms used below defined) in Note 4 of the Notes to Consolidated Financial Statements, included herein.
Since February 2009, we have satisfied all interest payments and substantially all principal payments due under our debt facilities with our cash flows and asset sales.
As of
June 26, 2016
, our debt consists of the following:
|
|
•
|
$400,000,000
aggregate principal amount of 9.5% Senior Secured Notes (the “Notes”), pursuant to an Indenture dated as of March 31, 2014 (the “Indenture”), of which
$385,000,000
is outstanding at
June 26, 2016
;
|
|
|
•
|
$250,000,000
first lien term loan (the "1st Lien Term Loan") and
$40,000,000
revolving facility (the "Revolving Facility") under a First Lien Credit Agreement dated as of March 31, 2014 (together, the “1
st
Lien Credit Facility”), of which
$119,546,000
is outstanding at
June 26, 2016
; and
|
|
|
•
|
$150,000,000
second lien term loan under a Second Lien Loan Agreement dated as of March 31, 2014 (the “ 2
nd
Lien Term Loan”), of which
$135,736,000
is outstanding at
June 26, 2016
.
|
Our ability to make payments on our indebtedness will depend on our ability to generate future cash flows from operations. Cash generated from future asset sales could serve as an additional source of repayment. This ability, to a certain extent, is subject to general economic, financial, competitive, business, legislative, regulatory and other factors that are beyond our control.
At
June 26, 2016
, after consideration of letters of credit, we have approximately
$33,068,000
available for future use under our Revolving Facility. Including cash, our liquidity at
June 26, 2016
totals
$54,940,000
. This liquidity amount
excludes any future cash flows. Our adjusted EBITDA has been strong for the last seven years and has exceeded $155,000,000 in each year from 2011 through the last twelve months ended June 26, 2016, but there can be no assurance that such performance will continue. We expect all interest and principal payments due in the next twelve months will be satisfied by our cash flows from operations and certain asset sales, which will allow us to maintain an adequate level of liquidity.
At
June 26, 2016
, the principal amount of our outstanding debt totaled
$640,282,000
. For the last twelve months ended
June 26, 2016
, the principal amount of our debt, net of cash, is
3.95
times our adjusted EBITDA, compared to a ratio of
4.6
at
June 28, 2015
.
The 2014 Refinancing significantly improved our debt maturity profile. Final maturities of our debt are March 2019 through December 2022. As a result, we believe refinancing risk has been substantially reduced for the next several years.
There are numerous potential consequences under the Notes, 1
st
Lien Credit Facility and 2
nd
Lien Term Loan, if an event of default, as defined, occurs and is not remedied. Many of those consequences are beyond our control. The occurrence of one or more events of default would give rise to the right of the applicable lender(s) to exercise their remedies under the Notes, 1
st
Lien Credit Facility and 2
nd
Lien Term Loan, respectively, including, without limitation, the right to accelerate all outstanding debt and take actions authorized in such circumstances under applicable collateral security documents.
Our ability to operate as a going concern is dependent on our ability to remain in compliance with debt covenants and to repay, refinance or amend our debt agreements as they become due, if necessary. The Notes, 1
st
Lien Credit Facility and 2
nd
Lien Term Loan have only limited affirmative covenants with which we are required to maintain compliance. We are in compliance with our debt covenants at
June 26, 2016
.
Due to our federal and state net operating loss carryforwards and based on historical levels of performance, we do not expect any significant income tax payments in the current year.
13 WEEKS ENDED JUNE 26, 2016
Operating results, as reported in the Consolidated Financial Statements, are summarized below.
|
|
|
|
|
|
|
|
|
13 Weeks Ended
|
|
(Thousands of Dollars, Except Per Share Data)
|
June 26
2016
|
|
June 28
2015
|
|
Percent
Change
|
|
|
|
|
|
Advertising and marketing services revenue:
|
|
|
|
Retail
|
59,181
|
|
63,601
|
|
(6.9
|
)
|
Classified
|
25,562
|
|
29,719
|
|
(14.0
|
)
|
National
|
4,527
|
|
4,608
|
|
(1.8
|
)
|
Niche publications and other
|
3,024
|
|
3,006
|
|
0.6
|
|
Total advertising and marketing services revenue
|
92,294
|
|
100,934
|
|
(8.6
|
)
|
Subscription
|
47,160
|
|
47,394
|
|
(0.5
|
)
|
Digital services
|
3,541
|
|
3,070
|
|
15.3
|
|
Commercial printing
|
3,116
|
|
3,239
|
|
(3.8
|
)
|
Other
|
4,835
|
|
4,041
|
|
19.6
|
|
Total operating revenue
|
150,946
|
|
158,678
|
|
(4.9
|
)
|
Operating expenses:
|
|
|
|
Compensation
|
57,218
|
|
58,442
|
|
(2.1
|
)
|
Newsprint and ink
|
6,604
|
|
7,421
|
|
(11.0
|
)
|
Other operating expenses
|
53,356
|
|
56,538
|
|
(5.6
|
)
|
Workforce adjustments
|
424
|
|
1,056
|
|
(59.8
|
)
|
Cash costs
|
117,602
|
|
123,457
|
|
(4.7
|
)
|
|
33,344
|
|
35,221
|
|
(5.3
|
)
|
Depreciation and amortization
|
10,868
|
|
11,395
|
|
(4.6
|
)
|
Loss (gain) on sales of assets, net
|
(354
|
)
|
686
|
|
NM
|
|
Equity in earnings of associated companies
|
1,825
|
|
1,705
|
|
7.0
|
|
Operating income
|
24,655
|
|
24,845
|
|
(0.8
|
)
|
Non-operating income (expense), net
|
(17,251
|
)
|
(20,569
|
)
|
NM
|
|
Income before income taxes
|
7,404
|
|
4,276
|
|
73.2
|
|
Income tax expense
|
3,037
|
|
2,141
|
|
41.8
|
|
Net income
|
4,367
|
|
2,135
|
|
NM
|
|
Net income attributable to non-controlling interests
|
(275
|
)
|
(253
|
)
|
8.7
|
|
Income attributable to Lee Enterprises, Incorporated
|
4,092
|
|
1,882
|
|
NM
|
|
Other comprehensive loss, net of income taxes
|
(43
|
)
|
(192
|
)
|
(77.6
|
)
|
Comprehensive income attributable to Lee Enterprises, Incorporated
|
4,049
|
|
1,690
|
|
NM
|
|
Earnings per common share:
|
|
|
|
Basic
|
0.08
|
|
0.04
|
|
NM
|
|
Diluted
|
0.08
|
|
0.03
|
|
NM
|
|
References to the "2016 Quarter" refer to the 13 weeks ended
June 26, 2016
. Similarly, references to the "2015 Quarter" refer to the 13 weeks ended
June 28, 2015
.
Advertising and Marketing Services Revenue
In the 2016 Quarter, advertising and marketing services revenue decreased
$8,640,000
,
or
8.6%
, compared to the 2015 Quarter. Retail advertising decreased
6.9%
.
The decrease in retail advertising revenue is due to reduced print advertising volume primarily from large retail and big box stores. Di
gital retail advertising on a stand-alone basis, which is the largest digital advertising category, increa
sed
8.3%
,
par
tially offsetting print declines.
Classified revenue decreased
14.0%
in the 2016 Quarter as we continue to experience a reduction in print advertising in automotive, employment and real estate in most of our markets. Digital classified revenue on a stand-alone basis decreased
4.1%
.
National advertising decreased
$81,000
, or
1.8%
. Digital national advertising on a stand-alone basis increased
15.8%
as a result of
improved inventory management of available ad positions offered on the national advertising exchanges and improved pricing and volume.
Digital advertising and marketing services revenue increased
4.9%
to
$22,238,000
in the 2016 Quarter, representing
24.1%
of total advertising and marketing services re
venue. Mobile advertising revenue, which is included in digital advertising, increased
22.2%
in the 2016 Quarter. Total digital revenue, including advertising and marketing services and all other digital business, totaled
$25,780,000
in the 2016 Quarter, a
6.2%
increase over the 2015 Quarter. Print advertising, including preprints and print marketing services revenue, decreased
12.1%
.
Subscription and Other Revenue
Subscription revenue decreased
$234,000
, or
0.5%
, in the 2016 Quarter.
Revenue declines were due to lower volumes which were not offset by higher subscription rates.
Our average daily newspaper circulation, including TNI, MNI and digital subscribers, totaled
0.9 million
in the 2016 Quarter. Sunday circulation totaled
1.3 million
.
Digital services revenue increased
$471,000
, or
15.3%
, due in part to TownNews.com, which generates the majority of its revenue from content management services but is expanding into digital ad agency services for web, mobile and social products at our properties as well as 1,600 other newspapers, and media operations
.
Commercial printing revenue decreased
$123,000
, or
3.8%
, in the 2016 Quarter due
to decreased volume for existing customers at several of our largest markets. Other revenue increased
$794,000
, or
19.6%
, in the 2016 Quarter due to an increase in revenue for delivery of third party newspapers.
Our mobile, tablet, desktop and app sites, including TNI and MNI, attracted
24.5 million
unique visitors in the month
of June 2016, with
211.6 million
million page views. Research in our larger markets indicates we continue to reach over 76% of all adults in the market through the combination of digital audience growth and strong print newspaper readership.
Operating Expenses
Operating expenses for the 2016 Quarter decreased
5.5%
.
Cash costs decreased
$5,855,000
, or
4.7%
, in the 2016 Quarter.
Compensation expense decreased
$1,224,000
, or
2.1%
, in the 2016 Quarter, driven by a decline of
8.7%
in average full-time equivalent employees. Significantly higher costs associated with our self-insured medical plan offset some of the reduction in wages.
Newsprint and ink costs decreased
$817,000
, or
11.0%
, in the 2016 Quarter, primarily
as a result of a
reduction in newsprint volume of
8.7
%. See Item 3, “Commodities”, included herein, for further discussion and analysis of the impact of newsprint prices on our business.
Other operating expenses, which are comprised of all operating costs not considered to be compensation, newsprint, depreciation, amortization, or unusual matters including delivery, postage, outsourced printing, digital cost of goods sold, facility expenses among others, decreased
$3,182,000
, or
5.6%
, in the 2016 Quarter. Cost reductions were primarily related to the impact of both subscriber delivery cost and a decrease in postage costs primarily related to a reduction in direct mail advertising volumes.
Excluding workforce adjustments, cash costs decreased
4.3%
in the 2016 Quarter.
Reductions in staffing resulted in workforce adjustment costs totaling
$424,000
and
$1,056,000
in the 2016 Quarter and 2015 Quarter, respectively.
For fiscal year 2016, we expect cash costs excluding workforce adjustments, to decrease between 3.75% to 4.00%.
Results of Operations
Depreciation expense decreased
$236,000
, or
5.2%
, and amortization expense decreased
$291,000
, or
4.3%
, in the 2016 Quarter. Sales of operating assets resulted in a net gain of
$354,000
in the 2016 Quarter compared to a loss of
$686,000
in the 2015 Quarter.
Equity in earnings of TNI and MNI increased
$120,000
in the 2016 Quarter.
The factors noted above resulted in operating income of
$24,655,000
in the 2016 Quarter compared to
$24,845,000
in the 2015 Quarter.
Nonoperating Income and Expense
Interest expense decreased
$2,338,000
, or
12.9%
, to
$15,783,000
in the 2016 Quarter due to lower debt balances.
Our weighted average cost of debt, excluding amortization of debt financing costs, increased to
9.6%
at the end of the 2016 Quarter compared to
9.4%
at the end of the 2015 Quarter, as our Notes and 2
nd
Lien Term Loan balances are now a greater percentage of our outstanding debt due to the reduction of the 1
st
Lien Term Loan, our lowest cost of debt.
We recognized $
1,196,000
of debt financing and administrative costs in the 2016 Quarter compared to $
1,445,000
in the 2015 Quarter.
Overall Results
We recognized income tax expense of
41.0%
of income before income taxes in the 2016 Quarter and
50.1%
in the 2015 Quarter. See Note 6 of the Notes to the Consolidated Financial Statements, included herein, for a discussion of the difference between the expected federal income tax rate and the actual tax rates.
As a result of the factors noted above, income attributable to Lee Enterprises, Incorporated totaled
$4,092,000
in the 2016 Quarter compared to
$1,882,000
in the 2015 Quarter. We recorded earnings per diluted common share of
$0.08
in the 2016 Quarter and
$0.03
in the 2015 Quarter. Excluding unusual matters, as detailed in the table below, diluted earnings per common share, as adjusted, were
$0.08
in the 2016 Quarter, compared to
$0.05
in the 2015
Quarter. Per share amounts may not add due to rounding.
|
|
|
|
|
|
|
|
|
|
|
13 Weeks Ended
|
|
|
June 26
2016
|
|
June 28
2015
|
|
(Thousands of Dollars, Except Per Share Data)
|
Amount
|
|
Per Share
|
|
Amount
|
|
Per Share
|
|
|
|
|
|
|
Income attributable to Lee Enterprises, Incorporated, as reported
|
4,092
|
|
0.08
|
|
1,882
|
|
0.03
|
|
Adjustments:
|
|
|
|
|
Warrants fair value adjustment
|
415
|
|
|
1,091
|
|
|
|
415
|
|
0.01
|
|
1,091
|
|
0.02
|
|
Income attributable to Lee Enterprises, Incorporated, as adjusted
|
4,507
|
|
0.08
|
|
2,973
|
|
0.05
|
|
39 WEEKS ENDED JUNE 26, 2016
Operating results, as reported in the Consolidated Financial Statements, are summarized below. Certain prior period amounts have been reclassified to conform with the current year presentation.
|
|
|
|
|
|
|
|
|
39 Weeks Ended
|
|
(Thousands of Dollars, Except Per Share Data)
|
June 26
2016
|
|
June 28
2015
|
|
Percent
Change
|
|
|
|
|
|
Operating revenue:
|
|
|
|
Retail
|
185,184
|
|
201,678
|
|
(8.2
|
)
|
Classified
|
75,998
|
|
87,849
|
|
(13.5
|
)
|
National
|
16,675
|
|
17,134
|
|
(2.7
|
)
|
Niche publications and other
|
8,805
|
|
8,119
|
|
8.4
|
|
Total advertising and marketing services revenue
|
286,662
|
|
314,780
|
|
(8.9
|
)
|
Subscription
|
144,249
|
|
145,904
|
|
(1.1
|
)
|
Digital services
|
10,271
|
|
9,267
|
|
10.8
|
|
Commercial printing
|
9,385
|
|
8,830
|
|
6.3
|
|
Other
|
15,619
|
|
13,663
|
|
14.3
|
|
Total operating revenue
|
466,186
|
|
492,444
|
|
(5.3
|
)
|
Operating expenses:
|
|
|
|
Compensation
|
174,733
|
|
181,615
|
|
(3.8
|
)
|
Newsprint and ink
|
19,343
|
|
23,928
|
|
(19.2
|
)
|
Other operating expenses
|
166,332
|
|
173,641
|
|
(4.2
|
)
|
Workforce adjustments
|
1,616
|
|
1,908
|
|
(15.3
|
)
|
Cash costs
|
362,024
|
|
381,092
|
|
(5.0
|
)
|
|
104,162
|
|
111,352
|
|
(6.5
|
)
|
Depreciation and amortization
|
32,752
|
|
34,457
|
|
(4.9
|
)
|
Loss (gain) on sales of assets, net
|
(1,763
|
)
|
434
|
|
NM
|
|
Equity in earnings of associated companies
|
6,633
|
|
6,114
|
|
8.5
|
|
Operating income
|
79,806
|
|
82,575
|
|
(3.4
|
)
|
Non-operating expense, net
|
(21,877
|
)
|
(59,038
|
)
|
(62.9
|
)
|
Income before income taxes
|
57,929
|
|
23,537
|
|
NM
|
|
Income tax expense
|
22,571
|
|
9,353
|
|
NM
|
|
Net income
|
35,358
|
|
14,184
|
|
NM
|
|
Net income attributable to non-controlling interests
|
(801
|
)
|
(749
|
)
|
6.9
|
|
Income attributable to Lee Enterprises, Incorporated
|
34,557
|
|
13,435
|
|
NM
|
|
Other comprehensive loss, net of income taxes
|
(129
|
)
|
(576
|
)
|
(77.6
|
)
|
Comprehensive income attributable to Lee Enterprises, Incorporated
|
34,428
|
|
12,859
|
|
NM
|
|
Earnings per common share:
|
|
|
|
Basic
|
0.65
|
|
0.26
|
|
NM
|
|
Diluted
|
0.64
|
|
0.25
|
|
NM
|
|
References to the "2016 Period" refer to the 39 weeks ended
June 26, 2016
. Similarly, references to the "2015 Period" refer to the 39 weeks ended
June 28, 2015
.
Advertising and Marketing Services Revenue
In the 2016 Period, advertising and marketing services revenue decreased
$28,118,000
,
or
8.9%
, compared to the 2015 Period. Retail advertising decreas
ed
8.2%
. The decrease in retail advertising revenue is due to reduced advertising volume primarily from large retail and big box stores. Digital retai
l advertising on a stand-alone basis increa
sed
9.7%
,
par
tially offsetting print declines.
Classified revenue decreased
13.5%
in the 2016 Period as we continue to experience a reduction in advertising from automotive, employment and real estate in most of our markets. Digital classified revenue on a stand-alone basis decreased
5.0%
.
National advertising decreased
$459,000
, or
2.7%
. Digital national advertising on a stand-alone basis
increased
22.5%
due to improved inventory management of available ad positions offered on the national advertising exchanges and improved pricing. Revenue
in niche publications and other increased
$686,000
or
8.4%
mainly attributed to increases in creative service charges.
On a stand-alone basis, digital advertising and marketing services revenue increased
6.0%
, to
$64,308,000
, in the 2016 Period, representing
22.4%
of total advertising and marketing services re
venue. Mobile advertising revenue, which is included in digital advertising, increased
17.6%
in the 2016 Period. Total digital revenue for the 2016 Period, including advertising and marketing services and all other digital business, totaled
$74.6 million
, an increase of
6.6%
from a year ago, representing
16.0%
of total operating revenue. Print advertising, including preprints and print marketing services revenue, decreased
12.5%
.
Subscription and Other Revenue
Subscription revenue decreased
$1,655,000
, or
1.1%
, in the 2016 Period, as subscription price increases did not offset paid subscriber losses.
Our average daily newspaper circulation, including TNI, MNI and digital subscribers, totaled
1.0 million
in the 2016 Period. Sunday circulation totaled
1.3 million
.
Digital services revenue increased
$1,004,000
, or
10.8%
, largely due to TownNews.com, which generates the majority of its revenue from content management services but is expanding into digital and agency services for web, mobile and social products at our properties as well as 1,600 other newspapers, and media operations. Commercial printing revenue increased
$555,000
, or
6.3%
, in the 2016 Perio
d due to new customers at several of our largest markets. Other reven
ue increased
$1,956,000
, or
14.3%
, in the 2016 Period, due to an increase in revenue for delivery of third party newspapers.
Operating Expenses
Operating expenses for the 2016 Period decreased
5.5%
.
Cash costs decreased
$19,068,000
, or
5.0%
, in the 2016 Period.
Compensation expense decreased
$6,882,000
, or
3.8%
, in the 2016 Period, driven by a decline in average full time equivalent employees of
8.2%
, offset by significantly higher costs associated with our self-insured medical plan.
Newsprint and ink costs decreased
$4,585,000
, or
19.2%
, in the 2016 Period
, primarily
as a result of a reduction in newsprint volume of
10.6
%. See Item 3, “Commodities”, included herein, for further discussion and analysis of the impact of newsprint on our business.
Other operating expenses, which are comprised of all operating costs not considered to be compensation, newsprint, depreciation, amortization, or unusual matters including delivery, postage, outsourced printing, digital cost of goods sold, facility expenses among others, decreased
$7,309,000
, or
4.2%
, in the 2016 Period. Cost reductions were primarily related to the impact of both subscriber delivery cost and a decrease in postage costs primarily related to a reduction in direct mail advertising volumes.
Excluding workforce adjustments, cash costs decreased
5.0%
in the 2016 Period.
Reduction in staffing resulted in workforce adjustment costs totaling
$1,616,000
and
$1,908,000
in the 2016 Period and 2015 Period, respectively.
Results of Operations
Depreciation expense decreased
$885,000
, or
6.4%
, and amortization expense decreased
$820,000
, or
4.0%
, in the 2016 Period. Sales of operating assets, which totaled
$3,983,000
in the 2016 Period, resulted in a net gain of
$1,763,000
in the 2016 Period compared to a net loss of
$434,000
in the 2015 Period.
Equity in earnings in associated companies increased
$519,000
in the 2016 Period.
The factors noted above resulted in operating income of
$79,806,000
in the 2016 Period compared to
$82,575,000
in the 2015 Period.
Nonoperating Income and Expense
Interest expense decreased
$6,108,000
, or
11.0%
, to
$49,206,000
in the 2016 Period due to lower debt balances.
In the 2016 Period, we recognized a
$30,646,000
gain on an insurance settlement. The settlement represents our share of a subrogation recovery arising from the settlement of claims for damages suffered as a result of a 2009 loss at one of the Lee Legacy production facilities.
We recognized
$4,563,000
of debt financing costs in the 2016 Period compared to
$4,040,000
in the 2015 Period related to our 2014 refinancing. We also recognized
$1,250,000
gain on extinguishment of debt.
Overall Results
We recognized income tax expense of
39.0%
of income before income taxes in the 2016 Period and
39.7%
in the 2015 Period. See Note 6 of the Notes to the Consolidated Financial Statements, included herein, for a discussion of the difference between the expected federal income tax rate and the actual tax rates.
As a result of the factors noted above, income attributable to Lee Enterprises, Incorporated totaled
$34,557,000
in the 2016 Period compared to
$13,435,000
in the 2015 Period. We recorded earnings per diluted common share of
$0.64
in the 2016 Period and
$0.25
in the 2015 Period. Excluding unusual matters, as detailed in the table below, diluted earnings per common share, as adjusted, were
$0.28
in the 2016 Period and
$0.25
in the 2015 Period. Per share amounts may not add due to rounding.
|
|
|
|
|
|
|
|
|
|
|
|
|
39 Weeks Ended
|
|
|
June 26
2016
|
|
June 28
2015
|
|
(Thousands of Dollars, Except Per Share Data)
|
Amount
|
|
Per Share
|
|
Amount
|
|
Per Share
|
|
|
|
|
Income attributable to Lee Enterprises, Incorporated, as reported
|
34,557
|
|
0.64
|
|
13,435
|
|
0.25
|
|
Adjustments:
|
|
|
|
|
Warrants fair value adjustment
|
404
|
|
|
312
|
|
|
Gain on insurance settlement
|
(30,646
|
)
|
|
—
|
|
|
|
(30,242
|
)
|
|
312
|
|
|
Income tax effect of adjustments, net
|
10,726
|
|
|
—
|
|
|
|
(19,516
|
)
|
(0.36
|
)
|
312
|
|
0.01
|
|
Income attributable to Lee Enterprises, Incorporated, as adjusted
|
15,041
|
|
0.28
|
|
13,747
|
|
0.25
|
|
LIQUIDITY AND CAPITAL RESOURCES
Operating Activities
Cash provided by operating activities was
$65,827,000
in the 2016 Period and
$66,149,000
in the 2015 Period. We recorded net income of
$35,358,000
in the 2016 Period and
$14,184,000
in the 2015 Period. Non-cash debt financing costs charged to expense totaled
$4,563,000
in the 2016 Period compared to
$4,040,000
in the 2015 Period. Changes in depreciation and amortization, deferred income taxes, and operating assets and liabilities accounted for the bulk of the change in cash provided by operating activities in the 2016 Quarter.
Investing Activities
Cash provided by investing activities totaled
$29,611,000
in the 2016 Period compared to cash required for investing activities of
$3,927,000
in the 2015 Period. In the 2016 Period, we received
$30,646,000
related to an insurance settlement. Capital spending totaled
$5,793,000
in the 2016 Period compared to
$7,686,000
in the 2015 Period. We
received
$3,983,000
and
$3,341,000
of proceeds from sales of assets in the 2016 Period and the 2015 Period, respectively.
We anticipate that funds necessary for capital expenditures, which are expected to total up to $10,000,000 in 2016, and other requirements, will be available from internally generated funds or availability under our Revolving Facility.
Financing Activities
Cash required for financing activities totaled
$84,700,000
in the 2016 Period and
$60,022,000
in the 2015 Period. Debt reduction accounted for the majority of the usage of funds in both the 2016 Period and the 2015 Period.
Liquidity
At
June 26, 2016
, after consideration of letters of credit, we have approximately
$33,068,000
available for future use under our Revolving Facility. Including cash, our liquidity at
June 26, 2016
totals
$54,940,000
. 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 and certain asset sales, 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
June 26, 2016
, the principal amount of our outstanding debt totals
$640,282,000
. For the last twelve months ending
June 26, 2016
, the principal amount of our debt, net of cash, is
3.95
times our adjusted EBITDA, compared to a ratio of
4.6
at
June 28, 2015
.
On January 15, 2016, we received payment of $30,646,000 from our insurer for our share of a subrogation recovery arising from the settlement of claims for damages suffered as a result of a 2009 loss at one of our Lee Legacy production facilities. Of the total proceeds received by the Company, in January 2016, $20,000,000 was used to reduce outstanding debt under our 1
st
Lien Term Loan and the majority of the remaining proceeds were used to buy back Notes with a face value of $10,000,000, at a substantial discount.
The 2014 Refinancing significantly improved our debt maturity profile. Final maturities of our debt have been extended to dates from December 2018 through December 2022. As a result, we believe refinancing risk has been substantially reduced for the next several years.
There are numerous potential consequences under the Notes, 1
st
Lien Credit Facility and 2
nd
Lien Term Loan, if an event of default, as defined, occurs and is not remedied. Many of those consequences are beyond our control. The occurrence of one or more events of default would give rise to the right of the applicable lender(s) to exercise their remedies under the Notes, 1
st
Lien Credit Facility and 2
nd
Lien Term Loan, respectively, including, without limitation, the right to accelerate all outstanding debt and take actions authorized in such circumstances under applicable collateral security documents.
Our ability to operate as a going concern is dependent on our ability to remain in compliance with debt covenants and to refinance or amend our debt agreements as they become due, or earlier if available liquidity is consumed. The Notes, 1
st
Lien Credit Facility and 2
nd
Lien Term Loan have only limited affirmative covenants with which we are required to maintain compliance. We are in compliance with our debt covenants at
June 26, 2016
.
In 2014, we filed a Form S-3 shelf registration statement ("Shelf") with the SEC, which has been declared effective. The Shelf gives us the flexibility to issue and publicly distribute various types of securities, including preferred stock, common stock, warrants, secured or unsecured debt securities, purchase contracts and units consisting of any combination of such securities, from time to time, in one or more offerings, up to an aggregate amount of $750,000,000. SEC issuer eligibility rules require us to have a public float of at least $75,000,000 in order to use the Shelf. Subject to maintenance of the minimum level of equity market float and the conditions of our existing debt agreements, the Shelf may enable us to sell securities quickly and efficiently when market conditions are favorable or financing needs arise. Under our existing debt agreements, net proceeds from the sale of any securities may be used generally to reduce debt.
CHANGES IN LAWS AND REGULATIONS
Energy Costs
Energy costs can be volatile, and may increase in the future as a result of carbon emissions and other regulations being considered by the United States Environmental Protection Agency.
Health Care
The Affordable Care Act was enacted into law in 2010.
We expect the Affordable Care Act will continue to evolve. More recently, certain provisions applicable to employers were delayed. We expect our future health care costs to increase based on analysis published by the United States Department of Health and Human Services, input from independent advisors and our understanding of various provisions of the Affordable Care Act that differ from our previous medical plans, such as:
•
Certain preventive services provided without additional charge to employees;
•
Automatic enrollment of new employees;
•
Higher maximum age for dependent coverage;
•
Elimination of lifetime benefit caps; and
•
Free choice vouchers for certain lower income employees.
Administrative costs are also likely to increase as a result of new compliance reporting and mandatory fees per participant. New costs being imposed on other medical care businesses, such as health insurers, pharmaceutical companies and medical device manufacturers, may be passed on to us in the form of higher costs. We may be able to mitigate certain of these future cost increases through changes in plan design.
We do not expect the Affordable Care Act will have a significant impact on our postretirement medical benefit obligation liability.
Pension Plans
In 2012, the Surface Transportation Extension Act of 2012 (“STEA”) was signed into law. STEA provides for changes in the determination of discount rates that result in a near-term reduction in minimum funding requirements for our defined benefit pension plans. STEA will also result in an increase in future premiums to be paid to the Pension Benefit Guarantee Corporation ("PBGC").
In 2014, the Highway and Transportation Funding Act ("HATFA") was signed into law. HATFA generally extends the relief offered under STEA and further increases premiums to be paid to the PBGC.
Income Taxes
Certain states in which we operate periodically consider changes to their corporate income tax rates. Until such changes are enacted, the impact of such changes cannot be determined.
Wage Laws
In 2016, the Department of Labor ("DOL") published its final rule updating overtime regulations and minimum pay regulations for exempt employees. Among other things, the final rule sets a minimum weekly rate for all exempt employees at $913 per week, more than double the previous limit. The final rule is effective beginning December 1, 2016. The Company is still evaluating the impact of this change and as a result has not determined what, if any, impact it will have on the Company at this time.
The United States and various state and local governments are considering increasing their respective minimum wage rates. Most of our employees earn an amount in excess of the current United States or state minimum wage rates. However, until changes to such rates are enacted, the impact of the changes cannot be determined.
INFLATION
General inflation in the United States economy has not been significant for the last several years. 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.