NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
References to "we", "our", "us" and the like throughout the Consolidated Financial Statements refer to Lee Enterprises, Incorporated and subsidiaries (the "Company"). References to "2016", "2015", "2014" and the like refer to the fiscal years ended the last Sunday in September.
Lee Enterprises, Incorporated is a leading provider of local news and information and a major platform for advertising, Primarily in midsize markets, with 48 daily newspapers and a joint interest in four others, rapidly growing digital products and nearly 300 weekly newspapers and specialty publications in 21 states. We currently operate in a single operating segment.
1. SIGNIFICANT ACCOUNTING POLICIES
Basis of Presentation
The Consolidated Financial Statements include our accounts and those of our subsidiaries, all of which are wholly-owned, except for our
50%
interest in TNI,
50%
interest in MNI and
82.5%
interest in TownNews.com. TNI and MNI are accounted for under the equity method. Results of TownNews.com are consolidated.
Fiscal Year
All of our enterprises use period accounting with the fiscal year ending on the last Sunday in September.
Subsequent Events
We have evaluated subsequent events through December 9, 2016. No events have occurred subsequent to
September 25, 2016
that require disclosure or recognition in these financial statements, except as included herein.
Accounting Estimates
The preparation of financial statements in conformity with accounting principles generally accepted in the United States of America ("GAAP") requires us to make estimates and judgments that affect the reported amounts of assets, liabilities, revenue and expenses, and related disclosure of contingent assets and liabilities. We evaluate our estimates on an on-going basis. We base our estimates on historical experience and on various other assumptions that are believed to be reasonable under the circumstances, the results of which form the basis for making judgments about the carrying
values of assets and liabilities that are not readily apparent from other sources. Actual results may differ from these estimates under different assumptions or conditions.
Principles of Consolidation
All significant intercompany transactions and balances have been eliminated.
Investments in TNI and MNI are accounted for using the equity method and are reported at cost, plus our share of undistributed earnings since acquisition less, for TNI, amortization of, and reductions in the value of, intangible assets.
Cash and Cash Equivalents
We consider all highly liquid debt instruments purchased with an original maturity of three months or less at date of acquisition to be cash equivalents.
Outstanding checks in excess of funds on deposit are included in accounts payable and are classified as financing activities in the Consolidated Statements of Cash Flows.
Accounts Receivable
We evaluate our allowance for doubtful accounts receivable based on historical credit experience, payment trends and other economic factors. Delinquency is determined based on timing of payments in relation to billing dates. Accounts considered to be uncollectible are written off.
Inventories
Newsprint inventories are priced at the lower of cost or market, with cost being determined by the first-in, first-out or last-in, first-out methods. Newsprint inventories at
September 25, 2016
and
September 27, 2015
are less than replacement cost by
$1,900,000
and
$1,780,000
, respectively.
The components of newsprint inventory by cost method are as follows:
|
|
|
|
|
|
|
(Thousands of Dollars)
|
September 25 2016
|
|
|
September 27 2015
|
|
|
|
|
|
First-in, first-out
|
1,064
|
|
|
786
|
|
Last-in, first-out
|
1,627
|
|
|
1,547
|
|
|
2,691
|
|
|
2,333
|
|
Other inventories consisting of ink, plates and film are priced at the lower of cost or market, with cost being determined by the first-in, first-out method.
Other Investments
Other investments primarily consist of marketable securities held in trust under a deferred compensation arrangement and investments for which no established market exists. Marketable securities are classified as trading securities and carried at fair value with gains and losses reported in earnings. Non-marketable securities are carried at cost.
Property and Equipment
Property and equipment are carried at cost. Equipment, except for printing presses and preprint insertion equipment, is depreciated primarily by declining-balance methods. The straight-line method is used for all other assets. The estimated useful lives are as follows:
|
|
|
|
Years
|
|
|
Buildings and improvements
|
5 - 54
|
Printing presses and insertion equipment
|
3 - 28
|
Other
|
3 - 17
|
We capitalize interest as a component of the cost of constructing major facilities. At
September 25, 2016
and
September 27, 2015
, capitalized interest was not significant.
We recognize the fair value of a liability for a legal obligation to perform an asset retirement activity when such activity is a condition of a future event and the fair value of the liability can be estimated.
Goodwill and Other Intangible Assets
Intangible assets include covenants not to compete, consulting agreements, customer lists, newspaper subscriber lists and mastheads. Intangible assets subject to amortization are being amortized using the straight-line method as follows:
|
|
|
|
|
Years
|
|
|
|
Customer lists
|
15 - 23
|
|
Newspaper subscriber lists
|
12 - 33
|
|
Non-compete and consulting agreements
|
15
|
|
In assessing the recoverability of goodwill and other non-amortized intangible assets, we annually assess qualitative factors affecting our business to determine if the probability of a goodwill impairment is more likely than not. Our assessment includes reviewing internal and external factors affecting our business, such as cash flow projections,
stock price and other industry or market considerations. This assessment is made on the first day of our fourth fiscal quarter of each year.
We analyze goodwill and other non-amortized intangible assets for impairment more frequently if impairment indicators are present. Such indicators of impairment include, but are not limited to, changes in business climate and operating or cash flow losses related to such assets.
Should we determine that a goodwill impairment is more likely than not, we make a determination of the fair value of our business. Fair value is determined using a combination of an income approach and a market approach weighted equally.
Should we determine that a non-amortized intangible asset impairment is more likely than not, we make a determination of the individual asset's fair value. Fair value is determined using the relief from royalty method, which estimates fair value based upon appropriate royalties of future revenue discounted to their present value. The impairment amount, if any, is calculated based on the excess of the carrying amount over the fair value of such asset.
We review our amortizable intangible assets for impairment when indicators of impairment are present. We assess recoverability of these assets by comparing the estimated undiscounted cash flows associated with the asset group with their carrying amount. The impairment amount, if any, is calculated based on the excess of the carrying amount over the fair value of those asset groups.
The required valuation methodology and underlying financial information that are used to determine fair value require significant judgments to be made by us and represent a Level 3 fair value measurement. These judgments include, but are not limited to, long term projections of future financial performance and the selection of appropriate discount rates used to determine the present value of future cash flows. Changes in such estimates or the application of alternative assumptions could produce significantly different results.
We also periodically evaluate the useful lives of amortizable intangible assets. Any resulting changes in the useful lives of such intangible assets will not impact our cash flows. However, a decrease in the useful lives of such intangible assets would increase future amortization expense and decrease future reported operating results and earnings per common share.
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 impairment charges in the future. See Note 3.
Non-controlling Interest
Non-controlling interest in earnings of TownNews.com is recognized in the Consolidated Financial Statements.
Revenue Recognition
Advertising revenue is recorded when advertisements are placed in the publication or on the related digital platform. Subscription revenue is recorded over the print or digital subscription term or as newspapers are individually sold. Other revenue is recognized when the related product or service has been delivered. Unearned revenue arises in the ordinary course of business from advance subscription payments for print or digital products or advance payments for advertising.
Advertising Costs
A substantial amount of our advertising and promotion consists of advertising placed in our own publications and digital platforms, using available space. The incremental cost of such advertising is not significant and is not measured separately by us. External advertising costs are not significant and are expensed as incurred.
Pension, Postretirement and Postemployment Benefit Plans
We evaluate our liabilities for pension, postretirement and postemployment benefit plans based upon computations made by consulting actuaries, incorporating estimates and actuarial assumptions of future plan service costs, future interest costs on projected benefit obligations, rates of compensation increases, when applicable, employee turnover rates, anticipated mortality rates, expected investment returns on plan assets, asset allocation assumptions of plan
assets and other factors. If we used different estimates and assumptions regarding these plans, the funded status of the plans could vary significantly, resulting in recognition of different amounts of expense over future periods.
We use a fiscal year end measurement date for all our pension and postretirement obligations in accordance with Financial Accounting Standards Board ("FASB") Accounting Standards Codification ("ASC") Topic 715,
Retirement Plans
.
Income Taxes
Deferred income taxes are provided using the asset and liability method, whereby deferred income tax assets are recognized for deductible temporary differences and loss carryforwards and deferred income tax liabilities are recognized for taxable temporary differences. Temporary differences are the difference between the reported amounts of assets and liabilities and their tax basis. Deferred income tax assets are reduced by a valuation allowance when, in our opinion, it is more likely than not 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.
Fair Value of Financial Instruments
We utilize FASB ASC Topic 820,
Fair Value Measurements and Disclosures
, to measure and report fair value. FASB ASC Topic 820 defines fair value, establishes a framework for measuring fair value and expands disclosures about fair value measurements. FASB ASC Topic 820 establishes a three-level hierarchy of fair value measurements based on whether the inputs to those measurements are observable or unobservable, which consists of the following levels:
Level 1
- Quoted prices for identical instruments in active markets.
Level 2
- Quoted prices for similar instruments in active markets; quoted prices for identical or similar instruments in markets that are not active; and model-derived valuations in which all significant inputs are observable in active markets.
Level 3
- Valuations derived from valuation techniques in which one or more significant inputs are unobservable.
Investments measured at net asset value, as a practical expedient for fair value, are excluded from the fair value hierarchy.
Valuation methodologies used for pension and postretirement assets measured at fair value are as follows:
Cash and cash equivalents c
onsist of short term deposits valued based on quoted prices in active markets. Such investments are classified as Level 1.
Treasury Inflation-Protected Securities
("TIPS")
consist of low yield mutual funds and are valued by quoted market prices. Such investments are classified as Level 1.
Equity securities
are valued based on the closing market price in an active market and are classified as Level 1. Certain investments in commingled funds are valued at the net asset value of units held at the end of the period based upon the value of the underlying investments as determined by quoted market prices. Such investments are classified as Level 2.
Debt securities
consist of corporate bonds and government securities that are valued based upon quoted market prices. Such investments are classified as Level 1. Certain investments in commingled funds are valued at the net asset value of units held at the end of the period based upon the value of the underlying investments as determined by quoted market prices. Such investments are classified as Level 2.
Hedge funds
consist of a long/short equity fund and a diversified fund of funds. These funds are valued at the net asset value of units held at the end of the period based upon the value of the underlying investments, which is determined using multiple approaches including by quoted market prices and by private market quotations. Such investments are classified as Level 2 and Level 3.
Stock Compensation and Warrants
We have several active stock-based compensation plans. We account for grants under those plans under the fair value expense recognition provisions of FASB ASC Topic 718,
Compensation-Stock Compensation
. We determine the fair value of stock options using the Black-Scholes option pricing formula. Key inputs to this formula include expected term, expected volatility and the risk-free interest rate.
The expected term represents the period that our stock-based awards are expected to be outstanding, and is determined based on historical experience of similar awards, giving consideration to contractual terms of the awards, vesting schedules and expectations of future employee behavior. The volatility factor is calculated using historical market data for our Common Stock. The time frame used is equal to the expected term. We base the risk-free interest rate on the yield to maturity at the time of the stock option grant on zero-coupon U.S. government bonds having a remaining term equal to the option's expected term. When estimating forfeitures, we consider voluntary termination behavior as well as actual option forfeitures.
We amortize as compensation expense the value of stock options and restricted Common Stock using the straight-line method over the vesting or restriction period, which is generally one to three years.
We also have
6,000,000
warrants outstanding to purchase shares of our Common Stock. Warrants are recorded at fair value determined using the Black-Scholes option pricing formula. See Notes 4, 8 and 11.
Uninsured Risks
We are self-insured for health care, workers compensation and certain long-term disability costs of our employees, subject to stop loss insurance, which limits our losses in the event of large claims. We accrue our estimated health care costs in the period in which such costs are incurred, including an estimate of incurred but not reported claims. Other risks are insured and carry deductible losses of varying amounts. Letters of credit and performance bonds totaling
$5,107,000
at
September 25, 2016
are outstanding in support of our insurance program.
Our accrued reserves for health care and workers compensation claims are based upon estimates of the remaining liability for retained losses made by consulting actuaries. The amount of workers compensation reserve has been determined based upon historical patterns of incurred and paid loss development factors from the insurance industry.
2 INVESTMENTS IN ASSOCIATED COMPANIES
TNI Partners
In Tucson, Arizona, TNI, acting as agent for our subsidiary, Star Publishing Company (“Star Publishing”) and Citizen Publishing Company (“Citizen”), a subsidiary of Gannett Co. Inc., is responsible for printing, delivery, advertising and subscription activities of the
Arizona Daily Star,
as well as the related digital platforms and specialty publications. TNI collects all receipts and income and pays substantially all operating expenses incident to the partnership's operations and publication of the newspaper and other media.
Income or loss of TNI is allocated equally to Star Publishing and Citizen.
Summarized financial information of TNI is as follows:
|
|
|
|
|
|
|
(Thousands of Dollars)
|
September 25
2016
|
|
|
September 27
2015
|
|
|
|
|
|
ASSETS
|
|
|
|
|
|
|
|
Current assets
|
5,107
|
|
|
5,761
|
|
Investments and other assets
|
12
|
|
|
33
|
|
Total assets
|
5,119
|
|
|
5,794
|
|
|
|
|
|
LIABILITIES AND MEMBERS' EQUITY
|
|
|
|
|
|
|
|
Current liabilities
|
6,484
|
|
|
4,787
|
|
Members' equity
|
(1,365
|
)
|
|
1,007
|
|
Total liabilities and members' equity
|
5,119
|
|
|
5,794
|
|
Summarized results of TNI are as follows:
|
|
|
|
|
|
|
|
|
|
(Thousands of Dollars)
|
2016
|
|
|
2015
|
|
|
2014
|
|
|
|
|
|
|
|
Operating revenue
|
52,761
|
|
|
55,926
|
|
|
57,892
|
|
Operating expenses
|
41,804
|
|
|
45,413
|
|
|
47,229
|
|
Operating income
|
10,957
|
|
|
10,513
|
|
|
10,663
|
|
|
|
|
|
|
|
Company's 50% share
|
5,478
|
|
|
5,256
|
|
|
5,331
|
|
Less amortization of intangible assets
|
418
|
|
|
418
|
|
|
418
|
|
Equity in earnings of TNI
|
5,060
|
|
|
4,838
|
|
|
4,913
|
|
TNI makes weekly distributions of its earnings. We received
$6,636,000
,
$5,475,000
and
$5,246,000
in distributions in 2016, 2015 and 2014, respectively.
Star Publishing's
50%
share of TNI depreciation and certain general and administrative expenses associated with its share of the operation and administration of TNI are reported as operating expenses (benefit) in our Consolidated Statements of Income and Comprehensive Income (Loss). These amounts totaled
$149,000
,
$(254,000)
,and
$(60,000)
, in 2016, 2015 and 2014, respectively. Fees for editorial services provided to TNI by Star Publishing totaled
$5,599,000
,
$5,492,000
, and
$5,908,000
in 2016, 2015 and 2014, respectively.
At
September 25, 2016
, the carrying value of the Company's 50% investment in TNI is
$15,933,000
. The difference between our carrying value and our
50%
share of the members' equity of TNI relates principally to goodwill of
$12,366,000
and other identified intangible assets of
$4,554,000
, certain of which are being amortized over their estimated useful lives through 2020. See Note 3.
Annual amortization of intangible assets is estimated to be
$418,000
in 2017, 2018, 2019, and
$280,000
in 2020.
Madison Newspapers, Inc.
We have a
50%
ownership interest in MNI, which publishes daily and Sunday newspapers, and other publications in Madison, Wisconsin, and other Wisconsin locations, and operates their related digital sites. Net income or loss of MNI (after income taxes) is allocated equally to us and The Capital Times Company (“TCT”). MNI conducts its business under the trade name Capital Newspapers.
Summarized financial information of MNI is as follows:
|
|
|
|
|
|
|
(Thousands of Dollars)
|
September 25
2016
|
|
|
September 27
2015
|
|
|
|
|
|
ASSETS
|
|
|
|
|
|
|
|
Current assets
|
12,320
|
|
|
18,255
|
|
Investments and other assets
|
33,364
|
|
|
34,209
|
|
Total assets
|
45,684
|
|
|
52,464
|
|
|
|
|
|
LIABILITIES AND MEMBERS' EQUITY
|
|
|
|
|
|
|
|
Current liabilities
|
8,391
|
|
|
8,100
|
|
Other liabilities
|
9,500
|
|
|
9,235
|
|
Stockholders' equity
|
27,793
|
|
|
35,129
|
|
Total liabilities and stockholders' equity
|
45,684
|
|
|
52,464
|
|
Summarized results of MNI are as follows:
|
|
|
|
|
|
|
|
|
|
(Thousands of Dollars)
|
2016
|
|
|
2015
|
|
|
2014
|
|
|
|
|
|
|
|
Operating revenue
|
65,172
|
|
|
67,264
|
|
|
67,478
|
|
Operating expenses, excluding workforce adjustments, depreciation and amortization
|
52,646
|
|
|
54,795
|
|
|
55,393
|
|
Workforce adjustments
|
39
|
|
|
459
|
|
|
244
|
|
Depreciation and amortization
|
1,684
|
|
|
1,630
|
|
|
1,626
|
|
Operating income
|
10,803
|
|
|
10,380
|
|
|
10,215
|
|
Net income
|
6,947
|
|
|
6,832
|
|
|
6,768
|
|
Equity in earnings of MNI
|
3,473
|
|
|
3,416
|
|
|
3,384
|
|
MNI makes quarterly distributions of its earnings. We received
$7,250,000
,
$5,500,000
and
$4,750,000
in distributions in 2016, 2015 and 2014, respectively.
Fees for editorial services provided to MNI by us are included in other revenue in the Consolidated Statements of Operations and Comprehensive Income and totaled
$7,099,000
,
$7,242,000
and
$7,050,000
, in 2016, 2015 and 2014, respectively.
At
September 25, 2016
, the carrying value of the Company's 50% investment in MNI is
$13,896,000
.
3 GOODWILL AND OTHER INTANGIBLE ASSETS
Changes in the carrying amount of goodwill related to continuing operations are as follows:
|
|
|
|
|
|
|
(Thousands of Dollars)
|
2016
|
|
|
2015
|
|
|
|
|
|
Goodwill, gross amount
|
1,532,458
|
|
|
1,532,458
|
|
Accumulated impairment losses
|
(1,288,729
|
)
|
|
(1,288,729
|
)
|
Goodwill, end of year
|
243,729
|
|
|
243,729
|
|
Identified intangible assets related to continuing operations consist of the following:
|
|
|
|
|
|
|
(Thousands of Dollars)
|
September 25
2016
|
|
|
September 27
2015
|
|
|
|
|
|
Non-amortized intangible assets:
|
|
|
|
Mastheads
|
23,644
|
|
|
25,102
|
|
Amortizable intangible assets:
|
|
|
|
Customer and newspaper subscriber lists
|
687,182
|
|
|
687,182
|
|
Less accumulated amortization
|
552,472
|
|
|
526,322
|
|
|
134,710
|
|
|
160,860
|
|
Non-compete and consulting agreements
|
28,524
|
|
|
28,524
|
|
Less accumulated amortization
|
28,524
|
|
|
28,524
|
|
|
—
|
|
|
—
|
|
|
158,354
|
|
|
185,962
|
|
In 2016, we performed a qualitative analysis to test our goodwill for impairment and concluded that the likelihood of an impairment was less than 50%. In 2015, we performed additional quantitative analysis of the carrying value of our goodwill and concluded the implied fair value of goodwill was significantly in excess of its carrying value. As a result no goodwill impairment was recorded. In 2014, we performed a qualitative analysis to test our goodwill for impairment and concluded that the likelihood of an impairment was less than 50%.
In 2016 and 2014, due to continuing revenue declines, we recorded non-cash charges to reduce the carrying value of non-amortized intangible assets.
We also recorded pretax charges to reduce the carrying value of other assets in 2016 and 2014 in Impairment of intangible and other assets
in the Consolidated Statements of Income and Comprehensive Income (Loss)
. We recorded deferred income tax benefits related to these charges.
A summary of the pretax impairment charges is included in the table below:
|
|
|
|
|
|
|
|
|
|
(Thousands of Dollars)
|
2016
|
|
|
2015
|
|
|
2014
|
|
|
|
|
|
|
|
Continuing operations:
|
|
|
|
|
|
Non-amortized intangible assets
|
818
|
|
|
—
|
|
|
1,936
|
|
Property, equipment and other assets
|
1,367
|
|
|
—
|
|
|
1,044
|
|
|
2,185
|
|
|
—
|
|
|
2,980
|
|
Annual amortization of intangible assets for the years ending September 2017 to September 2021 is estimated to be
$25,030,000
,
$16,653,000
,
$15,972,000
,
$15,206,000
, and
$14,042,000
, respectively.
4 DEBT
On March 31, 2014, we completed a comprehensive refinancing of our debt (the “2014 Refinancing”), which includes 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”).
|
|
|
•
|
$250,000,000
first lien term loan (the "1
st
Lien Term Loan") due March 2019 and
$40,000,000
revolving facility (the "Revolving Facility") under a First Lien Credit Agreement dated as of March 31, 2014 (together, the “1
st
Lien Credit Facility”).
|
|
|
•
|
$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”) due December 2022 and bears interest at a fixed annual rate of
12.0%
.
|
The Notes, 1
st
Lien Credit Facility and 2
nd
Lien Term Loan enabled us to repay in full, including accrued interest, and terminate, on March 31, 2014: (i) the remaining principal balance of $593,000,000 under our previous 1
st
lien agreement and (ii) the remaining principal balance of $175,000,000 under our previous 2
nd
lien agreement. We also used the proceeds of the refinancing to pay fees and expenses totaling $30,931,000 related to the 2014 Refinancing.
Notes
The Notes are senior secured obligations of the Company and mature on March 15, 2022. At September 25, 2016 the principal balance of the Notes is
$385,000,000
.
Interest
The Notes require payment of interest semiannually on March 15 and September 15 of each year, at a fixed annual rate of
9.5%
.
Redemption
We may redeem some, or all, of the principal amount of the Notes at any time on or after March 15, 2018 as follows:
|
|
|
|
Period Beginning
|
Percentage of Principal Amount
|
|
|
|
March 15, 2018
|
104.75
|
|
March 15, 2019
|
102.38
|
|
March 15, 2020
|
100.00
|
|
We may redeem up to 35% of the Notes prior to March 15, 2017 at
109.5%
of the principal amount using the proceeds of certain future equity offerings.
We may repurchase Notes in the open market at any time. In 2016 we purchased
$15,000,000
principal amount of Notes in privately negotiated transactions. The transactions resulted in a gain on extinguishment of debt totaling
$1,250,000
, which is recorded in Other, net non-operating income (expense) in our Consolidated Statements of Income and Comprehensive Income.
If we sell certain of our assets or experience specific types of changes of control, we must, subject to certain exceptions, offer to purchase the Notes at 101% of the principal amount. Any redemption of the Notes must also satisfy any accrued and unpaid interest thereon.
Covenants and Other Matters
The Indenture and 1
st
Lien Credit Facility contains restrictive covenants as discussed more fully below. However, certain of these covenants will cease to apply if the Notes are rated investment grade by either Moody’s Investors Service, Inc. or Standard & Poor’s Ratings Group and there is no default or event of default under the Indenture.
1
st
Lien Credit Facility
The 1
st
Lien Credit Facility consists of the
$250,000,000
1
st
Lien Term Loan that matures in March 2019 and the
$40,000,000
Revolving Facility that matures in December 2018. The 1
st
Lien Credit Facility documents the primary terms of the 1
st
Lien Term Loan and the Revolving Facility. The Revolving Facility may be used for working capital and general corporate purposes (including letters of credit). At
September 25, 2016
, after consideration of letters of credit, we have approximately
$33,318,000
available for future use under the Revolving Facility.
Interest
Interest on the 1
st
Lien Term Loan, which has a principal balance of
$101,304,000
at
September 25, 2016
, accrues, at our option, at either (A) LIBOR plus
6.25%
(with a LIBOR floor of 1.0%) or (B)
5.25%
plus the higher of (i) the prime rate at the time, (ii) the federal funds rate plus
0.5%
, or (iii) one month LIBOR plus
1.0%
(with a floor of
2.0%
). Interest is payable quarterly.
The 1
st
Lien Term Loan was funded with an original issue discount of 2.0%, or
$5,000,000
, which is being amortized as interest expense over the life of the 1
st
Lien Term Loan.
Interest on the Revolving Facility, which has a principal balance of
zero
at
September 25, 2016
, accrues, at our option, at either (A) LIBOR plus
5.5%
, or (B)
4.5%
plus the higher of (i) the prime rate at the time, (ii) the federal funds rate plus
0.5%
, or (iii) one month LIBOR plus 1.0%.
Principal Payments
Quarterly principal payments of
$6,250,000
are required under the 1
st
Lien Term Loan, with additional payments required to be made based on 90% of excess cash flow of Lee Legacy ("Lee Legacy Excess Cash Flow"), as defined, or from proceeds of asset sales, which are not reinvested, as defined, from our subsidiaries other than Pulitzer Inc. ("Pulitzer") and its subsidiaries (collectively, the "Pulitzer Subsidiaries"). For excess cash flow calculation purposes Lee Legacy constitutes the business of the Company, including MNI, but excluding Pulitzer and TNI. We may voluntarily prepay principal amounts outstanding or reduce commitments under the 1
st
Lien Credit Facility at any time without premium or penalty, upon proper notice and subject to certain limitations as to minimum amounts of prepayments.
Quarterly, the Company is required to prepare a Lee Legacy Excess Cash Flow calculation, which is generally determined as the cash earnings of our subsidiaries other than the Pulitzer Subsidiaries and is adjusted for changes in working capital, capital spending, pension contributions, debt principal payments and income tax payments or refunds. Any excess cash flow as calculated is required to be paid to the 1
st
Lien lenders 45 days after the end of the quarter.
2016 payments made under the 1
st
Lien Term Loan are summarized by quarter and fiscal year as follows:
|
|
|
|
|
|
|
|
|
|
|
|
(Thousands of Dollars)
|
December 27
2015
|
|
March 27
2016
|
|
June 26
2016
|
|
September 25
2016
|
|
2016
|
|
|
|
|
|
|
|
Mandatory
|
6,250
|
|
6,250
|
|
6,250
|
|
6,250
|
|
25,000
|
|
Voluntary
|
5,000
|
|
27,000
|
|
3,000
|
|
6,000
|
|
41,000
|
|
Excess cash flow
|
—
|
|
1,135
|
|
6,441
|
|
5,992
|
|
13,568
|
|
|
11,250
|
|
34,385
|
|
15,691
|
|
18,242
|
|
79,568
|
|
In January 2016, we used
$20,000,000
of the proceeds received from an insurance settlement to reduce outstanding debt under our 1
st
Lien Term Loan. The majority of the remaining proceeds was used to repurchase Notes at a substantial discount.
Covenants and Other Matters
The 1
st
Lien Credit Facility requires that we comply with certain affirmative and negative covenants customary for financing of this nature, including a maximum total leverage ratio, which is only applicable to the Revolving Facility.
The 1
st
Lien Credit Facility restricts us from paying dividends on our Common Stock. These restrictions no longer apply if Lee Legacy leverage is below 3.25x before and after such payments. Further, the 1
st
Lien Credit Facility restricts or limits, among other things, subject to certain exceptions, the ability of the Company and its subsidiaries to: (i) incur indebtedness, (ii) enter into mergers, acquisitions and asset sales, (iii) incur or create liens and (iv) enter into transactions with certain affiliates. The 1
st
Lien Credit Facility contains various representations and warranties and may be terminated upon occurrence of certain events of default. The 1
st
Lien Credit Facility also contains cross-default provisions tied to the terms of each of the Indenture and 2
nd
Lien Term Loan.
2
nd
Lien Term Loan
The 2
nd
Lien Term Loan, which has a balance of
$130,863,000
at
September 25, 2016
, bears interest at a fixed annual rate of
12.0%
, payable quarterly, and matures in December 2022.
Principal Payments
There are no scheduled mandatory amortization payments required under the 2
nd
Lien Term Loan.
Quarterly, we are required to prepare a calculation of excess cash flow of the Pulitzer Subsidiaries ("Pulitzer Excess Cash Flow"). Pulitzer Excess Cash Flow is generally determined as the cash earnings of the Pulitzer Subsidiaries adjusted for changes in working capital, capital spending, pension contributions, debt principal payments and income tax payments. Pulitzer Excess Cash Flow also includes a deduction for interest costs incurred under the 2
nd
Lien Term Loan. Changes to settlement of certain intercompany costs between the Company and Pulitzer have been affected, with the net result being a reduction in the excess cash flows of Pulitzer from historically reported levels.
Under the 2
nd
Lien Term Loan, subject to certain other conditions, Pulitzer Excess Cash Flow must be used, (a) prior to March 31, 2017, to make an offer to the 2
nd
Lien Lenders to prepay amounts under the 2
nd
Lien Term Loan at par (which offer the 2
nd
Lien Lenders may accept or reject; if rejected, we may use the Pulitzer Excess Cash Flow to prepay amounts under the 1
st
Lien Credit Facility or repurchase Notes in the open market), and (b) after March 31, 2017, to pay such amounts under the 2
nd
Lien Term Loan at par. Pulitzer Excess Cash Flow payments are required to be offered and/or paid 45 days after the end of the quarter.
Pulitzer Excess Cash Flow and the related payments on the 2
nd
Lien Term Loan made in 2016 are as follows:
|
|
|
|
|
|
For the Period Ending
(Thousands of Dollars)
|
Pulitzer Excess Cash Flow
|
Payment Date
|
Payment Amount
(not rejected)
|
|
|
|
|
|
September 27, 2015
|
5,143
|
Q1 2016
|
3,326
|
|
December 27, 2015
|
2,864
|
Q2 2016
|
1,867
|
|
March 27, 2016
|
2,730
|
Q3 2016
|
525
|
|
June 26, 2016
|
1,583
|
Q4 2016
|
299
|
|
There was no Pulitzer Excess Cash Flow for the quarter ended September 25, 2016.
Subject to certain other conditions in the 2
nd
Lien Term Loan, the balance of the 2
nd
Lien Term Loan will be repaid at par from proceeds from asset sales by the Pulitzer Subsidiaries that are not reinvested. We repaid
$8,119,000
and
$5,000,000
of the 2
nd
Lien Term Loan, at par, due to the sale of assets at our Pulitzer properties in 2016 and 2015, respectively.
Voluntary payments under the 2
nd
Lien Term Loan are subject to call premiums as follows:
|
|
|
Period Beginning
|
Percentage of Principal Amount
|
|
|
March 31, 2014
|
112
|
March 31, 2017
|
106
|
March 31, 2018
|
103
|
March 31, 2019
|
100
|
Covenants and Other Matters
The 2
nd
Lien Term Loan requires that we comply with certain affirmative and negative covenants customary for financing of this nature, including the negative covenants under the 1
st
Lien Credit Facility discussed above. The 2
nd
Lien Term Loan contains various representations and warranties and may be terminated upon occurrence of certain events of default. The 2
nd
Lien Term Loan also contains cross-default provisions tied to the terms of the Indenture and 1
st
Lien Credit Facility.
In connection with the 2
nd
Lien Term Loan, we entered into a Warrant Agreement dated as of March 31, 2014 (the “Warrant Agreement”). Under the Warrant Agreement, certain affiliates or designees of the 2
nd
Lien Lenders received on March 31, 2014 their pro rata share of warrants to purchase, in cash, an initial aggregate of
6,000,000
shares of Common Stock, subject to adjustment pursuant to anti-dilution provisions (the “Warrants”). The Warrants represent, when fully exercised, approximately 10.1% of shares of Common Stock outstanding at March 30, 2014 on a fully diluted basis. The exercise price of the Warrants is
$4.19
per share.
The Warrant Agreement contains a cash settlement provision in the event of a change of control prior to March 31, 2018 as well as other provisions requiring the Warrants to be measured at fair value and included in other liabilities in our Consolidated Balance Sheets. We remeasure the fair value of the liability each reporting period, with changes
reported in other, net non-operating income (expense). The initial fair value of the Warrants was $
16,930,000
. See Note 8.
In connection with the issuance of the Warrants, we entered into a Registration Rights Agreement dated as of March 31, 2014 (the “Registration Rights Agreement”). The Registration Rights Agreement requires, among other matters, that we use our commercially reasonable efforts to maintain the effectiveness for certain specified periods of a shelf registration statement related to the shares of Common Stock to be issued upon exercise of the Warrants.
Security
The Notes and the 1
st
Lien Credit Facility are fully and unconditionally guaranteed on a joint and several first-priority basis by each of the Company's material domestic subsidiaries, excluding MNI, the Pulitzer Subsidiaries and TNI (the "Lee Legacy Assignors"), pursuant to a first lien guarantee and collateral agreement dated as of March 31, 2014 (the "1
st
Lien Guarantee and Collateral Agreement").
The Notes, the 1
st
Lien Credit Facility and the subsidiary guarantees are secured, subject to certain exceptions, priorities and limitations, by perfected security interests in all property and assets, including certain real estate, of the Lee Legacy Assignors, other than the capital stock of MNI and any property and assets of MNI (the “Lee Legacy Collateral”), on a first-priority basis, equally and ratably with all of the Lee Legacy Assignors' existing and future obligations. The Lee Legacy Collateral includes, among other things, equipment, inventory, accounts receivables, depository accounts, intellectual property and certain of their other tangible and intangible assets.
Also, the Notes and the 1
st
Lien Credit Facility are secured, subject to certain exceptions, priorities and limitations in the various agreements, by first-priority security interests in the capital stock of, and other equity interests owned by, the Lee Legacy Assignors (excluding the capital stock of MNI). The Notes and 1
st
Lien Credit Facility are subject to a Pari Passu Intercreditor Agreement dated March 31, 2014.
The Notes, the 1
st
Lien Credit Facility and the subsidiary guarantees are also secured, subject to permitted liens, by a second-priority security interest in the property and assets of the Pulitzer Subsidiaries that become subsidiary guarantors (the "Pulitzer Assignors") other than assets of or used in the operations or business of TNI (collectively, the “Pulitzer Collateral”). In June 2015 the Pulitzer Assignors became a party to the 1
st
Lien Guarantee and Collateral Agreement on a second lien basis.
Also, the Notes and the 1
st
Lien Credit Facility are secured, subject to certain exceptions, priorities, and limitations in the various agreements, by second-priority security interests in the capital stock of, and other equity interests in, the Pulitzer Assignors and Star Publishing’s interest in TNI.
The 2
nd
Lien Term Loan is fully and unconditionally guaranteed on a joint and several first-priority basis by the Pulitzer Assignors, pursuant to a Second Lien Guarantee and Collateral Agreement dated as of March 31, 2014 (the “2
nd
Lien Guarantee and Collateral Agreement”) among the Pulitzer Assignors and the 2
nd
Lien collateral agent.
Under the 2
nd
Lien Guarantee and Collateral Agreement, the Pulitzer Assignors have granted (i) first-priority security interests, subject to certain priorities and limitations in the various agreements, in the Pulitzer Collateral and (ii) have granted first-priority lien mortgages or deeds of trust covering certain real estate, as collateral for the payment and performance of their obligations under the 2
nd
Lien Term Loan.
Also, under the 2
nd
Lien Guarantee and Collateral Agreement, the Lee Legacy Assignors have granted (i) second-priority security interests, subject to certain priorities and limitations in the various agreements, in the Lee Legacy Collateral, and (ii) have granted second-priority lien mortgages or deeds of trust covering certain real estate, as collateral for the payment and performance of their obligations under the 2
nd
Lien Term Loan. Assets of, or used in the operations or business of, MNI are excluded.
The rights of each of the collateral agents with respect to the Lee Legacy Collateral and the Pulitzer Collateral are subject to customary intercreditor and intercompany agreements.
Other
In connection with the 2014 Refinancing, we capitalized $37,819,000 of debt financing costs. Amortization of debt financing costs totaled
$5,541,000
,
$4,693,000
and
$2,145,000
in 2016, 2015 and 2014 respectively. Amortization of
such costs is estimated to total
$4,176,000
in 2017,
$4,245,000
in 2018,
$4,044,000
in 2019,
$4,040,000
in 2020 and
$4,217,000
in 2021. At
September 25, 2016
we have
$26,271,000
of unamortized debt financing costs recorded in other long term assets in our Consolidated Balance Sheets.
Debt is summarized as follows:
|
|
|
|
|
|
|
|
|
|
Interest Rates
(%)
|
(Thousands of Dollars)
|
September 25
2016
|
|
September 27
2015
|
|
September 25
2016
|
|
|
|
|
Revolving Facility
|
—
|
|
—
|
|
5.65
|
1
st
Lien Term Loan
|
101,304
|
|
180,872
|
|
7.25
|
Notes
|
385,000
|
|
400,000
|
|
9.50
|
2
nd
Lien Term Loan
|
130,863
|
|
145,000
|
|
12.00
|
|
617,167
|
|
725,872
|
|
|
Less current maturities of long-term debt
|
25,070
|
|
25,000
|
|
|
Total long-term debt
|
592,097
|
|
700,872
|
|
|
At
September 25, 2016
, our weighted average cost of debt, excluding amortization of debt financing costs, is
9.7%
.
Aggregate minimum required maturities of debt excluding amounts required to be paid from excess cash flow requirements at
September 25, 2016
total $
25,070,000
for 2017, $
25,000,000
in 2018, $
51,234,000
in 2019,
zero
in 2020,
zero
in 2021 and $
515,863,000
thereafter.
Liquidity
At
September 25, 2016
, after consideration of letters of credit, we have approximately
$33,318,000
available for future use under our Revolving Facility. Including cash, our liquidity at
September 25, 2016
totals
$50,302,000
. 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
subject to a reduction for any amounts the Company may elect to use to repay our 1
st
Lien Term Loan and/or the Notes.
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, 1st Lien Credit Facility and 2nd Lien Term Loan, if an event of default, as defined, occurs and is not remedied. Many of those consequences are beyond our control. The occurrence of one or more events of default would give rise to the right of the applicable lender(s) to exercise their remedies under the Notes, 1st Lien Credit Facility and 2nd Lien Term Loan, respectively, including, without limitation, the right to accelerate all outstanding debt and take actions authorized in such circumstances under applicable collateral security documents.
Our ability to operate as a going concern is dependent on our ability to remain in compliance with debt covenants and to repay, refinance or amend our debt agreements as they become due. The Notes, 1st Lien Credit Facility and 2nd Lien Term Loan have only limited affirmative covenants with which we are required to maintain compliance. We are in compliance with our debt covenants at
September 25, 2016
.
5 PENSION PLANS
We have several non-contributory defined benefit pension plans that together cover selected employees. Benefits under the plans were generally based on salary and years of service. Effective in 2012, substantially all benefits are frozen and only a small amount of additional benefits are being accrued. Our liability and related expense for benefits under the plans are recorded over the service period of employees based upon annual actuarial calculations. Plan funding strategies are influenced by government regulations. Plan assets consist primarily of domestic and foreign corporate equity securities, government and corporate bonds, hedge fund investments and cash.
The net periodic cost (benefit) components of our pension plans are as follows:
|
|
|
|
|
|
|
|
|
|
(Thousands of Dollars)
|
2016
|
|
|
2015
|
|
|
2014
|
|
|
|
|
|
|
|
Service cost for benefits earned during the year
|
197
|
|
|
232
|
|
|
156
|
|
Interest cost on projected benefit obligation
|
6,061
|
|
|
8,122
|
|
|
7,996
|
|
Expected return on plan assets
|
(8,698
|
)
|
|
(9,863
|
)
|
|
(9,932
|
)
|
Amortization of net loss
|
2,397
|
|
|
1,682
|
|
|
423
|
|
Amortization of prior service benefit
|
(136
|
)
|
|
(136
|
)
|
|
(136
|
)
|
Net periodic pension cost (benefit)
|
(179
|
)
|
|
37
|
|
|
(1,493
|
)
|
Net periodic pension benefit of $56,000 is allocated to TNI in 2016, 2015 and 2014
Changes in benefit obligations and plan assets are as follows:
|
|
|
|
|
|
|
(Thousands of Dollars)
|
2016
|
|
|
2015
|
|
|
|
|
|
Benefit obligation, beginning of year
|
193,751
|
|
|
199,197
|
|
Service cost
|
197
|
|
|
232
|
|
Interest cost
|
6,061
|
|
|
8,122
|
|
Actuarial loss (gain)
|
13,630
|
|
|
(2,543
|
)
|
Benefits paid
|
(11,481
|
)
|
|
(11,257
|
)
|
Benefit obligation, end of year
|
202,158
|
|
|
193,751
|
|
Fair value of plan assets, beginning of year:
|
143,288
|
|
|
151,013
|
|
Actual return on plan assets
|
14,819
|
|
|
1,817
|
|
Benefits paid
|
(11,481
|
)
|
|
(11,257
|
)
|
Administrative expenses paid
|
(2,099
|
)
|
|
(1,862
|
)
|
Employer contributions
|
4,604
|
|
|
3,577
|
|
Fair value of plan assets, end of year
|
149,131
|
|
|
143,288
|
|
Funded status - benefit obligation in excess of plan assets
|
53,027
|
|
|
50,463
|
|
Disaggregated amounts recognized in the Consolidated Balance Sheets are as follows:
|
|
|
|
|
|
|
(Thousands of Dollars)
|
September 25
2016
|
|
|
September 27
2015
|
|
|
|
|
|
Pension obligations
|
53,027
|
|
|
50,463
|
|
Accumulated other comprehensive loss (before income taxes)
|
(54,862
|
)
|
|
(47,515
|
)
|
Amounts recognized in accumulated other comprehensive income (loss) are as follows:
|
|
|
|
|
|
|
(Thousands of Dollars)
|
September 25
2016
|
|
|
September 27
2015
|
|
|
|
|
|
Unrecognized net actuarial loss
|
(55,241
|
)
|
|
(48,031
|
)
|
Unrecognized prior service benefit
|
379
|
|
|
516
|
|
|
(54,862
|
)
|
|
(47,515
|
)
|
We expect to recognize
$2,947,000
and
$137,000
of unrecognized net actuarial loss and unrecognized prior service benefit, respectively, in net periodic pension cost in 2017.
The accumulated benefit obligation for the plans total
$202,158,000
at
September 25, 2016
and
$193,751,000
at
September 27, 2015
. The projected benefit obligation, accumulated benefit obligation and fair value of plan assets for the pension plans with accumulated benefit obligations in excess of plan assets are
$202,158,000
,
$202,158,000
and
$149,131,000
, respectively, at
September 25, 2016
.
Assumptions
Weighted-average assumptions used to determine benefit obligations are as follows:
|
|
|
|
|
(Percent)
|
September 25
2016
|
|
September 27
2015
|
|
|
|
|
Discount rate
|
3.5
|
|
4.2
|
Weighted-average assumptions used to determine net periodic benefit cost are as follows:
|
|
|
|
|
|
|
|
|
|
(Percent)
|
2016
|
|
|
2015
|
|
|
2014
|
|
|
|
|
|
|
|
Discount rate
|
4.2
|
|
|
4.2
|
|
|
4.7
|
|
Expected long-term return on plan assets
|
6.3
|
|
|
6.8
|
|
|
7.0
|
|
For 2016, the expected long-term return on plan assets is
5.5%
. The assumptions related to the expected long-term return on plan assets are developed through an analysis of historical market returns, current market conditions and composition of plan assets.
Plan Assets
The primary objective of our investment strategy is to satisfy our pension obligations at a reasonable cost. Assets are actively invested to balance real growth of capital through appreciation and reinvestment of dividend and interest income and safety of invested funds.
Our investment policy outlines the governance structure for decision making, sets investment objectives and restrictions and establishes criteria for selecting and evaluating investment managers. The use of derivatives is strictly prohibited, except on a case-by-case basis where the manager has a proven capability, and only to hedge quantifiable risks such as exposure to foreign currencies. An investment committee, consisting of certain of our executives and supported by independent consultants, is responsible for monitoring compliance with the investment policy. Assets are periodically redistributed to maintain the appropriate policy allocation.
The weighted-average asset allocation of our pension assets is as follows:
|
|
|
|
|
|
(Percent)
|
Policy Allocation
|
|
Actual Allocation
|
Asset Class
|
September 25 2016
|
|
September 25
2016
|
September 27
2015
|
|
|
|
|
Equity securities
|
50
|
|
50
|
46
|
Debt securities
|
35
|
|
33
|
37
|
TIPS
|
5
|
|
4
|
4
|
Hedge fund investments
|
10
|
|
11
|
11
|
Cash and cash equivalents
|
—
|
|
2
|
2
|
Plan assets include no Company securities. Assets include cash and cash equivalents and receivables from time to time due to the need to reallocate assets within policy guidelines.
Fair Value Measurements
The fair value hierarchy of pension assets at
September 25, 2016
is as follows:
|
|
|
|
|
|
|
|
(Thousands of Dollars)
|
NAV
|
|
Level 1
|
|
Level 2
|
|
|
|
|
|
Cash and cash equivalents
|
—
|
|
2,757
|
|
—
|
|
Domestic equity securities
|
—
|
|
9,669
|
|
49,809
|
|
International equity securities
|
—
|
|
6,773
|
|
7,755
|
|
TIPS
|
—
|
|
6,883
|
|
—
|
|
Debt securities
|
14,558
|
|
25,612
|
|
9,648
|
|
Hedge fund investments
|
17,531
|
|
—
|
|
—
|
|
The fair value hierarchy of pension assets at
September 27, 2015
is as follows:
|
|
|
|
|
|
|
|
(Thousands of Dollars)
|
NAV
|
|
Level 1
|
|
Level 2
|
|
|
|
|
|
Cash and cash equivalents
|
—
|
|
2,407
|
|
—
|
|
Domestic equity securities
|
—
|
|
8,153
|
|
44,470
|
|
International equity securities
|
—
|
|
6,286
|
|
7,389
|
|
TIPS
|
—
|
|
6,450
|
|
—
|
|
Debt securities
|
17,246
|
|
31,196
|
|
4,124
|
|
Hedge fund investments
|
17,344
|
|
—
|
|
—
|
|
There were no purchases, sales or transfers of assets classified as Level 3 in 2016 or 2015.
Cash Flows
Based on our forecast at
September 25, 2016
, we do not expect to make contributions to our pension trust in 2017.
We anticipate future benefit payments to be paid from the pension trust as follows:
|
|
|
|
(Thousands of Dollars)
|
|
|
|
2017
|
11,803
|
|
2018
|
11,735
|
|
2019
|
11,757
|
|
2020
|
11,728
|
|
2021
|
11,735
|
|
2022-2026
|
58,487
|
|
Other Plans
We are obligated under an unfunded plan to provide fixed retirement payments to certain former employees. The plan is frozen and no additional benefits are being accrued. The accrued liability under the plan is
$2,232,000
and
$2,337,000
at
September 25, 2016
and
September 27, 2015
, respectively, of which
$113,000
and
$278,000
is included in compensation and other accrued liabilities in the Consolidated Balance Sheet at
September 25, 2016
and
September 27, 2015
, respectively.
6 POSTRETIREMENT AND POSTEMPLOYMENT BENEFITS
We provide retiree medical and life insurance benefits under postretirement plans at several of our operating locations. The level and adjustment of participant contributions vary depending on the specific plan. In addition, St. Louis Post Dispatch LLC ("PD LLC") provides postemployment disability benefits to certain employee groups prior to retirement
.
Our liability and related expense for benefits under the postretirement plans are recorded over the service period of active employees based upon annual actuarial calculations. We accrue postemployment disability benefits when it
becomes probable that such benefits will be paid and when sufficient information exists to make reasonable estimates of the amounts to be paid.
The net periodic postretirement benefit cost (benefit) components for our postretirement plans are as follows:
|
|
|
|
|
|
|
|
|
|
(Thousands of Dollars)
|
2016
|
|
|
2015
|
|
|
2014
|
|
|
|
|
|
|
|
Service cost for benefits earned during the year
|
63
|
|
|
76
|
|
|
596
|
|
Interest cost on projected benefit obligation
|
623
|
|
|
922
|
|
|
911
|
|
Expected return on plan assets
|
(1,322
|
)
|
|
(1,445
|
)
|
|
(1,483
|
)
|
Amortization of net actuarial gain
|
(1,093
|
)
|
|
(1,386
|
)
|
|
(1,819
|
)
|
Amortization of prior service benefit
|
(1,459
|
)
|
|
(1,459
|
)
|
|
(1,459
|
)
|
Net periodic postretirement benefit
|
(3,188
|
)
|
|
(3,292
|
)
|
|
(3,254
|
)
|
Changes in benefit obligations and plan assets are as follows:
|
|
|
|
|
|
|
(Thousands of Dollars)
|
2016
|
|
|
2015
|
|
|
|
|
|
Benefit obligation, beginning of year
|
23,812
|
|
|
25,506
|
|
Service cost
|
63
|
|
|
76
|
|
Interest cost
|
623
|
|
|
922
|
|
Actuarial loss (gain)
|
(773
|
)
|
|
(1,149
|
)
|
Benefits paid, net of premiums received
|
(1,434
|
)
|
|
(1,541
|
)
|
Medicare Part D subsidies
|
220
|
|
|
(2
|
)
|
Benefit obligation, end of year
|
22,511
|
|
|
23,812
|
|
Fair value of plan assets, beginning of year
|
30,123
|
|
|
32,881
|
|
Actual return on plan assets
|
1,085
|
|
|
(547
|
)
|
Employer contributions
|
563
|
|
|
745
|
|
Benefits paid, net of premiums and Medicare Part D subsidies received
|
(1,213
|
)
|
|
(1,544
|
)
|
Benefits paid for active employees
|
(1,510
|
)
|
|
(1,412
|
)
|
Allocation to active medical plans
|
(4,925
|
)
|
|
—
|
|
Fair value of plan assets at measurement date
|
24,123
|
|
|
30,123
|
|
Funded status - benefit obligation less than plan assets
|
(1,612
|
)
|
|
(6,311
|
)
|
The accumulated benefit obligation for plans with benefit obligations in excess of plan assets included in the table above was
$7,527,000
at
September 25, 2016
. These plans are unfunded.
Disaggregated amounts recognized in the Consolidated Balance Sheets are as follows:
|
|
|
|
|
|
|
(Thousands of Dollars)
|
September 25
2016
|
|
|
September 27
2015
|
|
|
|
|
|
Non-current assets
|
9,138
|
|
|
13,420
|
|
Postretirement benefit obligations
|
7,527
|
|
|
7,109
|
|
Accumulated other comprehensive income (before income tax benefit)
|
19,026
|
|
|
22,551
|
|
Amounts recognized in accumulated other comprehensive income are as follows:
|
|
|
|
|
|
|
(Thousands of Dollars)
|
September 25
2016
|
|
|
September 27
2015
|
|
|
|
|
|
Unrecognized net actuarial gain
|
11,089
|
|
|
13,155
|
|
Unrecognized prior service benefit
|
7,937
|
|
|
9,396
|
|
|
19,026
|
|
|
22,551
|
|
We expect to recognize
$1,016,000
and
$1,459,000
of unrecognized net actuarial gain and unrecognized prior service benefit, respectively, in net periodic postretirement benefit in 2017.
Assumptions
Weighted-average assumptions used to determine post retirement benefit obligations are as follows:
|
|
|
|
|
(Percent)
|
September 25
2016
|
|
September 27
2015
|
|
|
|
|
Discount rate
|
3.1
|
|
3.7
|
Expected long-term return on plan assets
|
4.5
|
|
4.5
|
The assumptions related to the expected long-term return on plan assets are developed through an analysis of historical market returns, current market conditions and composition of plan assets.
Weighted-average assumptions used to determine net periodic benefit cost are as follows:
|
|
|
|
|
|
|
|
|
|
(Percent)
|
2016
|
|
|
2015
|
|
|
2014
|
|
|
|
|
|
|
|
Discount rate
|
3.7
|
|
|
3.7
|
|
|
4.0
|
|
Expected long-term return on plan assets
|
4.5
|
|
|
4.5
|
|
|
4.5
|
|
Assumed health care cost trend rates are as follows:
|
|
|
|
|
(Percent)
|
September 25
2016
|
|
September 27
2015
|
|
|
|
|
Health care cost trend rates
|
9.0
|
|
9.0
|
Rate to which the cost trend rate is assumed to decline (the “Ultimate Trend Rate”)
|
4.5
|
|
4.5
|
Year in which the rate reaches the Ultimate Trend Rate
|
2025
|
|
2025
|
Administrative costs related to indemnity plans are assumed to increase at the health care cost trend rates noted above.
Assumed health care cost trend rates have an effect on the amounts reported for the postretirement plans. A one percentage point change in assumed health care cost trend rates would have the following annualized effects on reported amounts for 2016:
|
|
|
|
|
|
|
|
One Percentage Point
|
|
(Thousands of Dollars)
|
Increase
|
|
|
Decrease
|
|
|
|
|
|
Effect on net periodic postretirement benefit
|
20
|
|
|
(18
|
)
|
Effect on postretirement benefit obligation
|
697
|
|
|
(629
|
)
|
Plan Assets
Assets of the retiree medical plan are invested in a master trust. The master trust also pays benefits of active employee medical plans for the same union employees. In 2016, it was determined that the assets of the retiree medical plan should be allocated among all plans that it funds and as a result, we allocated
$4,925,000
of the retiree medical plan assets to the active medical plans during the year. The fair value of master trust assets allocated to the retiree medical plan is
$24,123,000
at September 25, 2016. The fair value of master trust assets allocated to the active employee medical plans at September 25, 2016 is
$4,925,000
.
The primary objective of our investment strategy is to satisfy our postretirement obligations at a reasonable cost. Assets are actively invested to balance real growth of capital through appreciation and reinvestment of dividend and interest income and safety of invested funds.
Our investment policy outlines the governance structure for decision making, sets investment objectives and restrictions, and establishes criteria for selecting and evaluating investment managers. The use of derivatives is strictly prohibited, except on a case-by-case basis where the manager has a proven capability, and only to hedge quantifiable risks such as exposure to foreign currencies. An investment committee, consisting of certain of our executives and supported by independent consultants, is responsible for monitoring compliance with the investment policy. Assets are periodically redistributed to maintain the appropriate policy allocation.
The weighted-average asset allocation of our postretirement assets is as follows:
|
|
|
|
|
|
(Percent)
|
Policy Allocation
|
|
Actual Allocation
|
Asset Class
|
September 25 2016
|
|
September 25
2016
|
September 27
2015
|
|
|
|
|
Equity securities
|
20
|
|
22
|
19
|
Debt securities
|
70
|
|
65
|
68
|
Hedge fund investment
|
10
|
|
11
|
10
|
Cash and cash equivalents
|
—
|
|
2
|
3
|
Plan assets include no Company securities. Assets include cash and cash equivalents and receivables from time to time due to the need to reallocate assets within policy guidelines.
Fair Value Measurements
The fair value hierarchy of postretirement assets at
September 25, 2016
is as follows:
|
|
|
|
|
|
|
|
(Thousands of Dollars)
|
NAV
|
|
Level 1
|
|
Level 2
|
|
|
|
|
|
Cash and cash equivalents
|
—
|
|
518
|
|
—
|
|
Domestic equity securities
|
—
|
|
3,342
|
|
1,572
|
|
International equity securities
|
—
|
|
695
|
|
898
|
|
Debt securities
|
—
|
|
18,840
|
|
—
|
|
Hedge fund investment
|
3,182
|
|
—
|
|
—
|
|
The fair value hierarchy of postretirement assets at
September 27, 2015
is as follows:
|
|
|
|
|
|
|
|
(Thousands of Dollars)
|
NAV
|
|
Level 1
|
|
Level 2
|
|
|
|
|
|
Cash and cash equivalents
|
—
|
|
790
|
|
—
|
|
Domestic equity securities
|
—
|
|
2,896
|
|
1,372
|
|
International equity securities
|
—
|
|
645
|
|
857
|
|
Debt securities
|
—
|
|
13,910
|
|
6,581
|
|
Hedge fund investment
|
3,072
|
|
—
|
|
—
|
|
There were no purchases, sales or transfers of assets classified as Level 3 in 2016 or 2015.
Cash Flows
Based on our forecast at
September 25, 2016
, we do not expect to contribute to our postretirement plans in 2017.
The Medicare Prescription Drug, Improvement and Modernization Act of 2003 (the “Modernization Act”) introduced a prescription drug benefit under Medicare (“Medicare Part D”) and a federal subsidy to sponsors of retiree health care benefit plans (“Subsidy”) that provide a benefit at least actuarially equivalent (as that term is defined in the Modernization Act) to Medicare Part D. We concluded we qualify for the Subsidy under the Modernization Act since the prescription drug benefits provided under our postretirement health care plans generally require lower premiums from covered retirees and have lower deductibles than the benefits provided in Medicare Part D and, accordingly, are actuarially equivalent to or better than, the benefits provided under the Modernization Act.
We anticipate future benefit payments to be paid either with future contributions to the plan or directly from plan assets, as follows:
|
|
|
|
|
|
|
|
|
|
(Thousands of Dollars)
|
Gross
Payments
|
|
|
Less
Medicare
Part D
Subsidy
|
|
|
Net
Payments
|
|
|
|
|
|
|
|
2017
|
3,600
|
|
|
(200
|
)
|
|
3,400
|
|
2018
|
1,870
|
|
|
(210
|
)
|
|
1,660
|
|
2019
|
1,910
|
|
|
(210
|
)
|
|
1,700
|
|
2020
|
1,880
|
|
|
(210
|
)
|
|
1,670
|
|
2021
|
1,790
|
|
|
(200
|
)
|
|
1,590
|
|
2022-2026
|
7,910
|
|
|
(870
|
)
|
|
7,040
|
|
Postemployment Plan
Our postemployment benefit obligation, representing certain disability benefits
,
is
$3,190,000
at
September 25, 2016
and
$3,951,000
at
September 27, 2015
.
7 OTHER RETIREMENT PLANS
Substantially all of our employees are eligible to participate in a qualified defined contribution retirement plan. We also have a non-qualified plan for employees whose incomes exceed qualified plan limits.
Retirement and compensation plan costs, including costs related to stock based compensation and interest on deferred compensation costs, charged to continuing operations are
$4,616,000
in 2016,
$4,125,000
in 2015 and
$3,963,000
in 2014.
Multiemployer Pension Plans
We contribute to three multiemployer defined benefit pension plans under the terms of collective-bargaining agreements ("CBAs"). The risks of participating in these multiemployer plans are different from our company-sponsored plans in the following aspects:
|
|
•
|
We do not manage the plan investments or any other aspect of plan administration;
|
|
|
•
|
Assets contributed to the multiemployer plan by one employer may be used to provide benefits to employees of other participating employers;
|
|
|
•
|
If a participating employer stops contributing to the plan, the unfunded obligations of the plan may be borne by the remaining participating employers; and
|
|
|
•
|
If we choose to stop participating in one or more multiemployer plans, we may be required to fund over time an amount based on the unfunded status of the plan at the time of withdrawal, referred to as "withdrawal liability".
|
Information related to these plans is outlined in the table below:
|
|
|
|
|
|
|
|
|
|
|
|
|
(Thousands of Dollars)
|
Zone Status September 30
|
Funding Improvement Plan/Rehabilitation Plan Status
|
Contributions
|
|
|
|
Pension Plan
|
2016
|
2015
|
Status
|
2016
|
|
2015
|
|
2014
|
|
Surcharge Imposed
|
Expiration Dates of CBAs
|
|
|
|
|
|
|
|
|
|
GCIU- Employer Retirement Fund
91-6024903/001
|
Red
|
Red
|
Implemented
|
138
|
|
145
|
|
265
|
|
No
|
1/13/2017
|
|
|
|
|
|
|
|
8/31/2017
|
CWA/ITU Negotiated Pension Plan
13-6212879/001
|
Red
|
Red
|
Implemented
|
108
|
|
122
|
|
133
|
|
No
|
5/12/2017
|
|
|
|
|
|
|
|
12/31/2017
|
|
|
|
|
|
|
|
4/1/2017
|
|
|
|
|
|
|
|
8/31/2017
|
District No. 9, International Association of Machinists and Aerospace Workers Pension Trust
43-0736847/001
|
Green
|
Green
|
N/A
|
31
|
|
34
|
|
37
|
|
N/A
|
2/28/2017
|
Multiemployer plans in red zone status are generally less well funded than plans in green zone status.
One of our enterprise's bargaining units withdrew from representation, and as a result we are subject to a future claim from the multiemployer pension plan for a withdrawal liability. The amount and timing of such liability will be dependent on actions taken, or not taken, by the Company and the pension plan, as well as the future investment performance and funding status of the pension plan. Any withdrawal liability determined to be due under this plan will be funded over a period of 20 years.
8 COMMON STOCK, CLASS B COMMON STOCK AND PREFERRED SHARE PURCHASE RIGHTS
Common Stock
The par value of our Common Stock was changed from
$2.00
per share to
$0.01
per share effective January 30, 2012. Holders of our previous 2
nd
lien agreement shared in the issuance of
6,743,640
shares of our Common Stock, an amount equal to
13%
of outstanding shares on a pro forma basis as of January 30, 2012.
In connection with the currently outstanding 2nd Lien Term Loan, we entered into the Warrant Agreement. Under the Warrant Agreement, certain affiliates or designees of the 2nd Lien Lenders received on March 31, 2014 their pro rata share of Warrants to purchase, in cash,
6,000,000
shares of Common Stock, subject to adjustment pursuant to anti-dilution provisions. The Warrants represent, when fully exercised, approximately
10.1%
of shares of Common Stock outstanding at March 30, 2014 on a fully diluted basis. The exercise price of the Warrants is
$4.19
per share.
The Warrant Agreement contains a cash settlement provision in the event of a change of control prior to March 31, 2018, as well as other provisions requiring the Warrants be measured at fair value and classified as other liabilities in our Consolidated Balance Sheets. We remeasure the liability to fair value each reporting period, with changes reported in other non-operating income (expense). The initial fair value of the Warrants was $
16,930,000
. At
September 25, 2016
, the fair value of the Warrants is
$11,760,000
.
In connection with the issuance of the Warrants, we entered into the Registration Rights Agreement. The Registration Rights Agreement requires, among other matters, that we use our commercially reasonable efforts to file and maintain the effectiveness for certain specified periods of a shelf registration statement covering the shares of Common Stock upon exercise of the Warrants.
Class B Common Stock
In 1986, one share of Class B Common Stock was issued as a dividend for each share of Common Stock held by stockholders of record at the time. The transfer of Class B Common Stock was restricted. As originally anticipated, the number of outstanding Class B shares decreased over time through trading and reached the sunset level of
5,600,000
shares in March 2011. In March 2011, in accordance with the sunset provisions established in 1986, we effected conversion of all outstanding shares of Class B Common Stock to Common Stock. As a result, all stockholders have one vote per share on all future matters. Class B shares formerly had ten votes per share.
Preferred Share Purchase Rights
In 1998, the Board of Directors adopted a Shareholder Rights Plan (the “Rights Plan”). Under the Rights Plan, the Board of Directors declared a dividend of one Preferred Share Purchase Right (“Right”) for each outstanding share of our Common Stock and Class B Common Stock (collectively “Common Shares”). Rights are attached to, and automatically trade with, our Common Shares. In 2008, the Board of Directors approved an amendment to the Rights Plan. The amendment increased the beneficial ownership threshold to
25%
from
20%
for stockholders purchasing Common Stock for passive investment only and decreased the threshold to
15%
for all other investors. In addition, the amendment extended the expiration of the Rights Plan to May 31, 2018 from May 31, 2008.
Rights become exercisable only in the event that any person or group of affiliated persons other than a passive investor becomes a holder of
15%
or more of our outstanding Common Shares, or commences a tender or exchange offer which, if consummated, would result in that person or group of affiliated persons owning at least
15%
of our outstanding Common Shares. Once the Rights become exercisable, they entitle all other stockholders to purchase, by payment of a
$150
exercise price, one one-thousandth of a share of Series A Participating Preferred Stock, subject to adjustment, with a value of twice the exercise price. In addition, at any time after a
15%
position is acquired and prior to the acquisition of a
50%
position, the Board of Directors may require, in whole or in part, each outstanding Right (other than Rights held by the acquiring person or group of affiliated persons) to be exchanged for one share of Common Stock or one one-thousandth of a share of Series A Preferred Stock. The Rights may be redeemed at a price of
$0.001
per Right at any time prior to their expiration.
9 STOCK OWNERSHIP PLANS
Total non-cash stock compensation expense
is
$2,306,000
,
$1,971,000
and
$1,481,000
, in 2016, 2015 and 2014, r
espectively.
At
September 25, 2016
, we have reserved
4,460,214
shares of Common Stock for issuance to employees under an incentive and nonstatutory stock option and restricted stock plan approved by stockholders. At
September 25, 2016
,
2,762,549
shares are available for granting of non-qualified stock options or issuance of restricted Common Stock.
Stock Options
Options are granted at a price equal to the fair market value on the date of the grant and are exercisable, upon vesting, over a ten-year period.
A summary of stock option activity is as follows:
|
|
|
|
|
|
|
|
|
|
(Thousands of Shares)
|
2016
|
|
|
2015
|
|
|
2014
|
|
|
|
|
|
|
|
Under option, beginning of year
|
1,871
|
|
|
2,333
|
|
|
2,769
|
|
Granted
|
—
|
|
|
—
|
|
|
15
|
|
Exercised
|
(74
|
)
|
|
(289
|
)
|
|
(342
|
)
|
Canceled
|
(99
|
)
|
|
(173
|
)
|
|
(109
|
)
|
Under option, end of year
|
1,698
|
|
|
1,871
|
|
|
2,333
|
|
Exercisable, end of year
|
1,692
|
|
|
1,840
|
|
|
1,786
|
|
Weighted average prices of stock options are as follows:
|
|
|
|
|
|
|
|
|
|
(Dollars)
|
2016
|
|
|
2015
|
|
|
2014
|
|
|
|
|
|
|
|
Granted
|
—
|
|
|
—
|
|
|
2.99
|
|
Exercised
|
1.17
|
|
|
1.27
|
|
|
2.01
|
|
Cancelled
|
8.78
|
|
|
5.02
|
|
|
10.98
|
|
Under option, end of year
|
2.42
|
|
|
2.71
|
|
|
2.70
|
|
The following assumptions were used to estimate the fair value of option awards:
|
|
|
|
|
|
|
|
|
|
|
|
|
2014
|
|
|
|
|
|
|
|
Volatility
(Percent)
|
|
|
|
|
91
|
|
Risk-free interest rate
(Percent)
|
|
|
|
|
1.24
|
|
Expected term
(Years)
|
|
|
|
|
4.5
|
|
Estimated fair value
(Dollars)
|
|
|
|
|
2.02
|
|
A summary of stock options outstanding at
September 25, 2016
is as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(Dollars)
|
Options Outstanding
|
|
|
Options Exercisable
|
|
Range of
Exercise
Prices
|
Number
Outstanding
(Thousands)
|
|
Weighted Average
Remaining Contractual
Life
(Years)
|
|
Weighted
Average
Exercise Price
|
|
|
Number
Exercisable
(Thousands)
|
|
|
Weighted
Average
Exercise Price
|
|
|
|
|
|
|
|
|
|
|
1 - 5
|
1,659
|
|
4.5
|
|
1.80
|
|
|
1,653
|
|
|
1.80
|
|
25 - 50
|
39
|
|
0.1
|
|
28.72
|
|
|
39
|
|
|
28.72
|
|
|
1,698
|
|
4.4
|
|
2.42
|
|
|
1,692
|
|
|
2.42
|
|
Total unrecognized compensation expense for unvested stock options at
September 25, 2016
is
$1,000
, which will be recognized over a weighted average period of
0.1
years.
The aggregate intrinsic value of stock options outstanding at
September 25, 2016
is
$3,227,000
.
Restricted Common Stock
A summary of restricted Common Stock activity follows:
|
|
|
|
|
|
|
|
|
|
(Thousands of Shares)
|
2016
|
|
|
2015
|
|
|
2014
|
|
|
|
|
|
|
|
Outstanding, beginning of year
|
1,546
|
|
|
1,291
|
|
|
500
|
|
Granted
|
1,018
|
|
|
786
|
|
|
817
|
|
Vested
|
(63
|
)
|
|
(500
|
)
|
|
—
|
|
Forfeited
|
(39
|
)
|
|
(31
|
)
|
|
(26
|
)
|
Outstanding, end of year
|
2,462
|
|
|
1,546
|
|
|
1,291
|
|
Weighted average grant date fair values of restricted Common Stock are as follows:
|
|
|
|
|
|
|
|
|
|
(Dollars)
|
2016
|
|
|
2015
|
|
|
2014
|
|
|
|
|
|
|
|
Outstanding, beginning of year
|
3.62
|
|
|
2.72
|
|
|
1.31
|
|
Granted
|
1.49
|
|
|
3.62
|
|
|
3.61
|
|
Vested
|
3.39
|
|
|
1.31
|
|
|
—
|
|
Forfeited
|
3.31
|
|
|
3.62
|
|
|
3.61
|
|
Outstanding, end of year
|
2.74
|
|
|
3.62
|
|
|
2.72
|
|
Total unrecognized compensation expense for unvested restricted Common Stock at
September 25, 2016
is
$2,260,000
, which will be recognized over a weighted average period of
1.4
years.
In December 2016, we issued
832,500
shares of restricted Common Stock to employees. The grant date fair value was
$3.35
per share. All restrictions lapse in December 2019 with respect to these shares.
Stock Purchase Plans
We have
270,000
shares of Common Stock available for issuance pursuant to our Employee Stock Purchase Plan. We also have
8,700
shares of Common Stock available for issuance under our Supplemental Employee Stock Purchase Plan. There has been no activity under these plans in 2016, 2015 or 2014.
10 INCOME TAXES
Income tax expense consists of the following:
|
|
|
|
|
|
|
|
|
|
(Thousands of Dollars)
|
2016
|
|
|
2015
|
|
|
2014
|
|
|
|
|
|
|
|
Current:
|
|
|
|
|
|
Federal
|
1,241
|
|
|
720
|
|
|
451
|
|
State
|
379
|
|
|
(92
|
)
|
|
(571
|
)
|
Deferred
|
20,556
|
|
|
12,966
|
|
|
6,410
|
|
|
22,176
|
|
|
13,594
|
|
|
6,290
|
|
Income tax expense differs from the amounts computed by applying the U.S. federal income tax rate to income before income taxes. The reasons for these differences are as follows:
|
|
|
|
|
|
|
|
|
|
(Percent of Income (Loss) Before Income Taxes)
|
2016
|
|
|
2015
|
|
|
2014
|
|
|
|
|
|
|
|
Computed “expected” income tax expense (benefit)
|
35.0
|
|
|
35.0
|
|
|
35.0
|
|
State income tax expense (benefit), net of federal tax impact
|
3.8
|
|
|
(7.1
|
)
|
|
11.0
|
|
Net income of associated companies taxed at dividend rates
|
(2.6
|
)
|
|
(5.2
|
)
|
|
(9.3
|
)
|
Resolution of tax matters
|
3.2
|
|
|
0.5
|
|
|
3.6
|
|
Non-deductible expenses
|
1.0
|
|
|
2.8
|
|
|
7.9
|
|
Valuation allowance
|
(7.7
|
)
|
|
15.9
|
|
|
(4.5
|
)
|
Warrant valuation
|
5.0
|
|
|
(6.1
|
)
|
|
(15.1
|
)
|
CODI tax attribute reduction
|
—
|
|
|
—
|
|
|
18.3
|
|
Other
|
0.4
|
|
|
0.1
|
|
|
(1.8
|
)
|
|
38.1
|
|
|
35.9
|
|
|
45.1
|
|
Net deferred income tax liabilities consist of the following components:
|
|
|
|
|
|
|
(Thousands of Dollars)
|
September 25
2016
|
|
|
September 27
2015
|
|
|
|
|
|
Deferred income tax liabilities:
|
|
|
|
Property and equipment
|
(33,549
|
)
|
|
(35,593
|
)
|
Identified intangible assets
|
(43,745
|
)
|
|
(51,380
|
)
|
Long-term debt
|
(16,158
|
)
|
|
(15,176
|
)
|
|
(93,452
|
)
|
|
(102,149
|
)
|
Deferred income tax assets:
|
|
|
|
|
Investments
|
12,138
|
|
|
17,521
|
|
Accrued compensation
|
6,391
|
|
|
4,551
|
|
Allowance for doubtful accounts and losses on loans
|
1,273
|
|
|
1,184
|
|
Pension and postretirement benefits
|
6,505
|
|
|
5,719
|
|
Net operating loss carryforwards
|
52,604
|
|
|
81,228
|
|
Accrued expenses
|
577
|
|
|
572
|
|
Other
|
3,634
|
|
|
1,720
|
|
|
83,122
|
|
|
112,495
|
|
Valuation allowance
|
(27,978
|
)
|
|
(32,483
|
)
|
Net deferred income tax liabilities
|
(38,308
|
)
|
|
(22,137
|
)
|
All deferred taxes are categorized as non-current because the Company elected to early adopt ASU 2015-17. See Note 16, Impact of Recently Adopted Accounting Standards.
A reconciliation of 2016 and 2015 changes in gross unrecognized tax benefits is as follows:
|
|
|
|
|
|
|
(Thousands of Dollars)
|
2016
|
|
|
2015
|
|
|
|
|
|
Balance, beginning of year
|
11,799
|
|
|
13,520
|
|
Increases (decreases) in tax positions for prior years
|
46
|
|
|
(1,861
|
)
|
Increases in tax positions for the current year
|
1,600
|
|
|
1,098
|
|
Lapse in statute of limitations
|
(914
|
)
|
|
(958
|
)
|
Balance, end of year
|
12,531
|
|
|
11,799
|
|
Approximately
$8,025,000
and
$7,475,000
of the gross unrecognized tax benefit balances for 2016 and 2015 respectively, relate to state net operating losses which are netted against deferred taxes on our balance sheet. The total amount of unrecognized tax benefits that, if recognized, would impact the effective tax rate was
$8,213,000
at
September 25, 2016
. We recognize interest and penalties related to unrecognized tax benefits as a component of income tax expense. The amount of accrued interest related to unrecognized tax benefits was, net of tax,
$317,000
at
September 25, 2016
and
$330,000
at
September 27, 2015
. There were no amounts provided for penalties at
September 25, 2016
or
September 27, 2015
.
No significant income tax audits are currently in progress and the Company has not received any notices of intent to audit. Certain of the Company's state income tax returns for the year ended September 30, 2012 are open for examination. The Federal and remaining state returns are open beginning with the September 29, 2013 year.
At
September 25, 2016
, we had approximately
$57,392,000
of state net operating loss ("NOL") tax benefits that expire between
2017
and
2036
. At
September 25, 2016
and
September 27, 2015
the Company had deferred income tax assets related to state NOL carryforwards of
$37,305,000
and $34,623,000, respectively, a portion of which are offset by a valuation allowances. In 2016, the Company reduced its state valuation allowance by $3,655,000 based on projected future earnings in the carryforward periods. In 2015, the Company recorded an additional valuation allowance of $6,043,000 due to increases in cumulative losses and other deferred tax assets not realizable within their carryforward periods.
We reported a Federal NOL of approximately
$165,489,000
for our 2014 year. We reported taxable income on our 2015 tax return which reduced the Federal NOL to
$136,630,000
. We expect to record taxable income in 2016 which will further reduce the Federal NOL to
$58,618,000
resulting in a deferred income tax asset balance of $20,615,000 at September 25, 2016. A valuation allowance is not required for the Federal NOL at September 25, 2016 based on our projection of future earnings during the carryforward period.
11 FAIR VALUE OF FINANCIAL INSTRUMENTS
The following methods and assumptions are used to estimate the fair value of each class of financial instruments for which it is practicable to estimate value.
The carrying amounts of cash equivalents, accounts receivable and accounts payable approximate fair value because of the short maturity of those instruments. Investments totaling
$6,359,000
, including our 17% ownership of the non-voting common stock of TCT and a private equity investment, are carried at cost. As of September 25, 2016, the approximate fair value of our private equity investment is $8,164,000, which is a level 3 fair value measurement.
The fair value of floating rate debt, which consists of our 1
st
Lien Term Loan, is
$101,240,000
, based on an average of private market price quotations. Our fixed rate debt consists of
$385,000,000
principal amount of the Notes and,
$130,863,000
principal amount under the 2
nd
Lien Term Loan. At
September 25, 2016
, based on an average of private market price quotations, the fair values were
$399,437,000
and
$136,833,000
for the Notes and 2nd Lien Term Loan, respectively.
As discussed more fully in Notes 4 and 8, we recorded a liability for the Warrants issued in connection with the Warrant Agreement. The liability was initially measured at its fair value and we will remeasure the liability to fair value each reporting period, with changes reported in other non-operating income (expense). The initial fair value of the Warrants was $
16,930,000
. The fair value of the Warrants at
September 25, 2016
, September 27, 2015 and September 28, 2014 are
$11,760,000
,
$4,240,000
and
$10,808,000
, respectively. In other, net in the Consolidated Statements of Income and Comprehensive Income (Loss), we recognized expense of
$7,520,000
in 2016 and income of
$6,568,000
and
$6,122,000
in 2015 and 2014, respectively, for adjustments in the fair value of the Warrants.
The following assumptions were used to estimate the fair value of the Warrants:
|
|
|
|
|
|
|
|
|
|
|
2016
|
|
|
2015
|
|
|
2014
|
|
|
|
|
|
|
|
Volatility
(Percent)
|
63
|
|
|
61
|
|
|
55
|
|
Risk-free interest rate
(Percent)
|
1.25
|
|
|
1.75
|
|
|
2.34
|
|
Expected term
(Years)
|
5.5
|
|
|
6.5
|
|
|
7.5
|
|
Estimated fair value
(Dollars)
|
1.96
|
|
|
0.71
|
|
|
1.80
|
|
In 2016 and 2014, we reduced the carrying value of equipment and other assets no longer in use by
$1,367,000
and
$1,044,000
, respectively, based on estimates of the related fair value in the current market. Based on age, condition and marketability we estimated the assets had no value.
12 EARNINGS PER COMMON SHARE
The following table sets forth the computation of basic and diluted earnings (loss) per common share:
|
|
|
|
|
|
|
|
|
|
(Thousands of Dollars and Shares, Except Per Common Share Data)
|
2016
|
|
|
2015
|
|
|
2014
|
|
|
|
|
|
|
|
Income attributable to Lee Enterprises, Incorporated:
|
34,961
|
|
|
23,316
|
|
|
6,795
|
|
|
|
|
|
|
|
Weighted average Common Stock
|
55,493
|
|
|
54,430
|
|
|
53,438
|
|
Less non-vested restricted Common Stock
|
(2,295
|
)
|
|
(1,790
|
)
|
|
(1,165
|
)
|
Basic average Common Stock
|
53,198
|
|
|
52,640
|
|
|
52,273
|
|
Dilutive stock options and restricted Common Stock
|
1,026
|
|
|
1,291
|
|
|
1,463
|
|
Diluted average Common Stock
|
54,224
|
|
|
53,931
|
|
|
53,736
|
|
Earnings per common share:
|
|
|
|
|
|
Basic:
|
0.66
|
|
|
0.44
|
|
|
0.13
|
|
Diluted
|
0.64
|
|
|
0.43
|
|
|
0.13
|
|
For 2016, 2015 and 2014, we had
7,577,000
,
6,620,000
and
3,121,000
weighted average shares, respectively, not considered in the computation of diluted earnings (loss) per common share because the exercise prices of the related stock options and Warrants were in excess of the fair market value of our Common Stock.
13 ALLOWANCE FOR DOUBTFUL ACCOUNTS
Valuation and qualifying account information related to the allowance for doubtful accounts receivable related to continuing operations is as follows:
|
|
|
|
|
|
|
|
|
|
(Thousands of Dollars)
|
2016
|
|
|
2015
|
|
|
2014
|
|
|
|
|
|
|
|
Balance, beginning of year
|
4,194
|
|
|
4,526
|
|
|
4,501
|
|
Additions charged to expense
|
1,195
|
|
|
1,307
|
|
|
1,754
|
|
Deductions from reserves
|
(1,062
|
)
|
|
(1,639
|
)
|
|
(1,729
|
)
|
Balance, end of year
|
4,327
|
|
|
4,194
|
|
|
4,526
|
|
14 OTHER INFORMATION
Compensation and other accrued liabilities consist of the following:
|
|
|
|
|
|
|
(Thousands of Dollars)
|
September 25
2016
|
|
|
September 27
2015
|
|
|
|
|
|
Compensation
|
12,290
|
|
|
12,454
|
|
Retirement plans
|
4,135
|
|
|
3,459
|
|
Other
|
7,459
|
|
|
11,142
|
|
|
23,884
|
|
|
27,055
|
|
Cash payments are as follows:
|
|
|
|
|
|
|
|
|
|
(Thousands of Dollars)
|
2016
|
|
|
2015
|
|
|
2014
|
|
|
|
|
|
|
|
Interest
|
65,410
|
|
|
72,937
|
|
|
81,363
|
|
Debt financing and reorganization costs
|
422
|
|
|
733
|
|
|
31,587
|
|
Income tax payments (refunds), net
|
269
|
|
|
485
|
|
|
(6,022
|
)
|
Accumulated other comprehensive income (loss), net of deferred income taxes at
September 25, 2016
and
September 27, 2015
, is related to pension and postretirement benefits.
15 COMMITMENTS AND CONTINGENT LIABILITIES
Operating Leases
We have operating lease commitments for certain of our office, production and distribution facilities. Management expects that in the normal course of business, existing leases will be renewed or replaced. Minimum lease payments during the five years ending September 2021 and thereafter are
$3,065,000
,
$2,535,000
,
$1,383,000
,
$878,000
,
$755,000
and
$3,776,000
, respectively. Total operating lease expense is
$3,792,000
,
$3,415,000
and
$3,735,000
, in 2016, 2015 and 2014, respectively.
Capital Expenditures
At
September 25, 2016
, we had construction and equipment purchase commitments totaling approximately
$479,000
.
Income Taxes
Commitments exclude unrecognized tax benefits to be recorded in accordance with FASB ASC Topic 740,
Income Taxes
. We are unable to reasonably estimate the ultimate amount or timing of cash settlements with the respective taxing authorities for such matters. See Note 10.
We file income tax returns with the Internal Revenue Service ("IRS") and various state tax jurisdictions. From time to time, we are subject to routine audits by those agencies, and those audits may result in proposed adjustments. We have considered the alternative interpretations that may be assumed by the various taxing agencies, believe our positions taken regarding our filings are valid, and that adequate tax liabilities have been recorded to resolve such matters. However, the actual outcome cannot be determined with certainty and the difference could be material, either positively or negatively, to the Consolidated Statements of Income and Comprehensive Income (Loss) in the periods in which such matters are ultimately determined. We do not believe the final resolution of such matters will be material to our consolidated financial position or cash flows.
We have various income tax examinations ongoing and at various stages of completion, but generally our income tax returns have been audited or closed to audit through 2009.
Legal Proceedings
We are involved in a variety of legal actions that arise in the normal course of business. Insurance coverage mitigates potential loss for certain of these matters. While we are unable to predict the ultimate outcome of these legal actions, it is our opinion that the disposition of these matters will not have a material adverse effect on our Consolidated Financial Statements, taken as a whole.
Multiemployer Pension Plans
One of our enterprise's bargaining units withdrew from representation, and as a result we are subject to a future claim from the multiemployer pension plan for a withdrawal liability. The amount and timing of such liability will be dependent on actions taken, or not taken, by the Company and the pension plan, as well as the future investment performance and funding status of the pension plan. Any withdrawal liability determined to be due under this plan will be funded over a period of 20 years.
16 IMPACT OF RECENTLY ADOPTED ACCOUNTING STANDARDS
In November 2015, the Financial Accounting Standards Board ("FASB") issued an amendment to Accounting Standards Codification Standard 740: Income Taxes related to the classification of net deferred tax assets and liabilities. Deferred tax liabilities and assets are classified as current or noncurrent based on the classification of the related asset or liability for financial reporting. To simplify the presentation of deferred income taxes, the amendment requires that deferred income tax liabilities and assets be classified as noncurrent in our Consolidated Balance Sheets. We elected to adopt this standard in 2016 and have applied this standard retrospectively. As a result, we have reclassified
$15,659,000
of current assets to a reduction of the long-term deferred tax liability in the September 27, 2015 Consolidated Balance Sheet.
In May 2015, FASB issued Accounting Standards Update ("ASU") 2015-07, Fair Value Measurement (Topic 820): Disclosures for Investments in Certain Entities That Calculate NAV per Share (or Its Equivalent) (“ASU 2015-07”). Under the guidance, investments measured at NAV, as a practical expedient for fair value, are excluded from the fair value hierarchy. Removing investments measured using the practical expedient from the fair value hierarchy is intended to eliminate the diversity in practice that currently exists with respect to the categorization of these investments. The new guidance is effective in 2017, however early adoption is permitted. We have elected to early adopt ASU 2015-07 retrospectively for the investments eligible for the NAV practical expedient.
17 QUARTERLY FINANCIAL DATA (UNAUDITED)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Quarter Ended
|
|
(Thousands of Dollars, Except Per Common Share Data)
|
December
|
|
|
March
|
|
|
June
|
|
|
September
|
|
|
|
|
|
|
|
|
|
2016
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Operating revenue
|
168,405
|
|
|
146,835
|
|
|
150,946
|
|
|
148,178
|
|
|
|
|
|
|
|
|
|
Net income
|
11,508
|
|
|
19,483
|
|
|
4,367
|
|
|
661
|
|
|
|
|
|
|
|
|
|
Income attributable to Lee Enterprises, Incorporated
|
11,237
|
|
|
19,228
|
|
|
4,092
|
|
|
404
|
|
|
|
|
|
|
|
|
|
Earnings per common share:
|
|
|
|
|
|
|
|
Basic
|
0.21
|
|
|
0.36
|
|
|
0.08
|
|
|
0.01
|
|
Diluted
|
0.21
|
|
|
0.36
|
|
|
0.08
|
|
|
0.01
|
|
|
|
|
|
|
|
|
|
2015
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Operating revenue
|
177,210
|
|
|
156,557
|
|
|
158,677
|
|
|
156,099
|
|
|
|
|
|
|
|
|
|
Net income
|
10,007
|
|
|
2,042
|
|
|
2,135
|
|
|
10,134
|
|
|
|
|
|
|
|
|
|
Income attributable to Lee Enterprises, Incorporated
|
9,753
|
|
|
1,800
|
|
|
1,882
|
|
|
9,881
|
|
|
|
|
|
|
|
|
|
Earnings (loss) per common share:
|
|
|
|
|
|
|
|
Basic
|
0.19
|
|
|
0.03
|
|
|
0.04
|
|
|
0.18
|
|
Diluted
|
0.18
|
|
|
0.03
|
|
|
0.03
|
|
|
0.18
|
|
Results of operations for the September quarter of 2016 include pre-tax non-cash impairment charges of
$2,382,000
.