NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
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1
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BASIS OF PRESENTATION AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
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Basis of Presentation
The accompanying unaudited, interim, Consolidated Financial Statements included herein have been prepared pursuant to the rules and regulations of the Securities and Exchange Commission for quarterly reports. In the opinion of management, these financial statements contain all adjustments (consisting of only normal recurring items) necessary to present fairly the financial position of Lee Enterprises, Incorporated and subsidiaries (the “Company”) as of
March 25, 2018
and our results of operations and cash flows for the periods presented. The Consolidated Financial Statements should be read in conjunction with the Consolidated Financial Statements and Notes thereto included in the Company's 2017 Annual Report on Form 10-K.
Because of seasonal and other factors, the results of operations for the 13 weeks and 26 weeks ended
March 25, 2018
are not necessarily indicative of the results to be expected for the full year.
References to “we”, “our”, “us” and the like throughout the Consolidated Financial Statements refer to the Company. References to “2018”, “2017” and the like refer to the fiscal years ended the last Sunday in September.
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 Partners (“TNI”),
50%
interest in Madison Newspapers, Inc. (“MNI”) and
82.5%
interest in TownNews.com.
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 intangible assets.
On June 30, 2017, in the Company's fourth fiscal quarter of 2017, we purchased the assets of the
Dispatch-Argus
serving Moline and Rock Island, Illinois for
$7,150,000
plus an adjustment for working capital. The purchase included one daily newspaper, a weekly publication, two niche publications as well as the related digital platforms. The purchase was funded with cash on the balance sheet. Operating results of the
Dispatch-Argus
were consolidated beginning in the 13 weeks ended September 24, 2017.
Use of Estimates
The preparation of the Consolidated Financial Statements in conformity with Generally Accepted Accounting Principles ("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 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.
New accounting pronouncements
In February 2018, the Financial Accounting Standards Board ("FASB") issued a new standard that gives entities the option to reclassify the tax effects related to items in accumulated other comprehensive income as a result of tax reform to retained earnings. The new standard is effective for fiscal years beginning after December 15, 2018, and interim periods within those fiscal years.
In March 2017, the FASB issued a new standard to improve the presentation of pension and postretirement benefit expense. The new standard requires that the service cost component of pension and postretirement benefits expense is recognized as compensation expense, while the remaining components of the expense (benefit) are presented outside of operating income. The current presentation includes all components of the expense (benefit) as Compensation in our Consolidated Statements of Income and Comprehensive Income
for the periods presented. The adoption of the new standard is required in fiscal 2019. If adopted in fiscal year 2018, compensation expense would increase $2,776,000 on an annual basis.
In August 2016, the FASB issued a new standard to conform the presentation in the statement of cash flows for certain transactions, including cash distribution from equity method investments, among others. The adoption of the new standard is required in fiscal year 2020. The adoption of this standard will reclassify certain cash receipts within the Consolidation Statements of Cash Flows.
In March 2016, the FASB issued a new standard with improvements to the accounting for employee share-based payments. The new standard simplifies several aspects of the accounting for employee share-based payment transactions, including the accounting for income taxes and statutory tax withholding requirements, as well as classification in the statement of cash flows. We adopted this new standard in 2018, as required, and the adoption did not have a material impact on the Consolidated Financial Statements.
In February 2016, the FASB issued a new standard for the accounting treatment of leases. Under the new guidance, lessees will be required to recognize a lease liability and a right-of-use asset for all leases with terms greater than 12 months. Leases will be classified as either finance or operating, with classification affecting the pattern of expense recognition in the statement of income. We currently anticipate adopting the new lease standard in the first quarter of our fiscal year 2020. To date we have made progress in our assessment of the new lease standard. We are currently evaluating the provisions of the updated guidance and assessing the impact on our Consolidated Financial Statements.
In May 2014, the FASB issued a new revenue recognition standard which prescribes a single comprehensive model for entities to use to account for revenue arising from contracts with customers. The new guidance will supersede virtually all existing revenue guidance under U.S. GAAP and is effective for our fiscal year 2019. The core principle contemplated by this new standard is that an entity should recognize revenue to depict the transfer of promised goods or services to customers in an amount reflecting the consideration to which the entity expects to be entitled in exchange for those goods or services. New disclosures about the nature, amount, timing, and uncertainty of revenue and cash flows arising from contracts with customers are also required. In April and May 2016, the FASB also issued clarifying updates to the new standard specifically to address certain core principles including the identification of performance obligations, licensing guidance, the assessment of the collectability criterion, the presentation of taxes collected from customers, noncash considerations, contract modifications, and completed contracts at transition.
We are currently evaluating the impact that the new revenue recognition standard will have on our financial statements and related disclosures. As part of the implementation process, we are holding regular meetings with key stakeholders to discuss the impact of the standard across our organization. We are continuing to review our customer contracts, identifying contractual provisions that may result in a change in the timing or the amount of revenue recognized and assessing the enhanced disclosure requirements of the new guidance. We expect to complete our assessment in the fourth quarter of fiscal year 2018.
We currently anticipate adopting the new revenue recognition standard using the modified retrospective approach in the fiscal year beginning October 1, 2018. This approach consists of recognizing the cumulative effect, if any, of initially applying the standard as an adjustment to opening retained earnings.
No other new accounting pronouncement issued or effective during the fiscal year had, or is expected to have, a material impact on our Consolidated Financial Statements.
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 (before income taxes) is allocated equally to Star Publishing and Citizen.
Summarized results of TNI are as follows:
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13 Weeks Ended
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26 Weeks Ended
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(Thousands of Dollars)
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March 25
2018
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March 26
2017
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March 25
2018
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March 26
2017
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|
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Operating revenue
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11,851
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12,507
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25,081
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25,821
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Operating expenses
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9,354
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9,770
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19,338
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19,770
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Operating income
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2,497
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2,737
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5,743
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6,051
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Company's 50% share of operating income
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1,248
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1,368
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2,872
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3,026
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Less amortization of intangible assets
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104
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104
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209
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209
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Equity in earnings of TNI
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1,144
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1,264
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2,663
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2,817
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TNI makes weekly distributions of its earnings and for the 13 weeks ended
March 25, 2018
and
March 26, 2017
we received
$1,631,000
and
$1,437,000
in distributions, respectively. In the 26 weeks ended
March 25, 2018
and
March 26, 2017
we received
$3,198,000
and
$2,420,000
in distributions, 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 in our Consolidated Statements of Income and Comprehensive Income. These amoun
ts totaled $
127,000
and $
159,000
in the 13 weeks ended
March 25, 2018
and
March 26, 2017
, respectively, and $
261,000
and $
301,000
in the 26 weeks ended
March 25, 2018
and
March 26, 2017
, respectively.
Annual amortization of intangible assets is estimated to be
$418,000
for the 52 weeks ending March 2019 and 2020, respectively, and zero thereafter.
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 platforms. 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 results of MNI are as follows:
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13 Weeks Ended
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26 Weeks Ended
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(Thousands of Dollars)
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March 25
2018
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March 26
2017
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March 25
2018
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March 26
2017
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Operating revenue
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13,838
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14,382
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29,903
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31,424
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Operating expenses, excluding workforce adjustments, depreciation and amortization
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12,016
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12,548
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24,948
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25,928
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Workforce adjustments
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146
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129
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|
210
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155
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Depreciation and amortization
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280
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348
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558
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696
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Operating income
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1,396
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1,357
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4,187
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4,645
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Net income
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928
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929
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2,656
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3,200
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Equity in earnings of MNI
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464
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465
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1,328
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1,600
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MNI makes quarterly distributions of its earnings and in the 13 weeks ended
March 25, 2018
and
March 26, 2017
we received dividends of
$1,250,000
and
$1,000,000
, respectively. In the 26 weeks ended
March 25, 2018
and
March 26, 2017
we received dividends of $
2,000,000
and $
2,250,000
, respectively.
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3
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GOODWILL AND OTHER INTANGIBLE ASSETS
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Changes in the carrying amount of goodwill are as follows:
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26 Weeks Ended
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(Thousands of Dollars)
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March 25
2018
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Goodwill, gross amount
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1,535,155
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Accumulated impairment losses
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(1,288,729
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)
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Goodwill, beginning of period
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246,426
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Goodwill, end of period
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246,426
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Identified intangible assets consist of the following:
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(Thousands of Dollars)
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March 25
2018
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September 24
2017
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Nonamortized intangible assets:
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Mastheads
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21,883
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22,035
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Amortizable intangible assets:
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Customer and newspaper subscriber lists
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692,016
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691,994
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Less accumulated amortization
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586,354
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577,727
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105,662
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114,267
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Noncompete and consulting agreements
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28,524
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28,524
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Less accumulated amortization
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28,524
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28,524
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—
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—
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Other intangible assets, net
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127,545
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136,302
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Annual amortization of intangible assets for the 52 or 53 weeks ended March 2019 to March 2023 is estimated to be
$16,992,000
,
$15,827,000
,
$15,564,000
,
$12,924,000
and
$12,019,000
, respectively.
On March 31, 2014, we completed a comprehensive refinancing of our debt (the"2014 Refinancing"), which included the following:
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•
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$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”).
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•
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$250,000,000
first lien term loan (the "1
st
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”).
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•
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$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”).
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Debt is summarized as follows:
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Interest Rates
(%)
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(Thousands of Dollars)
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March 25
2018
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September 24
2017
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March 25
2018
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Revolving Facility
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—
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—
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5.63
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1
st
Lien Term Loan
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24,645
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45,145
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7.90
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Notes
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385,000
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385,000
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9.50
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2
nd
Lien Term Loan
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106,676
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118,240
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12.00
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516,321
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548,385
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Unamortized debt issue costs
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(19,621
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)
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(21,824
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)
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Current maturities of long-term debt
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30,904
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30,182
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Total long-term debt
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465,796
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496,379
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Our weighted average cost of debt, excluding amortization of debt financing costs at
March 25, 2018
, is
9.9%
.
At
March 25, 2018
, aggregate minimum required maturities of debt excluding amounts required to be paid from future excess cash flow computations total $
18,759,000
for the remainder of 2018, $
12,145,000
in 2019, $
0
in 2020,
$0
in 2021,
$385,000,000
in 2022 and $
100,417,000
thereafter.
Notes
The Notes are senior secured obligations of the Company and mature on March 15, 2022. At
March 25, 2018
, the principal balance of the Notes totaled
$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, we may redeem the Notes as follows:
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Period Beginning
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Percentage of Principal Amount
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March 15, 2018
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104.75
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March 15, 2019
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102.38
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March 15, 2020
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100.00
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If we sell certain of our assets or experience specific kinds 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 the 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 31, 2019 and the
$40,000,000
Revolving Facility that matures on December 28, 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
March 25, 2018
, after consideration of letters of credit, we have approximately
$33,835,000
available for future use under the Revolving Facility.
Interest
Interest on the 1
st
Lien Term Loan, which has a principal balance of
$24,645,000
at
March 25, 2018
, 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 debt financing and administration costs over the life of the 1
st
Lien Term Loan.
Interest on the Revolving Facility, which has a principal balance of
zero
at
March 25, 2018
, 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 includes adjustments 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.
For the 13 weeks ended
March 25, 2018
, the required Lee Legacy Excess Cash Flow payment was
zero
.
2018 payments made, or required to be made for the remainder of the year, under the 1
st
Lien Term Loan are summarized as follows:
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13 Weeks Ended
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13 Weeks Ending
|
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(Thousands of Dollars)
|
December 24
2017
|
|
March 25
2018
|
|
June 24
2018
|
|
September 30
2018
|
|
|
|
|
|
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Mandatory
|
6,250
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|
6,250
|
|
6,250
|
|
6,250
|
|
Voluntary
|
5,000
|
|
3,000
|
|
—
|
|
—
|
|
|
11,250
|
|
9,250
|
|
6,250
|
|
6,250
|
|
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. This restriction no longer applies if Lee Legacy leverage is below 3.25x before and after such payments. Lee Legacy leverage as defined is 3.93x at March 25, 2018. 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
$106,676,000
at
March 25, 2018
, 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 including adjustments 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.
Prior to March 31, 2017, we were required to offer the Pulitzer Excess Cash Flow to the 2nd Lien Lenders to prepay the 2nd Lien Term Loan at par, which payment the 2nd Lien Lenders could accept or reject. After March 31, 2017, Pulitzer Excess Cash Flow is used to prepay the 2nd Lien Term Loan, at par. Pulitzer Excess Cash Flow payments are required to be paid 45 days after the end of the quarter.
Payments will also be made on the 2
nd
Lien Term Loan, at par, with proceeds from asset sales by the Pulitzer Subsidiaries that are not reinvested subject to certain other conditions.
During the 13 and 26 weeks ended
March 25, 2018
, payments on the 2
nd
Lien Term Loan totaled
$6,382,000
and
$11,564,000
, respectively. For the 13 weeks ended
March 25, 2018
, Pulitzer Excess Cash Flow totaled
$6,259,000
, which will be used to make a payment on the 2
nd
Lien Term Loan in May 2018, at par.
Voluntary payments under the 2
nd
Lien Term Loan are subject to call premiums as follows:
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|
|
Period Beginning
|
Percentage of Principal Amount
|
|
|
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 provisions requiring the Warrants to be measured at fair value and included in other liabilities in our Consolidated Balance Sheets. We re-measure 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 9.
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
$2,203,000
in the 26 weeks ended
March 25, 2018
. Amortization of such costs is estimated to total
$2,029,000
in 2018,
$3,925,000
in 2019,
$4,005,000
in 2020,
$4,175,000
in 2021, and
$4,359,000
in 2022. At
March 25, 2018
, we have
$19,621,000
of unamortized debt financing costs recorded as a reduction of Long-term debt in our Consolidated Balance Sheets.
Liquidity
At
March 25, 2018
, after consideration of letters of credit, we have approximately
$33,835,000
available for future use under our Revolving Facility, which expires on December 28, 2018. Including cash, our liquidity at
March 25, 2018
totals
$46,136,000
. 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 existing cash and 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.
Final maturities of our debt range from December 2018 through December 2022.
There are numerous potential consequences under the Notes, 1
st
Lien Credit Facility and 2
nd
Lien Term Loan, if an event of default, as defined, occurs and is not remedied. Many of those consequences are beyond our control. The occurrence of one or more events of default would give rise to the right of the applicable lender(s) to exercise their remedies under the Notes, 1
st
Lien Credit Facility and 2
nd
Lien Term Loan, respectively, including, without limitation, the right to accelerate all outstanding debt and take actions authorized in such circumstances under applicable collateral security documents.
Our ability to operate as a going concern is dependent on our ability to remain in compliance with debt covenants and to repay, refinance or amend our debt agreements as they become due. 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
March 25, 2018
.
|
|
5
|
PENSION, POSTRETIREMENT AND POSTEMPLOYMENT DEFINED BENEFIT PLANS
|
We have several noncontributory 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.
In addition, 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, 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.
We use a fiscal year end measurement date for all of our pension and postretirement medical plan obligations.
The net periodic postretirement cost (benefit) components for our postretirement plans are as follows:
|
|
|
|
|
|
|
|
|
|
PENSION PLANS
|
13 Weeks Ended
|
|
26 Weeks Ended
|
|
(Thousands of Dollars)
|
March 25
2018
|
|
March 26
2017
|
|
March 25
2018
|
|
March 26
2017
|
|
|
|
|
|
|
Service cost for benefits earned during the period
|
12
|
|
21
|
|
24
|
|
42
|
|
Interest cost on projected benefit obligation
|
1,438
|
|
1,349
|
|
2,876
|
|
2,698
|
|
Expected return on plan assets
|
(1,983
|
)
|
(1,969
|
)
|
(3,966
|
)
|
(3,938
|
)
|
Amortization of net loss
|
506
|
|
736
|
|
1,012
|
|
1,472
|
|
Amortization of prior service benefit
|
(34
|
)
|
(34
|
)
|
(68
|
)
|
(68
|
)
|
Pension expense (benefit)
|
(61
|
)
|
103
|
|
(122
|
)
|
206
|
|
|
|
|
|
|
POSTRETIREMENT MEDICAL PLANS
|
13 Weeks Ended
|
|
26 Weeks Ended
|
|
(Thousands of Dollars)
|
March 25
2018
|
|
March 26
2017
|
|
March 25
2018
|
|
March 26
2017
|
|
|
|
|
|
|
Service cost for benefits earned during the period
|
—
|
|
9
|
|
—
|
|
12
|
|
Interest cost on projected benefit obligation
|
90
|
|
110
|
|
181
|
|
232
|
|
Expected return on plan assets
|
(270
|
)
|
(264
|
)
|
(540
|
)
|
(528
|
)
|
Amortization of net gain
|
(246
|
)
|
(243
|
)
|
(492
|
)
|
(480
|
)
|
Amortization of prior service benefit
|
(196
|
)
|
(365
|
)
|
(392
|
)
|
(730
|
)
|
Curtailment gains
|
(2,031
|
)
|
(3,741
|
)
|
(2,031
|
)
|
(3,741
|
)
|
Postretirement medical benefit
|
(2,653
|
)
|
(4,494
|
)
|
(3,274
|
)
|
(5,235
|
)
|
Amortization of net gains (losses) and prior service benefits are recorded as compensation in the Consolidated Statements of Income and Comprehensive Income.
Based on our forecast at
March 25, 2018
, we expect to make contributions of
$4,940,000
to our pension trust during the remainder of fiscal 2018.
In March 2017, we notified certain participants in one of our post employment medical plans of changes to their plan and in December 2017, our fiscal second quarter, the plan was terminated. These changes resulted in a non-cash curtailment gain of
$2,031,000
in the 13 weeks ended March 25, 2018 and
$3,741,000
in the 13 weeks ended March 26, 2017. Curtailment gains are recorded in gain on sales of assets and other, net in the Consolidated Statements of Income and Comprehensive income.
On December 22, 2017, comprehensive tax legislation commonly referred to as the Tax Cuts and Jobs Act (the “2017 Tax Act”) was signed into law. Among other provisions, the 2017 Tax Act reduces the federal statutory corporate income tax rate from 35% to 21%. The reduction of the corporate tax rate caused us to re-measure our deferred tax assets and liabilities to the lower federal base rate of 21%. The discrete adjustment from revaluing our deferred tax assets and liabilities resulted in a provisional net decrease in income tax expense of
$24,872,000
for the 26 weeks ended March 25, 2018.
The changes resulting from the 2017 Tax Act are complex and the final transitional impact of the 2017 Tax Act may differ from the above estimate, possibly materially, due to, among other things, changes in interpretations of the 2017 Tax Act, any legislative action to address questions that arise because of the 2017 Tax Act, changes in accounting standards for income taxes or related interpretations in response to the 2017 Tax Act and updates or changes to estimates the Company has used to calculate the transition impacts, including impacts from changes to current year earnings estimates and changes in the timing of reversals of deferred income tax assets and liabilities. The Securities Exchange Commission has issued rules that allow for a measurement period of up to one year after the enactment date of the 2017 Tax Act to finalize the recording of the related transitional impact. We did not make any adjustments to the provisional amount recorded and currently anticipate finalizing the transitional impact of the 2017 Tax Act in the fourth quarter of 2018.
Including the transitional impact of revaluing deferred tax assets and liabilities, we recorded an income tax expense of
$927,000
and a tax benefit of
$18,763,000
related to income before taxes of
$3,460,000
and
$19,097,000
for the 13 and 26 weeks ended
March 25, 2018
, respectively. We recorded income tax expense of
$1,144,000
and
$7,410,000
related to income before taxes of
$7,521,000
and
$26,228,000
for the 13 and 26 weeks ended
March 26, 2017
, respectively.
The effective income tax rate for the 13 and 26 weeks ended
March 25, 2018
was
26.8%
and a negative
98.3%
, respectively. The effective income tax rate for the 13 and 26 weeks ended
March 26, 2017
was
15.2%
and
28.3%
, respectively. The majority of the differences between the effective tax rates and the statutory tax rates were due to the transitional adjustments from the 2017 Tax Act as well as the nontaxable income and nondeductible expenses related to the fair value adjustment of the warrants.
We file a consolidated federal tax return, as well as combined and separate tax returns in approximately 27 state and local jurisdictions. We have various income tax examinations ongoing which are at different stages of completion, but generally our income tax returns have been audited or closed to audit through 2009. See Note 10 for a discussion of our tax audits.
At September 25, 2017, we had approximately
$57,856,000
of state net operating loss tax benefits and a federal net operating loss carryforward of approximately
$6,247,000
.
|
|
7
|
EARNINGS PER COMMON SHARE
|
The following table sets forth the computation of basic and diluted earnings per common share:
|
|
|
|
|
|
|
|
|
|
|
13 Weeks Ended
|
|
26 Weeks Ended
|
|
(Thousands of Dollars and Shares, Except Per Share Data)
|
March 25
2018
|
|
March 26
2017
|
|
March 25
2018
|
|
March 26
2017
|
|
|
|
|
|
|
Income attributable to Lee Enterprises, Incorporated:
|
2,239
|
|
6,128
|
|
37,242
|
|
18,301
|
|
Weighted average common shares
|
57,070
|
|
56,607
|
|
56,924
|
|
56,268
|
|
Less weighted average restricted Common Stock
|
(2,378
|
)
|
(2,552
|
)
|
(2,416
|
)
|
(2,479
|
)
|
Basic average common shares
|
54,692
|
|
54,055
|
|
54,508
|
|
53,789
|
|
Dilutive stock options and restricted Common Stock
|
1,169
|
|
1,415
|
|
1,309
|
|
1,631
|
|
Diluted average common shares
|
55,861
|
|
55,470
|
|
55,817
|
|
55,420
|
|
Earnings per common share:
|
|
|
|
|
Basic
|
0.04
|
|
0.11
|
|
0.68
|
|
0.34
|
|
Diluted
|
0.04
|
|
0.11
|
|
0.67
|
|
0.33
|
|
For the 13 and 26 weeks ended
March 25, 2018
,
6,500,900
and
6,706,603
, weighted average shares, respectively, were not considered in the computation of diluted earnings 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. For the 13 and 26 weeks ended
March 26, 2017
,
6,823,500
, weighted average shares were not considered in the computation of diluted earnings 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.
A summary of stock option activity during the 26 weeks ended
March 25, 2018
follows:
|
|
|
|
|
|
|
|
|
(Thousands of Dollars and Shares, Except Per Share Data)
|
Shares
|
|
Weighted
Average
Exercise
Price
|
|
Weighted
Average
Remaining
Contractual
Term
(Years)
|
Aggregate
Intrinsic
Value
|
|
|
|
|
|
|
Outstanding, September 24, 2017
|
1,271
|
|
1.86
|
|
|
|
Exercised
|
(18
|
)
|
1.39
|
|
|
|
Cancelled
|
(12
|
)
|
1.99
|
|
|
|
Outstanding, March 25, 2018
|
1,241
|
|
1.86
|
|
3.1
|
448
|
|
|
|
|
|
|
Exercisable, March 25, 2018
|
1,241
|
|
1.86
|
|
3.1
|
448
|
|
Restricted Common Stock
The table below summarizes restricted Common Stock activity during the 26 weeks ended
March 25, 2018
:
|
|
|
|
|
|
(Thousands of Shares, Except Per Share Data)
|
Shares
|
|
Weighted
Average
Grant Date
Fair Value
|
|
|
|
|
Outstanding, September 24, 2017
|
2,478
|
|
2.69
|
|
Vested
|
(644
|
)
|
3.62
|
|
Granted
|
572
|
|
2.32
|
|
Cancelled
|
(57
|
)
|
2.96
|
|
Outstanding, March 25, 2018
|
2,349
|
|
2.34
|
|
Total unrecognized compensation expense for unvested restricted Common Stock at
March 25, 2018
is
$3,003,892
, which will be recognized over a weighted average period of
1.5
years.
|
|
9
|
FAIR VALUE MEASUREMENTS
|
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.
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
$6,318,000
, including our 17% ownership of the nonvoting common stock of TCT and a private equity investment, are carried at cost. As of September 30, 2017, based on the most recent data available, the approximate fair value of the private equity
investment is $9,183,000, which is a level 3 fair value measurement. Fair value of the remaining investments approximates book value.
The fair value of floating rate debt, which consists of our 1
st
Lien Term Loan, is
$24,645,000
, based on an average of private market price quotations. Our fixed rate debt consists of
$385,000,000
principal amount of the Notes and
$106,676,000
principal amount under the 2
nd
Lien Term Loan. At
March 25, 2018
, based on private market price quotations, the fair values were
$401,603,000
and
$109,876,000
for the Notes and 2
nd
Lien Term Loan, respectively. These represent level 2 fair value measurements.
As discussed more fully in Note 4, 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 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 Warrants at September 2017, December 2017 and March 2018 is
$1,580,000
,
$2,011,000
and
$1,456,000
, respectively. Fair value is determined using the Black-Scholes option pricing model. These represent level 2 fair value measurements.
|
|
10
|
COMMITMENTS AND CONTINGENT LIABILITIES
|
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 6.
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 Operations 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
The Company contributes to three multiemployer pension plans. In June 2017, a union contract covering certain of our employees under a multiemployer pension plan expired resulting in a partial withdrawal from one of the multiemployer plans. In 2017, the Company recorded an estimate of the partial withdrawal liability totaling $2,600,000. Once the multiemployer pension plan's administrators finalize the partial withdrawal liability, it will be paid in equal installments over a twenty year period.