NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
|
|
1
|
BASIS OF PRESENTATION AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
|
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
December 30, 2018
and our results of operations, changes in stockholder's equity 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 2018 Annual Report on Form 10-K.
Because of seasonal and other factors, the results of operations for the 13 weeks ended
December 30, 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 “2019”, “2018” 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 INN Partners, L.C. ("TownNews").
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 26, 2018, in the Company's fourth fiscal quarter, we entered into an agreement with BH Media Group, Inc. ("BH Media") to manage Berkshire Hathaway's newspaper and digital operations in 30 markets, beginning July 2, 2018 (the "Management Agreement"). The Company operates BH Media consistent with how it manages its own newspaper and digital operations. Among other decisions, Berkshire Hathaway is responsible for approving operating and capital budgets. The Management Agreement extends for a term of five years and may be extended thereafter for successive one-year terms on such terms as may be mutually agreed to by the Company and Berkshire Hathaway. The Management Agreement provides for the Company to be paid a fixed annual fee of $5 million, payable quarterly in arrears, and a variable fee based on the financial performance of BH Media. The variable fees are payable annually in arrears.
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
Between 2014 and 2017, the FASB issued several new standards which collectively comprise ASC Topic 606 “Revenue from Contracts with Customers”. Topic 606 supersedes the revenue recognition requirements in Topic 605 “Revenue Recognition” and is effective fiscal years beginning after December 15, 2017. Topic 606 provides a five-step model in determining when and how revenue is recognized and requires revenue recognition to depict the transfer of promised goods or services to customers in an amount that reflects the consideration a company expects to receive in exchange for those goods or services. Topic 606 also requires new disclosures about the nature, amount, timing, and uncertainty of revenue and cash flows arising from contracts with customers.
We adopted Topic 606 on October 1, 2018, using the modified retrospective method applied to those contracts which were not completed as of that date. We have completed our assessment and have not identified any significant changes to our revenue recognition policies. We identified similar performance obligations under Topic 606 as compared with the deliverables and separate units of accounting previously identified under Topic 605. As a result, the timing and amount of our revenue recognition were not impacted and we did not make any adjustments under the modified retrospective adoption method.
We have also assessed the new accounting principles related to the deferral and amortization of contract acquisition costs and due to the short-term nature of such costs, we will utilize the practical expedient to continue to expense these costs as incurred.
See note 11 for more information on our revenues and the application of Topic 606.
In August 2016, the FASB issued a new standard to conform the presentation in the statement of cash flows for certain transactions, including cash distributions from equity method investments, among others. There was no change to the Consolidated Statement of Cash Flows as a result of the adoption of this standard for the quarter ended December 30, 2018. Specifically, distributions received from equity method investees continue to be presented on the Consolidated Statement of Cash Flows utilizing the cumulative earnings approach.
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 as non-operating income in other, net. This new standard was adopted for the quarter ended December 30, 2018 and has been retrospectively applied to the Statement of Operations for all comparative periods presented. We recorded benefits of $711,000 in other, net in non-operating income (expense) for the quarter ended December 30, 2018. We reclassified benefits of $708,000 from compensation to other, net in non-operating income (expense) for the quarter ended December 24, 2017.
In February 2018, FASB issued new guidance to allow a reclassification from accumulated other comprehensive income (“AOCI”) to retained earnings for stranded tax effects resulting from what is commonly referred to as the Tax Cuts and Jobs Act (the "2017 Tax Act"). In the first quarter of fiscal year 2018, we remeasured our deferred taxes related to unrealized gains on our investment balances using the reduced tax rate. As required by GAAP, we recognized the net tax benefit in the provision for income taxes in our consolidated income statements, and we reclassified a $3,067,000 net tax benefit from AOCI to retained earnings in our consolidated balance sheets. Adoption of the standard had no impact to our consolidated income statements or cash flows 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:
|
|
|
|
|
|
|
13 Weeks Ended
|
|
(Thousands of Dollars)
|
December 30
2018
|
|
December 24
2017
|
|
|
|
|
Operating revenue
|
12,164
|
|
13,230
|
|
Operating expenses
|
9,095
|
|
9,982
|
|
Operating income
|
3,069
|
|
3,248
|
|
Company's 50% share of operating income
|
1,535
|
|
1,624
|
|
Less amortization of intangible assets
|
105
|
|
105
|
|
Equity in earnings of TNI
|
1,430
|
|
1,519
|
|
TNI makes weekly distributions of its earnings and for the 13 weeks ended
December 30, 2018
and
December 24, 2017
we received
$549,000
and
$1,567,000
in distributions, respectively.
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:
|
|
|
|
|
|
|
13 Weeks Ended
|
|
(Thousands of Dollars)
|
December 30
2018
|
|
December 24
2017
|
|
|
|
|
Operating revenue
|
14,826
|
|
16,065
|
|
Operating expenses, excluding restructuring costs, depreciation and amortization
|
12,663
|
|
12,932
|
|
Restructuring costs
|
30
|
|
64
|
|
Depreciation and amortization
|
280
|
|
279
|
|
Operating income
|
1,853
|
|
2,790
|
|
Net income
|
1,398
|
|
1,728
|
|
Equity in earnings of MNI
|
699
|
|
864
|
|
MNI makes quarterly distributions of its earnings and in the 13 weeks ended
December 30, 2018
and
December 24, 2017
we received dividends of
$750,000
in both years.
|
|
3
|
GOODWILL AND OTHER INTANGIBLE ASSETS
|
Changes in the carrying amount of goodwill are as follows:
|
|
|
|
|
13 Weeks Ended
|
|
(Thousands of Dollars)
|
December 30
2018
|
|
|
|
Goodwill, gross amount
|
1,535,155
|
|
Accumulated impairment losses
|
(1,288,979
|
)
|
Goodwill, beginning of period
|
246,176
|
|
Goodwill, end of period
|
246,176
|
|
Identified intangible assets consist of the following:
|
|
|
|
|
|
(Thousands of Dollars)
|
December 30
2018
|
|
September 30
2018
|
|
|
|
|
Nonamortized intangible assets:
|
|
|
Mastheads
|
21,883
|
|
21,883
|
|
Amortizable intangible assets:
|
|
|
Customer and newspaper subscriber lists
|
692,982
|
|
692,886
|
|
Less accumulated amortization
|
599,283
|
|
594,950
|
|
|
93,699
|
|
97,936
|
|
Other intangible assets, net
|
115,582
|
|
119,819
|
|
Annual amortization of intangible assets for the years ending December 2019 to December 2023 is estimated to be
$16,069,000
,
$15,608,000
,
$13,706,000
,
$12,164,000
and
$11,513,000
, respectively.
On March 31, 2014, we completed a comprehensive refinancing of our debt (the"2014 Refinancing"), which included the following:
|
|
•
|
$400,000,000
aggregate principal amount of
9.5%
Senior Secured Notes (the “Notes”), pursuant to an Indenture dated as of March 31, 2014 (the “Indenture”).
|
|
|
•
|
$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”).
|
|
|
•
|
$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”).
|
In December 2018 we amended our 1
st
Lien Credit Facility to amend and extend our Revolving Facility (the "Amendment"). The Amendment, among other changes, extends the maturity of the revolving loan commitments of the 1
st
Lien Lenders for twelve months and reduces the revolver loan commitments from
$40,000,000
to
$27,200,000
with a further 15% reduction to the revolving loan commitments of the 1
st
Lien Term Lenders effective as of July 31, 2019.
Debt is summarized as follows:
|
|
|
|
|
|
|
|
|
|
Interest Rates
(%)
|
(Thousands of Dollars)
|
December 30
2018
|
|
September 30
2018
|
|
December 30
2018
|
|
|
|
|
Revolving Facility
|
—
|
|
—
|
|
6.1
|
1
st
Lien Term Loan
|
—
|
|
6,303
|
|
8.5
|
Notes
|
385,000
|
|
385,000
|
|
9.5
|
2
nd
Lien Term Loan
|
92,832
|
|
93,556
|
|
12.0
|
|
477,832
|
|
484,859
|
|
|
Unamortized debt issue costs
|
(16,331
|
)
|
(17,055
|
)
|
|
Current maturities of long-term debt
|
1,377
|
|
7,027
|
|
|
Total long-term debt
|
460,124
|
|
460,777
|
|
|
Our weighted average cost of debt, excluding amortization of debt financing costs at
December 30, 2018
, is
10.0%
.
At
December 30, 2018
, aggregate minimum required maturities of debt excluding amounts required to be paid from future excess cash flow computations total $
1,377,000
for the remainder of 2019, $
0
in 2020,
$0
in 2021,
$385,000,000
in 2022 and
$91,455,000
in 2023.
Notes
The Notes are senior secured obligations of the Company and mature on March 15, 2022. At
December 30, 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 as follows:
|
|
|
Period Beginning
|
Percentage of Principal Amount
|
|
|
March 15, 2018
|
104.75
|
March 15, 2019
|
102.38
|
March 15, 2020
|
100.00
|
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 contain 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
$27,200,000
Revolving Facility that matures on December 28, 2019. 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
December 30, 2018
, after consideration of letters of credit, we have approximately
$21,435,000
available for future use under the Revolving Facility. The 1
st
Lien Term Loan was paid in full in November 2018 and has no outstanding balance as of
December 30, 2018
.
Interest
Interest on the Revolving Facility, which has a principal balance of
zero
at
December 30, 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%.
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 4.1x at December 30, 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
$92,832,000
at
December 30, 2018
, bears interest at a fixed annual rate of
12.0%
, payable quarterly, and matures in December 2022.
Principal Payments
Excluding excess cash flow 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 weeks ended
December 30, 2018
, payments on the 2
nd
Lien Term Loan totaled
$724,000
. For the 13 weeks ended
December 30, 2018
, Pulitzer Excess Cash Flow totaled
$1,377,000
, which will be used to make a payment on the 2
nd
Lien Term Loan in February 2019, at par.
Voluntary payments under the 2
nd
Lien Term Loan are subject to call premiums as follows:
|
|
|
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
$724,000
in the 13 weeks ended
December 30, 2018
. Amortization of such costs is estimated to total
$2,863,000
for the remainder of 2019,
$3,958,000
in 2020,
$4,116,000
in 2021,
$4,286,000
in 2022, and
$1,108,000
in 2023. At
December 30, 2018
, we have
$16,331,000
of unamortized debt financing costs recorded as a reduction of Long-term debt in our Consolidated Balance Sheets.
Liquidity
At
December 30, 2018
, after consideration of letters of credit, we have approximately
$21,435,000
available for future use under our Revolving Facility, which expires on December 28, 2019. Including cash, our liquidity at
December 30, 2018
totals
$37,344,000
. 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.
Excluding our Revolving Facility, which is undrawn as of December 30, 2018, final maturities of our debt range from March 2022 through December 2022. Our Revolving Facility expires December 28, 2019.
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
December 30, 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
|
|
(Thousands of Dollars)
|
December 30
2018
|
|
December 24
2017
|
|
|
|
|
Service cost for benefits earned during the period
|
9
|
|
12
|
|
Interest cost on projected benefit obligation
|
1,641
|
|
1,438
|
|
Expected return on plan assets
|
(2,018
|
)
|
(1,983
|
)
|
Amortization of net loss
|
284
|
|
506
|
|
Amortization of prior service benefit
|
(25
|
)
|
(34
|
)
|
Pension benefit
|
(109
|
)
|
(61
|
)
|
|
|
|
POSTRETIREMENT MEDICAL PLANS
|
13 Weeks Ended
|
|
(Thousands of Dollars)
|
December 30
2018
|
|
December 24
2017
|
|
|
|
|
Service cost for benefits earned during the period
|
—
|
|
—
|
|
Interest cost on projected benefit obligation
|
103
|
|
90
|
|
Expected return on plan assets
|
(270
|
)
|
(270
|
)
|
Amortization of net gain
|
(244
|
)
|
(246
|
)
|
Amortization of prior service benefit
|
(181
|
)
|
(196
|
)
|
Postretirement medical benefit
|
(592
|
)
|
(622
|
)
|
In the 13 weeks ended December 30, 2018, we adopted the new accounting standard to improve the presentation of pension and postretirement benefit expenses. As a result, the service cost for benefits earned during the period continue to be included as compensation in the Consolidated Statement of Income and Comprehensive income, while the other components of the pension benefit are recorded as non-operating income in other, net. Prior period amounts have been reclassified to conform to current period presentation.
In the 13 weeks ended
December 30, 2018
, we contributed
$650,000
to our pension plans. Based on our forecast at
December 30, 2018
, we do not expect to make contributions to our pension trust during the remainder of 2019.
We recorded income tax expense of
$4,513,000
related to income before taxes of
$15,232,000
for the 13 weeks ended
December 30, 2018
. For the 13 weeks ended
December 24, 2017
, we recorded
$19,690,000
in income tax benefit related to income before taxes of
$15,637,000
. The effective income tax rate for the 13 weeks ended
December 30, 2018
and
December 24, 2017
was a
29.6%
expense and
125.9%
benefit, respectively. Excluding the transitional impact from the 2017 Tax Act, the effective income tax rate for the 13 weeks ended
December 24, 2017
was 33.1%.
The primary differences between these rates and the U.S. federal statutory rate of 21% are due to the effect of state taxes, non-deductible expenses, adjustments to reserves for uncertain tax positions, including any related interest, and mark-to-market adjustments to value 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 do not currently have any federal or state income tax examinations in progress. Our income tax returns have generally been audited or closed to audit through 2012. See Note 10 for a discussion of our tax audits.
At September 25, 2018, we had approximately
$63,048,000
of state net operating loss benefits. The Company consumed its federal net operating losses in the year ended September 30, 2018.
|
|
7
|
EARNINGS PER COMMON SHARE
|
The following table sets forth the computation of basic and diluted earnings per common share:
|
|
|
|
|
|
|
13 Weeks Ended
|
|
(Thousands of Dollars and Shares, Except Per Share Data)
|
December 30
2018
|
|
December 24
2017
|
|
|
|
|
Income attributable to Lee Enterprises, Incorporated:
|
10,361
|
|
35,003
|
|
Weighted average common shares
|
57,303
|
|
56,782
|
|
Less weighted average restricted Common Stock
|
(2,099
|
)
|
(2,453
|
)
|
Basic average common shares
|
55,204
|
|
54,329
|
|
Dilutive stock options and restricted Common Stock
|
1,497
|
|
1,483
|
|
Diluted average common shares
|
56,701
|
|
55,812
|
|
Earnings per common share:
|
|
|
Basic
|
0.19
|
|
0.64
|
|
Diluted
|
0.18
|
|
0.63
|
|
For the 13 weeks ended
December 30, 2018
, and
December 24, 2017
,
6,448,000
and
6,707,000
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.
A summary of stock option activity during the 13 weeks ended
December 30, 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 30, 2018
|
1,100
|
|
1.88
|
|
|
|
Exercised
|
(8
|
)
|
1.48
|
|
|
|
Cancelled
|
(69
|
)
|
2.32
|
|
|
|
Outstanding, December 30, 2018
|
1,023
|
|
1.86
|
|
2.3
|
443
|
|
|
|
|
|
|
Exercisable, December 30, 2018
|
1,023
|
|
1.86
|
|
2.3
|
443
|
|
Restricted Common Stock
The table below summarizes restricted Common Stock activity during the 13 weeks ended
December 30, 2018
:
|
|
|
|
|
|
(Thousands of Shares, Except Per Share Data)
|
Shares
|
|
Weighted
Average
Grant Date
Fair Value
|
|
|
|
|
Outstanding, September 30, 2018
|
2,059
|
|
2.31
|
|
Vested
|
(728
|
)
|
1.53
|
|
Granted
|
788
|
|
2.18
|
|
Cancelled
|
(24
|
)
|
2.01
|
|
Outstanding, December 30, 2018
|
2,095
|
|
2.53
|
|
Total unrecognized compensation expense for unvested restricted Common Stock at
December 30, 2018
is
$3,224,000
, which will be recognized over a weighted average period of
1.9
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, contract assets and accounts payable approximate fair value because of the short maturity of those instruments. Investments totaling
$6,068,000
, including our 17% ownership of the nonvoting common stock of TCT and a private equity investment, are carried at cost. As of December 30, 2018, based on the most recent data available, the approximate fair value of the private equity investment is $9,118,000, which is a level 3 fair value measurement. Fair value of the remaining investments approximates book value.
Our fixed rate debt consists of
$385,000,000
principal amount of the Notes and
$92,832,000
principal amount under the 2
nd
Lien Term Loan. At
December 30, 2018
, based on private market price quotations, the fair values were
$390,293,750
and
$91,903,892
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 2018 and December 2018 are
$1,807,000
and
$1,726,000
, 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.
In the current quarter, we adopted the new revenue recognition accounting pronouncement related to revenue from contracts with customers, using the modified retrospective method applied to those contracts which were not completed as of the adoption date. Results for reporting periods beginning after October 1, 2018 are presented under the new guidance while prior period amounts are not adjusted and continue to be reported in accordance with legacy accounting under the old guidance. We did not record any adjustments to beginning retained earnings at October 1, 2018 as a result of adopting the new guidance.
The following table presents our revenues disaggregated by source:
|
|
|
|
|
|
|
13 Weeks Ended
|
|
(Thousands of Dollars)
|
December 30
2018
|
|
December 24
2017
|
|
|
|
|
Subscription revenue
|
46,268
|
|
48,269
|
|
Advertising and marketing services revenues
|
75,962
|
|
84,661
|
|
TownNews and other digital services revenues
|
4,677
|
|
3,661
|
|
Other revenues
|
9,294
|
|
7,195
|
|
Total operating revenue
|
136,201
|
|
143,786
|
|
Recognition principles:
Revenues are recognized when a performance obligation is satisfied by the transfer of control of the contracted goods or services to our customers, in an amount that reflects the consideration we expect to receive in exchange for those goods or services.
Advertising and marketing services revenues:
Advertising and marketing services revenues include amounts charged to customers for retail or classified advertising space purchased in our newspapers, retail or classified advertisements placed on our digital platforms, and other print advertising products such as preprint inserts and direct mail. Advertising and marketing services revenues also include amounts charged to customers for digital marketing services which include: Audience extension, Search Engine Optimization ("SEO"), Search Engine Marketing ("SEM"), web and mobile production, social media services and reputation monitoring and management. The following define the timing of revenue recognition for each general revenue category:
|
|
•
|
Print advertising revenues are recognized at the point in time the associated publication has been delivered.
|
|
|
•
|
Digital advertising revenues are recognized at the point in time that impressions are delivered.
|
|
|
•
|
Digital marketing services revenues are recognized over the period of time which the service is performed.
|
Advertising and marketing services contract transaction prices consist of fixed consideration. We recognize revenue when control of the related performance obligation transfers to the customer.
Payments for advertising revenues are due upon completion of our performance obligations at previously agreed upon rates. In instances where the timing of revenue recognition differs from the timing of invoicing, such timing differences are not large. As a result, we have determined that our contracts do not include a significant financing component.
Subscription revenues:
Subscription revenues include revenues for content delivered to consumers via print and digital products purchased by readers or distributors. Single copy revenues are also included in subscription revenues. Subscription revenues from single-copy and home delivery subscriptions are recognized at the point in time the publications are delivered. Digital subscription revenues are recognized over time as performance obligations are met via on-demand availability of online content made available to customers throughout the contract term. Payments for subscription revenues are typically collected in advance, are for contract periods of one year or less and result in an unearned revenue liability that is reduced when revenue is recognized.
Other revenues:
Other revenues are primarily comprised of digital services, Management Agreement revenues, commercial printing and delivery of third party products. Digital services revenues, which are primarily delivered through TownNews, are primarily comprised of contractual agreements to provide webhosting and content management services. As such, digital services revenues are recognized over the contract period. Prices for digital services are agreed upon in advance of the contract beginning and are typically billed in arrears on a monthly basis, with the exception of implementation fees which are recognized as deferred revenue and amortized over the contract period. Management Agreement revenues, consisting of fees collected from our Management Agreement, are recognized based on BH Media financial progress toward contractual performance goals related to certain financial benchmarks. BH Media provides historical and projected financial reports, which serve as the basis for our revenue recognition. Fixed Management Agreement revenues are recognized over time and paid quarterly and variable fees are paid annually. Variable fees are recognized when the fees are deemed earned and it is probable that substantially all of the consideration will be collected. Commercial printing and delivery revenues are recognized when the product is delivered to the customer.
Arrangements with multiple performance obligations:
We have various advertising and subscription agreements which include both print and digital performance obligations. Revenues from sales agreements that contain multiple performance obligations are allocated to each obligation based on the relative standalone selling price. We determine standalone selling prices based on observable prices charged to customers.
Contract Assets and Liabilities:
The Company’s primary source of unearned revenue is from subscriptions paid in advance of the service provided. The Company expects to recognize the revenue related to unsatisfied performance obligations over the next three to twelve months in accordance with the terms of the subscriptions and other contracts with customers. The unearned revenue balances described herein are the Company's only contract liability under ASC 606. Unearned revenues were
$23,430,000
as of
December 30, 2018
and
$23,895,000
as of
September 30, 2018
. Revenues recognized in the quarter that were included in the contract liability as of September 30, 2018 were
$15,727,000
.
Contract asset balances relate to our Management Agreement revenues and were
$1,106,000
as of December 30, 2018 and $0 as of September 30, 2018 and consisted solely of the variable portion of the contract. These contract asset balances are included in accounts receivable and contract assets, net. There are no other contract assets recorded. Accounts receivable, excluding allowance for doubtful accounts and contract assets, was
$55,139,000
and
$48,517,000
as of
December 30, 2018
and
September 30, 2018
, respectively. Allowance for doubtful accounts was
$5,208,000
and
$4,806,000
as of
December 30, 2018
and
September 30, 2018
, respectively.
Practical expedients and exemptions:
Sales commissions are expensed as incurred as the associated contractual periods are one year or less. These costs are recorded within compensation. Additionally, we do not disclose the value of unsatisfied performance obligations because the vast majority of our contracts have original expected lengths of one year or less and revenue is earned at a rate and amount that corresponds directly with the value to the customer.