Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations
The following discussion includes comments and analysis relating to our results of operations and financial condition as of and for the 13 weeks and
39
weeks ended
June 30, 2019
. This discussion should be read in conjunction with the Consolidated Financial Statements and related Notes thereto, included herein, and our 2018 Annual Report on Form 10-K.
NON-GAAP FINANCIAL MEASURES
No non-GAAP financial measure should be considered as a substitute for any related GAAP financial measure. However, we believe the use of non-GAAP financial measures provides meaningful supplemental information with which to evaluate our financial performance, or assist in forecasting and analyzing future periods. We also believe such non-GAAP financial measures are alternative indicators of performance used by investors, lenders, rating agencies and financial analysts to estimate the value of a publishing business and its ability to meet debt service requirements.
We define our non-GAAP measures, which may not be comparable to similarly titled measures reported by other companies, as follows:
Adjusted EBITDA
is a non-GAAP financial performance measure that enhances financial statement users' overall understanding of the operating performance of the Company. The measure isolates unusual, infrequent or non-cash transactions from the operating performance of the business. This allows users to easily compare operating performance among various fiscal periods and how management measures the performance of the business. This measure also provides users with a benchmark that can be used when forecasting future operating performance of the Company that excludes unusual, nonrecurring or one time transactions. Adjusted EBITDA is also a component of the calculation used by stockholders and analysts to determine the value of our business when using the market approach, which applies a market multiple to financial metrics. It is also a measure used to calculate the leverage ratio of the Company, which is a key financial ratio monitored and used by the Company, its lenders and its investors. Adjusted EBITDA is defined as net income (loss), plus non-operating expenses, income tax expense (benefit), depreciation and amortization, assets loss (gain) on sales, impairments and other, restructuring costs and other, stock compensation and our 50% share of EBITDA from TNI and MNI, minus equity in earnings of TNI and MNI and curtailment gains.
Cash Costs
represent a non-GAAP financial performance measure of operating expenses which are measured on an accrual basis and settled in cash. This measure is useful to investors in understanding the components of the Company’s cash-settled operating costs. Occasionally, the Company provides forward-looking guidance of Cash Costs, which can be used by financial statement users to assess the Company's ability to manage and control its operating cost structure. Cash Costs are defined as the sum of compensation, newsprint and ink and other operating expenses. Depreciation and amortization, assets loss (gain) on sales, impairments and other, other non-cash operating expenses and other expenses are excluded. Cash Costs also exclude restructuring costs and other, which are typically paid in cash.
Total Operating Revenue Less Cash Costs
, or “margin”, represents a non-GAAP financial performance measure of revenue less total cash costs, also a non-GAAP financial measure. This measure is useful to investors in understanding the profitability of the Company after direct cash costs related to the production and delivery of products are paid. Margin is also useful in developing opinions and expectations about the Company’s ability to manage and control its operating cost structure in relation to its peers.
A table reconciling adjusted EBITDA to net income, the most directly comparable measure under GAAP, is set forth below under the caption "Reconciliation of Non-GAAP Financial Measures". Reconciliations of adjusted income and adjusted earnings per diluted common share to income attributable to Lee Enterprises, Incorporated and earnings per diluted common share, respectively, the most directly comparable measures under GAAP, are set forth in Item 2, included herein, under the caption “Net Income and Earnings Per Share”.
Cash Costs and Total Revenue less Cash Costs are reconciled to operating expenses and operating income, respectively, in tables in Item 2, included herein, under the captions “13 Weeks Ended
June 30, 2019
" and “
39
Weeks Ended
June 30, 2019
.
RECONCILIATION OF NON-GAAP FINANCIAL MEASURES
(UNAUDITED)
The table below reconciles the non-GAAP financial performance measure of adjusted EBITDA to net income, the most directly comparable GAAP measure:
|
|
13 Weeks Ended
|
|
|
39 Weeks Ended
|
|
|
53 Weeks Ended
|
|
(Thousands of Dollars)
|
|
June 30, 2019
|
|
|
June 24, 2018
|
|
|
June 30, 2019
|
|
|
June 24, 2018
|
|
|
June 30, 2019
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net Income
|
|
|
6,172
|
|
|
|
4,750
|
|
|
|
14,564
|
|
|
|
42,611
|
|
|
|
19,001
|
|
Adjusted to exclude
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income tax expense (benefit)
|
|
|
1,505
|
|
|
|
1,972
|
|
|
|
6,175
|
|
|
|
(16,791
|
)
|
|
|
6,738
|
|
Non-operating expenses, net
|
|
|
12,354
|
|
|
|
13,433
|
|
|
|
39,579
|
|
|
|
40,730
|
|
|
|
53,722
|
|
Equity in earnings of TNI and MNI
|
|
|
(1,451
|
)
|
|
|
(1,578
|
)
|
|
|
(5,298
|
)
|
|
|
(5,569
|
)
|
|
|
(8,978
|
)
|
Loss (gain) on sale of assets and other, net
|
|
|
(195
|
)
|
|
|
101
|
|
|
|
(212
|
)
|
|
|
(1,197
|
)
|
|
|
7,414
|
|
Depreciation and amortization
|
|
|
7,347
|
|
|
|
7,904
|
|
|
|
22,263
|
|
|
|
23,973
|
|
|
|
30,056
|
|
Restructuring costs and other
|
|
|
2,792
|
|
|
|
1,865
|
|
|
|
5,612
|
|
|
|
4,150
|
|
|
|
7,012
|
|
Stock compensation
|
|
|
321
|
|
|
|
425
|
|
|
|
1,209
|
|
|
|
1,441
|
|
|
|
1,626
|
|
Add:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Ownership share of TNI and MNI EBITDA (50%)
|
|
|
1,806
|
|
|
|
2,189
|
|
|
|
6,486
|
|
|
|
7,433
|
|
|
|
8,936
|
|
Adjusted EBITDA
|
|
|
30,651
|
|
|
|
31,061
|
|
|
|
90,378
|
|
|
|
96,781
|
|
|
|
125,527
|
|
IMPACT OF RECENTLY ISSUED ACCOUNTING STANDARDS
In August 2018, the Financial Accounting Standards Board (“FASB”) issued a new standard which modifies the disclosure requirements for employers that sponsor defined benefit pension or other postretirement plans. The modifications remove disclosures, clarify the specific requirements of disclosures and add disclosure requirements identified as relevant. We are currently in the process of evaluating the impact of this guidance on our Consolidated Financial Statements.
In August 2018, the FASB issued a new standard which modifies the disclosure requirements on fair value measurements. The amendments on changes in unrealized gains and losses, the range and weighted average of significant unobservable inputs used to develop Level 3 fair value measurements, and the narrative description of measurement uncertainty should be applied prospectively for only the most recent interim or annual period presented in the initial fiscal year of adoption. All other amendments should be applied retrospectively to all periods presented upon their effective date. We are currently in the process of evaluating the impact of this guidance on our Consolidated Financial Statements.
CRITICAL ACCOUNTING POLICIES
Our critical accounting policies include the following:
|
•
|
Intangible assets, other than goodwill;
|
|
•
|
Pension, postretirement and postemployment benefit plans; and
|
Additional information regarding these critical accounting policies can be found under the caption “Management's Discussion and Analysis of Financial Condition and Results of Operations” in our 2018 Annual Report on Form 10-K.
EXECUTIVE OVERVIEW
Lee Enterprises, Incorporated is a leading provider of high quality, trusted, local news and information, and a major platform for advertising in the markets we serve. We operate 50 principally mid-sized local media operations and manage 30 additional local media operations through an agreement with BH Media Group, Inc. (the "Management Agreement").
We reach 79% of all adults in our larger markets through a combination of our print and digital content offerings.
|
•
|
Our web and mobile sites are the number one digital source of local news in most of our markets, reaching more than
29.3
million unique visitors each month with a monthly average of
289.1
million page views. Page views per visit, one metric we use to monitor engagement, increased
6.9%
in the 2019 Quarter.
|
|
•
|
Our printed newspapers reach more than
0.7
million households daily and more than
1.0
million on Sunday, with estimated readership totaling three million. Digital only subscribers totaled approximately
79,000
, a
72.0%
increase over the prior year.
|
Our products include daily newspapers, websites and mobile applications, mobile news and advertising, video products, a digital marketing agency, digital services including web hosting and content management, niche publications and community newspapers. Our local media operations range from large daily newspapers and their associated digital products, such as the
St. Louis Post-Dispatch
, to non-daily newspapers with news websites and digital platforms serving smaller communities.
We also operate TownNews, through our 82.5% owned subsidiary INN Partners, L.C. ("TownNews"). TownNews provides state-of-the-art web hosting, content management services and video management services to nearly 2,000 other media organizations including broadcast.
We entered into the Management Agreement to manage Berkshire Hathaway's newspaper and digital operations in 30 markets. 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.
IMPAIRMENT OF GOODWILL AND OTHER ASSETS
We have significant amounts of goodwill and identified intangible assets. Since 2007 we have recorded impairment charges totaling almost $1.3 billion to reduce the value of certain of these assets. Future decreases in our market value, or significant differences in revenue, expenses or cash flows from estimates used to determine fair value, could result in additional impairment charges in the future.
DEBT AND LIQUIDITY
We have a substantial amount of debt, as discussed more fully in Note 5 of the Notes to Consolidated Financial Statements, included herein. Since February 2009, we have satisfied all interest payments and substantially all principal payments due under our debt facilities with our cash flows and asset sales.
As of
June 30, 2019
, our debt consists of the following:
|
•
|
$400,000,000 aggregate principal amount of 9.5% Senior Secured Notes (the “Notes”), pursuant to an Indenture dated as of March 31, 2014 (the “Indenture”), of which $
374,420,000
is outstanding at
June 30, 2019
;
|
|
•
|
$250,000,000 first lien term loan (the "1st Lien Term Loan") and $40,000,000 revolving facility (the "Revolving Facility") under a First Lien Credit Agreement dated as of March 31, 2014 (together, the “1
st
Lien Credit Facility”), of which $0 is outstanding at
June 30, 2019
; and
|
|
•
|
$150,000,000 second lien term loan under a Second Lien Loan Agreement dated as of March 31, 2014 (the “ 2
nd
Lien Term Loan”), of which $
84,138,000
is outstanding at
June 30, 2019
.
|
In November 2018, we repaid, in full, the remaining balance of the 1
st
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, 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.
We may repurchase Notes in the open market at any time. In the 13 weeks ended
June 30, 2019
we purchased $
10,580,000
principal amount of Notes in privately negotiated transactions. The transactions resulted in a loss on extinguishment of debt totaling $
238,000
in the 13 weeks ended June 30, 2019 which is recorded in Other, net in the Consolidated Statements of Income and Comprehensive Income.
Our ability to make payments on our indebtedness will depend on our ability to generate future cash flows from operations. Cash generated from future asset sales could serve as an additional source of repayment. This ability, to a certain extent, is subject to general economic, financial, competitive, business, legislative, regulatory and other factors that are beyond our control.
At
June 30, 2019
, after consideration of letters of credit, we have approximately $
21,685,000
available for future use under our Revolving Facility, which expires December 28, 2019. Including cash, our liquidity at
June 30, 2019
totals $
35,201,000
. This liquidity amount excludes any future cash flows. Our adjusted EBITDA has been strong for the last seven years and totaled $
125,527,000
for the trailing twelve months ended
June 30, 2019
, but there can be no assurance that such performance will continue. We expect all interest and principal payments due in the next twelve months will be satisfied by our cash flows from operations and certain asset sales, which will allow us to maintain an adequate level of liquidity.
At
June 30, 2019
, the principal amount of our outstanding debt totaled $
458,558,000
. The
June 30, 2019
principal amount of our debt, net of cash, is
3.5
times our trailing twelve months adjusted EBITDA.
Excluding our Revolving Facility, which is undrawn as of
June 30, 2019
, 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, if necessary. The Notes, 1
st
Lien Credit Facility and 2
nd
Lien Term Loan have only limited affirmative covenants with which we are required to maintain compliance. We are in compliance with our debt covenants at
June 30, 2019
.
13 WEEKS ENDED
June 30, 2019
Operating results, as reported in the Consolidated Financial Statements, are summarized below.
(Thousands of Dollars, Except Per Share Data)
|
|
June 30, 2019
|
|
|
June 24, 2018
|
|
|
Percent Change
|
|
Advertising and marketing services revenue
|
|
|
65,754
|
|
|
|
73,538
|
|
|
|
(10.6
|
)
|
Subscription
|
|
|
46,620
|
|
|
|
48,165
|
|
|
|
(3.2
|
)
|
Other
|
|
|
14,910
|
|
|
|
10,915
|
|
|
|
36.6
|
|
Total operating revenue
|
|
|
127,284
|
|
|
|
132,618
|
|
|
|
(4.0
|
)
|
Operating expenses:
|
|
|
|
|
|
|
|
|
|
|
|
|
Compensation
|
|
|
45,373
|
|
|
|
48,570
|
|
|
|
(6.6
|
)
|
Newsprint and ink
|
|
|
5,230
|
|
|
|
6,442
|
|
|
|
(18.8
|
)
|
Other operating expenses
|
|
|
48,157
|
|
|
|
49,159
|
|
|
|
(2.0
|
)
|
Cash costs
|
|
|
98,760
|
|
|
|
104,171
|
|
|
|
(5.2
|
)
|
Total operating revenue less cash costs
|
|
|
28,524
|
|
|
|
28,447
|
|
|
|
0.3
|
|
Depreciation and amortization
|
|
|
7,347
|
|
|
|
7,904
|
|
|
|
(7.0
|
)
|
Assets loss (gain) on sales, impairments and other, net
|
|
|
(195
|
)
|
|
|
101
|
|
|
|
NM
|
|
Restructuring costs and other
|
|
|
2,792
|
|
|
|
1,865
|
|
|
|
49.7
|
|
Operating expenses
|
|
|
108,704
|
|
|
|
114,041
|
|
|
|
(4.7
|
)
|
Equity in earnings of associated companies
|
|
|
1,451
|
|
|
|
1,578
|
|
|
|
(8.0
|
)
|
Operating income
|
|
|
20,031
|
|
|
|
20,155
|
|
|
|
(0.6
|
)
|
Non-operating income (expense):
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest expense
|
|
|
(11,860
|
)
|
|
|
(12,913
|
)
|
|
|
(8.2
|
)
|
Debt financing and administrative cost
|
|
|
(4,196
|
)
|
|
|
(1,747
|
)
|
|
|
NM
|
|
Other, net
|
|
|
3,702
|
|
|
|
1,227
|
|
|
|
NM
|
|
Non-operating expenses, net
|
|
|
(12,354
|
)
|
|
|
(13,433
|
)
|
|
|
(8.0
|
)
|
Income before income taxes
|
|
|
7,677
|
|
|
|
6,722
|
|
|
|
14.2
|
|
Income tax expense
|
|
|
1,505
|
|
|
|
1,972
|
|
|
|
(23.7
|
)
|
Net income
|
|
|
6,172
|
|
|
|
4,750
|
|
|
|
29.9
|
|
Net income attributable to non-controlling interests
|
|
|
(406
|
)
|
|
|
(292
|
)
|
|
|
39.0
|
|
Income attributable to Lee Enterprises, Incorporated
|
|
|
5,766
|
|
|
|
4,458
|
|
|
|
29.3
|
|
Other comprehensive income (loss), net of income taxes
|
|
|
(122
|
)
|
|
|
27
|
|
|
|
NM
|
|
Comprehensive income attributable to Lee Enterprises, Incorporated
|
|
|
5,644
|
|
|
|
4,485
|
|
|
|
25.8
|
|
Earnings per common share:
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic
|
|
|
0.10
|
|
|
|
0.08
|
|
|
|
27.3
|
|
Diluted
|
|
|
0.10
|
|
|
|
0.08
|
|
|
|
27.5
|
|
References to the "2019 Quarter" refer to the 13 weeks ended
June 30, 2019
. Similarly, references to the "2018 Quarter" refer to the 13 weeks ended
June 24, 2018
. To facilitate a comparison of our results without the impact of acquisitions and dispositions of revenues and expenses, certain revenue and expense trends, as described below, are presented on a same property basis and are calculated as follows:
|
•
|
Reported revenue or expenses;
|
|
•
|
Less: revenue or expenses for our 2019 acquisitions; and
|
|
•
|
Less: revenue or expenses from enterprises that were disposed of in 2018.
|
Operating Revenue
In the 2019 Quarter, advertising and marketing services revenue decreased $
7,784,000
, or
10.6%
compared to the 2018 Quarter. The decrease in advertising and marketing services revenue is due to softness in print advertising demand resulting in reduced advertising volume primarily from large retail, big box stores and classifieds. Advertising and marketing services revenue on a same property basis decreased
$
9,155,000
, or
12.4%
.
Digital advertising increased
2.8%
to $
25,448,000
in the 2019 Quarter and represents
38.7%
of total advertising revenue.
Subscription revenue decreased $
1,545,000
, or
3.2%
, in the 2019 Quarter. Strategic pricing programs and premium content helped offset lower paid circulation units. Our average daily newspaper circulation, including TNI, MNI and digital subscribers, totaled
0.7
million in the 2019 Quarter. Sunday circulation totaled
1.0
million.
Digital only subscribers totaled approximately
79,000
, a
72.0%
increase over the prior year. Subscription revenue on a same property basis decreased
$
2,566,000
or
5.3%
.
Other revenue, which consists of digital services, Management Agreement revenue, commercial printing, revenue from delivery of third party products and the sale of books, increased
36.6%
in the 2019 Quarter. The increase was driven by growth at TownNews as well as $
3,539,000
in Management Agreement revenue from BH Media.
Excluding intercompany activity, total revenue at TownNews increased
35.7%
in the 2019 Quarter due to a growing broadcast customer base, gaining print market share and the impact of the GTxcel acquisition. On a stand alone basis, total revenue at TownNews totaled $
22,141,000
over the last twelve months.
In the 2019 Quarter, our mobile, tablet, desktop and app sites, including TNI and MNI, attracted a monthly average of
29.3
million unique visitors with
289.1
million page views, a
7.5%
increase in page views compared to the 2018 Quarter. Increased audience engagement is driving a higher number of pages viewed per user session in the 2019 Quarter. Research in our larger markets indicates we are maintaining our share of audience in our markets through the combination of strong digital audience growth and print newspaper readership.
Operating Expenses
Operating expenses for the 2019 Quarter decreased
4.7%
. Cash costs decreased
5.2%
compared to the prior year quarter.
Compensation expense decreased $
3,197,000
, or
6.6%
driven by an
8.0%
decline in average full-time equivalent employees. Continued business transformation affected the number of full-time equivalents in the 2019 Quarter.
Newsprint and ink costs decreased $
1,212,000
, or
18.8%
, due to decreases in newsprint prices and an
11.6%
decrease in newsprint volume. See Item 3, “Commodities”, included herein, for further discussion and analysis of the impact of newsprint prices on our business.
Other operating expenses for the 2019 Quarter decreased $
1,002,000
, or
2.0%
. Other operating expenses include all operating costs not considered to be compensation, newsprint, depreciation and amortization, or restructuring costs and other. The largest components of these costs include delivery, postage, outsourced printing, digital cost of goods sold and facility expenses. Cost reductions were primarily related to lower delivery and other print-related costs offset in part by higher costs associated with growing digital revenue and outsourcing.
On a same property basis, cash costs were down
$
7,950,000
or
7.6%
in the 2019 quarter. We expect cash costs on a same property basis to be down 4.75 - 5.5% in fiscal year 2019, an improvement from our previous cost guidance.
Depreciation expense decreased $
459,000
, or
12.7%
, and amortization expense decreased $
98,000
, or
2.3%
, in the 2019 Quarter.
Assets loss (gain) on sales, impairments and other, was a net gain of $
195,000
in the 2019 Quarter compared to a net loss of $
101,000
in the 2018 Quarter. Restructuring costs and other totaled $
2,792,000
and $
1,865,000
in the 2019 Quarter and 2018 Quarter, respectively.
Results of Operations
The factors noted above resulted in operating income of $
20,031,000
in the 2019 Quarter compared to $
20,155,000
in the 2018 Quarter.
Equity in earnings of TNI and MNI decreased $
127,000
in the 2019 Quarter.
Nonoperating Income and Expense
Interest expense decreased $
1,053,000
, or
8.2%
, to $
11,860,000
in the 2019 Quarter due to lower debt balances. Our weighted average cost of debt, excluding amortization of debt financing costs, was
10.0%
at the end of the 2019 Quarter.
We recognized $
4,196,000
of debt financing and administrative costs in the 2019 Quarter compared to $
1,747,000
in the 2018 Quarter. The increase in the 2019 Quarter is primarily driven by write-offs associated with the current year debt repurchases totaling $
10,580,000
.
In addition, we recorded an out of period adjustment in the 2019 Quarter totaling $1,309,000 as discussed in Note 5.
The majority of the costs represent amortization of refinancing costs paid in 2014.
Other non-operating income and expense consists of benefits associated with our pension and other postretirement plans and the fair value adjustment of our Warrants.
We recorded $
712,000
of other periodic pension benefits in the 2019 Quarter and $
708,000
in the 2018 Quarter.
Due to the fluctuation in the price of our Common Stock, we recorded non-operating income of $
3,062,000
in the 2019 Quarter and $
405,000
in the 2018 Quarter, related to the changes in the value of the Warrants.
Overall Results
We recorded an income tax expense of $
1,505,000
, or
19.6%
of pretax income in the 2019 Quarter. For the 13 weeks ended
June 24, 2018
, we recognized an income tax expense of $
1,972,000
, or
29.3%
, of pretax income.
NET INCOME AND EARNINGS PER SHARE
The following table summarizes the impact from the fair value adjustments of our Warrants on income attributable to Lee Enterprises, Incorporated and earnings per diluted common share. Per share amounts may not add due to rounding.
|
|
13 Weeks Ended
|
|
|
|
|
|
|
|
|
June 30, 2019
|
|
|
|
|
|
|
|
June 24, 2018
|
|
(Thousands of Dollars, Except Per Share Data)
|
|
Amount
|
|
|
Per Share
|
|
|
Amount
|
|
|
Per Share
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income attributable to Lee Enterprises, Incorporated, as reported
|
|
|
5,766
|
|
|
|
0.10
|
|
|
|
4,458
|
|
|
|
0.08
|
|
Adjustments:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Warrants fair value adjustment
|
|
|
(3,062
|
)
|
|
|
(0.05
|
)
|
|
|
(405
|
)
|
|
|
(0.01
|
)
|
Income attributable to Lee Enterprises, Incorporated, as adjusted
|
|
|
2,704
|
|
|
|
0.05
|
|
|
|
4,053
|
|
|
|
0.07
|
|
39 WEEKS ENDED JUNE 30, 2019
Operating results, as reported in the Consolidated Financial Statements, are summarized below.
(Thousands of Dollars, Except Per Share Data)
|
|
June 30, 2019
|
|
|
June 24, 2018
|
|
|
Percent Change
|
|
Total advertising and marketing services revenue
|
|
|
204,651
|
|
|
|
229,751
|
|
|
|
(10.9
|
)
|
Subscription
|
|
|
137,965
|
|
|
|
142,405
|
|
|
|
(3.1
|
)
|
Other
|
|
|
43,573
|
|
|
|
32,052
|
|
|
|
35.9
|
|
Total operating revenue
|
|
|
386,189
|
|
|
|
404,208
|
|
|
|
(4.5
|
)
|
Operating expenses:
|
|
|
|
|
|
|
|
|
|
|
|
|
Compensation
|
|
|
140,197
|
|
|
|
149,551
|
|
|
|
(6.3
|
)
|
Newsprint and ink
|
|
|
17,394
|
|
|
|
17,920
|
|
|
|
(2.9
|
)
|
Other operating expenses
|
|
|
145,915
|
|
|
|
148,830
|
|
|
|
(2.0
|
)
|
Cash costs
|
|
|
303,506
|
|
|
|
316,301
|
|
|
|
(4.0
|
)
|
Total operating revenue less cash costs
|
|
|
82,683
|
|
|
|
87,907
|
|
|
|
(5.9
|
)
|
Depreciation and amortization
|
|
|
22,263
|
|
|
|
23,973
|
|
|
|
(7.1
|
)
|
Assets loss (gain) on sales, impairments and other
|
|
|
(212
|
)
|
|
|
(1,197
|
)
|
|
|
(82.3
|
)
|
Restructuring costs and other
|
|
|
5,612
|
|
|
|
4,150
|
|
|
|
35.2
|
|
Operating expenses
|
|
|
331,169
|
|
|
|
343,227
|
|
|
|
(3.5
|
)
|
Equity in earnings of associated companies
|
|
|
5,298
|
|
|
|
5,569
|
|
|
|
(4.9
|
)
|
Operating income
|
|
|
60,318
|
|
|
|
66,550
|
|
|
|
(9.4
|
)
|
Non-operating income (expense):
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest expense
|
|
|
(36,256
|
)
|
|
|
(39,837
|
)
|
|
|
(9.0
|
)
|
Debt financing and administrative cost
|
|
|
(6,053
|
)
|
|
|
(4,061
|
)
|
|
|
49.1
|
|
Other, net
|
|
|
2,730
|
|
|
|
3,168
|
|
|
|
(13.8
|
)
|
Non-operating expenses, net
|
|
|
(39,579
|
)
|
|
|
(40,730
|
)
|
|
|
(2.8
|
)
|
Income before income taxes
|
|
|
20,739
|
|
|
|
25,820
|
|
|
|
(19.7
|
)
|
Income tax expense (benefit)
|
|
|
6,175
|
|
|
|
(16,791
|
)
|
|
|
NM
|
|
Net income
|
|
|
14,564
|
|
|
|
42,611
|
|
|
|
(65.8
|
)
|
Net income attributable to non-controlling interests
|
|
|
(1,115
|
)
|
|
|
(911
|
)
|
|
|
22.4
|
|
Income attributable to Lee Enterprises, Incorporated
|
|
|
13,449
|
|
|
|
41,700
|
|
|
|
(67.7
|
)
|
Other comprehensive income (loss), net of income taxes
|
|
|
(365
|
)
|
|
|
18
|
|
|
|
NM
|
|
Comprehensive income attributable to Lee Enterprises, Incorporated
|
|
|
13,084
|
|
|
|
41,718
|
|
|
|
(68.6
|
)
|
Earnings per common share:
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic
|
|
|
0.24
|
|
|
|
0.76
|
|
|
|
(68.3
|
)
|
Diluted
|
|
|
0.24
|
|
|
|
0.75
|
|
|
|
(68.1
|
)
|
References to the "2019 Period" refer to the
39
weeks ended
June 30, 2019
. Similarly, references to the "2018 Period" refer to the
39
weeks ended
June 24, 2018
. To facilitate a comparison of our results without the impact of acquisitions and dispositions of revenues and expenses, certain revenue and expense trends, as described below, are presented on a same property basis and are calculated as follows:
|
•
|
Reported revenue or expenses;
|
|
•
|
Less: revenue or expenses for our 2019 acquisitions; and
|
|
•
|
Less: revenue or expenses from enterprises that were disposed of in 2018.
|
Operating Revenue
In the 2019 Period, advertising and marketing services revenue decreased $
25,100,000
, or
10.9%
, compared to the 2018 Period. The decrease in advertising and marketing services revenue is due to softness in print advertising demand resulting in reduced advertising volume primarily from large retail, big box stores and classifieds. Advertising and marketing services revenue on a same property basis decreased
$
26,807,000
or
11.7%
.
Digital advertising increased
5.3%
to $
75,011,000
in the 2019 Period and represents
36.7%
of total advertising and marketing services revenue. Digital retail advertising, which represents
62.8%
of total digital advertising, increased
6.2%
partially offsetting print declines.
Subscription revenue decreased $
4,440,000
, or
3.1%
, in the 2019 Period. Strategic pricing programs and premium content helped offset lower paid circulation units. Our average daily newspaper circulation, including TNI, MNI and digital subscribers, totaled
0.7
million in the 2019 Period. Sunday circulation totaled
1.0
million. Subscription revenue on a same property basis decreased $
5,902,000
or
4.2%
.
Other revenue, which consists of digital services, Management Agreement revenues, commercial printing, revenue from delivery of third party products and the sale of books, increased
35.9%
in the 2019 Period. The increase was driven by growth at TownNews as well as $
9,989,000
in Management Agreement revenue from BH Media. In the first year of the Management Agreement, the year ended
June 30, 2019
, we earned $
11,320,000
in total Management Agreement revenue.
Excluding intercompany activity, total revenue at TownNews increased
30.6%
in the 2019 Period, due to growing broadcast customer base, gaining print market share and the impact of the GTxcel acquisition. On a stand alone basis, total revenue at TownNews totaled $
22,141,000
over the last twelve months. In the 2019 Period, our mobile, tablet, desktop and app sites, including TNI and MNI, attracted a monthly average of
29.5
million unique visitors with
292.1
million page views, a
12.6%
increase in page views compared to the 2018 Period. Increased audience engagement is driving a higher number pages viewed per user session in the 2019 Period. Research in our larger markets indicates we are maintaining our share of audience in our markets through the combination of strong digital audience growth and print newspaper readership.
Operating Expenses
Operating expenses for the 2019 Period decreased
3.5%
and cash costs decreased
4.0%
. On a same property basis, cash costs were down
$
16,382,000
or
5.2%
in the 2019 Period compared to the 2018 Period.
Compensation expense for the 2019 Period decreased $
9,354,000
, or
6.3%
, driven by a decline of
10.3%
in average full time equivalent employees.
Newsprint and ink costs for the 2019 Period decreased $
526,000
, or
2.9%
, due to
11.2%
reduction in newsprint volume from unit declines partially offset by higher prices. See Item 3, “Commodities”, included herein, for further discussion and analysis of the impact of newsprint on our business.
Other operating expenses for the 2019 Period decreased $
2,915,000
, or
2.0%
. Other operating expenses include all operating costs not considered to be compensation, newsprint, depreciation and amortization, or restructuring costs and other. The largest components of these costs include delivery, postage, outsourced printing, digital cost of goods sold and facility expenses. Cost reductions were primarily related to lower delivery and other print-related costs offset in part by higher costs associated with growing digital revenue and outsourcing.
Depreciation expense decreased $
1,546,000
, or
14.0%
, and amortization expense decreased $
164,000
, or
1.3%
in the 2019 Period.
Assets loss (gain) on sales, impairments and other, was a net gain of $
212,000
in the 2019 Period compared to a net gain of $
1,197,000
in the 2018 Period. The net gain in the 2018 Period includes curtailment gains of $
2,031,000
. In the 2019 Period, we recorded an estimated withdrawal liability of $
500,000
related to one of our multi-employer plans, which is included in restructuring costs and other.
Restructuring costs totaled $
5,612,000
and $
4,150,000
in the 2019 Period and 2018 Period, respectively. The majority of restructuring costs relate to severance and a partial withdrawal liability related to one of our multi employer pension plans.
Results of Operations
The factors noted above resulted in operating income of $
60,318,000
in the 2019 Period compared to $
66,550,000
in the 2018 Period.
Equity in earnings in associated companies decreased $
271,000
in the 2019 Period.
Nonoperating Income and Expense
Interest expense decreased $
3,581,000
, or
9.0%
to $
36,256,000
in the 2019 Period due to lower debt balances.
We recognized $
6,053,000
of debt financing and administrative costs in the 2019 Period compared to $
4,061,000
in the 2018 Period. The increase in the 2019 Period is primarily driven by write-offs associated with the current year debt repurchases totaling $
10,580,000
.
In addition, we recorded an out of period adjustment in the 2019 Period totaling $1,145,000 as discussed in Note 5.
The majority of the costs represent amortization of refinancing costs paid in 2014.
Other non-operating income and expense consists of benefits associated with our pension and other postretirement plans and the fair value adjustment of our Warrants. We recorded $
2,135,000
of other periodic pension benefits in the 2019 Period and $
2,123,000
in the 2018 Period. We recorded non-operating income of $
389,000
in 2019 Period and $
529,000
in the 2018 Period, related to the changes in the value of the Warrants.
Overall Results
On December 22, 2017, the 2017 Tax Act was signed into law. Among other provisions, the 2017 Tax Act reduced 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% in the 2018 Quarter. We reported a discrete adjustment from revaluing our deferred tax assets and liabilities resulting in a net decrease in income tax expense of $24,872,000 in the 2018 Quarter.
We recorded an income tax expense of $
6,175,000
, or
29.8%
of pretax income in the 2019 Period. For the
39
weeks ended
June 24, 2018
, we recognized a $
16,791,000
income tax benefit. Excluding the transitional impact from the 2017 Tax Act, the effective income tax rate for the
39
weeks ended
June 24, 2018
was
31.3%
.
NET INCOME AND EARNINGS PER SHARE
The following table summarizes the impact from the 2017 Tax Act as well as the warrant fair value adjustments on income attributable to Lee Enterprises, Incorporated and earnings per diluted common share. Per share amounts may not add due to rounding.
|
|
|
|
|
|
|
|
|
|
39 Weeks Ended
|
|
|
|
June 30, 2019
|
|
|
June 24, 2018
|
|
(Thousands of Dollars, Except Per S
h
are Data)
|
|
Amount
|
|
|
Per Share
|
|
|
Amount
|
|
|
Per Share
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income attributable to Lee Enterprises, Incorporated, as reported
|
|
|
13,449
|
|
|
|
0.24
|
|
|
|
41,700
|
|
|
|
0.75
|
|
Adjustments:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Warrants fair value adjustment
|
|
|
(389
|
)
|
|
|
(0.01
|
)
|
|
|
(529
|
)
|
|
|
—
|
|
Income tax effect of 2017 Tax Act
|
|
|
—
|
|
|
|
|
|
|
|
(24,872
|
)
|
|
|
(0.45
|
)
|
Income attributable to Lee Enterprises, Incorporated, as adjusted
|
|
|
13,060
|
|
|
|
0.22
|
|
|
|
16,299
|
|
|
|
0.29
|
|
LIQUIDITY AND CAPITAL RESOURCES
Operating Activities
Cash provided by operating activities was $
43,786,000
in the 2019 Period compared to $
57,033,000
in the 2018 Period. Net income for the 2019 Period totaled $
14,564,000
compared to $
42,611,000
in the 2018 Period. The decrease in cash provided by operating activities in the 2019 Period is mainly attributed to year over year changes in operating income as well as increased income tax payments.
Investing Activities
Cash required for investing activities totaled $
7,911,000
in the 2019 Period compared to $
2,076,000
in the 2018 Period. Capital spending totaled $
3,753,000
in the 2019 Period compared to $
4,281,000
in the 2018 Period. We spent $
5,274,000
on acquisitions in the 2019 Period.
We anticipate that funds necessary for capital expenditures, which
are expected to total up to $
8,000,000
in 2019, and other requirements, will be available from internally generated funds or available under our Revolving Facility.
Financing Activities
Cash required for financing activities totaled $
27,739,000
in the 2019 Period and $
49,549,000
in the 2018 Period. Debt reduction accounted for the majority of the usage of funds in both the 2019 Period and the 2018 Period.
Liquidity
At
June 30, 2019
, after consideration of letters of credit, we have approximately $
21,685,000
available for future use under our Revolving Facility. Including cash and availability under our Revolving Facility, our liquidity at
June 30, 2019
totals $
35,201,000
. This liquidity amount excludes any future cash flows. We expect all interest and principal payments due in the next twelve months will be satisfied by our cash flows, which will allow us to maintain an adequate level of liquidity. The Warrants, if and when exercised, would provide additional liquidity in an amount up to $
25,140,000
. On July 31, 2019, our liquidity was reduced by $4.1 million due to a reduction in availability under our Revolving Facility.
Our Revolving Facility expires December 28, 2019.
At
June 30, 2019
, the principal amount of our outstanding debt totals $
458,558,000
. The
June 30, 2019
principal amount of debt, net of cash, is
3.5
times our trailing 12 months adjusted EBITDA.
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 repay, refinance or amend our debt agreements as they become due, if available liquidity is consumed. The Notes, 1
st
Lien Credit Facility and 2
nd
Lien Term Loan have only limited affirmative covenants with which we are required to maintain compliance. We are in compliance with our debt covenants at
June 30, 2019
.
In February 2017 our filing of a replacement Form S-3 registration statement ("Shelf") with the SEC, was declared effective and expires February 2020. The Shelf registration gives us the flexibility to issue and publicly distribute various types of securities, including preferred stock, common stock, warrants, secured or unsecured debt securities, purchase contracts and units consisting of any combination of such securities, from time to time, in one or more offerings, up to an aggregate amount of $750,000,000. SEC issuer eligibility rules require us to have a public float of at least $75,000,000 in order to use the Shelf. Subject to maintenance of the minimum level of equity market float and the conditions of our existing debt agreements, the Shelf may enable us to sell securities quickly and efficiently when market conditions are favorable or financing needs arise. Under our existing debt agreements, net proceeds from the sale of any securities may be used generally to reduce debt.
CHANGES IN LAWS AND REGULATIONS
Pension Plans
In 2012, the Surface Transportation Extension Act of 2012 (“STEA”) was signed into law. STEA provides for changes in the determination of discount rates that result in a near-term reduction in minimum funding requirements for our defined benefit pension plans. STEA will also result in an increase in future premiums to be paid to the Pension Benefit Guarantee Corporation ("PBGC").
In 2014, the Highway and Transportation Funding Act ("HATFA") was signed into law. HATFA generally extends the relief offered under STEA and further increases premiums to be paid to the PBGC.
Income Taxes
On December 22, 2017, the 2017 Tax Act was signed into law. Among other provisions, the 2017 Tax Act reduces the federal statutory corporate income tax rate from 35% to 21%. The reduction of the corporate tax rate caused us to re-measure our deferred tax assets and liabilities to the lower federal base rate of 21%. We reported a discrete adjustment from revaluing our deferred tax assets and liabilities which resulted in a provisional net decrease in income tax expense of $24,872,000 for the
39
weeks ended
June 24, 2018
.
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. Apart from any future changes in interpretations, legislative action or changes in accounting standards, we finalized and recorded the resulting adjustments as of September 30, 2018.
Wage Laws
The United States and various state and local governments are considering increasing their respective minimum wage rates. Most of our employees earn an amount in excess of the current United States or state minimum wage rates. However, until changes to such rates are enacted, the impact of the changes cannot be determined.
INFLATION
Price increases (or decreases) for our products or services are implemented when deemed appropriate by us. We continuously evaluate price increases, productivity improvements, sourcing efficiencies and other cost reductions to mitigate the impact of inflation.