10-K 1 a10k20169-25x1609252016.htm 10-K Document
 
UNITED STATES SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-K
[X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For The Fiscal Year Ended September 25, 2016
OR
[  ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
Commission File Number 1-6227
LEE ENTERPRISES, INCORPORATED
(Exact name of Registrant as specified in its Charter)
Delaware
42-0823980
(State of incorporation)
(I.R.S. Employer Identification No.)
201 N. Harrison Street, Suite 600, Davenport, Iowa 52801
(Address of principal executive offices)
(563) 383-2100
Registrant's telephone number, including area code
Title of Each Class
Name of Each Exchange On Which Registered
Securities registered pursuant to Section 12(b) of the Act:
 
Common Stock - $0.01 par value
New York Stock Exchange
Preferred Share Purchase Rights
New York Stock Exchange

Indicate by check mark if the Registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities Act. Yes [ ] No [X]
 
Indicate by check mark if the Registrant is not required to file reports pursuant to Section 13 or Section 15(d) of the Act. Yes [ ] No [X]
 
Indicate by check mark whether the Registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the Registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes [X] No [ ]
 
Indicate by check mark whether the Registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§232.405 of this Chapter) during the preceding 12 months (or such shorter period that the Registrant was required to submit and post such files). Yes [X] No [ ]
                                     
Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K (S 229.405 of this Chapter) is not contained herein, and will not be contained, to the best of Registrant's knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K. [ ]
                                         
Indicate by check mark whether the Registrant is a large accelerated filer, an accelerated filer, or a non-accelerated filer, or a "smaller reporting company" under Rule 12b-2 under the Exchange Act. See the definition of “large accelerated filer", "accelerated filer" and "smaller reporting company” in Rule 12b-2 of the Exchange Act:
 
Large accelerated filer [ ] Accelerated filer [X] Non-accelerated filer (Do not check if a smaller reporting company) [ ] Smaller Reporting Company [ ]
 
Indicate by check mark whether the Registrant is a shell company (as defined in Rule 12b-2 of the Act). Yes [ ] No [X]
 
Indicate by check mark whether the Registrant has filed all documents and reports required to be filed by Sections 12, 13 or 15(d) of the Securities Exchange Act of 1934 subsequent to the distribution of securities under a plan confirmed by a court.  Yes [X]     No [  ]
 
State the aggregate market value of the voting and non-voting common equity held by non-affiliates computed by reference to the price at which the common equity was last sold, or the average bid and asked price of such common equity, as of the last business day of the Registrant's most recently completed second fiscal quarter. Based on the closing price of the Registrant's Common Stock on the New York Stock Exchange on March 31, 2016, such aggregate market value is approximately $93,233,000. For purposes of the foregoing calculation only, as required, the Registrant has included in the shares owned by affiliates the beneficial ownership of Common Stock of officers and directors of the Registrant and members of their families, and such inclusion shall not be construed as an admission that any such person is an affiliate for any purpose.
 
Indicate the number of shares outstanding of each of the Registrant's classes of common stock, as of November 30, 2016. Common Stock, $0.01 par value, 55,562,832 shares.
 
DOCUMENTS INCORPORATED BY REFERENCE
 
Portions of the Lee Enterprises, Incorporated Definitive Proxy Statement to be filed in January 2017 are incorporated by reference in Part III of this Form 10-K.
 



TABLE OF CONTENTS
PAGE
 
 
 
 
 
 
 
 
 
 
 
 
Part I
 
 
 
 
 
 
Item 1
 
 
 
 
 
Item 1A
 
 
 
 
 
Item 1B
 
 
 
 
 
Item 2
 
 
 
 
 
Item 3
 
 
 
 
 
Item 4
Mine Safety Disclosures
 
 
 
 
Part II
 
 
 
 
 
 
Item 5
 
 
 
 
 
Item 6
 
 
 
 
 
Item 7
 
 
 
 
 
Item 7A
 
 
 
 
 
Item 8
 
 
 
 
 
Item 9
 
 
 
 
 
Item 9A
 
 
 
 
 
Item 9B
 
 
 
 
Part III
 
 
 
 
 
 
Item 10
 
 
 
 
 
Item 11
 
 
 
 
 
Item 12
 
 
 
 
 
Item 13
 
 
 
 
 
Item 14
Principal Accounting Fees and Services
 
 
 
 
Part IV
 
 
 
 
 
 
Item 15
 
 
 
 
 
 
 
 
 
 
 
 




References to “we”, “our”, “us” and the like throughout this document refer to Lee Enterprises, Incorporated and subsidiaries (the "Company"). References to "2016", "2015", "2014" and the like refer to the fiscal years ended the last Sunday in September.
 
FORWARD-LOOKING STATEMENTS

The Private Securities Litigation Reform Act of 1995 provides a “safe harbor” for forward-looking statements. This report contains information that may be deemed forward-looking that is based largely on our current expectations, and is subject to certain risks, trends and uncertainties that could cause actual results to differ materially from those anticipated. Among such risks, trends and other uncertainties, which in some instances are beyond our control, are:

Our ability to generate cash flows and maintain liquidity sufficient to service our debt;
Our ability to comply with the financial covenants in our credit facilities;
Our ability to refinance our debt as it comes due;
That the warrants issued in our refinancing will not be exercised;
The impact and duration of adverse conditions in certain aspects of the economy affecting our business;
Change in advertising and subscription demand;
Changes in technology that impact our ability to deliver digital advertising;
Potential changes in newsprint, other commodities and energy costs;
Interest rates;
Labor costs;
Legislative and regulatory rulings;
Our ability to achieve planned expense reductions;
Our ability to maintain employee and customer relationships;
Our ability to manage increased capital costs;
Our ability to maintain our listing status on the NYSE;
Competition; and
Other risks detailed from time to time in our publicly filed documents.

Any statements that are not statements of historical fact (including statements containing the words “may”, “will”, “would”, “could”, “believes”, “expects”, “anticipates”, “intends”, “plans”, “projects”, “considers” and similar expressions) generally should be considered forward-looking statements. Readers are cautioned not to place undue reliance on such forward-looking statements, which are made as of the date of this report. We do not undertake to publicly update or revise our forward-looking statements, except as required by law.

PART I
 
ITEM 1. BUSINESS
 
Lee Enterprises, Incorporated is a leading provider of local news and information, and a major platform for print and digital advertising, in the markets we serve, which are located primarily in the Midwest, Mountain West and West regions of the United States. With the exception of St. Louis, Missouri, our 49 markets (including TNI Partners ("TNI") and Madison Newspapers ("MNI")), across 21 states, are principally midsize or small. Through our paid and unpaid print and digital platforms, we reach an overwhelming majority of adults in our markets.

Our products include:

46 daily and 34 Sunday newspapers with print and digital subscribers totaling 0.8 million and 1.2 million, respectively, for the 13 weeks ended September 25, 2016. We estimate that more than three million people read our printed daily newspapers each day.
Nearly 300 weekly newspapers and classified and niche publications.

Our markets have established retail bases, and most are regional shopping hubs. We are located in four state capitals. Six of our top ten markets by revenue include major universities, and seven are home to major corporate headquarters. Community newspapers and their associated digital media are a valuable source of local news and information attracting readers and providing an effective means for local advertisers to reach their customers. We believe our audiences across these communities tend to be loyal readers that actively seek our content and serve as an attractive target for our advertisers.

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We do not face significant competition from other local daily newspapers in most of our markets, although there is significant competition for audience in those markets from other media. In our top ten markets by revenue, only two have significant local daily print competition.

Lee Enterprises, Incorporated was founded in 1890, incorporated in 1950, and listed on the New York Stock Exchange ("NYSE") in 1978. We have acquired and divested a number of businesses since inception.

In 2014, we completed a comprehensive refinancing of our debt (the "2014 Refinancing"). Final maturities of our debt have been extended to dates from March 2019 through December 2022. As a result, we believe refinancing risk has been substantially reduced for the next several years.

We experienced significant net losses since 2007 primarily due to non-cash charges for impairment of intangible and other assets in 2013, 2011, 2009 and 2008 and reorganization costs in 2012. 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, or earlier if available liquidity is consumed. We are in compliance with our debt covenants at September 25, 2016. The information included herein should be evaluated in that context. See Item 1A, “Risk Factors”, and Notes 3 and 4 of the Notes to Consolidated Financial Statements, included herein, for additional information.

STRATEGIC INITIATIVES

We are focused on several strategic initiatives:

Comprehensive Local News That Drives Frequency And Engagement

We drive frequency and engagement with our products by delivering valuable, intensely local, original news and information that, in many cases, we believe our audiences cannot otherwise readily obtain. Our large and talented news and editorial staff provide constant, real-time local news with significant breadth, depth and reliability. Our full access platforms provide our subscribers with in-depth and breaking news and information through continuous updates to our stories digitally on websites, mobile devices and tablets.

We believe the strength of our local brands is the result of the quality and size of our news gathering staff, which allow us to provide the most comprehensive coverage of local news in our markets. In most of our markets, we are the leading source of print and digital news and information. As the digital consumption of news has expanded, we have moved quickly to develop applications that address audience and digital advertising demands for mobile and tablet advertising platforms. As new digital technologies emerge, we expect to move rapidly to make our content available through them and monitize the audience.

We are focused on continually improving the functionality and the look and feel of all our news platforms, providing greater depth of coverage and reader engagement. We are arming our journalists with new tools to give them real-time information about audience engagement on our digital platforms, helping inform their decisions on both presentation and coverage.

We believe our journalists are at the forefront for information about the local community. We are engaging our readers by providing information that we believe stirs public awareness, advances ideas, inspires vision, creates debate and provokes action. Through our news leadership we strive to contribute to community betterment, promote education, foster commerce and help improve the quality of life in our markets.

Accelerate And Expand Digital Revenue Growth

Our digital businesses have experienced rapid growth since 2010. Digital advertising grew 5.6% and reached 25.3% of total advertising and marketing services revenue in the 13 weeks and year ended September 25, 2016. We are growing revenue by offering an expansive array of digital products, including video, digital couponing, behavioral targeting, audience retargeting, banner ads and social networking.

We provide digital marketing services to small and midsized businesses ("SMBs"), including search engine marketing ("SEM"), social media, audience extension, business profiles and website hosting and design. Lee Local offers small business solutions including search engine optimization (“SEO”), local online marketing, social media marketing, video advertising and web site design. Lee Local seeks to help small businesses maximize the return on marketing dollars

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by increasing audiences, expanding brands, and enhancing their web presence. We believe that these innovative solutions will continue to drive meaningful new opportunities for us to grow our digital marketing revenue.

Digital national revenue grew 20.4% in 2016, driven by our sweeps program and improved inventory management and pricing. Mobile advertising increased 19.6% and digital retail advertising that represents 60.5% of total digital advertising increased 9.6% in 2016.

INN Partners, L.C. ("TownNews.com"), of which we own 82.5%, provides digital infrastructure and digital publishing services for nearly 1,600 daily and weekly newspapers, along with universities, television stations and niche publications, as well as for us. We believe TownNews.com represents a powerful opportunity for us to drive additional digital revenue. In 2016, digital services revenue, which is primarily TownNews,com, increased to more than $14 million, or 13.7% over 2015.

We are also a member of the Local Media Consortium (the “Consortium”). The Consortium partners with companies like Google, Yahoo! and other technology companies and service providers to increase the potential share of new revenue and audience-building programs available to consortium members, as well as the quality of information and advertising services available from, Consortium members. The Consortium currently includes more than 1,600 local newspapers and hundreds of local broadcast outlets in the United States.

Our sales force is larger than any local competitor, and we believe they are the most highly trained and proficient sales force in our markets. We also continue to expand our array of digital products to address advertisers evolving needs, while seeking to increase our share of advertising and marketing services spending from existing customers and react to competition.

In 2016, no single advertiser accounted for more than 2% of advertising revenue and our top 10 advertisers represented 8.9% of advertising revenue.

Our local sales forces are one of our core strengths. We have strong relationships with businesses in our markets and offer a wide array of products to deliver the advertisers' message. In fact eighty percent of our advertising revenue now comes from local and regional businesses, and our sales executives pitch the power of our audiences directly to these local decision makers.

To address the evolving needs of local advertisers we are changing the way we sell local advertising to maximize our opportunities with small and medium-sized businesses. Local, controllable advertising accounts, in which our local sales teams have direct contact with the advertising decision makers are the core of our business. To address the needs of and better serve these local advertisers we developed the "Edison Project" which is directly aimed at these local advertisers.

With Edison, we are completely restructuring local sales teams and simplifying advertising packages to offer bigger ads and more frequency across our digital and print products.

In our test markets, results from the Edison Project have been very promising and we're expanding Edison into all Lee markets beginning in the first quarter of fiscal 2017, with full implementation expected by the end of the second fiscal quarter.

In addition, our successful Big Pitch initiative targets larger, local accounts such as the big local hardware store or regional hospital group. We pair creative advertising campaigns with our broad suite of products, both digital and print. Because of the success of this program we've added creative resources and accelerated the number of pitches developed providing greater creativity, faster speed to market, and more pitches closed.

Grow Audience Revenue And Engagement

Based on independent audience research conducted on our behalf, for the period January to June 2016, we reached 74% of all adults over the course of a seven-day period in 11 selected markets, which include most of our largest strategic business units. Half of the adults in these markets read our newspapers in print, with 19% being both newspaper readers and visitors to our newspaper digital platforms. Another 17% were exclusive digital users. The remaining 12% primarily used our newspapers to obtain advertising and other information.

Our audiences strength spans across all age groups. Among the 18-29 age group, 15% read our printed newspapers,

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while 23% accessed our publications by web, mobile or tablet. Another 11% primarily used our newspapers to obtain advertising and other information.

As media access and delivery vehicles continue to evolve, it is clear that our audiences are evolving and increasingly moving from one delivery platform to another throughout the day and accessing our content in print, on desktops and laptops, and on mobile devices. We seek to grow our audience and engagement on whatever platform they choose by, among other things, continually improving content and presentation to maximize the unique and evolving capabilities of each platform. Our digital audiences are massive. Unique visitors to our digital sites totaled 26.0 million in September 2016, while page views totaled 218.1 million in September 2016.

To serve our readers across all delivery platforms, in 2014, we began to phase in a new subscription model, which is now in place in substantially all of our markets. This model, known as full access, provides subscribers complete access to our print and digital products available in their market for a single subscription rate.

Transforming Our Business And Managing Our Costs

We are transforming our business model and reducing our costs to maintain our margins and cash flows. We have regionalized many staff functions; consolidated and/or selectively outsourced printing and ad production; discontinued unprofitable publications; reduced newsprint volume significantly; and continually seek to improve the efficiencies of our operation and reduce costs. We have reduced personnel while protecting our strengths in news, sales and digital products. In 2016, we reduced cash costs(1) excluding unusual matters 4.8%. We continue our focus on cost efficiencies while investing in revenue drivers.

Generate Strong Adjusted EBITDA(1) With A Commitment To Reduce Our Debt

Throughout the last economic downturn and subsequent recovery, and during a time of unprecedented transition for our industry, we have posted strong adjusted EBITDA. We require modest capital expenditures and pension contributions, and we continue to make significant debt reductions each year. Since 2009, we have dedicated substantially all of our free cash flow to debt repayment, and we intend to continue to use all our available cash to continue to reduce debt.

The principal amount of debt was reduced by $108.7 million in 2016 and totaled $617.2 million as of September 25, 2016. Since 2005, we have reduced debt by over $1 billion and we expect to continue to significantly reduce our debt in 2017. As a result of our debt reductions, interest expense was reduced by $8.2 million in 2016 compared to 2015, providing additional free cash flow for debt service.

In 2016, we received $30,646,000 due to an insurance settlement. The settlement represents our share of a subrogation recovery arising from the settlement of claims for damages suffered as a result of a 2009 loss at one of our production facilities. The proceeds were used to make voluntary payments on our 1st Lien Term Loan and repurchase Notes (each as defined below) at a substantial discount.

(1)     See "Non-GAAP Financial Measures: in Item 7, included herein, for additional information.

PULITZER
 
In 2005, we acquired Pulitzer Inc. (“Pulitzer”). We currently publish 9 daily newspapers that were acquired from Pulitzer and more than 60 weekly newspapers and specialty publications. Pulitzer also owned a 50% interest in TNI, as discussed more fully below. The acquisition was financed primarily with debt and our second lien term loan lenders have a first lien of the Pulitzer assets.

Pulitzer newspaper operations include Bloomington, IL and St. Louis, Missouri, where its subsidiary, St. Louis Post-Dispatch LLC (“PD LLC”), publishes the St. Louis Post-Dispatch, the only major daily newspaper serving the greater St. Louis metropolitan area, a variety of specialty publications, and supports its related digital products. St. Louis newspaper operations also include the Suburban Journals of Greater St. Louis, a group of weekly newspapers and niche publications that focus on separate communities within the metropolitan area.
 
On August 28, 2016 we sold substantially all of the assets of our Provo, Utah newspaper operations, a former Pulitzer newspaper.


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TNI Partners
 
As a result of the acquisition of Pulitzer, we own a 50% interest in TNI, the Tucson, Arizona newspaper partnership. TNI, acting as agent for our subsidiary, Star Publishing Company (“Star Publishing”) and Citizen Publishing Company (“Citizen”), the owner of the remaining 50%, a subsidiary of Gannett Co., Inc., (“Gannett”). TNI is responsible for printing, delivery, advertising and subscription activities of the Arizona Daily Star and, until May 2009, the Tucson Citizen, as well as their related digital products and specialty publications. In May 2009, Citizen discontinued print publication of the Tucson Citizen and in 2014 stopped publishing its digital product.

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. Under the amended and restated operating agreement between Star Publishing and Citizen, the Arizona Daily Star remains the separate property of Star Publishing. Results of TNI are accounted for using the equity method. Income or loss of TNI (before income taxes) is allocated equally to Star Publishing and Citizen. TNI makes weekly distributions to Star Publishing and Citizen of all available cash.
 
The TNI agency agreement (“Agency Agreement”), has governed the operation since 1940. Both the Company and Citizen incur certain administrative costs and capital expenditures that are reported by their individual companies. The Agency Agreement expires in 2040, but contains an option, which may be exercised by either party, to renew the agreement for successive periods of 25 years each. Star Publishing and Citizen also have a reciprocal right of first refusal to acquire the 50% interest in TNI owned by Citizen and Star Publishing, respectively, under certain circumstances.
 
MADISON NEWSPAPERS
 
We own 50% of the capital stock of MNI and 8.7% of the common stock of The Capital Times Company (“TCT”). TCT owns the remaining 50% of the capital stock of MNI. MNI publishes daily and Sunday newspapers, and other publications in Madison, Wisconsin, and other Wisconsin locations, and supports their related digital products. MNI conducts business under the trade name Capital Newspapers. We have a contract to furnish the editorial and news content for the Wisconsin State Journal, which is published by MNI, and periodically provide other services to MNI. Results of MNI are accounted for using the equity method. Net income or loss of MNI (after income taxes) is allocated equally to the Company and TCT. MNI makes quarter dividend payments to the Company and TCT.
 
ADVERTISING AND MARKETING SERVICES
 
Approximately 61% of our 2016 revenue was derived from advertising and marketing services.
 
The following broadly define major categories of advertising and marketing services revenue:
 
Retail advertising is print or digital revenue earned from sales of display advertising space in the publication, or for preprinted advertising inserted in the publication, to local accounts or regional and national businesses with local retail operations.

Classified advertising, which includes employment, automotive, real estate for sale or rent, legal, obituaries and other categories, is revenue earned from sales of advertising space in these categories or from publications consisting primarily of such advertising. Classified publications offer advertisers a cost-effective local advertising vehicle and are particularly effective in larger markets with higher media fragmentation.
 
National advertising is revenue earned from print or digital display advertising space, or for preprinted advertising inserted in the publication for national accounts that do not have a local retailer representing the account in the market.
 
Digital advertising consists of display, banner, behavioral targeting, search, rich media, directories, classified or other advertising on websites or mobile devices associated and integrated with our print publications, other digital applications, or on third party websites accessed through the extended audience network. Digital advertising is reported in combination with print advertising in the retail, classified and national categories.

Niche publications are specialty publications, such as lifestyle, business, health or home improvement publications that contain significant amounts of advertising.

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Marketing services includes a robust suite of custom digital marketing services that include: SEO, SEM, web and mobile production, social media services and reputation monitoring and management. Our services also include media buying in audience extension networks (outside of those owned and operated by us) such as Centro DSP, Google Ad Exchange and Facebook.
 
The advertising environment is influenced by the state of the overall economy, including retail sales, unemployment rates, inflation, energy prices and consumer interest rates. Our enterprises are primarily located in midsize and small markets. Historically these markets have been more stable than major metropolitan markets because our focus is on local, rather than national, advertising. More than eighty percent of our advertising revenue is derived from local and regional businesses. We believe that local advertising tends to be less sensitive to economic cycles than national advertising because local businesses generally have fewer effective advertising channels through which they may reach their customers.

Several of our businesses operate in geographic groups of publications, or “clusters,” which provide operational efficiencies, extend sales penetration and provide broader audiences for advertisers. Operational efficiencies are obtained through consolidation of sales forces, back office operations such as finance, human resources, management and/or production of the publications. A table under the caption “Daily Newspapers and Markets” in Item 1, included herein, identifies those groups of our newspapers operating in clusters.
 
Our newspapers, classified and specialty publications, and digital products compete with newspapers having national or regional circulation, magazines, radio, network, cable and satellite television, other advertising media such as outdoor, mobile, and movie theater promotions, other classified and specialty publications, direct mail, directories, as well as national, regional and local advertising websites and content providers. Competition for advertising is based on audience size and composition, subscription levels, readership demographics, distribution and display mechanisms, price and advertiser results. In addition, several of our daily and Sunday newspapers compete with other local daily or weekly newspapers. We believe we capture a substantial share of the total advertising dollars spent in each of our markets.

The number of competitors in any given market varies. However, all of the forms of competition noted above exist to some degree in our markets, including those listed in the table under the caption “Daily Newspapers and Markets” in Item 1, included herein.
 
SUBSCRIPTION

Approximately 32% of our 2016 revenue was derived from subscriptions to our printed and digital products.

Subscription revenue is derived from the delivery of our leading local news, information and advertising content in print and digitally, via desktop and mobile devices. In 2014, we began the rollout of our full access subscription model, which is now in place in substantially all of our markets. This model provides subscribers access to both the print and digital editions of our newspapers for one price. Digital only options are also available to subscribers.


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AUDIENCES
 
Based on independent research, we estimate that, in an average week, our newspapers and digital products reach approximately 74% of adults in our larger markets. We also measure use of our daily newspapers for advertising, sports scores and entertainment listings ("print users").
   
Audience reach is summarized as follows:
 
All Adults
 
(Percent, Past Seven Days)
2016

2015

2014

2013

2012

 
 
 
 
 
 
Print only
26.8

31.3

33.1

36.9

37.8

Print and digital
19.3

19.3

20.0

17.8

19.6

Digital only
16.6

12.5

12.1

10.5

9.4

Total readership
62.7

63.1

65.2

65.2

66.8

Print users
11.6

12.8

13.0

13.9

14.7

Total reach
74.3

75.9

78.2

79.1

81.5

 
 
 




 
Total print reach
57.7

63.4

66.1

68.6

72.1

Total digital reach
35.9

31.8

32.1

28.3

29.0


 
Age 18-29
 
(Percent, Past Seven Days)
2016

2015

2014

2013

2012

 
 
 
 
 
 
Print only
15.3

19.5

20.3

30.7

29.4

Print and digital
16.2

20.2

18.3

15.6

20.5

Digital only
23.4

12.7

15.3

10.5

10.7

Total readership
54.9

52.4

53.9

56.8

60.6

Print users
11.2

19.5

19.5

22.0

23.7

Total reach
66.1

71.9

73.4

78.8

84.3

 
 
 




 
Total print reach
42.7

59.2

58.1

68.3

73.6

Total digital reach
39.6

32.9

33.6

26.1

31.2

Source:
Lee Enterprises Audience Report, Thoroughbred Research. January-June 2012-2016.
Markets:
11 largest markets in 2012-2016.
Margin of Error:
Total sample +/- 1.2%, Total digital sample +/- 1.3%
  
After advertising, subscriptions and single copy sales are our largest source of revenue. For the 13 weeks ended September 2016, our daily circulation units, which include TNI and MNI, as measured by the Alliance for Audited Media ("AAM") were 0.8 million and Sunday circulation units were 1.2 million.
 
Growth in audiences can, over time, also positively impact advertising revenue. Our strategies to grow audiences include continuous improvement of content and promotional efforts to expand our audience. Content can include focus on local news, features, scope of coverage, accuracy, presentation, writing style, tone and type style. Promotional efforts include advertising, contests and other initiatives to increase awareness of our products. Customer service can also influence subscriptions. The introduction in 2010, and continued improvement since, of mobile and tablet applications has positively impacted our digital audiences.
 
We have historically experienced higher retention of customers using credit cards or bank account withdrawals, ("easy pay"). Accordingly we focus on our enterprises on increasing the number of easy pay subscribers. Other initiatives vary from location to location and are determined principally by our centralized consumer sales and marketing group in collaboration with local management. Competition for subscriptions is generally based on the content, journalistic quality and price of the publication.
 

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Audience competition exists in all markets, from unpaid print and digital products, but is most significant in markets with competing local daily newspapers. These markets tend to be near major metropolitan areas, where the size of the population may be sufficient to support more than one daily newspaper.

Our subscription sales channels continue to evolve through an emphasis on targeted telemarketing, direct mail and email to acquire new subscribers and retain current subscribers.


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DAILY NEWSPAPERS AND MARKETS
 
The Company, TNI and MNI publish the following daily newspapers and maintain the following primary digital sites:
 
 
 
Average Units (1)
 
 
Newspaper
Primary Website
Location
  Daily (2) 

 
Sunday

 
 
 
 
 
 
 
 
St. Louis Post-Dispatch (3)
stltoday.com
St. Louis, MO
113,990

 
385,690

 
Arizona Daily Star (5) (3)
azstarnet.com
Tucson, AZ
53,593

 
105,839

 
Capital Newspapers (4)
 
 
 
 
 
 
Wisconsin State Journal
madison.com
Madison, WI
61,785

 
80,900

 
Daily Citizen
wiscnews.com/bdc
Beaver Dam, WI
5,883

 

 
Portage Daily Register
wiscnews.com/pdr
Portage, WI
3,023

 

 
Baraboo News Republic
wiscnews.com/bnr
Baraboo, WI
2,624

 

 
The Times
nwitimes.com
Munster, Valparaiso, and Crown Point, IN
58,026

 
67,773

 
Central Illinois Newspaper Group
 
 
 
 
 
 
The Pantagraph (3)
pantagraph.com
Bloomington, IL
24,608

 
28,585

 
Herald & Review
herald-review.com
Decatur & Mattoon/Charleston, IL
29,734

 
22,903

 
Lincoln Group
 
 
 
 
 
 
Lincoln Journal Star
journalstar.com
Lincoln, NE
42,821

 
49,394

 
Columbus Telegram
columbustelegram.com
Columbus, NE
4,796

 

 
Fremont Tribune
fremonttribune.com
Fremont, NE
4,698

 

 
Beatrice Daily Sun
beatricedailysun.com
Beatrice, NE
3,352

 

 
Quad-City Times
qctimes.com
Davenport & Muscatine, IA
38,939

 
37,473

 
River Valley Newspaper Group
 
 
 
 
 
 
La Crosse Tribune
lacrossetribune.com
La Crosse, WI
19,252

 
26,083

 
Winona Daily News
winonadailynews.com
Winona, MN
6,705

 
7,681

 
The Chippewa Herald
chippewa.com
Chippewa Falls, WI
3,501

 
3,448

 
Billings Gazette
billingsgazette.com
Billings, MT
28,741

 
32,627

 
The Courier
wcfcourier.com
Waterloo and Cedar Falls, IA
33,913

 
31,708

 
Sioux City Journal
siouxcityjournal.com
Sioux City, IA
23,350

 
26,092

 
The Bismarck Tribune
bismarcktribune.com
Bismarck, ND
21,192

 
24,214

 
The Post-Star
poststar.com
Glens Falls, NY
18,942

 
24,127

 
Missoula Group
 
 
 
 
 
 
Missoulian
missoulian.com
Missoula, MT
17,627

 
20,876


Ravalli Republic
ravallinews.com
Hamilton, MT
2,411

(6) 
2,239

(6) 
The Southern Illinoisan
thesouthern.com
Carbondale, IL
14,096

 
22,060

 
Rapid City Journal
rapidcityjournal.com
Rapid City, SD
17,596

 
21,560

 
Helena/Butte Group
 
 
 
 
 
 
Independent Record
helenair.com
Helena, MT
11,275

 
11,613

 
The Montana Standard
mtstandard.com
Butte, MT
9,204

 
9,278

 
The Journal Times
journaltimes.com
Racine, WI
18,396

 
20,758

 
Mid-Valley News Group
 
 
 
 
 
 
Albany Democrat-Herald
democratherald.com
Albany, OR
9,599

 
9,770

 
Corvallis Gazette-Times
gazettetimes.com
Corvallis, OR
8,014

 
7,904

 
Casper Star-Tribune
trib.com
Casper, WY
14,913

 
15,921

 

9


 
Average Units (1)
 
 
Newspaper
Primary Website
Location
  Daily (2)

 
Sunday

 
 
 
 
 
 
 
 
Magic Valley Group
 
 
 
 
 
 
The Times-News
magicvalley.com
Twin Falls, ID
13,714

 
15,287

 
Elko Daily Free Press
elkodaily.com
Elko, NV
3,303

(6) 

 
Globe Gazette
globegazette.com
Mason City, IA
12,123

 
13,311

 
The Daily News
tdn.com
Longview, WA
15,025

 
12,637

 
Santa Maria Times (3)
santamariatimes.com
Santa Maria, CA
7,854

 
12,090

 
Napa Valley Register (3)
napavalleyregister.com
Napa, CA
9,367

 
9,557

 
Arizona Daily Sun (3)
azdailysun.com
Flagstaff, AZ
7,763

 
8,417

 
The Citizen
auburnpub.com
Auburn, NY
6,711

 
8,202

 
The Times and Democrat
thetandd.com
Orangeburg, SC
7,220

 
7,900

 
The Sentinel
cumberlink.com
Carlisle, PA
9,009

 

 
The World (3)
theworldlink.com
Coos Bay, OR
5,508

 

 
The Sentinel (3)
hanfordsentinel.com
Hanford, CA
4,992

 

 
The Ledger Independent
maysville-online.com
Maysville, KY
4,349

 

 
Daily Journal (3)
dailyjournalonline.com
Park Hills, MO
3,600

 

 
 
 
 
837,137

 
1,183,917

 
(1)
Source: AAM: September 2016 Quarterly Executive Summary Data Report, unless otherwise noted.
(2)
Not all newspapers are published Monday through Saturday
(3)
Owned by Pulitzer, Inc.
(4)
Owned by MNI.
(5)
Owned by Star Publishing and published through TNI.
(6)
Source: Company statistics.
 
NEWSPRINT
 
The basic raw material of newspapers, and our other print publications, is newsprint. We purchase newsprint from U.S. and Canadian producers. We believe we will continue to receive a supply of newsprint adequate for our needs and consider our relationships with newsprint producers to be good. Newsprint purchase prices can be volatile and fluctuate based upon factors that include foreign currency exchange rates and both foreign and domestic production capacity and consumption. Price fluctuations can have a significant effect on our results of operations. We have not entered into derivative contracts for newsprint. For the quantitative impacts of these fluctuations, see Item 7A, “Quantitative and Qualitative Disclosures about Market Risk”, included herein.
 

10


EXECUTIVE TEAM
 
The following table lists our current executive team members:
Name
Age
Service
With The
Company
Named
To Current
Position
Current Position
 
 
 
 
 
Mary E. Junck
69
June 1999
February 2016
Executive Chairman
 
 
 
 
 
Kevin D. Mowbray
54
September 1986
February 2016
President and Chief Executive Officer
 
 
 
 
 
Nathan E. Bekke
47
January 1992
February 2015
Vice President - Consumer Sales and Marketing
 
 
 
 
 
Paul M. Farrell
61
October 2013
October 2015
Vice President - Sales and Marketing
 
 
 
 
 
Robert P. Fleck
54
May 2016
May 2016
Vice President - Business Development
 
 
 
 
 
Suzanna M. Frank
46
December 2003
March 2008
Vice President - Audience
 
 
 
 
 
Astrid J. Garcia
66
December 2006
December 2013
Vice President - Human Resources
 
 
 
 
 
James A. Green
50
March 2013
March 2013
Vice President - Digital
 
 
 
 
 
Michael R. Gulledge
56
October 1982
October 2015
Vice President - Advertising Sales Leadership
 
 
 
 
 
John M. Humenik
53
December 1998
February 2015
Vice President - News
 
 
 
 
 
Ronald A. Mayo
55
May 2015
June 2015
Vice President - Chief Financial Officer and Treasurer
 
 
 
 
 
Michele Fennelly White
54
June 1994
June 2011
Vice President - Information Technology and Chief Information Officer
Mary E. Junck was elected Executive Chairman in February 2016. From 2002 - February 2106 she served as President and Chief Executive Officer. She was elected to the Board of Directors of the Company in 1999.
 
Kevin D. Mowbray was elected President and Chief Executive Officer in February 2016. From April 2015 - February 2016 he was Executive Vice President and Chief Operating Officer. From May 2013 to April 2015 he served as Vice President and Chief Operating Officer. From 2004 to May 2013 he served as a Vice President - Publishing and was Publisher of the St. Louis Post-Dispatch from 2006 until May 2013. He was elected to the Board of Directors of the Company in February 2016.
 
Nathan E. Bekke was appointed Vice President - Consumer Sales and Marketing in February 2015. From 2003 to February 2015, he served as Publisher of the Casper Star-Tribune.
 
Paul M. Farrell was appointed Vice President - Sales in October 2015. From October 2013 to October 2015, he served as Vice President - Digital Sales. From September 2012 to October 2013, he served as Publisher of the Connecticut Media Group of Hearst Media Services. From May 2007 to August 2012, he served as Vice President - Sales and Marketing of the Company.

Robert P. Fleck was appointed Vice President - Business Development in May 2016. Prior to joining the Company, he was with The Tribune Company. His 24-year career with Tribune included Executive Vice President of Tribune Publishing Company; General Manager and Senior Vice President for TRIBUNE365; and Senior Vice President of the Chicago Tribune Media Group.

Suzanna M. Frank was appointed Vice President - Audience in March 2008. From 2003 to March 2008 she served as Director of Research and Marketing of the Company.
 
Astrid J. Garcia was appointed Vice President - Human Resources in December 2013. From 2006 to November 2013 she served as Vice President of Human Resources, Labor Relations and Operations of the St. Louis Post-Dispatch.

11


James A. Green was appointed Vice President - Digital in March 2013. From June 2011 to March 2013, he served as Executive Vice President and General Manager of Travidia, Inc., a developer of newspaper digital shopping media and marketing programs. From 2004 to June 2011 he served as Chief Marketing Officer of Travidia, Inc.

Michael R. Gulledge was elected Vice President - Sales and Marketing in September 2012 and named Publisher of the Billings Gazette in 2000. From 2005 to September 2012 he served as a Vice President - Publishing.

John M. Humenik was appointed Vice President - News in February 2015.  He is also president and publisher of the Wisconsin State Journal and president of Madison Newspapers Inc., a position he has held since 2013. He was publisher and editor of the Arizona Daily Star from 2005 to 2010 and additionally served president of Tucson Newspapers Inc until 2013.

Ronald A. Mayo was elected Vice President, Chief Financial Officer and Treasurer in June 2015. Prior to joining the Company, he was Chief Financial Officer of Halifax Media Group from July 2014 to January 2015 and previously served MediaNews Group, Inc, most recently as Vice President and Chief Financial Officer.

Michele Fennelly White was appointed Vice President - Information Technology and Chief Information Officer in June 2011. From 1999 to June 2011, she served as Director of Technical Support.
 
Ms. Junck and Messrs. Mowbray, Farrell, Green, Gulledge, and Mayo have been designated by the Board of Directors as executive officers for US Securities and Exchange Commission ("SEC") reporting purposes.

EMPLOYEES
 
At September 25, 2016, we had approximately 3,976 employees, including approximately 1,062 part-time employees, exclusive of TNI and MNI. Full-time equivalent employees in 2016 totaled approximately 3,666. We consider our relationships with our employees to be good.
Bargaining units represent 372, or 66%, of the total employees of the St. Louis Post-Dispatch, which has six contracts with bargaining units with expiration dates through September 2018.
Approximately 35 employees in three additional locations are represented by collective bargaining units.
CORPORATE GOVERNANCE AND PUBLIC INFORMATION
 
We have a long, substantial history of sound corporate governance practices. Our Board of Directors has a lead independent director, and has had one for many years. Currently, six of nine members of our Board of Directors are independent, as are all members of the Board's Audit, Executive Compensation and Nominating and Corporate Governance committees. The Audit Committee approves all services to be provided by our independent registered public accounting firm and its affiliates.
 
At www.lee.net, one may access a wide variety of information, including news releases, SEC filings, financial statistics, annual reports, investor presentations, governance documents, newspaper profiles and digital links. We make available via our website all filings made by the Company under the Securities Exchange Act of 1934 (the "Exchange Act"), including Forms 10-K, 10-Q and 8-K, and related amendments, as soon as reasonably practicable after they are filed with, or furnished to, the SEC. All such filings are available free of charge. The content of any website referred to in this Annual Report is not incorporated by reference unless expressly noted.
 
ITEM 1A. RISK FACTORS
 
Risk exists that our past results may not be indicative of future results. A discussion of our risk factors follows. See also, “Forward-Looking Statements”, included herein. In addition, a number of other factors (those identified elsewhere in this document) may cause actual results to differ materially from expectations.
 

12


DEBT AND LIQUIDITY
 
We May Have Insufficient Earnings Or Liquidity To Meet Our Future Debt Obligations
 
We have a substantial amount of debt, as discussed more fully (and certain capitalized terms used below defined) in Item 7,"Liquidity" and Note 5 of the Notes to Consolidated Financial Statements, included herein. Since February 2009, we have satisfied substantially all principal and interest payments due under our debt facilities with our cash flows and asset sales.
 
As of September 25, 2016, our debt consists of the following:

$400,000,000 aggregate principal amount of 9.5% Senior Secured Notes (the “Notes”) due March 2022, pursuant to an Indenture dated as of March 31, 2014 (the “Indenture”), of which $385,000,000 is currently outstanding as of September 25, 2016;
 
$250,000,000 first lien term loan (the "1st Lien Term Loan") due March 2019 and $40,000,000 revolving facility (the "Revolving Facility") under a First Lien Credit Agreement dated as of March 31, 2014 (together, the “1st Lien Credit Facility”), of which $101,304,000 is outstanding at September 25, 2016; and

$150,000,000 12.0% second lien term loan under a Second Lien Loan Agreement dated as of March 31, 2014 (the “ 2nd Lien Term Loan”) due December 2022, of which $130,863,000 is outstanding at September 25, 2016.

Our ability to make payments on our indebtedness will depend on our ability to generate future cash flows from operations. Cash generated from future asset sales could serve as an additional source of repayment. This ability, to a certain extent, is subject to general economic, financial, competitive, business, legislative, regulatory and other factors that are beyond our control.

At September 25, 2016, after consideration of letters of credit, we have approximately $33,318,000 available for future use under our Revolving Facility. Including cash, our liquidity at September 25, 2016 totals $50,302,000. This liquidity amount excludes any future cash flows. Our adjusted EBITDA has been strong for the last seven years and has exceeded $153,000,000 in each year from 2011 through 2016, but there can be no assurance that such results will continue. We expect all interest and principal payments due in the next twelve months will be satisfied by our continuing cash flows and certain asset sales, which will allow us to maintain an adequate level of liquidity.

At September 25, 2016, the principal amount of our outstanding debt totals $617,167,000. At September 25, 2016 and September 27, 2015 our debt, net of cash, is 3.9 times and 4.4 times our adjusted EBITDA, respectively.

Final maturities of our debt are March 2019 through December 2022. As a result, we believe refinancing risk has been substantially reduced for the next several years.

There are numerous potential consequences under the Notes, 1st Lien Credit Facility, 2nd Lien Term Loan, if an event of default, as defined, occurs and is not remedied. Many of those consequences are beyond our control. The occurrence of one or more events of default would give rise to the right of the applicable lenders to exercise their remedies under the Notes, 1st Lien Credit Facility, 2nd Lien Term Loan, respectively, including, without limitation, the right to accelerate the repayment of all outstanding debt and take actions authorized in such circumstances under applicable collateral security documents.

Our ability to operate as a going concern is dependent on our ability to remain in compliance with debt covenants and to refinance or amend our debt agreements as they become due, if necessary. The Notes, 1st Lien Credit Facility and 2nd Lien Term Loan have only limited affirmative covenants with which we are required to maintain compliance. We are in compliance with our debt covenants at September 25, 2016.


13


ECONOMIC CONDITIONS
 
General Economic Conditions May Continue To Impact Our Revenue And Operating Results
 
It is difficult to estimate the level of economic growth or contraction as current and future conditions in the economy have an inherent degree of uncertainty. Adverse changes may occur to our business as a result of weak global economic conditions, declining oil prices, wavering consumer confidence, unemployment, declines in stock markets, contraction of credit availability, changes in interest rates, declines in real estate values, or other factors affecting economic conditions in general. These changes may negatively affect the sales of our products, increase exposure to losses from bad debts, increase the cost and decrease the availability of financing, or increase costs associated with publishing and distributing our publications.

OPERATING REVENUE
 
Our Revenue May Not Return To Historical Levels

A significant portion of our revenue is derived from advertising. The demand for advertising is sensitive to the overall level of economic activity, both locally and nationally. Newspaper publishing is both capital and labor intensive and, as a result, newspapers may not be able to quickly reduce cost. Accordingly, changes in advertising and circulation revenue could have a disproportionate effect on our results of operations.

Operating revenue in most categories has decreased since 2007 and may decrease in the future. Such decreases may not be offset by growth in advertising in other categories, such as digital revenue which has been rising since 2010. Historically, newspaper publishing has been viewed as a cost-effective method of delivering various forms of advertising. There can be no guarantee that this historical perception will guide future decisions on the part of advertisers. Web sites and applications for mobile devices distributing news and other content continue to gain popularity. As a result, audience attention and advertising spending are shifting and may continue to shift from traditional print media to digital media. As media audiences increasingly move to consume news and information digitally, we expect that advertisers will allocate greater portions of their future budgets to digital media advertising, which can offer more measurable returns than traditional print media through pay for performance and keyword-targeted advertising. If our efforts to adapt to evolving technological developments in the media industry are unsuccessful, or if we fail to correctly anticipate shifts in audience demand and digital media trends, we may be unable to provide the services, media and content that audiences and potential audiences in our markets prefer and we may be unable to provide the returns on ad spending that our advertisers seek. This increased competition and shift to the digital consumption of news and information has had, and may continue to have, an adverse effect on our business and financial results. The digital media industry has greater competitive challenges than print because barriers to entry can be low and geographic location is less relevant.

Technological developments also pose additional challenges that could adversely affect our revenue and competitive position. New delivery platforms may lead to pricing restrictions and the loss of a direct relationship with consumers. We may also be adversely affected if the use of technology developed to block the display of advertising on websites and other digital platforms proliferates.

The rates we charge for advertising are, in part, related to the size of the audience of our publications and digital products. There is significant competition for readers and viewers from other media. Our business may be adversely affected to the extent individuals decide to obtain news, entertainment, classified listings and local shopping information from digital or other media, to the exclusion of our outlets for such information.

Retail Advertising

Many advertisers, including major retail store chains, automobile manufacturers and dealers, banks and telecommunications companies, have experienced significant merger and acquisition activity over the last several years, and some have gone out of business, effectively reducing the number of brand names under which the merged entities operate. Changes in the economy and consumer shopping habits such as the increasing use of online shopping, drive advertising spending and retailers approach to advertising and marketing their goods and services.


14


Classified Advertising

Classified advertising is the category that has been most significantly impacted by changing advertising trends and the increase in digital/classified advertising competitors. All categories of classified advertising have generally declined since 2007.

See "Advertising and Marketing Services” in Item 1, included herein, for additional information on the risks associated with advertising revenue.

Subscription Revenue

Advertising and subscription revenue is affected by readership of our print publications and digital products. Although our aggregate print and digital audience is relatively stable, subscription sales have nonetheless been declining for many years, reflecting general trends in the newspaper industry, including consumer migration toward digital platforms and other media for news and information. The possibility exists that future subscription price increases may be difficult to accomplish or maintain and as a result subscription sales may decline, and price decreases may be necessary to retain or grow subscription volume. We believe we are maintaining our share of audience in our local markets through digital audience growth and strong print newspaper readership.

 
As audience attention increasingly focuses on digital media, print circulation of our newspapers may be adversely affected, which may decrease subscription revenue and exacerbate declines in print advertising. We face increasing competition from other digital news sources which can impact subscription revenue. This competition has increased as a result of the continued development of new digital media technologies. To maintain our subscription base, we may be required to incur additional costs that we may not be able to recover through subscription and advertising revenue. We may not be able to achieve a profitable balance between subscription levels and advertising revenue. In addition, if we are not successful in growing our digital businesses, including digital subscription revenue, to offset declines in revenue from our print products, our business, financial condition and prospects will be adversely affected.

In 2014, we began the transition of our subscriptions to full access, including the printed edition, desktop, mobile and tablet. Our ability to build a subscriber base on our digital platforms through these packages depends on market acceptance, consumer habits, pricing, an adequate digital infrastructure, terms of delivery platforms and other factors. In addition, the metered model and/or the price increases may result in fewer page views or unique visitors to our digital platforms if viewers are unwilling to pay to gain access to our digital content after reaching the maximum number of free articles in a month. Stagnation, or a decline in traffic levels, may adversely affect our advertiser base and advertising rates and result in a decline in digital revenue.

See "Audiences” in Item 1, included herein, for additional information on the risks associated with subscription revenue.

If We Are Not Successful In Growing Our Digital Business, Our Business, Financial Condition, Results Of Operations And Prospects Could Be Adversely Affected

Our future performance depends to a significant degree upon the development and management of our digital business. The growth of our digital business over the long term depends on various factors, including, among other things, the ability to:

Continue to increase digital audiences;

Attract advertisers to our digital platforms;

Maintain or increase the advertising rates on our digital platforms;

 
Exploit new and existing technologies to distinguish our products and services from those of competitors and develop new content, products and services;

Invest funds and resources in digital opportunities; and

Partner with, or use services from, providers that can assist us in effectively growing our digital business.

15


Create digital content that is useful and attractive to audiences in our markets.

In addition, we expect that our digital business will continue to increase as a percentage of our total revenue. In 2016, total digital revenue (including revenue from advertising and marketing services and digital services, mainly TownNews.com) comprised 16.4% of total revenue, as compared to 14.5% in 2015. As our digital business becomes a greater portion of our overall business, we will face a number of increased risks from managing our digital operations, including, but not limited, to the following:

Continuing training of our sales force to more effectively sell digital advertising, combined digital and print advertising packages versus our historical print advertising business;

Attracting and retaining employees with skill sets and the knowledge base needed to successfully operate our digital business; and

Managing the transition to a digital business from a historically print-focused business.

OPERATING EXPENSES
 
We May Not Be Able To Reduce Future Expenses To Offset Potential Revenue Declines
 
We reduced cash costs(1) of our continuing operations (compensation, newsprint and ink, other operating expenses and workforce adjustments) significantly since 2011. Such expense reductions are not expected to significantly impact our ability to deliver advertising, news or other content to our customers. As a result of the significantly reduced cost structure to date, future cost reductions may not be as significant.
 
Newsprint comprises approximately five percent of our operating costs. See “Newsprint” in Item 1, and “Commodities” in Item 7A, included herein, for additional information on the risks associated with changes in newsprint costs.

In addition, the technological developments and changes we need to make to our business, may require significant capital investments. We may be limited in our ability to invest funds and resources in digital products, services or opportunities, and we may incur costs of research and development in building and maintaining the necessary and continually evolving technology infrastructure. As a result, our digital business could suffer if we are unable to make these investments.

(1) See Non-GAAP Financial Measures: in Item 7, included herein, for additional information.

We May Incur Additional Non-Cash Impairment Charges

We have significant amounts of goodwill and identified intangible assets. Since 2007 we have recorded impairment charges totaling almost $1.3 billion to reduce the value of certain of these assets. Should general economic, market or business conditions decline, and have a negative impact on our stock price or projected future cash flows, we may be required to record additional impairment charges in the future. Such charges would not impact our cash flows or debt covenant compliance. See “Critical Accounting Policies” in Item 7, included herein, for additional information on the risks associated with such assets.

Sustained Increases In Costs Of Employee Health And Welfare Benefits May Reduce Our Profitability

In recent years, we experienced significant increases in the cost of employee medical benefits because of economic factors beyond our control, including increases in health care costs. At least some of these factors may continue to put upward pressure on the cost of providing medical benefits. Although we have actively sought to control increases in these costs, there can be no assurance that we will succeed in limiting cost increases, and continued upward pressure could reduce the profitability of our businesses.


16


Sustained Increases In Funding Requirements Of Our Pension and Postretirement Obligations
May Reduce The Cash Available For Our Business

Pension liabilities, net of plan assets, totaled $55.1 million at September 25, 2016. The Company does not expect to be required to make pension contributions in 2017. At September 25, 2016 the assets of one of our postretirement medical plans exceeded plan liabilities by $9.1 million.

Our pension and postretirement plans invest in a variety of equity and debt securities. Future volatility and disruption in the securities markets could cause declines in the asset values of our pension and postretirement plans. In addition, a decrease in the discount rates or changes to mortality estimates and other assumptions used to determine the liability could increase the benefit obligation of the plans. Unfavorable changes to the plan assets and/or the benefit obligations could increase the level of required contributions above what is currently estimated, which could reduce the cash available for our business. Legislation passed in 2012, 2014 and 2015 temporarily reduced funding requirements for our pension plans, but those payments will eventually need to be restored unless discount rates and/or plan assets increase.

We Expect To Be Subject To Withdrawal Liability In Connection With One Multiemployer Pension Plan And May Be Subject To Additional Withdrawal Liabilities In Connection With Other Multiemployer Pension Plans, Which May Reduce The Cash Available For Our Business

Pursuant to our collective bargaining obligations, we contribute to three multiemployer pension plans on behalf of certain of our employees. Based on the most recent communications from the plans’ administrators, two of these plans are currently in “critical” status, as that term is used in relation to such plans under the PPA. For plans that are in critical status, benefit reductions may apply and/or we could be required to make additional contributions.

One of our enterprise's bargaining units withdrew from representation, and as a result we could be subject to a future claim from the multiemployer pension plan for a withdrawal liability. The amount of such liability, if any, will be dependent on actions taken, or not taken, by the Company and the pension plan, as well as the future investment performance and funding status of the pension plan. The withdrawal liability is expected to be funded over a 20 year period.

If, we were to withdraw from one of these plans or trigger a partial withdrawal due to declines in contribution base units, and the plan had unfunded vested benefits at the time of our withdrawal or partial withdrawal, we could incur a significant plan withdrawal liability, which could reduce the cash available for our business.
 
EQUITY CAPITAL
 
A Decrease In Our Stock Price May Limit The Ability To Trade Our Stock
Or For The Company To Raise Equity Capital

Under the NYSE listing standards, if our common stock fails to maintain an adequate per share price and our total market capitalization falls below $50.0 million, our common stock could be removed from the NYSE and traded in the over the counter market. In July 2011, the NYSE notified us that our common stock did not meet the NYSE continued listing standards due to the failure to maintain an adequate share price. Under the NYSE rules, our common stock was allowed to continue to be listed during a cure period. In February 2012, after completing our debt refinancing, the NYSE notified us that we were again in compliance with the minimum closing price standard. In January 2013, the NYSE notified us that we had returned to full compliance with all continued listing standards. However, there can be no assurance that we will continue to be able to meet these listing standards, and the removal of our common stock from the NYSE could adversely affect our ability to raise equity capital.

OTHER

Cybersecurity Risks Could Harm Our Ability To Operate Effectively

In the 13-weeks ended September 25, 2016, 17.5% of our revenue was obtained from digital sources, including advertising and one of our businesses, TownNews.com, that provides digital infrastructure and digital publishing services for us and other companies.

We use computers and digital technology in substantially all aspects of our business operations. Such uses give rise to cybersecurity risks, including the misappropriation of personally identifiable information that we store and manage

17


and disabling or taking over of our websites. We have preventive systems and processes in place to protect against the risk of cyber incidents. However, the techniques used to obtain unauthorized access and to disable systems and websites change frequently and may be difficult to detect for long periods of time. There can be no assurance that we, or the security systems we implement, will protect against all of these rapidly changing risks. Prolonged system outages or a cyber incident that goes undetected could reduce our print and/or digital revenue, increase our operating costs, disrupt our operations, harm our reputation, lead to legal exposure to customers and/or subject us to liability under laws and regulations that protect personal data. We maintain insurance coverage against certain of such risks, but cannot guarantee that such coverage will be applicable or sufficient with respect to any given incident.

We May Not Be Able To Protect Our Intellectual Property Rights, Which May Adversely Affect Our Business

Our business depends on our intellectual property, including our valuable brands and content. We believe our proprietary trademarks and other intellectual property rights are important to our continued success and our competitive position.

Unauthorized parties may attempt to copy or otherwise obtain and use our content or infringe upon, dilute, reproduce, misappropriate or otherwise violate our intellectual property. There can be no assurance that the steps we have taken to protect our proprietary rights will be successful in any given case.

ITEM 1B. UNRESOLVED STAFF COMMENTS
 
None.
 
ITEM 2. PROPERTIES
 
Our executive offices are located in leased facilities at 201 North Harrison Street, Suite 600, Davenport, Iowa. The initial lease term expires April 30, 2019.

All of our principal printing facilities are owned, except Madison, Wisconsin (which is owned by MNI), Tucson (which is jointly owned by Star Publishing and Citizen), St. Louis (as described below) and leased land for the Helena, Montana plant. All facilities are well maintained, in good condition, suitable for existing office and publishing operations, as applicable, and adequately equipped. With the exception of St. Louis, none of our facilities is individually significant to our business.

Information related to St. Louis facilities at September 25, 2016 is as follows:
(Square Feet)
Owned

Leased

 
 
 
PD LLC
665,000

2,500

Suburban Journals
9,000

4,000

   
Nearly 43% of our daily newspapers, as well as many of our nearly 300 other publications, are printed at other Company facilities, or such printing is outsourced, to enhance operating efficiency. We are continuing to evaluate additional insourcing and outsourcing opportunities in order to more effectively manage our operating and capital costs.
 
Our newspapers and other publications have formal or informal backup arrangements for printing in the event of a disruption in production capability.

ITEM 3. 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.

ITEM 4. MINE SAFETY DISCLOSURES

Not applicable.


18


PART II
 
ITEM 5. MARKET FOR THE REGISTRANT'S COMMON EQUITY,
RELATED STOCKHOLDER MATTERS AND ISSUER PURCHASES OF EQUITY SECURITIES
 
Our Common Stock is listed on the NYSE. In March 2011, in accordance with sunset provisions established in 1986, we effected conversion of all outstanding shares of Class B Common Stock to Common Stock. The table below includes the high and low prices of Common Stock for each calendar quarter during the past three years and the closing price at the end of each quarter.
 
Quarter Ended
 
(Dollars)
December

 
March

 
June

 
September

 
 
 
 
 
 
 
 
2016
 
 
 
 
 
 
 
High
2.54

 
2.20

 
2.43

 
3.92

Low
1.43

 
1.15

 
1.69

 
1.74

Closing
1.68

 
1.80

 
1.91

 
3.75

 
 
 
 
 
 
 
 
2015
 
 
 
 
 
 
 
High
3.93

 
3.73

 
3.55

 
3.40

Low
3.07

 
2.74

 
2.78

 
1.36

Closing
3.68

 
3.17

 
3.33

 
2.08

 
 
 
 
 
 
 
 
2014
 
 
 
 
 
 
 
High
3.92

 
5.42

 
4.78

 
4.72

Low
2.60

 
3.30

 
3.81

 
3.24

Closing
3.47

 
4.47

 
4.45

 
3.38

 
At September 25, 2016, we had 6,350 holders of record of our Common Stock.
 
Our debt agreements generally limit our ability to pay dividends and repurchase Common Stock unless in each case no default has occurred and we have satisfied certain financial measurements. See Note 4 of the Notes to Consolidated Financial Statements, included herein.


19


PERFORMANCE PRESENTATION
 
The following graph compares the percentage change in the cumulative total return of the Company, the Standard & Poor's ("S&P") 500 Stock Index, and a peer group index, in each case for the five years ended September 30, 2016 (with September 30, 2011 as the measurement point). Total return is measured by dividing (a) the sum of (i) the cumulative amount of dividends declared for the measurement period, assuming dividend reinvestment and (ii) the difference between the issuer's share price at the end and the beginning of the measurement period, by (b) the share price at the beginning of the measurement period.

performancegrapha06.jpg

Copyright© 2016 Standard & Poor's, a division of S&P Global. All rights reserved.
 
The value of $100 invested on September 30, 2011 in stock of the Company, the Peer Group Index and in the S&P 500 Stock Index, including reinvestment of dividends, is summarized in the table below.
 
September 30
 
(Dollars)
2011

 
2012

 
2013

 
2014

 
2015

 
2016

 
 
 
 
 
 
 
 
 
 
 
 
Lee Enterprises, Incorporated
100.00

 
189.74

 
338.46

 
433.33

 
266.67

 
480.77

Peer Group Index
100.00

 
163.87

 
216.20

 
208.59

 
198.19

 
211.93

S&P 500 Stock Index
100.00

 
130.20

 
155.39

 
186.05

 
184.91

 
213.44

 
The S&P 500 Stock Index includes 500 U.S. companies in the industrial, transportation, utilities and financial sectors and is weighted by market capitalization. The New Peer Group Index is comprised of three U.S. publicly traded companies with significant newspaper publishing operations (excluding the Company) and is weighted by market capitalization. The Peer Group Index includes A.H. Belo Corp., The McClatchy Company and The New York Times Company.

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ITEM 6.  SELECTED FINANCIAL DATA
 
Selected financial data is as follows:
(Thousands of Dollars and Shares, Except Per Common Share Data)
2016

 
2015

 
2014

 
2013

 
2012

 
 
 
 

 
 

 
 

 
 
OPERATING RESULTS (1)
 
 
 

 
 

 
 

 
 
 
 
 
 
 
 
 
 
 
 
Operating revenue
614,364

 
648,543

 
660,877

 
677,774

 
709,580

Operating expenses, excluding depreciation, amortization, and impairment of intangible and other assets
476,413

 
501,760

 
505,822

 
517,047

 
546,863

Depreciation and amortization
43,441

 
45,563

 
48,511

 
55,527

 
65,191

Loss (gain) on sales of assets, net
(3,139
)
 
106

 
(1,338
)
 
110

 
(52
)
Impairment of intangible and other assets (2)
2,185

 

 
2,980

 
171,094

 
1,388

Equity in earnings of associated companies
8,533

 
8,254

 
8,297

 
8,685

 
7,231

Operating income (loss)
103,997

 
109,368

 
113,199

 
(57,319
)
 
103,421

Financial income
400

 
337

 
385

 
300

 
236

Interest expense
(64,233
)
 
(72,409
)
 
(79,724
)
 
(89,447
)
 
(83,078
)
Debt financing and administration costs
(5,947
)
 
(5,433
)
 
(22,927
)
 
(646
)
 
(2,823
)
Gain on insurance settlement
30,646

 

 

 

 

Other, net
(6,668
)
 
6,049

 
3,028

 
7,889

 
(2,533
)
 
 
 
 
 
 
 
 
 
 
Income (loss) from continuing operations
36,019

 
24,318

 
7,671

 
(76,478
)
 
(13,381
)
Discontinued operations, net of income taxes

 

 

 
(1,246
)
 
(2,918
)
Net income (loss)
36,019

 
24,318

 
7,671

 
(77,724
)
 
(16,299
)
 
 
 
 
 
 
 
 
 
 
Income (loss) attributable to Lee Enterprises, Incorporated
34,961

 
23,316

 
6,795

 
(78,317
)
 
(16,698
)
 
 
 
 
 
 
 
 
 
 
Income (loss) from continuing operations attributable to Lee Enterprises, Incorporated
34,961

 
23,316

 
6,795

 
(77,071
)
 
(13,780
)
 
 
 
 
 
 
 
EARNINGS (LOSS) PER COMMON SHARE
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Basic:
 
 
 
 
 
 
 
 
 
Continuing operations
0.66

 
0.44

 
0.13

 
(1.49
)
 
(0.28
)
Discontinued operations

 

 

 
(0.02
)
 
(0.06
)
 
0.66

 
0.44

 
0.13

 
(1.51
)
 
(0.34
)
 
 
 
Diluted:
 
 
 
 
 
 
 
 
 
Continuing operations
0.64

 
0.43

 
0.13

 
(1.49
)
 
(0.28
)
Discontinued operations

 

 

 
(0.02
)
 
(0.06
)
 
0.64

 
0.43

 
0.13

 
(1.51
)
 
(0.34
)
 
 
 
Weighted average common shares:
 
 
 
 
 
 
 
 
 
Basic
53,198

 
52,640

 
52,273

 
51,833

 
49,261

Diluted
54,224

 
53,931

 
53,736

 
51,833

 
49,261

 
 
 
BALANCE SHEET INFORMATION (End of Year)
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Total assets
689,126

 
747,825

 
811,275

 
827,705

 
1,061,136

Debt, including current maturities (3)
617,167

 
725,872

 
804,750

 
847,500

 
945,850

Debt, net of cash and restricted cash (3)
600,183

 
714,738

 
787,605

 
829,938

 
931,930

Stockholders' deficit
(128,485
)
 
(159,393
)
 
(178,253
)
 
(170,350
)
 
(114,633
)
(1
)
2012 includes 53 weeks of business operations. All other years include 52 weeks.

21


(2
)
The Company recorded pretax, non-cash impairment charges to reduce the carrying value of assets as follows:
(Thousands of Dollars)
2016

 
2015

 
2014

 
2013

 
2012

 
 
 
 
 
 
 
 
 
 
Continuing operations:
 
 
 
 
 
 
 
 
 
Goodwill

 

 

 

 

Non-amortized intangible assets
818

 

 
1,936

 
1,567

 

Amortizable intangible assets

 

 

 
169,041

 

Property, equipment and other assets
1,367

 

 
1,044

 
486

 
1,388

 
2,185

 

 
2,980

 
171,094

 
1,388

 
 
 
 
 
 
 
 
 
 
Discontinued operations

 

 

 

 
3,606

(3
)
Principal amount of debt, excluding fair value adjustments. See Note 4 of the Notes to Consolidated Financial Statements, included herein.
 
 
ITEM 7.  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 2016, 2015 and 2014. This discussion should be read in conjunction with the Consolidated Financial Statements and related Notes thereto, included herein.
 
NON-GAAP FINANCIAL MEASURES
 
We use the following non-GAAP financial performance measure for purpose of evaluating our performance and liquidity. We believe that each of the non-GAAP measures provides additional useful information to investors by allowing them to view our businesses through the eyes of our management and Board of Directors, facilitating comparison of results across historical periods, and providing a focus on the underlying ongoing operating performance and liquidity of our businesses. The non-GAAP financial measures we use are as follows:

Adjusted EBITDA is a non-GAAP financial performance measure that enhances financial statement users overall understanding of the operating performance of the Company. The measure isolates, unusual, infrequent or non-cash transactions from the operating performance of the business. This allows users to easily compare operating performance among various fiscal periods and understand how management measures the performance of the business. This measure also provides users with a benchmark that can be used when forecasting future operating performance of the Company that excludes unusual, nonrecurring or one time transactions. Adjusted EBITDA is also a component of the calculation used by stockholders and analysts to determine the value of our business when using the market approach, which applies a market multiple to financial metrics. It is also a measure used to calculate the leverage ratio of the Company, which is a key financial ratio monitored and used by the Company and its investors. Adjusted EBITDA is defined as net income (loss), plus nonoperating expenses (net), income tax expenses (benefit), depreciation, amortization, loss (gain) on sale of assets, impairment charges, workforce adjustment costs, stock compensation and our 50% share of EBITDA from TNI and MNI, minus equity in earnings of TNI and MNI curtailment gains.
  
Adjusted Earnings and Adjusted Earnings Per Diluted Common Share are non-GAAP financial performance measures that we believe offer a useful metric to evaluate overall performance of the Company by providing financial statement users the operating performance of the Company on a per share basis excluding unusual and infrequent transactions. It is defined as income (loss) attributable to Lee Enterprises, Incorporated and earnings (loss) per diluted common share adjusted to exclude both unusual matters and those of a substantially non-recurring nature.

Cash Costs is a non-GAAP financial performance measure of operating expenses that are settled in cash and is useful to investors in understanding the components of the Company's cash operating costs. Generally, the Company provides forward-looking guidance to Cash Costs, which can be used by financial statement users to asses the Company's ability to manage and control its operating cost structure. Cash Costs is defined as compensation, newsprint and ink, other operating expenses and certain unusual matters, such as workforce adjustment costs. Depreciation, amortization, impairment charges, other non-cash operating expenses and other unusual matters are excluded. Cash Costs

22


are also presented excluding workforce adjustments, which are paid in cash.

A table reconciling adjusted EBITDA to net income (loss), the most directly comparable measure under GAAP, is set forth below under the caption "Non-GAAP Financial Measures".

Reconciliations of adjusted earnings and adjusted earnings per diluted common share to income (loss) attributable to Lee Enterprises, Incorporated and earnings (loss) per diluted common share, respectively, the most directly comparable measures under GAAP, are set forth in Item 7, included herein, under the caption “Overall Results”.

The subtotals of operating expenses representing cash costs can be found in tables in Item 7, included herein, under the captions “2016 vs. 2015” and “2015 vs. 2014”.

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:
(Thousands of Dollars)
2016

2015

2014

 
 
 
 
Net Income
36,019

24,318

7,671

Adjusted to exclude
 
 
 
Income tax expense
22,176

13,594

6,290

Non-operating expenses, net
45,802

71,456

99,238

Equity in earnings of TNI and MNI
(8,533
)
(8,254
)
(8,297
)
Loss (gain) on sale of assets, net
(3,139
)
106

(1,338
)
Impairment of intangible and other assets
2,185


2,980

Depreciation and amortization
43,441

45,563

48,511

Workforce adjustments
1,825

3,304

1,265

Stock compensation
2,306

1,971

1,481

Add:
 
 
 
Ownership share of TNI and MNI EBITDA (50%)
11,705

11,246

11,236

Adjusted EBITDA
153,787

163,304

169,037

    
CRITICAL ACCOUNTING POLICIES
 
Our discussion and analysis of operations and financial condition are based upon our Consolidated Financial Statements, which have been prepared in accordance with Generally Accepted Accounting Principles ("GAAP"). The preparation of these financial statements requires us to make estimates and judgments that affect the reported amounts of assets, liabilities, revenue and expenses, and related disclosure of contingent assets and liabilities. We evaluate our estimates on an on-going basis.

We base our estimates on historical experience and on various other assumptions that are believed to be reasonable under the circumstances, the results of which form the basis for making judgments about the carrying values of assets and liabilities that are not readily apparent from other sources. Actual results may differ from these estimates under different assumptions or conditions. Additional information follows with regard to certain of the most critical of our accounting policies.

Goodwill and Other Intangible Assets
 
In assessing the recoverability of goodwill and other non-amortized intangible assets, we annually assess qualitative factors affecting our business to determine if the probability of a goodwill impairment is more likely than not. Our assessment includes reviewing internal and external factors affecting our business, such as cash flow projections, stock price and other industry or market considerations. This assessment is made as of the first day of our fourth fiscal quarter of each year.


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We analyze goodwill and other non-amortized intangible assets for impairment more frequently if impairment indicators are present. Such indicators of impairment include, but are not limited to, changes in business climate and operating or cash flow losses related to such assets.

Should we determine that a goodwill impairment is more likely than not, we make a determination of the fair value of our business. Fair value is determined using a combination of an income approach and a market approach weighted equally.

Under the income approach, fair value is determined by estimating future cash flows discounted to their present value. The market approach estimates fair value using market multiples of various financial measures compared to a set of comparable public companies in the publishing industry. Determining the fair value is judgmental in nature and involves significant estimates and assumptions including estimates of future revenue, cash costs, operating margins, discount rates, valuation multiples of entities engaged in the same or similar lines of business and future economic and market conditions.

There are significant inherent uncertainties and judgments involved in estimating fair value. An extension or deepening of the industry downturn could have a negative impact on the cash flow analysis. While we believe we have used reasonable estimates and assumptions to estimate the fair value of our reporting unit, it is possible that material changes could occur due to factors impacting our industry. If actual results are not consistent with our estimates and assumptions, such as future revenue, operating margins, EBITDA, growth rates and discount rates, we may be required to reassess the fair value of goodwill in the future.

Should we determine that a non-amortized intangible asset impairment is more likely than not, we make a determination of the individual asset's fair value. Fair value is determined using the relief from royalty method, which estimates fair value based upon appropriate royalties of future revenue discounted to their present value. The impairment amount, if any, is calculated based on the excess of the carrying amount over the fair value of such asset.

We review our amortizable intangible assets for impairment when indicators of impairment are present. We assess recoverability of these assets by comparing the estimated undiscounted cash flows associated with the asset group with their carrying amount. The impairment amount, if any, is calculated based on the excess of the carrying amount over the fair value of those asset groups.

The required valuation methodology and underlying financial information that are used to determine fair value require significant judgments to be made by us and represent a Level 3 fair value measurement. These judgments include, but are not limited to, long term projections of future financial performance and the selection of appropriate discount rates used to determine the present value of future cash flows. Changes in such estimates or the application of alternative assumptions could produce significantly different results.
 
We also periodically evaluate our determination of the useful lives of amortizable intangible assets. Any resulting changes in the useful lives of such intangible assets will not impact our cash flows. However, a decrease in the useful lives of such intangible assets would increase future amortization expense and decrease future reported operating results and earnings per common share.

In 2016, we performed a qualitative analysis to test our goodwill for impairment and concluded that the likelihood of an impairment was less than 50%. In 2015 , we performed additional quantitative analysis of the carrying value of our goodwill and concluded the implied fair value of goodwill was significantly in excess of its carrying value. As a result no goodwill impairment was recorded. In 2014, we performed a qualitative analysis to test our goodwill for impairment and concluded that the likelihood of an impairment was less than 50%.

In 2016 and 2014, due to continuing revenue declines, we recorded non-cash charges to reduce the carrying value of non-amortized intangible assets. We also recorded pretax, non-cash charges to reduce the carrying value of property, equipment and other assets in 2016 and 2014. We recorded deferred income tax benefits related to these charges.
 

24


A summary of impairment charges is included in the table below:
(Thousands of Dollars)
2016

 
2015

 
2014

 
 
 
 
 
 
Continuing operations:
 
 
 
 
 
Non-amortized intangible assets
818

 

 
1,936

Property, equipment and other assets
1,367

 

 
1,044

 
2,185

 

 
2,980


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.
 
Pension, Postretirement and Postemployment Benefit Plans
 
We evaluate our liability for pension, postretirement and postemployment benefit plans based upon computations made by consulting actuaries, incorporating estimates and actuarial assumptions of future plan service costs, future interest costs on projected benefit obligations, rates of compensation increases, when applicable, employee turnover rates, anticipated mortality rates, expected investment returns on plan assets, asset allocation assumptions of plan assets, and other factors. If we used different estimates and assumptions regarding these plans, the funded status of the plans could vary significantly, resulting in recognition of different amounts of expense over future periods.
 
Increases in market interest rates, which may impact plan assumptions, generally result in lower service costs for current employees, higher interest expense and lower liabilities. Actual returns on plan assets that are lower than the plan assumptions will generally result in decreases in a plan's funded status and may necessitate additional contributions.

Income Taxes
 
Deferred income taxes are provided using the asset and liability method, whereby deferred income tax assets are recognized for deductible temporary differences and loss carryforwards and deferred income tax liabilities are recognized for taxable temporary differences. Temporary differences are the difference between the reported amounts of assets and liabilities and their tax basis. We currently have recorded valuation allowances that we will maintain until, in our opinion, it is more likely than not that some portion or all of the deferred tax assets will be realized. Deferred income tax assets and liabilities are adjusted for the effects of changes in tax laws and rates on the date of enactment. Our income tax expense recorded in the future may be increased or decreased to the extent our valuation allowances change. An increase in the valuation allowance could result in additional income tax expense, while a decrease in the valuation allowance could result in a reduction to income tax expense, in such period and could have a significant impact on our future earnings.

We recognize the effect of income tax positions only if those positions are more likely than not of being sustained. Recognized income tax positions are measured at the largest amount that is greater than 50% likely of being realized. Changes in recognition or measurement are reflected in the period in which the change in judgment occurs. We record interest and penalties related to unrecognized tax benefits as a component of income tax expense. Changes in accounting for uncertain tax positions can result in additional variability in our effective income tax rate.

Our current and deferred income tax provisions are calculated based on estimates and assumptions that could differ from the actual results reflected in income tax returns filed during the subsequent year. These estimates are reviewed and adjusted, if needed, throughout the year. Adjustments between our estimates and the actual results of filed returns are recorded when identified.
 
We file income tax returns with the Internal Revenue Service (“IRS”) and various state tax jurisdictions. From time to time, we are subject to routine audits by those agencies, and those audits may result in proposed adjustments. We have considered the alternative interpretations that may be assumed by the various taxing agencies, believe our positions taken regarding our filings are valid, and that adequate tax liabilities have been recorded to resolve such matters. However, the actual outcome cannot be determined with certainty and the difference could be material, either positively or negatively, to the Consolidated Statements of Income and Comprehensive Income (Loss) in the periods in which such matters are ultimately determined.
 

25


 Revenue Recognition
 
Advertising revenue is recorded when advertisements are placed in the publication or on the related digital platform. Subscription revenue is recorded over the print or digital subscription term as the product is delivered or made available or as newspapers are individually sold. Other revenue is recognized when the related product or service has been delivered. Unearned revenue arises in the ordinary course of business from advance subscription payments for print or digital products or advance payments for advertising.
 
Uninsured Risks
 
We are self-insured for health care, workers compensation and certain long-term disability costs of our employees, subject to stop loss insurance, which limits exposure to large claims. We accrue our estimated health care costs in the period in which such costs are incurred, including an estimate of incurred but not reported claims. Other risks are insured and carry deductible losses of varying amounts.
 
Our accrued reserves for health care and workers compensation claims are based upon estimates of the remaining liability for retained losses made by consulting actuaries. The amount of workers compensation reserve has been determined based upon historical patterns of incurred and paid loss development factors from the insurance industry.

An increasing frequency of large claims, deterioration in overall claim experience or changes in federal or state laws affecting our liability for such claims could increase the volatility of expenses for such self-insured risks.

IMPACT OF RECENTLY ISSUED ACCOUNTING STANDARDS

In August 2016, the Financial Accounting Standards Board ("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. The adoption of the new standard is required in 2019. The adoption of this standard may reclassify certain cash receipts within the Consolidated 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. The adoption of the new standard is required in 2018. We have not determined the potential effects on the Consolidated Financial Statements.

In February 2016, the FASB issued a new standard for the accounting treatment of leases. The new standard is based on the principle that entities should recognize assets and liabilities arising from leases. The new standard does not significantly change the lessees’ recognition, measurement and presentation of expenses and cash flows from the previous accounting standard. Leases are classified as finance or operating. The new standards primary change is the requirement for entities to recognize a lease liability for payments and a right of use asset representing the right to use the leased asset during the term on operating lease arrangements. Lessees are permitted to make an accounting policy election to not recognize the asset and liability for leases with a term of twelve months or less. Lessors’ accounting under the new standard is largely unchanged from the previous accounting standard. In addition, the new standard expands the disclosure requirements of lease arrangements. Lessees and lessors will use a modified retrospective transition approach, which includes a number of practical expedients. The adoption of this new standard is required in the first quarter of fiscal year 2020 with early adoption permitted. We have not determined the potential effects on the Consolidated Financial Statements.

In April 2015, the FASB issued a new standard for the presentation of debt issuance costs. The new standard will streamline the balance sheet presentation of debt related valuations. Debt issuance costs are currently recognized as deferred charges and presented as an asset while debt discounts and premiums are treated as adjustments to the related debt. Under the new standard, debt issuance costs will be recognized as reductions to the related debt. The adoption of the new standard is required in 2017. The adoption of this standard will serve to reclassify certain amounts within our Consolidated Balance Sheets.

In August 2014, the FASB issued a new going concern standard. The new standard changes the period that companies use to evaluate their ability to meet obligations to a look-forward period of one year from the financial statement issuance date, from one year from the balance sheet date. The new standard also changes disclosure requirements. The

26


adoption of the new standard is required in 2017. We do not expect the adoption of this standard to have a material impact on our Consolidated Financial Statements, taken as a whole.

In May 2014, the FASB issued new accounting requirements for the recognition of revenue from contracts with customers. The new requirements also include additional disclosure about the nature, amount, timing and uncertainty of revenue and cash flows arising from customer contracts, including significant judgments and changes in judgments and assets recognized from costs incurred to obtain or fulfill a contract. The adoption of these requirements is required in 2019. We have not yet determined the potential impact on our Consolidated Financial Statements.



27


CONTINUING OPERATIONS

2016 vs. 2015

Operating results, as reported in the Consolidated Financial Statements, are summarized below:
(Thousands of Dollars and Shares, Except Per Share Data)
2016

 
2015

 
Percent Change

 
 
 
 
 
 
Advertising and marketing services revenue:
 
 
 
 
 
Retail
239,136

 
262,079

 
(8.8
)
Classified
100,582

 
116,480

 
(13.6
)
National
22,114

 
22,422

 
(1.4
)
Niche publications and other
11,631

 
11,118

 
4.6

Total advertising and marketing services revenue
373,463

 
412,099

 
(9.4
)
Subscription
194,002

 
194,474

 
(0.2
)
Digital services
14,240

 
12,522

 
13.7

Commercial printing
12,269

 
11,875

 
3.3

Other
20,390

 
17,573

 
16.0

Total operating revenue
614,364

 
648,543

 
(5.3
)
Compensation
229,752

 
239,028

 
(3.9
)
Newsprint and ink
26,110

 
30,263

 
(13.7
)
Other operating expenses
218,726

 
229,165

 
(4.6
)
Workforce adjustments
1,825

 
3,304

 
(44.8
)
Cash costs
476,413

 
501,760

 
(5.1
)
 
137,951

 
146,783

 
(6.0
)
Depreciation
17,291

 
18,418

 
(6.1
)
Amortization
26,150

 
27,145

 
(3.7
)
Loss (gain) on sales of assets, net
(3,139
)
 
106

 
NM

Impairment of intangible and other assets
2,185

 

 
NM

Equity in earnings of associated companies
8,533

 
8,254

 
3.4

Operating income
103,997

 
109,368

 
(4.9
)
Non-operating expense, net
(45,802
)
 
(71,456
)
 
(35.9
)
Income from continuing operations before income taxes
58,195

 
37,912

 
53.5

Income tax expense
22,176

 
13,594

 
63.1

Net income
36,019

 
24,318

 
48.1

Net income attributable to non-controlling interests
(1,058
)
 
(1,002
)
 
5.6

Income attributable to Lee Enterprises, Incorporated
34,961

 
23,316

 
49.9

Other comprehensive loss, net
(6,503
)
 
(6,445
)
 
0.9

Comprehensive income (loss) attributable to Lee Enterprises, Incorporated
28,458

 
16,871

 
68.7

 
 
 
 
 
 
Earnings per common share:
 
 
 
 
 
Basic
0.66

 
0.44

 
47.7

Diluted
0.64

 
0.43

 
48.8



28


Advertising and Marketing Services Revenue

In 2016 advertising and marketing services revenue decreased $38,636,000, or 9.4% compared to 2015. Retail advertising decreased 8.8%. The decrease in advertising and marketing services revenue is due to reduced advertising volume primarily from large retailers, big box stores and classifieds. Digital retail advertising on a stand-alone basis, which is the largest digital advertising category, increased 9.6%, partially offsetting print declines.

Classified revenue decreased $15,898,000, or 13.6% in 2016 as we continue to experience a reduction in print and digital advertising in automotive, employment and real estate in most of our markets. Digital classified revenue on a stand-alone basis decreased 5.5%.

National advertising decreased $308,000, or 1.4%. Digital national advertising on a stand-alone basis increased 20.4% as a result of improved inventory management of available ad positions offered on the national advertising exchanges and improved pricing. Revenue in niche publications and other increased $513,000, or 4.6% mainly attributed to increases in creative service charges.

On a stand alone basis, digital advertising and marketing services revenue increased 5.6%, to $86,279,000 in 2016, representing 23.1% of total advertising and marketing services revenue. Mobile advertising revenue, which is included in digital advertising, increased 19.6% in 2016. Total digital revenue, including advertising and marketing services and all other digital business, totaled $100,519,000 in 2016, an increase of 6.6% from a year ago, representing 16.4% of total operating revenue. Print advertising, including preprints and print marketing services revenue decreased 13.1%.

Subscription and Other Revenue

Subscription revenue decreased $472,000, or 0.2% in 2016. Subscription revenue was virtually flat as price increases and the addition of premium content days with higher single day pricing almost completely offset revenue declines from print subscription units loses.

Our average daily newspaper circulation, including TNI, MNI and digital subscribers, totaled 0.8 million in the September 2016 quarter. Sunday circulation totaled 1.2 million.

Digital services revenue increased $1,718,000, or 13.7% in 2016, largely due to TownNews.com, which generates the majority of its revenue from content management services but is expanding into digital ad agency services for web, mobile and social products at our properties as well as 1,600 other newspapers, and media operations. Commercial printing revenue increased 3.3% in 2016, due to new customers offset by decreased volume for existing customers at several of our larger markets. Other revenue increased $2,817,000, or 16.0% in 2016, due to an increase in revenue for delivery of third party newspapers.

Our mobile, tablet, desktop and app sites, including TNI and MNI, attracted an average of 26.0 million unique visitors in the quarter ended September 2016, with 218.1 million page views. Research in our larger markets indicates we continue to reach over 74% of all adults in the market through the combination of digital audience growth and strong print newspaper readership.

Operating Expenses

Operating expenses decreased 5.2% in 2016. Cash costs decreased by $25,347,000, or 5.1% in 2016.

Compensation expense decreased $9,276,000, or 3.9% in 2016, driven by a decline of 7.9% in average full-time equivalent employees. Costs associated with our self-insured medical plan increased $4.0 million in 2016 due to higher claims costs compared to 2015, offsetting some of the costs due to the reduction in full-time equivalent employees.

Newsprint and ink costs decreased $4,153,000, or 13.7% in 2015, primarily as a result of reduction in newsprint volume of 10.7%. See Item 7A, “Commodities”, included herein, for further discussion and analysis of the impact of newsprint prices on our business.

Other operating expenses, which are comprised of all operating costs not considered to be compensation, newsprint, depreciation, amortization, or unusual matters including delivery, postage, outsourced printing, digital cost of goods sold, facility expenses among others, decreased $10,439,000, or 4.6% in 2016. Cost reductions were primarily related to the impact of both subscriber delivery cost and a decrease in postage costs primarily related to a reduction in direct

29


mail advertising volumes.
Excluding workforce adjustments, cash costs decreased 4.8% in 2016.

Reductions in staffing resulted in workforce adjustment costs totaling $1,825,000 and $3,304,000 in 2016 and 2015, respectively.

For fiscal year 2017, we expect cash costs excluding workforce adjustments on a same property basis, to decrease between 2.5% to 3.5%.

Results of Operations

Depreciation expense decreased $1,127,000, or 6.1%, and amortization expense decreased $995,000, or 3.7% in 2016. Sales of operating assets including the sale of the Provo Daily Herald in August 2016, resulted in a net gain of $3,139,000 in 2016 compared to a net loss of $106,000 in 2015.

In 2016, we recorded a $818,000 non-cash charge to reduce the carrying values of certain non-amortized intangible assets to fair value. We also recorded $1,367,000 pre-tax, non-cash charges for assets considered other than temporarily impaired in 2016.

Equity in earnings of TNI and MNI increased $279,000 in 2016.

The factors noted above resulted in operating income of $103,997,000 in 2016 compared to $109,368,000 in 2015.

Nonoperating Income and Expenses

Interest expense decreased $8,176,000, or 11.3%, to $64,233,000 in 2016 due to lower debt balances. Our weighted average cost of debt, excluding amortization of debt financing cost, increased to 9.7% in 2016 compared to 9.4% in 2015, as our Notes and 2nd Lien Term Loan balances are now a greater percentage of our outstanding debt due to reduction on the 1st Lien Term Loan, our lowest cost of debt.

In 2016, we recognized a $30,646,000 gain on an insurance settlement. The settlement represents our share of a subrogation recovery arising from the settlement of claims for damages suffered as a result of a 2009 loss at one of our production facilities.

We recognized $5,947,000 of debt financing and administrative costs in 2016 compared to $5,433,000 in 2015.

As more fully discussed in Note 4 of the Notes to the Consolidated Financial Statements, included herein, we recorded a liability for the Warrants, issued in connection with the Warrant Agreement. We remeasure the liability to fair value each reporting period, with changes reported in other non-operating income (expenses). Due to the fluctuation in the price of our Common Stock, we recorded non-operating expenses related to the increase in the value of the Warrants of $7,520,000 in 2016 and non-operating income related to the decrease in the value of the Warrants of $6,568,000, in 2015.

Overall Results

We recognized income tax expense at 38.1% of income before income taxes in 2016 and 35.9% in 2015. See Note 10 of the Notes to the Consolidated Financial Statements, included herein, for a discussion of the differences between the expected federal income tax rate to the actual tax rates.


30


As a result of the factors noted above, income attributable to Lee Enterprises, Incorporated totaled $34,961,000 in 2016 compared to $23,316,000 in 2015. We recorded earnings per diluted common share of $0.64 in 2016 and $0.43 in 2015. Excluding unusual matters, as detailed in the table below, adjusted earnings per diluted common share were $0.42 in 2016, compared to $0.31 in 2015. Per share amounts may not add due to rounding.
 
2016
 
2015
 
(Thousands of Dollars, Except Per Share Data)
Amount

Per Share

Amount

Per Share

 
 
 
Income attributable to Lee Enterprises, Incorporated, as reported
34,961

0.64

23,316

0.43

Adjustments:
 
 
 
 
Warrants fair value adjustment
7,519

 
(6,568
)
 
Gain on insurance settlement
(30,646
)
 

 
 
(23,127
)
 
(6,568
)
 
Income tax effect of adjustments, net
10,726

 

 
 
(12,401
)
(0.23
)
(6,568
)
(0.12
)
Income attributable to Lee Enterprises, Incorporated, as adjusted
22,560

0.42

16,748

0.31




31


2015 vs. 2014

Operating results, as reported in the Consolidated Financial Statements, are summarized below:
(Thousands of Dollars and Shares, Except Per Share Data)
2015

 
2014

 
Percent Change

 
 
 
 
 
 
Advertising and marketing services revenue:
 
 
 
 
 
Retail
262,079

 
282,044

 
(7.1
)
Classified
116,480

 
126,277

 
(7.8
)
National
22,422

 
24,867

 
(9.8
)
Niche publications and other
11,118

 
10,059

 
10.5

Total advertising and marketing services revenue
412,099

 
443,247

 
(7.0
)
Subscription
194,474

 
176,826

 
10.0

Digital services
12,522

 
10,181

 
23.0

Commercial printing
11,875

 
12,050

 
(1.5
)
Other
17,573

 
18,573

 
(5.4
)
Total operating revenue
648,543

 
660,877

 
(1.9
)
Compensation
239,028

 
243,054

 
(1.7
)
Newsprint and ink
30,263

 
37,994

 
(20.3
)
Other operating expenses
229,165

 
223,509

 
2.5

Workforce adjustments
3,304

 
1,265

 
NM

Cash costs
501,760

 
505,822

 
(0.8
)
 
146,783

 
155,055

 
(5.3
)
Depreciation
18,418

 
20,920

 
(12.0
)
Amortization
27,145

 
27,591

 
(1.6
)
Loss (gain) on sales of assets, net
106

 
(1,338
)
 
NM

Impairment of intangible and other assets

 
2,980

 
NM

Equity in earnings of associated companies
8,254

 
8,297

 
(0.5
)
Operating income
109,368

 
113,199

 
(3.4
)
Non-operating expense, net
(71,456
)
 
(99,238
)
 
(28.0
)
Income from continuing operations before income taxes
37,912

 
13,961

 
NM

Income tax expense
13,594

 
6,290

 
NM

Net income
24,318

 
7,671

 
NM

Net income attributable to non-controlling interests
(1,002
)
 
(876
)
 
14.4

Income attributable to Lee Enterprises, Incorporated
23,316

 
6,795

 
NM

Other comprehensive loss, net
(6,445
)
 
(17,497
)
 
(63.2
)
Comprehensive income (loss) attributable to Lee Enterprises, Incorporated
16,871

 
(10,702
)
 
NM

 
 
 
 
 
 
Earnings per common share:
 
 
 
 
 
Basic
0.44

 
0.13

 
NM

Diluted
0.43

 
0.13

 
NM


Total operating revenue decreased $12,334,000, or 1.9% in 2015 compared to the prior year. Excluding the impact of the subscription-related expense reclassification as a result of moving to fee-for-service delivery contracts at several of our newspapers, operating revenue for 2015 decreased 3.7%. This reclassification increases both print subscription revenue and other operating expenses, with no impact on operating cash flow or operating income. Certain delivery expenses were previously reported as a reduction of revenue. A table below under the heading Operating Expenses details the impact of the reclassification on revenue and cash costs. Unless otherwise noted, the comparisons below are presented on an as reported basis.

Advertising and Marketing Services Revenue

In 2015 advertising and marketing services revenue decreased $31,148,000, or 7.0%, compared to 2014. Retail advertising decreased 7.1%. The decrease in retail advertising revenue is due to reduced advertising volume primarily

32


from large retail and big box stores. Digital retail advertising on a stand-alone basis increased 5.6%, partially offsetting print declines.

Classified revenue decreased $9,797,000, or 7.8% in 2015 as we continue to experience a reduction in print advertising from automotive, employment and real estate in most of our markets. Digital classified revenue on a stand-alone basis increased 7.0%, partially offsetting print declines.

National advertising decreased $2,445,000 or 9.8%. Digital national advertising on a stand-alone basis increased 16.9% due to improved management of available ad positions offered on the national advertising exchanges and improved pricing. Advertising in niche publications and other increased $1,059,000, or 10.5%.

On a stand-alone basis, digital advertising and marketing services revenue increased 6.9%, to $81,735,000 in 2015, representing 19.8% of total advertising and marketing services revenue. Mobile advertising revenue, which is included in digital advertising, increased 24.8% in 2015. Total digital revenue for 2015, including advertising and marketing services and all other digital business, totaled $94 million, an increase of 8.8% from a year ago, representing 14.5% of total operating revenue. Print advertising, including preprints and print marketing services revenue decreased 9.9%

Subscription and Other Revenue

Subscription revenue increased $17,648,000, or 10.0% in 2015. Excluding the impact of the subscription-related expense reclassification, subscription revenue increased 3.6% or $6,055,000. The increase in subscription revenue in 2016 is primarily due to the effect of our full access subscription model, price increases and the addition of premium content days with higher single day pricing, in part offset by a decline in print units.

Our average daily newspaper circulation, including TNI, MNI and digital subscribers, totaled 0.9 million in the September 2015 quarter. Sunday circulation totaled 1.3 million.

Digital services revenue increased $2,341,000, or 23.0% in 2015, largely due to TownNews.com. Commercial printing revenue decreased $175,000, or 1.5% in 2015 due to decreased volume for existing customers at several of our large markets. Other revenue decreased $1,000,000, or 5.4%.

Our mobile, tablet, desktop and app sites, including TNI and MNI, attracted 24.9 million unique visitors in the month of September 2015, with 221.4 million page views. Research in our larger markets indicates we are maintaining our share of audience through the combination of digital audience growth and strong print newspaper readership.

Operating Expenses

Operating expenses decreased 1.5%, and cash cost decreased $4,062,000, or 0.8% in 2015. Excluding the impact of the subscription-related expense reclassification, cash costs decreased 3.1%. Also excluding workforce adjustments and the subscription-related expense reclassification, cash costs decreased 3.6% in 2015 or $17,694,000.

Compensation expense decreased $4,026,000, or 1.7% in 2015, driven by a decline in average full-time equivalent employees of 4.2%, partially offset by company-wide compensation increases in January 2015.

Newsprint and ink costs decreased $7,731,000, or 20.3% in 2015, primarily as a result of lower newsprint prices and a reduction in newsprint volume of 12.3%%. See Item 7A, “Commodities”, included herein, for further discussion and analysis of the impact of newsprint on our business.

Other operating expenses, which are comprised of all operating costs not considered to be compensation, newsprint, depreciation, amortization, or unusual matters including delivery, postage, outsourced printing, digital cost of good sold, facility expenses among others, increased $5,656,000, or 2.5% in 2015, due to the subscription-related expense reclassification. Excluding the impact of the subscription-related expenses reclassification, other operating expenses decreased 2.7%.

Reductions in staffing resulted in workforce adjustment costs totaling $3,304,000 and $1,265,000 in 2015 and 2014, respectively.


33


Certain results, excluding the impact of the subscription-related expense reclassification, are as follows:
(Thousands of Dollars)
2015

2014

Percent
Change

 
 
 
 
Subscription revenue, as reported
194,474

176,826

10.0

Adjustment for subscription-related expense reclassification
(18,300
)
(6,707
)
NM

Subscription revenue, as adjusted
176,174

170,119

3.6

 
 
 
 
Total operating revenue, as reported
648,543

660,877

(1.9
)
Adjustment for subscription-related expense reclassification
(18,300
)
(6,707
)
NM

Total operating revenue, as adjusted
630,243

654,170

(3.7
)
 
 
 
 
Other cash costs, as reported
229,165

223,509

2.5

Adjustment for subscription-related expense reclassification
(18,300
)
(6,707
)
NM

Other cash costs, as adjusted
210,865

216,802

(2.7
)
 
 
 
 
Total cash costs excluding workforce adjustments
498,456

504,557

(1.2
)
Adjustment for subscription-related expense reclassification
(18,300
)
(6,707
)
NM

Total cash cost excluding workforce adjustments, as adjusted
480,156

497,850

(3.6
)
 
 
 
 
Total cash costs, as reported
501,760

505,822

(0.8
)
Adjustment for subscription-related expense reclassification
(18,300
)
(6,707
)
NM

Total cash costs, as adjusted
483,460

499,115

(3.1
)

The subscription-related expense reclassification described above also increased revenue and cash costs of MNI by $5,791,000 in 2015. Such amounts for MNI are not included in the table above.

Results of Operations

Depreciation expense decreased $2,502,000, or 12.0% in 2015 and amortization expense decreased $446,000, or 1.6% in 2015.

In 2014, we recorded a $1,936,000 non-cash charge to reduce the carrying values of certain non-amortized intangible assets to fair value. We also recorded $1,044,000 pre-tax, non-cash charges to reduce the carrying value of property and equipment in 2014. Sales of operating assets resulted in a net loss of $106,000 in 2015 compared to a net gain of $1,338,000 in 2014.

Equity in earnings in associated companies decreased $43,000 in 2015.

The factors noted above resulted in operating income of $109,368,000 in 2015 compared to $113,199,000 in 2014.

Nonoperating Income and Expenses

Interest expense decreased $7,315,000 or 9.2%, to $72,409,000 in 2015 due to lower debt balances.

We recognized $5,433,000 of debt financing and administrative costs in 2015 compared to $22,927,000 in 2014. The decrease is related to the costs charged to expense at the closing of the 2014 Refinancing. Also in 2014, we recorded a $2,300,000 loss related to a litigation settlement.

Due to the decrease in the price of our Common Stock, we recorded non-operating income related to the decrease in the value of the Warrants of $6,568,000 and $6,122,000, in 2015 and 2014, respectively.

Overall Results

We recognized income tax expense at 35.9% of income before income taxes in 2015 and 45.1% in 2014. See Note 10 of the Notes to the Consolidated Financial Statements, included herein, for a discussion of the difference between the expected federal income tax rate and the actual tax rates.

34


As a result of the factors noted above, income attributable to Lee Enterprises, Incorporated totaled $23,316,000 in 2015 compared to $6,795,000 in 2014. We recorded earnings per diluted common share of $0.43 in 2015 and $0.13 in 2014. Excluding unusual matters, as detailed in the table below, adjusted earnings per diluted common share were $0.31 in 2015, compared to $0.26 in 2014. Per share amounts may not add due to rounding.
 
2015
 
2014
 
(Thousands of Dollars, Except Per Share Data)
Amount

Per Share

Amount

Per Share

 
 
 
Income attributable to Lee Enterprises, Incorporated, as reported
23,316

0.43

6,795

0.13

Adjustments:
 
 
 
 
Warrants fair value adjustment
(6,568
)
 
(6,122
)
 
Expenses related to the 2014 Refinancing

 
20,591

 
 
10,180

 
14,469

 
Income tax effect of adjustments, net

 
(7,380
)
 
 
10,180

(0.12
)
7,089

0.13

Income attributable to Lee Enterprises, Incorporated, as adjusted
16,748

0.31

13,884

0.26




35


LIQUIDITY AND CAPITAL RESOURCES
 
Operating Activities
 
Cash provided by operating activities was $79,190,000, $74,476,000 and $82,075,000 in 2016, 2015 and 2014, respectively. We recorded net income of $36,019,000, $24,318,000 and $7,671,000 in 2016, 2015 and 2014, respectively. Non-cash debt financing and administration costs charged to expense totaled $5,947,000, $5,433,000, and $22,927,000 in 2016, 2015 and 2014, respectively. Changes in operating assets and liabilities accounted for the bulk of the change in cash provided by operating activities in 2016 and 2015.

Pension liabilities, net of plan assets, totaled $55.1 million as of September 25, 2016. No contributions to pension plans are expected in 2017.

Investing Activities
 
Cash required for investing activities totaled $34,508,000, $208,000 and $9,284,000 in 2016, 2015 and 2014, respectively. Capital spending totaled $7,091,000 in 2016, $9,707,000 in 2015 and $13,661,000 in 2014. In 2016 we received proceeds of $30,646,000 related to an insurance settlement. We received $9,878,000, $8,871,000 and $4,485,000 in proceeds from sales of assets in 2016, 2015 and 2014, respectively.
 
We anticipate that funds necessary for capital expenditures, which are expected to total up to $10,000,000 in 2017, and other requirements, will be available from internally generated funds, or available under our Revolving Facility.
 
Financing Activities
 
Cash required for financing activities for continued operations totaled $107,848,000 in 2016, $79,838,000 in 2015 and $73,649,000 in 2014. We paid $422,000, $733,000 and $31,587,000 of debt financing and administrative costs in 2016, 2015 and 2014, respectively. The increase in such costs in 2014 was due to the 2014 Refinancing. Debt reduction accounted for the majority of the remaining usage of funds in all years.

Debt is summarized as follows:
 
 
 
Interest Rates (%)
(Thousands of Dollars)
September 25
2016

September 27
2015

September 25
2016
 
 
 
 
Revolving Facility


5.65
1st Lien Term Loan
101,304

180,872

7.25
Notes
385,000

400,000

9.50
2nd Lien Term Loan
130,863

145,000

12.00
 
617,167

725,872

 
Less current maturities of long-term debt
25,070

25,000

 
Total long-term debt
592,097

700,872

 

At September 25, 2016, our weighted average cost of debt, excluding amortization of debt financing costs, is 9.7%.

Aggregate maturities of debt total $25,070,000 in 2017, $25,000,000 in 2018 $51,234,000 in 2019, $0 in 2020 and $515,863,000 thereafter. In addition to mandatory paydowns, the first lien and 2nd lien term loans require excess cash flow payments based on calculations defined in the credit agreements. See Note 4 of the Notes to the Consolidated Financial Statements.

Liquidity
 
At September 25, 2016, after consideration of letters of credit, we have approximately $33,318,000 available for future use under our Revolving Facility. Including cash, our liquidity at September 25, 2016 totals $50,302,000. This liquidity amount excludes any future cash flows. We expect all interest and principal payments due in the next twelve months will be satisfied by our cash flows, which will allow us to maintain an adequate level of liquidity. The Warrants, if and when exercised, would provide additional liquidity in an amount up to $25,140,000.

36