10-K 1 a10k20189-30x18.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 30, 2018
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
Securities registered pursuant to Section 12(b) of the Act:
Title of Each Class
Name of Each Exchange On Which Registered
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 every Interactive Data File required to be submitted 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). 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, a non-accelerated filer, a smaller reporting company, or an emerging growth company. See the definitions of “large accelerated filer," "accelerated filer," "smaller reporting company,” and "emerging growth company" in Rule 12b-2 of the Exchange Act.
                                    
Large accelerated filer [ ] Accelerated filer [X] Non-accelerated filer [ ] Smaller Reporting Company [ ] Emerging growth company [ ]
                                    
If an emerging growth company, indicate by check mark if the Registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act. [ ]
 
Indicate by check mark whether the Registrant is a shell company (as defined in Rule 12b-2 of the Act). Yes [ ] No [X]
 
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, 2018, such aggregate market value was approximately $102,433,453. 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, 2018. Common Stock, $0.01 par value, 57,148,888 shares.
 
DOCUMENTS INCORPORATED BY REFERENCE
 
Portions of the Lee Enterprises, Incorporated Definitive Proxy Statement to be filed in January 2019 are incorporated by reference in Part III of this Form 10-K. Except as expressly incorporated by reference, the Registrant's Definitive Proxy Statement shall not be deemed to be a part of this report.
 




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 "2018", "2017", "2016" and the like refer to the fiscal years ended the last Sunday in September.

PART I
 
ITEM 1. BUSINESS
 
Lee Enterprises, Incorporated ("Company", "we" or "our") is a leading provider of high quality, trusted, local news and information, and a major platform for advertising in the markets we serve. We operate 49 principally mid-sized local media operations (including TNI Partners ("TNI") and Madison Newspapers, Inc. ("MNI")) across 20 states.

Our products include daily newspapers, websites and mobile applications, mobile news and advertising, video products, a digital marketing agency, digital services including web hosting and content management, niche publications and community newspapers. Our local media operations range from large daily newspapers and the associated digital products, such as the St. Louis Post-Dispatch, to non-daily newspapers with news websites and digital platforms serving smaller communities.

Our mission is to be the leading provider of local news, information and to be a major source of advertising in our local media operations. We aim to grow our business through three main categories; consumers, local retail accounts and digital services.

We are committed to a business strategy that drives audience growth and engagement by delivering valuable, intensely local, original news and information to consumers.

Local, controllable retail accounts - those in which our local sales teams have direct contact with the advertising decision makers - are the core of our business. This segment represents nearly 50% of advertising revenue and our historical financial results for this revenue category are better than our overall results.

TownNews represents a powerful opportunity for us to drive additional digital revenue by providing state-of-the-art web hosting and content management services to 1,700 other media organizations including broadcast.

Our local media operations generate revenue primarily through print and digital advertising, subscriptions to our publications and digital services, primarily through TownNews. Our operations also provide commercial printing, distribution of third party publications and marketing services.

Advertising and marketing services - Approximately 56% of our 2018 revenue was derived from advertising and marketing services. We provide advertising and marketing solutions using a multi-platform sales approach that maximizes audience reach for our customers by tailoring our print and digital advertising platforms to the individual needs of our advertisers, from small, medium sized businesses ("SMBs") to large complex businesses. The following broadly define major categories of advertising and marketing services revenue:
 
Retail advertising is revenue earned from sales of display advertising in the publication, or from preprinted advertising inserted in the publication, from local, regional and national businesses with local retail operations.

Classified advertising is revenue from the sale of advertising space, or from separate publications, consisting primarily of advertising categories, such as employment, automotive, real estate, legal notices, obituaries and other merchandise. Classified publications offer advertisers a cost-effective, local advertising vehicle and can be particularly effective in larger markets with higher media fragmentation.
 
National advertising is revenue earned from the sale of print or digital display advertising space, or from preprinted advertising inserted in the publication, from 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 applications that are integrated with our print publications, 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.

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Niche publications are specialty publications, such as lifestyle, business, health or home improvement publications that contain advertising.
 
Marketing services is comprised of a suite of custom digital marketing services that include: Search Engine Optimization, Search Engine Marketing ("SEM"), web and mobile production, social media services and reputation monitoring and management. Our marketing services also include media buying in audience extension networks outside of those owned and operated by the Company, such as Centro DSP and TradeDesk.

Our advertising revenues are subject to seasonality due primarily to fluctuations in advertising volumes. Our advertising revenues for publishing are typically highest in our first quarter due to holiday and seasonal advertising and lowest in the second quarter following the holiday season. The volume of advertising sales in any period is also impacted by other external factors such as competitors' pricing, advertisers' decisions to increase or decrease their advertising expenditures in response to anticipated consumer demand, and general economic conditions.

Subscription - Approximately 36% of our 2018 revenue was derived from subscriptions to our printed and digital products. Subscription revenue is earned primarily from our full access subscription model and digital only subscriptions. Full access subscribers receive print and digital access to our leading local news, information and advertising content.

We reach 79% of all adults in our larger markets through a combination of our print and digital content offerings.

Our web and mobile sites are the number one digital source of local news in most of our markets, reaching more than 27 million unique visitors each month with a monthly average of 267.1 million page views. Page views per session, one metric we use to monitor engagement, increased 5.6% in 2018.

Our printed newspapers reach more than 700,000 households daily and more than 1.1 million on Sunday, with estimated readership totaling three million.

While our print audience tends to skew to an older demographic, our digital audience skews younger, as evidenced by third party research that suggests the print and digital reach among the younger demographic (ages 18-29) totals 77%, with a 43% digital reach. Consistent within the publishing industry, print circulation volumes declined in 2018. Growing our digital only subscribers and subscription revenue is a priority.

Other Revenue - Other revenue is comprised mainly of digital services, commercial printing and delivery of third party products and represents 8.3% of our business. Digital services revenue, which is mostly TownNews, is the largest component of Other Revenue.

TownNews, operated through our 82.5% owned subsidiary INN Partners, L.C., is a leading provider of integrated digital publishing and content management solutions, and offers a state-of-the-art platform for creating, distributing and monetizing multimedia content.

TownNews services nearly 1,700 daily and weekly newspapers as well as universities, television stations, niche publications, and Lee Enterprises properties.

Including revenue generated from Lee Enterprises, total revenue at TownNews grew 16% in 2018.

With strong product offerings, investments in video and over the top ("OTT") technology and a diversifying customer base into broadcast, we believe TownNews is positioned to continue to be a key component to our growth strategy.

Our operating costs are primarily compensation, newsprint and delivery. Over the past several years we have adjusted our business model to create operational efficiencies and significantly reduce our cost structure.

We have centralized, or regionalized, most back office functions including the design of our newspapers. The regional design centers ("RDCs") have enabled us to more cost effectively design and layout the newspaper. The RDCs - combined with a common content management system across all of our daily newspaper markets - have created additional operating efficiencies and cost savings. We have templated designs for our printed and digital editions, and we have created a national news desk that shares high quality content across all of our markets, including national news, regional news and other special sections content. The national news desk allows our newsrooms to focus on

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high quality local content. We believe we will continue to create additional operational efficiencies and continue to transform our business model.

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. A table under the caption “Daily Newspapers and Markets” in Item 1, included herein, identifies those groups of our newspapers operating in clusters.

Our local media operations compete with other media and digital companies for advertising and marketing spend as well as other news and information outlets for subscription spend. While very few of our local media operations have similar daily print competitors that are published in the same city, our local media operations compete with the following types of businesses:
 
Newspapers having national, regional and smaller suburban area newspapers and free or paid publications; and
Other media including magazines, radio, television, outdoor/billboard advertising, other classified and specialty publications, direct mail, directories, and national, regional and local advertising websites and content providers.

The number of competitors in any given market varies, however all of the forms of competition noted above exist to some degree in all of our markets.

Lee Enterprises, Incorporated was founded in 1890, incorporated in 1950, and listed on the New York Stock Exchange ("NYSE") in 1978.

We experienced significant net losses in 2008, 2009, 2011, 2012 and 2013 primarily due to non-cash charges for impairment of intangible and other assets and reorganization costs, and as a result, we have negative equity of $36.3 million as of September 30, 2018. Our ability to operate as a going concern is dependent on our ability to repay, refinance or amend our debt agreements as they become due, and remain in compliance with debt covenants. We are in compliance with our debt covenants as of September 30, 2018. 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

Key elements of our strategy are as follows:

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 we believe in many cases 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 platform provides our subscribers with breaking news throughout the day on our digital platforms as well as in depth daily print and digital news and information.

We believe the strength of our local brands is the result of the quality and size of our news gathering staff. This allows 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 consumption of news on digital devices has expanded, we have moved quickly to develop applications that address audience and digital advertising demands for mobile and tablet content advertising platforms. As new digital technologies emerge, we expect to move rapidly to make our content available through them and monetize the audience accessing our content.

We are focused on continually improving the functionality and design of all our news platforms, allowing us to provide greater depth of coverage and increasing reader engagement. We are providing our journalists with tools to give them real-time information about audience engagement on our digital platforms. This helps inform their decisions on both presentation and coverage.

We believe our journalists are at the forefront of gathering and producing news and information about their local community. We seek to grow our digital audience by engaging our readers with news and information that we believe stirs public awareness, advances ideas, inspires vision, creates debate and provokes action. Through our news

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leadership we strive to contribute to community betterment, promote education, foster commerce and help improve the quality of life in our markets.

Become Predominately Digital Revenue Driven

Our digital businesses have experienced rapid growth since 2010. Total digital revenue, including digital advertising revenue and digital services revenue, grew 6.3% in 2018 and totaled $112,825,000. Digital advertising revenue totaled 31.8% of total advertising and marketing services revenue for the 53 weeks ended September 30, 2018. Digital national revenue grew 13.1% in 2018, driven by our sweeps program and improved inventory management and pricing. Mobile advertising increased 3.8%, and digital retail advertising, which represents more than 62% of total digital advertising, increased 7.7% in 2018. Digital services revenue grew 16.6% in 2018 due to revenue growth at TownNews.

We are growing digital revenue by offering an expansive array of digital products including: video, behavioral targeting, audience retargeting, banner ads, social networking, and digital couponing. We provide digital marketing services to SMBs, including SEM, social media, audience extension, business profiles, and website hosting and design.

We believe that these innovative solutions will continue to drive meaningful new opportunities for us to grow our digital marketing revenue. We also continue to expand our array of digital products to address advertisers' evolving needs, react to competition while seeking to increase our share of advertising and marketing services spending from existing customers. In 2017, we introduced Digital Connect, a digital services package aimed at growing digital revenue from local businesses. Digital Connect provides local businesses a turn-key package for expanding their digital presence through enhanced search engine management. Digital Connect was a significant contributor to digital advertising revenue growth in 2018.

In 2019, we expect to continue to expand our digital marketing footprint with programs aimed at SMB's and our top local accounts, including:

Consumer and local merchant intelligence solutions that enable marketers to more easily analyze their customers spending habits;
 
SMB customer loyalty programs using email and text platforms that drive loyalty and frequency; and

Sales channel development by expanding dedicated digital sales resources.

One key tactic to becoming predominately digital revenue driven is to acquire and retain top digital talent. As of September 30, 2018, we have 40 digital elite specialists that reside in our larger markets. The role of the digital elite specialists is to educate the local media operation's sales team on current digital product offerings, purse new and sizable digital opportunities and serve as a company resource for anticipating future advertising needs and requirements. We expect to grow the number of digital elite specialists in 2019.

Growing digital subscribers is another key to becoming predominately digital revenue driven. As of September 30, 2018, we have 57% of all full access subscriptions digitally activated. In addition to the full access subscriptions, all of our markets offer digital only subscription packages and growing our digital only subscriber base remains a key priority. While the number of digital only subscribers is small, we grew our base by over 70% in 2018. Our primary digital subscription acquisition tactics include on-site and off-site promotion, email marketing, social media, event marketing, and direct mail.

We believe TownNews represents a powerful opportunity for us to drive additional digital revenue. In 2018, digital services revenue, which is primarily TownNews, totaled more than $16,000,000, and since 2011 the compounded annual growth rate of TownNews revenue has been 9.7%. In 2018, TownNews expanded its broadcast and video capabilities by acquiring an acclaimed video management and streaming solution for media operations. The acquisition allows TownNews customers to have broadcast quality video available for desktop, mobile and OTT applications. The investment also allows TownNews to diversify its customer base by offering state-of-the-art product offerings to broadcast television stations.

Accelerate Local Retail Performance

Local, controllable retail accounts - those in which our local sales teams have direct contact with the advertising decision makers - are the core of our business. This revenue category represents nearly 50% of advertising revenue and is

4


comprised of SMBs and our top local accounts. Our historical financial results for this revenue category are better than our overall results and we believe we can accelerate financial performance in this revenue category.

Our local sales forces are larger than any local competitor, and we believe they are the most highly trained and proficient sales force in our markets.

We have strong relationships with businesses in our markets and offer a wide array of products to deliver our advertisers' message.

Our sales executives pitch the power of our audiences directly to local decision makers.

To address the evolving needs of local advertisers we changed the way we sell local advertising to maximize our opportunities with SMBs by developing the Edison Project, which is directly aimed at these local advertisers. With Edison, we completely restructured our local sales teams and simplified advertising packages, providing advertisers with an expanded robust digital presence, increased frequency in print products, and longer advertising commitments.

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

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 consolidated or regionalized many common functions; consolidated or selectively outsourced printing and ad production; discontinued unprofitable publications; significantly reduced newsprint volume; and continually seek to improve the efficiencies and reduce costs of our operations. We have reduced personnel while protecting our strengths in news, sales and digital products. In 2018, on a same property basis we reduced cash costs(1) 6.1%. We continue to implement 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 ongoing recovery - at a time of unprecedented transition for our industry - we have posted strong adjusted EBITDA and consistent margins. We anticipate modest capital expenditures and pension contributions, and we expect to continue to significantly reduce our debt each year.

The principal amount of debt was reduced by $63.5 million in 2018 and totaled $484.9 million as of September 30, 2018. Since 2005, we have reduced debt by more than $1 billion and we expect to continue to significantly reduce our debt in 2019. As a result of our debt reductions, interest expense was reduced by $4.7 million in 2018 compared to 2017, providing additional free cash flow for debt service and other corporate uses.

(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 includes our 50% interest in TNI, as discussed more fully below.

Pulitzer newspapers largest operations include Bloomington, Illinois and St. Louis, Missouri, where its subsidiary, St. Louis Post-Dispatch LLC (“PD LLC”), publishes the St. Louis Post-Dispatch, our only major daily newspaper, which serves the greater St. Louis metropolitan area. St. Louis newspaper operations also include a variety of specialty publications, and supports its related digital products as well as the Suburban Journals of Greater St. Louis, a group of weekly newspapers and niche publications that focus on separate communities within the metropolitan area.
 
The 2005 acquisition was financed primarily with debt. The second lien term loan lenders have a first lien on Pulitzer assets. Excess cash flow from Pulitzer, as defined in the Second Lien Loan Agreement, and cash flow from Pulitzer asset sales are used to pay down the second lien term loan at par. On August 28, 2016 we sold substantially all of the

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assets of our Provo, Utah newspaper operations, a former Pulitzer newspaper, and proceeds from the sale were used to pay down the second lien term loan.

TNI Partners
 
In conjunction with the Pulitzer acquisition we obtained 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 was responsible for printing, delivery, advertising and subscription activities of the Arizona Daily Star and the Tucson Citizen. 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. 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. Both the Company and Citizen incur certain administrative costs and capital expenditures that are reported by their individual companies.
 
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 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 for a fee. 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 quarterly dividend payments to the Company and TCT.
 

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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)
2018 Monthly Average ('000s)
Newspaper
Primary Website
Location
  Daily (2) 

Sunday

Unique Visitors

Page Views

 
 
 
 
 
 
 
St. Louis Post-Dispatch (3)
stltoday.com
St. Louis, MO
95,659

353,673

6,366

71,667

Arizona Daily Star (5) (3)
azstarnet.com
Tucson, AZ
44,815

90,992

1,499

11,909

Capital Newspapers (4)
 
 
 
 
 
 
Wisconsin State Journal
madison.com
Madison, WI
51,303

64,820

1,934

10,889

Daily Citizen
wiscnews.com/bdc
Beaver Dam, WI
4,470


188

1,197

Portage Daily Register
wiscnews.com/pdr
Portage, WI
2,347


95

631

Baraboo News Republic
wiscnews.com/bnr
Baraboo, WI
2,041


82

476

The Times
nwitimes.com
Munster, Valparaiso, and Crown Point, IN
42,709

57,941

1,676

25,001

Quad Cities Group
 
 
 
 
 
 
Quad-City Times
qctimes.com
Davenport, IA
27,948

30,690

760

6,256

Dispatch-Argus
qconline.com
Moline, IL
55,073

21,620

69

595

Muscatine Journal
muscatinejournal.com
Muscatine, IA
3,908


349

2,803

Central Illinois Newspaper Group
 
 
 
 
 
The Pantagraph (3)
pantagraph.com
Bloomington, IL
19,160

24,358

597

7,552

Herald & Review
herald-review.com
Decatur, IL
14,066

21,210

399

3,904

Journal Gazette & Times-Courier
jg-tc.com
Mattoon/Charleston, IL
7,270


141

1,163

Lincoln Group
 
 
 
 
 
 
Lincoln Journal Star
journalstar.com
Lincoln, NE
38,465

45,112

1,759

20,906

Columbus Telegram (6)
columbustelegram.com
Columbus, NE
3,421


148

1,084

Fremont Tribune (6)
fremonttribune.com
Fremont, NE
2,750


117

992

Beatrice Daily Sun (6)
beatricedailysun.com
Beatrice, NE
2,755


67

554

The Bismarck Tribune
bismarcktribune.com
Bismarck, ND
22,022

27,688

523

6,536

River Valley Newspaper Group
 
 
 
 
 
La Crosse Tribune
lacrossetribune.com
La Crosse, WI
16,064

19,805

572

6,152

Winona Daily News
winonadailynews.com
Winona, MN
4,916

5,655

169

1,491

The Chippewa Herald (6)
chippewa.com
Chippewa Falls, WI
2,134


141

1,055

Billings Gazette
billingsgazette.com
Billings, MT
22,668

25,333

1,097

10,957

The Courier
wcfcourier.com
Waterloo and Cedar Falls, IA
30,051

25,105

525

5,003

Sioux City Journal
siouxcityjournal.com
Sioux City, IA
19,049

21,468

532

3,627

Missoula Group
 
 
 
 
 
 
Missoulian
missoulian.com
Missoula, MT
14,117

16,850

628

4,755

Ravalli Republic (6)
ravallinews.com
Hamilton, MT
1,683

1,417

91

412

Rapid City Journal
rapidcityjournal.com
Rapid City, SD
14,619

18,134

512

4,602

The Post-Star
poststar.com
Glens Falls, NY
14,523

18,038

533

6,865

Casper Star-Tribune
trib.com
Casper, WY
17,779

17,154

434

2,999

The Journal Times
journaltimes.com
Racine, WI
14,949

17,041

433

4,413

Helena/Butte Group
 
 
 
 
 
 
Independent Record
helenair.com
Helena, MT
8,612

9,196

335

3,436

The Montana Standard
mtstandard.com
Butte, MT
7,277

7,504

252

2,494


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Average Units (1)
2018 Monthly Average (000)
Newspaper
Primary Website
Location
  Daily (2)

Sunday

Unique Visitors

Page Views

 
 
 
 
 
 
 
Mid-Valley News Group
 
 
 
 
 
 
Albany Democrat-Herald
democratherald.com
Albany, OR
7,460

7,887

193

1,837

Corvallis Gazette-Times
gazettetimes.com
Corvallis, OR
7,170

7,323

219

1,726

The Southern Illinoisan
thesouthern.com
Carbondale, IL
10,045

14,545

341

2,171

Santa Maria Times (3)
santamariatimes.com
Santa Maria, CA
6,640

11,831

237

1,520

The Daily News
tdn.com
Longview, WA
13,322

11,801

254

1,809

Magic Valley Group
 
 
 
 
 
 
The Times-News
magicvalley.com
Twin Falls, ID
1,730

11,146

297

2,626

Elko Daily Free Press (6)
elkodaily.com
Elko, NV
2,296


160

1,320

Globe Gazette
globegazette.com
Mason City, IA
8,360

10,351

363

4,384

Napa Valley Register (3)
napavalleyregister.com
Napa, CA
8,320

8,752

459

3,303

Arizona Daily Sun (3) (6)
azdailysun.com
Flagstaff, AZ
4,860

6,516

292

1,828

The Times and Democrat
thetandd.com
Orangeburg, SC
6,133

6,335

268

2,444

The Sentinel (6)
cumberlink.com
Carlisle, PA
6,055


252

1,932

The Citizen (6)
auburnpub.com
Auburn, NY
4,139


288

2,793

The World (3)
theworldlink.com
Coos Bay, OR
3,905


113

659

The Sentinel (3)
hanfordsentinel.com
Hanford, CA
3,156


181

1,140

Daily Journal (3) (6)
dailyjournalonline.com
Park Hills, MO
3,139


203

1,925

 
 
 
725,353

1,037,291

27,143

265,793

(1)
Source: AAM: September 2018 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 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, tariffs and both foreign and domestic production capacity and consumption. Price fluctuations can effect 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.
 

8


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
71
June 1999
February 2016
Executive Chairman
 
 
 
 
 
Kevin D. Mowbray
56
September 1986
February 2016
President and Chief Executive Officer
 
 
 
 
 
Nathan E. Bekke
49
January 1992
February 2015
Vice President - Consumer Sales and Marketing
 
 
 
 
 
Paul M. Farrell
63
October 2013
October 2015
Vice President - Sales
 
 
 
 
 
Ray G. Farris
62
October 2006
December 2018
Vice President - Group Publisher
 
 
 
 
 
Suzanna M. Frank
48
December 2003
March 2008
Vice President - Audience
 
 
 
 
 
Astrid J. Garcia
68
December 2006
December 2013
Vice President - Human Resources and Legal
 
 
 
 
 
James A. Green
52
March 2013
March 2013
Vice President - Digital
 
 
 
 
 
John M. Humenik
55
December 1998
February 2015
Vice President - News
 
 
 
 
 
Timothy R. Millage
37
March 2010
August 2018
Vice President - Chief Financial Officer and Treasurer
 
 
 
 
 
Michele Fennelly White
56
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 2016 she served as President and Chief Executive Officer. She was elected to the Board of Directors of the Company in 1999. Following the Company's annual shareholder's meeting in February 2019, Ms. Junck will transition to Chairman.
 
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.

Ray G. Farris was appointed Vice President - Group Publisher in December 2018. From May 2013 to December 2018, he served as President and Publisher of the St. Louis Post-Dispatch. From August 2010 to May 2013, he served as General Manager and Vice President of Sales of the St. Louis Post-Dispatch. From October 2006 to August 2010, he served as Vice President of Classified Advertising of the St. Louis Post-Dispatch.

Suzanna M. Frank was appointed Vice President - Research and Metrics in November 2018. From March 2008 to November 2018 she served as Vice President - Audience. From 2003 to 2008 she served as Director of Research and Marketing of the Company.


9


Astrid J. Garcia was appointed Vice President - Human Resources and Legal 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.

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.

John M. Humenik was appointed Vice President - News in February 2015.  He was 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 as president of Tucson Newspapers Inc. until 2013.

Timothy R. Millage was elected Vice President, Chief Financial Officer and Treasurer in August 2018. From 2012 to 2018 he served as the corporate controller.

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, Bekke, Farrell, Farris, Green and Millage have been designated by the Board of Directors as executive officers for US Securities and Exchange Commission ("SEC") reporting purposes.

EMPLOYEES
 
At September 30, 2018, we had approximately 3,056 employees, including approximately 741 part-time employees, exclusive of TNI and MNI. Full-time equivalent employees in 2018 totaled approximately 3,241. We consider our relationships with our employees to be good.
Bargaining units represent 311, or 70%, of the total employees of the St. Louis Post-Dispatch, which has six contracts with bargaining units with expiration dates from February 2019 through September 2021.
Approximately 56 employees in six additional locations are represented by collective bargaining units.
CORPORATE GOVERNANCE AND PUBLIC INFORMATION
 
We have a long 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.

FORWARD-LOOKING STATEMENTS

The Private Securities Litigation Reform Act of 1995 provides a “safe harbor” for forward-looking statements. This annual report ("Annual 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;

10


Our ability to manage declining print revenue;
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, including this Annual Report and
particularly in "Risk Factors", Part I, Item 1A herein.

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 Annual Report. We do not undertake to publicly update or revise our forward-looking statements, except as required by law.
 
ITEM 1A. RISK FACTORS
 
Risk exists that our past results may not be indicative of future results. In addition, a number of other factors (those identified elsewhere in this document) may cause actual results to differ materially from expectations. Potential investors should carefully consider the following risks and other information in this Annual Report in evaluating us and our common stock. See also, “Forward-Looking Statements”, included herein.
  
Our advertising revenues may decline due to weak general economic conditions and business conditions.
 
A significant portion of our revenue is derived from advertising. The demand for advertising is sensitive to the overall level of economic strength, both in the markets in which we operate and nationally. Additionally, the decline in the financial or economic conditions of our advertisers could alter discretionary spending by advertisers. Certain segments of the economy have been challenged in recent years, particularly in the brick and mortar retail sector, and total advertising revenues have declined as a result. Advertising revenues may worsen if advertisers reduce their budgets, shift their spending priorities, are forced to consolidate or cease operations.

We compete with a large number of companies in the local media industry; if we are unable to compete effectively, our advertising and subscription revenues may decline.

We compete for audiences and advertising revenue with newspapers and other media such as the internet, magazines, broadcast, cable and satellite television, radio, direct mail, outdoor billboards and yellow pages. For example, as the use of the internet and mobile devices has increased, we have lost some classified advertising and subscribers to online advertising businesses and our free Internet sites that contain abbreviated versions of our publications. Some of our current and potential competitors have greater financial and other resources than we do. If we fail to compete effectively with competing newspapers and other media, our results of operations may be materially adversely affected.

Our operating revenue may be materially adversely affected if we do not successfully respond to the shift in newspaper readership and advertising expenditures away from traditional print media and towards digital media. Significant capital investments may be needed to respond to this shift.

Currently, our primary source of revenue is from advertising and marketing services, which accounts for nearly 56% of our revenue. Subscription revenue accounts for more than 36% of our revenue. The media publishing industry has experienced rapid evolution in consumer demands and expectations due to advances in technology, which have led to a proliferation of delivery methods for news and information. The number of consumers who access online services through devices other than personal computers, such as tablets and mobile devices, has increased dramatically in recent years and likely will continue to increase. The media publishing industry also continues to be affected by

11


demographic shifts, with older generations preferring more traditional print newspaper delivery and younger generations developing the habit of consuming news through digital media. In addition, the revenues generated by media publishing companies have been affected significantly by the shift in advertising expenditures towards digital media.

The future revenue performance of our digital business depends to a significant degree upon the growth development and management of our subscriber and advertising audiences. 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;

Tailor our products to efficiently and effectively deliver content and advertising on mobile devices;

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;

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

Invest funds and resources in digital opportunities;

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

Protect our intellectual property rights; and

Create digital content and platforms that attracts and engages audiences in our markets.

If we are unable to grow our digital audience, distinguish our products and services from those of our competitors or develop compelling new products and services that engage users across multiple platforms, then our business, financial condition, and results of operations may be adversely affected. Responding to the changes described above may require us to make significant capital investments and incur significant research and development costs related to building, maintaining, and evolving our technology infrastructure, and our ability to make the level of investments required may be limited.

See "Audiences” in Item 1, included herein, for additional information on about our print and digital audiences.

As digital revenues increase as a proportion of our total revenues, we will become increasingly subject to risks associated with digital media operations.

The central component to our business strategy involves transitioning from traditional print businesses to digital media businesses and, accordingly, we expect our digital revenues to increase as a percentage of our total revenues in future periods. That transition comes with additional risk of operating mainly as a digital media company, including:

Rates we achieve in the marketplace for the advertising inventory on our digital platforms may be adversely affected by:

Customized news feeds and news aggregation websites, which are often free to users, may reduce our traffic levels by creating a disincentive for users to visit our websites or use our digital products;

Our inability to increase our digital presence and visibility, which also may reduce our traffic levels; or

Our inability to maintain and improve the performance of our customers' advertising on our digital properties;


12


Technology developed to block the display of advertising on websites could proliferate, impairing our ability to generate digital revenues;

Mobile devices, including smartphones and tablets, may present challenges for traditional display advertising;

Our use of subscription models (which may require users to pay for content after accessing a limited number of pages or news articles for free on our websites each month) may cause consumers to opt out of subscription offers in greater numbers than anticipated or result in fewer page views or unique visitors to our websites than projected;

New delivery platforms may lead to pricing restrictions, loss of distribution control, or loss of direct relationships with consumers;

Technical or other problems could prevent us from delivering our products in a rapid and reliable manner or otherwise affect the user experience, and users could develop negative views about the quality or usefulness of our products; and

Our inability to respond successfully to these or similar challenges could materially adversely impact our ability to maintain and grow our digital revenues.

We rely on revenue from printing and distribution of third-party publications and digital services that may be subject to many of the same business and industry risks facing us.

We generate a portion of our revenue from printing and distributing third-party publications, and our relationships with these third parties are generally pursuant to short-term contracts. Typically, these third parties are operating in the same industry and a similar geographical location as us. In addition, digital services revenue is derived primarily from third-party businesses in the same industry as us. As a result, revenue from these third parties is subject to the same macroeconomic and industry trends affecting our operations. If their businesses are adversely affected by these trends, our associated revenue would be adversely affected.

We may not be able to reduce future expenses to offset potential revenue declines.
 
As a result of adverse general business conditions in our industry and our operating results, we have reduced cash costs(1) of our operations significantly since 2011 by reducing workforce, centralizing or regionalizing operations and implementing cost-control measures. If we do not achieve expected savings from these initiatives, or if our operating costs increase, our total operating costs may be greater than anticipated and our profitability may be lower than anticipated.

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

Our business, reputation and results of operations could be negatively affected if we become subject to significant data security breaches or if our information technology systems fail to perform adequately.

In the 14-weeks ended September 30, 2018, 21.7% of our revenue was obtained from digital sources, including advertising and one of our businesses, TownNews, that provides digital infrastructure and digital publishing services for us and other companies.

We use 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 and disabling or taking over our websites. 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.

In addition, attempts to compromise information technology systems occur regularly across many industries and sectors, and the techniques used to perpetrate such compromises are constantly changing. Maintaining the security of our systems is critically important both due to our reliance on those systems and because they store and process confidential subscriber, employee, and other sensitive personal data. Although we and our third-party service providers have implemented security measures and other controls designed to prevent breaches, these precautions might fail to defend against future cyber-attacks or prevent breaches or other disruptions to our systems or those of our third-

13


party providers. Because cyber-attacks evolve quickly and often are not recognized until after they are launched, we may be unable to anticipate them or implement adequate measures to prevent a breach. A significant breach could result in, among other things:

Improper disclosures of personal data or confidential information;
Expenditures of significant resources to remedy the breach and defend against further attacks;
Diversion of management's attention and resources;
Liability under laws that protect personal data; and
Loss of customer trust and, as a result, revenues.

Consequences of these actions could result in harm to our reputation, loss of revenue, increased operating costs, lead to legal exposure to customers and employees as well as subject us to liability under laws and regulations that protect our customers and employees 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.

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 reflect the reduced value of these assets. Should general economic, market or business conditions decline, and cause a negative impact on our stock price or projected future cash flows, we may need 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 funding requirements of our pension and postretirement obligations may reduce the cash available for our business.

Pension liabilities, net of plan assets, totaled $26.7 million at September 30, 2018, a reduction of $16.8 million from September 28, 2017, primarily due to favorable changes to discount rates used to determine our pension obligations and an increase in pension contributions.

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 and debt service.

Over the last several years, federal legislation has provided for pension funding relief, temporarily reducing our pension contributions. Even with funding relief, we expect to have to make additional contributions to our plans in the future.

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 Pension Protection Act of 2006. For plans that are in critical status, benefit reductions may apply and/or we could be required to make additional contributions.

14


In 2017, one of our enterprise's bargaining units withdrew from representation, and as a result we are subject to a claim from the multiemployer pension plan for a withdrawal liability. The amount of such liability will be dependent on actions taken, or not taken, by 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 the remaining 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.

A portion of our employees are members of unions, and if we experience labor unrest, our ability to produce and deliver newspapers could be impaired.

Our ability to produce and deliver newspapers could be impaired in some markets, if we experience labor unrest. In addition, the results of future labor negotiations could harm our operating results. While we have not had a history of labor strikes, we cannot ensure that a strike will not occur in one or more of our markets in the future. As of September 30, 2018, approximately 12.0% of full‑time and part‑time employees were represented by unions. Most of our union‑represented employees are currently working under labor agreements, with expiration dates through September 2021.

We are subject to significant financial risk as a result of our $485 million in total consolidated debt.

We have $484.9 million of debt outstanding as of September 30, 2018, as discussed more fully below (and certain capitalized terms used below defined) in Item 7,"Liquidity" and Note 4 of the Notes to Consolidated Financial Statements, included herein.
 
As of September 30, 2018, 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 30, 2018;
 
$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 $6,303,000 is outstanding as of September 30, 2018; 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 $93,556,000 is outstanding as of September 30, 2018.

We have reduced debt by $63.5 million in 2018 and $241.0 million over the last three fiscal years. Despite the significant reduction, our debt, net of cash, is 3.6 times our adjusted EBITDA at September 30, 2018. This level of debt increases our vulnerability to general adverse economic and industry conditions. Higher leverage ratios, our economic performance, our credit ratings, adverse financial markets or other factors could adversely affect our future ability to refinance our maturing debt on commercially acceptable terms, or at all.

We may have insufficient earnings or liquidity to meet our future debt obligations.
 
At September 30, 2018, after consideration of letters of credit, we had approximately $34,235,000 available for future use under our Revolving Facility. Including cash, our liquidity at September 30, 2018 totaled $39,615,000. This liquidity amount excludes any future cash flows. Our adjusted EBITDA has been strong and has exceeded $135 million in each year from 2011 through 2018, but there can be no assurance that such results will continue.

At September 30, 2018, the principal amount of our outstanding debt totaled $484,859,000. At September 30, 2018 and September 24, 2017 our debt, net of cash, was 3.6 times and 3.7 times our adjusted EBITDA, respectively.

Final maturities of our debt are March 2019 through December 2022. The 1st Lien Term Loan was paid in full in November 2018 ahead of the original due date of March 2019. Final maturities of our other debt range from March

15


2022 through December 2022. The Revolving Facility matures on December 28, 2018. We expect to amend and extend our Revolving Facility prior to its maturity.

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 as of September 30, 2018.

The ability to make payments on our indebtedness or refinance our indebtedness prior to when it comes due may be affected by events beyond our control, including prevailing economic, financial, competitive, business, legislative, regulatory and industry conditions.

The Notes, 1st Lien Credit Facility and 2nd Lien Term Loan each contain restrictive covenants that limit our ability to grow our business or return capital to our stockholders

The Notes, 1st Lien Credit Facility and 2nd Lien Term Loan each contain various restrictions, covenants and representations and warranties. If we fail to comply with any of these covenants or breach these representations or warranties in any material respect, such noncompliance would constitute a default, and the lenders could elect to declare all amounts outstanding under the agreements related thereto to be immediately due and payable and enforce their respective interests against collateral pledged under such agreements.

Subject to certain exceptions, these covenants limit, subject to certain exceptions, and/or restrict our ability to, among other things:

incur or guarantee additional debt;
make certain investments, loans or acquisitions;
transfer or sell assets; and
make certain restricted payments, including repurchases of outstanding common stock and dividends.

The restrictions described above may interfere with our ability to obtain new or additional financing or engage in other business activities, which may significantly limit or harm our results of operations, financial condition and liquidity.

Adverse results from litigation or governmental investigations can impact our business practices and operating results.

We are a party to litigation and regulatory, environmental, and other proceedings with governmental authorities and administrative agencies from time to time. Adverse outcomes could result in significant monetary damages or injunctive relief that could adversely affect our ability to conduct our businesses as they presently are conducted. In addition, new laws or regulations or changes in existing laws or regulations could result in penalties for non-compliance or reduction in revenues and could limit our ability to transform our businesses in accordance with our strategic plan.

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

16


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.
 
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 St. Louis, MIssouri and leased land for the Helena, Montana plant. Additionally, property is leased for Madison, Wisconsin (which is owned by MNI) and Tucson, Arizona (which is jointly owned by Star Publishing and Citizen). All facilities are well maintained, in good condition, suitable for existing office and publishing operations, as applicable, and adequately equipped.

More than 50% of our daily newspapers, as well as many of our nearly 300 other publications, are printed at either another one of our print locations or outsourced to a third party, 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.


17


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

 
 
 
 
 
 
 
 
2018
 
 
 
 
 
 
 
High
2.50

 
2.70

 
3.30

 
3.30

Low
2.15

 
1.95

 
2.00

 
2.60

Closing
2.35

 
1.95

 
2.85

 
2.65

 
 
 
 
 
 
 
 
2017
 
 
 
 
 
 
 
High
3.76

 
3.30

 
3.10

 
2.40

Low
2.40

 
2.40

 
1.75

 
1.80

Closing
2.90

 
2.60

 
1.90

 
2.20

 
 
 
 
 
 
 
 
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

 
At September 30, 2018, we had 5,868 registered 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.


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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, 2018 (with September 30, 2013 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.
performancegraph2018.jpg

Copyright© 2018 Standard & Poor's, a division of S&P Global. All rights reserved.
 
The value of $100 invested on September 30, 2013 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)
2013

 
2014

 
2015

 
2016

 
2017

 
2018

 
 
 
 
 
 
 
 
 
 
 
 
Lee Enterprises, Incorporated
100.00

 
128.03

 
78.79

 
142.05

 
83.33

 
100.38

Old Peer Group Index
100.00

 
96.48

 
91.67

 
98.03

 
151.69

 
180.08

New Peer Group Index
100.00

 
104.78

 
99.21

 
103.51

 
122.53

 
144.32

S&P 500 Stock Index
100.00

 
119.73

 
119.00

 
137.36

 
162.92

 
192.10

 
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 six U.S. publicly traded companies with significant newspaper publishing operations (excluding the Company) and is weighted by market capitalization. The Old Peer Group Index includes A.H. Belo Corp., The McClatchy Company and The New York Times Company. The New Peer Group Index includes A.H. Belo Corp., Gannett Co Inc, The McClatchy Company, New Media Investment Group Inc., The New York Times Company and Tribune Publishing Co.

19


ITEM 6.  SELECTED FINANCIAL DATA
 
Selected financial data is as follows:
(Thousands of Dollars and Shares, Except Per Share Data)
2018

 
2017

 
2016

 
2015

 
2014

 
 
 
 

 
 

 
 

 
 
OPERATING RESULTS
 
 
 

 
 

 
 

 
 
 
 
 
 
 
 
 
 
 
 
Operating revenue
543,955

 
566,943

 
614,364

 
648,543

 
660,877

Cash Costs (1)
420,936

 
434,350

 
474,588

 
498,456

 
504,557

Depreciation and amortization
31,766

 
41,282

 
43,441

 
45,563

 
48,511

Assets loss (gain) on sales, impairments and other
6,429

 
(1,150
)
 
(954
)
 
106

 
1,642

Restructuring costs and other
5,550

 
7,523

 
1,825

 
3,304

 
1,265

Equity in earnings of associated companies
9,249

 
7,609

 
8,533

 
8,254

 
8,297

Operating income
88,523

 
92,547

 
103,997

 
109,368

 
113,199

Interest expense
(52,842
)
 
(57,573
)
 
(64,233
)
 
(72,409
)
 
(79,724
)
Debt financing and administration costs
(5,311
)
 
(4,818
)
 
(5,947
)
 
(5,433
)
 
(22,927
)
Gain on insurance settlement

 

 
30,646

 

 

Other, net
450

 
10,060

 
(6,268
)
 
6,386

 
3,413

 
 
 
 
 
 
 
 
 
 
Net income
47,048

 
28,605

 
36,019

 
24,318

 
7,671

 
 
 
 
 
 
 
 
 
 
Income attributable to Lee Enterprises, Incorporated
45,766

 
27,481

 
34,961

 
23,316

 
6,795

 
 
 
 
 
 
 
Earnings per common share:
 
 
 
 
 
 
 
 
 
Basic
0.84

 
0.51

 
0.66

 
0.44

 
0.13

Diluted
0.82

 
0.50

 
0.64

 
0.43

 
0.13

 
 
 
Weighted average common shares:
 
 
 
 
 
 
 
 
 
Basic
54,702

 
53,990

 
53,198

 
52,640

 
52,273

Diluted
55,948

 
55,392

 
54,224

 
53,931

 
53,736

 
 
 
 
 
 
 
 
 
 
Total assets
575,411

 
620,850

 
662,855

 
747,825

 
811,275

Debt, including current maturities (2)
484,859

 
548,385

 
617,167

 
725,872

 
804,750

Debt, net of cash and restricted cash (2)
479,479

 
537,764

 
600,183

 
714,738

 
787,605

Stockholders' deficit
(37,354
)
 
(92,235
)
 
(128,485
)
 
(159,393
)
 
(178,253
)
(1
)
Cash costs is a non GAAP financial measure. See Item 7.
(2
)
Principal amount of debt. 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 September 30, 2018 and for 2018, 2017 and 2016. This discussion should be read in conjunction with the Consolidated Financial Statements and related Notes thereto, included herein.
 
NON-GAAP FINANCIAL MEASURES
 
We use non-GAAP financial performance measures to supplement the financial information presented on a GAAP basis. These non-GAAP financial measures should not be considered in isolation or as a substitute for the relevant GAAP measures and should be read in conjunction with information presented on a GAAP basis.

In this report, we present adjusted EBITDA, adjusted income (loss), adjusted earnings (loss) per common share (EPS), and cash costs, which are non-GAAP financial performance measures that exclude from our reported GAAP results the impact of certain items consisting primarily of restructuring charges and non-cash charges. We believe

20


such expenses, charges, and gains are not indicative of normal, ongoing operations, and their inclusion in results makes for more difficult comparisons between years and with peer group companies. In the future, however, we are likely to incur expenses, charges, and gains similar to the items for which the applicable GAAP financial measures have been adjusted and to report non-GAAP financial measures excluding such items. Accordingly, exclusion of those or similar items in our non-GAAP presentations should not be interpreted as implying the items are non-recurring, infrequent, or unusual.

We define our non-GAAP measures, which may not be comparable to similarly titled measures reported by other companies, as follows:

Adjusted EBITDA is a non-GAAP financial performance measure that enhances financial statement users overall understanding of the operating performance of the Company. The measure isolates unusual, infrequent or non-cash transactions from the operating performance of the business. This allows users to easily compare operating performance among various fiscal periods and how management measures the performance of the business. This measure also provides users with a benchmark that can be used when forecasting future operating performance of the Company that excludes unusual, nonrecurring or one time transactions. Adjusted EBITDA is also a component of the calculation used by stockholders and analysts to determine the value of our business when using the market approach, which applies a market multiple to financial metrics. It is also a measure used to calculate the leverage ratio of the Company, which is a key financial ratio monitored and used by the Company and its investors. Adjusted EBITDA is defined as net income (loss), plus nonoperating expenses, income tax expense (benefit), depreciation and amortization, assets loss (gain) on sales, impairments and other, restructuring costs and other, stock compensation and our 50% share of EBITDA from TNI and MNI, minus equity in earnings of TNI and MNI and curtailment gains.

Adjusted Income (Loss) and Adjusted Earnings (Loss) Per 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 excluding the impact of changes in the warrant valuation, which are non-cash transactions, and the impact of the Tax Cuts and Jobs Act (the "2017 Tax Act"). It is defined as income (loss) attributable to Lee Enterprises, Incorporated and diluted earnings (loss) per common share adjusted to exclude the impact of the warrant valuation, the impact of the 2017 Tax Act, and the gain on insurance settlement.

Cash Costs represent a non-GAAP financial performance measure of operating expenses which are measured on an accrual basis and settled in cash. This measure is useful to investors in understanding the components of the Company’s cash-settled operating costs. Generally, the Company provides forward-looking guidance of Cash Costs, which can be used by financial statement users to assess the Company's ability to manage and control its operating cost structure. Cash Costs are defined as compensation, newsprint and ink and other operating expenses. Depreciation and amortization, assets loss (gain) on sales, impairments and other, other non-cash operating expenses and other expenses are excluded. Cash Costs also exclude restructuring costs and other, which are typically paid in cash.

A table reconciling adjusted EBITDA to net income, the most directly comparable measure under GAAP, is set forth below under the caption "Reconciliation of Non-GAAP Financial Measures". Reconciliations of adjusted income (loss) and adjusted earnings (loss) 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 “Net Income and Earnings Per Share”.

The subtotals of operating expenses representing cash costs can be found in tables in Item 7, included herein, under the caption “Continuing Operations”.


21


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)
2018

2017

2016

 
 
 
 
Net Income
47,048

28,605

36,019

Adjusted to exclude
 
 
 
Income tax expense (benefit)
(16,228
)
11,611

22,176

Non-operating expenses, net
57,703

52,331

45,802

Equity in earnings of TNI and MNI
(9,249
)
(7,609
)
(8,533
)
Assets loss (gain) on sales, impairments and other
6,429

(1,150
)
(954
)
Depreciation and amortization
31,766

41,282

43,441

Restructuring costs
5,550

7,523

1,825

Stock compensation
1,857

2,088

2,306

Add:
 
 
 
Ownership share of TNI and MNI EBITDA (50%)
9,883

9,927

11,705

Adjusted EBITDA
134,759

144,608

153,787

    
CRITICAL ACCOUNTING POLICIES
 
The preparation of financial statements in conformity with generally accepted accounting principles requires management to make estimates and assumptions about future events that affect the amounts reported in the financial statements and accompanying notes. Actual results could differ significantly from those estimates. We believe the following discussion addresses our most critical accounting policies, which are those that are important to the presentation of our financial condition and results of operations and require management's most subjective and complex judgments.

Intangible Assets, Other Than Goodwill
 
Local mastheads (e.g., publishing periodical titles and web site domain names) are not subject to amortization. Non-amortized intangible assets are tested for impairment annually on the first day of the fourth fiscal quarter or more frequently if events or changes in circumstances suggest the asset might be impaired.

The quantitative impairment test consists of a comparison of the fair value of each masthead or domain name with its carrying amount. We use a relief from royalty approach which utilizes a discounted cash flow model to determine the fair value of each masthead, domain name, or trade name. Management's judgments and estimates of future operating results in determining the intangibles fair values are consistently applied to each underlying business in determining the fair value of each intangible asset. No impairment was recorded in 2018. In 2017 and 2016 following this testing, we recognized impairment charges of $2.0 million and $0.8 million, respectively. These charges were to bring the recorded indefinite lived intangibles equal to their implied fair values based on future projections.

Our amortizable intangible assets consist mainly of customer relationships including subscriber lists and advertiser relationships. These asset values are amortized systematically over their estimated useful lives. Intangible assets subject to amortization are tested for recoverability whenever events or changes in circumstances indicate that their carrying amounts may not be recoverable. The carrying amount of each asset group is not recoverable if it exceeds the sum of the undiscounted cash flows expected to result from the use of such asset group. There were no indicators of impairment on intangible assets subject to amortization in 2018, 2017 or 2016.

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.


22


Pension, Postretirement and Postemployment Benefit Plans
 
We, along with our subsidiaries, have various defined benefit retirement plans, postretirement plans and postemployment plans, under which substantially all of the benefits have been frozen in previous years.

We account for our pension, postretirement and postemployment plans in accordance with the applicable accounting guidance, which requires us to include the funded status of our pension plans in our balance sheets and to recognize, as a component of other comprehensive income (loss), the gains or losses that arise during the period but are not recognized in pension expense. Pension expenses is reported on the Consolidated Statements of Income and Comprehensive Income and included in Compensation.

The determination of pension and postretirement plan obligations and expense is based on a number of actuarial assumptions. Two critical assumptions are the discount rates applied to pension and postretirement plan obligations and the expected long-term rate of return on plan assets.

The discount rate assumption is based on investment yields available at year-end on corporate bonds rated AA and above with a maturity to match the expected benefit payment stream. To determine the expected long-term rate of return on pension plan assets, we consider the current and expected asset allocations, as well as historical and expected returns on various categories of plan assets, input from the actuaries and investment consultants and long-term inflation assumptions. We used an assumption of 5.5% for 2018 for our expected return on pension plan assets and a 4.5% for 2018 for our postretirement and postemployement benefits.

The following table illustrates the sensitivity to a change of 50 basis point decrease:
 
Effect on 2018 Pension Expense
Effect on September 30, 2018 Liability
Pension discount rate(1)
$

$
9,800,000

Postretirement and postemployment benefits discount rate(1)
$

$
500,000

Pension expected rate of return on assets
$
722,000

$

Postretirement and postemployment benefits expected rate of return on assets
$
120,000

$

 
 
 
(1) The Company's Pension and Other Postretirement Plans have been substantially frozen as of September 30, 2018. As a result, changes in discount rates do not meaningfully impact net periodic pension expense.

Income Taxes

We are subject to income taxes in the U.S. and record our tax provision for the anticipated tax consequences in our reported results of operations. Tax laws are complex and subject to different interpretations by the taxpayer and respective government taxing authorities. Significant management judgment is required in determining our provision for income taxes, deferred tax assets and liabilities, and the valuation allowance recorded against our net deferred tax assets, if any.

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.

Deferred tax assets and liabilities are determined based on the difference between the financial statement and tax basis of assets and liabilities using currently enacted tax rates. Deferred income tax assets are recognized for deductible temporary differences and loss carryforwards and deferred income tax liabilities are recognized for taxable temporary differences. Temporary differences are the difference between the reported amounts of assets and liabilities and their tax basis. Deferred income tax assets are reduced by a valuation allowance when, in our opinion, it is more likely than not some portion or all of the deferred income tax assets will not be realized. Deferred income tax assets and liabilities are adjusted for the effects of changes in tax laws and rates on the date of enactment.
 
We recognize the effect of income tax positions only if those positions are more likely than not of being sustained. Recognized income tax positions are measured at the largest amount that is greater than 50% likely of being realized.

23


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.

IMPACT OF RECENTLY ISSUED ACCOUNTING STANDARDS

In March 2017, the Financial Accounting Standards Board ("FASB") issued a new standard to improve the presentation of pension and postretirement benefit expense. The new standard requires that the service cost component of pension and postretirement benefits expense is recognized as compensation expense, while the remaining components of the expense are presented outside of operating income. The current presentation includes all components of the expense as Compensation in our Consolidated Statements of Income and Comprehensive Income. The adoption of the new standard is required in 2019. Based on 2018 results, the adoption of this standard would have reduced operating income by $4,808,000, which includes the impact of a $2,031,000 curtailment gain, however net income will remain unchanged.

In August 2016, the FASB issued a new standard to conform the presentation in the statement of cash flows for certain transactions, including cash distributions from equity method investments, among others. The adoption of the new standard is required in 2019. The adoption of this standard will reclassify certain cash receipts within the Consolidated Statements of Cash Flows.

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 standard's 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 most 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. In addition, the new standard expands the disclosure requirements of lease arrangements. Lessees have the option to use a modified retrospective transition approach, which includes a number of practical expedients.

FASB issued Accounting Standard Update ("ASU") No. 2018-11 in July 2018. This update provides for an optional transition method that allows issuers to initially apply the new lease standard to all leases that exist as of the adoption date, with the cumulative effect of initially applying the new lease standard recognized as an adjustment to retained earnings as of the adoption date. We intend to adopt the optional transition approach in fiscal year 2020. To date we have made progress in our assessment of the new lease standard. We are currently compiling an inventory of leases, evaluating the provisions of the updated guidance and assessing the impact on our Consolidated Financial Statements.

In May 2014, the FASB issued ASU No. 2014-09 “Revenue from Contracts with Customers” and in 2015, 2016, and 2017 the FASB issued several clarifying updates to this new standard (ASU No. 2015-14, 2016-08, 2016-10, 2016-11, 2016-12, 2016-20 and 2017-05), which collectively comprises ASC Topic 606 “Revenue from Contracts with Customers”. Topic 606 supersedes the revenue recognition requirements in Topic 605 “Revenue Recognition” and is effective fiscal years beginning after December 15, 2017. Topic 606 provides a five-step model in determining when and how revenue is recognized and requires revenue recognition to depict the transfer of promised goods or services to customers in an amount that reflects the consideration a company expects to receive in exchange for those goods or services. Topic 606 also requires new disclosures about the nature, amount, timing, and uncertainty of revenue and cash flows arising from contracts with customers.

We will adopt Topic 606 on October 1, 2018, using the modified retrospective method applied to those contracts which were not completed as of that date. We have completed our assessment and have not identified any significant changes to our revenue recognition policies. We identified similar performance obligations under Topic 606 as compared with the deliverables and separate units of accounting previously identified under Topic 605. As a result, the timing and amount of our revenue recognition will not be materially impacted; however, we expect to expand certain disclosures as required.

We have also assessed the new accounting principles related to the deferral and amortization of contract acquisition costs and due to the short-term nature of such costs, we will utilize the practical expedient to continue to expense these costs as incurred.

We expect the adoption of Topic 606 will not have a material impact to our consolidated financial statements.

24


CONTINUING OPERATIONS

Operating results, as reported in the Consolidated Financial Statements, are summarized below:
(Thousands of Dollars and Shares, Except Per Share Data)
2018
2017
Percent Change
2016
Percent Change
Advertising and marketing services revenue
303,446

331,360

(8.4
)
373,463

(11.3
)
Subscription
195,108

191,922

1.7

194,002

(1.1
)
Other
45,401

43,661

4.0

46,899

(6.9
)
Total operating revenue
543,955

566,943

(4.1
)
614,364

(7.7
)
Operating expenses:
 
 
 
 
 
   Compensation
196,334

209,692

(6.4
)
229,752

(8.7
)
   Newsprint and ink
24,949

24,904

0.2

26,110

(4.6
)
   Other operating expenses
199,653

199,754

(0.1
)
218,726

(8.7
)
Cash costs
420,936

434,350

(3.1
)
474,588

(8.5
)
Total operating revenue less cash costs
123,019

132,593

(7.2
)
139,776

(5.1
)
Depreciation and amortization
31,766

41,282

(23.1
)
43,441

(5.0
)
Assets loss (gain) on sales, impairments and other
6,429

(1,150
)
NM

(954
)
20.5

Restructuring costs and other
5,550

7,523

(26.2
)
1,825

NM

Operating expenses
464,681

482,005

(3.6
)
518,900

(7.1
)
Equity in earnings of associated companies
9,249

7,609

21.6

8,533

(10.8
)
Operating income
88,523

92,547

(4.3
)
103,997

(11.0
)
Non-operating income (expense):
 
 
 
 
 
Interest expense
(52,842
)
(57,573
)
(8.2
)
(64,233
)
(10.4
)
Debt financing and administrative cost
(5,311
)
(4,818
)
10.2

(5,947
)
(19.0
)
Gain on insurance settlement



30,646

NM

  Other, net
450

10,060

(95.5
)
(6,268
)
NM

Non-operating expenses, net
(57,703
)
(52,331
)
10.3

(45,802
)
14.3

Income before income taxes
30,820

40,216

(23.4
)
58,195

(30.9
)
Income tax expense (benefit)
(16,228
)
11,611

NM

22,176

(47.6
)
Net income
47,048

28,605

64.5

36,019

(20.6
)
Net income attributable to non-controlling interests
(1,282
)
(1,124
)
14.1

(1,058
)
6.2

Income attributable to Lee Enterprises, Incorporated
45,766

27,481

66.5

34,961

(21.4
)
Other comprehensive income, net of income taxes
4,322

6,710

(35.6
)
(6,503
)
NM

Comprehensive income attributable to Lee Enterprises, Incorporated
50,088

34,191

46.5

28,458

20.1

 
 
 
 
 
 
Earnings per common share:
 
 
 
 
 
Basic
0.84

0.51

64.7

0.66

(22.7
)
Diluted
0.82

0.50

64.0

0.64

(21.9
)

Due to our fiscal calendar, 2018 was comprised of 53 weeks while 2017 and 2016 were comprised of 52 weeks. Additionally, we purchased a local media operation in 2017 and disposed of one local media operation in both 2018 and 2016.

To facilitate a comparison of our results without the impact of acquisitions, dispositions and the 53rd week of revenues and expenses, certain revenue and expense trends, as described below, are presented on a same property basis and are calculated as follows:

Reported revenues or expenses
Less: revenues or expenses for our 2017 acquisitions
Less: revenues or expenses from enterprises that were disposed of in 2018 and 2016
Less: 53rd week revenue or expenses in 2018


25


OPERATING REVENUE

Revenue Comparison 2018-2017

In 2018, advertising and marketing services revenue decreased $27,914,000, or 8.4%, compared to 2017. On a same property basis, advertising and marketing services revenue declined 11.4%. The decrease in advertising and marketing services revenue is due to continued softness in print advertising demand resulting in reduced advertising volume primarily from large retail, big box stores and classifieds.

Digital advertising increased 4.7% to $96,498,000 in 2018 and represents 31.8% of total advertising and marketing services revenue. On a same property basis digital advertising increased 2.9%. Digital retail advertising, which represents 62.2% of total digital advertising, increased 7.7%, partially offsetting print declines.

Subscription revenue increased $3,186,000, or 1.7%, in 2018 and decreased 1.7%, on a same property basis. Strategic pricing programs and premium content helped offset lower paid print circulation units. Our average daily newspaper circulation, including TNI, MNI and digital subscribers, totaled 0.7 million in 2018. Sunday circulation totaled 1.0 million.

Other revenue, which consists of digital services, commercial printing, revenue from delivery of third party products and the sale of books, increased 4.0% in 2018. On a same property basis, digital services revenue, which is mainly TownNews, grew 15.8% in 2018 and was partially offset by revenue declines in commercial printing and third party delivery due to a reduction in volume.

Excluding intercompany activity, revenue at TownNews increased 19.8% in 2018 due to an increase in customers, including broadcast, and monetizing digital audience with programmatic digital advertising revenue. On a stand alone basis, revenue at TownNews increased 16.0% to $18,900,000.

Total digital revenue including digital advertising revenue and digital services revenue totaled $112,825,000 in 2018, an increase of 6.3% over 2017.

In 2018, our mobile, tablet, desktop and app sites, including TNI and MNI, attracted a monthly average of 27.4 million unique visitors, with 267.1 million page views, a 17.4% increase in page views compared to 2017. Increased audience engagement is driving a higher number pages viewed per user session in 2018. Research in our larger markets indicates we are maintaining our share of audience in our markets through the combination of digital audience growth and strong print newspaper readership.

Equity in earnings of TNI and MNI increased $1,640,000 in 2018.

Revenue Comparison 2017-2016, Same Property Basis

In 2017 advertising and marketing services revenue decreased $39,062,000, or 10.6%, compared to 2016. The decrease in advertising revenue is due to continued softness in print advertising demand resulting in reduced advertising volume primarily from large retail, big box stores and classifieds.

Digital advertising, included in advertising and marketing services revenue, increased 8.0%, to $91,947,000 in 2017 and represents 28.0% of total advertising revenue. Digital retail advertising increased 9.4%, partially offsetting print declines.

Subscription revenue decreased $1,083,000, or 0.6%, in 2017. Selective price increases mostly offset paid subscription revenue declines from reduced volume. Our average daily newspaper circulation, including TNI, MNI and digital subscribers, totaled 0.8 million in 2017. Sunday circulation totaled 1.2 million.

Other revenue, which consists of digital services, commercial printing, revenue from delivery of third party products and the sale of books, decreased 6.6% in the 2017 due to volume declines in commercial printing and third party delivery, partially offset by revenue growth at TownNews.

Total digital revenue, including digital advertising revenue and digital services revenue totaled $105,954,000 in 2017, an increase of 6.7% over 2016.


26


In 2017, our mobile, tablet, desktop and app sites, including TNI and MNI, attracted an average of 25.5 million unique visitors per month, with 227.6 million monthly page views, a 5.7% increase compared to 2016.

Equity in earnings of TNI and MNI decreased $924,000 in 2017, on a GAAP basis.

OPERATING EXPENSES

Operating Expense Comparison 2018-2017

Operating expenses decreased 3.6% in 2018. Cash cost on a same property basis decreased 6.1% compared to 2017 achieving cash cost guidance.

Compensation expense, on a same property basis, decreased $19,461,000, or 9.4%, driven by a 12.0% reduction in average full time equivalent employees. Outsourcing certain functions in 2018 affected the number of full time equivalents in 2018.

Newsprint and ink costs, on a same property basis, decreased $451,000, or 1.8%, due to a 17.9% reduction in newsprint volume from unit declines and using lower basis weight newsprint partially offset by significant price increases. See Item 7A, “Commodities”, included herein, for further discussion and analysis of the impact of newsprint on our business.

Other operating expenses, on a same property basis, decreased $6,419,000, or 3.3%. Other operating expenses include all operating costs not considered to be compensation, newsprint, depreciation and amortization, or restructuring costs and other. The largest components of these costs include delivery, postage, outsourced printing, digital cost of goods sold and facility expenses. Cost reductions were primarily related to lower delivery and other print-related costs offset in part by higher costs associated with growing digital revenue and outsourcing.

Restructuring costs and other totaled $5,550,000 and $7,523,000 in 2018 and 2017, respectively. The majority of restructuring costs are severance. 2017 includes a $2,600,000 expense to record an estimate of a partial withdrawal liability from one of our multiemployer pension plans.

Depreciation expense decreased $1,482,000, or 9.2%, and amortization expense decreased $8,034,000, or 31.8%, in 2018.

Assets loss (gain) on sales, impairments and other was a net expense of $6,429,000 in 2018 compared to a net benefit of $1,150,000 in 2017. We recognized a $8,193,000 loss on sale of assets in 2018 compared to a $74,000 loss in 2017. We recorded $267,000 of non-cash impairment charges in 2018 compared to $2,517,000 in 2017. Curtailment gains totaled $2,031,000 and $3,741,000 in 2018 and 2017, respectively, from the elimination of an unfunded employee benefit plan.

The factors noted above resulted in operating income of $88,523,000 in 2018 compared to $92,547,000 in 2017.

Operating Expense Comparison 2017-2016

Operating expenses decreased 7.1% in 2017. Cash costs excluding restructuring costs and other decreased $40,238,000, or 8.5%, in 2017.

Compensation expense, on a same property basis, decreased $19,064,000, or 8.4%, in 2017 driven by a decline of 8.5% in average full-time equivalent employees and lower self-insured medical costs.

Newsprint and ink costs, on a same property basis, decreased $1,226,000, or 4.7%, in 2017, as a result of a 12.2% reduction in newsprint volume partially offset by higher prices. See Item 7A, “Commodities”, included herein, for further discussion and analysis of the impact of newsprint on our business.

Other operating expenses, on a same property basis, decreased $15,713,000, or 7.4%, in 2017. Other operating expenses include all operating costs not considered to be compensation, newsprint, depreciation, amortization, or restructuring costs and other. The largest components of these costs include delivery, postage, outsourced printing, digital cost of good sold and facility expenses. Cost reduction were primarily related to lower delivery and other print-related costs associated with growing digital revenue.


27


Restructuring costs totaled $7,523,000 and $1,825,000 in 2017 and 2016, respectively. The majority of restructuring costs relate to severance. 2017 includes a $2,600,000 expense to record an estimate of a partial withdrawal liability from one of our multiemployer pension plans.

Depreciation expense decreased $1,265,000, or 7.3%, and amortization expense decreased $894,000, or 3.4%, in 2017.

Assets loss (gain) on sales, impairments and other, was a net gain of $1,150,000 in 2017 and $954,000 in 2016. We recognized a $74,000 loss on sales of assets in 2017 and $3,139,000 gain in 2016. Non-cash impairment charges totaled $2,517,000 in 2017 and $2,185,000 in 2016. In 2017, we recorded a $3,741,000 curtailment gain from the elimination of an unfunded employee benefit plan.

The factors noted above resulted in operating income of $92,547,000 in 2017 compared to $103,997,000 in 2016.

NON-OPERATING INCOME AND EXPENSES

Non-operating Income and Expense Comparison 2018-2017

Interest expense decreased $4,731,000, or 8.2%, to $52,842,000 in 2018 due to lower debt balances. Our weighted average cost of debt, excluding amortization of debt financing cost, increased to 10.0% in 2018 compared to 9.9% in 2017, as the majority of our debt repayments were made on our lowest cost debt.

We recognized $5,311,000 of debt financing and administrative costs in 2018 compared to $4,818,000 in 2017. The majority of costs represent amortization of refinancing costs paid in 2014.

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, and changes in interest rates, the estimated fair value of the warrant liability can change each period. We recorded non-operating expense of $226,000 in 2018 and non-operating income of $10,181,000, in 2017, due to the change in fair value of the Warrants.

Non-operating Income and Expense Comparison 2017-2016

Interest expense decreased $6,660,000, or 10.4%, to $57,573,000 in 2017 due to lower debt balances.

We recognized $4,818,000 of debt financing and administrative costs in 2017 compared to $5,947,000 in 2016, related to our 2014 refinancing. We also recognized $1,250,000 gain on extinguishment of debt in 2016.

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.

Due to the fluctuation in the price of our Common Stock, we recorded non-operating income of $10,181,000 in 2017 and non-operating expenses of $7,519,000 in 2016 related to the change in fair value of the warrants.

INCOME TAX EXPENSES

Income Tax Comparison 2018-2017

On December 22, 2017, comprehensive tax legislation commonly referred to as the Tax Cuts and Jobs Act (the “2017 Tax Act”) was signed into law. Among other provisions, the 2017 Tax Act reduces the federal statutory corporate income tax rate from 35% to 21%. The reduction of the corporate tax rate caused us to re-measure our deferred tax assets and liabilities to the lower federal base rate of 21%. We reported a discrete adjustment from revaluing our deferred tax assets and liabilities resulting in a net decrease in income tax expense of $24,872,000 for the 53 weeks ended September 30, 2018.

Including the impact of the 2017 Tax Act, we recorded an income tax benefit of $16,228,000 in 2018 or 52.7% of pretax income. Excluding the impact from the 2017 Tax Act, the effective income tax rate for 2018 was 28.0%. In 2017, we

28


recognized income tax expense of $11,611,000, resulting in an effective tax rate of 28.9%. 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.

Income Tax Comparison 2017-2016

We recognized income tax expense of $11,611,000, resulting in an effective tax rate of 28.9% in 2017 compared to 38.1% in 2016. 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.

NET INCOME AND EARNINGS PER SHARE

The following table summarizes the impact from the 2017 Tax Act, the warrant fair value adjustments and the 2017 Tax Act on income attributable to Lee Enterprises, Incorporated and earnings per diluted common share. Per share amounts may not add due to rounding.
 
2018
 
2017
 
2016
 
(Thousands of Dollars, Except Per Share Data)
Amount

Per Share

Amount

Per Share

Amount

Per Share

 
 
 
 
 
Income attributable to Lee Enterprises, Incorporated, as reported
45,766

0.82

27,481

0.50

34,961

0.64

Adjustments:
 
 
 
 
 
 
Warrants fair value adjustment
226


(10,181
)
(0.19
)
7,519

0.14

Gain on insurance settlement

 

 
(30,646
)
(0.56
)
Adjusted income before income tax impacts
45,992

0.82

17,300

0.31

11,834

0.22

Income tax effect of adjustments, net

 

 
10,726

0.20

Income tax effect of 2017 Tax Act
(24,872
)
(0.44
)

 

 
Income tax effects, total
(24,872
)
(0.44
)


10,726

0.20

Income attributable to Lee Enterprises, Incorporated, as adjusted
21,120

0.38

17,300

0.31

22,560

0.42




29


LIQUIDITY AND CAPITAL RESOURCES
 
Operating Activities
 
Cash provided by operating activities totaled $59,296,000 in 2018 compared to $72,281,000 in 2017 due to a decline in net income to $22,176,000 in 2018 from $28,605,000 in 2017, after adjusting for the 2017 Tax Act impact of $24,872,000. The decline in net income is primarily the result of continued softening of the print advertising environment. Operating cash flows were also impacted by an increase in pension contributions.

Cash provided by operating activities totaled $72,281,000 in 2017 compared to $79,190,000 in 2016. The decrease in cash flows in 2017 is due to a decrease in net income of $28,605,000 in 2017 from $36,019,000 in 2016, changes in operating assets and liabilities, and pension contributions.

Pension liabilities, net of plan assets, totaled $26,745,000 as of September 30, 2018. Contributions to pension plans are expected to total $650,000 in 2019.

Investing Activities
 
Cash required for investing activities totaled $72,000 in 2018 and $9,455,000 in 2017. Capital spending totaled $6,025,000 and $4,078,000 in 2018 and 2017, respectively. Proceeds from sales of assets totaled $6,623,000 and $2,582,000 in 2018 and 2017, respectively. 2017 included $7,450,000 in spending related to the acquisition of local media operations.

Cash required for investing activities totaled $9,455,000 in 2017 and cash provided by investing activities totaled $34,508,000 in 2016. The change in cash flows from investing activities is mainly due to a $30,646,000 insurance settlement in 2016. Capital spending totaled $4,078,000 and $7,091,000 in 2017 and 2016, respectively, and proceeds from sales of assets totaled $2,582,000 in 2017 and $9,878,000 in 2016, respectively.
 
We anticipate that funds necessary for capital expenditures, which are expected to be $11,000,000 in 2019, and other requirements, will be available from internally generated funds, or available under our Revolving Facility.
 
Financing Activities
 
Cash required for financing activities totaled $64,465,000 in 2018, $69,189,000 in 2017 and $107,848,000 in 2016. Debt reduction accounted for the majority of the usage of funds in all years.

Debt is summarized as follows:
 
 
 
Interest Rates (%)
(Thousands of Dollars)
September 30
2018

September 25
2016

September 30
2018
 
 
 
 
Revolving Facility


6.1
1st Lien Term Loan
6,303

45,145

8.3
Notes
385,000

385,000

9.5
2nd Lien Term Loan
93,556

118,240

12.0
 
484,859

548,385

 
Unamortized debt issue costs
(17,055
)
(21,824
)
 
Less current maturities of long-term debt
7,027

30,182

 
Total long-term debt
460,777

496,379

 

At September 30, 2018, our weighted average cost of debt, excluding amortization of debt financing costs, is 10.0%.

At September 30, 2018, aggregate minimum required maturities of debt excluding amounts required to be paid from future excess cash flow computations total $7,027,000 in 2019, $0 in 2020 and 2021, $385,000,000 in 2022 and $92,832,000 in 2023.


30


In addition to mandatory paydowns, the 1st 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
 
We maintain a Revolving Facility pursuant to which we may borrow up to $40,000,000. At September 30, 2018, after consideration of letters of credit, we have approximately $34,235,000 available for future use under our Revolving Facility. The Revolving Facility contains a maintenance covenant in order to borrow on the Revolving Facility. At September 30, 2018, we are in compliance with this covenant. The Revolving Facility matures on December 28, 2018. We expect to amend and extend our Revolving Facility prior to its maturity.

Including cash, our liquidity at September 30, 2018 totals $39,615,000. 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.

At September 30, 2018, the principal amount of our outstanding debt totals $484,859,000. For the last twelve months ending September 30, 2018, the principal amount of our debt, net of cash, is 3.6 times our adjusted EBITDA, compared to a ratio of 3.7 times at September 24, 2017.

The 2014 Refinancing significantly extended our debt maturity profile with final maturity of the majority of our debt in 2022. As a result, 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 lender(s) to exercise their remedies under the Notes, 1st Lien Credit Facility, 2nd Lien Term Loan, respectively, including, without limitation, the right to accelerate all outstanding debt and take actions authorized in such circumstances under applicable collateral security documents.

Our ability to operate as a going concern is dependent on our ability to remain in compliance with debt covenants and repay, refinance or amend our debt agreements as they become due, or earlier if liquidity is available. 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 30, 2018.

In February 2017 our filing of a replacement Form S-3 registration statement ("Shelf") with the SEC, was declared effective and expires February 2020, maintaining an effective shelf is required under our credit agreements. The Shelf registration gives us the flexibility to issue and publicly distribute various types of securities, including preferred stock, common stock, warrants, secured or unsecured debt securities, purchase contracts and units consisting of any combination of such securities, from time to time, in one or more offerings, up to an aggregate amount of $750,000,000. SEC issuer eligibility rules require us to have a public float of at least $75,000,000 in order to use the Shelf. Subject to maintenance of the minimum level of equity market float and the conditions of our existing debt agreements, the Shelf may enable us to sell securities quickly and efficiently when market conditions are favorable or financing needs arise. Under our existing debt agreements, net proceeds from the sale of any securities may be used generally to reduce debt.

Other Matters
 
Cash and cash equivalents decreased $5,241,000 in 2018, decreased $6,363,000 in 2017 and increased $5,850,000 in 2016.    
 
SEASONALITY
 
Our largest source of publishing revenue, retail advertising, is seasonal and tends to fluctuate with retail sales in markets served. Historically, retail advertising is higher in the December and June quarters. Advertising and marketing services revenue is lowest in the March quarter.
 
Quarterly results of operations are summarized in Note 16 of the Notes to Consolidated Financial Statements, included herein.


31


INFLATION
 
Price increases (or decreases) for our products are implemented when deemed appropriate by us. We continuously evaluate price increases, productivity improvements, sourcing efficiencies and other cost reductions to mitigate the impact of inflation.

CONTRACTUAL OBLIGATIONS
 
The following table summarizes our significant contractual obligations at September 30, 2018:
(Thousands of Dollars)
Payments (or Commitments) Due (Years)
 
Nature of Obligation
Total

 
Less
Than 1

 
1-3

 
3-5

 
More
Than 5

 
 
 
 
 
 
 
 
 
 
Debt (Principal Amount) (1)
484,859

 
7,027

 
385,000

 
92,832

 

Interest expense (2)(3)
178,613

 
47,792

 
129,429

 
1,392

 

Operating lease obligations
20,483

 
4,131

 
5,950

 
4,426

 
5,976

Capital expenditure commitments
680

 
680

 

 

 

 
684,635

 
59,630

 
520,379

 
98,650

 
5,976

(1)
Maturities of long-term debt are limited to mandatory payments and, accordingly, exclude excess cash flow, asset sale and other payments under the 1st Lien Credit Facility, Notes and the 2nd Lien Term Loan. While excess cash flow payments are based on actual performance, we expect to make voluntary and excess cash flow payments on the 1st and 2nd lien term loans currently outstanding, in the next five years. See Note 5 of the Notes to the Consolidated Financial Statements, included herein.
(2)
Interest expense includes an estimate of interest expense for the Notes, 1st Lien Credit Facility, and 2nd Lien Term Loan until their maturities in March 2022, March 2019, and December 2022, respectively. Interest expense under the Notes is estimated using the 9.5% contractual rate applied to the outstanding balance as reduced by future contractual maturities of such debt. Interest expense under the 1st Lien Term Loan is estimated based on the one month LIBOR at September 30, 2018 of 2.29% as increased by our applicable margin of 6.25% applied to the outstanding balance, as reduced by future contractual maturities of such debt. Interest expense under the Revolving Facility is estimated based on the one month LIBOR at September 30, 2018 of 2.29% as increased by our applicable margin of 5.5% applied to the outstanding balance, as reduced by future contractual maturities of such debt. Interest expense under the 2nd Lien Term Loan is estimated using the 12.0% contractual rate applied to the outstanding balance during each period. Changes in interest rates in excess of current LIBOR levels, use of borrowing rates not based on LIBOR, use of interest rate hedging instruments, and/or principal payments in excess of contractual maturities or based on other requirements of the Notes, 1st Lien Credit Facility or 2nd Lien Term Loan could significantly change this estimate. See Note 4 of the Notes to Consolidated Financial Statements, included herein.
(3)
Interest expense excludes non-cash present value adjustments and amortization of debt financing costs previously paid. See Note 4 of the Notes to Consolidated Financial Statements, included herein.
 
The table above excludes future cash requirements for pension, postretirement and postemployment obligations. The periods in which these obligations will be settled in cash are not readily determinable and are subject to numerous future events and assumptions. See Notes 5 and 6 of the Notes to the Consolidated Financial Statements, included herein.

The contractual obligations above exclude unrecognized tax benefits to be recorded in accordance with FASB ASC Topic 740, Income Taxes. We are unable to reasonably estimate the ultimate amount or timing of cash settlements with the respective taxing authorities for such matters. A substantial amount of our deferred income tax liabilities will not result in future cash payments. See Note 10 of the Notes to the Consolidated Financial Statements, included herein.

ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
 
We are exposed to market risk stemming from changes in interest rates and commodity prices. Changes in these factors could cause fluctuations in earnings and cash flows. In the normal course of business, exposure to certain of these market risks is managed as described below.
 
INTEREST RATES ON DEBT
 
Our debt structure, which is predominantly fixed rate, significantly reduces the potential financial impact of future increases in interest rates. At September 30, 2018, 1.3% of the principal amount of our debt is subject to floating interest rates. Our primary exposure is to LIBOR. A 100 basis point increase to LIBOR would, in excess of LIBOR minimums discussed more fully below, decrease income before income taxes on an annualized basis by approximately $63,030 based on $6,303,000 of floating rate debt outstanding at September 30, 2018.


32


Our debt under the 1st Lien Term Loan is subject to minimum LIBOR interest rate levels of 1.0%. Current LIBOR rates are in excess of the minimum and any future increases in LIBOR will affect our interest rates.

We regularly evaluate alternatives to hedge our interest rate risk, but have no hedging instruments in place.

COMMODITIES

Newsprint prices increased significantly during the Company’s 2018 fiscal year. Price increases were driven primarily by North American and overseas reductions in newsprint production capacity leading to significantly tight supply, including some spot shortages, versus demand. Upward pricing momentum was also influenced by actions from a formal complaint filed by one U.S. based uncoated groundwood producer leading the United States Department of Commerce and International Trade Commission to impose preliminary tariff duties on a number of Canadian manufacturers of uncoated groundwood, including newsprint, resulting in higher prices from some Canadian producers. Tight supply markets prevented opportunities to secure non-tariffed newsprint from other sources. Printing industry and paper producers objections led to the U.S International Trade Commission to reverse the decision to impose tariffs bringing Canadian producers’ price levels back in line with current U.S producer pricing.

Our long term supply strategy continues to align the Company with those cost effective suppliers most likely to continue producing and supplying newsprint to the North American market and geographically aligned with our print locations. Where possible the Company will align supply with the lowest cost material, but may be restricted due to current supply chain tightness and paper production availability.

A $10 per tonne price increase for 30 pound newsprint would result in an annualized reduction in income before taxes of approximately $286,000 based on anticipated consumption in 2019, excluding consumption of TNI and MNI and the impact of LIFO accounting.

SENSITIVITY TO CHANGES IN VALUE
 
At September 30, 2018, the fair value of floating rate debt, which consists primarily of our 1st Lien Term Loan, is $6,299,060, based on an average of private market price quotations. Our fixed rate debt consists of $385,000,000 principal amount of the Notes and $93,556,000 principal amount under the 2nd Lien Term Loan. At September 24, 2017, based on an average of private market price quotations, the fair values were $399,206,500 and $95,427,120 for the Notes and 2nd Lien Term Loan, respectively.

ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
 
Information with respect to this Item is included herein under the caption “Consolidated Financial Statements”.

ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS
ON ACCOUNTING AND FINANCIAL DISCLOSURE
 
Information with respect to this Item is included in our Proxy Statement to be filed in January 2018, which is incorporated herein by reference, under the caption “Relationship with Independent Registered Public Accounting Firm”.

ITEM 9A. CONTROLS AND PROCEDURES
 
EVALUATION OF DISCLOSURE CONTROLS AND PROCEDURES

Under the supervision and with the participation of our senior management, including our chief executive officer and chief financial officer, we conducted an evaluation of the effectiveness of the design and operation of our disclosure controls and procedures, as defined in Rules 13a-15(e) and 15d-15(e) under the Exchange Act, as of September 30, 2018, the end of the period covered by this Annual Report (the Evaluation Date). Based on this evaluation, our chief executive officer and chief financial officer concluded as of the Evaluation Date that our disclosure controls and procedures were effective such that the information relating to the Company, including our consolidated subsidiaries, required to be disclosed in our SEC reports (i) is recorded, processed, summarized and reported within the time periods specified in SEC rules and forms, and (ii) is accumulated and communicated to our management, including our chief executive officer and chief financial officer, as appropriate to allow timely decisions regarding required disclosure.


33


MANAGEMENT'S REPORT ON INTERNAL CONTROL OVER FINANCIAL REPORTING

The Company's management is responsible for establishing and maintaining adequate internal control over financial reporting as such term is defined in Rule 13a-15(f) of the Exchange Act. Any internal control system, no matter how well designed, has inherent limitations and may not prevent or detect misstatements. Accordingly, even those systems determined to be effective can provide only reasonable assurance with respect to financial statement preparation and presentation.

Under the supervision and with the participation of our senior management, including our chief executive officer and chief financial officer, we assessed the effectiveness of our internal control over financial reporting as of the Evaluation Date, using the criteria set forth in the Internal Control-Integrated Framework (2013) issued by the Committee of Sponsoring Organizations of the Treadway Commission. Based on this assessment, management has concluded that our internal control over financial reporting is effective as of the Evaluation Date.

Our independent registered public accounting firm, KPMG LLP, has issued a report on the Company's internal control over financial reporting. KPMGs report on the audit of internal control over financial reporting appears in this Annual Report.

CHANGES IN INTERNAL CONTROL OVER FINANCIAL REPORTING

There have been no changes in our internal control over financial reporting that occurred during the 14 weeks ended September 30, 2018 that have materially affected or are reasonably likely to materially affect our internal control over financial reporting.


34


REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM

To the Stockholders and Board of Directors
Lee Enterprises, Incorporated
   
Opinion on Internal Control Over Financial Reporting
We have audited Lee Enterprises, Incorporated and subsidiaries’ (the Company) internal control over financial reporting as of September 30, 2018, based on criteria established in Internal Control - Integrated Framework (2013) issued by the Committee of Sponsoring Organizations of the Treadway Commission. In our opinion, the Company maintained, in all material respects, effective internal control over financial reporting as of September 30, 2018, based on criteria established in Internal Control - Integrated Framework (2013) issued by the Committee of Sponsoring Organizations of the Treadway Commission.
We also have audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States) (PCAOB), the consolidated balance sheets of the Company as of September 30, 2018 and September 24, 2017, the related consolidated statements of income and comprehensive income, stockholders’ deficit, and cash flows for the 53-week period ended September 30, 2018 and each of the 52-week periods ended September 24, 2017 and September 25, 2016, and the related notes (collectively, the consolidated financial statements), and our report dated December 14, 2018 expressed an unqualified opinion on those consolidated financial statements.
Basis for Opinion
The Company’s management is responsible for maintaining effective internal control over financial reporting and for its assessment of the effectiveness of internal control over financial reporting, included in the accompanying Management’s Report on Internal Control Over Financial Reporting. Our responsibility is to express an opinion on the Company’s internal control over financial reporting based on our audit. We are a public accounting firm registered with the PCAOB and are required to be independent with respect to the Company in accordance with the U.S. federal securities laws and the applicable rules and regulations of the Securities and Exchange Commission and the PCAOB.
We conducted our audit in accordance with the standards of the PCAOB. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether effective internal control over financial reporting was maintained in all material respects. Our audit of internal control over financial reporting included obtaining an understanding of internal control over financial reporting, assessing the risk that a material weakness exists, and testing and evaluating the design and operating effectiveness of internal control based on the assessed risk. Our audit also included performing such other procedures as we considered necessary in the circumstances. We believe that our audit provides a reasonable basis for our opinion.
Definition and Limitations of Internal Control Over Financial Reporting
A company’s internal control over financial reporting is a process designed to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles. A company’s internal control over financial reporting includes those policies and procedures that (1) pertain to the maintenance of records that, in reasonable detail, accurately and fairly reflect the transactions and dispositions of the assets of the company; (2) provide reasonable assurance that transactions are recorded as necessary to permit preparation of financial statements in accordance with generally accepted accounting principles, and that receipts and expenditures of the company are being made only in accordance with authorizations of management and directors of the company; and (3) provide reasonable assurance regarding prevention or timely detection of unauthorized acquisition, use, or disposition of the company’s assets that could have a material effect on the financial statements.
Because of its inherent limitations, internal control over financial reporting may not prevent or detect misstatements. Also, projections of any evaluation of effectiveness to future periods are subject to the risk that controls may become inadequate because of changes in conditions, or that the degree of compliance with the policies or procedures may deteriorate.

/s/ KPMG LLP

Chicago, Illinois
December 14, 2018

35


ITEM 9B. OTHER INFORMATION
 
None.
 
PART III
 
ITEM 10. DIRECTORS, EXECUTIVE OFFICERS AND CORPORATE GOVERNANCE
 
Information with respect to this Item, except for certain information related to our executive officers included under the caption “Executive Team” in Part I of this Annual Report, is included in our Proxy Statement to be filed in January 2019, which is incorporated herein by reference, under the captions “Proposal 1 - Election of Directors” and “Section 16(a) Beneficial Ownership Reporting Compliance”. Our executive officers are those elected officers whose names and certain information are set forth under the caption “Executive Team” in Part 1 of this Annual Report.
 
We have a Code of Business Conduct and Ethics ("Code") that applies to all of our employees, including our principal executive officer, and principal financial and accounting officer. The Code is monitored by the Audit Committee of our Board of Directors and is annually affirmed by our directors and executive officers. We maintain a corporate governance page on our website which includes the Code. The corporate governance page can be found at www.lee.net by clicking on “Governance” under the "About" tab. A copy of the Code will also be provided without charge to any stockholder who requests it. Any future amendment to, or waiver granted by us from, a provision of the Code will be posted on our website.
 
ITEM 11. EXECUTIVE COMPENSATION
 
Information with respect to this Item is included in our Proxy Statement to be filed in January 2019, which is incorporated herein by reference, under the captions, “Compensation of Non-Employee Directors”, “Executive Compensation” and “Compensation Discussion and Analysis”; provided, however, that the subsection entitled “Executive Compensation - Executive Compensation Committee Report” shall not be deemed to be incorporated by reference.
 
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
AND RELATED STOCKHOLDER MATTERS
 
Information with respect to this Item is included in our Proxy Statement to be filed in January 2019, which is incorporated herein by reference, under the captions “Voting Securities and Principal Holders Thereof” and “Equity Compensation Plan Information”.
 
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
AND DIRECTOR INDEPENDENCE
 
Information with respect to this Item is included in our Proxy Statement to be filed in January 2019, which is incorporated herein by reference, under the caption “Directors' Meetings and Committees of the Board of Directors”.
 
ITEM 14. PRINCIPAL ACCOUNTING FEES AND SERVICES
 
Information with respect to this Item is included in our Proxy Statement to be filed in January 2019, which is incorporated herein by reference, under the caption “Relationship with Independent Registered Public Accounting Firm”.
 

36


PART IV
 
ITEM 15. EXHIBITS AND FINANCIAL STATEMENT SCHEDULES
 
The following documents are filed as part of this Annual Report:
 
FINANCIAL STATEMENTS
 
Consolidated Statements of Income and Comprehensive Income - 53 weeks ended September 30, 2018, 52 weeks ended September 24, 2017 and 52 weeks ended September 25, 2016
Consolidated Balance Sheets - September 30, 2018 and September 24, 2017
Consolidated Statements of Stockholders' Equity (Deficit) - 53 weeks ended September 30, 2018, 52 weeks ended September 24, 2017 and 52 weeks ended September 25, 2016
Consolidated Statements of Cash Flows - 53 weeks ended September 30, 2018, 52 weeks ended September 24, 2017 and 52 weeks ended September 25, 2016
Notes to Consolidated Financial Statements
Report of Independent Registered Public Accounting Firm
 
FINANCIAL STATEMENT SCHEDULES
 
All schedules have been omitted as they are not required, not applicable, not deemed material or because the information is included in the Notes to Consolidated Financial Statements, included herein.
 
EXHIBITS
 
See Exhibit Index, included herein.
 

37

















 

38


CONSOLIDATED STATEMENTS OF INCOME AND COMPREHENSIVE INCOME
(Thousands of Dollars, Except Per Common Share Data)
2018

 
2017

 
2016

 


 
 
 
 
Operating revenue:
 
 
 
 
 
Advertising and marketing services
303,446

 
331,360

 
373,463

Subscription
195,108

 
191,922

 
194,002

Other
45,401

 
43,661

 
46,899

Total operating revenue
543,955

 
566,943

 
614,364

Operating expenses:
 
 
 
 
 
Compensation
196,334

 
209,692

 
229,752

Newsprint and ink
24,949

 
24,904

 
26,110

Other operating expenses
199,653

 
199,754

 
218,726

Depreciation and amortization
31,766

 
41,282

 
43,441

Assets loss (gain) on sales, impairments and other

6,429

 
(1,150
)
 
(954
)
Restructuring costs and other
5,550

 
7,523

 
1,825

Total operating expenses
464,681

 
482,005

 
518,900

Equity in earnings of associated companies
9,249

 
7,609

 
8,533

Operating income
88,523

 
92,547

 
103,997

Non-operating income (expense):
 
 
 
 
 
Interest expense
(52,842
)
 
(57,573
)
 
(64,233
)
Debt financing and administrative costs
(5,311
)
 
(4,818
)
 
(5,947
)
Gain on insurance settlement

 

 
30,646

Other, net
450

 
10,060

 
(6,268
)
Total non-operating expense, net
(57,703
)
 
(52,331
)
 
(45,802
)
Income before income taxes
30,820

 
40,216

 
58,195

Income tax expense (benefit)
(16,228
)
 
11,611

 
22,176

Net income
47,048

 
28,605

 
36,019

Net income attributable to non-controlling interests
(1,282
)
 
(1,124
)
 
(1,058
)
Income attributable to Lee Enterprises, Incorporated
45,766

 
27,481

 
34,961

Other comprehensive income (loss), net of income taxes
4,322

 
6,710

 
(6,503
)
Comprehensive income attributable to Lee Enterprises, Incorporated
50,088

 
34,191

 
28,458

 
 
 
 
 
 
Earnings per common share:
 
 
 
 
 
Basic:
0.84

 
0.51

 
0.66

Diluted:
0.82

 
0.50

 
0.64

 
The accompanying Notes are an integral part of the Consolidated Financial Statements.


39


CONSOLIDATED BALANCE SHEETS
(Thousands of Dollars)
September 30
2018

 
September 24
2017

 
 
 
 
ASSETS
 
 
 
 
 
 
 
Current assets:
 
 
 
Cash and cash equivalents
5,380

 
10,621

Accounts receivable, less allowance for doubtful accounts:
 
 
 
2018 $4,806; 2017 $4,796
43,711

 
49,469

Inventories
5,684

 
3,616

Other
4,567

 
4,132

Total current assets
59,342

 
67,838

Investments:
 
 
 
Associated companies
29,216

 
29,181

Other
10,958

 
9,949

Total investments
40,174

 
39,130

Property and equipment:
 
 
 
Land and improvements
17,432

 
20,424

Buildings and improvements
150,376

 
172,138

Equipment
276,332

 
278,880

Construction in process
1,710

 
752

 
445,850

 
472,194

Less accumulated depreciation
353,522

 
357,998

Property and equipment, net
92,328

 
114,196

Goodwill
246,176

 
246,426

Other intangible assets, net
119,819

 
136,302

Medical plan assets, net
16,157

 
15,392

Other
1,415

 
1,566

 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Total assets
575,411

 
620,850

 
The accompanying Notes are an integral part of the Consolidated Financial Statements.


40


(Thousands of Dollars and Shares, Except Per Share Data)
September 30
2018

 
September 24
2017

 
 
 
 
LIABILITIES AND STOCKHOLDERS' EQUITY
 
 
 
 
 
 
 
Current liabilities:
 
 
 
Current maturities of long-term debt
7,027

 
30,182

Accounts payable
12,747

 
17,027

Compensation and other accrued liabilities
19,641

 
22,606

Accrued interest
2,031

 
1,512

Unearned revenue
23,895

 
26,881

Total current liabilities
65,341

 
98,208

Long-term debt, net of current maturities
460,777

 
496,379

Pension obligations
26,745

 
43,537

Postretirement and postemployment benefit obligations
2,580

 
5,004

Deferred income taxes
39,108

 
53,397

Income taxes payable
6,559

 
5,497

Warrants and other
10,561

 
10,041

Total liabilities
611,671

 
712,063