Lee Enterprises(LEE) - 2019 Q3 - Quarterly Report

FORWARD-LOOKING STATEMENTS This section outlines forward-looking statements, emphasizing inherent risks and uncertainties that could cause actual results to differ materially from expectations - The report contains forward-looking statements based on current expectations, subject to risks, trends, and uncertainties that could cause actual results to differ materially[6] - Key risks include the ability to generate cash flows and maintain liquidity for debt service, compliance with financial covenants, debt refinancing, changes in advertising and subscription demand, technology impacts on digital advertising, commodity and energy costs, interest rates, labor costs, cybersecurity breaches, legislative/regulatory rulings, expense reduction achievement, employee/customer relationships, capital costs, NYSE listing status, and competition[8] PART I FINANCIAL INFORMATION This part presents the company's unaudited financial statements, management's discussion and analysis, market risk disclosures, and controls and procedures Item 1. Financial Statements (Unaudited) This section presents the unaudited consolidated financial statements, including balance sheets, statements of operations and comprehensive income, statements of stockholders' equity, and statements of cash flows, along with detailed notes on accounting policies, revenue recognition, investments, goodwill, debt, pension plans, income taxes, earnings per share, stock ownership plans, fair value measurements, and contingent liabilities for the periods ended June 30, 2019 Consolidated Balance Sheets This section provides a snapshot of the company's financial position, detailing assets, liabilities, and stockholders' deficit as of June 30, 2019, and September 30, 2018 Consolidated Balance Sheet Highlights (Thousands of Dollars) | Metric | June 30, 2019 | September 30, 2018 | Change | Change (%) | | :----------------------------------- | :------------ | :----------------- | :----- | :--------- | | Total current assets | 71,252 | 59,342 | 11,910 | 20.1% | | Total assets | 574,401 | 575,411 | (1,010) | (0.2%) | | Total current liabilities | 69,150 | 65,341 | 3,809 | 5.8% | | Long-term debt, net of current maturities | 442,026 | 460,777 | (18,751) | (4.1%) | | Total liabilities | 595,941 | 611,671 | (15,730) | (2.6%) | | Total stockholders' deficit | (23,049) | (37,354) | 14,305 | (38.3%) | | Total liabilities and deficit | 574,401 | 575,411 | (1,010) | (0.2%) | - Cash and cash equivalents increased significantly from $5,380 thousand at September 30, 2018, to $13,516 thousand at June 30, 2019[11] - Goodwill increased from $246,176 thousand to $249,727 thousand, while other intangible assets, net, decreased from $119,819 thousand to $110,806 thousand[11] Consolidated Statements of Operations and Comprehensive Income This section details the company's financial performance, including revenue, expenses, operating income, and net income for the 13 and 39 weeks ended June 30, 2019 Consolidated Statements of Operations and Comprehensive Income (Thousands of Dollars, Except Per Common Share Data) | Metric | 13 Weeks Ended June 30, 2019 | 13 Weeks Ended June 24, 2018 | Change (%) | 39 Weeks Ended June 30, 2019 | 39 Weeks Ended June 24, 2018 | Change (%) | | :----------------------------------- | :--------------------------- | :--------------------------- | :--------- | :--------------------------- | :--------------------------- | :--------- | | Total operating revenue | 127,284 | 132,618 | (4.0%) | 386,189 | 404,208 | (4.5%) | | Total operating expenses | 108,704 | 114,041 | (4.7%) | 331,169 | 343,227 | (3.5%) | | Operating income | 20,031 | 20,155 | (0.6%) | 60,318 | 66,550 | (9.4%) | | Income before income taxes | 7,677 | 6,722 | 14.2% | 20,739 | 25,820 | (19.7%) | | Net income | 6,172 | 4,750 | 29.9% | 14,564 | 42,611 | (65.8%) | | Income attributable to Lee Enterprises, Incorporated | 5,766 | 4,458 | 29.3% | 13,449 | 41,700 | (67.7%) | | Basic EPS | 0.10 | 0.08 | 27.3% | 0.24 | 0.76 | (68.3%) | | Diluted EPS | 0.10 | 0.08 | 27.5% | 0.24 | 0.75 | (68.1%) | - Advertising and marketing services revenue decreased by 10.6% for the 13 weeks and 10.9% for the 39 weeks ended June 30, 2019, compared to the prior year periods[16] - Other revenue significantly increased by 36.6% for the 13 weeks and 35.9% for the 39 weeks ended June 30, 2019, primarily due to digital services and Management Agreement revenue[16] Consolidated Statements of Stockholders' Equity (Deficit) This section outlines changes in the company's stockholders' equity (deficit), reflecting the impact of net income and other comprehensive income for the period Changes in Stockholders' Equity (Deficit) (Thousands of Dollars) | Metric | October 1, 2018 | June 30, 2019 | Change | | :----------------------------------- | :-------------- | :------------ | :----- | | Accumulated Deficit | (279,691) | (266,242) | 13,449 | | Common Stock | 572 | 578 | 6 | | Additional paid-in capital | 253,511 | 254,727 | 1,216 | | Accumulated Other Comprehensive Loss | (11,746) | (12,112) | (366) | | Total Stockholders' Deficit | (37,354) | (23,049) | 14,305 | - The total stockholders' deficit improved from $(37,354) thousand at October 1, 2018, to $(23,049) thousand at June 30, 2019, primarily driven by income attributable to Lee Enterprises, Incorporated[18] Consolidated Statements of Cash Flows This section presents the company's cash inflows and outflows from operating, investing, and financing activities for the 39 weeks ended June 30, 2019 Consolidated Statements of Cash Flows (Thousands of Dollars) | Metric | 39 Weeks Ended June 30, 2019 | 39 Weeks Ended June 24, 2018 | Change | | :----------------------------------- | :--------------------------- | :--------------------------- | :----- | | Net cash provided by operating activities | 43,786 | 57,033 | (13,247) | | Net cash required for investing activities | (7,911) | (2,076) | (5,835) | | Net cash required for financing activities | (27,739) | (49,549) | 21,810 | | Net increase in cash and cash equivalents | 8,136 | 5,408 | 2,728 | | Cash and cash equivalents, end of period | 13,516 | 16,029 | (2,513) | - Cash provided by operating activities decreased by $13,247 thousand, mainly due to lower net income and increased income tax payments[21][221] - Cash required for investing activities increased significantly due to $5,274 thousand spent on acquisitions in the 2019 Period[21][223] - Cash required for financing activities decreased by $21,810 thousand, primarily due to lower debt reduction payments compared to the prior year[21][225] Notes to Consolidated Financial Statements This section provides detailed explanations of the accounting policies, significant estimates, and additional information supporting the consolidated financial statements 1. Basis of Presentation and Summary of Significant Accounting Policies This note describes the basis of financial statement preparation and outlines key accounting policies, including revenue recognition and new lease standards - The unaudited interim financial statements include all adjustments (normal recurring items) necessary for fair presentation[25] - The Company adopted the New Revenue Standard (ASC 606) on October 1, 2018, using the modified retrospective method, with no significant impact on revenue recognition policies, timing, or amount[34] - The Company anticipates a material impact on its Consolidated Balance Sheets from the adoption of the new lease standard (ASC 842) in fiscal year 2020, due to the recognition of lease assets and liabilities, but no material impact on income or cash flows[42] - The Company manages Berkshire Hathaway's newspaper and digital operations in 30 markets, earning a fixed annual fee of $5 million and variable fees based on financial performance, totaling $11,320,000 in fees as of June 30, 2019[28] 2. Revenue This note disaggregates revenue by source and explains the company's revenue recognition policies, including unearned revenue and contract assets Revenue Disaggregation by Source (Thousands of Dollars) | Revenue Source | 13 Weeks Ended June 30, 2019 | 13 Weeks Ended June 24, 2018 | Change (%) | 39 Weeks Ended June 30, 2019 | 39 Weeks Ended June 24, 2018 | Change (%) | | :----------------------------------- | :--------------------------- | :--------------------------- | :--------- | :--------------------------- | :--------------------------- | :--------- | | Advertising and marketing services revenue | 65,754 | 73,538 | (10.6%) | 204,651 | 229,751 | (10.9%) | | Subscription Revenue | 46,620 | 48,165 | (3.2%) | 137,965 | 142,405 | (3.1%) | | TownNews and other digital services revenue | 5,087 | 3,826 | 33.0% | 14,507 | 11,302 | 28.4% | | Other revenue | 9,823 | 7,089 | 38.6% | 29,066 | 20,750 | 40.1% | | Total operating revenue | 127,284 | 132,618 | (4.0%) | 386,189 | 404,208 | (4.5%) | - Revenue is recognized when performance obligations are satisfied by transferring control of goods or services to customers[44] - Unearned revenue from subscriptions paid in advance was $22,970,000 as of June 30, 2019, and $23,895,000 as of September 30, 2018[50] - Contract asset balances related to the Management Agreement revenue were $5,506,000 as of June 30, 2019, and $0 as of September 30, 2018, reflecting the variable portion of the fee[51] 3. Investments in Associated Companies This note details the company's equity method investments in TNI Partners and Madison Newspapers, Inc., and their summarized financial results Summarized Results of TNI (Thousands of Dollars) | Metric | 13 Weeks Ended June 30, 2019 | 13 Weeks Ended June 24, 2018 | Change (%) | 39 Weeks Ended June 30, 2019 | 39 Weeks Ended June 24, 2018 | Change (%) | | :----------------------------------- | :--------------------------- | :--------------------------- | :--------- | :--------------------------- | :--------------------------- | :--------- | | Operating revenue | 10,465 | 11,013 | (5.0%) | 34,109 | 36,094 | (5.5%) | | Operating income | 2,102 | 1,974 | 6.5% | 7,818 | 7,718 | 1.3% | | Company's 50% share of operating income | 1,051 | 987 | 6.5% | 3,909 | 3,860 | 1.3% | | Equity in earnings of TNI | 946 | 882 | 7.3% | 3,596 | 3,546 | 1.4% | Summarized Results of MNI (Thousands of Dollars) | Metric | 13 Weeks Ended June 30, 2019 | 13 Weeks Ended June 24, 2018 | Change (%) | 39 Weeks Ended June 30, 2019 | 39 Weeks Ended June 24, 2018 | Change (%) | | :----------------------------------- | :--------------------------- | :--------------------------- | :--------- | :--------------------------- | :--------------------------- | :--------- | | Operating revenue | 13,709 | 14,518 | (5.6%) | 41,627 | 44,421 | (6.3%) | | Operating income | 1,230 | 2,123 | (42.1%) | 4,316 | 6,311 | (31.6%) | | Net income | 1,010 | 1,391 | (27.4%) | 3,405 | 4,047 | (15.9%) | | Equity in earnings of MNI | 505 | 696 | (27.4%) | 1,702 | 2,023 | (15.9%) | - The Company holds an 82.5% interest in TownNews.com, a 50% interest in TNI Partners, and a 50% interest in Madison Newspapers, Inc. (MNI), with TNI and MNI accounted for using the equity method[27] 4. Goodwill and Other Intangible Assets This note provides details on the carrying amounts of goodwill and other intangible assets, including recent acquisitions and amortization schedules Goodwill Carrying Amount (Thousands of Dollars) | Metric | 39 Weeks Ended June 30, 2019 | | :----------------------------------- | :--------------------------- | | Goodwill, beginning of period | 246,176 | | Goodwill acquired in business combinations | 3,551 | | Goodwill, end of period | 249,727 | Identified Intangible Assets (Thousands of Dollars) | Metric | June 30, 2019 | September 30, 2018 | | :----------------------------------- | :------------ | :----------------- | | Nonamortized intangible assets: Mastheads | 21,883 | 21,883 | | Amortizable intangible assets, net | 88,923 | 97,936 | | Other intangible assets, net | 110,806 | 119,819 | - In January 2019, the Company acquired Kenosha News and Lake Geneva Regional News, and TownNews purchased GTxcel's CMS business, resulting in $3,551,000 in goodwill and $3,650,000 in other intangible assets (customer lists amortized over 10 years)[59] - Estimated annual amortization of intangible assets ranges from $16,060,000 in 2020 to $11,237,000 in 2024[60] 5. Debt This note details the company's debt structure, including revolving facilities, term loans, and notes, along with compliance with debt covenants Debt Summary (Thousands of Dollars) | Debt Type | June 30, 2019 | September 30, 2018 | Interest Rates (%) | | :----------------------------------- | :------------ | :----------------- | :----------------- | | Revolving Facility | — | — | 6.1 | | 1 Lien Term Loan | — | 6,303 | 8.5 | | Notes | 374,420 | 385,000 | 9.5 | | 2nd Lien Term Loan | 84,138 | 93,556 | 12.0 | | Total long-term debt | 442,026 | 460,777 | | - The Company repaid the remaining balance of the 1st Lien Term Loan in full in November 2018[61] - The Revolving Facility was amended in December 2018, extending maturity to December 28, 2019, and reducing commitments from $40,000,000 to $27,200,000[62] - The Company repurchased $10,580,000 principal amount of Notes in privately negotiated transactions during the 13 and 39 weeks ended June 30, 2019, resulting in a $238,000 loss on extinguishment of debt[71] - At June 30, 2019, total liquidity was $35,201,000, including $21,685,000 available under the Revolving Facility, which expires December 28, 2019[106] - The Company was in compliance with all debt covenants at June 30, 2019, and expects to satisfy all interest and principal payments due in the next twelve months through existing cash and cash flows[109][106] 6. Pension, Postretirement and Postemployment Defined Benefit Plans This note outlines the components of net periodic pension and postretirement costs and the impact of new accounting standards Net Periodic Pension Cost (Benefit) Components (Thousands of Dollars) | Metric | 13 Weeks Ended June 30, 2019 | 13 Weeks Ended June 24, 2018 | 39 Weeks Ended June 30, 2019 | 39 Weeks Ended June 24, 2018 | | :----------------------------------- | :--------------------------- | :--------------------------- | :--------------------------- | :--------------------------- | | Pension benefit | (109) | (61) | (329) | (183) | | Postretirement medical benefit | (592) | (622) | (1,777) | (3,896) | - The Company adopted a new accounting standard for pension and postretirement benefit expenses, reclassifying non-service cost components to non-operating income in 'other, net'[113] - A non-cash curtailment gain of $2,031,000 was recorded in the 39 weeks ended June 24, 2018, due to the termination of a post-employment medical plan[115] 7. Income Taxes This note details the company's income tax expense, effective tax rates, and the impact of state taxes and net operating losses Income Tax Expense and Effective Tax Rate | Metric | 13 Weeks Ended June 30, 2019 | 13 Weeks Ended June 24, 2018 | 39 Weeks Ended June 30, 2019 | 39 Weeks Ended June 24, 2018 | | :----------------------------------- | :--------------------------- | :--------------------------- | :--------------------------- | :--------------------------- | | Income tax expense (benefit) | 1,505 | 1,972 | 6,175 | (16,791) | | Effective income tax rate | 19.6% | 29.3% | 29.8% | (65.0%) | - The effective tax rates differ from the U.S. federal statutory rate of 21% due to state taxes, non-deductible expenses, adjustments for uncertain tax positions, and mark-to-market adjustments for warrants[119] - The Company consumed its federal net operating losses in the year ended September 30, 2018, but had approximately $63,048,000 of state net operating loss tax benefits at that date[121] 8. Earnings Per Common Share This note presents the calculation of basic and diluted earnings per common share, including the impact of warrants Earnings Per Common Share (Thousands of Dollars and Shares, Except Per Share Data) | Metric | 13 Weeks Ended June 30, 2019 | 13 Weeks Ended June 24, 2018 | 39 Weeks Ended June 30, 2019 | 39 Weeks Ended June 24, 2018 | | :----------------------------------- | :--------------------------- | :--------------------------- | :--------------------------- | :--------------------------- | | Income attributable to Lee Enterprises, Incorporated | 5,766 | 4,458 | 13,449 | 41,700 | | Basic average common shares | 55,643 | 54,778 | 55,484 | 54,598 | | Diluted average common shares | 56,870 | 56,080 | 56,522 | 55,903 | | Basic EPS | 0.10 | 0.08 | 0.24 | 0.76 | | Diluted EPS | 0.10 | 0.08 | 0.24 | 0.75 | - 6,000,000 weighted average shares related to warrants were excluded from diluted EPS computation for the 13 and 39 weeks ended June 30, 2019, as their exercise prices exceeded the common stock's fair market value[122] 9. Stock Ownership Plans This note details activity related to stock options and restricted common stock, including outstanding shares and unrecognized compensation expense Stock Option Activity (Thousands of Shares, Except Per Share Data) | Metric | Shares | Weighted Average Exercise Price | | :----------------------------------- | :----- | :------------------------------ | | Outstanding, September 30, 2018 | 1,100 | 1.88 | | Exercised | (83) | 2.11 | | Cancelled | (58) | 2.01 | | Outstanding, June 30, 2019 | 959 | 1.86 | | Exercisable, June 30, 2019 | 959 | 1.86 | Restricted Common Stock Activity (Thousands of Shares, Except Per Share Data) | Metric | Shares | Weighted Average Grant Date Fair Value | | :----------------------------------- | :----- | :------------------------------------- | | Outstanding, September 30, 2018 | 2,059 | 2.31 | | Vested | (737) | 1.54 | | Granted | 788 | 2.18 | | Cancelled | (34) | 2.13 | | Outstanding, June 30, 2019 | 2,076 | 2.53 | - Total unrecognized compensation expense for unvested restricted Common Stock at June 30, 2019, was $2,258,011, to be recognized over a weighted average period of 1.4 years[125] 10. Fair Value Measurements This note provides fair value measurements for financial instruments, including notes, term loans, warrants, and investments - The fair value of the Notes was $381,440,375 and the 2nd Lien Term Loan was $83,927,867 at June 30, 2019, both classified as Level 2 fair value measurements[130] - The fair value of Warrants was $1,417,000 at June 30, 2019, down from $4,479,000 at March 31, 2019, determined using the Black-Scholes option pricing model (Level 2)[131] - Investments totaling $6,068,000 are carried at cost, with a private equity investment having an approximate fair value of $10,201,717 (Level 3)[129] 11. Commitments and Contingent Liabilities This note outlines the company's commitments and contingent liabilities, including routine legal actions and tax audits - The Company is subject to routine income tax audits, with California currently in progress, but believes adequate tax liabilities have been recorded[133][134] - Legal actions arising in the normal course of business are not expected to have a material adverse effect on the consolidated financial statements[135] - An estimated partial withdrawal liability of $500,000 for the CWA/ITU multi-employer plan was recorded in the second quarter of 2019, included in restructuring costs[137] Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations This section provides management's perspective on the Company's financial condition and results of operations for the 13 and 39 weeks ended June 30, 2019, discussing revenue and expense trends, non-GAAP measures, critical accounting policies, and liquidity. It highlights a decline in traditional advertising revenue offset by growth in digital services and management fees, alongside efforts to reduce operating costs and manage debt Non-GAAP Financial Measures This section defines and reconciles non-GAAP financial measures, including Adjusted EBITDA and Cash Costs, used by management to assess performance - Adjusted EBITDA is defined as net income (loss) plus non-operating expenses, income tax expense (benefit), depreciation and amortization, assets loss (gain) on sales, impairments and other, restructuring costs and other, stock compensation, and the Company's 50% share of EBITDA from TNI and MNI, minus equity in earnings of TNI and MNI and curtailment gains[141] - Cash Costs are defined as compensation, newsprint and ink, and other operating expenses, excluding non-cash items and restructuring costs[142] Adjusted EBITDA Reconciliation (Thousands of Dollars) | Metric | 13 Weeks Ended June 30, 2019 | 13 Weeks Ended June 24, 2018 | 39 Weeks Ended June 30, 2019 | 39 Weeks Ended June 24, 2018 | | :----------------------------------- | :--------------------------- | :--------------------------- | :--------------------------- | :--------------------------- | | Net Income | 6,172 | 4,750 | 14,564 | 42,611 | | Adjusted EBITDA | 30,651 | 31,061 | 90,378 | 96,781 | Impact of Recently Issued Accounting Standards This section discusses the company's evaluation of new FASB standards regarding disclosure requirements for benefit plans and fair value measurements - The Company is evaluating the impact of new FASB standards on disclosure requirements for defined benefit pension/postretirement plans and fair value measurements[147][148] Critical Accounting Policies This section identifies the company's critical accounting policies, including those for intangible assets, benefit plans, and income taxes - Critical accounting policies include intangible assets (other than goodwill), pension, postretirement and postemployment benefit plans, and income taxes[149] Executive Overview This section provides an overview of the company's operations, market reach, digital platform growth, and subsidiary activities - Lee Enterprises operates 50 local media operations and manages 30 additional operations for BH Media Group, reaching 79% of adults in larger markets through print and digital content[150] - Digital platforms attract over 29.3 million unique visitors monthly with 289.1 million page views, and digital-only subscribers increased by 72.0% to approximately 79,000[155] - TownNews, an 82.5% owned subsidiary, provides web hosting, content management, and video management services to nearly 2,000 media organizations[152] Impairment of Goodwill and Other Assets This section discusses past impairment charges for goodwill and intangible assets, noting potential for future charges based on market conditions - The Company has recorded nearly $1.3 billion in impairment charges since 2007 for goodwill and identified intangible assets, with future decreases in market value or differences from estimates potentially leading to additional charges[154] Debt and Liquidity This section details the company's outstanding debt, liquidity position, and compliance with debt covenants as of June 30, 2019 - Outstanding debt at June 30, 2019, totaled $458,558,000, consisting of $374,420,000 in 9.5% Senior Secured Notes and $84,138,000 in 12.0% Second Lien Term Loan[156][162] - The Company's debt, net of cash, was 3.5 times its trailing twelve months adjusted EBITDA at June 30, 2019[162] - Liquidity at June 30, 2019, was $35,201,000, including $21,685,000 available under the Revolving Facility, which expires December 28, 2019[161] - The Company was in compliance with all debt covenants at June 30, 2019, and expects to meet all interest and principal payments in the next twelve months through cash flows and asset sales[164][161] 13 Weeks Ended June 30, 2019 This section analyzes the company's operating revenue, expenses, and overall financial results for the 13-week period ended June 30, 2019 Operating Revenue This section details revenue trends for the 13-week period, highlighting changes in advertising, subscription, and other digital services revenue - Advertising and marketing services revenue decreased by 10.6% ($7,784,000) due to softness in print advertising demand, while digital advertising increased 2.8% to $25,448,000, representing 38.7% of total advertising revenue[169][170] - Subscription revenue decreased by 3.2% ($1,545,000), with digital-only subscribers increasing 72.0% to approximately 79,000[171] - Other revenue increased by 36.6%, driven by growth at TownNews and $3,539,000 from the Management Agreement[172][173] - Total revenue at TownNews increased 35.7% due to a growing broadcast customer base, gaining print market share, and the GTxcel acquisition[175] Operating Expenses This section analyzes the changes in operating expenses, including compensation, newsprint, and other costs for the 13-week period - Total operating expenses decreased by 4.7%, with cash costs down 5.2% compared to the prior year quarter[178] - Compensation expense decreased by 6.6% ($3,197,000) due to an 8.0% decline in average full-time equivalent employees[178] - Newsprint and ink costs decreased by 18.8% ($1,212,000) due to lower prices and an 11.6% decrease in volume[179] - Other operating expenses decreased by 2.0% ($1,002,000), primarily from lower delivery and print-related costs, partially offset by higher digital revenue and outsourcing costs[180] Results of Operations This section summarizes the operating income and equity in earnings of associated companies for the 13-week period - Operating income was $20,031,000, a slight decrease of 0.6% from $20,155,000 in the prior year quarter[184] - Equity in earnings of associated companies (TNI and MNI) decreased by $127,000[184] Nonoperating Income and Expense This section details non-operating items such as interest expense, debt financing costs, and fair value adjustments for warrants - Interest expense decreased by 8.2% ($1,053,000) to $11,860,000 due to lower debt balances[186] - Debt financing and administrative costs increased to $4,196,000 from $1,747,000, primarily due to write-offs from debt repurchases and a $1,309,000 out-of-period adjustment[188] - Non-operating income of $3,062,000 was recorded due to changes in the fair value of Warrants, compared to $405,000 in the prior year[189] Overall Results This section provides an overview of the company's income tax expense and its impact on overall financial performance for the 13-week period - Income tax expense was $1,505,000 (19.6% of pretax income) for the 2019 Quarter, compared to $1,972,000 (29.3%) in the 2018 Quarter[191] Net Income and Earnings Per Share This section presents the reported and adjusted net income and earnings per share for the 13-week period, including warrant adjustments Adjusted Net Income and EPS (13 Weeks Ended) | Metric | June 30, 2019 (Amount) | June 30, 2019 (Per Share) | June 24, 2018 (Amount) | June 24, 2018 (Per Share) | | :----------------------------------- | :----------------------- | :------------------------ | :----------------------- | :------------------------ | | Income attributable to Lee Enterprises, Incorporated, as reported | 5,766 | 0.10 | 4,458 | 0.08 | | Warrants fair value adjustment | (3,062) | (0.05) | (405) | (0.01) | | Income attributable to Lee Enterprises, Incorporated, as adjusted | 2,704 | 0.05 | 4,053 | 0.07 | 39 Weeks Ended June 30, 2019 This section analyzes the company's operating revenue, expenses, and overall financial results for the 39-week period ended June 30, 2019 Operating Revenue This section details revenue trends for the 39-week period, highlighting changes in advertising, subscription, and other digital services revenue - Advertising and marketing services revenue decreased by 10.9% ($25,100,000), primarily due to reduced print advertising volume[197] - Digital advertising increased 5.3% to $75,011,000, representing 36.7% of total advertising and marketing services revenue, with digital retail advertising up 6.2%[198] - Subscription revenue decreased by 3.1% ($4,440,000), partially offset by strategic pricing and premium content[199] - Other revenue increased by 35.9%, driven by TownNews growth and $9,989,000 from the Management Agreement (totaling $11,320,000 for the year ended June 30, 2019)[200] - TownNews total revenue increased 30.6%, and mobile, tablet, desktop, and app sites attracted a monthly average of 29.5 million unique visitors with 292.1 million page views, a 12.6% increase[201] Operating Expenses This section analyzes the changes in operating expenses, including compensation, newsprint, and restructuring costs for the 39-week period - Operating expenses decreased by 3.5%, and cash costs decreased by 4.0% (5.2% on a same-property basis)[203] - Compensation expense decreased by 6.3% ($9,354,000) due to a 10.3% decline in average full-time equivalent employees[203] - Newsprint and ink costs decreased by 2.9% ($526,000) due to an 11.2% reduction in volume, partially offset by higher prices[204] - Other operating expenses decreased by 2.0% ($2,915,000), mainly from lower delivery and print-related costs, offset by higher digital revenue and outsourcing costs[205] - Restructuring costs totaled $5,612,000, up from $4,150,000, primarily related to severance and a multi-employer pension plan withdrawal liability[208] Results of Operations This section summarizes the operating income and equity in earnings of associated companies for the 39-week period - Operating income was $60,318,000, a decrease of 9.4% from $66,550,000 in the prior year period[210] - Equity in earnings of associated companies decreased by $271,000[210] Nonoperating Income and Expense This section details non-operating items such as interest expense, debt financing costs, and fair value adjustments for warrants - Interest expense decreased by 9.0% ($3,581,000) to $36,256,000 due to lower debt balances[212] - Debt financing and administrative costs increased to $6,053,000 from $4,061,000, driven by write-offs from debt repurchases and a $1,145,000 out-of-period adjustment[213] - Non-operating income of $389,000 was recorded due to changes in the fair value of Warrants, compared to $529,000 in the prior year[214] Overall Results This section provides an overview of the company's income tax expense and its impact on overall financial performance for the 39-week period - Income tax expense was $6,175,000 (29.8% of pretax income) for the 2019 Period, compared to a $16,791,000 income tax benefit in the 2018 Period, which included a $24,872,000 discrete adjustment from revaluing deferred tax assets due to the 2017 Tax Act[216][217] Net Income and Earnings Per Share This section presents the reported and adjusted net income and earnings per share for the 39-week period, including tax act adjustments Adjusted Net Income and EPS (39 Weeks Ended) | Metric | June 30, 2019 (Amount) | June 30, 2019 (Per Share) | June 24, 2018 (Amount) | June 24, 2018 (Per Share) | | :----------------------------------- | :----------------------- | :------------------------ | :----------------------- | :------------------------ | | Income attributable to Lee Enterprises, Incorporated, as reported | 13,449 | 0.24 | 41,700 | 0.75 | | Warrants fair value adjustment | (389) | (0.01) | (529) | — | | Income tax effect of 2017 Tax Act | — | | (24,872) | (0.45) | | Income attributable to Lee Enterprises, Incorporated, as adjusted | 13,060 | 0.22 | 16,299 | 0.29 | Liquidity and Capital Resources This section discusses the company's cash flows from operating, investing, and financing activities, along with its overall liquidity position Operating Activities This section details cash flows generated from or used in the company's primary business operations - Cash provided by operating activities decreased to $43,786,000 in the 2019 Period from $57,033,000 in the 2018 Period, mainly due to lower net income and increased income tax payments[221] Investing Activities This section outlines cash flows related to the acquisition and disposal of long-term assets and business combinations - Cash required for investing activities increased to $7,911,000 in the 2019 Period from $2,076,000 in the 2018 Period, primarily due to $5,274,000 spent on acquisitions[223] - Capital expenditures are expected to total up to $8,000,000 in 2019, funded by internally generated funds or the Revolving Facility[223] Financing Activities This section describes cash flows from debt, equity, and other financing transactions impacting the company's capital structure - Cash required for financing activities decreased to $27,739,000 in the 2019 Period from $49,549,000 in the 2018 Period, mainly due to lower debt reduction[225] Liquidity This section assesses the company's ability to meet short-term obligations and fund operations, including available credit and debt compliance - Total liquidity at June 30, 2019, was $35,201,000, including $21,685,000 available under the Revolving Facility (expiring December 28, 2019)[227][228] - The Company's ability to operate as a going concern depends on compliance with debt covenants and the ability to repay, refinance, or amend debt agreements[230] - A shelf registration statement effective until February 2020 allows for the issuance of up to $750,000,000 in various securities, subject to market conditions and debt agreements, with proceeds potentially used for debt reduction[231] Changes in Laws and Regulations This section discusses the impact of recent legislative changes, including pension funding requirements and the 2017 Tax Act, on the company's financials - The Surface Transportation Extension Act of 2012 (STEA) and the Highway and Transportation Funding Act (HATFA) have reduced near-term minimum funding requirements for pension plans but increased future premiums to the PBGC[233][234] - The 2017 Tax Act reduced the federal corporate income tax rate from 35% to 21%, leading to a $24,872,000 net decrease in income tax expense in the 39 weeks ended June 24, 2018, due to revaluation of deferred tax assets and liabilities[236] Wage Laws This section addresses potential impacts of future changes in minimum wage rates on the company's operating costs - Potential increases in minimum wage rates by federal, state, and local governments are being considered, but the impact cannot be determined until enacted[239] Inflation This section outlines the company's strategies to mitigate the effects of inflation through cost management and pricing adjustments - The Company continuously evaluates price increases, productivity improvements, sourcing efficiencies, and other cost reductions to mitigate the impact of inflation[240] Item 3. Quantitative and Qualitative Disclosures About Market Risk This section outlines the Company's exposure to market risks, specifically from changes in interest rates and commodity prices, and how these risks are managed. It notes that the Company's debt is entirely fixed-rate, eliminating interest rate risk, and discusses the impact of newsprint price fluctuations Interest Rates on Debt This section clarifies that the company's fixed-rate debt structure eliminates exposure to interest rate fluctuations - The Company's debt structure is entirely fixed rate, eliminating exposure to interest rate increases, and there are no interest rate hedging instruments in place[242] Commodities This section discusses the impact of newsprint price changes on the company's costs and profitability - Newsprint prices decreased during the June 2019 Quarter due to declining domestic and export demand[243] - A $10 per tonne price increase for 30-pound newsprint would result in an estimated annualized reduction in income before taxes of approximately $331,000[244] Sensitivity to Changes in Value This section provides fair value details for the company's fixed-rate notes and term loan based on market quotations - The fair values of the fixed-rate Notes and 2nd Lien Term Loan at June 30, 2019, were $381,440,375 and $83,927,867, respectively, based on private market price quotations[245] Item 4. Controls and Procedures This section confirms the effectiveness of the Company's disclosure controls and procedures and reports no material changes in internal control over financial reporting during the quarter ended June 30, 2019 Evaluation of Disclosure Controls and Procedures This section confirms the effectiveness of the company's disclosure controls and procedures as of June 30, 2019 - The CEO and CFO concluded that the Company's disclosure controls and procedures were effective as of June 30, 2019[246] Changes in Internal Control Over Financial Reporting This section reports no material changes in internal control over financial reporting during the quarter ended June 30, 2019 - There have been no material changes in internal control over financial reporting during the 13 weeks ended June 30, 2019[247] PART II OTHER INFORMATION This part includes information on legal proceedings, exhibits filed, and required signatures for the quarterly report Item 1. Legal Proceedings This section states that the Company is involved in routine legal actions, but their disposition is not expected to have a material adverse effect on the consolidated financial statements - The Company is involved in various legal actions in the normal course of business, with insurance coverage mitigating potential losses[249] - The ultimate outcome of these legal actions is not expected to have a material adverse effect on the Consolidated Financial Statements[249] Item 6. Exhibits This section lists the exhibits filed with the Quarterly Report on Form 10-Q, primarily consisting of certifications - Exhibits include Rule 13a-14(a)/15d-14(a) certifications (31.1, 31.2) and Section 1350 certification (32)[250] SIGNATURES This section contains the required signatures for the Quarterly Report on Form 10-Q, authorizing its filing - The report was duly signed on behalf of Lee Enterprises, Incorporated by Timothy R. Millage, Vice President, Chief Financial Officer and Treasurer, on August 9, 2019[252][253]