Annual Statements Open main menu

LEE ENTERPRISES, Inc - Quarter Report: 2015 December (Form 10-Q)

 
UNITED STATES SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
  
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
  
For The Quarterly Period Ended December 27, 2015
 
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 or other jurisdiction of
incorporation or organization)
(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)
 
Indicate by check mark whether the Registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the Registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.
Yes [X]     No [  ]
 
Indicate by check mark whether the Registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (232.405 of this chapter) during the preceding 12 months (or for such shorter period that the Registrant was required to submit and post such files). Yes [X]     No [  ]
 
Indicate by check mark whether the Registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company. See definitions of “ large accelerated filer, accelerated filer and small reporting company” in Rule 12b-2 of the Exchange Act.
 
Large accelerated filer
[  ]
Accelerated filer
[X]
 
Non-accelerated filer
[ ] (Do not check if a smaller reporting company)
Smaller reporting company
[  ]

Indicate by check mark whether the Registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).
Yes [  ]     No [X]
 
Indicate by check mark whether the Registrant has filed all documents and reports required to be filed by Sections 12, 13 or 15(d) of the Securities Exchange Act of 1934 subsequent to the distribution of securities under a plan confirmed by a court.  Yes [X]     No [  ]
                                                                                                              
As of January 31, 2016, 55,530,574 shares of Common Stock of the Registrant were outstanding.
 



Table Of Contents
 
PAGE
 
 
 
FORWARD LOOKING STATEMENTS
 
 
 
 
 
PART I
FINANCIAL INFORMATION
 
 
 
 
 
 
 
Item 1.
Financial Statements (Unaudited)
 
 
 
 
 
 
 
 
Consolidated Balance Sheets - December 27, 2015 and September 27, 2015
 
 
 
 
 
 
 
 
Consolidated Statements of Operations and Comprehensive Operations - 13 weeks ended December 27, 2015 and December 28, 2014
 
 
 
 
 
 
 
 
Consolidated Statements of Cash Flows - 13 weeks ended December 27, 2015 and December 28, 2014
 
 
 
 
 
 
 
 
Notes to Consolidated Financial Statements
 
 
 
 
 
 
 
Item 2.
Management's Discussion and Analysis of Financial Condition and Results of Operations
 
 
 
 
 
 
 
Item 3.
Quantitative and Qualitative Disclosures About Market Risk
 
 
 
 
 
 
 
Item 4.
Controls and Procedures
 
 
 
 
 
 
PART II
OTHER INFORMATION
 
 
 
 
 
 
 
Item 1.
Legal Proceedings
 
 
 
 
 
 
 
Item 6.
Exhibits
 
 
 
 
 
 
SIGNATURES
 
 






Table of Contents

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

FORWARD-LOOKING STATEMENTS

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

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

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


1

Table of Contents

PART I
FINANCIAL INFORMATION
 
Item 1.       Financial Statements

LEE ENTERPRISES, INCORPORATED
CONSOLIDATED BALANCE SHEETS
(Unaudited)

(Thousands of Dollars)
December 27
2015

September 27
2015

 
 
 
ASSETS
 
 
 
 
 
Current assets:
 
 
Cash and cash equivalents
11,813

11,134

Accounts receivable, net
66,580

58,899

Income taxes receivable
62

413

Inventories
3,956

3,914

Other
6,131

8,304

Total current assets
88,542

82,664

Investments:
 
 
Associated companies
34,640

35,069

Other
9,363

9,083

Total investments
44,003

44,152

Property and equipment:
 
 
Land and improvements
22,252

22,257

Buildings and improvements
179,766

179,731

Equipment
286,857

290,127

Construction in process
1,630

997

 
490,505

493,112

Less accumulated depreciation
349,660

349,343

Property and equipment, net
140,845

143,769

Goodwill
243,729

243,729

Other intangible assets, net
179,346

185,962

Postretirement assets, net
13,915

13,421

Other
33,024

34,128

 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Total assets
743,404

747,825


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












2

Table of Contents








 
(Thousands of Dollars and Shares, Except Per Share Data)
December 27
2015

September 27
2015

 
 
 
LIABILITIES AND EQUITY
 
 
 
 
 
Current liabilities:
 
 
Current maturities of long-term debt
26,135

25,000

Accounts payable
18,013

20,113

Compensation and other accrued liabilities
20,721

27,055

Accrued interest
13,436

4,184

Unearned revenue
28,824

28,929

Total current liabilities
107,129

105,281

Long-term debt, net of current maturities
677,861

700,872

Pension obligations
51,152

52,522

Postretirement and postemployment benefit obligations
10,689

11,060

Deferred income taxes
28,679

22,137

Income taxes payable
5,093

4,856

Other
9,594

9,680

Total liabilities
890,197

906,408

Equity (deficit):
 
 
Stockholders' equity (deficit):
 
 
Serial convertible preferred stock, no par value; authorized 500 shares; none issued


Common Stock, $0.01 par value; authorized 120,000 shares; issued and outstanding:
555

547

December 27, 2015; 55,499 shares;
 
 
September 27, 2015; 54,679 shares
 
 
Class B Common Stock, $2 par value; authorized 30,000 shares; none issued


Additional paid-in capital
247,862

247,302

Accumulated deficit
(379,729
)
(390,966
)
Accumulated other comprehensive loss
(16,319
)
(16,276
)
Total stockholders' deficit
(147,631
)
(159,393
)
Non-controlling interests
838

810

Total deficit
(146,793
)
(158,583
)
Total liabilities and deficit
743,404

747,825


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


3

Table of Contents

LEE ENTERPRISES, INCORPORATED
CONSOLIDATED STATEMENTS OF INCOME AND COMPREHENSIVE INCOME
(Unaudited)
 
13 Weeks Ended
 
(Thousands of Dollars, Except Per Common Share Data)
December 27
2015

December 28
2014

 
 
 
Operating revenue:
 
 
Advertising and marketing services
105,637

115,830

Subscription
50,430

50,399

Other
12,338

10,981

Total operating revenue
168,405

177,210

Operating expenses:


Compensation
58,665

61,937

Newsprint and ink
6,685

8,846

Other operating expenses
58,869

60,237

Depreciation
4,327

4,616

Amortization of intangible assets
6,616

6,880

Gain on sales of assets, net
(971
)
(257
)
Workforce adjustments
604

211

Total operating expenses
134,795

142,470

Equity in earnings of associated companies
2,799

2,757

Operating income
36,409

37,497

Non-operating income (expense):
 
 
Financial income
76

78

Interest expense
(17,142
)
(18,790
)
Debt financing and administrative costs
(1,333
)
(1,102
)
Other, net
645

(1,178
)
Total non-operating expense, net
(17,754
)
(20,992
)
Income before income taxes
18,655

16,505

Income tax expense
7,147

6,498

Net income
11,508

10,007

Net income attributable to non-controlling interests
(271
)
(254
)
Income attributable to Lee Enterprises, Incorporated
11,237

9,753

Other comprehensive loss, net of income taxes
(43
)
(192
)
Comprehensive income attributable to Lee Enterprises, Incorporated
11,194

9,561

Earnings per common share:
 
 
Basic:
0.21

0.19

Diluted:
0.21

0.18


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

4

Table of Contents

LEE ENTERPRISES, INCORPORATED
CONSOLIDATED STATEMENTS OF CASH FLOWS
(Unaudited)
    
 
13 Weeks Ended
 
(Thousands of Dollars)
December 27
2015

December 28
2014

 
 
 
Cash provided by operating activities:
 
 
Net income
11,508

10,007

Adjustments to reconcile net income to net cash provided by operating activities:
 
 
Depreciation and amortization
10,943

11,496

Gain on sales of assets, net
(971
)
(257
)
Stock compensation expense
570

443

Distributions greater than earnings of MNI
567

638

Deferred income tax expense
6,572

6,289

Debt financing and administrative costs
1,333

1,102

Gain on extinguishment of debt
(525
)

Changes in operating assets and liabilities:
 
 
Increase in receivables
(7,681
)
(9,616
)
Decrease (increase) in inventories and other
(291
)
1,473

Increase in accounts payable, compensation and other accrued liabilities and unearned revenue
162

485

Decrease in pension, postretirement and postemployment benefit obligations
(2,309
)
(1,115
)
Change in income taxes receivable or payable
588

206

Other, net
603

1,139

Net cash provided by operating activities
21,069

22,290

Cash provided by (required for) investing activities:
 
 
Purchases of property and equipment
(1,470
)
(3,547
)
Decrease in restricted cash

441

Proceeds from sales of assets
2,614

315

Distributions less than earnings of TNI
(137
)
(451
)
Other, net

410

Net cash provided by (required for) investing activities
1,007

(2,832
)
Cash provided by (required for) financing activities:
 
 
Proceeds from long-term debt
5,000

3,000

Payments on long-term debt
(26,351
)
(23,250
)
Debt financing costs paid
(44
)
(17
)
Common stock transactions, net
(2
)
48

Net cash required for financing activities
(21,397
)
(20,219
)
Net increase (decrease) in cash and cash equivalents
679

(761
)
Cash and cash equivalents:
 
 
Beginning of period
11,134

16,704

End of period
11,813

15,943


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

5

Table of Contents

LEE ENTERPRISES, INCORPORATED
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)

1
BASIS OF PRESENTATION

The accompanying unaudited, interim, Consolidated Financial Statements included herein have been prepared pursuant to the rules and regulations of the Securities and Exchange Commission for quarterly reports. In the opinion of management, these financial statements contain all adjustments (consisting of only normal recurring items) necessary to present fairly the financial position of Lee Enterprises, Incorporated and subsidiaries (the “Company”) as of December 27, 2015 and their results of operations and cash flows for the periods presented. The Consolidated Financial Statements should be read in conjunction with the Consolidated Financial Statements and Notes thereto included in the Company's 2015 Annual Report on Form 10-K.

Because of seasonal and other factors, the results of operations for the 13 weeks ended December 27, 2015 are not necessarily indicative of the results to be expected for the full year.

References to “we”, “our”, “us” and the like throughout the Consolidated Financial Statements refer to the Company. References to “2016”, “2015” and the like refer to the fiscal years ended the last Sunday in September.

The Consolidated Financial Statements include our accounts and those of our subsidiaries, all of which are wholly-owned, except for our 50% interest in TNI Partners (“TNI”), 50% interest in Madison Newspapers, Inc. (“MNI”) and 82.5% interest in INN Partners, L.C. ("TownNews").

Investments in TNI and MNI are accounted for using the equity method and are reported at cost, plus our share of undistributed earnings since acquisition less, for TNI, amortization of intangible assets.

Subsequent Events

On January 15, 2016, we received payment of $30,645,628 from our insurer for 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 Lee Legacy production facilities. We expect to record a gain on the transaction in the quarter ended March 27, 2016. Of the total proceeds received by the Company, in January 2016, $20,000,000 was used to reduce outstanding debt under our 1st Lien Term Loan (as defined below) and, to the extent permissible and available at a discount, we intend to use some portion of the remaining proceeds to repurchase outstanding Notes (as defined below) in the quarter ending March 27, 2016.

2INVESTMENTS IN ASSOCIATED COMPANIES

TNI Partners
 
In Tucson, Arizona, TNI, acting as agent for our subsidiary, Star Publishing Company (“Star Publishing”), and Citizen Publishing Company (“Citizen”), a subsidiary of Gannett Co. Inc., is responsible for printing, delivery, advertising, and subscription activities of the Arizona Daily Star as well as the related digital platforms and specialty publications. TNI collects all receipts and income and pays substantially all operating expenses incident to the partnership's operations and publication of the newspapers and other media.
 
Income or loss of TNI (before income taxes) is allocated equally to Star Publishing and Citizen.


6

Table of Contents

Summarized results of TNI are as follows:
 
13 Weeks Ended
 
(Thousands of Dollars)
December 27
2015

December 28
2014

 
 
 
Operating revenue
14,782

15,600

Operating expenses, excluding workforce adjustments, depreciation and amortization
11,341

12,102

Workforce adjustments


Operating income
3,441

3,498

Company's 50% share of operating income
1,721

1,749

Less amortization of intangible assets
105

105

Equity in earnings of TNI
1,616

1,644


TNI makes weekly distributions of its earnings and for the 13 weeks ended December 27, 2015 and December 28, 2014 we received $1,479,000 and $1,194,000 in distributions, respectively.

Star Publishing's 50% share of TNI depreciation and certain general and administrative expenses (income) associated with its share of the operation and administration of TNI are reported as operating expenses (benefit) in our Consolidated Statements of Operations and Comprehensive Income. These amounts totaled $(119,000) and $(68,000) in the 13 weeks ended December 27, 2015 and December 28, 2014, respectively.

Annual amortization of intangible assets is estimated to be $418,000 for the periods ending December 2016, 2017, 2018, 2019, and $105,000 in 2020.

Madison Newspapers, Inc.

We have a 50% ownership interest in MNI, which publishes daily and Sunday newspapers, and other publications in Madison, Wisconsin, and other Wisconsin locations, and operates their related digital platforms. Net income or loss of MNI (after income taxes) is allocated equally to us and The Capital Times Company (“TCT”). MNI conducts its business under the trade name Capital Newspapers.

Summarized results of MNI are as follows:
 
13 Weeks Ended
 
(Thousands of Dollars)
December 27
2015

December 28
2014

 
 
 
Operating revenue
17,789

18,657

Operating expenses, excluding workforce adjustments, depreciation and amortization
13,612

14,631

Workforce adjustments

11

Depreciation and amortization
410

464

Operating income
3,767

3,551

Net income
2,358

2,224

Equity in earnings of MNI
1,183

1,112


MNI makes quarterly distributions of its earnings and in each of the 13 weeks ended December 27, 2015 and December 28, 2014, we received dividends of $1,750,000.


7

Table of Contents

3
GOODWILL AND OTHER INTANGIBLE ASSETS

Changes in the carrying amount of goodwill are as follows:
 
13 Weeks Ended

(Thousands of Dollars)
December 27
2015

 
 
Goodwill, gross amount
1,532,458

Accumulated impairment losses
(1,288,729
)
Goodwill, beginning of period
243,729

Goodwill, end of period
243,729


Identified intangible assets consist of the following:
(Thousands of Dollars)
December 27
2015

September 27
2015

 
 
 
Nonamortized intangible assets:
 
 
Mastheads
25,102

25,102

Amortizable intangible assets:
 
 
Customer and newspaper subscriber lists
687,182

687,182

Less accumulated amortization
532,938

526,322

 
154,244

160,860

Noncompete and consulting agreements
28,524

28,524

Less accumulated amortization
28,524

28,524

 


Other intangible assets, net
179,346

185,962


Annual amortization of intangible assets for the 52 week periods ending December 2016, December 2017, the 53 week period ending December 2018 and the 52 week periods ending December 2019 and December 2020 is estimated to be $25,745,000, $22,908,000, $16,653,000, $15,624,000 and $15,163,000, respectively.

4
DEBT

On March 31, 2014, we completed a comprehensive refinancing of our debt (the"2014 Refinancing"), which included the following:

$400,000,000 aggregate principal amount of 9.5% Senior Secured Notes (the “Notes”), pursuant to an Indenture dated as of March 31, 2014 (the “Indenture”).
 
$250,000,000 first lien term loan (the "1st Lien Term Loan") and $40,000,000 revolving facility (the "Revolving Facility") under a First Lien Credit Agreement dated as of March 31, 2014 (together the “1st Lien Credit Facility”).

$150,000,000 second lien term loan under a Second Lien Loan Agreement dated as of March 31, 2014 (the “2nd Lien Term Loan”).

Notes

The Notes are senior secured obligations of the Company and mature on March 15, 2022. At December 27, 2015, the principal balance of the Notes totaled $395,000,000.

Interest

The Notes require payment of interest semiannually on March 15 and September 15 of each year, at a fixed annual rate of 9.5%.  

8

Table of Contents

Redemption

We may redeem some, or all, of the principal amount of the Notes at any time on or after March 15, 2018, as follows:
Period Beginning
Percentage of Principal Amount
 
 
March 15, 2018
104.75
March 15, 2019
102.38
March 15, 2020
100.00

We may redeem up to 35% of the Notes prior to March 15, 2017 at 109.5% of the principal amount using the proceeds of certain future equity offerings.

If we sell certain of our assets or experience specific kinds of changes of control, we must, subject to certain exceptions, offer to purchase the Notes at 101% of the principal amount. Any redemption of the Notes must also satisfy any accrued and unpaid interest thereon.

In the 13 weeks ended December 27, 2015, we purchased $5,000,000 principal amount of Notes in a privately negotiated transaction. The transaction resulted in a $525,000 gain on extinguishment of debt, which is recorded in Other, net non-operating in income (expense) in our Consolidated Statements of Income and Comprehensive Income.

Covenants and Other Matters

The Indenture and the 1st Lien Credit Facility contains restrictive covenants as discussed more fully below. However, certain of these covenants will cease to apply if the Notes are rated investment grade by either Moody’s Investors Service, Inc. or Standard & Poor’s Ratings Group and there is no default or event of default under the Indenture.

1st Lien Credit Facility

The 1st Lien Credit Facility consists of the $250,000,000 1st Lien Term Loan that matures in March 2019 and the $40,000,000 Revolving Facility that matures in December 2018. The 1st Lien Credit Facility documents the primary terms of the 1st Lien Term Loan and the Revolving Facility. The Revolving Facility may be used for working capital and general corporate purposes (including letters of credit). At December 27, 2015, after consideration of letters of credit, we have approximately $32,935,000 available for future use under the Revolving Facility.

Interest

Interest on the 1st Lien Term Loan, which has a principal balance of $169,622,000 at December 27, 2015, accrues, at our option, at either (A) LIBOR plus 6.25% (with a LIBOR floor of 1.0%) or (B) 5.25% plus the higher of (i) the prime rate at the time, (ii) the federal funds rate plus 0.5%, or (iii) one month LIBOR plus 1.0% (with a floor of 2.0%). Interest is payable quarterly.

The 1st Lien Term Loan was funded with an original issue discount of 2.0%, or $5,000,000, which is being amortized as interest expense over the life of the 1st Lien Term Loan.

Interest on the Revolving Facility, which has a principal balance of zero at December 27, 2015, accrues, at our option, at either (A) LIBOR plus 5.5%, or (B) 4.5% plus the higher of (i) the prime rate at the time, (ii) the federal funds rate plus 0.5%, or (iii) one month LIBOR plus 1.0%.

Principal Payments

Quarterly principal payments of $6,250,000 are required under the 1st Lien Term Loan, with other payments made based on 90% of excess cash flow of Lee Legacy ("Lee Legacy Excess Cash Flow"), as defined, or from proceeds of asset sales, as defined, from our subsidiaries other than Pulitzer Inc. ("Pulitzer") and its

9

Table of Contents

subsidiaries (collectively, the "Pulitzer Subsidiaries"). We may voluntarily prepay principal amounts outstanding or reduce commitments under the 1st Lien Credit Facility at any time without premium or penalty, upon proper notice and subject to certain limitations as to minimum amounts of prepayments.

Quarterly, the Company is required to prepare a Lee Legacy Excess Cash Flow calculation, which is generally determined as the cash earnings of our subsidiaries other than the Pulitzer Subsidiaries and is adjusted for changes in working capital, capital spending, debt principal payments and income tax payments or refunds. Any excess cash flow as calculated is required to be paid to the 1st Lien lender 45 days after the end of the quarter.

2016 payments made, or required to be made for the remainder of the year, under the 1st Lien Term Loan are summarized as follows:
 
13 Weeks Ended
13 Weeks Ending
(Thousands of Dollars)
December 27
2015

March 27
2016

June 26
2016

September 25
2016

 
 
 
 
 
Mandatory
6,250

6,250

6,250

6,250

Voluntary
5,000




Asset sales




Excess cash flow

1,135



 
11,250

7,385

6,250

6,250


As discussed in Note 1, in January 2016, we used $20,000,000 of an insurance settlement to reduce outstanding debt under our 1st Lien Term Loan. To the extent permissible and available at a discount, we intend to use some portion of the remaining $10,645,628 to repurchase outstanding Notes in the quarter ending March 27, 2016 or make voluntary payments on the 1st Lien Term Loan.

Covenants and Other Matters

The 1st Lien Credit Facility requires that we comply with certain affirmative and negative covenants customary for financing of this nature, including a maximum total leverage ratio, which is only applicable to the Revolving Facility. 

The 1st Lien Credit Facility restricts us from paying dividends on our Common Stock. This restriction no longer applies if Lee Legacy leverage is below 3.25x before and after such payments. Further, the 1st Lien Credit Facility restricts or limits, among other things, subject to certain exceptions, the ability of the Company and its subsidiaries to: (i) incur indebtedness, (ii) enter into mergers, acquisitions and asset sales, (iii) incur or create liens and (iv) enter into transactions with certain affiliates. The 1st Lien Credit Facility contains various representations and warranties and may be terminated upon occurrence of certain events of default. The 1st Lien Credit Facility also contains cross-default provisions tied to the terms of each of the Indenture and 2nd Lien Term Loan.

2nd Lien Term Loan

The 2nd Lien Term Loan, which has a balance of $139,374,000 at December 27, 2015, bears interest at a fixed annual rate of 12.0%, payable quarterly, and matures in December 2022.

Principal Payments

There are no scheduled mandatory amortization payments required under the 2nd Lien Term Loan.

Quarterly, we are required to prepare a calculation of excess cash flow of the Pulitzer Subsidiaries ("Pulitzer Excess Cash Flow"). Pulitzer Excess Cash Flow is generally determined as the cash earnings of the Pulitzer Subsidiaries adjusted for changes in working capital, capital spending, debt principal payments and income tax payments. Pulitzer Excess Cash Flow also includes a deduction for interest costs incurred under the 2nd Lien Term Loan. Changes to settlement of certain intercompany costs between the Company and Pulitzer

10

Table of Contents

have been affected, with the net result being a reduction in the excess cash flows of Pulitzer from historically reported levels.

Under the 2nd Lien Term Loan, subject to certain other conditions, Pulitzer Excess Cash Flow must be used, (a) prior to March 31, 2017, to make an offer to the 2nd Lien Lenders to prepay amounts under the 2nd Lien Term Loan at par (which offer the 2nd Lien Lenders may accept or reject; if rejected we may use the Pulitzer Excess Cash Flow to prepay amounts under the 1st Lien Credit Facility or repurchase Notes in the open market), and (b) after March 31, 2017, to pay such amounts under the 2nd Lien Term Loan at par. In November 2015, $3,326,000 of the September 2015 excess cash flow payment was not rejected and according to the 2nd Lien Term Loan was prepaid at par. Pulitzer Excess Cash Flow for the December 2015 quarter totaled $2,864,000 and was offered to the 2nd Lien lenders in February 2016.

Subject to certain other conditions in the 2nd Lien Term Loan, the balance of the 2nd Lien Term Loan will be repaid at par from proceeds from asset sales by Pulitzer Inc and its subsidiaries that are not reinvested. In 2015, we repaid $5,000,000 of the 2nd Lien Term Loan, at par, due to the sale of real estate at one of our Pulitzer properties. For the 13 weeks ended December 27, 2015, we repaid $2,300,000 on the 2nd Lien Term Loan, at par, with net proceeds from the sale of Pulitzer assets.

Voluntary payments under the 2nd Lien Term Loan are subject to call premiums as follows:
Period Beginning
Percentage of Principal Amount
 
 
March 31, 2014
112
March 31, 2017
106
March 31, 2018
103
March 31, 2019
100

Covenants and Other Matters

The 2nd Lien Term Loan requires that we comply with certain affirmative and negative covenants customary for financing of this nature, including the negative covenants under the 1st Lien Credit Facility discussed above. The 2nd Lien Term Loan contains various representations and warranties and may be terminated upon occurrence of certain events of default. The 2nd Lien Term Loan also contains cross-default provisions tied to the terms of the Indenture and 1st Lien Credit Facility.

In connection with the 2nd Lien Term Loan, we entered into a Warrant Agreement dated as of March 31, 2014 (the “Warrant Agreement”). Under the Warrant Agreement, certain affiliates or designees of the 2nd Lien Lenders received on March 31, 2014 their pro rata share of warrants to purchase, in cash, an initial aggregate of 6,000,000 shares of Common Stock, subject to adjustment pursuant to anti-dilution provisions (the “Warrants”). The Warrants represent, when fully exercised, approximately 10.1% of shares of Common Stock outstanding at March 30, 2014 on a fully diluted basis. The exercise price of the Warrants is $4.19 per share.

The Warrant Agreement contains a cash settlement provision in the event of a change of control prior to March 31, 2018 as well as other provisions requiring the Warrants to be measured at fair value and included in other liabilities in our Consolidated Balance Sheets. We remeasure the fair value of the liability each reporting period, with changes reported in other, net non-operating income (expense). The initial fair value of the Warrants was $16,930,000. See Note 9.

In connection with the issuance of the Warrants, we entered into a Registration Rights Agreement dated as of March 31, 2014 (the “Registration Rights Agreement”). The Registration Rights Agreement requires, among other matters, that we use our commercially reasonable efforts to maintain the effectiveness for certain specified periods of a shelf registration statement related to the shares of Common Stock to be issued upon exercise of the Warrants.

Security

The Notes and the 1st Lien Credit Facility are fully and unconditionally guaranteed on a joint and several first-priority basis by each of the Company's material domestic subsidiaries, excluding MNI, the Pulitzer Subsidiaries

11

Table of Contents

and TNI (the "Lee Legacy Assignors"), pursuant to a first lien guarantee and collateral agreement dated as of March 31, 2014 (the "1st Lien Guarantee and Collateral Agreement").

The Notes, the 1st Lien Credit Facility and the subsidiary guarantees are secured, subject to certain exceptions, priorities and limitations, by perfected security interests in all property and assets, including certain real estate, of the Lee Legacy Assignors, other than the capital stock of MNI and any property and assets of MNI (the “Lee Legacy Collateral”), on a first-priority basis, equally and ratably with all of the Lee Legacy Assignors' existing and future obligations. The Lee Legacy Collateral includes, among other things, equipment, inventory, accounts receivables, depository accounts, intellectual property and certain of their other tangible and intangible assets.

Also, the Notes and the 1st Lien Credit Facility are secured, subject to certain exceptions, priorities and limitations in the various agreements, by first-priority security interests in the capital stock of, and other equity interests owned by, the Lee Legacy Assignors (excluding the capital stock of MNI). The Notes and 1st Lien Credit Facility are subject to a Pari Passu Intercreditor Agreement dated March 31, 2014.

The Notes, the 1st Lien Credit Facility and the subsidiary guarantees are also secured, subject to permitted liens, by a second-priority security interest in the property and assets of the Pulitzer Subsidiaries that become subsidiary guarantors (the "Pulitzer Assignors") other than assets of or used in the operations or business of TNI (collectively, the “Pulitzer Collateral”). In June 2015 the Pulitzer Assignors became a party to the 1st Lien Guarantee and Collateral Agreement on a second lien basis.

Also, the Notes and the 1st Lien Credit Facility are secured, subject to certain exceptions, priorities, and limitations in the various agreements, by second-priority security interests in the capital stock of, and other equity interests in, the Pulitzer Assignors and Star Publishing’s interest in TNI.

The 2nd Lien Term Loan is fully and unconditionally guaranteed on a joint and several first-priority basis by the Pulitzer Assignors, pursuant to a Second Lien Guarantee and Collateral Agreement dated as of March 31, 2014 (the “2nd Lien Guarantee and Collateral Agreement”) among the Pulitzer Assignors and the 2nd Lien collateral agent.

Under the 2nd Lien Guarantee and Collateral Agreement, the Pulitzer Assignors have granted (i) first-priority security interests, subject to certain priorities and limitations in the various agreements, in the Pulitzer Collateral and (ii) have granted first-priority lien mortgages or deeds of trust covering certain real estate, as collateral for the payment and performance of their obligations under the 2nd Lien Term Loan.

Also, under the 2nd Lien Guarantee and Collateral Agreement, the Lee Legacy Assignors have granted (i) second-priority security interests, subject to certain priorities and limitations in the various agreements, in the Lee Legacy Collateral, and (ii) have granted second-priority lien mortgages or deeds of trust covering certain real estate, as collateral for the payment and performance of their obligations under the 2nd Lien Term Loan. Assets of, or used in the operations or business of, MNI are excluded.

The rights of each of the collateral agents with respect to the Lee Legacy Collateral and the Pulitzer Collateral are subject to customary intercreditor and intercompany agreements.

Other

We incurred $30,931,000 of fees and expenses related to the 2014 Refinancing, including a $1,750,000 premium (1% of the principal amount) related to the redemption of the previous 2nd lien agreement and $5,000,000 original issue discount on the 1st Lien Term Loan. We recognized an original issue discount of $16,930,000 on the 2nd Lien Term Loan related to the Warrants. Certain of the unamortized present value adjustments, the new fees and expenses and a portion of the value of the Warrants were charged to expense upon completion of the 2014 Refinancing while the remainder of such costs have been capitalized and are being amortized over the lives of the respective debt agreements.

Amortization of debt financing costs totaled $1,064,000 in the 13 weeks ended December 27, 2015. Amortization of such costs is estimated to total $4,220,000 in 2016, $4,364,000 in 2017, $4,476,000 in 2018, $4,235,000 in 2019 and $4,171,000 in 2020. At December 27, 2015 we have $30,557,000 of unamortized debt financing costs in our Consolidated Balance Sheets.


12

Table of Contents

Debt is summarized as follows:
 
 
 
Interest Rates (%)
(Thousands of Dollars)
December 27
2015

September 27
2015

December 27
2015
 
 
 
 
Revolving Facility


5.65
1st Lien Term Loan
169,622

180,872

7.25
Notes
395,000

400,000

9.50
2nd Lien Term Loan
139,374

145,000

12.00
 
703,996

725,872

 
Less current maturities of long-term debt
26,135

25,000

 
Total long-term debt
677,861

700,872

 
 
At December 27, 2015, our weighted average cost of debt, excluding amortization of debt financing costs, is 9.5%.

Aggregate minimum required maturities of debt excluding amounts required to be paid from excess cash flow requirements at December 27, 2015 total $19,885,000 for the remainder of 2016, $25,000,000 in 2017, $25,000,000 in 2018, $99,737,000 in 2019, $0 in 2020 and $534,374,000 thereafter.

Liquidity
 
At December 27, 2015, after consideration of letters of credit, we have approximately $32,935,000 available for future use under our Revolving Facility. Including cash, our liquidity at December 27, 2015 totals $44,748,000. 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 subject to a reduction for any amounts the Company may elect to use to repay our 1st Lien Term Loan and/or the Notes.

The 2014 Refinancing significantly improved our debt maturity profile. Final maturities of our debt have been extended to dates from December 2018 through December 2022. As a result, we believe refinancing risk has been substantially reduced for the next several years.

There are numerous potential consequences under the Notes, 1st Lien Credit Facility and 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 and 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 to repay, refinance or amend our debt agreements as they become due. 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 December 27, 2015.

5
PENSION, POSTRETIREMENT AND POSTEMPLOYMENT DEFINED BENEFIT PLANS

We have several noncontributory defined benefit pension plans that together cover selected employees. Benefits under the plans were generally based on salary and years of service. Effective in 2012, substantially all benefits are frozen and only a small amount of additional benefits are being accrued. Our liability and related expense for benefits under the plans are recorded over the service period of employees based upon annual actuarial calculations. Plan funding strategies are influenced by government regulations. Plan assets consist primarily of domestic and foreign corporate equity securities, government and corporate bonds, hedge fund investments and cash.
 

13

Table of Contents

In addition, we provide retiree medical and life insurance benefits under postretirement plans at several of our operating locations. The level and adjustment of participant contributions vary depending on the specific plan. In addition, one of our Pulitzer Subsidiaries, St. Louis Post-Dispatch LLC, provides postemployment disability benefits to certain employee groups prior to retirement. Our liability and related expense for benefits under the postretirement plans are recorded over the service period of active employees based upon annual actuarial calculations. We accrue postemployment disability benefits when it becomes probable that such benefits will be paid and when sufficient information exists to make reasonable estimates of the amounts to be paid. Postretirement medical plan assets may also be used to fund current medical costs of certain active employees.
 
We use a fiscal year end measurement date for all of our pension and postretirement medical plan obligations.
 
The net periodic postretirement cost (benefit) components for our postretirement plans are as follows:
PENSION PLANS
13 Weeks Ended
 
(Thousands of Dollars)
December 27
2015

December 28
2014

 
 
 
Service cost for benefits earned during the period
49

226

Interest cost on projected benefit obligation
1,515

1,859

Expected return on plan assets
(2,174
)
(2,466
)
Amortization of net loss
599

420

Amortization of prior service benefit
(34
)
(34
)
Pension expense (benefit)
(45
)
5

 
 
 
POSTRETIREMENT MEDICAL PLANS
13 Weeks Ended
 
(Thousands of Dollars)
December 27
2015

December 28
2014

 
 
 
Service cost for benefits earned during the period
16

39

Interest cost on projected benefit obligation
156

211

Expected return on plan assets
(331
)
(361
)
Amortization of net gain
(273
)
(347
)
Amortization of prior service benefit
(365
)
(365
)
Postretirement medical benefit
(797
)
(823
)

Amortization of net gains (losses) and prior service benefits are recorded as compensation in the Consolidated Statements of Operations and Comprehensive Operations.

In the 13 weeks ended December 27, 2015 we contributed $744,000 to our pension plans. Based on our forecast at December 27, 2015, we expect to contribute $5,037,000 to our pension plans for the remainder of 2016. Based on our forecast at December 27, 2015, we do not expect to contribute to our postretirement medical plans for the remainder of 2016.

6
INCOME TAXES

We recorded income tax expense of $7,147,000 related to income before taxes of $18,655,000 for the 13 weeks ended December 27, 2015. For the 13 weeks ended December 28, 2014, we recorded $6,498,000 in income tax expense related to income taxes before taxes of $16,505,000. The effective income tax rates for the 13 weeks ended December 27, 2015 and December 28, 2014 were 38.3% and 39.4%, respectively. The primary differences between these rates and the U.S. federal statutory rate of 35% are due to the effect of state taxes, non-deductible expenses, adjustments to reserves for uncertain tax positions, including any related interest, and mark-to-market adjustments to value the Warrants.

We file a consolidated federal tax return, as well as combined and separate tax returns in approximately 27 state and local jurisdictions. We have various income tax examinations ongoing which are at different stages

14

Table of Contents

of completion, but generally our income tax returns have been audited or closed to audit through 2009. See Note 10 for a discussion of our tax audits.

Due to our federal and state net operating loss carryforwards and based on historical levels of performance, we do not expect any significant income tax payments in the current year.

7
EARNINGS PER COMMON SHARE

The following table sets forth the computation of basic and diluted earnings per common share:
 
13 Weeks Ended
 
(Thousands of Dollars and Shares, Except Per Share Data)
December 27
2015

December 28
2014

 
 
 
Income attributable to Lee Enterprises, Incorporated:
11,237

9,753

Weighted average common shares
54,856

53,913

Less weighted average restricted Common Stock
(1,716
)
(1,442
)
Basic average common shares
53,140

52,471

Dilutive stock options and restricted Common Stock
718

1,483

Diluted average common shares
53,858

53,954

Earnings per common share:
 
 
Basic
0.21

0.19

Diluted
0.21

0.18


For the 13 weeks December 27, 2015 and December 28, 2014, 7,684,000 and 6,254,000 weighted average shares, respectively, were not considered in the computation of diluted earnings per common share because the exercise prices of the related stock options and Warrants were in excess of the fair market value of our Common Stock.

8
STOCK OWNERSHIP PLANS

A summary of stock option activity during the 13 weeks ended December 27, 2015 follows:
(Thousands of Dollars and Shares, Except Per Share Data)
Shares

Weighted
Average
Exercise
Price

Weighted
Average
Remaining
Contractual
Term (Years)
Aggregate
Intrinsic
Value

 
 
 
 
 
Outstanding, September 27, 2015
1,871

2.71

 
 
Exercised
(3
)
1.13

 
 
Cancelled
(27
)
23.17

 
 
Outstanding, December 27, 2015
1,841

2.41

5.1
455

 
 
 
 
 
Exercisable, December 27, 2015
1,814

2.42

5.1
445


Total unrecognized compensation expense for unvested stock options as of December 27, 2015 is $12,000, which will be recognized over a weighted average period of 0.4 years.


15

Table of Contents

Restricted Common Stock

The table below summarizes restricted Common Stock activity during the 13 weeks ended December 27, 2015.
(Thousands of Shares, Except Per Share Data)
Shares

Weighted
Average
Grant Date
Fair Value

 
 
 
Outstanding, September 27, 2015
1,546

3.62

Vested
(8
)
3.62

Granted
868

1.53

Cancelled
(47
)
3.63

Outstanding, December 27, 2015
2,359

2.84

Total unrecognized compensation expense for unvested restricted Common Stock at December 27, 2015 is $3,762,000, which will be recognized over a weighted average period of 2.1 years.
9
FAIR VALUE MEASUREMENTS

We utilize FASB ASC Topic 820, Fair Value Measurements and Disclosures, to measure and report fair value. FASB ASC Topic 820 defines fair value, establishes a framework for measuring fair value and expands disclosures about fair value measurements. FASB ASC Topic 820 establishes a three-level hierarchy of fair value measurements based on whether the inputs to those measurements are observable or unobservable, which consists of the following levels:
 
Level 1 - Quoted prices for identical instruments in active markets.

Level 2 - Quoted prices for similar instruments in active markets; quoted prices for identical or similar instruments in markets that are not active; and model-derived valuations in which all significant inputs are observable in active markets.

Level 3 - Valuations derived from valuation techniques in which one or more significant inputs are unobservable.
 
The following methods and assumptions are used to estimate the fair value of each class of financial instruments for which it is practicable to estimate value.

The carrying amounts of cash equivalents, accounts receivable and accounts payable approximate fair value because of the short maturity of those instruments. Investments totaling $6,359,000, including our 17% ownership of the nonvoting common stock of TCT, are carried at cost. As of September 27, 2015, the most recent data available, the approximate fair value of our private equity investment is $7,100,000, which is a level 3 fair value measurement.

The fair value of floating rate debt, which consists of our 1st Lien Term Loan, is $167,000,000, based on an average of private market price quotations. Our fixed rate debt consists of $395,000,000 principal amount of the Notes and $139,374,000 principal amount under the 2nd Lien Term Loan. At December 27, 2015, based on private market price quotations the fair values were $358,000,000 and $144,000,000 for the Notes and 2nd Lien Term Loan, respectively. These represent level 2 fair value measurements.

As discussed more fully in Note 4, we recorded a liability for the Warrants issued in connection with the Warrant Agreement. The liability was initially measured at its fair value. We remeasure the liability to fair value each reporting period, with changes reported in other non-operating income (expense). The initial fair value of the Warrants was $16,930,000. The fair value of Warrants at September 27, 2015 and December 27, 2015 is$4,240,000 and $4,167,000, respectively. Fair value is determined using the Black-Scholes option pricing model. These represent level 2 fair value measurements.


16

Table of Contents

10
COMMITMENTS AND CONTINGENT LIABILITIES

Income Taxes

Commitments exclude unrecognized tax benefits to be recorded in accordance with FASB ASC Topic 740, Income Taxes. We are unable to reasonably estimate the ultimate amount or timing of cash settlements with the respective taxing authorities for such matters. See Note 6.

We file income tax returns with the Internal Revenue Service and various state tax jurisdictions. From time to time, we are subject to routine audits by those agencies and those audits may result in proposed adjustments. We have considered the alternative interpretations that may be assumed by the various taxing agencies, believe our positions taken regarding our filings are valid, and that adequate tax liabilities have been recorded to resolve such matters. However, the actual outcome cannot be determined with certainty and the difference could be material, either positively or negatively, to the Consolidated Statements of Operations and Comprehensive Income (Loss) in the periods in which such matters are ultimately determined. We do not believe the final resolution of such matters will be material to our consolidated financial position or cash flows.

We have various income tax examinations ongoing and at various stages of completion, but generally our income tax returns have been audited or closed to audit through 2009.

Legal Proceedings

We are involved in a variety of other legal actions that arise in the normal course of business. Insurance coverage mitigates potential loss for certain of these other matters. While we are unable to predict the ultimate outcome of these other legal actions, it is our opinion that the disposition of these matters will not have a material adverse effect on our Consolidated Financial Statements, taken as a whole.

Multiemployer Pension Plans

One of our enterprise's bargaining units withdrew from representation, and as a result we are subject to a future claim from the multiemployer pension plan for a withdrawal liability. The amount and timing of such liability will be dependent on actions taken, or not taken, by the Company and the pension plan, as well as the future investment performance and funding status of the pension plan. Any withdrawal liability determined to be due under this plan will be funded over a period of 20 years.

11
RECENTLY ADOPTED ACCOUNTING PRONOUNCEMENTS

In November 2015, the Financial Accounting Standards Board issued an amendment to Accounting Standards Codification Standard 740: Income Taxes related to the classification of net deferred tax assets and liabilities. Deferred tax liabilities and assets are classified as current or noncurrent based on the classification of the related asset or liability for financial reporting. To simplify the presentation of deferred income taxes, the amendment requires that deferred income tax liabilities and assets be classified as noncurrent in our Consolidated Balance Sheets. We elected to early adopt this standard in the 13 weeks ended December 27, 2015 and have applied this standard retrospectively. As a result, we have reclassified $15,659,000 of current assets to a reduction of the long-term deferred tax liability in the September 27, 2015 Consolidated Balance Sheet.

Item 2.       Management's Discussion and Analysis of Financial Condition and Results of Operations

The following discussion includes comments and analysis relating to our results of operations and financial condition as of and for the 13 weeks ended December 27, 2015. This discussion should be read in conjunction with the Consolidated Financial Statements and related Notes thereto, included herein, and our 2015 Annual Report on Form 10-K.

NON-GAAP FINANCIAL MEASURES

No non-GAAP financial measure should be considered as a substitute for any related GAAP financial measure. However, we believe the use of non-GAAP financial measures provides meaningful supplemental information with which to evaluate our financial performance, or assist in forecasting and analyzing future periods. We also believe such non-

17

Table of Contents

GAAP financial measures are alternative indicators of performance used by investors, lenders, rating agencies and financial analysts to estimate the value of a publishing business and its ability to meet debt service requirements.
 
The non-GAAP financial measures utilized by us are defined as follows:

Adjusted EBITDA is defined as operating income (loss), plus depreciation, amortization, loss (gain) on sale of assets, impairment charges, workforce adjustment costs, stock compensation and our 50% share of EBITDA from TNI and MNI, minus equity in earnings of TNI and MNI and curtailment gains.

Adjusted Income (Loss) and Adjusted Earnings (Loss) Per Common Share are defined as income (loss) attributable to Lee Enterprises, Incorporated and earnings (loss) per common share adjusted to exclude both unusual matters and those of a substantially non-recurring nature.

Cash Costs are defined as compensation, newsprint and ink, other operating expenses and certain unusual matters, such as workforce adjustment costs. Depreciation, amortization, impairment charges, other non-cash operating expenses and other unusual matters are excluded. Cash costs are also presented excluding workforce adjustments.

EBITDA is defined as operating income (loss), plus depreciation, amortization, loss (gain) on sale of assets, impairment charges and our 50% share of EBITDA from TNI and MNI, minus equity in earnings of TNI and MNI and curtailment gains.

Operating Cash Flow is defined as operating income (loss), plus depreciation, amortization, loss (gain) on sale of assets and impairment charges, minus equity in earnings of TNI and MNI and curtailment gains. Operating Cash Flow margin is defined as operating cash flow divided by operating revenue.

Unlevered Free Cash Flow is defined as operating income (loss), plus depreciation, amortization, loss (gain) on sale of assets, impairment charges, stock compensation, distributions from TNI and MNI and cash income tax refunds, minus equity in earnings of TNI and MNI, curtailment gains, cash income taxes, pension contributions and capital expenditures. Changes in working capital, asset sales, minority interest and discontinued operations are excluded. Free Cash Flow also includes financial income, interest expense and debt financing and administrative costs.

Tables reconciling operating cash flow, operating cash flow margin, EBITDA, adjusted EBITDA, unlevered free cash flow and free cash flow to operating income (loss), the most directly comparable measure under GAAP, are set forth in Item 2, included herein, under the caption "Selected Consolidated Financial Information".

Reconciliations of adjusted income (loss) and adjusted earnings (loss) per common share to income (loss) attributable to Lee Enterprises, Incorporated and earnings (loss) per common share, respectively, the most directly comparable measures under GAAP, are set forth in Item 2, included herein, under the caption “Overall Results”.

The subtotals of operating expenses representing cash costs can be found in tables in Item 2, included herein, under the captions “13 Weeks Ended December 27, 2015".

We also present selected information for Lee Legacy and Pulitzer. Lee Legacy constitutes the business of the Company, including MNI, but excluding Pulitzer and TNI. See “Selected Lee Legacy Financial Information” and “Selected Pulitzer Financial Information” in Item 2, included herein.

CRITICAL ACCOUNTING POLICIES

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

We base our estimates on historical experience and on various other assumptions that are believed to be reasonable under the circumstances, the results of which form the basis for making judgments about the carrying values of assets

18

Table of Contents

and liabilities that are not readily apparent from other sources. Actual results may differ from these estimates under different assumptions or conditions.
Our critical accounting policies include the following:
 
Goodwill and other intangible assets;
Pension, postretirement and postemployment benefit plans;
Income taxes;
Revenue recognition; and
Uninsured risks.

Additional information regarding these critical accounting policies can be found under the caption “Management's Discussion and Analysis of Financial Condition and Results of Operations” in our 2015 Annual Report on Form 10-K.

IMPACT OF RECENTLY ISSUED ACCOUNTING STANDARDS

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

In August 2014, the FASB issued a new going concern standard. The new standard changes the period that companies use to evaluate their ability to meet obligations to a look-forward period of one year from the financial statement issuance date, from one year from the balance sheet date. The new standard also changes disclosure requirements. The adoption of the new standard is required in 2017. We do not expect the adoption of this standard to have a material impact on our Consolidated Financial Statements, taken as a whole.

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

EXECUTIVE OVERVIEW

Lee Enterprises, Incorporated is a leading provider of local news and information, and a major platform for advertising, in the markets we serve, which are located primarily in the Midwest, Mountain West and West regions of the United States. With the exception of St. Louis, Missouri, our 50 daily newspaper markets, across 22 states, are principally midsize or small. Through our print and digital platforms, we reach an overwhelming majority of adults in our markets.

Our products include:

50 daily and 38 Sunday newspapers with subscribers totaling 1.0 million and 1.4 million, respectively, read by over three million people in print; and

Nearly 300 weekly newspapers and classified and niche publications.

Our markets have established retail bases, and most are regional shopping hubs. We are located in four state capitals. Six of our top ten markets by revenue include major universities, and seven are home to major corporate headquarters. Based on data from the Bureau of Labor of Statistics as of November 2015, the unemployment rate in five of our top ten markets by revenue was lower than the national average. We believe that all of these factors have had a positive impact on advertising revenue. Community newspapers and their associated digital media remain a valuable source of local news and information to readers and an effective means for local advertisers to reach their customers. We believe our audiences across these communities tend to be loyal readers that actively seek our content and serve as an attractive target for our advertisers.


19

Table of Contents

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

Our primary source of revenue is advertising and marketing services, followed by subscription revenue. Over the last several years, the advertising industry has experienced a shift from print and other traditional media towards digital advertising as readership has also shifted from print to digital. This trend in traditional print advertising and readership was compounded by the effects of the last recession, and such trend continues to impact our print advertising and marketing services revenue. In addition, our printed newspaper paid subscription and single copy unit sales have declined. We have attempted to offset our declines in print advertising and marketing services revenue and print subscription revenue with our efforts to grow our digital advertising revenue and also increase subscription rates, including full access, and increase the number of paid digital subscribers.

In April 2014, we began to implement a full access subscription model, which provides subscribers with complete digital access, including desktop, mobile, tablet and replica editions. These are offered as packages with print home delivery or as digital-only subscriptions, with subscription rates reflective of the expanded access. Due to the timing of the rollout and staggered subscriber renewal dates, the bulk of the revenue increase from this initiative was realized in 2015.

We continue to transform our business model and carefully manage our costs to maintain high cash flows and margins.

IMPAIRMENT OF GOODWILL AND OTHER ASSETS

We have significant amounts of goodwill and identified intangible assets. Since 2007 we have recorded impairment charges totaling almost $1.3 billion to reduce the value of certain of these assets. Should general economic, market or business conditions decline, and have a negative impact on our stock price or projected future cash flows, we may be required to record additional impairment charges in the future. Such charges would not impact our cash flows or debt covenant compliance.

DEBT AND LIQUIDITY

We have a substantial amount of debt, as discussed more fully (and certain capitalized terms used below defined) in Note 4 of the Notes to Consolidated Financial Statements, included herein. Since February 2009, we have satisfied all interest payments and substantially all principal payments due under our debt facilities with our cash flows and asset sales.

As of December 27, 2015, our debt consists of the following:

$400,000,000 aggregate principal amount of 9.5% Senior Secured Notes (the “Notes”), pursuant to an Indenture dated as of March 31, 2014 (the “Indenture”), of which $395,000,000 is outstanding at December 27, 2015 and
 
$250,000,000 first lien term loan (the "1st Lien Term Loan") and $40,000,000 revolving facility (the "Revolving Facility") under a First Lien Credit Agreement dated as of March 31, 2014 (together, the “1st Lien Credit Facility”), of which $169,622,000 is outstanding at December 27, 2015; and

$150,000,000 second lien term loan under a Second Lien Loan Agreement dated as of March 31, 2014 (the “ 2nd Lien Term Loan”), of which $139,374,000 is outstanding at December 27, 2015.

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

At December 27, 2015, after consideration of letters of credit, we have approximately $32,935,000 available for future use under our Revolving Facility. Including cash, our liquidity at December 27, 2015 totals $44,748,000. This liquidity amount excludes any future cash flows. Our unlevered free cash flow has been strong for the last seven years and has exceeded $149,000,000 in each year from 2011 through the last twelve months ended December 27, 2015, but there can be no assurance that such cash flows will continue. We expect all interest and principal payments due in

20

Table of Contents

the next twelve months will be satisfied by our cash flows from operations and certain asset sales, which will allow us to maintain an adequate level of liquidity.

At December 27, 2015, the principal amount of our outstanding debt totaled $703,996,000. For the last twelve months ended December 27, 2015, the principal amount of our debt, net of cash, is 4.3 times our adjusted EBITDA, compared to a ratio of 4.7 at December 28, 2014.

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

There are numerous potential consequences under the Notes, 1st Lien Credit Facility and 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 and 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 to repay, refinance or amend our debt agreements as they become due, if necessary. The Notes, 1st Lien Credit Facility and 2nd Lien Term Loan have only limited affirmative covenants with which we are required to maintain compliance. We are in compliance with our debt covenants at December 27, 2015.

On January 15, 2016, we received payment of $30,645,628 from our insurer for 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 Lee Legacy production facilities. We expect to record a gain on the transaction in the quarter ended March 27, 2016. Of the total proceeds received by the Company, in January 2016, $20,000,000 was used to reduce outstanding debt under our 1st Lien Term Loan and, to the extent permissible and available at a discount, we intend to use some portion of the remaining proceeds to repurchase outstanding Notes in the quarter ending March 27, 2016.

Due to our federal and state net operating loss carryforwards and based on historical levels of performance, we do not expect any significant income tax payments in the current year.


21

Table of Contents

13 WEEKS ENDED DECEMBER 27, 2015

Operating results, as reported in the Consolidated Financial Statements, are summarized below.
 
13 Weeks Ended
 
(Thousands of Dollars, Except Per Share Data)
December 27
2015

December 28
2014

Percent
Change

 
 
 
 
Advertising and marketing services revenue:
 
 
 
Retail
70,587

77,083

(8.4
)
Classified
25,358

29,279

(13.4
)
National
6,746

7,151

(5.7
)
Niche publications and other
2,946

2,317

27.1

Total advertising and marketing services revenue
105,637

115,830

(8.8
)
Subscription
50,430

50,399

0.1

Digital services
3,316

3,136

5.7

Commercial printing
3,226

2,816

14.6

Other
5,796

5,029

15.3

Total operating revenue
168,405

177,210

(5.0
)
Operating expenses:
 
 
 
Compensation
58,665

61,937

(5.3
)
Newsprint and ink
6,685

8,846

(24.4
)
Other operating expenses
58,869

60,237

(2.3
)
Workforce adjustments
604

211

NM

Cash costs
124,823

131,231

(4.9
)
Operating cash flow
43,582

45,979

(5.2
)
Depreciation and amortization
10,943

11,496

(4.8
)
Gain on sales of assets, net
(971
)
(257
)
NM

Equity in earnings of associated companies
2,799

2,757

1.5

Operating income
36,409

37,497

(2.9
)
Non-operating expense, net
(17,754
)
(20,992
)
(15.4
)
Income before income taxes
18,655

16,505

13.0

Income tax expense
7,147

6,498

10.0

Net income
11,508

10,007

15.0

Net income attributable to non-controlling interests
(271
)
(254
)
6.7

Income attributable to Lee Enterprises, Incorporated
11,237

9,753

15.2

Other comprehensive loss, net of income taxes
(43
)
(192
)
(77.6
)
Comprehensive income attributable to Lee Enterprises, Incorporated
11,194

9,561

17.1

Earnings per common share:
 
 
 
Basic
0.21

0.19

15.8

Diluted
0.21

0.18

16.7


References to the "2016 Quarter" refer to the 13 weeks ended December 27, 2015. Similarly, references to the "2015 Quarter" refer to the 13 weeks ended December 28, 2014.

Total operating revenue decreased $8,805,000, or 5.0%, in the 2016 Quarter, compared to the 2015 Quarter. Including digital advertising, subscription, digital services, commercial printing and other revenue, approximately 50.2% of our revenue comes from growing categories.

Advertising and Marketing Services Revenue

In the 2016 Quarter, advertising and marketing services revenue decreased $10,193,000, or 8.8%, compared to the 2015 Quarter. Retail advertising decreased 8.4%. The decrease in advertising and marketing services revenue is due to reduced advertising volume primarily from major retail and big box stores. Digital retail advertising on a stand-alone basis, which is the largest digital advertising category, increased 12.8%, partially offsetting print declines.


22

Table of Contents

Classified revenue decreased 13.4% in the 2016 Quarter as we continue to experience a reduction in print advertising in automotive, employment and real estate in most of our markets. Digital classified revenue on a stand-alone basis decreased 8.9%.

National advertising decreased $405,000, or 5.7%. Digital national advertising on a stand-alone basis increased 22.2% as a result of improved inventory management of available ad positions offered on the national advertising exchanges and improved pricing. Advertising in niche publications and other increased $629,000, or 27.1%, mainly attributed to increases for creative services charges.

Digital advertising and marketing services revenue increased 7.2% to $21,758,000 in the 2016 Quarter, representing 20.6% of total advertising and marketing services revenue. Print advertising, including preprints and print marketing services revenue decreased 12.2%.

Subscription and Other Revenue

Subscription revenue increased $31,000, or 0.1%, in the 2016 Quarter.

Our average daily newspaper circulation, including TNI, MNI and digital subscribers, totaled 1.0 million in the 2016 Quarter. Sunday circulation totaled 1.4 million.
 
Commercial printing revenue increased $410,000, or 14.6%, in the 2016 Quarter due to new customers and increased volume for existing customers at several of our largest markets. Digital services revenue increased $180,000, or 5.7%, largely due to TownNews.com, which generates the vast majority of its revenue from content management services but is expanding into digital ad agency services for web, mobile and social products at our properties as well as 1,600 other newspapers, and media operations. Other revenue increased $767,000, or 15.3%, in the 2016 Quarter due to a combination of the sale of historical books in the quarter and an increase in revenue for delivery of third party newspapers.

Our mobile, tablet, desktop and app sites, including TNI and MNI, attracted 24.6 million unique visitors in the month
of December 2015, with 222.4 million million page views. Research in our larger markets indicates we are maintaining our share of audience through the combination of digital audience growth and strong print newspaper readership.

Operating Expenses

Cash costs decreased $6,408,000, or 4.9%, in the 2016 Quarter. Excluding workforce adjustments, cash costs decreased 5.2% in the 2016 Quarter.

Compensation expense decreased $3,272,000, or 5.3%, in the 2016 Quarter, driven by a decline of 7.5% in average full-time equivalent employees.

Newsprint and ink costs decreased $2,161,000, or 24.4%, in the 2016 Quarter, primarily as a result of lower newsprint prices and a reduction in newsprint volume of 11.3%. See Item 3, “Commodities”, included herein, for further discussion and analysis of the impact of newsprint on our business.

Other operating expenses, which are comprised of all operating costs not considered to be compensation, newsprint, depreciation, amortization, or unusual matters including delivery, postage, digital cost of goods sold, facility expenses among others, decreased $1,368,000, or 2.3%, in the 2016 Quarter.

Reductions in staffing resulted in workforce adjustment costs totaling $604,000 and $211,000 in the 2016 Quarter and 2015 Quarter, respectively.

In 2016, we expect cash costs excluding workforce adjustments, to decrease between 3.5% to 4.0%.

Operating Cash Flow and Results of Operations

As a result of the factors noted above, operating cash flow decreased 5.2%, to $43,582,000, in the 2016 Quarter compared to $45,979,000 in the 2015 Quarter. Operating cash flow margin remained flat at 25.9% in the 2016 Quarter compared to the 2015 Quarter. 

23

Table of Contents

Depreciation expense decreased $289,000, or 6.3%, and amortization expense decreased $264,000, or 3.8%, in the 2016 Quarter. Sales of operating assets resulted in a net gain of $971,000 in the 2016 Quarter compared to a net gain of $257,000 in the 2015 Quarter.

Equity in earnings of TNI and MNI increased $42,000 in the 2016 Quarter.

The factors noted above resulted in operating income of $36,409,000 in the 2016 Quarter compared to $37,497,000 in the 2015 Quarter.

Nonoperating Income and Expense

Interest expense decreased $1,648,000, or 8.8%, to $17,142,000 in the 2016 Quarter due to lower debt balances. Our weighted average cost of debt, excluding amortization of debt financing costs, increased to 9.5% at the end of the 2016 Quarter compared to 9.4% at the end of the 2015 Quarter.

We recognized $1,333,000 of debt financing and administrative costs in the 2016 Quarter compared to $1,102,000 in the 2015 Quarter. We also recognized $525,000 gain on extinguishment of debt.

Overall Results

We recognized income tax expense of 38.3% of income before income taxes in the 2016 Quarter and 39.4% in the 2015 Quarter. See Note 6 of the Notes to the Consolidated Financial Statements, included herein, for a discussion of the difference between the expected federal income tax rate to the actual tax rates.

As a result of the factors noted above, income attributable to Lee Enterprises, Incorporated totaled $11,237,000 in the 2016 Quarter compared to $9,753,000 in the 2015 Quarter. We recorded earnings per diluted common share of $0.21 in the 2016 Quarter and $0.18 in the 2015 Quarter. Excluding unusual matters, as detailed in the table below, diluted earnings per common share, as adjusted, were $0.22 in the 2016 Quarter, the same as the 2015 Quarter. Per share amounts may not add due to rounding.
 
13 Weeks Ended
 
 
December 27
2015
 
December 28
2014
 
(Thousands of Dollars, Except Per Share Data)
Amount

Per Share

Amount

Per Share

 
 
 
 
 
Income attributable to Lee Enterprises, Incorporated, as reported
11,237

0.21

9,753

0.18

Adjustments:
 
 
 
 
Debt financing costs
1,333

 
1,102

 
Warrants fair value adjustment
(73
)
 
1,302

 
Other, including workforce adjustments
54

 
(54
)
 
 
1,314

 
2,350

 
Income tax effect of adjustments, net
(494
)
 
(367
)
 
 
820

0.02

1,983

0.04

Income attributable to Lee Enterprises, Incorporated, as adjusted
12,057

0.22

11,736

0.22


LIQUIDITY AND CAPITAL RESOURCES

Operating Activities

Cash provided by operating activities was $21,069,000 in the 2016 Quarter and $22,290,000 in the 2015 Quarter. We recorded net income of $11,508,000 in the 2016 Quarter and $10,007,000 in the 2015 Quarter. Non-cash debt financing costs charged to expense totaled $1,333,000 in the 2016 Quarter compared to $1,102,000 in the 2015 Quarter. Changes in depreciation and amortization, deferred income taxes, and operating assets and liabilities accounted for the bulk of the change in cash provided by operating activities in the 2016 Quarter.

24

Table of Contents

Investing Activities

Cash provided by investing activities totaled $1,007,000 in the 2016 Quarter compared to cash required for investing activities of $2,832,000 in the 2015 Quarter. Capital spending totaled $1,470,000 in the 2016 Quarter compared to $3,547,000 in the 2015 Quarter. We received $2,614,000 and $315,000 of proceeds from sales of assets in the 2016 Quarter and the 2015 Quarter, respectively.

We anticipate that funds necessary for capital expenditures, which are expected to total up to $10,000,000 in 2016, and other requirements, will be available from internally generated funds or availability under our Revolving Facility.

Financing Activities

Cash required for financing activities totaled $21,397,000 in the 2016 Quarter and $20,219,000 in the 2015 Quarter. Debt reduction accounted for the majority of the usage of funds in both the 2016 Quarter and the 2015 Quarter.

Liquidity
 
At December 27, 2015, after consideration of letters of credit, we have approximately $32,935,000 available for future use under our Revolving Facility. Including cash, our liquidity at December 27, 2015 totals $44,748,000. 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 December 27, 2015, the principal amount of our outstanding debt totals $703,996,000. For the last twelve months ending December 27, 2015, the principal amount of our debt, net of cash, is 4.3 times our adjusted EBITDA, compared to a ratio of 4.7 at December 28, 2014.

On January 15, 2016, we received payment of $30,645,628 from our insurer for 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 Lee Legacy production facilities. We expect to record a gain on the transaction in the quarter ended March 27, 2016. Of the total proceeds received by the Company, in January 2016, $20,000,000 was used to reduce outstanding debt under our 1st Lien Term Loan and, to the extent permissible and available at a discount, we intend to use some portion of the remaining proceeds to repurchase outstanding Notes in the quarter ending March 27, 2016.

The 2014 Refinancing significantly improved our debt maturity profile. Final maturities of our debt have been extended to dates from December 2018 through December 2022. As a result, we believe refinancing risk has been substantially reduced for the next several years.

There are numerous potential consequences under the Notes, 1st Lien Credit Facility and 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 and 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 to refinance or amend our debt agreements as they become due, or earlier if available liquidity is consumed. 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 December 27, 2015.

In 2014, we filed a Form S-3 shelf registration statement ("Shelf") with the SEC, which has been declared effective. The Shelf 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.

25

Table of Contents

CHANGES IN LAWS AND REGULATIONS

Energy Costs

Energy costs can be volatile, and may increase in the future as a result of carbon emissions and other regulations being considered by the United States Environmental Protection Agency.

Health Care

The Affordable Care Act was enacted into law in 2010.
 
We expect the Affordable Care Act will continue to evolve. More recently, certain provisions applicable to employers were delayed. We expect our future health care costs to increase based on analysis published by the United States Department of Health and Human Services, input from independent advisors and our understanding of various provisions of the Affordable Care Act that differ from our previous medical plans, such as:
 
Certain preventive services provided without charge to employees;
Automatic enrollment of new employees;
Higher maximum age for dependent coverage;
Elimination of lifetime benefit caps; and
Free choice vouchers for certain lower income employees.

Administrative costs are also likely to increase as a result of new compliance reporting and mandatory fees per participant. New costs being imposed on other medical care businesses, such as health insurers, pharmaceutical companies and medical device manufacturers, may be passed on to us in the form of higher costs. We may be able to mitigate certain of these future cost increases through changes in plan design.

We do not expect the Affordable Care Act will have a significant impact on our postretirement medical benefit obligation liability.

Pension Plans

In 2012, the Surface Transportation Extension Act of 2012 (“STEA”) was signed into law. STEA provides for changes in the determination of discount rates that result in a near-term reduction in minimum funding requirements for our defined benefit pension plans. STEA will also result in an increase in future premiums to be paid to the Pension Benefit Guarantee Corporation ("PBGC").

In 2014, the Highway and Transportation Funding Act ("HATFA") was signed into law. HATFA generally extends the relief offered under STEA and further increases premiums to be paid to the PBGC.

Income Taxes

Certain states in which we operate periodically consider changes to their corporate income tax rates. Until such changes are enacted, the impact of such changes cannot be determined.

Minimum Wage Laws

The United States and various state and local governments are considering increasing their respective minimum wage rates. Most of our employees earn an amount in excess of the current United States or state minimum wage rates. However, until changes to such rates are enacted, the impact of the changes cannot be determined.

INFLATION

General inflation in the United States economy has not been significant for the last several years. 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.


26

Table of Contents

SELECTED CONSOLIDATED FINANCIAL INFORMATION
(UNAUDITED)
 
13 Weeks Ended
 
 
52 Weeks Ended

(Thousands of Dollars)
December 27
2015

December 28
2014

 
December 27
2015

 
 
 
 
 
Advertising and marketing services
105,637

115,830

 
401,906

Subscription
50,430

50,399

 
194,505

Other
12,338

10,981

 
43,327

Total operating revenue
168,405

177,210

 
639,738

Compensation
58,665

61,937

 
235,756

Newsprint and ink
6,685

8,846

 
28,102

Other operating expenses
58,869

60,237

 
227,796

Depreciation and amortization
10,943

11,496

 
45,009

Gain on sales of assets, net
(971
)
(257
)
 
(608
)
Workforce adjustments
604

211

 
3,698

Total operating expenses
134,795

142,470

 
539,753

Equity in earnings of TNI and MNI
2,799

2,757

 
8,296

Operating income
36,409

37,497

 
108,281

Adjusted to exclude:
 
 
 
 
Depreciation and amortization
10,943

11,496

 
45,009

Gain on sale of assets, net
(971
)
(257
)
 
(608
)
Equity in earnings of TNI and MNI
(2,799
)
(2,757
)
 
(8,296
)
Operating cash flow
43,582

45,979

 
144,386

Add:
 
 
 
 
Ownership share of TNI and MNI EBITDA (50%)
3,809

3,757

 
11,298

EBITDA
47,391

49,736

 
155,684

Adjusted to exclude:
 
 
 
 
Workforce adjustments
604

211

 
3,698

Stock compensation
570

443

 
2,098

Adjusted EBITDA
48,565

50,390

 
161,480

Adjusted to exclude:
 
 
 
 
Ownership share of TNI and MNI EBITDA (50%)
(3,809
)
(3,757
)
 
(11,298
)
Add (deduct):
 
 
 
 
Distributions from TNI and MNI
3,229

2,944

 
11,260

Capital expenditures, net of insurance proceeds
(1,470
)
(3,547
)
 
(7,630
)
Pension contributions
(744
)

 
(4,321
)
Cash income tax refunds (payments)
11

(4
)
 
(470
)
Unlevered free cash flow
45,782

46,026

 
149,021

Add (deduct):
 
 
 
 
Financial income
76

78

 
335

Interest expense to be settled in cash
(17,142
)
(18,790
)
 
(70,761
)
Debt financing and administration costs paid
(44
)
(17
)
 
(760
)
Free cash flow
28,672

27,297

 
77,835




27

Table of Contents

SELECTED LEE LEGACY ONLY FINANCIAL INFORMATION
(UNAUDITED)
 
13 Weeks Ended
 
 
52 Weeks Ended

(Thousands of Dollars)
December 27
2015

December 28
2014

 
December 27
2015

 
 
 
 
 
Advertising and marketing services
72,438

80,194

 
279,661

Subscription
34,538

33,546

 
132,344

Other
10,407

9,069

 
36,666

Total operating revenue
117,383

122,809

 
448,671

Compensation
44,848

46,246

 
178,637

Newsprint and ink
5,147

6,523

 
20,931

Other operating expenses
34,066

34,003

 
130,592

Depreciation and amortization
7,635

7,951

 
31,041

Loss (gain) on sale of assets, net
37

(79
)
 
7

Workforce adjustments
543

72

 
1,455

Total operating expenses
92,276

94,716

 
362,663

Equity in earnings of MNI
1,183

1,112

 
3,487

Operating income
26,290

29,205

 
89,495

Adjusted to exclude:
 
 
 
 
Depreciation and amortization
7,635

7,951

 
31,041

Loss (gain) on sales of assets, net
37

(79
)
 
7

Equity in earnings of MNI
(1,183
)
(1,112
)
 
(3,487
)
Operating cash flow
32,779

35,965

 
117,056

Add:
 
 
 
 
Ownership share of MNI EBITDA (50%)
2,089

2,008

 
6,070

EBITDA
34,867

37,973

 
123,126

Adjusted to exclude:
 
 
 
 
Workforce adjustments
543

72

 
1,455

Stock compensation
570

443

 
2,098

Adjusted EBITDA
35,980

38,488

 
126,679

Adjusted to exclude:
 
 
 
 
Ownership share of MNI EBITDA (50%)
(2,088
)
(2,008
)
 
(6,070
)
Add (deduct):
 
 
 
 
Distributions from MNI
1,750

1,750

 
5,500

Capital expenditures, net of insurance proceeds
(1,203
)
(2,080
)
 
(5,870
)
Pension contributions


 

Cash income tax refunds (payments)
11

(4
)
 
(381
)
Intercompany charges not settled in cash

(2,318
)
 
(4,635
)
Other
(697
)

 
(2,697
)
Unlevered free cash flow
33,753

33,828

 
112,526












28

Table of Contents

SELECTED PULITZER ONLY FINANCIAL INFORMATION
(UNAUDITED)
 
13 Weeks Ended
 
 
52 Weeks Ended

(Thousands of Dollars)
December 27
2015

December 28
2014

 
December 27
2015

 
 
 
 
 
Advertising and marketing services
33,199

35,636

 
122,245

Subscription
15,892

16,853

 
62,161

Other
1,931

1,912

 
6,661

Total operating revenue
51,022

54,401

 
191,067

Compensation
13,817

15,691

 
57,119

Newsprint and ink
1,538

2,323

 
7,171

Other operating expenses
24,803

26,234

 
97,204

Depreciation and amortization
3,308

3,545

 
13,968

Gain on sale of assets, net
(1,008
)
(178
)
 
(615
)
Workforce adjustments
61

139

 
2,243

Total operating expenses
42,519

47,754

 
177,090

Equity in earnings of TNI
1,616

1,645

 
4,809

Operating income
10,119

8,292

 
18,786

Adjusted to exclude:
 
 
 
 
Depreciation and amortization
3,308

3,545

 
13,968

Gain on sales of assets, net
(1,008
)
(178
)
 
(615
)
Equity in earnings of TNI
(1,616
)
(1,645
)
 
(4,809
)
Operating cash flow
10,803

10,014

 
27,330

Add:
 
 
 
 
Ownership share of TNI EBITDA (50%)
1,721

1,749

 
5,228

EBITDA
12,524

11,763

 
32,558

Adjusted to exclude:
 
 
 
 
Workforce adjustments
61

139

 
2,243

Adjusted EBITDA
12,585

11,902

 
34,801

Adjusted to exclude:
 
 
 
 
Ownership share of TNI EBITDA (50%)
(1,721
)
(1,749
)
 
(5,228
)
Add (deduct):
 
 
 
 
Distributions from TNI
1,479

1,194

 
5,760

Capital expenditures, net of insurance proceeds
(267
)
(1,467
)
 
(1,760
)
Pension contributions
(744
)

 
(4,321
)
Cash income tax refunds (payments)


 
(89
)
Intercompany charges not settled in cash

2,318

 
4,635

Other
697


 
2,697

Unlevered free cash flow
12,029

12,198

 
36,495



29

Table of Contents

Item 3.       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 impact of an increase in interest rates. At December 27, 2015, 24.1% 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, if in excess of LIBOR minimums discussed more fully below, decrease income before income taxes on an annualized basis by approximately $1,696,000 based on $169,622,000 of floating rate debt outstanding at December 27, 2015.

Our debt under the 1st Lien Term Loan is subject to minimum interest rate levels of 1.0%. Based on the difference between interest rates in December 2015 and our 1.0% minimum rate, LIBOR would need to increase approximately 15 basis points for six month borrowing and up to approximately 58 basis points for one month borrowing before our borrowing cost would begin to be impacted by an increase in interest rates.

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

COMMODITIES

Newsprint purchase prices declined throughout the fiscal year 2015 as North American newsprint producers faced significant domestic demand declines in addition to weak international shipment opportunities. The current price cycle is likely at the bottom as several suppliers implemented supply/demand balancing action plans including the permanent closures of two North American newsprint paper machines in last half of 2015. Suppliers have announced price increases effective January with an additional increase in February 2016.

Price change announcements are influenced primarily by the balance between supply capacity and demand, domestic and export, and the producer's ability to mitigate input cost pressures taking the U. S. dollar to Canadian dollar exchange rate into consideration. The extent to which the currently announced price increases are successful or future price changes occur is subject to negotiations with each newsprint producer at the time newsprint is ordered.

Long term supply strategy takes potential capacity closures into consideration and aligns the Company with suppliers most likely to continue to supply the North American newsprint market and our print locations.
 
A $10 per tonne price increase for 30 pound newsprint would result in an annualized reduction in income before income taxes of approximately $532,000, based on anticipated consumption in 2016, excluding consumption of TNI and MNI and the impact of LIFO accounting. Such prices may also decrease. We manage significant newsprint inventories, which will temporarily mitigate the impact of future price changes.

SENSITIVITY TO CHANGES IN VALUE

At December 27, 2015, the fair value of floating rate debt, which consists primarily of our 1st Lien Term Loan, is $167,000,000 , based on an average of private market price quotations. Our fixed rate debt consists of $395,000,000 principal amount of the Notes and $139,374,000 principal amount under the 2nd Lien Term Loan. At December 27, 2015, based on an average of private market price quotations, the fair values were $358,000,000 and $144,000,000 for the Notes and 2nd Lien Term Loan, respectively.

Item 4.       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 the end of the period covered by this Quarterly Report on Form 10-Q (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

30

Table of Contents

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.

CHANGES IN INTERNAL CONTROL OVER FINANCIAL REPORTING

There have been no changes in our internal control over financial reporting that occurred during the 13 weeks ended December 27, 2015 that have materially affected, or are reasonably likely to materially affect, our internal control over financial reporting.

PART II
OTHER INFORMATION

Item 1.        Legal Proceedings

We are involved in a variety of other legal actions that arise in the normal course of business. Insurance coverage mitigates potential loss for certain of these other matters. While we are unable to predict the ultimate outcome of these other 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 6.        Exhibits
Number
 
Description 
 
 
 
31.1
 
Rule 13a-14(a)/15d-14(a) certification
31.2
 
Rule 13a-14(a)/15d-14(a) certification
32
 
Section 1350 certification

SIGNATURES

Pursuant to the requirements of the Securities Exchange Act of 1934, the Registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.
 
 
 
 
LEE ENTERPRISES, INCORPORATED
 
 
 
 
 
/s/ Ronald A. Mayo
 
February 5, 2016
Ronald A. Mayo
 
 
Vice President, Chief Financial Officer and Treasurer
 
 
(Principal Financial and Accounting Officer)
 
 

31