Business Context and Reporting Period
Lee Enterprises, Incorporated is a local media company operating 50 principally mid-sized local media operations and managing 30 additional Berkshire Hathaway media operations. Its offerings include newspapers, digital news and advertising, subscriptions, digital marketing, web hosting and content management through TownNews, and related services.
This unaudited Form 10-Q covers the 13 and 39 weeks ended June 30, 2019, compared with the 13 and 39 weeks ended June 24, 2018. Fiscal-year results are subject to seasonality and are not necessarily indicative of the full year.
Key Financial Metrics
| Metric | 13 Weeks Ended June 30, 2019 | 13 Weeks Ended June 24, 2018 | 39 Weeks Ended June 30, 2019 | 39 Weeks Ended June 24, 2018 |
|---|---|---|---|---|
| Total operating revenue | $127.3 million | $132.6 million | $386.2 million | $404.2 million |
| Operating income | $20.0 million | $20.2 million | $60.3 million | $66.6 million |
| Operating margin | 15.7% | 15.2% | 15.6% | 16.5% |
| Net income | $6.2 million | $4.8 million | $14.6 million | $42.6 million |
| Income attributable to Lee | $5.8 million | $4.5 million | $13.4 million | $41.7 million |
| Diluted EPS | $0.10 | $0.08 | $0.24 | $0.75 |
| Adjusted EBITDA | $30.7 million | $31.1 million | $90.4 million | $96.8 million |
| Cash provided by operating activities | Not separately presented | Not separately presented | $43.8 million | $57.0 million |
Quarterly cash costs were $98.8 million, down 5.2%, and revenue less cash costs was $28.5 million, producing a 22.4% cash-cost margin versus 21.5% in the prior-year quarter. For the 39-week period, cash costs were $303.5 million, down 4.0%, and revenue less cash costs was $82.7 million.
At June 30, 2019, cash and cash equivalents were $13.5 million. Revolver availability, after letters of credit, was approximately $21.7 million, resulting in reported liquidity of $35.2 million. Total principal debt was $458.6 million, consisting primarily of $374.4 million of 9.5% senior secured notes and $84.1 million of 12.0% second-lien term debt. The weighted average cost of debt was 10.0%.
Total assets were $574.4 million and total liabilities were $595.9 million, resulting in a total deficit of $21.5 million. Stockholders’ deficit was $23.0 million.
Material Changes Versus the Prior Comparable Period
- Quarterly revenue declined 4.0%; advertising and marketing services declined 10.6%, subscription revenue declined 3.2%, and other revenue increased 36.6%.
- For the 39-week period, revenue declined 4.5%, advertising and marketing services declined 10.9%, subscription revenue declined 3.1%, and other revenue increased 35.9%.
- Print advertising weakness, particularly in large retail, big-box and classified categories, was the principal revenue pressure. Digital advertising increased 2.8% in the quarter and 5.3% for the 39-week period.
- Digital-only subscribers increased 72.0% year over year to approximately 79,000, while subscription revenue still declined because of lower paid circulation units.
- Cost reductions partially offset revenue pressure. Quarterly compensation expense declined 6.6%, newsprint and ink declined 18.8%, and average full-time equivalent employees declined 8.0%.
- Quarterly operating income was nearly unchanged, down 0.6%, while 39-week operating income declined 9.4%.
- Quarterly net income increased 29.9%, primarily reflecting lower interest expense, lower taxes, and higher warrant-related non-operating income. The 39-week net income comparison was distorted by a $24.9 million tax benefit recorded in the prior-year period under the 2017 Tax Act.
- Operating cash flow declined to $43.8 million from $57.0 million, while cash used for debt repayment declined to $27.7 million from $49.5 million.
Guidance, Outlook, Risks and Unusual Items
- Management expects same-property cash costs to decline 4.75% to 5.5% in fiscal 2019, an improvement from prior guidance.
- Capital expenditures are expected to total up to $8.0 million in fiscal 2019.
- The company expects interest and principal payments due during the next 12 months to be funded by operating cash flows and certain asset sales. This expectation depends on continued cash generation, covenant compliance, and access to financing.
- The revolving facility expires December 28, 2019. Its availability was scheduled to decline to $23.1 million on July 31, 2019; management disclosed that this reduced liquidity by approximately $4.1 million.
- Debt maturities are concentrated in 2022, including $374.4 million of senior secured notes due March 2022 and second-lien debt maturing in December 2022. The company repurchased $10.6 million principal amount of notes during the quarter and recorded a $0.2 million extinguishment loss.
- The company recorded $5.6 million of restructuring costs during the first 39 weeks, including a $0.5 million estimated partial withdrawal liability related to a multiemployer pension plan.
- An out-of-period debt financing cost adjustment increased quarterly expense by $1.3 million and first-nine-month expense by $1.1 million. Management concluded the adjustment was not material to prior financial statements or expected full-year net income.
- Management Agreement revenue from Berkshire Hathaway totaled $11.3 million in its first year, including fixed and variable fees. The related $5.5 million contract asset at June 30, 2019 was collected in July 2019.
- The company adopted the new revenue standard without a material change to revenue recognition. It expects adoption of the new lease standard on September 30, 2019 to materially increase recognized lease assets and liabilities, without a material impact on income or cash flow statements.
- Key risks include declining advertising and subscription demand, technology and digital competition, newsprint and labor costs, cyber and information-system disruptions, covenant compliance, refinancing risk, interest rates, asset impairments, legal and tax matters, and the ability to maintain adequate liquidity.
Investor Verification Checklist
- Verify the company’s ability to refinance or repay the concentrated 2022 debt maturities and renew or replace the revolving facility expiring in December 2019.
- Monitor operating cash flow, same-property revenue trends, advertising demand, and whether targeted cash-cost reductions are sustainable.
- Separate recurring earnings from the prior-year tax benefit, warrant fair-value adjustments, debt repurchase costs, restructuring charges, and other unusual items.
- Review covenant compliance, leverage, available revolver capacity, and the company’s stated dependence on future operating cash flows and asset sales.
- Assess the effect of continued print declines against growth in digital advertising, digital subscriptions, TownNews, and Berkshire Hathaway management fees.
- Evaluate potential future goodwill and intangible-asset impairments; the company has previously recorded almost $1.3 billion of impairment charges.
- Confirm the final amounts and timing of tax examinations, multiemployer pension withdrawal liabilities, legal contingencies, and lease liabilities upon adoption of the new lease standard.