LEE ENTERPRISES, Inc quarterly report, Q2 FY2021

Lee Enterprises, Inc. — Fiscal 2021 Second-Quarter Form 10-Q Summary

Business Context and Reporting Period

Lee Enterprises is a local media company operating print and digital newspapers, subscription products, advertising and marketing services, commercial printing, and digital services through TownNews. The filing covers the 13 and 26 weeks ended March 28, 2021, compared with the periods ended March 29, 2020. Results include the BH Media Newspaper Business and The Buffalo News acquisition completed March 16, 2020, which significantly affects year-over-year comparability.

The company reported approximately one million paid print and digital subscribers, including approximately 309,000 digital-only subscribers, up 57.6% year over year. Its digital platforms reached more than 54 million unique visitors in March 2021.

Key Financial Metrics

Metric	13 Weeks Ended March 28, 2021	13 Weeks Ended March 29, 2020	26 Weeks Ended March 28, 2021	26 Weeks Ended March 29, 2020
Total operating revenue	$192.4 million	$121.4 million	$404.2 million	$243.7 million
Operating income	$8.4 million	$13.8 million	$29.2 million	$32.1 million
Net income	$(0.6) million	$(5.0) million	$15.8 million	$0.7 million
Income attributable to Lee	$(1.1) million	$(5.4) million	$14.8 million	$(0.05) million
Diluted EPS	$(0.19)	$(0.94)	$2.55	$(0.01)
Adjusted EBITDA	$24.1 million	$17.4 million	$64.1 million	$45.5 million
Cash provided by operating activities	Not separately provided	Not separately provided	$39.3 million	$10.7 million

Second-quarter revenue increased 58.6%, but pro forma revenue declined 8.1% after removing acquisition effects. Year-to-date revenue increased 65.9%, while pro forma revenue declined 9.6%. Second-quarter operating margin was approximately 4.4%, compared with 11.4% in the prior-year quarter. Adjusted EBITDA margin was approximately 12.5%, compared with 14.3%.

Second-quarter advertising and marketing services revenue increased 40.4% to $85.6 million; digital advertising represented 36.7% of the category.
Subscription revenue increased 91.2% to $89.8 million, supported by acquisitions, digital-only subscriber growth, and selective price increases, partly offset by declining full-access volume.
Total digital revenue increased 62.0% to $59.5 million and represented 30.9% of quarterly revenue. On a pro forma basis, digital revenue increased 29.7%.
Second-quarter cash costs increased 60.8% to $170.2 million, while pro forma cash costs declined 9.1%. Management reported $22.2 million of revenue less cash costs.
Cash and cash equivalents were $33.8 million at March 28, 2021, essentially unchanged from September 27, 2020.
Debt principal outstanding was $498.9 million, down from $538.3 million at September 27, 2020. The weighted-average cost of debt was 9.0%, and the term loan matures March 16, 2045.
Total liabilities were $847.9 million, compared with total assets of $835.1 million; the company reported total stockholders’ deficit of $14.8 million and total deficit of $12.8 million.

Material Changes Versus the Prior Comparable Period

Reported revenue and adjusted EBITDA benefited materially from a full period of acquired BH Media and Buffalo News operations. On a pro forma basis, revenue and cash costs declined, reflecting continuing pressure on the legacy print business and the effects of COVID-19.
Operating income declined 38.9% in the quarter and 8.9% year to date despite higher reported revenue, primarily because acquired operating expenses, depreciation and amortization, and asset-sale losses increased.
The prior-year quarter included $10.7 million of debt financing and administrative costs, primarily related to the 2020 refinancing; no comparable expense was recorded in 2021.
Year-to-date 2021 results included a $23.8 million non-cash curtailment gain from eliminating certain postretirement medical coverage and a $12.3 million pension withdrawal cost payable over 20 years.
The company made a $7.5 million voluntary term-loan prepayment during the quarter. In addition, $13.8 million of excess cash flow was used to repay debt in April 2021.
The company completed a one-for-ten reverse stock split effective March 15, 2021; prior-period share and per-share data were retrospectively adjusted.

Cash Flow, Liquidity, Debt, and Other Items

Year-to-date operating cash flow was $39.3 million. Investing activities provided $0.3 million, including $2.9 million of capital expenditures and $2.8 million of asset-sale proceeds. Financing activities used $39.5 million, principally for debt repayment.
Management stated that operations and cash on hand are expected to provide sufficient liquidity for operating expenses, interest, and capital expenditures. However, the ultimate COVID-19 impact could materially affect liquidity and the ability to meet obligations.
The credit agreement restricts additional indebtedness, liens, investments, acquisitions, dividends, share repurchases, and certain other transactions. The company has no revolving facility and is restricted from paying common-stock dividends, subject to specified exceptions.
The company expects no additional pension trust contributions during the remainder of fiscal 2021 as a result of changes under the American Rescue Plan Act.
Newsprint price increases were announced for 2021. Management estimated that a $10-per-ton increase for 27.7-pound newsprint would reduce annualized pretax income by approximately $0.5 million, excluding TNI and MNI consumption and LIFO effects.

Guidance, Outlook, Management Commentary, Risks, and Unusual Items

The filing does not provide formal quantitative revenue or earnings guidance. Management expects continued near-term negative effects from COVID-19, including advertising pressure, potential permanent changes in publishing, higher costs, and operational disruptions. The company reported approximately $100 million of pro forma cost reductions from December 2019 through December 2020 through centralized functions, workforce actions, and elimination of duplicate structures.

Key risks include continued print revenue and circulation declines, changes in advertising and subscription demand, technology and cybersecurity risks, competition, labor and newsprint costs, interest rates, and the ability to integrate acquisitions and achieve planned expense reductions.
Significant goodwill and intangible assets remain exposed to impairment risk. Cumulative goodwill impairment charges since 2007 were described as nearly $1.3 billion.
The company has a $12.3 million estimated multiemployer pension withdrawal liability payable over 20 years.
Warrants representing approximately 10.4% of the shares outstanding at the original issuance date have a $41.90 exercise price and expire in March 2022. Their reported fair value was $1.1 million at March 28, 2021.
Routine legal actions and tax matters are ongoing, but management does not expect them to have a material adverse effect on the consolidated financial statements.
Management concluded that disclosure controls and procedures were effective as of March 28, 2021.

Important Facts for Investors to Verify

Reconcile reported growth with pro forma declines and assess the sustainability of legacy revenue trends after removing BH Media and Buffalo News effects.
Evaluate debt repayment capacity, the 9.0% fixed interest burden, excess-cash-flow sweep requirements, and restrictive credit agreement covenants.
Assess whether cost reductions can offset ongoing print advertising, circulation, COVID-19, labor, and newsprint pressures without impairing digital growth.
Review the sustainability and quality of adjusted EBITDA, including exclusions for restructuring, non-cash charges, asset-sale items, pension items, and other unusual gains or costs.
Monitor goodwill and intangible asset impairment exposure, pension obligations, the pension withdrawal liability, and postretirement benefit changes.
Confirm the effects of the one-for-ten reverse stock split and the potential dilution or expiration of outstanding warrants.