Lee Enterprises, Inc. — Form 10-Q Summary
Business Context and Reporting Period
Lee Enterprises operates local newspapers, digital news and advertising platforms, digital marketing and hosting services, and related print businesses. The filing covers the unaudited 13 weeks ended December 29, 2019, compared with the 13 weeks ended December 30, 2018. Fiscal 2020 began September 30, 2019.
The company operated 49 principally mid-sized local media operations and managed 30 additional Berkshire Hathaway Media Group operations under a management agreement. Digital-only subscribers increased 84.8% year over year to approximately 105,000, while digital revenue represented 30.4% of total operating revenue.
Financial Performance and Key Metrics
| Metric | 13 Weeks Ended Dec. 29, 2019 | 13 Weeks Ended Dec. 30, 2018 | Change |
|---|---|---|---|
| Total operating revenue | $122.3 million | $136.2 million | (10.2%) |
| Advertising and marketing services | $65.7 million | $76.0 million | (13.5%) |
| Subscription revenue | $41.7 million | $46.3 million | (9.9%) |
| Cash costs | $96.4 million | $103.1 million | (6.5%) |
| Revenue less cash costs | $25.9 million | $33.1 million | (21.7%) |
| Operating income | $18.3 million | $27.7 million | (34.0%) |
| Net income | $5.7 million | $10.7 million | (46.7%) |
| Net income attributable to Lee | $5.3 million | $10.4 million | (48.7%) |
| Adjusted EBITDA | $28.1 million | $36.1 million | (22.2%) |
| Diluted EPS | $0.09 | $0.18 | (48.8%) |
Revenue less cash costs margin declined to approximately 21.2% from 24.3%. Operating margin declined to approximately 15.0% from 20.4%, and net margin declined to approximately 4.7% from 7.9%.
Digital advertising and marketing services revenue was $25.9 million, or 39.5% of advertising and marketing services revenue. Total digital revenue increased 1.7% to $37.2 million. TownNews revenue increased 17.8% on a standalone basis, supported by product expansion and market share gains.
Cash provided by operating activities was $10.4 million, compared with $19.4 million in the prior-year quarter. Capital expenditures were $2.5 million, compared with $1.0 million, and cash required for investing activities was $3.7 million. Financing activities used $10.8 million, including $10.2 million of debt payments. Cash declined to $4.5 million from $8.6 million at September 29, 2019.
Balance Sheet, Debt, and Liquidity
- Total assets were $565.7 million at December 29, 2019; total liabilities were $596.7 million; and total deficit was $31.0 million.
- Principal debt outstanding was $433.4 million, consisting of $356.1 million of 9.5% senior secured notes and $77.3 million of a 12.0% second-lien term loan. The weighted average cost of debt was 9.9%.
- The senior secured notes mature in March 2022 and the second-lien term loan matures in December 2022. The revolving facility was undrawn and had approximately $17.6 million of availability after letters of credit.
- Total liquidity, including cash and revolving availability, was approximately $22.1 million. Management stated that expected operating cash flow and asset-sale proceeds should fund interest and principal payments due over the next 12 months.
- Lee reported compliance with its debt covenants at December 29, 2019. Its net debt-to-trailing-twelve-month adjusted EBITDA ratio was 3.8x.
- The company adopted ASC 842 on September 30, 2019, recording operating lease right-of-use assets and lease liabilities. Operating lease liabilities totaled approximately $10.1 million at quarter-end.
Material Changes Versus the Prior Comparable Period
- Revenue declined 10.2%, primarily because of lower print advertising demand, lower print subscription volumes, and the absence of prior-year political advertising strength.
- Advertising revenue declined 13.5%, while subscription revenue declined 9.9%. Digital growth and TownNews performance only partially offset print declines.
- Operating expenses declined 4.5%, reflecting business transformation initiatives, outsourcing, lower print volumes, and a 9.8% reduction in full-time employees.
- Newsprint and ink expense declined 25.3%, and compensation expense declined 8.1%.
- Restructuring costs increased to $1.6 million from $62,000, primarily reflecting severance.
- Interest expense declined 9.3% due to lower debt balances. During the quarter, Lee repurchased $7.3 million principal amount of senior secured notes and recorded a $25,000 gain on extinguishment.
- The company adopted the new lease accounting standard, increasing reported right-of-use assets and lease liabilities without restating prior periods.
Guidance, Outlook, Risks, Contingencies, and Unusual Items
On January 29, 2020, after the quarter ended, Lee entered into an agreement to acquire certain BH Media newspaper and publication assets and The Buffalo News for an aggregate purchase price of $140 million. The transaction was expected to close around March 16, 2020, subject to regulatory and other closing conditions.
BH Finance agreed to provide approximately $576 million of secured, 25-year financing at a 9.0% annual interest rate. Proceeds were intended to fund the acquisition, refinance Lee’s existing debt, and provide cash in lieu of a revolving credit facility. The proposed financing would make BH Finance Lee’s sole lender and terminate the existing management agreement and revolving facility.
Management projected an 87% increase in revenue, a 40% increase in adjusted EBITDA before synergies, and $20 million to $25 million of annual revenue and cost synergies, with the full synergy run-rate expected within 24 months of closing. These projections were forward-looking and subject to integration, financing, regulatory, execution, and market risks.
Lee expected approximately $7.8 million of fiscal 2020 capital expenditures. Management also expected to contribute $6.7 million to pension plans during the remainder of fiscal 2020.
- The company has substantial leverage and depends on operating cash flow, asset sales, covenant compliance, and refinancing to remain a going concern.
- Print advertising and subscription demand continue to decline, and digital growth may not fully offset those declines.
- Additional goodwill or intangible-asset impairment charges could result from lower market value or weaker-than-expected revenue, expenses, or cash flows. Goodwill had accumulated impairment losses of approximately $1.3 billion.
- Newsprint prices, labor costs, interest rates, cybersecurity events, technology changes, competition, and regulatory developments could affect results.
- Lee recorded a $3.3 million liability related to withdrawal from a multiemployer pension plan; the liability is expected to be funded over 20 years.
- Routine legal proceedings and tax examinations were disclosed; management did not expect them to have a material adverse effect, although outcomes are uncertain.
- A $10-per-ton increase in 30-pound newsprint prices would reduce annualized pretax income by approximately $331,000 based on anticipated 2020 consumption, excluding TNI and MNI.
Most Important Facts for Investors to Verify
- Whether the BH Media and Buffalo News transaction closed on the expected timetable and on the disclosed terms.
- The final amount, terms, covenants, collateral, and cash balance associated with the approximately $576 million BH Finance refinancing.
- Post-acquisition revenue, adjusted EBITDA, leverage, integration costs, and realization of the projected $20 million to $25 million synergies.
- Whether declining print advertising and subscription revenue stabilize and whether digital growth continues to offset print erosion.
- Actual operating cash flow, liquidity, debt repayment requirements, and compliance with financing covenants.
- Capital expenditures, pension contributions, multiemployer pension withdrawal liability, and any additional impairment or restructuring charges.
- The impact of ASC 842 and the expected adoption of the forward-looking credit-loss standard beginning September 28, 2020.