Lee Enterprises, Inc. — Fiscal 2021 Third-Quarter Form 10-Q
Business context and reporting period
Lee Enterprises operates local print and digital media, advertising and marketing services, subscription products, commercial printing, and TownNews digital services. The filing covers the 13 weeks and 39 weeks ended June 27, 2021, compared with June 28, 2020. Prior-period per-share data reflects the one-for-ten reverse stock split effective March 15, 2021.
The company operated 77 principally mid-sized local media operations, reached more than 49 million unique digital visitors in June 2021, and had approximately one million paid print and digital subscribers. Digital-only subscribers increased 50.5% year over year to approximately 337,000.
Financial performance and key metrics
| Metric | 13 weeks ended June 27, 2021 | 13 weeks ended June 28, 2020 | 39 weeks ended June 27, 2021 | 39 weeks ended June 28, 2020 |
|---|---|---|---|---|
| Total operating revenue | $196.5 million | $182.5 million | $600.7 million | $426.2 million |
| Operating income | $13.8 million | $11.7 million | $43.0 million | $43.8 million |
| Net income | $3.7 million | $(0.7) million | $19.5 million | $0.002 million |
| Income attributable to Lee | $3.2 million | $(1.3) million | $18.0 million | $(1.3) million |
| Diluted EPS | $0.55 | $(0.23) | $3.10 | $(0.23) |
| Cash provided by operating activities | Not separately provided | Not separately provided | $42.8 million | $38.0 million |
| Adjusted EBITDA | $26.7 million | $26.3 million | $90.8 million | $71.8 million |
| Revenue less cash costs | $24.6 million | $25.1 million | $84.7 million | $66.5 million |
Quarterly revenue increased 7.6%, led by advertising and marketing services growth of 17.2%; subscription revenue declined 0.4%. Quarterly operating income increased 17.3%, while net income improved from a loss to $3.7 million. Year-to-date revenue increased 40.9%, substantially reflecting the BH Media and Buffalo News transactions; management reported pro forma revenue decreased 4.7%.
Calculated operating margins were approximately 7.0% for the quarter and 7.2% year to date, versus approximately 6.4% and 10.3%, respectively, in the prior comparable periods. The non-GAAP revenue-less-cash-cost margin was approximately 12.5% for the quarter and 14.1% year to date, compared with approximately 13.8% and 15.6% in the prior periods.
Quarterly digital revenue totaled $65.6 million, or 33.4% of revenue, up 48.3%. Year-to-date digital revenue totaled $187.0 million, or 31.1% of revenue, up 60.8%. Quarterly digital advertising and marketing revenue increased 30.8% and represented 39.2% of advertising and marketing services revenue.
Cash flow, liquidity and debt
- Cash and cash equivalents were $21.1 million at June 27, 2021, compared with $33.7 million at September 27, 2020.
- Operating cash flow was $42.8 million for the first 39 weeks, up from $38.0 million.
- Investing activities used $2.5 million, including $5.4 million of capital expenditures and $3.1 million of asset-sale proceeds.
- Financing activities used $53.0 million, primarily for debt repayment. Cash decreased $12.7 million during the period.
- Term Loan principal outstanding was $485.2 million, with $484.1 million classified as long-term debt. The loan bears fixed interest at 9.0% and matures March 16, 2045.
- Debt has been reduced by approximately $90.8 million since the March 2020 refinancing. Excess cash flow of $1.1 million for the quarter was used to repay debt in July 2021.
- The credit agreement restricts dividends, additional indebtedness, certain investments, acquisitions, liens, asset sales and other capital transactions. There are no financial performance covenants, and the company has no revolving facility.
- Total liabilities exceeded assets by $8.5 million at June 27, 2021; stockholders’ deficit was $10.6 million.
Material changes versus the prior comparable period
- Quarterly advertising and marketing services revenue rose 17.2%, including print advertising growth of 10.3% and digital advertising and marketing growth of 30.8%.
- Quarterly compensation expense increased 14.3%, principally because the prior-year period included COVID-19-related furloughs and compensation reductions. Cash costs increased 9.2%, exceeding revenue growth and reducing the non-GAAP margin.
- Year-to-date results include $207.9 million of revenue and $185.7 million of operating expenses from the BH Media and Buffalo News acquisitions. Accordingly, reported year-to-date growth is not fully comparable with the prior period.
- Operating income was broadly stable year to date despite reported revenue growth, reflecting acquisition-related expenses, higher depreciation and amortization, and a $6.9 million net loss on asset sales, impairments and other items versus a $5.2 million net gain in the prior period.
- Interest expense declined 16.2% in the quarter and 3.5% year to date as debt balances declined. Prior-year results included $11.9 million of debt financing and administrative cost that did not recur.
- Year-to-date results benefited from a $23.8 million non-cash postretirement curtailment gain, partially offset by a $12.3 million pension withdrawal cost. The pension withdrawal liability will be paid over 20 years.
Guidance, outlook, commentary and risks
The filing does not provide specific full-year revenue or earnings guidance. Management expects operations and cash on hand to provide sufficient near-term liquidity for operating expenses, interest and capital expenditures, but cautions that the ultimate COVID-19 impact could materially affect liquidity and the ability to meet obligations.
Management’s strategy emphasizes digital presentation of local news, subscription growth, and expanded digital advertising, video and e-commerce offerings through Amplified Digital Agency. The company expects digital growth to continue, while full-access print subscription volume and print advertising remain subject to secular declines.
- COVID-19, variants, government responses and changes in consumer behavior may continue to reduce revenue or increase costs.
- Newsprint price increases were announced or implemented during January, February, April, May and July 2021, with another increase expected in August. A $10-per-ton increase in 27.7-pound newsprint would reduce annual pretax income by approximately $0.5 million, based on anticipated 2021 consumption.
- The company remains highly leveraged, with fixed-rate debt at 9.0%, restricted access to additional financing, and no revolving facility.
- Declining print revenue and circulation, competition, technology changes, labor costs, cyberattacks, acquisition integration, impairment risk and the ability to achieve planned expense reductions remain material risks.
- Goodwill and intangible assets remain significant. The company has recorded nearly $1.3 billion of historical impairment charges and could incur additional charges if market value, revenue, expenses or cash flows underperform estimates.
- Routine legal proceedings and tax matters are unresolved, although management does not expect them to have a material adverse effect on consolidated financial statements.
Important facts for investors to verify
- Separate organic performance from reported growth generated by the BH Media and Buffalo News acquisitions, particularly for the year-to-date period.
- Reconcile adjusted EBITDA and revenue-less-cash-cost measures to GAAP results and assess whether elevated compensation and digital investment costs are sustainable.
- Monitor debt repayment, excess-cash-flow requirements, fixed 9.0% interest expense and covenant restrictions.
- Track digital subscriber growth and digital revenue against continuing declines in print advertising, print circulation and full-access subscriptions.
- Evaluate the effect of continuing newsprint price increases, COVID-19 developments and potential goodwill or intangible-asset impairments.
- Confirm the treatment and timing of the $23.8 million curtailment gain and $12.3 million pension withdrawal liability when assessing recurring earnings and cash flow.