Lee Enterprises, Inc. — Fiscal 2021 First-Quarter Form 10-Q
Reporting period: 13 weeks ended December 27, 2020, compared with the 13 weeks ended December 29, 2019. The filing was signed February 5, 2021. Results include the BH Media Newspaper Business and Buffalo News acquisitions completed March 16, 2020, which materially affect year-over-year comparisons.
Business Context
Lee operates local print and digital media businesses, including newspapers, digital advertising and subscriptions, commercial printing, and TownNews digital services. The company reported approximately 1.2 million print and digital subscribers, including approximately 286,000 digital-only subscribers, and operated 77 principally mid-sized local media operations.
Financial Performance and Key Metrics
| Metric | Q1 FY2021 | Q1 FY2020 | Change |
|---|---|---|---|
| Total operating revenue | $211.8 million | $122.3 million | +73.1% |
| Advertising and marketing services | $102.6 million | $65.7 million | +56.1% |
| Subscription revenue | $90.5 million | $41.7 million | +117.1% |
| Operating income | $20.8 million | $18.3 million | +13.7% |
| Net income | $16.4 million | $5.7 million | +187.0% |
| Net income attributable to Lee | $15.9 million | $5.3 million | +199.0% |
| Diluted EPS | $0.28 | $0.09 | Improved |
| Adjusted EBITDA | $40.0 million | $28.1 million | +42.3% |
| Cash provided by operating activities | $18.4 million | $10.4 million | +77.4% |
Calculated operating margin was approximately 9.8%, compared with approximately 15.0% in the prior-year quarter. Net margin was approximately 7.7%, compared with approximately 4.7%. Adjusted EBITDA margin was approximately 18.9%, compared with approximately 23.0%.
- Digital revenue, including digital advertising, digital subscriptions and digital services, was $62.5 million, or 29.5% of total revenue, up 57.9% year over year.
- Digital advertising and marketing services represented 34.1% of advertising and marketing services revenue.
- Total operating revenue less cash costs, a non-GAAP measure, was $37.9 million versus $25.9 million.
- Cash costs were $173.9 million, up 80.3% reported, but down 10.1% on a pro forma basis.
Liquidity, Debt and Cash Flow
- Cash and cash equivalents were $37.1 million at December 27, 2020, up from $33.7 million at September 27, 2020.
- Operating cash flow was $18.4 million. Investing activities used $0.1 million, and financing activities used $14.9 million, primarily for debt repayment.
- Total debt was $523.6 million, consisting of a fixed-rate 9.0% term loan; $506.4 million was classified as long-term debt and $17.1 million as current maturities.
- The term loan matures March 16, 2045. It has no revolving facility and requires prepayments based principally on excess cash flow and qualifying asset-sale proceeds.
- Excess cash flow for the quarter was $17.1 million, and an additional $1.0 million from asset sales was used to repay debt in January 2021.
- Management stated that expected interest and principal payments for the next 12 months can be satisfied with existing cash and operating cash flows. The company was in compliance with its debt covenants at quarter-end.
- Total liabilities were $879.7 million, compared with total assets of $867.3 million, resulting in a total deficit of $12.4 million.
Material Changes Versus the Prior Comparable Period
- Reported revenue growth primarily reflects the acquired operations, which contributed $109.1 million of revenue and $23.1 million of net income. On a pro forma basis, revenue declined 10.9%, indicating continued underlying pressure.
- Advertising growth included acquired revenue, higher Amplified Agency revenue and incremental political advertising, but print advertising demand continued to decline.
- Subscription growth reflected acquired revenue and higher digital-only subscriptions, partially offset by lower print circulation.
- Operating expenses increased 82.5% due largely to the acquisitions. Compensation rose 94.6%, newsprint and ink rose 68.8%, and other operating expenses rose 68.7%.
- Interest expense increased 6.9% to $11.9 million, although the reported weighted average debt cost declined to 9.0% from 9.9% because of the 2020 refinancing.
- The company achieved approximately $100 million of pro forma cost reductions from December 2019 through December 2020 through centralized functions and elimination of duplicate costs.
Outlook, Unusual Items and Risks
- COVID-19 continued to negatively affect advertising demand, profitability and cash flows. Management expects a significant near-term impact, while the longer-term effects remain uncertain.
- The company recorded a $23.8 million non-cash curtailment gain from eliminating postretirement medical coverage for certain participants. It also recorded a $12.3 million pension withdrawal cost; the estimated liability is payable over 20 years.
- Restructuring expense was $3.2 million, primarily severance. Asset losses, impairments and other charges were $5.2 million.
- Management stated that cost reductions may not fully offset pandemic-related effects and that a material deterioration could affect liquidity and the ability to meet obligations.
- Newsprint producers announced price increases for January and February 2021. A $10-per-ton increase for 27.7-pound newsprint would reduce annualized pretax income by approximately $0.5 million based on anticipated 2021 consumption.
- The company has substantial goodwill and intangible assets and has recorded nearly $1.3 billion of impairment charges since 2007. Future declines in market value, revenue or cash flow estimates could result in additional impairment charges.
- Warrants exercisable for approximately 6.0 million shares at $4.19 per share expire in March 2022 and could provide up to $25.1 million of liquidity if exercised, while also creating potential dilution.
- Potential risks include continued print and circulation declines, advertising demand, COVID-19 disruption, acquisition integration, debt covenant compliance, cybersecurity, labor costs, commodity prices, competition and possible legal or indemnification claims.
Investor Verification Items
- Separate the acquisition contribution from organic performance, particularly the 10.9% pro forma revenue decline and 10.1% pro forma cash-cost decline.
- Assess whether operating cash flow is sufficient to support the 9.0% debt burden, required excess-cash-flow repayments and ongoing capital needs.
- Monitor print advertising and circulation trends against digital subscriber and digital advertising growth.
- Review the sustainability of the approximately $100 million cost-reduction program and whether it can offset continued revenue pressure.
- Distinguish recurring operating performance from the $23.8 million curtailment gain, $12.3 million pension withdrawal cost and other restructuring or asset charges.
- Evaluate exposure to additional goodwill or intangible-asset impairments and the company’s deficit position.
- Verify COVID-19 impacts, newsprint cost increases, pension liabilities, acquisition accounting adjustments and compliance with the Berkshire-affiliated term-loan agreement.