Lee Enterprises, Inc. — Fiscal 2019 Form 10-K Summary
Business context and reporting period
Lee Enterprises operates 50 local media operations across 20 states, providing print and digital news, advertising, marketing services, subscriptions, commercial printing, distribution and digital publishing services through TownNews. The filing covers the 52-week fiscal year ended September 29, 2019; fiscal 2018 comprised 53 weeks.
For the fourth quarter ended September 29, 2019, revenue was $123.7 million, net income was $1.3 million, income attributable to Lee was $0.8 million and diluted EPS was $0.01.
Financial performance and key metrics
| Metric | 2019 | 2018 | Change |
|---|---|---|---|
| Operating revenue | $509.9 million | $544.0 million | (6.3%) |
| Advertising and marketing services | $265.9 million | $303.4 million | (12.4%) |
| Subscription revenue | $186.7 million | $195.1 million | (4.3%) |
| Other revenue | $57.2 million | $45.4 million | 26.1% |
| Operating income | $74.7 million | $85.7 million | (12.8%) |
| Net income | $15.9 million | $47.0 million | (66.2%) |
| Income attributable to Lee | $14.3 million | $45.8 million | (68.8%) |
| Adjusted EBITDA | $121.5 million | $131.9 million | (7.9%) |
| Cash provided by operating activities | $57.7 million | $59.3 million | (2.7%) |
Cash costs declined 5.9% on a same-property basis to $398.8 million. Revenue less cash costs, or management’s non-GAAP margin measure, was $111.0 million, representing approximately 21.8% of revenue. Operating margin was approximately 14.7%, net margin was approximately 3.1% and Adjusted EBITDA margin was approximately 23.8%.
Total digital revenue increased 4.0% to $144.6 million, or 28.4% of operating revenue. Digital-only subscribers increased 79.1% to 91,000. TownNews revenue increased approximately 20% to $22.6 million, while Amplified Agency revenue increased 29%.
Cash and cash equivalents were $8.6 million at year-end. Total liquidity, including available revolver capacity, was $26.3 million, consisting of approximately $17.6 million of revolver availability and cash. Capital expenditures were $5.9 million, acquisition spending was $6.5 million, and cash used in financing activities was $43.5 million, primarily for debt repayment.
Principal debt totaled $443.6 million, down $41.2 million from 2018. Debt consisted primarily of $363.4 million of 9.5% senior secured notes due March 2022 and $80.2 million of a 12.0% second-lien term loan due December 2022. The weighted-average cost of debt was 10.0%, and net debt was approximately 3.6 times Adjusted EBITDA. Stockholders’ deficit was $38.5 million.
Material changes versus the prior comparable period
- Revenue declined primarily because of continued weakness in print advertising, lower print subscription volumes and the absence of the 53rd week included in fiscal 2018.
- Advertising and marketing services declined 12.4%, with national retail, big-box and classified advertising particularly weak. Digital advertising and marketing services reached $100.0 million and partially offset print declines.
- Subscription revenue decreased 4.3% because of full-access volume declines, partially offset by pricing initiatives and growth in digital-only subscribers.
- Other revenue increased 26.1%, aided by a full year of BH Media Group management agreement revenue and TownNews growth.
- Operating expenses decreased 5.4%, including an 8.2% reduction in compensation and a 10.9% reduction in newsprint and ink costs. Restructuring costs increased to $11.6 million from $5.6 million, including $3.8 million related to multiemployer pension withdrawals.
- Interest expense decreased $5.4 million to $47.5 million because of lower debt balances. The remaining first-lien term loan was repaid in November 2018.
- Net income benefited from a $16.2 million income tax benefit in 2018, including the impact of the 2017 Tax Act; 2019 included $7.9 million of tax expense. This significantly affected the year-over-year net income comparison.
- The Company acquired the Kenosha News and Lake Geneva Regional News businesses and TownNews acquired a content management system business during 2019.
Guidance, outlook, risks and unusual items
- Management expected 2020 cash costs to decline 5.5% to 6.5%, supported by transformation initiatives, lower print production and distribution costs and lower newsprint prices.
- Management anticipated approximately $7.8 million of 2020 capital expenditures, pension contributions of $6.7 million and continued use of substantially all available cash flow for debt reduction.
- The Company expects to refinance its debt before the 2022 maturities and amend or extend its $23.1 million revolving facility before its December 2020 maturity. Its ability to continue as a going concern depends on cash generation, covenant compliance and refinancing or amendment of debt agreements.
- Lee remains exposed to structural declines in print advertising and circulation, competition from digital and other media, advertiser demand, technology changes, cybersecurity incidents, newsprint price volatility, labor costs and economic weakness.
- Pension liabilities, net of plan assets, increased to approximately $47.0 million. The Company expects additional contributions and faces potential withdrawal liabilities from multiemployer pension plans, including a $3.3 million accrued liability related to the CWA/ITU plan and a $3.2 million final assessment related to the GCIU plan.
- The Company recorded $2.5 million of asset-sale losses in 2019 and $11.6 million of restructuring costs. No goodwill or indefinite-lived intangible asset impairment was recorded in 2019.
- A $1.3 million out-of-period adjustment related to debt financing costs was recorded in 2019; management concluded it was not material to prior or current financial statements.
- Adoption of the new lease standard on September 30, 2019 was expected to add $9.6 million to $12.6 million of lease liabilities and right-of-use assets, with possible additional obligations from embedded leases in outsourced printing contracts.
- KPMG issued unqualified opinions on the consolidated financial statements and internal control over financial reporting. Management reported effective disclosure controls and internal controls.
Important facts for investors to verify
- Whether digital growth, including TownNews, digital advertising and digital-only subscriptions, can offset continuing print revenue declines.
- The Company’s ability to refinance or otherwise address the $363.4 million of notes due in 2022 and the $80.2 million second-lien term loan due in December 2022.
- Actual 2020 cash generation, cash-cost reductions, pension contributions and debt repayment relative to management’s expectations.
- Compliance with debt covenants and the availability and extension terms of the revolving facility.
- The ultimate amount and timing of multiemployer pension withdrawal liabilities and the effect of pension funding requirements on liquidity.
- Potential additional impairment charges, lease obligations related to outsourced printing arrangements and changes in newsprint prices.
- The dilution and potential liquidity effects of 6.0 million outstanding warrants exercisable at $4.19 per share.