Lee Enterprises, Inc. — Fiscal 2021 Form 10-K Summary
Reporting period: Fiscal year ended September 26, 2021, comprising 52 weeks. The filing is an annual Form 10-K, not a standalone quarterly filing. Comparisons are primarily with fiscal 2020, which included the March 2020 acquisition of BH Media and Buffalo News.
Business Context
Lee operates 77 principally mid-sized local media operations across 26 states, providing print and digital news, subscriptions, advertising and marketing services, commercial printing, distribution, and digital publishing services through TownNews. The company is transitioning from a print-centric business toward digital subscriptions, digital marketing, and software-as-a-service offerings.
- Digital-only subscribers reached 402,000, up 65% from 2020.
- Amplified Agency revenue was approximately $41.6 million, up 42.6%.
- TownNews revenue, including intercompany revenue, was approximately $27.2 million, up 8.6%.
- Digital revenue totaled $253.5 million, representing 31.9% of operating revenue versus 26.6% in 2020.
Financial Performance
| Metric | 2021 | 2020 | Change |
|---|---|---|---|
| Total operating revenue | $794.6 million | $618.0 million | +28.6% |
| Advertising and marketing services | $369.3 million | $289.7 million | +27.5% |
| Subscription revenue | $357.7 million | $268.3 million | +33.3% |
| Other revenue | $67.7 million | $60.1 million | +12.6% |
| Operating income | $56.6 million | $50.3 million | +12.5% |
| Net income | $24.8 million | $(1.3) million | Improved |
| Income attributable to Lee | $22.8 million | $(3.1) million | Improved |
| Diluted EPS | $3.91 | $(0.55) | Improved |
| Adjusted EBITDA | $116.6 million | $97.2 million | +19.9% |
| Cash provided by operating activities | $50.1 million | $49.9 million | +0.4% |
Reported operating margin was approximately 7.1%, net margin was approximately 3.1%, and Adjusted EBITDA margin was approximately 14.7%. Cash Costs were $686.3 million, producing non-GAAP revenue less Cash Costs of $108.4 million, or approximately 13.6% of revenue.
Material Changes Versus Prior Comparable Period
- Reported revenue increased substantially because fiscal 2021 included a full year of BH Media and Buffalo News operations, whereas fiscal 2020 included only a partial period. On a pro forma basis, total revenue declined 3.3%.
- On a pro forma basis, advertising and marketing services revenue declined 6.0%, primarily because print advertising fell 12.9%; digital advertising and marketing services increased 8.3%.
- On a pro forma basis, subscription revenue increased 0.5%, with digital subscriber and digital subscription growth offsetting declines in traditional full-access subscriptions.
- Digital revenue increased 34% on a pro forma basis and became a larger share of total revenue.
- Pro forma Cash Costs declined 2.7%, reflecting cost reductions, lower print volumes, outsourcing, and lower delivery costs, partly offset by investment in digital capabilities.
- Management reported $112 million of cumulative cost synergies from the BH Media and Buffalo News transactions, exceeding its $100 million target through September 2021.
- Operating cash flow was broadly stable despite improved earnings because working capital absorbed cash, including unfavorable changes in receivables and income taxes payable.
Cash Flow, Debt and Liquidity
| Item | Amount or Terms |
|---|---|
| Cash and cash equivalents | $26.1 million at September 26, 2021 |
| Liquidity after current debt maturities | $20.0 million |
| Total debt principal | $482.6 million |
| Current debt maturities | $6.1 million |
| Weighted average cost of debt | 9.0% |
| Net debt / Adjusted EBITDA | 3.9 times |
| Final stated debt maturity | 2045 |
| 2021 capital expenditures | $7.5 million |
The debt is entirely fixed rate and is governed by a Credit Agreement with BH Finance. There is no revolver. The agreement requires mandatory repayments from excess cash flow and certain asset-sale proceeds, restricts additional debt and other capital transactions, and prohibits common-stock dividends subject to limited exceptions. Management stated that existing cash and expected operating cash flow should satisfy interest and principal obligations due over the next 12 months.
Guidance, Outlook and Unusual Items
- Management expects 2022 capital expenditures of approximately $12 million, funded from internally generated cash.
- Management targets continued digital subscriber growth and expects digital-only subscribers to exceed 900,000 by 2026.
- Management plans continued investment in multimedia, video, streaming, digital marketing, and TownNews offerings.
- Fiscal 2021 net income benefited from a $23.8 million non-cash curtailment gain related to eliminating certain post-retirement medical coverage. This was partly offset by a $12.9 million pension withdrawal cost payable over 20 years.
- Restructuring costs were $7.2 million, primarily severance. Asset losses, impairments, and other charges totaled $8.2 million, including $0.8 million of masthead impairment and $0.2 million of other intangible impairment.
- At September 26, 2021, pension plans were in a net overfunded position of $13.4 million, compared with a $71.5 million underfunded position in 2020. The improvement was driven by asset returns and actuarial gains.
- After year-end, Lee sold three buildings for net proceeds of $14.5 million and made an additional $10.4 million principal payment in the first quarter of fiscal 2022.
- After year-end, Alden Global Capital proposed acquiring Lee for $24 per share. Lee's board rejected the proposal as undervaluing the company. The board also adopted a stockholder rights plan effective through November 23, 2022, subject to its terms.
Key Risks and Contingencies
- Continued secular decline in print advertising, print circulation, and traditional media consumption.
- COVID-19-related effects on advertising demand, subscriptions, costs, employee availability, and local economies, including potential effects from variants and government restrictions.
- High leverage, 9% borrowing costs, mandatory excess-cash-flow and asset-sale repayments, covenant compliance, and limited liquidity.
- Dependence on successful digital transformation, subscriber growth, digital advertising, and TownNews and Amplified execution.
- Potential impairment of goodwill, mastheads, and other intangible assets. Goodwill was $330.2 million and mastheads were $39.7 million at year-end; future revenue or valuation declines could require non-cash impairment charges.
- Newsprint price and supply volatility. A $10-per-ton increase in 27.7-pound newsprint was estimated to reduce annual pretax income by approximately $0.5 million based on anticipated 2022 consumption.
- Cybersecurity, data privacy, payment-card, and information-technology system risks.
- Multiemployer pension withdrawal liabilities totaled $23.5 million at year-end, with additional potential obligations and collective-bargaining agreements expiring within 12 months.
- Unsolicited takeover activity could result in management distraction, legal and advisory costs, litigation, employee or customer uncertainty, and stock-price volatility.
Investor Verification Checklist
- Reconcile reported growth with pro forma trends to isolate the effect of the BH Media and Buffalo News acquisition.
- Verify whether digital subscriber growth and digital revenue can offset ongoing print advertising and circulation declines.
- Review operating cash flow, excess-cash-flow debt repayments, and the ability to maintain at least adequate liquidity under the Credit Agreement.
- Assess the sustainability of the $116.6 million Adjusted EBITDA, including the non-GAAP exclusions and the effect of unusual pension items.
- Monitor future impairment testing for goodwill and mastheads, particularly the sensitivity to revenue forecasts, royalty rates, and discount rates.
- Review subsequent filings regarding the Alden proposal, the rights plan, any proxy contest, and related transaction costs.
- Verify the timing and amount of additional multiemployer pension withdrawal liabilities and upcoming labor-agreement renewals.