Lee Enterprises, Inc. — Fiscal 2020 Form 10-K Summary
Business context and reporting period
The filing covers the 52-week fiscal year ended September 27, 2020; “2020 Q4” is the final quarter of this fiscal year, but the filing primarily reports full-year results. Lee operates local print and digital media, advertising and marketing services, and digital publishing services across 77 markets in 26 states. On March 16, 2020, Lee acquired BH Media’s newspaper operations and The Buffalo News for $140.0 million, substantially expanding its operating footprint and revenue base. The acquisition was financed through a new $576.0 million term loan from BH Finance, an affiliate of Berkshire Hathaway.
Key financial metrics
| Metric | 2020 | 2019 | Change |
|---|---|---|---|
| Operating revenue | $618.0 million | $509.9 million | 21.2% increase |
| Advertising and marketing services | $289.7 million | $265.9 million | 8.9% increase |
| Subscription revenue | $265.9 million | $186.7 million | 42.4% increase |
| Digital revenue | $164.3 million | $144.6 million | 13.6% increase |
| Operating income | $50.3 million | $74.7 million | 32.7% decrease |
| Net income | $(1.3) million | $15.9 million | Decline to loss |
| Net income attributable to Lee | $(3.1) million | $14.3 million | Decline to loss |
| Diluted EPS | $(0.05) | $0.25 | Decline |
| Adjusted EBITDA | $97.2 million | $121.5 million | 20.0% decrease |
| Cash costs | $526.6 million | $398.8 million | 32.1% increase |
| Revenue less cash costs | $91.4 million | $111.0 million | 17.7% decrease |
| Cash flow from operations | $49.9 million | $57.7 million | 13.5% decrease |
Calculated operating margin was approximately 8.1% in 2020 versus 14.7% in 2019. Adjusted EBITDA margin was approximately 15.7% versus 23.8%. The filing states that Adjusted EBITDA and cash costs are non-GAAP measures.
- Digital advertising and marketing services were $106.5 million, representing 36.8% of advertising and marketing services revenue.
- Digital-only subscribers reached 244,000 at year-end, up 63.1% from 2019; 92,000 were added through the BH Media and Buffalo News transactions.
- TownNews revenue was $25.0 million, up 10.7% on a standalone basis.
- Cash and cash equivalents were $33.7 million at September 27, 2020, compared with $8.6 million a year earlier.
- Principal debt was $538.3 million, consisting of a fixed-rate 9.0% term loan maturing in March 2045. Debt, net of cash and restricted cash, was $504.6 million.
- Management reported compliance with debt covenants. There is no revolving facility, and the credit agreement restricts dividends.
- Total assets were $864.1 million and stockholders’ deficit was $31.6 million at year-end.
Material changes versus the prior comparable period
- Reported revenue increased primarily because the acquired businesses contributed $203.0 million of revenue. The increase does not represent organic growth alone.
- Operating expenses increased 29.1%, including $193.8 million of acquired expenses. Compensation increased 32.9% and other operating expenses increased 33.9%.
- COVID-19 caused significant declines in advertising demand, particularly as local businesses and retail activity were disrupted. Furloughs and compensation reductions temporarily reduced operating expenses by approximately $10.0 million.
- Operating income and Adjusted EBITDA declined despite the acquisition-driven revenue increase, reflecting COVID-19 effects, ongoing print revenue declines, acquisition-related costs, and higher operating expenses.
- Interest expense was broadly stable at $47.7 million, but debt financing and administrative costs increased to $12.0 million, including $9.6 million of accelerated amortization of previously unamortized debt issuance costs.
- Cash used in investing activities increased to $118.2 million, including $131.0 million of acquisition spending. Financing activities provided $93.4 million, primarily from the new term loan and refinancing.
- Pension liabilities, net of plan assets, increased to approximately $71.5 million, primarily because of pension plans acquired with Buffalo News.
- The company adopted the new lease accounting standard, recording $70.9 million of operating lease right-of-use assets and $71.0 million of related lease liabilities at year-end.
Guidance, outlook, commentary, risks and unusual items
- Management expects COVID-19 to continue having a significant negative near-term impact on advertising and subscription activity, with the duration and long-term effects uncertain.
- Lee expects to achieve approximately $100 million of cost reductions from December 2019 through September 2021 through centralized functions, systems consolidation, and elimination of duplicate costs. Management cautions that these actions may not fully offset pandemic-related weakness.
- Management expects digital-only subscribers to exceed 500,000 by 2025 and expects continued growth in TownNews through market-share gains, product-mix improvements, and expansion into adjacent markets.
- Planned 2021 capital expenditures are approximately $9.6 million. Expected 2021 pension contributions are approximately $3.2 million.
- Liquidity is constrained by the debt structure: cash of $33.7 million less $13.7 million of current debt maturities leaves approximately $20.0 million before considering future cash flows. Excess cash above $20.0 million is generally required to repay debt.
- The company’s debt carries a 9.0% fixed interest rate and requires substantial cash interest payments. Failure to comply with covenants or meet debt obligations could permit acceleration of the debt.
- Subsequent events include a $23.8 million non-cash curtailment gain from eliminating retiree medical benefits for certain employees, expected to be recognized in the quarter ended December 27, 2020, and an estimated $12.3 million multiemployer pension withdrawal liability from an October 2020 withdrawal.
- 2020 included a $972,000 impairment charge for non-amortized intangible assets; goodwill impairment was not recorded.
- Material risks include further print and advertising declines, prolonged COVID-19 impacts, acquisition integration risk, high leverage, pension and multiemployer withdrawal liabilities, impairment of goodwill and other intangibles, cybersecurity incidents, labor disruptions, newsprint costs, competition, and possible NYSE listing issues.
- Management and KPMG reported effective internal control over financial reporting, although acquired businesses representing 38.4% of total assets and 32.5% of total revenue were excluded from management’s assessment.
Most important facts for investors to verify
- Separate acquisition-driven revenue growth from organic trends, particularly advertising, print subscriptions, and digital revenue.
- Progress toward the $100 million cost-reduction target and whether savings offset COVID-19 and structural print declines.
- Free cash flow after interest, capital expenditures, pension contributions, and mandatory excess-cash-flow debt repayments.
- Liquidity headroom under the $20.0 million excess-cash-flow threshold and compliance with all debt covenants.
- Integration results for BH Media and The Buffalo News, including expected synergies and final purchase-price accounting.
- Potential additional impairment charges for mastheads, goodwill, or other intangible assets.
- Actual future obligations from pension plans, multiemployer withdrawal liabilities, and the October 2020 retiree medical and Buffalo withdrawal events.
- The filing text does not provide a separate full-year or quarter-specific organic revenue, free cash flow, or management earnings forecast.