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MarketScreener Homepage  >  Equities  >  Nyse  >  Lee Enterprises, Incorporated    LEE

LEE ENTERPRISES, INCORPORATED

(LEE)
  Report
Delayed Quote. Delayed Nyse - 11/27 01:10:00 pm
0.9999 USD   -2.92%
11/02DAVENPORT, IOWA (NOVEMBER 2, 2020) — LEE ENTERPRISES, INCORPORATED (NYSE : LEE), a leading provider of news, information and advertising in 77 markets, announced today that Lee Publisher Paul Farrell has been named group publisher of Lee's 13 Virginia markets. He will retain his role as president..
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11/02DAVENPORT, IOWA (OCTOBER 26, 2020) — LEE ENTERPRISES, INCORPORATED (NYSE : LEE), a leading provider of news, information and advertising in 77 markets, announced today that the company has named Michael Distelhorst president and director of local advertising sales for the Daily Journal in Park Hi..
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10/21DAVENPORT, IOWA (OCTOBER 21, 2020) — LEE ENTERPRISES, INCORPORATED (NYSE : LEE), a leading provider of news, information and advertising in 77 markets, announced today that it has named media executive Robin Gruen vice president of Brand Avenue Studios. She will lead Lee's custom content division..
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Lee Enterprises Incorporated : , INC Management's Discussion and Analysis of Financial Condition and Results of Operations (form 10-Q)

08/07/2020 | 03:28pm EST

The following discussion includes comments and analysis relating to our results of operations and financial condition as of and for the 13 and 39 weeks ended June 28, 2020. This discussion should be read in conjunction with the Consolidated Financial Statements and related Notes thereto, included herein, and our 2019 Annual Report on Form 10-K.



NON-GAAP FINANCIAL MEASURES


We use non-GAAP financial performance measures to supplement the financial information presented on a GAAP basis. These non-GAAP financial measures should not be considered in isolation or as a substitute for the relevant GAAP measures and should be read in conjunction with information presented on a GAAP basis.

In this report, we present Adjusted EBITDA, cash costs, and total operating revenue less cash costs which are non-GAAP financial performance measures that exclude from our reported GAAP results the impact of certain items consisting primarily of restructuring charges and non-cash charges. We believe such expenses, charges and gains are not indicative of normal, ongoing operations, and their inclusion in results makes for more difficult comparisons between years and with peer group companies. In the future, however, we are likely to incur expenses, charges and gains similar to the items for which the applicable GAAP financial measures have been adjusted and to report non-GAAP financial measures excluding such items. Accordingly, exclusion of those or similar items in our non-GAAP presentations should not be interpreted as implying the items are non-recurring, infrequent, or unusual.

We define our non-GAAP measures, which may not be comparable to similarly titled measures reported by other companies, as follows:

Adjusted EBITDA is a non-GAAP financial performance measure that enhances financial statement users overall understanding of the operating performance of the Company. The measure isolates unusual, infrequent or non-cash transactions from the operating performance of the business. This allows users to easily compare operating performance among various fiscal periods and how management measures the performance of the business. This measure also provides users with a benchmark that can be used when forecasting future operating performance of the Company that excludes unusual, nonrecurring or one time transactions. Adjusted EBITDA is also a component of the calculation used by stockholders and analysts to determine the value of our business when using the market approach, which applies a market multiple to financial metrics. It is also a measure used to calculate the leverage ratio of the Company, which is a key financial ratio monitored and used by the Company and its investors. Adjusted EBITDA is defined as net income (loss), plus non-operating expenses, income tax expense, depreciation and amortization, assets loss (gain) on sales, impairments and other, restructuring costs and other, stock compensation and our 50% share of EBITDA from TNI and MNI, minus equity in earnings of TNI and MNI.

Cash Costs represent a non-GAAP financial performance measure of operating expenses which are measured on an accrual basis and settled in cash. This measure is useful to investors in understanding the components of the Company's cash-settled operating costs. Generally, the Company provides forward-looking guidance of Cash Costs, which can be used by financial statement users to assess the Company's ability to manage and control its operating cost structure. Cash Costs are defined as compensation, newsprint and ink and other operating expenses. Depreciation and amortization, assets loss (gain) on sales, impairments and other, other non-cash operating expenses and other expenses are excluded. Cash Costs also exclude restructuring costs and other, which are typically settled in cash.

Total Operating Revenue Less Cash Costs, or "margin", represents a non-GAAP financial performance measure of revenue less total cash costs, also a non-GAAP financial measure. This measure is useful to investors in understanding the profitability of the Company after direct cash costs related to the production and delivery of products are paid. Margin is also useful in developing opinions and expectations about the Company's ability to manage and control its operating cost structure in relation to its peers.

The subtotals of operating expenses representing cash costs and total operating revenue less cash costs can be found in tables included herein, under the caption "Continuing Operations". Adjusted EBITDA is reconciled to net income, below, its closest comparable number under GAAP.

RECONCILIATION OF NON-GAAP FINANCIAL MEASURES

(UNAUDITED)

The table below reconciles the non-GAAP financial performance measure of Adjusted EBITDA to net income, the most directly comparable GAAP measure:

                                                13 Weeks Ended    39 Weeks Ended
                                             June 28, June 30, June 28, June 30,
(Thousands of Dollars)                           2020     2019     2020     2019

Net income (loss)                               (727)    6,172        2   14,564
Adjusted to exclude
Income tax expense (benefit)                      368    1,505     (92)    6,175
Non-operating expenses, net                    12,108   12,354   43,933   39,579
Equity in earnings of TNI and MNI               (842)  (1,451)  (3,773)  (5,298)

Loss (gain) on sale of assets and other, net 147 (195) (5,153) (212) Depreciation and amortization

                  11,201    7,347   25,196   22,263
Restructuring costs and other                   2,865    2,792    6,422    5,612
Stock compensation                                228      321      799    1,209

Add:

Ownership share of TNI and MNI EBITDA (50%)       955    1,806    4,464    6,486
Adjusted EBITDA                                26,303   30,651   71,798   90,378




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IMPACT OF RECENTLY ADOPTED ACCOUNTING STANDARDS

In February 2016, the FASB issued a new standard for the accounting treatment of leases, known as Accounting Standards Codification 842 ("ASC 842"). The new standard is based on the principle that entities should recognize assets and liabilities arising from leases. The new standard's primary change is the requirement for entities to recognize a lease liability for payments and a right-of-use ("ROU") asset representing the right to use the leased asset during the term on most operating lease arrangements. We adopted the standard effective September 30, 2019, the first day of fiscal year 2020.

We elected the package of practical expedients which permits the Company to not reassess under the new standard the prior conclusions about lease identification, lease classification, or initial direct costs. In addition, we did reassess whether existing land easements which were previously not accounted for as leases are or contain leases under the new guidance. We have elected to combine non-lease and lease components when accounting for leases. The Company has made a policy election to exclude short-term leases, those with an original term of less than twelve months, from recognition and measurement under ASC 842. As such, we have not recognized an ROU asset or lease liability for these leases. Additional information and disclosures required by this new standard are contained in Note 6.




CRITICAL ACCOUNTING POLICIES



Our critical accounting policies include the following:



  • Intangible assets, other than goodwill;
  • Pension, postretirement and postemployment benefit plans;
  • Income taxes; and
  • Business combinations



Accounting for business combinations requires us to make significant estimates and assumptions, especially at the acquisition date, with respect to tangible and intangible assets acquired and liabilities assumed. We use our best estimates and assumptions to accurately assign fair value to the tangible and intangible assets acquired and liabilities assumed at the acquisition date as well as the useful lives of those acquired intangible assets. The Company prepared its initial estimates of the fair values of intangible assets utilizing the multi-period excess earnings method for customer-related amortizable intangible assets and the relief from royalty method for indefinite lived masthead assets. Examples of critical estimates in valuing certain of the intangible assets and goodwill we have acquired include but are not limited to:



  • future expected cash flows from subscription, advertising and commercial
    print relationships and related assumptions about future revenue growth and
    customer retention;
  • discount rates; and
  • royalty rates used to value acquired mastheads.



Additional information regarding our accounting for business combinations can be found in Note 1. Additional information regarding all other critical accounting policies can be found under the caption "Management's Discussion and Analysis of Financial Condition and Results of Operations" in our 2019 Annual Report on Form 10-K.




EXECUTIVE OVERVIEW



Lee Enterprises, Incorporated is a leading provider of high quality, trusted, local news and information, and a major platform for advertising in the markets we serve.

Including the recently completed acquisition of BHMG and The Buffalo News, we operate 77 principally mid-sized local media operations.

We reach 72.5% of all adults in our larger markets through a combination of our print and digital content offerings.



  • Our web and mobile sites are the number one digital source of local news in
    most of our markets, reaching more than60 million unique visitors, in the
    month of June 2020 with 485 million page views and 131 million visits.

  • Our printed newspapers, including the acquisitions, reach
    approximately 1.2 million households daily and approximately 1.5 million on
    Sunday, with estimated readership totaling three million. Digital only
    subscribers totaled approximately 222,000, with a 85.4% increase over the
    prior year at Legacy Lee.



Our products include daily newspapers, websites and mobile applications, mobile news and advertising, video products, a digital marketing agency, digital services including web hosting and content management, niche publications and community newspapers. Our local media operations range from large daily newspapers and their associated digital products, such as the St. Louis Post-Dispatch, to non-daily newspapers with news websites and digital platforms serving smaller communities.

We also operate TownNews, through our 82.5% owned subsidiary INN Partners, L.C. ("TownNews"). TownNews provides state-of-the-art web hosting, content management services and video management services to nearly 2,200 other media organizations including broadcast.




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Purchase Agreement with Berkshire Hathaway

On March 16, 2020, the Company completed the Asset and Stock Purchase Agreement dated as of January 29, 2020 with Berkshire Hathaway Inc., a Delaware corporation ("Berkshire") and BH Media Group, Inc., a Delaware corporation ("BHMG") (the "Purchase Agreement"). As part of the Purchase Agreement, the Company purchased certain assets and assumed certain liabilities of BHMG's newspapers and related community publications business ("BH Media Newspaper Business"), excluding real estate and fixtures such as production equipment, and all of the issued and outstanding capital stock of The Buffalo News, Inc., a Delaware corporation ("Buffalo News"), for a combined purchase price of $140,000,000 (collectively, the "Transactions"). The Transactions were financed pursuant to a credit agreement dated as of January 29, 2020 between the Company and BH Finance LLC, a Delaware limited liability company affiliated with Berkshire (the "Credit Agreement"). Our Consolidated Financial Statements show the combined results of the Company for the period of March 16, 2020 through and as of June 28, 2020.

BHMG includes 30 daily newspapers and digital operations, in addition to 49 paid weekly newspapers with websites and 32 other print products. Buffalo News is a provider of local print and digital news to the Buffalo, NY area. Between July 2, 2018 and March 16, 2020, the Company managed the BH Media Newspaper Business pursuant to a Management Agreement between BHMG and the Company dated June 26, 2018 (the "Management Agreement").

In connection with the Transactions, the Management Agreement terminated on March 16, 2020. As part of the settlement of the preexisting relationship, the Company received $5,425,000 at closing. This amount represented $1,245,000 in fixed fees pro-rated under the contract and $4,180,000 in variable fees based upon the pro-rated annual target. The Company did not recognize a gain or loss as a result of the settlement of this preexisting relationship.

In connection with the Transactions, the Company entered into a lease agreement between BH Media, as Landlord, and the Company, as Tenant, providing for the leasing of 68 properties and related fixtures (including production equipment) used in the BH Media Newspaper Business (the "BH Lease"). The BH Lease was signed and commenced on March 16, 2020. The BH Lease requires the Company to pay annual rent of $8,000,000, payable in equal monthly payments, as well as all operating costs relating to the properties (including maintenance, repairs, property taxes and insurance). Rent payments will be subject to a Rent Credit (as defined in the BH Lease) equal to 8.00% of the net consideration for any leased real estate sold by BH Media during the term of the BH Lease.

IMPAIRMENT OF GOODWILL AND OTHER ASSETS

We have significant amounts of goodwill and identified intangible assets. Since 2007 we have recorded impairment charges totaling almost $1.3 billion to reduce the value of certain of these assets. Future decreases in our market value, or significant differences in revenue, expenses or cash flows from estimates used to determine fair value, could result in additional impairment charges in the future.

CERTAIN MATTERS AFFECTING CURRENT AND FUTURE OPERATING RESULTS

The following items affect period-over-period comparisons from 2020 to 2019 and will continue to affect period-over-period comparisons for future results:




Acquisitions and Divestitures



  • In March 2020, we completed the acquisition of BHMG and The Buffalo News for
    a purchase price of $140,000,000. The acquisition was funded by the Term
    Loan, as part of a broader comprehensive refinancing of all of our then
    outstanding debt, as well as cash on our balance sheet.

  • In the 13 weeks ended March 2020, we disposed of substantially all of the
    assets of certain of our smaller properties, including four daily newspapers
    and related print and digital publications, for an aggregate sales price of
    $3,950,000.




Impacts of COVID-19



With the outbreak of COVID-19 and the declaration of a pandemic by the World Health Organization on March 11, 2020, governments implemented a combination of shelter-in-place orders and other recommendations severely limiting or restricting economic activity in our local markets. Certain aspects of our operating results have experienced lower revenue and profitability over the last several years and these trends are expected to continue in the future; however, the pandemic and government restrictions caused significant and immediate declines in demand for certain our products and services, and ultimately in advertising revenue.

The COVID-19 pandemic has had and the Company currently expects that it will continue to have a significant negative impact, in the near term, on the Company's business and operating results. The long-term impact of the COVID-19 pandemic will depend on the length, severity and recurrence of the pandemic, the availability of antiviral medications and vaccinations, the duration and extent of government actions designed to combat the pandemic, as well as changes in consumer behavior, all of which are highly uncertain. Despite the significant negative impacts on our operating results, we have operated uninterrupted in providing local news, information and advertising in our print and digital editions.

In combination with our acquisition integration, ongoing business transformation and addressing the continued effects of COVID-19 on our operating results, we continued to implement measures to solidify our relationship with our local advertisers, reduce our cost structure and preserve liquidity, and as a result expect to achieve $100 million in cost reductions from December 2019 through September 2021. These reductions will be achieved by centralizing certain business functions and systems and reducing duplicate cost structures across the combined organization. The Company believes these initiatives will allow us to meet our commitments; however, they may not be sufficient to fully offset the negative impact of the COVID-19 pandemic on the Company's business and results of operations.

We have evaluated the current economic environment as of June 28, 2020 and have concluded that there is no event or circumstance that has occurred to trigger an impairment assessment of our long-lived or indefinite-lived assets. We will continue to monitor the environment to determine whether the impacts to the Company represent an event or change in circumstances that may trigger a need to reassess for useful life revision or impairment.




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13 WEEKS ENDED June 28, 2020

Operating results, as reported in the Consolidated Financial Statements, are summarized below.

--------------------------------------------------------------------------------

                                                       June 28,       June 30,       Percent
(Thousands of Dollars, Except Per Share Data)              2020           2019        Change
Advertising and marketing services revenue               77,754         65,754          18.2
Subscription                                             88,517         46,620          89.9
Other                                                    16,257         14,910           9.0
Total operating revenue                                 182,528        127,284          43.4
Operating expenses:
Compensation                                             72,396         45,373          59.6
Newsprint and ink                                         7,572          5,230          44.8
Other operating expenses                                 77,440         48,157          60.8
Cash costs                                              157,408         98,760          59.4
Total operating revenue less cash costs                  25,120         28,524         (11.9 )
Depreciation and amortization                            11,201          7,347          52.5
Assets loss (gain) on sales, impairments and                147           (195 )          NM
other, net
Restructuring costs and other                             2,865          2,792           2.6
Operating expenses                                      171,621        108,704          57.9
Equity in earnings of associated companies                  842          1,451         (42.0 )
Operating income                                         11,749         20,031         (41.3 )
Non-operating income (expense):
Interest expense                                        (13,135 )      (11,860 )        10.8
Debt financing and administrative cost                        -         (4,196 )          NM
Other, net                                                1,027          3,702         (72.3 )
Non-operating expenses, net                             (12,108 )      (12,354 )        (2.0 )
Income (loss) before income taxes                          (359 )        7,677            NM
Income tax expense                                          368          1,505         (75.5 )
Net income (loss)                                          (727 )        6,172            NM
Net income attributable to non-controlling                 (548 )         (406 )        35.0

interests

Income (loss) attributable to Lee Enterprises,           (1,275 )        5,766            NM

Incorporated

Other comprehensive income (loss), net of income            317           (122 )          NM

taxes

Comprehensive income (loss) attributable to Lee            (958 )        5,644            NM
Enterprises, Incorporated
Earnings per common share:
Basic                                                     (0.02 )         0.10            NM
Diluted                                                   (0.02 )         0.10            NM



References to the "2020 Quarter" refer to the 13 weeks ended June 28, 2020. Similarly, references to the "2019 Quarter" refer to the 13 weeks ended June 30, 2019.



                               Operating Revenue


Total operating revenue was $182,528,000 in the 2020 Quarter, up $55,244,000, or 43.4%, which included $91,173,000 in revenue from the acquisitions.

Advertising and marketing services revenue totaled $77,754,000 in the 2020 Quarter, up 18.2% compared to the prior year. Print advertising revenues were $51,989,000 in the 2020 Quarter, up 29.0% compared to the prior year, with $29,536,000 attributable to acquired print advertising revenue. Digital advertising and marketing services totaled $25,765,000 in the 2020 Quarter, up 1.2% compared to the prior year, with $6,747,000 attributable to acquired digital advertising and marketing services revenue. Digital advertising and marketing services represented 33.1% of the 2020 Quarter total advertising and marketing services revenue. Increases in the 2020 Quarter are attributed to acquired revenue, offset by the continued downward trend in print advertising demand, and the significant negative effects of COVID-19 in the 2020 Quarter.

Subscription revenue totaled $88,517,000 in the 2020 Quarter, up 89.9% compared to the 2019 Quarter. The increase is attributed to $48,205,000 of acquired subscription revenue and an increase in digital-only subscription revenue partially offset by lower print circulation units, consistent with industry trends and timing of price increases. As of June 28, 2020, we now have nearly 222,000 digital only subscribers.

The COVID-19 pandemic had a significant negative effect on single copy sales due to limited economic activity in our markets. Revenue from single copy sales were down 26.9% on a proforma basis.

Other revenue, which primarily consists of digital services revenue from TownNews and commercial printing revenue, increased $1,347,000, or 9.0%, in the 2020 Quarter compared to the 2019 Quarter. Other revenue in the 2020 Quarter included $6,685,000 of acquired other revenue, primarily from commercial printing. Digital services revenue totaled $4,971,000 in the 2020 Quarter, a 2.3% decrease compared to the 2019 Quarter. On a pro-forma basis, digital services revenue increased 8.5%. On a stand-alone basis, revenue at TownNews totaled $6,339,000, an increase of 7.7%. Investments in video and streaming technology expanded product offerings that helped gain market share in publishing and broadcast, and increased revenue. Commercial printing revenue totaled $5,446,000 in the 2020 Quarter, a 203.2% increase compared to the 2019 Quarter, due to $4,370,000 of acquired commercial printing revenue offset by declines in volume from our partners, consistent with general industry trends. Management Agreement revenue was $0 in the 2020 Quarter compared to $3,539,000 in the 2019 Quarter, due to the cessation of the agreement in conjunction with the transaction.

Total digital revenue including digital advertising revenue, digital subscription revenue and digital services revenue totaled $42,423,000 in the 2020 Quarter, an increase of 15.0% over the 2019 Quarter, and represented 23.2% of our total operating revenue in the 2020 Quarter.

Equity in earnings of TNI and MNI decreased $609,000 in the 2020 Quarter.




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                               Operating Expenses


Total operating expenses were $171,621,000, a 57.9% increase compared to the 2019 Quarter, which included $86,680,000 in operating expenses from acquisitions. Operating expenses include compensation expense, newsprint and ink, other operating expenses, depreciation, amortization, restructuring and other expenses, assets loss (gain) on sales, and impairments. Cash costs were $157,408,000, a 59.4% increase compared to the 2019 Quarter, which included $79,284,000 of acquired Cash Costs.

Compensation expense increased $27,023,000 in the 2020 Quarter, or 59.6%, compared to the 2019 Quarter. This increase was attributable to $38,630,000 of acquired compensation expense, partially offset by a 22.4% reduction in FTEs on a same property basis and furlough or compensation reductions for all employees in the 2020 Quarter, totaling approximately $10,000,000.

Newsprint and ink costs increased $2,342,000 in the 2020 Quarter, or 44.8%, compared to the 2019 Quarter. The increase is attributable to acquired newsprint and ink expenses of $4,799,000 offset by declines in newsprint volumes and prices. See Item 3, "Commodities", included herein, for further discussion and analysis of the impact of newsprint on our business.

Other operating expenses increased $29,283,000 in the 2020 Quarter, or 60.8%, compared to the 2019 Quarter. Other operating expenses include all operating costs not considered to be compensation, newsprint, depreciation and amortization, or restructuring costs and other. The largest components are costs associated with printing and distribution of our printed products, digital cost of goods sold and facility expenses. The increase is attributable to $35,855,000 of acquired other operating expenses and increases in digital investments, partially offset by lower delivery and other print-related costs due to lower volumes of our print editions.

Restructuring costs and other totaled $2,865,000 and $2,792,000 in the 2020 Quarter and 2019 Quarter, respectively. Restructuring costs in 2020 and 2019 are predominately severance.

Depreciation expense increased $1,202,000, or 38.2%, and amortization expense increased $2,652,000, or 63.1%, in the 2020 Quarter.

Assets loss (gain) on sales, impairments and other, was a net loss of $147,000 in the 2020 Quarter compared to a net gain of $195,000 in the 2019 Quarter.

The factors noted above resulted in operating income of $11,749,000 in the 2020 Quarter compared to $20,031,000 in the 2019 Quarter.



                        Non-operating Income and Expense


Interest expense increased $1,275,000, or 10.8%, to $13,135,000 in the 2020 Quarter. Our weighted average cost of debt, excluding amortization of debt financing costs, was 9.0% at the end of the 2020 Quarter and 10.0% at the end of the 2019 Quarter. The reduction of the weighted average cost of debt is due to the 2020 Refinancing.

We recognized no debt financing and administrative expense in the 2020 Quarter compared to $4,196,000 in the 2019 Quarter. The decrease in the 2020 Quarter is primarily driven by expensing previously unamortized financing costs which were expensed as incurred in the quarter ended March 29, 2020 as a result of the 2020 Refinancing.

Other non-operating income and expense consists of benefits associated with our pension and other postretirement plans and the fair value adjustment of our Warrants. We recorded $1,370,000 periodic pension and other postretirement benefits in the 2020 Quarter and $710,000 in the 2019 Quarter. We recorded non-operating expense of $271,000 in the 2020 Quarter and non-operating income of $3,062,000 in the 2019 Quarter, related to the changes in the value of the Warrants.



                          Income Tax Expense (Benefit)


We recorded an income tax expense of $368,000, or 102.5% of pretax loss in the 2020 Quarter. In the 2019 Quarter, we recognized an income tax expense of $1,505,000, or 19.6% of pretax loss.



                       Net Income and Earnings Per Share


Net loss was $727,000 and diluted loss per share was $0.02 for the 2020 Quarter compared to net income of $6,172,000 and diluted earnings per share of $0.10 for 2019 Quarter. The change reflects the various items discussed above.





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39 weeks ended June 28, 2020

Operating results, as reported in the Consolidated Financial Statements, are summarized below.

--------------------------------------------------------------------------------

                                                  June 28,      June 30,       Percent
(Thousands of Dollars, Except Per Share Data)         2020          2019        Change
Advertising and marketing services revenue         204,426       204,651          (0.1 )
Subscription                                       176,655       137,965          28.0
Other                                               45,157        43,573           3.6
Total operating revenue                            426,238       386,189          10.4
Operating expenses:
Compensation                                       164,330       140,197          17.2
Newsprint and ink                                   16,629        17,394          (4.4 )
Other operating expenses                           178,744       145,915          22.5
Cash costs                                         359,703       303,506          18.5
Total operating revenue less cash costs             66,535        82,683         (19.5 )
Depreciation and amortization                       25,196        22,263          13.2

Assets loss (gain) on sales, impairments and (5,153 ) (212 ) NM other, net Restructuring costs and other

                        6,422         5,612          14.4
Operating expenses                                 386,168       331,169          16.6
Equity in earnings of associated companies           3,773         5,298         (28.8 )
Operating income                                    43,843        60,318         (27.3 )
Non-operating income (expense):
Interest expense                                   (35,377 )     (36,256 )        (2.4 )
Debt financing and administrative cost             (11,865 )      (6,053 )        96.0
Other, net                                           3,309         2,730          21.2
Non-operating expenses, net                        (43,933 )     (39,579 )        11.0
Income (loss) before income taxes                      (90 )      20,739            NM
Income tax expense                                     (92 )       6,175            NM
Net income (loss)                                        2        14,564        (100.0 )

Net income attributable to non-controlling (1,322 ) (1,115 ) 18.6 interests Income (loss) attributable to Lee Enterprises, (1,320 ) 13,449

            NM

Incorporated

Other comprehensive income (loss), net of              950          (365 )          NM
income taxes
Comprehensive income (loss) attributable to           (370 )      13,084            NM
Lee Enterprises, Incorporated
Earnings per common share:
Basic                                                (0.02 )        0.24            NM
Diluted                                              (0.02 )        0.24            NM



References to the "2020 Period" refer to the 39 weeks ended June 28, 2020. Similarly, references to the "2019 Period" refer to the 39 weeks ended June 30, 2019.



                               Operating Revenue


Total operating revenue was $426,238,000 in the 2020 Period, up $40,049,000, or 10.4%, compared to the prior year, which included $105,820,000 in revenue from acquisitions.

Advertising and marketing services revenue totaled $204,426,000 in the 2020 Period, down 0.1% compared to the prior year. Print advertising revenues were $128,024,000 in the 2020 Period, down 1.2% compared to the prior year, with $34,923,000 attributable to acquired print advertising revenue. Digital advertising and marketing services totaled $76,402,000 in the 2020 Period, up 1.9% compared to the prior year, with $8,136,000 attributable to acquired digital advertising and marketing services revenue. Digital advertising and marketing services represented 37.4% of the 2020 Period total advertising and marketing services revenue. Increases are attributed to acquired revenue offset by reduced demand for print advertising, consistent with general industry trends adversely affecting the publishing industry, negative impacts from the COVID-19 pandemic and incremental advertising revenue in the 2019 Period from certain political campaigns.

Subscription revenue totaled $176,655,000 in the 2020 Period, up 28.0% compared to the 2019 period. The increase is attributable to acquired subscription revenue of $54,769,000 and an increase in digital only subscribers, offset by lower paid print circulation units, consistent with industry trends and timing of price increases. As of June 28, 2020, we now have nearly 222,000 digital-only subscribers.

Other revenue, which primarily consists of digital services revenue from TownNews, commercial printing revenue and until March 16, 2020, revenue from the Management Agreement, totaled $45,157,000, a 3.6% increase compared to the 2019 Period. Other revenue in the 2020 Period includes $7,992,000 of acquired other revenue, primarily from commercial printing.

Digital services revenue totaled $15,400,000 in the 2020 Period, a 6.2% increase compared to the 2019 Period. On a stand-alone basis, revenue at TownNews totaled $18,669,000, an increase of 12.0%, and totaled $24,628,000 over the last twelve months. Investments in video and streaming technology expanded product offerings that helped gain market share in publishing and broadcast, and increased revenue.

Commercial printing revenue totaled $9,437,000 in the 2020 Period, a 51.9% increase compared to the 2019 Period, due to acquired revenues.




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Management Agreement revenue totaled $5,814,000 in the 2020 Period compared to $9,989,000 in the 2019 Period. The decrease was attributable to the termination of the Management Agreement on March 16, 2020 in connection with the Transactions.

Total digital revenue including digital advertising revenue, digital subscription revenue and digital services revenue totaled $116,332,000 in the 2020 Period, an increase of 7.3% over the 2019 Period. Total digital revenue represented 27.3% of our total operating revenue in the 2020 Period.

Equity in earnings of TNI and MNI decreased $1,525,000 in the 2020 Period.



                               Operating Expenses


Total operating expenses were $386,168,000, a 16.6% increase compared to the 2019 Period, which included $98,291,000 in operating expenses from acquisitions. Operating expenses include compensation expense, newsprint and ink, other operating expenses, depreciation, amortization, restructuring and other expenses, assets loss (gain) on sales, and impairments. Cash Costs were $359,703,000, a 18.5% increase compared to the 2019 Period, which included $92,044,000 of acquired Cash Costs.

Compensation expense increased $24,133,000 in the 2020 Period, or 17.2%, compared to the 2019 Period. The increase was attributable to a 16.1% reduction in FTEs on a same property basis, partially offset by $45,208,000 of acquired compensation expense.

Newsprint and ink costs decreased $765,000 in the 2020 Period, or 4.4%, compared to the 2019 Period. The decrease is attributable to declines in newsprint volumes and prices, offset by $5,625,000 of acquired newsprint and ink expenses. See Item 3, "Commodities" included herein, for further discussion and analysis of the impact of newsprint on our business.

Other operating expenses increased $32,829,000 in the 2020 Period, or 22.5%, compared to the 2019 Period. Other operating expenses include all operating costs not considered to be compensation, newsprint, depreciation and amortization, or restructuring costs and other. The largest components are costs associated with printing and distribution of our printed products, digital cost of goods sold and facility expenses. The increase is attributable to $41,212,000 of acquired other operating expenses and increases in digital investments, partially offset by lower delivery and other print-related costs due to lower volumes of our print editions.

Restructuring costs and other totaled $6,422,000 and $5,612,000 in the 2020 Period and 2019 Period, respectively. Restructuring costs in 2020 and 2019 are predominately severance.

Depreciation increased $49,000, or 0.5%, and amortization increased $2,884,000, or 22.6%, in the 2020 Period. Assets loss (gain) on sales, impairments and other, was a net gain of $5,153,000 in the 2020 Period compared to a net gain of $212,000 in the 2019 Period. The net gain in the 2020 was related to the disposition of non-core assets, including real estate.

The factors noted above resulted in operating income of $43,843,000 in the 2020 Period compared to $60,318,000 in the 2019 Period.



                        Non-operating Income and Expense


Interest expense decreased $879,000, or 2.4%, to $35,377,000 in the 2020 Period. Our weighted average cost of debt, excluding amortization of debt financing costs, was 9.0% at the end of the 2020 Period and 10.0% at the end of the 2019 Period. The reduction of the weighted average cost of debt is due to the 2020 Refinancing.

We recognized $11,865,000 of debt financing and administrative costs in the 2020 Period compared to $6,053,000 in the 2019 Period. The increase in the 2020 Period is primarily driven by expensing previously unamortized financing costs of $9,583,000 and $470,000 of expenses incurred as a result of the 2020 Refinancing.

Other non-operating income and expense consists of benefits associated with our pension and other postretirement plans and the fair value adjustment of our Warrants. We recorded $2,458,000 of periodic pension and other postretirement benefits in the 2020 Period and $2,133,000 in the 2019 Period. We recorded non-operating income of $765,000 in 2020 Period and $389,000 in the 2019 Period, related to the changes in the value of the Warrants.



                          Income Tax Expense (Benefit)


We recorded an income tax benefit of $92,000, or 102.2% of pretax loss of $90,000 in the 2020 Period. In the 2019 Period we recognized an income tax expense of $6,175,000, or 29.8% of pretax income.

The Company expects to realize a tax benefit attributable to the CARES Act. The CARES Act permits the Company to defer certain employer payroll tax payments in 2020 to the end of 2021 and 2022. The Company intends to use this deferral, and is anticipating additional guidance from the Treasury and the Internal Revenue Service to determine whether additional tax benefits are available from this legislation.



                       Net Income and Earnings Per Share


Net income was $2,000 and diluted loss per share was $0.02 for the 2020 Period compared to net income of $14,564,000 and earnings per diluted common share of $0.24 for 2019 Period. The change reflects the various items discussed above.




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LIQUIDITY AND CAPITAL RESOURCES

Our operations have historically generated strong positive cash flow are expected to provide sufficient liquidity, together with cash on hand, to meet our requirements, primarily operating expenses, interest expense and capital expenditures. A summary of our cash flows is included in the narrative below.



                              Operating Activities


Cash provided by operating activities was $38,010,000 in the 2020 Period compared to $43,786,000 in the 2019 Period. Net income for the 2020 Period totaled $2,000 compared to $14,564,000 in the 2019 Period. The decrease in cash provided by operating activities in the 2020 Period is mainly attributed to the impacts of COVID-19 on our operating results and year-over-year changes in working capital, offset by cash provided by acquisitions.



                              Investing Activities


Cash required for investing activities totaled $121,137,000 in the 2020 Period compared to $7,911,000 in the 2019 Period. We spent $130,985,000 on acquisitions, net of cash, in the 2020 Period, primarily related to the acquisition of BHMG and the Buffalo News. Capital spending totaled $7,297,000 in the 2020 Period compared to $3,753,000 in the 2019 Period. Cash proceeds from asset sales, mainly real estate, totaled $17,649,000 in the 2020 Period compared to $1,477,000 in the 2019 Period.



                              Financing Activities


Cash provided by financing activities totaled $131,192,000 in the 2020 period compared to cash required for financing activities of $27,739,000 in the 2019 Period. Proceeds from the 2020 Refinancing totaled $576,000,000 in the 2020 Period. Debt reduction accounted for the majority of the remaining usage of funds in both the 2020 Period and the 2019 Period.



                                   Term Loan


In March 2020, in connection with the Transactions, the Company completed a comprehensive refinancing of its debt, which consists of a 25-year term loan with BH Finance in an aggregate principal amount of $576,000,000. The Term Loan, which matures March 16, 2045, bears interest at an annual rate of 9.0%.

Debt is summarized as follows:

                                          June 28, September 29,  Interest
(Thousands of Dollars)                        2020          2019 Rates (%)

Term Loan                                  576,000             -       9.0
Revolving Facility                               -             -         -
Notes                                            -       363,420       9.5
2nd Lien Term Loan                               -        80,207      12.0
                                           576,000       443,627
Unamortized debt issue costs                     -      (11,282)

Less current maturities of long-term debt 36,710 2,954 Total long-term debt

                       539,290       429,391




Excluding payments required from the Company's future excess cash flow (as defined in the Credit Agreement), the only required principal payments include payments from net cash proceeds from asset sales (as defined in the Credit Agreement) and payments upon certain instances of change in control. There are no other scheduled mandatory principal payments required under the Credit Agreement.

Excess cash flow for the 13 weeks ended June 28, 2020 totaled $36,710,000, which was used to repay debt in July 2020.

The Credit Agreement contains certain customary representations and warranties, certain affirmative and negative covenants and certain conditions, including restrictions on incurring additional indebtedness, creating certain liens, making certain investments or acquisitions, issuing dividends, repurchasing shares of stock of the Company and certain other capital transactions. Certain existing and future direct and indirect material domestic subsidiaries of the Company are guarantors of the Company's obligations under the Credit Agreement. There are no financial performance covenants under our Credit Agreement.

In connection with the Term Loan, the Company incurred $470,000 of fees and expenses that were expensed in the 39 weeks ended June 28, 2020.

In connection with closing of the transactions, we no longer have access to a Revolving Facility.



                      Additional Information on Liquidity


We continue to evaluate the effects of the COVID-19 pandemic on our results of operations and cash flows. To combat the negative impacts, we have taken significant and immediate action to manage cash flow by implementing various initiatives including reductions in force, compensation reductions, furloughs, and reductions in capital investments. We are also working with our large vendors to evaluate the amount and timing of significant expenses.

As part of the Company's effort to preserve liquidity, we plan to defer remittance of our FICA taxes, and defer required pension contributions, as allowed by the CARES Act.

While we currently forecast sufficient near-term liquidity, the ultimate impact of the COVID-19 pandemic could have a material impact on the Company's liquidity and its ability to meet its ongoing obligations.





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CHANGES IN LAWS AND REGULATIONS



                                 Pension Plans


In 2012, the Surface Transportation Extension Act of 2012 ("STEA") was signed into law. STEA provides for changes in the determination of discount rates that result in a near-term reduction in minimum funding requirements for our defined benefit pension plans. STEA will also result in an increase in future premiums to be paid to the Pension Benefit Guarantee Corporation ("PBGC").

In 2014, the Highway and Transportation Funding Act ("HATFA") was signed into law. HATFA generally extends the relief offered under STEA and further increases premiums to be paid to the PBGC.

The CARES Act allows the Company to defer required pension contributions until December 31, 2020. The Company does not expect to make pension contributions for the remainder of fiscal year 2020.



                                   Wage Laws


The United States and various state and local governments are considering increasing their respective minimum wage rates. Most of our employees earn an amount in excess of the current United States or state minimum wage rates. However, until changes to such rates are enacted, the impact of the changes cannot be determined. Among other provisions, the CARES Act allows the Company to defer payments of the employer's share of social security taxes which shall be paid between December 31, 2021 and December 31, 2022. The CARES Act also provides for an Employee Retention Credit of up to $5,000 per eligible employee which can be applied to the employer's share of payroll taxes. The Company has elected to defer the employer's share of social security tax payments and is currently determining the applicability of the Employee Retention Credit.



INFLATION


Price increases (or decreases) for our products or services are implemented when deemed appropriate by us. We continuously evaluate price increases, productivity improvements, sourcing efficiencies and other cost reductions to mitigate the impact of inflation.

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