LEE ENTERPRISES, INCORPORATED 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
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
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
Including the recently completed acquisition of
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
We also operate TownNews, through our 82.5% owned subsidiary
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Purchase Agreement with Berkshire Hathaway
On
BHMG includes 30 daily newspapers and digital operations, in addition to 49 paid
weekly newspapers with websites and 32 other print products.
In connection with the Transactions, the Management Agreement terminated on
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
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
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 • InMarch 2020 , we completed the acquisition ofBHMG 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 endedMarch 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
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
We have evaluated the current economic environment as of
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Table of Contents 13 WEEKS ENDEDJune 28, 2020
Operating results, as reported in the Consolidated Financial Statements, are summarized below.
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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 NMEnterprises, 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
Operating Revenue
Total operating revenue was
Advertising and marketing services revenue totaled
Subscription revenue totaled
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
Total digital revenue including digital advertising revenue, digital
subscription revenue and digital services revenue totaled
Equity in earnings of TNI and MNI decreased
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Operating Expenses
Total operating expenses were
Compensation expense increased
Newsprint and ink costs increased
Other operating expenses increased
Restructuring costs and other totaled
Depreciation expense increased
Assets loss (gain) on sales, impairments and other, was a net loss of
The factors noted above resulted in operating income of
Non-operating Income and Expense
Interest expense increased
We recognized no debt financing and administrative expense in the 2020 Quarter
compared to
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
Income Tax Expense (Benefit)
We recorded an income tax expense of
Net Income and Earnings Per Share
Net loss was
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Table of Contents 39 weeks endedJune 28, 2020
Operating results, as reported in the Consolidated Financial Statements, are summarized below.
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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
NM
Incorporated
Other comprehensive income (loss), net of 950 (365 ) NM income taxes Comprehensive income (loss) attributable to (370 ) 13,084 NMLee 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
Operating Revenue
Total operating revenue was
Advertising and marketing services revenue totaled
Subscription revenue totaled
Other revenue, which primarily consists of digital services revenue from
TownNews, commercial printing revenue and until
Digital services revenue totaled
Commercial printing revenue totaled
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Management Agreement revenue totaled
Total digital revenue including digital advertising revenue, digital
subscription revenue and digital services revenue totaled
Equity in earnings of TNI and MNI decreased
Operating Expenses
Total operating expenses were
Compensation expense increased
Newsprint and ink costs decreased
Other operating expenses increased
Restructuring costs and other totaled
Depreciation increased
The factors noted above resulted in operating income of
Non-operating Income and Expense
Interest expense decreased
We recognized
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
Income Tax Expense (Benefit)
We recorded an income tax benefit of
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
Net Income and Earnings Per Share
Net income was
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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
Investing Activities
Cash required for investing activities totaled
Financing Activities
Cash provided by financing activities totaled
Term Loan
In
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
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
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
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
Wage Laws
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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