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UNITED STATES SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

FORM 10-Q

 

 QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE

SECURITIES EXCHANGE ACT OF 1934

 

For The Quarterly Period Ended June 27, 2021

 

OR

 

 TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE

SECURITIES EXCHANGE ACT OF 1934

 

Commission File Number 1-6227

LEE ENTERPRISES, INCORPORATED

 

(Exact name of Registrant as specified in its Charter)

 

Delaware

42-0823980

(State or other jurisdiction of incorporation or organization)

(I.R.S. Employer Identification No.)

 

 4600 E. 53rd Street, Davenport, Iowa 52807

(Address of principal executive offices)

  

(563) 383-2100

(Registrant's telephone number, including area code)

 

Securities registered pursuant to Section 12(b) of the Act:

 

Title of each class

Trading Symbol(s)

Name of each exchange on which registered

Common Stock, par value $.01 per share

LEE

The Nasdaq Global Select Market

 

 

Indicate by check mark whether the Registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the Registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.

Yes ☒     No ☐

 

Indicate by check mark whether the Registrant has submitted electronically every Interactive Data File required to be submitted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the Registrant was required to submit and post such files. 

Yes ☒     No ☐

 

Indicate by check mark whether the Registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, a smaller reporting company or an emerging growth company. See the definitions of “large accelerated filer”, “accelerated filer”, “smaller reporting company,” and “emerging growth company” in Rule 12b-2 of the Exchange Act.

 

 

Large accelerated filer

Accelerated filer

 

Non-accelerated filer

Smaller reporting company

   

Emerging growth company

 

If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act. ☐

 

Indicate by check mark whether the Registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).

Yes      No ☒

 

As of July 31, 2021, 5,888,983 shares of Common Stock of the Registrant were outstanding. 

 

 

 

 

 

Table Of Contents

 

PAGE

     

FORWARD LOOKING STATEMENTS

  1
       

PART I

FINANCIAL INFORMATION

  2
         
 

Item 1.

Financial Statements (Unaudited)

  2
         
   

Consolidated Balance Sheets - June 27, 2021, and September 27, 2020

  2
         
   

Consolidated Statements of Income (Loss) and Comprehensive Income (Loss) - 13 and 39 weeks ended June 27, 2021 and June 28, 2020

  4
         
   

Consolidated Statements of Stockholder's Equity (Deficit) - 13 and 39 weeks ended June 27, 2021, and June 28, 2020

  5
         
   

Consolidated Statements of Cash Flows - 39 weeks ended June 27, 2021, and June 28, 2020

  6
         
   

Notes to Consolidated Financial Statements

  7
         
 

Item 2.

Management's Discussion and Analysis of Financial Condition and Results of Operations

  16
         
 

Item 3.

Quantitative and Qualitative Disclosures About Market Risk

  24
         
 

Item 4.

Controls and Procedures

  24
         

PART II

OTHER INFORMATION

  25
         
 

Item 1.

Legal Proceedings

  25
         
  Item 1.A. Risk Factors   25
         
 

Item 6.

Exhibits

  25
         

SIGNATURES

  26

 

 

 

References to “we”, “our”, “us” and the like throughout this document refer to Lee Enterprises, Incorporated (the “Company”). References to “2021”, “2020” and the like refer to the fiscal years ended the last Sunday in September.

 

FORWARD-LOOKING STATEMENTS

 

The Private Securities Litigation Reform Act of 1995 provides a “safe harbor” for forward-looking statements. This report contains information that may be deemed forward-looking that is based largely on our current expectations, and is subject to certain risks, trends and uncertainties that could cause actual results to differ materially from those anticipated. Among such risks, trends and other uncertainties, which in some instances are beyond our control, are:

 

  Revenues may continue to diminish or declines in revenue could accelerate as a result of the COVID-19 pandemic;
  Revenues may continue to be diminished longer than anticipated as a result of the COVID-19 pandemic; 
  The COVID-19 pandemic may result in material long-term changes to the publishing industry which may result in permanent revenue reductions for the Company and other risks and uncertainties;
 

We may experience increased costs, inefficiencies and other disruptions as a result of the COVID-19 pandemic;
 

We may be required to indemnify the previous owners of the BH Media or Buffalo News for unknown legal and other matters that may arise;
  Our ability to manage declining print revenue and circulation subscribers;
 

The warrants issued in our 2014 refinancing will not be exercised;

 

The impact and duration of adverse conditions in certain aspects of the economy affecting our business;

 

Changes in advertising and subscription demand;

 

Changes in technology that impact our ability to deliver digital advertising;

 

Potential changes in newsprint, other commodities and energy costs;

 

Interest rates;

 

Labor costs;

 

Significant cyber security breaches or failure of our information technology systems;

 

Our ability to achieve planned expense reductions and realize the expected benefit of our acquisitions;
 

Our ability to maintain employee and customer relationships;

 

Our ability to manage increased capital costs;

 

Our ability to maintain our listing status on NASDAQ;

 

Competition; and

 

Other risks detailed from time to time in our publicly filed documents.

 

Any statements that are not statements of historical fact (including statements containing the words “may”, “will”, “would”, “could”, “believes”, “expects”, “anticipates”, “intends”, “plans”, “projects”, “considers” and similar expressions) generally should be considered forward-looking statements. Statements regarding our plans, strategies, prospects and expectations regarding our business and industry, including statements regarding the impacts that the COVID-19 pandemic and our responses thereto may have on our future operations, are forward-looking statements. They reflect our expectations, are not guarantees of performance and speak only as of the date the statement is made. Readers are cautioned not to place undue reliance on such forward-looking statements, which are made as of the date of this report. We do not undertake to publicly update or revise our forward-looking statements, except as required by law.

 

 

 

 

PART I

FINANCIAL INFORMATION

 

Item 1.       Financial Statements

 

LEE ENTERPRISES, INCORPORATED

CONSOLIDATED BALANCE SHEETS

 

      (Unaudited)          
      June 27,       September 27,  

(Thousands of Dollars)

 

2021

   

2020

 
                 

ASSETS

               
                 

Current assets:

               

Cash and cash equivalents

    21,070       33,733  

Accounts receivable and contract assets, net

    62,085       52,598  

Inventories

    6,478       7,534  

Prepaids and other

    15,952       14,888  

Total current assets

    105,585       108,753  

Investments:

               

Associated companies

    27,172       27,624  

Other

    6,256       6,255  

Total investments

    33,428       33,879  

Property and equipment:

               

Land and improvements

    16,853       18,711  

Buildings and improvements

    108,719       128,475  

Equipment

    231,662       245,117  

Construction in process

    4,569       2,323  
      361,803       394,626  

Less accumulated depreciation

    275,375       289,017  

Property and equipment, net

    86,428       105,609  

Operating lease right-of-use assets

    67,260       70,933  

Goodwill

    330,204       328,445  

Other intangible assets, net

    163,064       182,680  

Pension plan assets, net

    6,831       4,147  

Medical plan assets, net

    16,116       15,912  

Other

    11,877       13,699  

Total assets

    820,793       864,057  

 

The accompanying Notes are an integral part of the Consolidated Financial Statements.

 

 

 

   (Unaudited)     
   June 27,   September 27, 

(Thousands of Dollars and Shares, Except Per Share Data)

 

2021

  

2020

 
         

LIABILITIES AND EQUITY

        
         

Current liabilities:

        

Current portion of lease liabilities

  8,803   8,577 

Current maturities of long-term debt

  1,070   13,733 

Accounts payable

  17,788   17,163 

Compensation and other accrued liabilities

  47,625   44,278 

Unearned revenue

  62,255   60,271 

Total current liabilities

  137,541   144,022 

Long-term debt, net of current maturities

  484,092   524,557 

Operating lease liabilities

  59,016   62,374 

Pension obligations

  70,622   75,656 

Postretirement and postemployment benefit obligations

  14,481   39,543 

Deferred income taxes

  14,625   15,208 

Income taxes payable

  19,921   18,048 

Warrants and other

  28,958   14,282 

Total liabilities

  829,256   893,690 

Equity (deficit):

        

Stockholders' equity (deficit):

        

Serial convertible preferred stock, no par value; authorized 500 shares; none issued

      

Common Stock, $0.01 par value; authorized 12,000 shares; issued and outstanding:

  59   58 

June 27, 2021; 5,889 shares; $0.01 par value

        

September 27, 2020; 5,835 shares; $0.01 par value

        

Class B Common Stock, $2 par value; authorized 3,000 shares; none issued

      

Additional paid-in capital

  257,851   256,957 

Accumulated deficit

  (250,534)  (268,529)

Accumulated other comprehensive loss

  (17,953)  (20,050)

Total stockholders' deficit

  (10,577)  (31,564)

Non-controlling interests

  2,114   1,931 

Total deficit

  (8,463)  (29,633)

Total liabilities and deficit

  820,793   864,057 

 

Prior period results have been adjusted to reflect the one-for-ten reverse stock split in March 2021. See Note 1 for details.

 

The accompanying Notes are an integral part of the Consolidated Financial Statements.

 

 

 

LEE ENTERPRISES, INCORPORATED

CONSOLIDATED STATEMENTS OF INCOME (LOSS) AND COMPREHENSIVE INCOME (LOSS)

(Unaudited)

 

   

13 Weeks Ended

   

39 Weeks Ended

 
   

June 27,

   

June 28,

   

June 27,

   

June 28,

 

(Thousands of Dollars, Except Per Common Share Data)

 

2021

   

2020

   

2021

   

2020

 
                                 

Operating revenue:

                               

Advertising and marketing services

    91,122       77,754       279,326       204,426  

Subscription

    88,792       89,115       269,905       178,234  

Other

    16,576       15,659       51,505       43,578  

Total operating revenue

    196,490       182,528       600,736       426,238  

Operating expenses:

                               

Compensation

    82,731       72,396       250,048       164,330  

Newsprint and ink

    7,051       7,572       22,222       16,629  

Other operating expenses

    82,117       77,440       243,749       178,744  

Depreciation and amortization

    10,836       11,201       33,794       25,196  

Assets loss (gain) on sales, impairments and other, net

    242       147       6,938       (5,153 )

Restructuring costs and other

    1,419       2,865       5,880       6,422  

Total operating expenses

    184,396       171,621       562,631       386,168  

Equity in earnings of associated companies

    1,689       842       4,902       3,773  

Operating income

    13,783       11,749       43,007       43,843  

Non-operating income (expense):

                               

Interest expense

    (11,010 )     (13,135 )     (34,129 )     (35,377 )

Debt financing and administrative costs

                      (11,865 )

Curtailment gain

                23,830        

Pension withdrawal cost

                (12,310 )      

Other, net

    2,330       1,027       6,240       3,309  

Total non-operating expense, net

    (8,680 )     (12,108 )     (16,369 )     (43,933 )

Income (loss) before income taxes

    5,103       (359 )     26,638       (90 )

Income tax (benefit) expense

    1,366       368       7,106       (92 )

Net income (loss)

    3,737       (727 )     19,532       2  

Net income attributable to non-controlling interests

    (510 )     (548 )     (1,537 )     (1,322 )

Income (loss) attributable to Lee Enterprises, Incorporated

    3,227       (1,275 )     17,995       (1,320 )

Other comprehensive income, net of income taxes

    477       317       2,097       950  

Comprehensive (loss) income attributable to Lee Enterprises, Incorporated

    3,704       (958 )     20,092       (370 )

Earnings per common share:

                               

Basic:

    0.56       (0.23 )     3.15       (0.23 )

Diluted:

    0.55       (0.23 )     3.10       (0.23 )

 

Prior period results have been adjusted to reflect the one-for-ten reverse stock split in March 2021. See Note 1 for details.

 

The accompanying Notes are an integral part of the Consolidated Financial Statements.

 

 

 

CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY (DEFICIT)

(Unaudited)

 

(Thousands of Dollars)

 

Accumulated Deficit

   

Common Stock

   

Additional paid-in capital

   

Accumulated Other Comprehensive Loss

   

Total

 
                               

September 28, 2020

  (268,529 )   58     256,957     (20,050 )   (31,564 )

Shares issued (redeemed)

      1     (55 )       (54 )

Income attributable to Lee Enterprises, Incorporated

  15,902                 15,902  

Stock compensation

          220         220  

Other comprehensive income

              1,347     1,347  

Deferred income taxes, net

              (205 )   (205 )

December 27, 2020

  (252,627 )   59     257,122     (18,908 )   (14,354 )
                               

Shares issued (redeemed)

          (8 )       (8 )

Loss attributable to Lee Enterprises, Incorporated

  (1,134 )               (1,134 )

Stock compensation

          214         214  

Other comprehensive loss

              682     682  

Deferred income taxes, net

              (204 )   (204 )

March 28, 2021

  (253,761 )   59     257,328     (18,430 )   (14,804 )
                               

Shares issued (redeemed)

          318         318  

Income attributable to Lee Enterprises, Incorporated

  3,227                 3,227  

Stock compensation

          205         205  

Other comprehensive loss

              682     682  

Deferred income taxes, net

              (205 )   (205 )

June 27, 2021

  (250,534 )   59     257,851     (17,953 )   (10,577 )

 

 

(Thousands of Dollars)

 

Accumulated Deficit

   

Common Stock

   

Additional paid-in capital

   

Accumulated Other Comprehensive Loss

   

Total

 
                               

September 30, 2019

  (265,423 )   57     255,996     (29,114 )   (38,484 )

Shares issued (redeemed)

      1     (376 )       (375 )

Income attributable to Lee Enterprises, Incorporated

  5,320                 5,320  

Stock compensation

          545         545  

Other comprehensive income

              452     452  

Deferred income taxes, net

              (135 )   (135 )

December 29, 2019

  (260,103 )   58     256,165     (28,797 )   (32,677 )
                               

Shares issued (redeemed)

          (199 )       (199 )

Loss attributable to Lee Enterprises, Incorporated

  (5,367 )               (5,367 )

Stock compensation

          269         269  

Other comprehensive loss

              451     451  

Deferred income taxes, net

              (135 )   (135 )

March 29, 2020

  (265,470 )   58     256,235     (28,481 )   (37,658 )
                               

Shares issued (redeemed)

          242         242  

Loss attributable to Lee Enterprises, Incorporated

  (1,275 )               (1,275 )

Stock compensation

          228         228  

Other comprehensive income

              451     451  

Deferred income taxes, net

              (134 )   (134 )

June 28, 2020

  (266,745 )   58     256,705     (28,163 )   (38,145 )

 

Prior period results have been adjusted to reflect the one-for-ten reverse stock split in March 2021. See Note 1 for details.

 

The accompanying Notes are an integral part of the Consolidated Financial Statements.

 

 

 

LEE ENTERPRISES, INCORPORATED

CONSOLIDATED STATEMENTS OF CASH FLOWS

(Unaudited)

 

   

39 Weeks Ended

 
   

June 27,

   

June 28,

 

(Thousands of Dollars)

 

2021

   

2020

 
                 

Cash provided by operating activities:

               

Net income

    19,532       2  

Adjustments to reconcile net income to net cash provided by operating activities:

               

Depreciation and amortization

    33,794       25,196  

Curtailment gain

    (23,830 )      

Pension withdrawal cost

    12,310        

Stock compensation expense

    639       1,042  

Assets loss (gain) on sales, impairments and other, net

    6,938       (5,153 )

Deferred income taxes

    (398 )     (8,377 )

Debt financing and administrative costs

          11,865  

Pension contributions

    (965 )      

Return of collateral on (Payments to collateralize) letters of credit

    1,686       (6,105 )

Other, net

    (147 )     (316 )

Changes in operating assets and liabilities:

               

(Increase) decrease in receivables and contract assets

    (8,720 )     24,173  

Decrease in inventories and other

    1,080       855  

Increase (decrease) in accounts payable and other accrued liabilities

    2,494       (7,893 )

Decrease in pension and other postretirement and postemployment benefit obligations

    (4,807 )     (3,947 )

Change in income taxes payable

    2,459       6,875  

Other, including warrants

    706       (207 )

Net cash provided by operating activities

    42,771       38,010  

Cash required for investing activities:

               

Purchases of property and equipment

    (5,350 )     (7,297 )

Proceeds from sales of assets

    3,095       17,649  

Acquisitions, net of cash acquired

          (130,985 )

Distributions greater (less) than earnings of TNI and MNI

    159       (154 )

Other, net

    (369 )     (350 )

Net cash required for investing activities

    (2,465 )     (121,137 )

Cash provided by (required for) financing activities:

               

Proceeds from long term debt

          576,000  

Payments on long-term debt

    (53,128 )     (443,627 )

Debt financing and administrative costs paid

          (609 )

Common stock transactions, net

    159       (572 )

Net cash (required for) provided by financing activities

    (52,969 )     131,192  

Net (decrease) increase in cash and cash equivalents

    (12,663 )     48,065  

Cash and cash equivalents:

               

Beginning of period

    33,733       8,645  

End of period

    21,070       56,710  

 

The accompanying Notes are an integral part of the Consolidated Financial Statements.

 

 

LEE ENTERPRISES, INCORPORATED

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

 

 

1

BASIS OF PRESENTATION AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

 

Basis of Presentation

 

The accompanying unaudited, interim, Consolidated Financial Statements included herein have been prepared pursuant to the rules and regulations of the Securities and Exchange Commission for quarterly reports. In the opinion of management, these financial statements contain all adjustments (consisting of only normal recurring items) necessary to present fairly the financial position of Lee Enterprises, Incorporated and its subsidiaries (the “Company”) as of June 27, 2021, and our results of operations and cash flows for the periods presented. The Consolidated Financial Statements should be read in conjunction with the Consolidated Financial Statements and Notes thereto included in the Company's 2020 Annual Report on Form 10-K.

 

Because of seasonal and other factors, the results of operations for the 13 and 39 weeks ended June 27, 2021, are not necessarily indicative of the results to be expected for the full year.

 

References to “we”, “our”, “us” and the like throughout the Consolidated Financial Statements refer to the Company. References to “2021”, “2020” and the like refer to the fiscal years ended the last Sunday in September.

 

The Consolidated Financial Statements include our accounts and those of our subsidiaries, all of which are wholly-owned, except for our 82.5% interest in INN Partners, L.C. (“TownNews.com”), 50% interest in TNI Partners (“TNI”) and 50% interest in Madison Newspapers, Inc. (“MNI”).

 

Investments in TNI and MNI are accounted for using the equity method and are reported at cost, plus our share of undistributed earnings since acquisition less, for TNI, amortization of intangible assets.

 

Certain amounts in prior period Consolidated Financial Statements have been reclassified to conform to the current year presentation. Pursuant to our acquisition of BH Media Group, Inc. a Delaware corporation, ("BHMG") and The Buffalo News, Inc. a Delaware corporation ("Buffalo News"), we realigned the presentation of certain home delivery print revenue and certain other Subscription revenue from Other revenue to Subscription revenue on the Consolidated Statements of Income (loss) and Comprehensive Income (loss). As a result of this updated presentation, Subscription revenue increased and Other revenue decreased for the 13 weeks ended June 28, 2020 by $598,000, the 39 weeks ended June 28, 2020 by $1,579,000 and the 13 weeks ended December 27, 2020 by $794,000. Operating revenues, net income (loss), accumulated deficit, and earnings per share remained unchanged. 

 

On February 25, 2021, our Board of Directors declared a one-for-ten split of the Company's common stock effected (the "Reverse Stock Split"). Effective March 15, 2021 the Company's shares began trading on a post reverse split basis. Prior period results have been adjusted to reflect the one-for-ten reverse stock split in March 2021. The split did not change the Company's Common Stock Par value but changed opening Common Stock and Additional Paid in Capital balances by offsetting amounts. Additionally, in March 29, 2020, we had outstanding shares of 58,135,910 which were adjusted to 5,813,591 to give effect to the Reverse Stock Split.

 

Use of Estimates

 

The preparation of the Consolidated Financial Statements in conformity with U.S. generally accepted accounting principles (“GAAP”) requires us to make estimates and judgments that affect the reported amounts of assets, liabilities, revenue and expenses, and related disclosure of contingent assets and liabilities. We evaluate these estimates and judgments on an ongoing basis.

 

We base our estimates on historical experience and on various other assumptions that are believed to be reasonable under the circumstances, the results of which form the basis for making judgments about the carrying values of assets and liabilities that are not readily apparent from other sources. Actual results may differ from these estimates under different assumptions or conditions.

 

Business Combinations

 

The Company accounts for acquisitions in accordance with the provisions of Accounting Standards Codification 805 “Business Combinations” (“ASC 805”), which provides guidance for recognition and measurement of identifiable assets and goodwill acquired, liabilities assumed, and any noncontrolling interest in the acquiree at fair value. In a business combination, the assets acquired, liabilities assumed and non-controlling interest in the acquiree are recorded as of the date of acquisition at their respective fair values with limited exceptions. Any excess of the purchase price (consideration transferred) over the estimated fair values of net assets acquired is recorded as goodwill. Transaction costs are expensed as incurred. The operating results of the acquired business are reflected in the Company’s Consolidated Financial Statements from the date of the acquisition.

 

COVID-19 Pandemic

 

The ongoing COVID-19 pandemic and related measures to contain its spread have resulted in significant volatility and economic uncertainty, which is expected to continue in the near term. The COVID-19 pandemic has had and the Company currently expects that it will continue to have a significant negative impact on the Company’s business and operating results in the near term. While vaccines have become widely available in the United States, the long-term impact of the COVID-19 pandemic remains uncertain and unpredictable as it will depend on the pace of vaccine distribution, government responses to future outbreaks, the spread of variants, 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.

 

7

 

Recently Issued Accounting Standards - Standards Adopted in 2021

 

In June 2016, the FASB issued a new standard to replace the incurred loss impairment methodology with a methodology that reflects expected credit losses and requires consideration of a wider array of reasonable and supportable information to inform and develop credit loss estimates ("ASC 326"). We are required to use a forward-looking expected credit loss model for both accounts receivables and other financial instruments. The new standard was adopted on September 28, 2020, using a modified retrospective approach. This standard did not have a material impact on our Consolidated Financial Statements.

 

In August 2018, the FASB issued new guidance that changes disclosure requirements related to fair value measurements as part of the disclosure framework project. The disclosure framework project aims to improve the effectiveness of disclosures in the notes to the financial statements by focusing on requirements that clearly communicate the most important information to users of the financial statements ("ASU 2018-13"). The new guidance was adopted on September 28, 2020, and did not have a material impact on our Consolidated Financial Statements.

 

In December 2019, the FASB issued new guidance that simplifies the accounting for income taxes by eliminating certain exceptions to the guidance in Accounting Standards Codification ("ASC") 740 related to the approach for intraperiod tax allocation, the methodology for calculating income taxes in an interim period and the recognition for deferred tax liabilities for outside basis differences. The standard also simplifies aspects of the accounting for franchise taxes and enacted changes in tax laws or rates and clarifies the accounting for transactions that result in a step-up in the tax basis of goodwill. This new guidance was adopted September 28, 2020 and did not have a material impact on our Consolidated Financial Statements.

 

Recently Issued Accounting Standards - Standards Not Yet Adopted

 

In August 2018, FASB issued a new standard to amend disclosure requirements for employers that sponsor defined benefit pension or other postretirement plans ("ASU 2018-14"). The new standard will be adopted beginning September 27, 2021 using a retrospective approach. The Company is still evaluating the impacts to our financial statement disclosures.

 

In October 2020, FASB issued new guidance containing amendments that improve consistency of the Codification. Many of the amendments arose because the FASB provided an option to give certain information either on the face of the financial statements or in the notes to financial statements. The Company is still evaluating the impacts to our financial statement disclosures.

 

 

2

REVENUE

 

The following table presents our revenue disaggregated by source:

 

  

13 Weeks Ended

  

39 Weeks Ended

 
  

June 27,

  

June 28,

  

June 27,

  

June 28,

 

(Thousands of Dollars)

 

2021

  

2020

  

2021

  

2020

 
                 

Advertising and marketing services revenue

  91,122   77,754   279,326   204,426 

Subscription revenue

  88,792   89,115   269,905   178,234 

TownNews and other digital services revenue

  4,713   5,010   14,363   14,544 

Other revenue

  11,863   10,649   37,142   29,034 

Total operating revenue

  196,490   182,528   600,736   426,238 

 

Recognition principles: Revenue is recognized when a performance obligation is satisfied by the transfer of control of the contracted goods or services to our customers, in an amount that reflects the consideration we expect to receive in exchange for those goods or services.

 

Arrangements with multiple performance obligations: We have various advertising and subscription agreements which include both print and digital performance obligations. Revenue from sales agreements that contain multiple performance obligations are allocated to each obligation based on the relative standalone selling price. We determine standalone selling prices based on observable prices charged to customers.

 

Contract Assets and Liabilities: The Company’s primary source of contract liabilities is unearned revenue from subscriptions paid in advance of the service provided. The Company expects to recognize the revenue related to unsatisfied performance obligations over the next twelve months in accordance with the terms of the subscriptions and other contracts with customers. The unearned revenue balances described herein are the Company's only contract liability. Unearned revenue was $62,255,000 as of June 27, 2021 and $60,271,000 as of September 27, 2020. Revenue recognized in the 13 and 39 weeks ended June 27, 2021 that was included in the contract liability as of September 27, 2020 was $5,489,000 and $53,992,000, respectively.

 

Accounts receivable, excluding allowance for credit losses was $70,558,000 and $66,029,000 as of June 27, 2021 and September 27, 2020, respectively. Allowance for credit losses was $8,473,000 and $13,431,000 as of June 27, 2021 and September 27, 2020, respectively.

 

Practical expedients: Sales commissions are expensed as incurred as the associated contractual periods are one year or less. These costs are recorded within compensation. The vast majority of our contracts have original expected lengths of one year or less and revenue is earned at a rate and amount that corresponds directly with the value to the customer.

 

8

 
 

3

INVESTMENTS IN ASSOCIATED COMPANIES

 

TNI Partners

 

In Tucson, Arizona, TNI, acting as agent for our subsidiary, Star Publishing Company (“Star Publishing”), and Citizen Publishing Company (“Citizen”), a subsidiary of Gannett Co. Inc., is responsible for printing, delivery, advertising, and subscription activities of the Arizona Daily Star as well as the related digital platforms and specialty publications. TNI collects all receipts and income and pays substantially all operating expenses incident to the partnership's operations and publication of the newspaper and other media.

 

Income or loss of TNI (before income taxes) is allocated equally to Star Publishing and Citizen.

 

Summarized results of TNI are as follows:

 

  

13 Weeks Ended

  

39 Weeks Ended

 
  

June 27,

  

June 28,

  

June 27,

  

June 28,

 

(Thousands of Dollars)

 

2021

  

2020

  

2021

  

2020

 
                 

Operating revenue

  8,389   8,222   26,548   28,602 

Operating expenses

  6,077   6,645   19,506   22,576 

Operating income

  2,312   1,577   7,042   6,026 

Company's 50% share of operating income

  1,156   789   3,521   3,013 

Less amortization of intangible assets

           209 

Equity in earnings of TNI

  1,156   789   3,521   2,804 

 

TNI makes weekly distributions of its earnings and for the 13 weeks ended June 27, 2021 and June 28, 2020 we received $544,000 and $959,000 in distributions, respectively. In the 39 weeks ended June 27, 2021 and June 28, 2020, we received $3,161,000 and $2,650,000 in distributions, respectively.

 

Madison Newspapers, Inc.

 

We have a 50% ownership interest in MNI, which publishes daily and Sunday newspapers, and other publications in Madison, Wisconsin, and other Wisconsin locations, and operates their related digital platforms. Net income or loss of MNI (after income taxes) is allocated equally to us and The Capital Times Company (“TCT”). MNI conducts its business under the trade name Capital Newspapers.

 

Summarized results of MNI are as follows:

 

  

13 Weeks Ended

  

39 Weeks Ended

 
  

June 27,

  

June 28,

  

June 27,

  

June 28,

 

(Thousands of Dollars)

 

2021

  

2020

  

2021

  

2020

 
                 

Operating revenue

  11,479   10,875   34,425   37,125 

Operating expenses, excluding restructuring costs, depreciation and amortization

  8,657   10,542   29,324   34,222 

Restructuring costs

        106    

Depreciation and amortization

  188   172   480   514 

Operating income

  2,634   161   4,515   2,389 

Net income

  1,066   107   2,762   1,938 

Equity in earnings of MNI

  533   54   1,381   969 

 

MNI makes quarterly distributions of its earnings and in the 13 weeks ended June 27, 2021 and June 28, 2020, we received dividends of $750,000 and $0, respectively. In the 39 weeks ended June 27, 2021 and June 28, 2020, we received dividends of $1,900,000 and $1,000,000 respectively.

 

 

4

GOODWILL AND OTHER INTANGIBLE ASSETS

 

Changes in the carrying amount of goodwill are as follows:

 

   39 Weeks Ended 
   June 27, 

(Thousands of Dollars)

 

2021

 
     

Goodwill, gross amount

  1,617,174 

Accumulated impairment losses

  (1,288,729)

Goodwill, beginning of September 27, 2020

  328,445 

Measurement period adjustments

  1,759 

Goodwill, end of period

  330,204 

 

9

 

Identified intangible assets consist of the following:

 

  

June 27,

  

September 27,

 

(Thousands of Dollars)

 

2021

  

2020

 
         

Non-amortized intangible assets:

        

Mastheads

  40,459   40,459 

Amortizable intangible assets:

        

Customer and newspaper subscriber lists

  774,291   774,604 

Less accumulated amortization

  651,704   632,457 
   122,587   142,147 

Non-compete and consulting agreements

  28,656   28,656 

Less accumulated amortization

  28,638   28,582 
   18   74 

Other intangible assets, net

  163,064   182,680 

 

The Company recognized $27,620,000 of advertiser relationships, $27,850,000 of subscriber relationships, $19,560,000 of commercial print relationships and $20,390,000 of indefinite-lived masthead assets as part of the Transactions as defined in Note 7.

 

Annual amortization of intangible assets for the five years ending December 2022 to December 2026 is estimated to be $21,494,000, $20,081,000, $18,043,000, $12,707,000, and $7,218,000, respectively. The weighted average amortization period for those amortizable assets acquired as part of the Transactions is 13.7 years.

 

The Company recognized $79,896,000 of Goodwill as part of the Transactions as defined in Note 7. The value of the acquired Goodwill is primarily related to an assembled workforce and expected synergies from combining operations. For tax purposes, the amount of Goodwill that is expected to be deductible is $42,442,000. Refer to Note 7 for more information regarding final purchase accounting for the Transactions.

 

 
5

DEBT

 

On March 16, 2020 in connection with the closing of the Transactions as defined in Note 7, the Company completed a comprehensive refinancing of its debt (the “2020 Refinancing”). The 2020 Refinancing consists of a 25-year term loan with BH Finance LLC (“BH Finance”), an affiliate of Berkshire, in an aggregate principal amount of $576,000,000 at a 9% annual rate (referred to herein as “Credit Agreement” and “Term Loan”). The proceeds of the Term Loan were used, along with cash on hand, to repay the Company's $431,502,000 in existing debt incurred in 2014 (the "2014 Refinancing") as well as to fund the acquisition of the BH Media Newspaper Business assets and the stock of the Buffalo News for $140,000,000 in cash. With the closing of this refinancing, BH Finance became Lee's sole lender. The Credit Agreement documents the primary terms of the Term Loan. The Term Loan matures on March 16, 2045.

 

As of June 27, 2021, the Company had $485,162,000 in aggregate principal outstanding under the Term Loan. The weighted average cost of debt at June 27, 2021 is 9.0%. 

 

For the 13-weeks ended June 27, 2021 excess cash flow (as such term is defined in the Term Loan) totaled $1,070,000 and was used to pay debt in July 2021. This balance was recognized in current maturities of long-term debt as of June 27, 2021 in the Consolidated Balance Sheets. Future payments are contingent on the Company's ability to generate future excess cash flow, as defined in the Credit Agreement.

 

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.

 

The Credit Agreement restricts us from paying dividends on our Common Stock. This restriction does not apply to dividends issued with the Company’s Equity Interests or from the proceeds of a sale of the Company’s Equity Interests. Further, the Credit Agreement restricts or limits, among other things, subject to certain exceptions, the ability of the Company and its subsidiaries to: (i) incur additional indebtedness, (ii) make certain investments, (iii) enter into mergers, acquisitions and asset sales, (iv) incur or create liens and (v) enter into transactions with certain affiliates. The Credit Agreement contains various representations and warranties by the Company and may be terminated upon the occurrence of certain events of default, including non-payment. The Credit Agreement also contains cross-default provisions tied to other agreements with BH Finance entered into by the Company and its subsidiaries in connection with the 2020 Refinancing.

 

10

 

Principal Payments

 

Voluntary payments under the Credit Agreement are not subject to call premiums and are payable at par.

 

There are no scheduled mandatory principal payments required under the Credit Agreement. The Company is required to make mandatory pre-payments of the Term Loan as follows:

 

 

The Company must prepay the Term Loan in an aggregate amount equal to 100% of any Net Cash Proceeds received by the Company or any subsidiary from a sale, transfer, license, lease or other disposition of any property of the Company or any subsidiary in excess of $500,000 in any ninety (90) day period.

   
 Beginning on June 28, 2020, the Company is required to prepay the Term Loan with excess cash flow, defined as cash on the balance sheet in excess of $20,000,000 (“Excess Cash Flow”). Excess Cash Flow is used to prepay the Term Loan, at par, and is due within 50-days of quarter end. 
   
 If there is a Change of Control (as defined in the Credit Agreement), BH Finance has the option to require the Company to prepay the Term Loan in cash equal to 105% of the unpaid principal balance, plus accrued and unpaid interest.

 

The Company may, upon notice to BH Finance, at any time or from time to time, voluntarily prepay the Term Loan in whole or in part, at par, provided that any voluntary prepayments of the Term Loan shall be accompanied by payment of all accrued interest on the amount of principal prepaid to the date of prepayment.

 

Warrants

 

In connection with the 2nd Lien Term Loan, we entered into a Warrant Agreement dated as of March 31, 2014 (the “Warrant Agreement”). Under the Warrant Agreement, certain affiliates or designees of the 2nd Lien Lenders received on March 31, 2014 their pro rata share of warrants to purchase, in cash, an initial aggregate of 600,000 shares of Common Stock, subject to adjustment pursuant to anti-dilution provisions (the “Warrants”). The Warrants represent, when fully exercised, approximately 10.4% of shares of Common Stock outstanding at March 30, 2014 on a fully diluted basis. The exercise price of the Warrants is $41.90 per share. The Warrants are set to expire in March 2022. Shares and exercise price have been adjusted to reflect the reverse stock split as described in Note 1.

 

The Warrant Agreement contains provisions requiring the Warrants to be measured at fair value and included in warrants and other liabilities in our Consolidated Balance Sheets. We re-measure the fair value of the liability each reporting period, with changes reported in other, net non-operating income (expense). The initial fair value of the Warrants was $16,930,000. See Note 11.

 

In connection with the issuance of the Warrants entered into in the 2014 Refinancing, we entered into a Registration Rights Agreement dated as of March 31, 2014 (the “Registration Rights Agreement”). The Registration Rights Agreement requires, among other matters, that we use our commercially reasonable efforts to maintain the effectiveness for certain specified periods of a shelf registration statement related to the shares of Common Stock to be issued upon exercise of the Warrants.

 

 

6

PENSION, POSTRETIREMENT AND POSTEMPLOYMENT DEFINED BENEFIT PLANS

 

We have several noncontributory defined benefit pension plans that together cover selected employees, including plans established under collective bargaining agreements. Our liability and related expense for benefits under the plans are recorded over the service period of employees based upon annual actuarial calculations. Plan funding strategies are influenced by government regulations. Plan assets consist primarily of domestic and foreign corporate equity securities, government and corporate bonds, hedge fund investments and cash.

 

We provide retiree medical and life insurance benefits under postretirement plans at several of our operating locations. Our liability and related expense for benefits under the postretirement plans are recorded over the service period of active employees based upon annual actuarial calculations. We accrue postemployment disability benefits when it becomes probable that such benefits will be paid and when sufficient information exists to make reasonable estimates of the amounts to be paid.

 

With the exception of defined benefit plans acquired in the Transactions as defined in Note 7, effective in 2012, substantially all benefits are frozen. Our liability and related expenses for benefits under the plans are recorded over the service period of employees based upon annual actuarial calculations. Plan funding strategies are influenced by government regulations. Plan assets consist primarily of domestic and foreign corporate equity securities, government and corporate bonds, hedge fund investments and cash.

 

During the 13 weeks ended December 27, 2020 we notified certain participants in our post-employment benefit plans of changes to be made to the plans, including elimination of coverage for certain participants. The changes resulted in a non-cash curtailment gain of $23,830,000 and a reduction in our benefit obligation liability by $23,830,000. This is recorded within Curtailment gain and Postretirement and postemployment benefit obligations.

 

11

 

We use a fiscal year end measurement date for all of our Pension and postretirement medical plan obligations.

 

The net periodic pension and postretirement cost (benefit) components for our plans are as follows:

 

PENSION PLANS

 

13 Weeks Ended

  

39 Weeks Ended

 
  

June 27,

  

June 28,

  

June 27,

  

June 28,

 

(Thousands of Dollars)

 

2021

  

2020

  

2021

  

2020

 
                 

Service cost for benefits earned during the period

  633   626   1,899   737 

Interest cost on projected benefit obligation

  1,787   2,462   5,361   5,113 

Expected return on plan assets

  (4,672)  (4,356)  (14,016)  (8,628)

Amortization of net loss

  1,004   792   3,013   2,376 

Amortization of prior service benefit

     (2)  (1)  (6)

Pension benefit

  (1,248)  (478)  (3,744)  (408)

 

POSTRETIREMENT MEDICAL PLANS

 

13 Weeks Ended

  

39 Weeks Ended

 
  

June 27,

  

June 28,

  

June 27,

  

June 28,

 

(Thousands of Dollars)

 

2021

  

2020

  

2021

  

2020

 
                 

Service cost for benefits earned during the period

  240   232   690   268 

Interest cost on projected benefit obligation

  239   346   601   523 

Expected return on plan assets

  (252)  (265)  (756)  (795)

Amortization of net gain

  (172)  (186)  (516)  (558)

Amortization of prior service benefit

  (162)  (161)  (485)  (483)

Curtailment gain

        (23,830)   

Postretirement medical benefit

  (107)  (34)  (24,296)  (1,045)

 

In the 39 weeks ended June 27, 2021 we contributed $965,000 to our pension plans. In March 2021, The American Rescue Plan Act was signed into law. Among other things, the law changed how companies compute minimum required pension contributions. As a result we expect to make no additional contributions to our pension trust during the remainder of fiscal 2021.

 

Multiemployer Pension Plans

 

During the 13 weeks ended December 27, 2020, we withdrew from a multiemployer pension plan and recorded a $12,310,000 liability reflecting an estimate of the withdrawal from the fund. The withdrawal liability is recorded in Warrants and other and the expense is included within Pension withdrawal cost. The liability will be paid over 20 years.

 

 

7

ACQUISITIONS

 

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 (“BH Media Group”) (“Purchase Agreement”). As part of the Purchase Agreement, the Company purchased certain assets and assumed certain liabilities of BH Media'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”). 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. The rationale for the acquisition was primarily the attractive nature of the various publications, businesses, and digital platforms as well as the revenue growth and operating expense synergy opportunities. The fair values of the assets and liabilities for the Transactions were finalized during the second quarter of 2021.


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.

 

12

 

Pro Forma Information

The following table sets forth unaudited pro forma results of operations assuming the Transactions, along with the credit arrangements necessary to finance the Transactions, occurred on September 30, 2019, the first day of fiscal year 2020.

 

  

Unaudited

   Unaudited 
  

13 Weeks Ended

  

39 Weeks Ended

 
  

June 28,

  

June 28,

 

(Thousands of Dollars, Except Per Share Data)

 

2020

  

2020

 

Total revenues

  182,528   630,027 

Income (loss) attributable to Lee Enterprises, Incorporated

  (1,275)  19,334 

Earnings per share - diluted

  (0.20)  3.40 

 

Prior period results have been adjusted to reflect the one-for-ten reverse stock split in March 2021. See Note 1 for details.

 

This pro forma financial information is based on historical results of operations, adjusted for the allocation of the purchase price and other acquisition accounting adjustments. This pro forma information is not necessarily indicative of what our results would have been had we operated the businesses since the beginning of the periods presented. The pro forma adjustments reflect the income statement effects of depreciation expense and amortization of intangibles related to the fair value adjustments of the assets acquired, acquisition-related costs, incremental interest expense related to the financing of the Transactions and 2020 Refinancing, the BH Lease entered into as part of the Transactions, the elimination of certain intercompany activity and the related tax effects of the adjustments.

 

The only material, nonrecurring adjustment made relates to the write-off of previously unamortized debt-issuance costs as of October 1, 2019 which resulted in an $8,900,000 increase to net income for the 39 weeks ended June 28, 2020.

 

 

8

INCOME TAXES

 

We recorded an income tax expense of $1,366,000 related to income before taxes of $5,103,000 for the 13 weeks ended June 27, 2021, and income tax expense of $7,106,000 related to income before taxes of $26,636,000 for the 39 weeks ended June 27, 2021. We recorded an income tax expense of $368,000 related to a loss before taxes of $359,000 for the 13 weeks ended June 27, 2020, and income tax benefit of $92,000 related to a loss before taxes of $90,000 for the 39 weeks ended June 28, 2020. The effective income tax rates for the 13 weeks and 39 weeks ended June 27, 2021 was 26.8% and 26.7%, respectively. The effective income tax rate for the 13 and 39 weeks ended June 28, 2020 was negative 102.5% and 102.2%, respectively.

 

13

 

The primary differences between these rates and the U.S. federal statutory rate of 21% are due to the effect of state taxes, non-deductible expenses, adjustments to reserves for uncertain tax positions, including any related interest, and mark-to-market adjustments to value stock warrants.

 

We file a consolidated federal tax return, as well as combined and separate tax returns in approximately 27 state and local jurisdictions.  We do not currently have any federal or material state income tax examinations in progress. Our income tax returns have generally been audited or closed to audit through 2013.

 

At September 27, 2020, we had approximately $46,066,000 of state net operating loss benefits.

 

 

9

EARNINGS PER COMMON SHARE

 

The following table sets forth the computation of basic and diluted earnings per common share as adjusted to give effect to the reverse stock split:

 

  

13 Weeks Ended

  

39 Weeks Ended

 
  

June 27,

  

June 28,

  

June 27,

  

June 28,

 

(Thousands of Dollars and Shares, Except Per Share Data)

 

2021

  

2020

  

2021

  

2020

 
                 

Income (loss) attributable to Lee Enterprises, Incorporated:

  3,227   (1,275)  17,995   (1,320)

Weighted average common shares

  5,881   5,820   5,867   5,823 

Less weighted average restricted Common Stock

  (156)  (156)  (155)  (153)

Basic average common shares

  5,725   5,664   5,712   5,670 

Dilutive stock options and restricted Common Stock

  123      102    

Diluted average common shares

  5,848   5,664   5,814   5,670 

Earnings per common share:

                

Basic

  0.56   (0.23)  3.15   (0.23)

Diluted

  0.55   (0.23)  3.10   (0.23)

 

For the 13 and 39 weeks ended June 27, 2021, 600,000 shares were not considered in the computation of diluted earnings per common share because the exercise prices of the related stock options and Warrants were in excess of the fair market value of our Common Stock. For the 13 and 39 weeks ended June 28, 2020, 813,497 and 737,200 shares, respectively, were not considered in the computation of diluted earnings per common share because the Company recorded net losses.

 

Prior period results have been adjusted to reflect the one-for-ten reverse stock split in March 2021. See Note 1 for details.

 

 

10

STOCK OWNERSHIP PLANS

 

A summary of stock option activity during the 39 weeks ended June 27, 2021 follows, as adjusted to give effect to the reverse stock split:

 

(Thousands of Dollars and Shares, Except Per Share Data)

 

Shares

  Weighted Average Exercise Price  Weighted Average Remaining Contractual Term (Years)  Aggregate Intrinsic Value 
                 

Outstanding, September 27, 2020

  41   11.40         

Exercised

  (2)  11.30         

Cancelled

  (3)  11.30         

Outstanding, June 27, 2021

  36   11.40   0.95   604 

Exercisable, June 27, 2021

  36   11.40   0.95   604 

 

Restricted Common Stock

 

The table below summarizes restricted Common Stock activity during the 39 weeks ended June 27, 2021, as adjusted to give effect to the reverse stock split:

 

(Thousands of Shares, Except Per Share Data)

 

Shares

  Weighted Average Grant Date Fair Value 
         

Outstanding, September 27, 2020

  155   21.50 

Vested

  (45)  27.70 

Granted

  46   11.20 

Cancelled

      

Outstanding, June 27, 2021

  156   16.70 

 

Total unrecognized compensation expense for unvested restricted Common Stock at June 27, 2021 is $1,115,000, which will be recognized over a weighted average period of 1.4 years.

 

14

 
 

11

FAIR VALUE MEASUREMENTS

 

We utilize FASB ASC Topic 820, Fair Value Measurements and Disclosures, to measure and report fair value. FASB ASC Topic 820 defines fair value, establishes a framework for measuring fair value and expands disclosures about fair value measurements. FASB ASC Topic 820 establishes a three-level hierarchy of fair value measurements based on whether the inputs to those measurements are observable or unobservable, which consists of the following levels:

 

Level 1 - Quoted prices for identical instruments in active markets.

 

Level 2 - Quoted prices for similar instruments in active markets; quoted prices for identical or similar instruments in markets that are not active; and model-derived valuations in which all significant inputs are observable in active markets.

 

Level 3 - Valuations derived from valuation techniques in which one or more significant inputs are unobservable.

 

The following methods and assumptions are used to estimate the fair value of each class of financial instruments for which it is practicable to estimate value.

 

The carrying amounts of cash equivalents, accounts receivable and accounts payable approximate fair value because of the short maturity of those instruments. Investments totaling $4,226,000, including our 17ownership of the non-voting common stock of TCT, are carried at cost. Fair value of the remaining investments are carried at cost.

 

Our fixed rate debt consists of $485,162,000 principal amount of the Term Loan recorded at carrying value. At June 27, 2021, based on market quotations, the fair value approximates carrying value. This represents a level 2 fair value measurement.

 

As discussed more fully in Note 5, we recorded a liability for the Warrants issued in connection with the Warrant Agreement. The liability was initially measured at its fair value and we measure the liability to fair value each reporting period, with changes reported in other non-operating income (expense). The initial fair value of the Warrants was $16,930,000. The fair value of Warrants at June 27, 2021, and  September 27, 2020,are $1,317,000 and $363,000, respectively. Fair value is determined using the Black-Scholes option pricing model. These represent level 2 fair value measurements.

 

 

12

COMMITMENTS AND CONTINGENT LIABILITIES

 

Income Taxes

 

Commitments exclude unrecognized tax benefits to be recorded in accordance with FASB ASC Topic 740, Income Taxes. We are unable to reasonably estimate the ultimate amount or timing of cash settlements with the respective taxing authorities for such matters. See Note 8.

 

We file income tax returns with the Internal Revenue Service (“IRS”) and various state tax jurisdictions. From time to time, we are subject to routine audits by those agencies and those audits may result in proposed adjustments. We have considered the alternative interpretations that may be assumed by the various taxing agencies, believe our positions taken regarding our filings are valid, and that adequate tax liabilities have been recorded to resolve such matters. However, the actual outcome cannot be determined with certainty and the difference could be material, either positively or negatively, to the Consolidated Statements of Operations and Comprehensive Income in the periods in which such matters are ultimately determined. We do not believe the final resolution of such matters will be material to our consolidated financial position or cash flows.

 

We have various income tax examinations ongoing and at various stages of completion, but generally our income tax returns have been audited or closed to audit through 2013.

 

Legal Proceedings

 

We are involved in a variety of legal actions that arise in the normal course of business. Insurance coverage mitigates potential loss for certain of these matters. While we are unable to predict the ultimate outcome of these legal actions, it is our opinion that the disposition of these matters will not have a material adverse effect on our Consolidated Financial Statements, taken as a whole.

 

Restructuring Costs and Other

 

We have recognized $1,419,000 and $5,880,000, respectively of expense related to restructuring costs and other for the 13 and 39 weeks ended June 27, 2021 and $2,865,000 and $6,422,000 for the 13 and 39 weeks ended June 28, 2020. The amounts consist of $907,000 and $4,074,000 for June 27, 2021 and $1,484,000 and $2,534,000 for June 28, 2020, respectively of severance expense. We did not have a significant restructuring liability as of June 27, 2021 or June 28, 2020.

 

Subsequent events

 

We have evaluated subsequent events through August 6, 2021. No events have occurred subsequent to June 27, 2021 that require disclosure or recognition in these financial statements.

 

15

 
 

Item 2.       Management's Discussion and Analysis of Financial Condition and Results of Operations

 

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 27, 2021. This discussion should be read in conjunction with the Consolidated Financial Statements and related Notes thereto, included herein, and our 2020 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 27,

   

June 28,

   

June 27,

   

June 28,

 

(Thousands of Dollars)

 

2021

   

2020

   

2021

   

2020

 
                                 

Net income (loss)

    3,737       (727 )     19,532       2  

Adjusted to exclude

                               

Income tax expense (benefit)

    1,366       368       7,106       (92 )

Non-operating expenses, net

    8,680       12,108       16,369       43,933  

Equity in earnings of TNI and MNI

    (1,689 )     (842 )     (4,902 )     (3,773 )

Loss (gain) on sale of assets and other, net

    242       147       6,938       (5,153 )

Depreciation and amortization

    10,836       11,201       33,794       25,196  

Restructuring costs and other

    1,419       2,865       5,880       6,422  

Stock compensation

    205       228       639       799  

Add:

                               

Ownership share of TNI and MNI EBITDA (50%)

    1,923       955       5,421       4,464  

Adjusted EBITDA

    26,719       26,303       90,777       71,798  

 

 

EXECUTIVE OVERVIEW

 

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

 

We operate 77 principally mid-sized local media operations.

 

We reach nearly 70% 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 than 49 million unique visitors, in the month of June 2021 with 400 million page views and 91 million visits.

 

  We have approximately one million paid subscribers to our print and digital products, with estimated readership totaling three million. Digital only subscribers totaled approximately 337,000, a 50.5% increase over the prior year.

 

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 and the Buffalo News, 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 provides state-of-the-art web hosting, content management services and video management services to nearly 2,200 other media organizations including broadcast.   

 

STRATEGY

 

We are a major subscription and advertising platform, a trusted local news provider and innovative, digitally focused marketing solutions company. Our focus is on the local market - including local news and information, local advertising and marketing services to top local accounts and SMBs, and digital services to local content curators. To align with the core strength of our Company, our post-pandemic operating strategy is locally focused around three pillars:

 

  Transform the presentation of local news and information by providing best-in-class reader and user experiences with digital presentations that emphasize video and other multimedia formats and rich, high-value content.
  Accelerate overall subscription growth by converting more of our vast addressable market to subscribers leveraging cutting-edge data and technology and expanded offerings for paid, niche, content on topics where we have expertise and unique selling positions.
  Diversify and expand offerings for advertisers by launching a portfolio of video advertising initiatives and e-commerce sales strategies through Lee's in-house Amplified Digital Agency that will enable advertisers to leverage our vast data-rich digital audiences and reach consumers in new ways.

 

 

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”).

 

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 BHMG, 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 BHMG 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 2021 to 2020 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 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

 

The ongoing COVID-19 pandemic and related measures to contain its spread have resulted in significant volatility and economic uncertainty, which is expected to continue in the near term. The COVID-19 pandemic has had and the Company currently expects that it will continue to have a significant negative impact on the Company’s business and operating results in the near term. While vaccines have become widely available in the United States, the long-term impact of the COVID-19 pandemic remains uncertain and unpredictable as it will depend on the pace of vaccine distribution, government responses to future outbreaks, the spread of variants, 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.

 

We have evaluated the current economic environment as of June 27, 2021, 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.

 

 

13 WEEKS ENDED June 27, 2021

 

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