Lee Enterprises(LEE) - 2020 Q1 - Quarterly Report

Forward-Looking Statements This section outlines forward-looking statements, highlighting risks related to the pending BH Media Group acquisition, declining print revenue, and debt management - The company entered an agreement on January 29, 2020, to acquire BH Media's newspaper business and The Buffalo News, pending regulatory approvals[7] - Key risks include managing declining print revenue, generating sufficient cash flow for debt service, complying with credit covenants, and adapting to changes in advertising demand and technology[7] PART I FINANCIAL INFORMATION Financial Statements (Unaudited) Unaudited financial statements for Q1 FY2020 show decreased net income, slight asset and liability increases, and a reduced deficit, reflecting ongoing print media challenges Consolidated Balance Sheets As of December 29, 2019, total assets increased to $565.7 million, liabilities rose to $596.7 million, and the stockholders' deficit reduced to $(32.7) million Consolidated Balance Sheet Highlights (in thousands) | Account | Dec 29, 2019 | Sep 29, 2019 | | :--- | :--- | :--- | | Total Assets | $565,730 | $555,202 | | Cash and cash equivalents | $4,468 | $8,645 | | Goodwill | $250,309 | $250,309 | | Total Liabilities | $596,700 | $592,033 | | Long-term debt, net | $421,248 | $429,391 | | Total Stockholders' Deficit | $(32,677) | $(38,484) | Consolidated Statements of Income and Comprehensive Income For the 13 weeks ended December 29, 2019, net income decreased to $5.7 million, total operating revenue fell 10.2%, and diluted EPS was $0.09 Q1 Fiscal 2020 vs Q1 Fiscal 2019 Performance (in thousands, except EPS) | Metric | 13 Weeks Ended Dec 29, 2019 | 13 Weeks Ended Dec 30, 2018 | | :--- | :--- | :--- | | Total Operating Revenue | $122,343 | $136,201 | | Advertising and marketing services | $65,727 | $75,962 | | Subscription | $41,694 | $46,268 | | Operating Income | $18,306 | $27,719 | | Net Income | $5,717 | $10,719 | | Diluted EPS | $0.09 | $0.18 | Consolidated Statements of Cash Flows Net cash from operations decreased to $10.4 million, investing activities used $3.7 million, and financing activities used $10.8 million, resulting in a $4.2 million cash decrease Cash Flow Summary (in thousands) | Activity | 13 Weeks Ended Dec 29, 2019 | 13 Weeks Ended Dec 30, 2018 | | :--- | :--- | :--- | | Net cash provided by operating activities | $10,361 | $19,407 | | Net cash required for investing activities | $(3,740) | $(1,395) | | Net cash required for financing activities | $(10,798) | $(7,483) | | Net (decrease) increase in cash | $(4,177) | $10,529 | Notes to Consolidated Financial Statements Notes detail accounting policies, including the January 2020 agreement to acquire BH Media Group for $140 million via a new $576 million 25-year loan, and the adoption of ASC 842 - On January 29, 2020, the company agreed to acquire BHMG's newspaper business and The Buffalo News for $140 million[28] - The acquisition will be financed by a new $576 million, 25-year term loan at 9.00% interest from BH Finance, refinancing all existing debt[35][62] - The company adopted ASC 842, recognizing $10.1 million in right-of-use assets and corresponding lease liabilities[43][107] Debt Summary (in thousands) | Debt Instrument | Dec 29, 2019 | Sep 29, 2019 | | :--- | :--- | :--- | | Notes (9.5%) | $356,141 | $363,420 | | 2nd Lien Term Loan (12.0%) | $77,253 | $80,207 | | Total Principal | $433,394 | $443,627 | Management's Discussion and Analysis of Financial Condition and Results of Operations Management discusses the strategic Berkshire Hathaway acquisition, expected to boost revenue by 87% with $576 million financing, while Q1 revenue declined 10.2% offset by digital growth - The $140 million acquisition of BHMG publications and The Buffalo News is expected to be immediately accretive, increasing revenue by 87% and adjusted EBITDA by 40%[154][158] - The company anticipates achieving $20-25 million in annual revenue and cost synergies within 24 months post-acquisition[158][161] - The new $576 million BH Finance loan features a 9% fixed interest rate, 25-year maturity, no performance covenants, and refinances all existing debt[159] Q1 Fiscal 2020 vs Q1 Fiscal 2019 Operating Results (in thousands) | Metric | Q1 2020 | Q1 2019 | % Change | | :--- | :--- | :--- | :--- | | Total operating revenue | $122,343 | $136,201 | (10.2)% | | Cash costs | $96,441 | $103,120 | (6.5)% | | Operating income | $18,306 | $27,719 | (34.0)% | | Adjusted EBITDA | $28,122 | $36,145 | (22.2)% | - Total digital revenue grew 1.7% to $37.2 million, comprising 30.4% of total operating revenue[185] - Digital-only subscribers increased by 84.8% year-over-year, reaching 105,000 total[182][157] Quantitative and Qualitative Disclosures About Market Risk The company's primary market risk is newsprint commodity prices, with minimal interest rate risk due to fixed-rate debt, and a strategy to mitigate price volatility - The company's debt is entirely fixed-rate, eliminating exposure to interest rate fluctuations[224] - A $10 per tonne increase in newsprint price would reduce pre-tax income by approximately $331,000 annually[227] - Newsprint prices decreased during the quarter due to declining domestic and export demand[225] Controls and Procedures Management concluded that disclosure controls and procedures were effective as of December 29, 2019, with no material changes to internal control over financial reporting during the quarter - Management concluded that disclosure controls and procedures were effective as of quarter-end[229] - No material changes occurred in internal control over financial reporting during the quarter[230] PART II OTHER INFORMATION Legal Proceedings The company is involved in routine legal actions, which management believes will not materially adversely affect consolidated financial statements - The company is involved in routine legal actions, not expected to materially affect financial statements[232] Risk Factors New risk factors relate to the pending Berkshire Hathaway acquisition, including completion failure, unrealized benefits, integration challenges, and impacts on employees and stock price - New risks from the pending Berkshire Hathaway acquisition include transaction completion failure, unrealized benefits, and integration difficulties[234] - Additional transaction risks include significant costs, unknown liabilities, potential litigation, and negative impacts on key employee retention[234] Exhibits The report lists filed exhibits, including Rule 13a-14(a)/15d-14(a) certifications by the CEO and CFO, and a Section 1350 certification Filed Exhibits | Number | Description | | :--- | :--- | | 31.1 | Rule 13a-14(a)/15d-14(a) certification | | 31.2 | Rule 13a-14(a)/15d-14(a) certification | | 32 | Section 1350 certification |