Lee Enterprises(LEE) - 2020 Q2 - Quarterly Report

FORWARD-LOOKING STATEMENTS This section highlights that the report contains forward-looking statements subject to inherent risks and uncertainties that may cause actual results to differ materially - The report contains forward-looking statements, which are subject to risks, trends, and uncertainties that could cause actual results to differ materially from those anticipated. Readers are cautioned not to place undue reliance on these statements, and the Company does not undertake to publicly update or revise them, except as required by law[6][7] - Key risks and uncertainties include potential continued or accelerated revenue declines due to the COVID-19 pandemic, long-term changes to the publishing industry, increased costs and disruptions from the pandemic, ability to service debt, manage declining print revenue, and maintain liquidity[10] EXPLANATORY NOTE This section explains the delay in filing the Form 10-Q due to significant operational and financial assessment disruptions caused by the COVID-19 pandemic - The Company delayed filing its Form 10-Q for the period ended March 29, 2020, until June 22, 2020, due to significant disruptions caused by the COVID-19 pandemic, including operational challenges, difficulties in financial assessment, and delays in acquisition accounting and tax provision finalization[8][9][11] PART I FINANCIAL INFORMATION This section encompasses the unaudited consolidated financial statements, management's discussion and analysis, market risk disclosures, and controls and procedures Item 1. Financial Statements (Unaudited) This section presents the unaudited consolidated financial statements for Lee Enterprises, Incorporated, including balance sheets, income statements, statements of stockholder's equity, and cash flow statements, along with detailed notes explaining the basis of presentation, significant accounting policies, and specific financial items such as revenue, investments, debt, leases, and acquisitions. The financial results for the 13 and 26 weeks ended March 29, 2020, reflect the impact of the BH Media Newspaper Business and Buffalo News acquisitions and the COVID-19 pandemic Consolidated Balance Sheets This section presents the Company's financial position, detailing assets, liabilities, and equity at specific reporting dates, reflecting recent acquisitions | (Thousands of Dollars) | March 29, 2020 | September 29, 2019 | | :--------------------- | :------------- | :----------------- | | ASSETS | | | | Total current assets | 129,602 | 60,303 | | Total investments | 39,829 | 39,426 | | Property and equipment, net | 114,627 | 82,039 | | Operating lease right-of-use assets | 72,677 | — | | Goodwill | 313,868 | 250,309 | | Other intangible assets, net | 212,978 | 107,393 | | Total assets | 905,736 | 555,202 | | LIABILITIES AND EQUITY | | | | Total current liabilities | 131,721 | 61,038 | | Long-term debt, net of current maturities | 576,000 | 429,391 | | Operating lease liabilities | 63,608 | — | | Pension obligations | 88,930 | 47,037 | | Postretirement and postemployment benefit obligations | 39,390 | 2,550 | | Total liabilities | 941,597 | 592,033 | | Total stockholders' deficit | (37,658) | (38,484) | | Total liabilities and deficit | 905,736 | 555,202 | - Total assets increased significantly from $555.2 million in September 2019 to $905.7 million in March 2020, primarily driven by increases in goodwill, other intangible assets, and operating lease right-of-use assets due to acquisitions[14] - Total liabilities also saw a substantial increase from $592.0 million to $941.6 million, mainly due to a rise in long-term debt and the recognition of operating lease liabilities and increased pension/postretirement obligations[16] Consolidated Statements of Income and Comprehensive Income (Loss) This section reports the Company's financial performance, including revenues, expenses, and net income or loss for the specified interim periods | (Thousands of Dollars) | 13 Weeks Ended March 29, 2020 | 13 Weeks Ended March 31, 2019 | 26 Weeks Ended March 29, 2020 | 26 Weeks Ended March 31, 2019 | | :--------------------- | :---------------------------- | :---------------------------- | :---------------------------- | :---------------------------- | | Total operating revenue | 121,367 | 122,704 | 243,710 | 258,905 | | Total operating expenses | 108,942 | 111,854 | 214,548 | 222,465 | | Operating income | 13,787 | 12,567 | 32,093 | 40,286 | | Total non-operating expense, net | (21,108) | (14,738) | (31,825) | (27,224) | | Income (loss) before income taxes | (7,321) | (2,171) | 268 | 13,062 | | Net income (loss) | (4,990) | (2,327) | 728 | 8,392 | | Income (loss) attributable to Lee Enterprises, Incorporated | (5,367) | (2,678) | (46) | 7,683 | | Basic EPS | (0.09) | (0.05) | (0.00) | 0.14 | | Diluted EPS | (0.09) | (0.05) | (0.00) | 0.14 | - For the 13 weeks ended March 29, 2020, the Company reported a net loss of $4.99 million, an increase from the $2.33 million net loss in the prior year, primarily due to higher non-operating expenses, including debt financing costs[19] - For the 26 weeks ended March 29, 2020, net income significantly decreased to $0.73 million from $8.39 million in the prior year, with income attributable to Lee Enterprises, Incorporated turning into a loss of $0.05 million, largely impacted by increased debt financing and administrative costs[19] Consolidated Statements of Stockholder's Equity This section details changes in the Company's equity accounts, including accumulated deficit and common stock, over the reporting periods | (Thousands of Dollars) | September 30, 2019 | December 29, 2019 | March 29, 2020 | | :--------------------- | :----------------- | :---------------- | :------------- | | Accumulated Deficit | (265,423) | (260,103) | (265,470) | | Common Stock | 577 | 581 | 581 | | Additional paid-in capital | 255,476 | 255,642 | 255,712 | | Accumulated Other Comprehensive Loss | (29,114) | (28,797) | (28,481) | | Total Stockholders' Deficit | (38,484) | (32,677) | (37,658) | - The total stockholders' deficit improved from $(38.48) million at September 30, 2019, to $(32.68) million at December 29, 2019, before slightly worsening to $(37.66) million by March 29, 2020, reflecting the net loss attributable to Lee Enterprises, Incorporated during the latter period[21] Consolidated Statements of Cash Flows This section provides an overview of cash inflows and outflows from operating, investing, and financing activities for the specified interim periods | (Thousands of Dollars) | 26 Weeks Ended March 29, 2020 | 26 Weeks Ended March 31, 2019 | | :--------------------- | :---------------------------- | :---------------------------- | | Net cash provided by operating activities | 10,698 | 27,833 | | Net cash required for investing activities | (119,711) | (7,538) | | Net cash provided by (required for) financing activities | 131,192 | (9,010) | | Net increase (decrease) in cash and cash equivalents | 22,179 | 11,285 | | Cash and cash equivalents, End of period | 30,824 | 16,665 | - Net cash provided by operating activities decreased significantly to $10.7 million in the 26 weeks ended March 29, 2020, from $27.8 million in the prior year, primarily due to lower net income and changes in working capital[23] - Investing activities required $119.7 million in cash, a substantial increase from $7.5 million in the prior year, mainly due to $131.0 million spent on acquisitions, net of cash acquired[23] - Financing activities provided $131.2 million in cash, a reversal from the $9.0 million required in the prior year, driven by $576.0 million in proceeds from long-term debt for the 2020 Refinancing, partially offset by debt payments[23] Notes to Consolidated Financial Statements This section provides detailed explanations and disclosures supporting the consolidated financial statements, covering accounting policies, specific financial items, and the impact of significant events 1 BASIS OF PRESENTATION AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES This section outlines the basis for preparing the unaudited financial statements, significant accounting policies, and the impact of recent acquisitions and the COVID-19 pandemic - The unaudited interim Consolidated Financial Statements include the accounts of the March 16, 2020 Transactions (BH Media Newspaper Business and Buffalo News acquisitions) for approximately two weeks, and are prepared in conformity with GAAP[25] - The COVID-19 pandemic has caused significant and immediate declines in demand for certain products and services, particularly advertising revenue, and is expected to have a significant negative near-term impact on the Company's business and operations[29][30] - On March 16, 2020, the Company acquired BH Media Newspaper Business and The Buffalo News for $140 million, funded by a new Credit Agreement with BH Finance LLC. This acquisition nearly doubled the size of the Company's operations[33][139][145] - The Company adopted ASC 842 (Leases) effective September 30, 2019, requiring recognition of ROU assets and lease liabilities for most operating lease arrangements[43] 2 REVENUE This section details the Company's revenue streams, including advertising, subscriptions, and digital services, and the impact of recent acquisitions | (Thousands of Dollars) | 13 Weeks Ended March 29, 2020 | 13 Weeks Ended March 31, 2019 | 26 Weeks Ended March 29, 2020 | 26 Weeks Ended March 31, 2019 | | :--------------------- | :---------------------------- | :---------------------------- | :---------------------------- | :---------------------------- | | Advertising and marketing services revenue | 60,945 | 62,934 | 126,672 | 138,897 | | Subscription revenue | 46,443 | 45,076 | 88,138 | 91,345 | | TownNews and other digital services revenue | 5,211 | 4,744 | 10,429 | 9,421 | | Other revenue | 8,768 | 9,950 | 18,471 | 19,242 | | Total operating revenue | 121,367 | 122,704 | 243,710 | 258,905 | - Total operating revenue decreased by 1.1% to $121.37 million for the 13 weeks ended March 29, 2020, and by 5.9% to $243.71 million for the 26 weeks, despite including $14.65 million in revenue from the recent acquisitions[47][159][185] - Subscription revenue increased by 3.0% for the 13 weeks, driven by $6.56 million from acquisitions and growth in digital-only subscribers, partially offsetting declines in print circulation[47][161] - Unearned revenue, primarily from subscriptions, increased from $21.72 million at September 29, 2019, to $58.56 million at March 29, 2020[49] 3 INVESTMENTS IN ASSOCIATED COMPANIES This section reports the Company's equity in earnings from its investments in associated companies, TNI Partners and Madison Newspapers, Inc TNI Partners Operating Income: | (Thousands of Dollars) | 13 Weeks Ended March 29, 2020 | 13 Weeks Ended March 31, 2019 | 26 Weeks Ended March 29, 2020 | 26 Weeks Ended March 31, 2019 | | :--------------------- | :---------------------------- | :---------------------------- | :---------------------------- | :---------------------------- | | Operating revenue | 10,185 | 11,480 | 20,381 | 23,644 | | Operating income | 2,419 | 2,648 | 4,450 | 5,716 | | Equity in earnings of TNI | 1,105 | 1,218 | 2,015 | 2,649 | MNI Operating Income: | (Thousands of Dollars) | 13 Weeks Ended March 29, 2020 | 13 Weeks Ended March 31, 2019 | 26 Weeks Ended March 29, 2020 | 26 Weeks Ended March 31, 2019 | | :--------------------- | :---------------------------- | :---------------------------- | :---------------------------- | :---------------------------- | | Operating revenue | 12,325 | 13,092 | 26,250 | 27,918 | | Operating income | 567 | 1,195 | 2,228 | 3,019 | | Equity in earnings of MNI | 257 | 499 | 915 | 1,197 | - Equity in earnings from TNI Partners decreased for both the 13-week (from $1.22 million to $1.11 million) and 26-week (from $2.65 million to $2.02 million) periods ended March 29, 2020, reflecting declines in operating revenue and income[53][54] - Equity in earnings from Madison Newspapers, Inc. (MNI) also decreased for both periods, with the 13-week period seeing a drop from $0.50 million to $0.26 million and the 26-week period from $1.20 million to $0.92 million, due to lower operating revenue and income[55] 4 GOODWILL AND OTHER INTANGIBLE ASSETS This section details the changes in goodwill and other intangible assets, primarily driven by recent acquisitions and their valuation | (Thousands of Dollars) | March 29, 2020 | September 29, 2019 | | :--------------------- | :------------- | :----------------- | | Goodwill, end of period | 313,868 | 250,309 | | Other intangible assets, net | 212,978 | 107,393 | | - Mastheads | 42,722 | 21,883 | | - Customer and newspaper subscriber lists, net | 170,143 | 85,359 | - Goodwill increased by $63.56 million to $313.87 million as of March 29, 2020, primarily due to the BH Media and Buffalo News acquisitions, reflecting the value of assembled workforce and expected synergies[56][59] - Other intangible assets, net, more than doubled to $212.98 million, with significant additions of advertiser relationships ($38.78 million), subscriber relationships ($36.06 million), commercial print relationships ($17.13 million), and indefinite-lived masthead assets ($21.68 million) from the Transactions[56][57] - The weighted average amortization period for amortizable assets acquired in the Transactions is 9.2 years, with overall amortizable intangible assets having a weighted average period of 6.4 years[57][58] 5 DEBT This section outlines the Company's debt structure, including the comprehensive debt refinancing, new term loan, and associated covenants | (Thousands of Dollars) | March 29, 2020 | September 29, 2019 | Interest Rates (%) | | :--------------------- | :------------- | :----------------- | :----------------- | | Term Loan | 576,000 | — | 9.0 | | Notes | — | 363,420 | 9.5 | | 2nd Lien Term Loan | — | 80,207 | 12.0 | | Total long-term debt | 576,000 | 429,391 | | - On March 16, 2020, the Company completed a comprehensive debt refinancing, securing a 25-year term loan of $576 million from BH Finance LLC at a 9% annual interest rate, which matures on March 16, 2045[60][64] - The proceeds from the new Term Loan were used to refinance $431.5 million of existing debt and finance the $140 million acquisition of BH Media Newspaper Business and Buffalo News, making BH Finance the Company's sole lender[60] - The new Credit Agreement has no required debt payments, with future payments contingent on the Company's ability to generate excess cash flow, and includes restrictions on dividends and other capital transactions[62][66][69][71][72] 6 LEASES This section describes the adoption of ASC 842, recognizing right-of-use assets and lease liabilities, and the impact of new lease agreements from acquisitions - Effective September 30, 2019, the Company adopted ASC 842, recognizing operating lease right-of-use assets of $10.71 million and corresponding lease liabilities[84][86] - In connection with the BH Media acquisition, the Company entered into a 10-year lease for 68 properties, recognizing $56.23 million in ROU assets and lease liabilities, with annual rent of $8 million[85] Total Operating Lease Expense: | (Thousands of Dollars) | 13 Weeks Ended March 29, 2020 | 26 Weeks Ended March 29, 2020 | | :--------------------- | :---------------------------- | :---------------------------- | | Operating lease costs | 1,742 | 2,711 | | Variable lease costs | 295 | 575 | | Short-term lease costs | 266 | 319 | | Total Operating Lease Expense | 2,303 | 3,605 | Present Value of Lease Liabilities (March 29, 2020): | (Thousands of Dollars) | Amount | | :--------------------- | :----- | | Total lease payments | 103,701 | | Less: interest | (31,794) | | Present value of lease liabilities | 71,907 | 7 PENSION, POSTRETIREMENT AND POSTEMPLOYMENT DEFINED BENEFIT PLANS This section details the Company's defined benefit pension and postemployment obligations, including those assumed through recent acquisitions - As part of the Transactions, the Company assumed several non-contributory defined benefit pension plans with a net obligation of $43.50 million and unfunded postemployment benefit plans with an obligation of $36.80 million as of March 16, 2020[93][94] Net Periodic Pension Benefit: | (Thousands of Dollars) | 13 Weeks Ended March 29, 2020 | 13 Weeks Ended March 31, 2019 | 26 Weeks Ended March 29, 2020 | 26 Weeks Ended March 31, 2019 | | :--------------------- | :---------------------------- | :---------------------------- | :---------------------------- | :---------------------------- | | Pension benefit | (8) | (109) | 70 | (218) | Net Periodic Postretirement Medical Benefit: | (Thousands of Dollars) | 13 Weeks Ended March 29, 2020 | 13 Weeks Ended March 31, 2019 | 26 Weeks Ended March 29, 2020 | 26 Weeks Ended March 31, 2019 | | :--------------------- | :---------------------------- | :---------------------------- | :---------------------------- | :---------------------------- | | Postretirement medical benefit | (466) | (592) | (1,011) | (1,184) | - The CARES Act allows the Company to defer pension contributions until January 1, 2021, and the Company does not expect to make contributions for the remainder of fiscal 2020[97] 8 ACQUISITIONS This section provides details on the acquisition of BH Media Newspaper Business and The Buffalo News, including the purchase price and preliminary fair value allocation - The Company acquired BH Media Newspaper Business and The Buffalo News for $140 million, with preliminary fair value allocation showing total assets of $314.63 million and total liabilities of $162.63 million, resulting in net assets of $152 million[33][100] Preliminary Fair Values of Acquired Assets and Liabilities (Thousands): | Category | Amount | | :--------------------- | :----- | | Cash and cash equivalents | 22,293 | | Current assets | 52,559 | | Other assets | 12,167 | | Property and equipment | 42,952 | | Operating lease assets | 7,445 | | Advertiser relationships | 38,780 | | Subscriber relationships | 36,060 | | Commercial print relationships | 17,130 | | Mastheads | 21,680 | | Goodwill | 63,559 | | Total assets | 314,625 | | Current liabilities assumed | (73,451) | | Operating lease liabilities | (6,625) | | Other liabilities assumed | (2,246) | | Pension obligations | (43,503) | | Postemployment benefit obligations | (36,800) | | Total liabilities | (162,625) | | Net assets | 152,000 | | Less: acquired cash | (22,293) | | Total consideration less acquired cash | 129,707 | - For the 13 weeks ended March 29, 2020, the acquired businesses contributed $14.65 million in revenue and $1.01 million in net income to the Consolidated Income Statement[101] 9 INCOME TAXES This section discusses the Company's income tax provisions, effective tax rates, and the anticipated benefits from the CARES Act Effective Income Tax Rate: | Period | March 29, 2020 | March 31, 2019 | | :--------------------- | :------------- | :------------- | | 13 Weeks Ended | 31.8% | -7.2% | | 26 Weeks Ended | -171.6% | 35.8% | - The Company recorded an income tax benefit of $2.33 million for the 13 weeks ended March 29, 2020, and $0.46 million for the 26 weeks, with highly variable effective tax rates due to state taxes, non-deductible expenses, and adjustments related to the Transactions[106] - The CARES Act, enacted March 27, 2020, allows the Company to defer certain employer payroll tax payments in 2020 to the end of 2021 and 2022, and the Company anticipates realizing benefits from this legislation[107][205] 10 EARNINGS PER COMMON SHARE This section presents the basic and diluted earnings per common share for the reporting periods, reflecting net income or loss Earnings Per Common Share: | Period | 13 Weeks Ended March 29, 2020 | 13 Weeks Ended March 31, 2019 | 26 Weeks Ended March 29, 2020 | 26 Weeks Ended March 31, 2019 | | :--------------------- | :---------------------------- | :---------------------------- | :---------------------------- | :---------------------------- | | Basic EPS | (0.09) | (0.05) | (0.00) | 0.14 | | Diluted EPS | (0.09) | (0.05) | (0.00) | 0.14 | - The Company reported a diluted loss per share of $0.09 for the 13 weeks ended March 29, 2020, compared to a loss of $0.05 in the prior year, and a diluted earnings per share of $0.00 for the 26 weeks, down from $0.14 in the prior year[110] - Approximately 7 million shares for the 13 weeks and 6.4 million shares for the 26 weeks ended March 29, 2020, were excluded from diluted EPS computation because their exercise prices exceeded the common stock's fair market value[110] 11 STOCK OWNERSHIP PLANS This section details the activity and unrecognized compensation expense related to the Company's restricted common stock plans Restricted Common Stock Activity (26 Weeks Ended March 29, 2020): | (Thousands of Shares) | Shares | Weighted Average Grant Date Fair Value | | :-------------------- | :----- | :------------------------------------- | | Outstanding, September 29, 2019 | 1,477 | 2.49 | | Vested | (601) | 1.94 | | Granted | 720 | 1.62 | | Cancelled | (24) | 2.49 | | Outstanding, March 29, 2020 | 1,572 | 2.15 | - Total unrecognized compensation expense for unvested restricted Common Stock was $1.76 million as of March 29, 2020, to be recognized over a weighted average period of 1.8 years[113] 12 FAIR VALUE MEASUREMENTS This section describes the Company's fair value measurement hierarchy and the valuation of financial instruments like fixed-rate debt and warrants - The Company uses a three-level hierarchy for fair value measurements, with Level 1 for active market quotes, Level 2 for similar instruments or observable inputs, and Level 3 for unobservable inputs[114][115] - Fixed rate debt of $576 million (Term Loan) is recorded at carrying value, approximating fair value, and is classified as a Level 3 fair value measurement[118] - The fair value of Warrants, re-measured each reporting period using the Black-Scholes option pricing model (Level 2), decreased from $16.93 million initially to $0.16 million at March 29, 2020[119] 13 COMMITMENTS AND CONTINGENT LIABILITIES This section outlines the Company's various commitments and contingent liabilities, including legal actions, tax audits, and pension withdrawal liabilities - The Company is subject to routine income tax audits and believes adequate tax liabilities have been recorded, though actual outcomes could differ materially[121][122] - The Company is involved in various legal actions in the normal course of business, but does not expect their disposition to have a material adverse effect on its consolidated financial statements[124] - A liability of $3.26 million has been accrued as of March 29, 2020, related to a multiemployer pension plan withdrawal liability, payable over 20 years[126] Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations This section provides management's perspective on the Company's financial condition and results of operations for the 13 and 26 weeks ended March 29, 2020. It includes discussions of non-GAAP financial measures, critical accounting policies, an executive overview of business operations, the impact of the Berkshire Hathaway acquisition, and the effects of the COVID-19 pandemic. Detailed analysis of operating revenues, expenses, non-operating items, income taxes, and earnings per share is provided for both the quarterly and year-to-date periods, alongside an assessment of liquidity and capital resources NON-GAAP FINANCIAL MEASURES This section defines and explains the Company's use of non-GAAP financial measures such as Adjusted EBITDA and cash costs to supplement GAAP reporting - The Company uses non-GAAP financial measures like Adjusted EBITDA, cash costs, and total operating revenue less cash costs to supplement GAAP information, believing they provide a clearer understanding of operating performance by excluding non-recurring or non-cash items[128][129] - Adjusted EBITDA is defined as net income (loss) adjusted for non-operating expenses, income tax, depreciation, amortization, asset gains/losses, restructuring costs, stock compensation, and the Company's share of TNI and MNI EBITDA[130] - Cash Costs are defined as compensation, newsprint and ink, and other operating expenses, excluding non-cash items and restructuring costs, to show cash-settled operating costs[131] RECONCILIATION OF NON-GAAP FINANCIAL MEASURES This section provides a reconciliation of non-GAAP financial measures, specifically Adjusted EBITDA, to the most directly comparable GAAP measure Adjusted EBITDA Reconciliation: | (Thousands of Dollars) | 13 Weeks Ended March 29, 2020 | 13 Weeks Ended March 31, 2019 | 26 Weeks Ended March 29, 2020 | 26 Weeks Ended March 31, 2019 | | :--------------------- | :---------------------------- | :---------------------------- | :---------------------------- | :---------------------------- | | Net Income | (4,990) | (2,327) | 728 | 8,392 | | Adjusted EBITDA | 17,373 | 23,584 | 45,495 | 59,728 | - Adjusted EBITDA decreased by 26.3% to $17.37 million for the 13 weeks ended March 29, 2020, and by 23.8% to $45.50 million for the 26 weeks, reflecting a decline in operating performance compared to the prior year[135] IMPACT OF RECENTLY ISSUED ACCOUNTING STANDARDS This section discusses the adoption of new accounting standards, particularly ASC 842 (Leases), and its impact on the Company's financial statements - The Company adopted ASC 842 (Leases) on September 30, 2019, using the modified retrospective method, which requires recognition of lease liabilities and right-of-use (ROU) assets for most operating leases[136] - Practical expedients were elected, allowing the Company to avoid reassessing prior conclusions on lease identification, classification, or initial direct costs, and to combine non-lease and lease components[137] CRITICAL ACCOUNTING POLICIES This section highlights the Company's critical accounting policies that require significant judgment and estimates, such as business combinations and intangible assets - Critical accounting policies include business combinations, intangible assets (other than goodwill), pension and postretirement benefit plans, and income taxes, all requiring significant estimates and assumptions[138][141] - Key estimates in valuing acquired intangible assets and goodwill involve future expected cash flows, discount rates, and royalty rates for mastheads[142] EXECUTIVE OVERVIEW This section provides a high-level summary of Lee Enterprises' business, its market position, digital growth, and the impact of recent acquisitions - Lee Enterprises is a leading provider of local news and advertising, operating 77 local media operations, which nearly doubled in size with the acquisition of BHMG and The Buffalo News on March 16, 2020[139][145] - The Company's digital platforms are the number one source of local news in most markets, reaching over 43 million unique visitors in March 2020, and digital-only subscribers increased by 91.7% year-over-year at Legacy Lee[143] - TownNews, an 82.5% owned subsidiary, provides web hosting, content management, and video services to nearly 2,000 media organizations[144] Purchase Agreement with Berkshire Hathaway This section details the acquisition of BH Media Group's newspaper business and The Buffalo News, including financing and operational expansion - On March 16, 2020, Lee Enterprises acquired BH Media Group's newspaper business and The Buffalo News for $140 million, financed by a credit agreement with BH Finance LLC[145] - The acquisition included 30 daily newspapers, 49 paid weekly newspapers, and 32 other print products, significantly expanding Lee's operations[146] - The prior Management Agreement with BHMG terminated upon acquisition, with Lee receiving $5.43 million in settlement, comprising fixed and variable fees[147] IMPAIRMENT OF GOODWILL AND OTHER ASSETS This section discusses the Company's history of impairment charges for goodwill and intangible assets and the factors that could lead to future impairments - The Company has recorded nearly $1.3 billion in impairment charges since 2007 for goodwill and identified intangible assets[149] - Future decreases in market value or significant deviations from revenue, expense, or cash flow estimates could lead to additional impairment charges[149] CERTAIN MATTERS AFFECTING CURRENT AND FUTURE OPERATING RESULTS This section addresses key factors influencing current and future operating results, including recent acquisitions and the significant impact of the COVID-19 pandemic - The acquisition of BHMG and The Buffalo News for $140 million in March 2020, along with the disposition of smaller properties for $3.95 million, will significantly impact period-over-period comparisons[155] - The COVID-19 pandemic has caused significant and immediate declines in advertising revenue and is expected to have a negative near-term impact on business and operations, with long-term effects remaining uncertain[151][152] - The Company has implemented measures to reduce costs and preserve liquidity, but these may not fully offset the negative impact of COVID-19[153] 13 WEEKS ENDED MARCH 29, 2020 This section provides a detailed analysis of the Company's operating results for the 13-week period, including revenue, expenses, and net income Operating Results (13 Weeks Ended): | (Thousands of Dollars) | March 29, 2020 | March 31, 2019 | Percent Change | | :--------------------- | :------------- | :------------- | :------------- | | Total operating revenue | 121,367 | 122,704 | (1.1)% | | Advertising and marketing services revenue | 60,945 | 62,934 | (3.2)% | | Subscription revenue | 46,443 | 45,076 | 3.0% | | Total operating expenses | 108,942 | 111,854 | (2.6)% | | Operating income | 13,787 | 12,567 | 9.7% | | Net loss | (4,990) | (2,327) | NM | | Diluted EPS | (0.09) | (0.05) | 95.7% | - Total operating revenue decreased by 1.1% to $121.37 million, despite including $14.65 million from acquisitions, primarily due to reduced demand for print advertising and COVID-19 impacts[159][160] - Operating income increased by 9.7% to $13.79 million, but net loss widened to $4.99 million from $2.33 million, largely due to a significant increase in debt financing and administrative costs ($10.67 million vs. $0.96 million)[157][173][176] - Digital advertising and marketing services revenue increased by 2.6% to $24.70 million, representing 40.5% of total advertising revenue, while digital services revenue from TownNews increased by 9.8% to $5.21 million[160][163] 26 WEEKS ENDED MARCH 29, 2020 This section provides a detailed analysis of the Company's operating results for the 26-week period, including revenue, expenses, and net income Operating Results (26 Weeks Ended): | (Thousands of Dollars) | March 29, 2020 | March 31, 2019 | Percent Change | | :--------------------- | :------------- | :------------- | :------------- | | Total operating revenue | 243,710 | 258,905 | (5.9)% | | Advertising and marketing services revenue | 126,672 | 138,897 | (8.8)% | | Subscription revenue | 88,138 | 91,345 | (3.5)% | | Total operating expenses | 214,548 | 222,465 | (3.6)% | | Operating income | 32,093 | 40,286 | (20.3)% | | Net income | 728 | 8,392 | (91.3)% | | Diluted EPS | 0.00 | 0.14 | NM | - Total operating revenue decreased by 5.9% to $243.71 million, with print advertising down 14.9% and digital advertising up 2.2%[185][186] - Operating income declined by 20.3% to $32.09 million, and net income plummeted by 91.3% to $0.73 million, primarily due to a substantial increase in debt financing and administrative costs ($11.87 million vs. $1.86 million)[183][198][201] - Total digital revenue, including advertising, subscriptions, and services, increased by 3.3% to $73.91 million, representing 30.3% of total operating revenue[191] LIQUIDITY AND CAPITAL RESOURCES This section assesses the Company's liquidity and capital resources, analyzing cash flows from operating, investing, and financing activities - Cash provided by operating activities decreased to $10.70 million for the 26 weeks ended March 29, 2020, from $27.83 million in the prior year, mainly due to lower net income and changes in working capital[209] - Investing activities required $119.71 million, primarily due to $130.99 million spent on acquisitions (BHMG and Buffalo News), offset by $17.64 million from asset sales[211] - Financing activities provided $131.19 million, driven by $576 million in proceeds from the new Term Loan, used to refinance existing debt and fund acquisitions[213][215] - The Company has implemented cost reductions, compensation reductions, furloughs, and capital investment reductions to manage cash flow and preserve liquidity in response to the COVID-19 pandemic[220] CHANGES IN LAWS AND REGULATIONS This section discusses the impact of recent legislative changes, specifically the CARES Act, on the Company's pension contributions and payroll taxes - The CARES Act allows the Company to defer required pension contributions until January 1, 2021, and defer employer's share of social security taxes to be paid in late 2021 and 2022[224][226] - The CARES Act also provides for an Employee Retention Credit of up to $5,000 per eligible employee, which the Company is currently evaluating for applicability[226] INFLATION This section outlines the Company's strategies to mitigate the impact of inflation on its operating costs and overall financial performance - The Company continuously evaluates price increases, productivity improvements, sourcing efficiencies, and other cost reductions to mitigate the impact of inflation on its products and services[227] Item 3. Quantitative and Qualitative Disclosures About Market Risk This section discusses the Company's exposure to market risks, primarily stemming from changes in interest rates and commodity prices, and how these risks are managed. It highlights the fixed-rate nature of the Company's debt and the impact of newsprint price fluctuations INTEREST RATES ON DEBT This section describes the Company's exposure to interest rate risk, noting its fixed-rate debt structure and lack of floating-rate exposure - The Company's debt structure is entirely fixed rate, eliminating exposure to interest rate increases, with no floating debt outstanding or interest rate hedging in place as of March 29, 2020[229] COMMODITIES This section discusses the impact of commodity price fluctuations, particularly newsprint, on the Company's operating expenses - Newsprint prices decreased during the 2020 Quarter due to declining domestic and export demand[230] - A $10 per tonne increase in newsprint price would result in an estimated annualized reduction in income before taxes of approximately $536,000[231] SENSITIVITY TO CHANGES IN VALUE This section addresses the sensitivity of the Company's financial instruments to changes in value, focusing on its fixed-rate Term Loan - The Company's fixed-rate Term Loan of $576 million is recorded at carrying value, which approximates its fair value[232] Item 4. Controls and Procedures This section details the evaluation of the Company's disclosure controls and procedures and reports on changes in internal control over financial reporting. It confirms the effectiveness of disclosure controls and notes that internal controls for acquired businesses were not yet assessed EVALUATION OF DISCLOSURE CONTROLS AND PROCEDURES This section confirms the effectiveness of the Company's disclosure controls and procedures as assessed by management - As of March 29, 2020, the Company's chief executive officer and chief financial officer concluded that disclosure controls and procedures were effective[233][234] CHANGES IN INTERNAL CONTROL OVER FINANCIAL REPORTING This section reports on any material changes in internal control over financial reporting, specifically noting the exclusion of recently acquired businesses from the current assessment - Internal controls related to the acquired businesses (BH Media and Buffalo News) have not yet been considered in the assessment of internal control over financial reporting[235] - Other than the acquisitions, there were no material changes in internal control over financial reporting during the 13 weeks ended March 29, 2020[235] PART II OTHER INFORMATION This section covers legal proceedings, risk factors, compensatory arrangements, and exhibits for the reporting period Item 1. Legal Proceedings This section states that the Company is involved in various legal actions arising in the normal course of business, but does not expect their ultimate disposition to have a material adverse effect on its consolidated financial statements - The Company is involved in routine legal actions, and while outcomes are unpredictable, they are not expected to materially adversely affect the consolidated financial statements[237] Item 1.A Risk Factors This section indicates that there have been no material changes to the risk factors previously disclosed in the 2019 Form 10-K, but also highlights new risks associated with strategic investments, joint ventures, and acquisitions - No material changes to previously disclosed risk factors from the 2019 Form 10-K are reported[238] - New risks include those associated with strategic investments, joint ventures, and acquisitions, which may not create value and could harm the business, financial condition, and results of operations[239] Item 5. Other Information This section provides additional information regarding compensatory arrangements for certain officers, specifically referencing the shareholder approval of the merger and amendment of the Company's Long-Term Incentive Plan Item 5.A Other Information - Compensatory Arrangements of Certain Officers This section details shareholder approval of the amended Long-Term Incentive Plan, impacting compensatory arrangements for certain officers - Shareholders approved the merger of the 1996 Stock Plan for Non-Employee Directors into, and the amendment of, the 1990 Long-Term Incentive Plan (now the '2020 Plan') on February 21, 2020, affecting compensatory arrangements for certain officers[240] Item 6. Exhibits This section lists the exhibits filed with the Quarterly Report on Form 10-Q, including certifications from the CEO and CFO, and the 2020 Long-Term Incentive Plan - Exhibits include Rule 13a-14(a) and Section 1350 Certifications from the Chief Executive Officer and Chief Financial Officer, and the Lee Enterprises, Incorporated 2020 Long-Term Incentive Plan[242] SIGNATURES This section formally certifies the filing of the report by the Company's authorized financial officer - The report was signed on behalf of Lee Enterprises, Incorporated by Timothy R. Millage, Vice President, Chief Financial Officer and Treasurer, on June 22, 2020[244][245]