Company Quick10K Filing
Lee Enterprises
Price2.08 EPS0
Shares58 P/E8
MCap120 P/FCF3
Net Debt435 EBIT71
TEV555 TEV/EBIT8
TTM 2019-09-29, in MM, except price, ratios
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8-K 2020-06-28
8-K 2020-06-18
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8-K 2018-02-21
8-K 2018-02-01
8-K 2018-01-11

LEE 10Q Quarterly Report

EX-31.1 ex_219552.htm
EX-31.2 ex_219553.htm
EX-32.1 ex_219554.htm
EX-32.2 ex_219555.htm

Lee Enterprises Earnings 2020-12-27

Balance SheetIncome StatementCash Flow
1.10.80.60.30.1-0.22012201420172020
Assets, Equity
0.20.10.10.0-0.0-0.12012201420172020
Rev, G Profit, Net Income
0.10.10.0-0.0-0.1-0.12012201420172020
Ops, Inv, Fin

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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 December 27, 2020

 

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

New York Stock Exchange

 

 

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 January 31, 2021, 58,764,532 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 - December 27, 2020 and September 27, 2020

  2
         
   

Consolidated Statements of Income and Comprehensive Income - 13 weeks ended December 27, 2020 and December 29, 2019

  4
         
   

Consolidated Statements of Stockholder's Equity (Deficit) - 13 weeks ended December 27, 2020 and December 29, 2019

  5
         
   

Consolidated Statements of Cash Flows - 13 weeks ended December 27, 2020 and December 29, 2019

  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

  22
         
 

Item 4.

Controls and Procedures

  22
         

PART II

OTHER INFORMATION

  23
         
 

Item 1.

Legal Proceedings

  23
         
  Item 1.A. Risk Factors   23
         
 

Item 6.

Exhibits

  23
         

SIGNATURES

  24

 

 

 

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 Newspaper Business or the Buffalo News for unknown legal and other matters that may arise;
  Our ability to manage declining print revenue and circulation subscribers;
 

That 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 the NYSE;

 

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)     
   December 27,   September 27, 

(Thousands of Dollars)

 

2020

  

2020

 
         

ASSETS

        
         

Current assets:

        
Cash and cash equivalents  37,142   33,733 
Accounts receivable and contract assets, net  68,031   52,598 
Inventories  6,957   7,534 
Prepaids and other  13,690   14,888 

Total current assets

  125,820   108,753 

Investments:

        
Associated companies  28,204   27,624 
Other  6,424   6,255 

Total investments

  34,628   33,879 

Property and equipment:

        
Land and improvements  17,964   18,711 
Buildings and improvements  116,397   128,475 
Equipment  236,332   245,117 
Construction in process  3,526   2,323 
   374,219   394,626 
Less accumulated depreciation  278,643   289,017 

Property and equipment, net

  95,576   105,609 
Operating lease right-of-use assets  71,579   70,933 
Goodwill  328,848   328,445 
Other intangible assets, net  176,887   182,680 
Pension plan assets, net  5,042   4,147 
Medical plan assets, net  15,803   15,912 
Other  13,132   13,699 

Total assets

  867,315   864,057 

 

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

 

 

 

   (Unaudited)     
   December 27,   September 27, 

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

 

2020

  

2020

 
         

LIABILITIES AND EQUITY

        
         

Current liabilities:

        
Current portion of lease liabilities  8,465   8,577 
Current maturities of long-term debt  17,142   13,733 
Accounts payable  18,011   17,163 
Compensation and other accrued liabilities  54,798   44,278 
Income taxes payable  2,940    
Unearned revenue  60,176   60,271 

Total current liabilities

  161,532   144,022 
Long-term debt, net of current maturities  506,414   524,557 
Operating lease liabilities  63,124   62,374 
Pension obligations  73,880   75,656 
Postretirement and postemployment benefit obligations  15,222   39,543 
Deferred income taxes  15,155   15,208 
Income taxes payable  18,778   18,048 
Warrants and other  25,613   14,282 

Total liabilities

  879,718   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 120,000 shares; issued and outstanding:  588   584 

December 27, 2020; 58,765 shares; $0.01 par value

        

September 27, 2020; 58,353 shares; $0.01 par value

        
Class B Common Stock, $2 par value; authorized 30,000 shares; none issued      
Additional paid-in capital  256,593   256,431 
Accumulated deficit  (252,627)  (268,529)
Accumulated other comprehensive loss  (18,908)  (20,050)

Total stockholders' deficit

  (14,354)  (31,564)
Non-controlling interests  1,951   1,931 

Total deficit

  (12,403)  (29,633)

Total liabilities and deficit

  867,315   864,057 

 

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

 

 

 

LEE ENTERPRISES, INCORPORATED

CONSOLIDATED STATEMENTS OF INCOME AND COMPREHENSIVE INCOME

(Unaudited)

 

  

13 Weeks Ended

 
  

December 27,

  

December 29,

 

(Thousands of Dollars, Except Per Common Share Data)

 

2020

  

2019

 
         

Operating revenue:

        

Advertising and marketing services

  102,629   65,727 

Subscription

  90,508   41,694 

Other

  18,680   14,922 

Total operating revenue

  211,817   122,343 

Operating expenses:

        

Compensation

  84,163   43,243 

Newsprint and ink

  7,992   4,736 

Other operating expenses

  81,767   48,462 

Depreciation and amortization

  10,441   6,719 

Assets loss on sales, impairments and other, net

  5,222   814 

Restructuring costs and other

  3,167   1,632 

Total operating expenses

  192,752   105,606 

Equity in earnings of associated companies

  1,743   1,569 

Operating income

  20,808   18,306 

Non-operating income (expense):

        

Interest expense

  (11,882)  (11,115)

Debt financing and administrative costs

     (1,196)
Curtailment Gain  23,830    
Pension withdrawal cost  (12,310)   

Other, net

  2,268   1,593 

Total non-operating income (expense), net

  1,906   (10,718)

Income before income taxes

  22,714   7,588 

Income tax expense

  6,311   1,871 

Net income

  16,403   5,717 

Net income attributable to non-controlling interests

  (501)  (397)

Income attributable to Lee Enterprises, Incorporated

  15,902   5,320 

Other comprehensive income, net of income taxes

  1,142   317 

Comprehensive income attributable to Lee Enterprises, Incorporated

  17,044   5,637 

Earnings per common share:

        

Basic:

  0.28   0.09 

Diluted:

  0.28   0.09 

 

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) 584  256,431  (20,050) (31,564)

Shares issued (redeemed)

   4  (58)   (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) 588  256,593  (18,908) (14,354)

 


 

(Thousands of Dollars)

 

Accumulated Deficit

  

Common Stock

  

Additional paid-in capital

  

Accumulated Other Comprehensive Loss

  

Total

 
                

September 30, 2019

 (265,423) 577  255,476  (29,114) (38,484)

Shares issued (redeemed)

   4  (379)   (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) 581  255,642  (28,797) (32,677)

 


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

 

 

 

LEE ENTERPRISES, INCORPORATED

CONSOLIDATED STATEMENTS OF CASH FLOWS

(Unaudited)

 

  

13 Weeks Ended

 
  

December 27,

  

December 29,

 

(Thousands of Dollars)

 

2020

  

2019

 
         

Cash provided by operating activities:

        

Net income

  16,403   5,717 

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

        

Depreciation and amortization

  10,441   6,719 
Curtailment gain  (23,830)   
Pension withdrawal cost  12,310    
Stock compensation expense  220   302 
Assets loss on sales, impairments and other, net  5,222   814 
Distributions (less) than earnings of MNI  (545)  (658)
Deferred income taxes  (353)  (8,328)
Debt financing and administrative costs     1,196 
Pension contributions  (400)   
Payments to collateralize letters of credit  (14)   
Other, net  (184)  (101)

Changes in operating assets and liabilities:

        
Increase in receivables and contract assets  (14,662)  (8,137)
Decrease in inventories and other  602   280 
Increase in accounts payable and other accrued liabilities  7,205   4,016 
Decrease in pension and other postretirement and postemployment benefit obligations  (1,523)  (709)
Change in income taxes payable  6,643   10,189 
Other, including warrants  836   (939)

Net cash provided by operating activities

  18,371   10,361 

Cash required for investing activities:

        
Purchases of property and equipment  (1,738)  (2,458)
Proceeds from sales of assets  2,236   12 
Acquisitions, net of cash acquired     (1,121)
Distributions (less) than earnings of TNI  (142)  (173)
Other, net  (430)   

Net cash required for investing activities

  (74)  (3,740)

Cash required for financing activities:

        
Payments on long-term debt  (14,734)  (10,233)
Debt financing and administrative costs paid     (193)
Common stock transactions, net  (154)  (372)

Net cash required for financing activities

  (14,888)  (10,798)

Net increase (decrease) in cash and cash equivalents

  3,409   (4,177)

Cash and cash equivalents:

        

Beginning of period

  33,733   8,645 

End of period

  37,142   4,468 

 

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 December 27, 2020 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 weeks ended December 27, 2020 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.

 

COVID-19 Pandemic

 

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

 

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

 

Purchase Agreement with Berkshire Hathaway

 

On March 16, 2020, the Company completed the Asset and Stock Purchase Agreement (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”). 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 Transactions were funded 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”), as described further in Note 5.

 

Between July 2, 2018 and March 16, 2020, the Company managed the BHMG 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 represents $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 amount we received settled our existing contract assets balance, which totaled $3,589,000 as of December 29, 2019, and the remaining amount was reflected in Other Revenue for the 13 weeks ended March 29, 2020. The amount of variable fees was estimated based on expected BHMG financial performance through March 16, 2020. Actual financial performance through March 16, 2020 did not vary materially from the estimated amount. As such, 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 also entered into a 10-year term lease with BHMG.

 

7

 

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.

 

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. 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.

 

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. 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.

 

 

2

REVENUE

 

The following table presents our revenue disaggregated by source:

 

  

13 Weeks Ended

 
  

December 27,

  

December 29,

 

(Thousands of Dollars)

 

2020

  

2019

 
         

Advertising and marketing services revenue

  102,629   65,727 

Subscription revenue

  90,508   41,694 
TownNews and other digital services revenue  5,622   5,218 

Other revenue

  13,058   9,704 

Total operating revenue

  211,817   122,343 

 

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 $60,176,000 as of December 27, 2020 and $60,271,000 as of September 27, 2020. Revenue recognized in the 13 weeks ended December 27, 2020 that was included in the contract liability as of September 27, 2020 was $35,955,000.

 

Accounts receivable, excluding allowance for credit losses was $79,013,000 and $66,029,000 as of December 27, 2020 and September 27, 2020, respectively. Allowance for credit losses was $10,982,000 and $13,431,000 as of December 27, 2020 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

 
  

December 27,

  

December 29,

 

(Thousands of Dollars)

 

2020

  

2019

 
         
Operating revenue  9,400   10,195 
Operating expenses  7,005   8,165 

Operating income

  2,395   2,030 

Company's 50% share of operating income

  1,198   1,015 

Less amortization of intangible assets

     104 

Equity in earnings of TNI

  1,198   911 

 

TNI makes weekly distributions of its earnings and for the 13 weeks ended December 27, 2020 and December 29, 2019, we received $1,056,000 and $738,000 in distributions.

 

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

 
  

December 27,

  

December 29,

 

(Thousands of Dollars)

 

2020

  

2019

 
         

Operating revenue

  11,922   13,925 

Operating expenses, excluding restructuring costs, depreciation and amortization

  10,430   12,120 
Restructuring costs  106    

Depreciation and amortization

  110   145 

Operating income

  1,276   1,660 

Net income

  1,089   1,316 

Equity in earnings of MNI

  545   658 

 

MNI generally makes quarterly distributions of its earnings, however no distributions were made in the 13 weeks ended December 27, 2020 and December 29, 2019, respectively.

 

 

4

GOODWILL AND OTHER INTANGIBLE ASSETS

 

Changes in the carrying amount of goodwill are as follows:

 

   13 Weeks Ended 
   December 27, 

(Thousands of Dollars)

 

2020

 
     

Goodwill, gross amount

  1,617,174 

Accumulated impairment losses

  (1,288,729)
Goodwill, beginning of period  328,445 
Measurement period adjustments  403 

Goodwill, end of period

  328,848 

 

9

 

Identified intangible assets consist of the following:

 

  

December 27,

  

September 27,

 

(Thousands of Dollars)

 

2020

  

2020

 
         

Non-amortized intangible assets:

        
Mastheads  40,459   40,459 

Amortizable intangible assets:

        
Customer and newspaper subscriber lists  774,722   774,604 
Less accumulated amortization  638,349   632,457 
   136,373   142,147 
Non-compete and consulting agreements  28,656   28,656 
Less accumulated amortization  28,601   28,582 
   55   74 

Other intangible assets, net

  176,887   182,680 

 

The Company recognized $27,960,000 of advertiser relationships, $28,200,000 of subscriber relationships, $19,580,000 of commercial print relationships and $20,390,000 of indefinite-lived masthead assets as part of the Transactions.

 

Annual amortization of intangible assets for the five years ending December 2021 to December 2025 is estimated to be $21,262,000 $19,688,000, $18,893,000, $16,460,000  and $10,783,000 , respectively. The weighted average amortization period for those amortizable assets acquired as part of the Transactions is 10.5 years.

 

The Company recognized $78,539,000 of Goodwill as part of the Transactions. 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 $41,734,000. Refer to Note 7 for more information regarding preliminary purchase accounting for the Transactions.

 

 
5

DEBT

 

On March 16, 2020 in connection with the closing of the Transactions, 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 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 matter, BH Finance became Lee's sole lender.

 

Proceeds of the Term Loan were used to finance the Transactions and repay all of the Company’s outstanding debt at par, including:

 

 

To redeem the 9.5% senior secured notes (“Notes”) pursuant to an indenture dated as of March 31, 2014 (the “Indenture”); and

   
 To repay the 12.0% second lien term loan pursuant to a Second Lien Term Loan Agreement dated as of March 31, 2014, as amended (the “2nd Lien Term Loan”).

 

There was no gain or loss recognized upon extinguishment of the Indenture and the 2nd Lien Term Loan.

 

The Credit Agreement documents the primary terms of the Term Loan. The Term Loan matures on March 16, 2045.

 

Debt is summarized as follows:

 

   December 27,   September 27,   Interest 

(Thousands of Dollars)

 

2020

  

2020

  

Rates (%)

 
             
Term Loan  523,556   538,290   9.0 

Less current maturities of long-term debt

  17,142   13,733     

Total long-term debt

  506,414   524,557     

 

Our weighted average cost of debt at December 27, 2020 is 9.0%.

 

For the 13-weeks ended December 27, 2020 excess cash flow totaled $17,142,000 and an additional $1,000,000 from asset sales was used to pay debt in January 2021. This balance was recognized in Current maturities of long-term debt as of December 27, 2020. Future payments are contingent on the Company’s ability to generate future excess cash flow, as defined in the Credit Agreement.  

 

Interest

 

Interest on the Term Loan bears interest at a fixed annual rate of 9.0%, payable monthly.

 

10

 

Principal Payments

 

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

 

Excluding the Excess Cash Flow payments described below, 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 prepayment of the Term Loan shall be accompanied by payment of all accrued interest on the amount of principal prepaid to the date of prepayment

 

Covenants and Other Matters

 

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.

 

Security

 

The Term Loan is fully and unconditionally guaranteed on a joint and several first-priority basis by the Company's material domestic subsidiaries (excluding MNI and TNI, the “Subsidiary Guarantors”), pursuant to a Guarantee and Collateral agreement dated as of March 16, 2020 (the “Guarantee and Collateral Agreement”). The Term Loan and the subsidiary guarantees are secured, subject to certain exceptions, priorities and limitations, by perfected security interests in substantially all property and assets, including certain real estate, of the Company and the Subsidiary Guarantors.

 

Also, the Term Loan is secured, subject to certain exceptions, priorities and limitations in the various agreements, by first-priority security interests in the capital stock of, and other equity interests owned by, the Company and the Subsidiary Guarantors (excluding the capital stock of MNI and TNI).

 

Liquidity

 

Pursuant to the terms of the Credit Agreement, our new debt does not include a revolver.

 

Our liquidity, consisting of cash on the balance sheet, totals $37,142,000 at December 27, 2020. This liquidity amount excludes any future cash flows. We expect all interest and principal payments due in the next twelve months will be satisfied by existing cash and our cash flows, which will allow us to maintain an adequate level of liquidity. The Warrants, as defined below, if and when exercised, would provide additional liquidity in an amount up to $25,140,000, which is not considered in the calculation of Excess Cash Flow.

 

There are numerous potential consequences under the Term Loan if an event of default, as defined, occurs and is not remedied. Many of those consequences are beyond our control. The occurrence of one or more events of default would give rise to the right of BH Finance to exercise their remedies under the Credit Agreement including, without limitation, the right to accelerate all outstanding debt and take actions authorized in such circumstances under applicable collateral security documents.

 

Our ability to operate as a going concern is dependent on our ability to remain in compliance with debt covenants and to repay, refinance or amend our debt agreement as it becomes due. The Credit Agreement (as defined above) has only limited affirmative covenants with which we are required to maintain compliance and there are no leverage or financial performance covenants. We are in compliance with our debt covenants at December 27, 2020.

 

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 6,000,000 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 $4.19 per share. The Warrants are set to expire in March 2022.

 

11

 

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, 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. Benefits under the plans were generally based on salary and years of service. With the exception of defined benefit plans acquired in the Transactions, effective in 2012, substantially all benefits are frozen. 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. The level and adjustment of participant contributions vary depending on the specific plan. In addition, St. Louis Post-Dispatch LLC, provides postemployment disability benefits to certain employee groups prior to retirement. 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.

 

As part of the Transactions, the Company assumed several non-contributory defined benefit pension plans that together cover selected employees. Benefits under the plans are generally based on salary and years of service. The 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 corporate equity securities, government and corporate bonds, money markets and deposits with insurance companies. The amount of net pension obligations for those plans as of March 16, 2020, the initial measurement date, was $43,503,000.

 

Additionally, as part of the Transactions, the Company assumed certain unfunded postemployment benefit plans which provide coverage to retirees for portions of premiums associated with medical, dental, life, and vision insurance benefits in eight collective bargaining units. The amount of premiums paid in five bargaining units are capped at specific dollar amounts per month. The amount of premiums paid in three bargaining units are uncapped. The plan groups consist of capped retirees, uncapped retirees, capped active employees, and uncapped active employees. New participants in the uncapped plans are eligible for Medicare supplemental medical insurance. The total postemployment benefit obligation recognized for these plans as of March 16, 2020, the initial measurement date, was $36,800,000.

 

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.

 

Multiemployer Pension Plans

 

During the 13 weeks ended December 27, 2020, we withdrew from a multiemployer pension plan and recorded a $12,310,000 million 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 estimate will be finalized upon receipt of the final assessment. The liability will be paid over 20 years.

 

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

 
  

December 27,

  

December 29,

 

(Thousands of Dollars)

 

2020

  

2019

 
         

Service cost for benefits earned during the period

  633   8 

Interest cost on projected benefit obligation

  1,787   1,231 

Expected return on plan assets

  (4,672)  (1,951)

Amortization of net loss

  1,004   792 

Amortization of prior service benefit

     (2)

Pension benefit

  (1,248)  78 

 

12

 

POSTRETIREMENT MEDICAL PLANS

 

13 Weeks Ended

 
  

December 27,

  

December 29,

 

(Thousands of Dollars)

 

2020

  

2019

 
         

Service cost for benefits earned during the period

  210    

Interest cost on projected benefit obligation

  123   67 

Expected return on plan assets

  (252)  (265)

Amortization of net gain

  (172)  (186)

Amortization of prior service benefit

  (161)  (161)
Curtailment gain  (23,830)   

Postretirement medical benefit

  (24,082)  (545)

 

In the 13 weeks ended December 27, 2020 we contributed $400,000 to our pension plans. Based on our forecast at December 27, 2020, we expect to make contributions of $2,790,000 to our pension trust during the remainder of fiscal 2021.

 

 
7ACQUISITIONS

 

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”) (“Purchase Agreement”). 


The allocation of the purchase price is preliminary. The valuation of property and equipment, intangibles, deferred income taxes, and residual goodwill is not complete, pending completion of the final valuation report. These amounts are subject to adjustment as additional information is obtained within the measurement period (not to exceed 12 months from the acquisition date). As part of the Transactions, the Company also entered into the Credit Agreement and the BH Lease, as described above. The Company concluded that these agreements were not separate from the Transactions and evaluated these agreements for off-market terms and no such terms were identified. As such, the consideration for the acquisitions was limited to cash consideration, as shown below. The accounting for the Credit Agreement and the BH Lease are described in Notes 5 and 6.

 

The following table summarizes the preliminary determination of fair values of the assets and liabilities for the Transactions.

 

(in Thousands)  Estimated fair value as previously reported   Measurement period adjustments   Fair value as adjusted 
Cash and Cash equivalents  22,293      22,293 
Current assets  52,559   (1,199)  51,361 
Other assets   12,167   3,448   15,619 
Property and equipment  42,952   33   42,985 
Operating lease assets  7,445   101   7,546 
Advertiser relationships  38,780   (10,820)  27,960 
Subscriber relationships  36,060   (7,860)  28,200 
Commercial print relationships  17,130   2,450   19,580 
Mastheads  21,680   (1,290)  20,390 
Goodwill  63,559   14,984   78,539 
Total assets  314,625   (152)   314,473 
Current liabilities assumed  (73,451)  1,074   (72,377)
Operating lease liabilities  (6,625)  (921)  (7,546)
Other liabilities assumed  (2,246)  (1)   (2,247)
Pension obligations  (43,503)     (43,503)
Postemployment benefit obligations  (36,800)     (36,800)
Total liabilities  (162,625)  152   (162,474)
Net assets   152,000      152,000 
Less: acquired cash  (22,293)     (22,293)
Total consideration less acquired cash  129,707      129,707 

The Company had one material measurement period adjustment since September 27, 2020, the last reported preliminary determination of fair values of the assets and liabilities. The significant adjustment included $403,000 net increase to Goodwill through adjustments to liabilities assumed as more information was obtained.

For the 13 weeks ended December 27, 2020, the revenue and net income included in the Consolidated Income Statement related to the acquirees was $109,061,000 and $23,132,000, respectively.

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

 
  

13 Weeks Ended

 
     

December 29,

 

(Thousands of Dollars, Except Per Share Data)

    

2019

 

Total revenues

      237,618 

Income (loss) attributable to Lee Enterprises, Incorporated

      16,554 

Earnings per share - diluted

      0.29 

 

13

 

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, 2018 which resulted in a $897,000 increase to net income for the 13 weeks ended December 29, 2019.

 

 

8

INCOME TAXES

 

We recorded an income tax expense of $6,311,000 related to income before taxes of $22,714,000 for the13 weeks ended December 27, 2020, resulting in an effective tax rate of 27.8%. For the 13 weeks ended December 29, 2019, we recorded an income tax expense of $1,871,000 related to income before taxes of $7,588,000 resulting in an effective tax rate of 24.7%.

 

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 including interest, and adjustments to reserves for uncertain tax positions, including any related interest.

 

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:

 

  

13 Weeks Ended

 
  

December 27,

  

December 29,

 

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

 

2020

  

2019

 
       

Income attributable to Lee Enterprises, Incorporated:

 15,902  5,320 
Weighted average common shares 58,449  57,729 
Less weighted average restricted Common Stock (1,545) (1,459)

Basic average common shares

 56,904  56,270 

Dilutive stock options and restricted Common Stock

 418  783 

Diluted average common shares

 57,322  57,053 

Earnings per common share:

      

Basic

 0.28  0.09 

Diluted

 0.28  0.09 

 

For the 13 weeks ended December 27, 2020 and December 29, 2019, 6,413,000 and 6,384,000 shares, respectively, 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.

 

 

10

STOCK OWNERSHIP PLANS

 

A summary of stock option activity during the 13 weeks ended December 27, 2020 follows:

 

(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

  413   1.14         

Exercised

              

Cancelled

              
Outstanding, December 27, 2020 413  1.14  1.4  50 
Exercisable, December 27, 2020 413  1.14  1.4  50 

 

14

 

Restricted Common Stock

 

The table below summarizes restricted Common Stock activity during the 13 weeks ended December 27, 2020:

 

(Thousands of Shares, Except Per Share Data)

 

Shares

  Weighted Average Grant Date Fair Value 
         

Outstanding, September 27, 2020

  1,550   2.15 
Vested  (447)  2.77 
Granted  458   1.12 
Cancelled      
Outstanding, December 27, 2020  1,561   1.67 

 

Total unrecognized compensation expense for unvested restricted Common Stock at December 27, 2020 is $1,534,000, which will be recognized over a weighted average period of 1.9 years.

 

 

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 17% ownership 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 $523,556,000 principal amount of the Term Loan recorded at carrying value. At December 27, 2020, based on market price quotations, the fair value is $532,456,000. 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 December 27, 2020 and  September 27, 2020 are $247,000 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 $3,167,000 of expense related to restructuring costs and other. This amount consists of severance expense of $3,167,000. We did not have a significant restructuring liability as of December 27, 2020.

 

Subsequent events

 

We have evaluated subsequent events through February 5, 2021. No events have occurred subsequent to December 27, 2020 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 weeks ended December 27, 2020. 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

 
   

December 27,

   

December 29,

 

(Thousands of Dollars)

 

2020

   

2019

 
             

Net income

  16,403     5,717  

Adjusted to exclude

           

Income tax expense

  6,311     1,871  

Non-operating (income) expenses, net

  (1,906 )   10,718  

Equity in earnings of TNI and MNI

  (1,743 )   (1,569 )

Loss on sale of assets and other, net

  5,222     814  

Depreciation and amortization

  10,441     6,719  

Restructuring costs and other

  3,167     1,632  

Stock compensation

  220     302  

Add:

           

Ownership share of TNI and MNI EBITDA (50%)

  1,890     1,918  

Adjusted EBITDA

  40,005     28,122  

 

 

CRITICAL ACCOUNTING POLICIES

 

Our critical accounting policies include the following:

 

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

 

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

 

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

 

Additional information regarding our accounting for business combinations can be found in Note 1. Additional information regarding all other critical accounting policies can be found under the caption “Management's Discussion and Analysis of Financial Condition and Results of Operations” in our 2020 Annual Report on Form 10-K.

 

EXECUTIVE OVERVIEW

 

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

 

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

 

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

 

 

Our web and mobile sites are the number one digital source of local news in most of our markets, reaching more than55 million unique visitors, in the month of December 2020 with 489 million page views and 114 million visits.

 

  We have approximately 1.2 million subscribers to our print and digital products, with estimated readership totaling three million. Digital only subscribers totaled approximately 286,000, with a 69.2% 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, to non-daily newspapers with news websites and digital platforms serving smaller communities.

 

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

 

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 BH Media during the term of the BH Lease.

 

 

IMPAIRMENT OF GOODWILL AND OTHER ASSETS

 

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

 

CERTAIN MATTERS AFFECTING CURRENT AND FUTURE OPERATING RESULTS

 

The following items affect period-over-period comparisons from 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 The Buffalo News for a purchase price of $140,000,000. The acquisition was funded by the Term Loan, as part of a broader comprehensive refinancing of all of our then outstanding debt, as well as cash on our balance sheet.
 
  In the 13 weeks ended March 2020, we disposed of substantially all of the assets of certain of our smaller properties, including four daily newspapers and related print and digital publications, for an aggregate sales price of $3,950,000. 

 

Impacts of COVID-19

 

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

 

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

 

In combination with our acquisition integration, ongoing business transformation and addressing the continued effects of COVID-19 on our operating results, we continued to implement measures to solidify our relationship with our local advertisers, reduce our cost structure and preserve liquidity, and as a result we achieved $100 million in cost reductions from December 2019 through December 2020 on a proforma basis. These reductions were achieved by centralizing certain business functions and systems and reducing duplicate cost structures across the combined organization. The Company believes these initiatives will allow us to meet our commitments; however, they may not be sufficient to fully offset the negative impact of the COVID-19 pandemic on the Company’s business and results of operations.

 

We have evaluated the current economic environment as of December 27, 2020 and have concluded that there is no event or circumstance that has occurred to trigger an impairment assessment of our long-lived or indefinite-lived assets. We will continue to monitor the environment to determine whether the impacts to the Company represent an event or change in circumstances that may trigger a need to reassess for useful life revision or impairment.

 

 

13 WEEKS ENDED December 27, 2020

 

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


      December 27,       December 29,       Percent  

(Thousands of Dollars, Except Per Share Data)

  2020     2019     Change  

Advertising and marketing services revenue

    102,629       65,727       56.1  
Subscription     90,508       41,694       NM  

Other

    18,680       14,922       25.2  

Total operating revenue

    211,817       122,343       73.1  

Operating expenses:

                       

Compensation

    84,163       43,243       94.6  

Newsprint and ink

    7,992       4,736       68.8  

Other operating expenses

    81,767       48,462       68.7  

Cash costs

    173,922       96,441       80.3  

Total operating revenue less cash costs

    37,895       25,902       46.3  

Depreciation and amortization

    10,441       6,719       55.4  

Assets loss on sales, impairments and other, net

    5,222       814       NM  
Restructuring costs and other     3,167       1,632       94.1  

Operating expenses

    192,752       105,606       82.5  

Equity in earnings of associated companies

    1,743       1,569       11.1  

Operating income

    20,808       18,306       13.7  

Non-operating income (expense):

                       

Interest expense

    (11,882 )     (11,115 )     6.9  
Debt financing and administrative cost           (1,196 )     NM  
Curtailment Gain     23,830             NM  
Pension withdrawal cost     (12,310 )           NM  
Other, net     2,268       1,593       NM  
Non-operating expenses, net     1,906       (12,311 )     NM  
Income before income taxes     22,714       7,588       NM  

Income tax expense

    6,311       1,871       NM  
Net income     16,403       5,717       NM  

Net income attributable to non-controlling interests

    (501 )     (397 )     26.2  
Income attributable to Lee Enterprises, Incorporated     15,902       5,320       NM  
Other comprehensive income, net of income taxes     1,142