Lee Enterprises, Inc. — Fiscal 2018 Second-Quarter Form 10-Q
Reporting period: 13 and 26 weeks ended March 25, 2018, compared with the periods ended March 26, 2017. The company operates local newspapers, digital platforms, advertising and marketing services, subscriptions, commercial printing, delivery services and TownNews.com.
Financial Performance
| Metric | 13 Weeks 2018 | 13 Weeks 2017 | 26 Weeks 2018 | 26 Weeks 2017 |
|---|---|---|---|---|
| Total revenue | $127.8 million | $133.4 million | $271.6 million | $287.4 million |
| Operating income | $17.3 million | $18.8 million | $47.8 million | $50.2 million |
| Operating margin | 13.5% | 14.1% | 17.6% | 17.5% |
| Net income | $2.5 million | $6.4 million | $37.9 million | $18.8 million |
| Income attributable to Lee | $2.2 million | $6.1 million | $37.2 million | $18.3 million |
| Diluted EPS | $0.04 | $0.11 | $0.67 | $0.33 |
| Adjusted EBITDA | $26.8 million | $28.8 million | $67.1 million | $72.1 million |
For the quarter, advertising and marketing services revenue declined 7.7%, while subscription revenue increased 2.1% and other revenue declined 5.2%. Digital advertising increased 2.7% to $22.9 million, representing 31.9% of total advertising revenue. Total digital revenue increased 3.6% to $26.7 million. TownNews.com revenue excluding intercompany revenue increased 17.0% during the quarter.
For the 26-week period, advertising and marketing services revenue declined 8.4%, subscription revenue increased 0.4%, and other revenue declined 7.8%. Total digital revenue increased 3.4% to $53.9 million.
Cash Flow, Debt and Liquidity
- Cash provided by operating activities was $35.1 million for the 26 weeks, compared with $33.4 million in the prior-year period.
- Capital expenditures were $2.5 million, compared with $2.1 million. Management expects fiscal 2018 capital expenditures of up to $10.0 million.
- Debt repayments totaled $32.1 million, resulting in a $1.7 million increase in cash to $12.3 million at March 25, 2018.
- Principal debt outstanding was $516.3 million, consisting primarily of $385.0 million of 9.5% senior secured notes, $24.6 million under the first-lien term loan and $106.7 million under the 12.0% second-lien term loan.
- Debt, net of cash, was 3.61 times trailing-twelve-month adjusted EBITDA. The weighted-average cost of debt was 9.9%.
- Revolving-facility availability was approximately $33.8 million. Including cash, reported liquidity was $46.1 million.
- The company stated that it was in compliance with debt covenants at March 25, 2018 and expected operating cash flows and certain asset sales to fund interest and principal payments due over the next 12 months.
Material Changes Versus Prior Comparable Period
- Quarterly revenue decreased 4.2%, primarily because of continued weakness in print advertising, including retail, big-box and classified advertising.
- Quarterly operating expenses declined 3.6%; cash costs excluding workforce adjustments declined 3.5%. Compensation expense benefited from a 13.1% reduction in average full-time-equivalent employees on a same-property basis.
- Operating income declined 8.2% for the quarter and 4.8% for the 26-week period.
- Interest expense declined 9.3% for the quarter and 9.0% for the 26-week period because of lower debt balances, although the company’s debt repayments were concentrated in its lower-cost first-lien debt.
- Quarterly earnings were reduced by a smaller warrant-related fair-value gain than in the prior year. Adjusted diluted EPS excluding the warrant adjustment was $0.03 in both quarters.
- Six-month net income benefited from a provisional $24.9 million tax benefit associated with revaluing deferred tax assets and liabilities under the Tax Cuts and Jobs Act. Excluding the tax adjustment and warrant valuation effects, adjusted six-month income attributable to Lee was $12.2 million, or $0.22 per diluted share, versus $10.9 million, or $0.20, in the prior-year period.
Guidance, Outlook, Risks and Unusual Items
- Management expects fiscal 2018 cash costs excluding workforce adjustments and other items to decrease 6.0% to 6.5% on a same-property basis.
- Management expects to complete its assessment of the new revenue-recognition standard in the fourth quarter of fiscal 2018 and anticipates adoption using the modified retrospective method beginning October 1, 2018. The ultimate financial statement impact was not yet clear.
- The $24.9 million tax benefit remains provisional; the company anticipated finalizing the Tax Cuts and Jobs Act transition impact by the end of fiscal 2018.
- A $2.0 million non-cash postretirement curtailment gain was recorded in the quarter, compared with $3.7 million in the prior-year quarter.
- The company expects to contribute approximately $4.9 million to its pension trust during the remainder of fiscal 2018.
- Debt maturities range from December 2018 through December 2022. The revolving facility expires December 28, 2018, the first-lien term loan matures March 31, 2019, and the $385.0 million senior secured notes mature March 15, 2022.
- Management identifies substantial leverage, refinancing requirements, covenant compliance, dependence on operating cash flow and asset sales, advertising demand, technology changes, labor costs, newsprint prices, tariffs, interest rates and competition as key risks.
- Newsprint price increases were expected in April and May 2018 because of supply constraints and preliminary duties on Canadian imports. A $10-per-ton newsprint price increase was estimated to reduce annualized pretax income by approximately $0.4 million.
- The company has significant goodwill and intangible assets and stated that additional impairment charges could be required if economic, market or projected cash-flow conditions deteriorate.
Investor Verification Points
- Verify the company’s ability to refinance or repay the December 2018 and March 2019 debt obligations, including the expiring revolving facility.
- Track print advertising declines against digital advertising growth and subscription pricing versus circulation losses.
- Reconcile reported six-month earnings with adjusted earnings excluding the provisional tax benefit and warrant fair-value changes.
- Monitor cash generation, asset-sale proceeds, required debt repayments and remaining liquidity relative to debt maturities.
- Confirm the final Tax Cuts and Jobs Act accounting impact and the implementation effect of the new revenue-recognition standard.
- Assess exposure to newsprint prices, Canadian import duties, pension contributions and potential impairment of goodwill or other intangible assets.