Lee Enterprises, Inc. — Fiscal 2014 Form 10-K Summary
Business context and reporting period
Lee Enterprises is a local news, information and advertising company operating primarily in midsize and small U.S. markets. It publishes 50 daily and 38 Sunday newspapers, nearly 300 weekly and specialty publications, and related digital platforms across 22 states. The company also owns 50% interests in TNI Partners and Madison Newspapers, Inc., accounted for under the equity method, and 82.5% of TownNews.
The filing covers the 52-week fiscal year ended September 28, 2014. Fiscal 2013 also contained 52 weeks; fiscal 2012 contained 53 weeks. The September 2014 quarter generated operating revenue of $162.1 million and net income attributable to Lee of $3.2 million, compared with $162.5 million and a loss of $88.7 million, respectively, in the September 2013 quarter.
Financial performance and key metrics
| Metric | 2014 | 2013 | Change |
|---|---|---|---|
| Operating revenue | $656.7 million | $674.7 million | Down 2.7% |
| Advertising and marketing services revenue | $442.0 million | $460.5 million | Down 4.0% |
| Subscription revenue | $176.8 million | $177.1 million | Down 0.1% |
| Operating cash flow | $155.1 million | $160.7 million | Down 3.5% |
| Operating cash flow margin | 23.6% | 23.8% | Down 0.2 points |
| Operating income | $113.2 million | $(57.3) million | Improved |
| Net income attributable to Lee | $6.8 million | $(78.3) million | Improved |
| Diluted EPS | $0.13 | $(1.51) | Improved |
| Adjusted diluted EPS | $0.41 | $0.47 | Down $0.06 |
| Adjusted EBITDA | $167.8 million | $173.7 million | Down 3.4% |
| Unlevered free cash flow | $159.2 million | $166.8 million | Down 4.5% |
| Free cash flow | $50.7 million | $82.0 million | Down 38.2% |
Digital advertising and marketing services revenue increased 12.0% to $75.2 million, representing 17.0% of advertising and marketing services revenue. Total digital revenue, including digital subscriptions and other digital businesses, increased 17.1% to $90.2 million, or 13.7% of total operating revenue versus 11.4% in 2013. Digital audiences reached 30.0 million unique visitors and 231.3 million page views in September 2014, increases of 29.2% and 10.6%, respectively.
Print-related trends remained challenging. Retail advertising declined 3.4%, classified advertising declined 7.0%, and print advertising and marketing services revenue on a standalone basis declined 6.8%. Automotive classified advertising declined 14.2%. Subscription revenue was essentially flat on a reported basis, but declined 3.9% after excluding a delivery-cost reclassification.
Cash costs declined 2.4% to $501.6 million, or 3.7% excluding the subscription-related reclassification. Compensation declined 4.6%, newsprint and ink declined 12.6%, and full-time-equivalent employment declined 4.8%. The company reported total assets of $811.3 million, cash of $16.7 million, total debt of $804.8 million, and stockholders’ deficit of $178.3 million at year-end.
Cash provided by operating activities was $82.1 million. Capital expenditures were $13.7 million, and cash required for investing activities was $9.3 million. The company used $73.6 million in financing activities, primarily for debt repayment and refinancing costs. Debt, net of cash, was 4.7 times 2014 adjusted EBITDA versus 4.8 times in 2013.
Material changes versus the prior comparable period
- Revenue declined 2.7%, driven principally by lower print advertising, especially classified advertising.
- Operating income improved to $113.2 million from a $57.3 million loss, mainly because 2013 included $171.1 million of non-cash impairment charges, compared with $3.0 million in 2014.
- Reported net income improved to $6.8 million from a $78.3 million loss; however, adjusted diluted EPS declined to $0.41 from $0.47.
- Operating cash flow and adjusted EBITDA declined modestly despite lower cash costs.
- The company completed a comprehensive refinancing on March 31, 2014, replacing prior credit agreements with $400.0 million of 9.5% senior secured notes, a $250.0 million first-lien term loan, a $40.0 million revolving facility and a $150.0 million second-lien term loan.
- Debt principal declined by $42.8 million during 2014, and an additional $32.0 million borrowed to fund refinancing costs was repaid during the year.
- The 2014 refinancing generated $22.9 million of debt financing costs expensed in 2014 and extended final maturities to dates ranging from April 2017 through December 2022.
Guidance, outlook, management commentary, risks and unusual items
Management expected 2015 capital expenditures of up to $12.0 million and pension contributions of approximately $3.8 million. It stated that interest and principal payments due during the next twelve months were expected to be funded from continuing cash flows. The filing does not provide formal revenue or earnings guidance.
Lee began rolling out full-access digital subscriptions in April 2014 and intended to expand the model to all markets by June 2015. Management expected most revenue and subscriber effects from the initiative to occur in 2015 and 2016.
Liquidity at September 28, 2014 was $44.8 million, including $16.7 million of cash and $27.6 million available under the revolving facility after letters of credit. Management stated that continued liquidity and going-concern status depend on generating sufficient cash flow, complying with debt covenants, and refinancing or amending obligations when required. The company was in compliance with its debt covenants at year-end.
- Debt maturities include $31.4 million in 2015, $31.4 million in 2016, $35.2 million in 2017, $25.0 million in 2018, $131.8 million in 2019 and $550.0 million thereafter.
- The second-lien term loan bears 12.0% interest, and the senior secured notes bear 9.5%; weighted-average debt cost was 9.3% excluding amortization of financing costs.
- Six million warrants issued with the refinancing are exercisable at $4.19 per share and could provide up to $25.1 million of liquidity if exercised, while creating potential dilution of approximately 10.1% on the stated fully diluted basis.
- Pension obligations increased to $50.2 million from $30.6 million. New mortality tables increased pension and postretirement liabilities by approximately $18.5 million and reduced accumulated other comprehensive income.
- A $2.3 million liability was recorded for a newspaper-carrier litigation settlement that remained subject to court approval at filing.
- The company recorded a $6.1 million non-operating gain from a decrease in the fair value of the warrants and a $2.3 million litigation-related charge.
- Key operating risks include continued print advertising and circulation declines, digital competition and execution risk, newsprint and energy costs, interest-rate exposure, pension funding, cybersecurity, labor matters, impairment charges, covenant compliance and refinancing risk.
Most important facts for investors to verify
- Reconcile reported earnings with adjusted EPS and assess the sustainability of cash generation after refinancing costs, interest, capital expenditures and pension contributions.
- Review debt agreements, mandatory and excess-cash-flow repayment provisions, collateral, covenant requirements and the concentration of maturities after 2019.
- Evaluate whether digital revenue and audience growth can offset ongoing declines in print advertising and circulation.
- Verify the company’s liquidity forecasts against actual operating cash flow and the $44.8 million year-end liquidity balance.
- Assess potential dilution and cash-settlement exposure from the 6.0 million warrants.
- Monitor pension funding requirements, multiemployer-plan exposure and the effect of updated mortality assumptions.
- Review the final outcome of the newspaper-carrier settlement and other legal, tax and contingent liabilities.