Lee Enterprises, Inc. — Form 10-Q Summary
Business context and reporting period
Lee Enterprises is a local news, information and advertising company operating 50 daily newspapers, weekly and niche publications, and digital platforms primarily in the Midwest, Mountain West and West. The unaudited filing covers the 13 and 26 weeks ended March 30, 2014, compared with March 31, 2013. The company reported 53.6 million common shares outstanding as of April 30, 2014.
- Digital platforms attracted 30.3 million unique visitors and 235.9 million page views in March 2014.
- In April 2014, the company began implementing a full-access subscription model covering print, desktop, mobile, tablet and replica editions.
Financial performance and position
| Metric | 13 weeks ended Mar. 30, 2014 | 13 weeks ended Mar. 31, 2013 | Change |
|---|
| Total operating revenue | $154.1 million | $160.6 million | Down 4.1% |
| Operating cash flow | $32.7 million | $31.9 million | Up 2.4% |
| Operating cash flow margin | 21.2% | 19.9% | Up 130 basis points |
| Operating income | $23.7 million | $18.7 million | Up 27.1% |
| Operating margin | 15.4% | 11.6% | Up 380 basis points |
| Income attributable to Lee | $1.5 million | $(6.0) million | Improved |
| Diluted earnings per share | $0.03 | $(0.12) | Improved |
| Metric | 26 weeks ended Mar. 30, 2014 | 26 weeks ended Mar. 31, 2013 | Change |
|---|
| Total operating revenue | $331.5 million | $345.3 million | Down 4.0% |
| Operating cash flow | $82.0 million | $83.4 million | Down 1.7% |
| Operating cash flow margin | 24.7% | 24.2% | Up 50 basis points |
| Operating income | $63.9 million | $58.2 million | Up 9.9% |
| Income attributable to Lee | $13.4 million | $8.6 million | Up 56.0% |
| Diluted earnings per share | $0.25 | $0.17 | Up 47.1% |
- Quarterly advertising and marketing services revenue declined 4.3%; classified advertising declined 10.7%, while digital advertising and marketing services revenue increased 10.2%.
- Quarterly subscription revenue declined 4.3% because of lower print subscriptions, partly offset by price increases and digital subscriber growth.
- Cash costs declined 5.7% in the quarter and 4.7% for the six-month period. Compensation and newsprint costs decreased 8.0% and 12.9%, respectively, in the quarter.
- Six-month cash flow from continuing operations was $34.7 million, compared with $45.3 million in the prior period. Capital expenditures were $4.9 million, and free cash flow as defined by management was $43.2 million.
- At March 30, 2014, cash and cash equivalents were $14.9 million, total assets were $797.3 million, total debt before present-value adjustments was approximately $802.5 million, and stockholders’ deficit was $156.3 million.
Material changes versus the prior comparable period
- Revenue continued to decline, primarily due to lower print advertising, classified advertising and print subscriptions. Digital revenue growth partially offset these declines.
- Cost reductions exceeded the revenue decline, improving operating cash flow and operating margins in the quarter; six-month operating cash flow declined modestly.
- Amortization expense decreased substantially because of impairment charges recorded in 2013, contributing to higher operating income.
- Interest expense declined 10.4% in the quarter and 10.8% for the six-month period, primarily because of lower debt balances and the May 2013 refinancing of the Pulitzer Notes.
- The prior-year periods included losses from discontinued operations, including the sale of The Garden Island. No discontinued-operations loss was recorded in 2014.
Debt refinancing, liquidity and outlook
- On March 31, 2014, immediately after quarter-end, the company completed a comprehensive refinancing. New debt consisted of $400 million of 9.5% senior secured notes due 2022, a $250 million first-lien term loan due 2019, a $40 million revolving facility due 2018, and a $150 million second-lien term loan bearing 12% interest and due 2022.
- The refinancing repaid the prior $593 million first-lien term loan and $175 million second-lien term loan and extended final maturities from the prior 2015–2017 period to March 2019 through December 2022.
- Principal debt outstanding after refinancing was $845 million. Management stated that pro forma net debt was 4.8 times adjusted EBITDA for the trailing twelve months ended March 30, 2014, versus 5.1 times a year earlier.
- At March 30, 2014, available revolver capacity was approximately $29.9 million and total liquidity, including cash, was $44.8 million. Management expected operating cash flows to cover interest and principal payments due over the following 12 months.
- Annual interest payments were expected to initially increase by approximately $3.4 million after refinancing, and pro forma cash interest cost was approximately 9.25%.
- Management expected 2014 cash costs to decrease 3.0% to 3.5%, excluding the effect of a subscription-related expense reclassification. Capital expenditures were expected to total up to $12 million.
- The company was in compliance with debt covenants at March 30, 2014. However, continued operations depend on generating sufficient cash flow, maintaining covenant compliance and managing future debt obligations.
Risks, contingencies and unusual items
- Key risks include declining advertising demand and print circulation, economic weakness, digital transition execution, newsprint and energy costs, interest rates, labor costs, competition, regulatory changes and the ability to achieve planned cost reductions.
- A 100-basis-point change in LIBOR was estimated to affect annualized pretax income by approximately $2.5 million based on post-refinancing floating-rate debt.
- A $10-per-ton increase in newsprint prices was estimated to reduce annualized pretax income by approximately $0.7 million, excluding TNI and MNI consumption.
- The refinancing generated approximately $32 million of fees and expenses, including a $1.75 million second-lien redemption premium and $5 million of original issue discount. Certain costs were expected to be charged to expense in the quarter ending June 29, 2014.
- Warrants issued in connection with the new second-lien term loan cover 6.0 million shares at an exercise price of $4.19 per share, representing approximately 10.1% of shares outstanding on a fully diluted basis and potentially providing up to $25.1 million of liquidity if exercised.
- The company faces an uninsured newspaper-carrier employment classification lawsuit. Management cannot predict whether the ultimate outcome could materially affect the financial statements.
- Management stated that disclosure controls were effective and that no material changes occurred in internal control over financial reporting during the six-month period.
Important facts for investors to verify
- Post-refinancing interest expense, debt amortization requirements, covenant thresholds and the company’s ability to sustain liquidity.
- Whether digital advertising and subscription growth can offset continuing declines in print advertising, classified revenue and print circulation.
- The effect of the new full-access subscription model on revenue, subscriber counts and customer retention.
- The amount and timing of refinancing-related charges, amortization and potential warrant dilution.
- Future newsprint, labor, healthcare and pension costs, including the expected $0.7 million 2014 pension contribution for the remainder of the year.
- The status and potential exposure from the newspaper-carrier litigation and ongoing tax examinations.
