Lee Enterprises, Inc. — Form 10-Q Summary
Business Context and Reporting Period
Lee Enterprises is a local news, information and advertising company operating primarily in small and midsize markets across 22 states. Its platforms included 50 daily newspapers, 38 Sunday newspapers, nearly 300 weekly and niche publications, and digital products. This filing covers the unaudited 13 weeks ended December 29, 2013, compared with the 13 weeks ended December 30, 2012. The company had 53.5 million common shares outstanding as of January 31, 2014.
Financial Performance and Position
| Metric | Q1 2014 | Q1 2013 | Change |
|---|---|---|---|
| Operating revenue | $177.4 million | $184.7 million | Down 3.9% |
| Operating income | $40.2 million | $39.5 million | Up 1.7% |
| Operating income margin | 22.7% | 21.4% | Up 130 bps |
| Operating cash flow | $49.3 million | $51.5 million | Down 4.3% |
| Operating cash flow margin | 27.8% | 27.9% | Down 10 bps |
| Income attributable to Lee | $11.9 million | $14.6 million | Down 18.4% |
| Diluted earnings per share | $0.22 | $0.28 | Down $0.06 |
| Cash flow from operating activities | $12.0 million | $18.6 million | Down $6.6 million |
| Capital expenditures | $2.3 million | $2.1 million | Up $0.2 million |
Advertising and marketing services revenue declined 5.0% to $122.4 million, subscription revenue declined 1.1% to $45.6 million, and commercial printing revenue declined 8.2%. Digital advertising and marketing services increased 9.8% on a standalone basis; total digital revenue rose 12.7% to $21.6 million. Digital properties attracted 25.6 million unique visitors in December 2013, up 19.9% year over year.
Cost reductions partly offset revenue pressure. Compensation expense declined 5.8%, newsprint and ink expense declined 13.2%, and total operating expenses declined 5.5%. Depreciation and amortization declined 20.0%, principally because of prior-year impairment charges. Adjusted diluted EPS, excluding unusual items, was $0.24 versus $0.20 in the prior-year quarter.
At December 29, 2013, total assets were $820.2 million, cash and cash equivalents were $12.7 million, and total liabilities were $977.6 million. The company reported a total stockholders’ deficit of $158.1 million and total deficit of $157.4 million.
Debt, Liquidity and Cash Flow
- Principal debt outstanding was approximately $833.0 million; carrying value of debt was $821.3 million after the present-value adjustment.
- Debt consisted principally of $603.0 million under the first-lien term loan, $175.0 million under the second-lien term loan and $55.0 million of New Pulitzer Notes.
- The weighted average cost of debt was 9.2%. Approximately 72.4% of principal debt carried floating interest rates.
- Cash was $12.7 million and availability under the revolving credit facility was approximately $29.9 million, producing reported liquidity of approximately $42.6 million.
- Debt maturities totaled $9.8 million for the remainder of 2014, $19.9 million in 2015, $586.2 million in 2016 and $217.2 million in 2017.
- Cash flow from continuing operating activities was $12.0 million. Investing activities used $2.6 million, and financing activities used $14.3 million, primarily for debt repayment. Cash decreased $4.9 million during the quarter to $12.7 million.
- The company stated that it was in compliance with its debt covenants at December 29, 2013. The first-lien total leverage ratio was 6.22:1 versus a maximum covenant of 9.9:1, and interest coverage was 1.71:1 versus a minimum covenant of 1.08:1.
Material Changes Versus the Prior Comparable Period
- Revenue declined $7.3 million, driven mainly by lower retail, classified and national advertising, while digital growth partially offset print declines.
- Operating income increased despite lower revenue because of expense reductions and substantially lower amortization.
- Net income declined because the prior-year quarter included a $7.1 million gain on the sale of an investment and a $1.0 million after-tax gain from discontinued operations. The current quarter had no discontinued-operations income.
- Interest expense declined 11.2% to $20.8 million due to lower debt balances and the refinancing of the Pulitzer Notes.
- Net debt relative to adjusted EBITDA improved to 4.8 times from 5.5 times in the comparable last-twelve-month period.
- The company issued 100,000 common shares in October 2013 to settle the former minority interest of Herald Publishing.
Guidance, Outlook, Risks and Unusual Items
- Management expected full-year 2014 cash costs to decline approximately 0.5% to 1.5%, excluding the effect of circulation-related expense reclassification beginning in the June 2014 quarter.
- 2014 capital expenditures were expected to total up to $12.0 million.
- Management expected interest expense to continue declining if LIBOR did not increase materially, reflecting lower debt balances and the lower rate on the New Pulitzer Notes.
- In January 2014, the company reached an agreement, subject to customary closing conditions, to refinance the $175.0 million second-lien facility with a new $200.0 million facility bearing 12.0% interest and maturing in December 2022. The facility could be reduced by up to $75.0 million if first-lien debt is refinanced. Lenders would receive warrants to purchase 6.0 million shares, approximately 10.1% of fully diluted shares.
- Going-concern stability depends on generating sufficient cash, maintaining covenant compliance and refinancing or amending substantial debt maturities. Debt agreements contain cross-default provisions and could permit acceleration upon an uncured event of default.
- Key operating risks include continued weakness in advertising demand, economic conditions, newsprint and energy prices, interest rates, labor costs, regulatory changes, execution of expense reductions and competition from other media.
- A 100-basis-point change in LIBOR would affect annualized pretax income by approximately $6.0 million, subject to the applicable interest-rate floors. A $10-per-ton newsprint price increase would reduce annualized pretax income by approximately $0.7 million.
- The company is defending an uninsured class action brought by newspaper carriers alleging employee status and employment-law violations. The potential economic outcome could not be predicted.
Investor Verification Priorities
- Verify closing and final terms of the proposed new second-lien refinancing, including the warrant issuance and use of proceeds.
- Assess the company’s ability to refinance or otherwise address the large 2016 and 2017 maturities.
- Monitor advertising trends, print circulation declines and the pace and profitability of digital revenue growth.
- Reconcile liquidity, cash generation and debt repayments against management’s expectation that the next twelve months’ obligations will be satisfied from internally generated funds.
- Track compliance with leverage, interest coverage and Pulitzer EBITDA covenants, as well as any cross-default exposure.
- Evaluate the carrier litigation, tax examinations and other contingencies for changes in potential materiality.
- Review the effect of the planned circulation-related revenue and expense reclassification on reported revenue and margins beginning in the June 2014 quarter.