Lee Enterprises, Inc. — Form 10-Q Summary
Business Context and Reporting Period
Lee Enterprises operates local print and digital news, information and advertising platforms, primarily in 52 markets across 23 states. The filing covers the unaudited 13 weeks and 39 weeks ended June 24, 2012, compared with June 26, 2011. The company emerged from Chapter 11 bankruptcy on January 30, 2012, after completing a comprehensive debt refinancing.
Key Financial Metrics
| Metric | 13 Weeks Ended June 24, 2012 | 39 Weeks Ended June 24, 2012 |
|---|---|---|
| Operating revenue | $179.3 million | $551.1 million |
| Operating income | $22.6 million | $78.2 million |
| Operating cash flow, non-GAAP | $37.4 million; 20.9% margin | $123.1 million; 22.3% margin |
| Net loss | $1.4 million | $13.3 million |
| Loss attributable to Lee | $1.5 million; $0.03 diluted loss per share | $13.5 million; $0.28 diluted loss per share |
| Cash flow from operating activities | Not separately reported for the quarter | $71.9 million |
| Cash and cash equivalents at June 24, 2012 | $19.2 million | |
| Total debt, carrying value | $935.0 million | |
| Available revolver capacity | $29.9 million | |
| Total stated liquidity, including cash | $49.1 million |
Revenue declined primarily because of lower advertising. For the quarter, advertising revenue fell 5.8% to $125.3 million, circulation revenue declined 1.1% to $44.4 million, and other revenue increased 2.0% to $9.6 million. Operating expenses excluding depreciation, amortization and unusual items declined 4.1% for the quarter and 5.1% for the nine-month period.
Total debt consisted principally of a $668.0 million first-lien term loan, a $175.0 million second-lien term loan and $113.0 million of Pulitzer Notes. The weighted average cost of debt was 9.2%, compared with 5.1% in the prior-year period. Approximately 69.9% of principal debt was subject to floating interest rates.
Material Changes Versus the Prior Comparable Period
- Quarterly revenue decreased 4.3%; nine-month revenue decreased 3.9%.
- Quarterly operating cash flow declined 6.8%, while the nine-month amount was approximately flat, declining 0.5%. The nine-month operating cash flow margin improved to 22.3% from 21.6%.
- Operating income improved substantially from a $171.6 million loss in the prior-year quarter and a $108.3 million loss in the prior-year nine-month period. The prior-year results included $187.3 million of goodwill and other asset impairment charges, a $12.0 million reduction of the TNI investment and curtailment gains.
- The company reported $37.6 million of reorganization costs during the nine-month period and paid $31.3 million of debt financing and reorganization costs.
- Financial expense increased 27.2% for the quarter and 21.3% for the nine-month period because of higher interest rates following the refinancing.
- Digital advertising increased 10.0% for the quarter and 10.1% for the nine-month period, partially offsetting print advertising declines. June digital sites attracted 22.2 million unique visitors, while mobile page views increased 156.2% year over year to 45.5 million.
Guidance, Outlook, Risks and Unusual Items
- Management expected 2012 operating expenses, excluding depreciation, amortization and unusual matters and excluding the 53rd week, to decrease 3.5% to 4.5% from comparable 2011 levels.
- 2012 capital expenditures were expected to total $5 million to $10 million and be funded from internally generated funds.
- Management expected continuing cash flows to satisfy interest and principal payments due during the next twelve months and stated that the company was in compliance with its debt covenants at June 24, 2012.
- The company’s ability to continue as a going concern depends on maintaining covenant compliance and refinancing or amending debt as it becomes due. Debt maturities include approximately $722.1 million in 2016 and $175.0 million in 2017.
- The first-lien agreement requires a maximum total leverage ratio and minimum interest coverage ratio. Actual ratios at June 24, 2012 were 6.8:1 and 2.3:1, respectively, compared with covenant limits of 10.0:1 and 1.5:1.
- Debt agreements restrict dividends, share repurchases, capital expenditures, additional debt, acquisitions and other investments. Dividends and share repurchases are suspended through December 2015.
- A 100-basis-point change in LIBOR would affect annualized pretax income by approximately $6.7 million, subject to the applicable LIBOR floor.
- A $10-per-ton increase in newsprint prices would reduce annualized pretax income by approximately $935,000, excluding TNI and MNI.
- The company continues to face declining print advertising and circulation, economic uncertainty, commodity and labor cost pressures, and potential NYSE listing issues. Although the company regained compliance with the minimum closing-price standard, NYSE reassessment of the market-capitalization standard remained outstanding.
- A class-action lawsuit by newspaper carriers alleging employee misclassification remained unresolved and was not covered by insurance. The company stated that the potential economic outcome could not be predicted.
Important Facts for Investors to Verify
- Whether advertising trends, particularly print classified and retail advertising, stabilize or continue to decline.
- Whether operating cash flow remains sufficient to fund interest, mandatory debt amortization, pension contributions and capital expenditures.
- Compliance with progressively tighter debt covenants and the company’s ability to refinance substantial 2016 maturities.
- The effect of the 15.0% second-lien interest rate and floating-rate exposure on future earnings and liquidity.
- The status of NYSE listing compliance and the potential consequences of any delisting.
- The ultimate outcome and potential exposure from the newspaper-carrier litigation.
- Whether digital audience and advertising growth can offset continuing declines in print revenue and circulation.