Lee Enterprises, Inc. — Fiscal 2017 Second-Quarter Form 10-Q
Business context and reporting period
Lee Enterprises operates local print and digital news, advertising, subscription, commercial printing and related media businesses, primarily in the Midwest, Mountain West and West regions. The filing covers the 13 weeks and 26 weeks ended March 26, 2017, compared with the periods ended March 27, 2016. Results are seasonal and are not necessarily indicative of the full fiscal year.
Financial performance and liquidity
| Metric | 13 weeks ended March 26, 2017 | 13 weeks ended March 27, 2016 | 26 weeks ended March 26, 2017 | 26 weeks ended March 27, 2016 |
|---|---|---|---|---|
| Total operating revenue | $133.4 million | $146.8 million | $287.4 million | $315.2 million |
| Operating income | $18.8 million | $18.7 million | $50.2 million | $55.2 million |
| Operating margin | 14.1% | 12.8% | 17.5% | 17.5% |
| Adjusted EBITDA | $28.8 million | $31.1 million | $72.1 million | $79.7 million |
| Net income | $6.4 million | $19.5 million | $18.8 million | $31.0 million |
| Income attributable to Lee | $6.1 million | $19.2 million | $18.3 million | $30.5 million |
| Diluted EPS | $0.11 | $0.36 | $0.33 | $0.57 |
- Quarterly advertising and marketing services revenue declined 12.6% to $77.5 million; subscription revenue declined 3.5% to $45.0 million. Total digital revenue increased 10.0% to $25.7 million in the quarter and represented approximately 19.3% of total revenue.
- Quarterly cash costs declined 8.2% excluding the effect of workforce adjustments. Compensation decreased 9.9%, while newsprint and ink costs increased 2.4% despite lower volume.
- Operating income was broadly stable in the quarter because cost reductions and a $3.7 million postretirement curtailment gain offset revenue pressure. Adjusted EBITDA declined 7.5% for the quarter and 9.6% for the six-month period.
- Cash provided by operating activities was $33.4 million for the first 26 weeks, versus $41.6 million in the prior-year period. Capital expenditures were $2.1 million, and cash used in financing activities was $32.5 million, principally for debt repayment.
- Cash and cash equivalents were $16.0 million at March 26, 2017, compared with $17.0 million at September 25, 2016. Revolver availability was approximately $33.3 million, producing reported liquidity of $49.3 million including cash.
- Principal debt outstanding was $584.9 million, consisting primarily of $385.0 million of 9.5% senior secured notes, $70.2 million of first-lien term debt and $129.7 million of 12.0% second-lien debt. Debt, net of cash, was 3.89 times trailing-twelve-month adjusted EBITDA.
- Total liabilities exceeded assets, resulting in a stockholders’ deficit of $108.4 million and a total deficit of $107.4 million at March 26, 2017.
Material changes versus the prior comparable period
- Revenue declined 9.2% in the quarter and 8.8% for the first six months, primarily from lower print advertising, classified advertising, subscriptions and commercial printing. Same-property revenue declined 7.9% and 7.5%, respectively.
- Standalone digital advertising and marketing services revenue increased 11.3% in the quarter and 9.0% for the six-month period, partially offsetting print declines. Print advertising declined 17.8% in the quarter and 16.2% for the six-month period.
- Operating expenses declined 10.6% in the quarter and 8.8% for the six-month period. Average full-time equivalent employees declined 7.2%.
- Net income and EPS were significantly lower because the prior-year periods included a $30.6 million insurance-settlement gain. The current period also benefited from a $3.7 million non-cash postretirement curtailment gain and warrant fair-value gains of $4.3 million in the quarter and $7.4 million for six months.
- Adjusted income attributable to Lee was a loss of $0.6 million, or $0.01 per diluted share, in the quarter, versus a loss of $0.6 million, or $0.01 per share, in the prior year. For six months, adjusted income was $8.5 million, or $0.15 per share, versus $10.5 million, or $0.20 per share.
Guidance, outlook, risks and unusual items
- Management expects fiscal 2017 cash costs, excluding workforce adjustments, to decrease 6.0% to 6.5%. Capital expenditures are expected to be up to $10.0 million.
- Management expects operating cash flow to fund interest and principal payments due over the next 12 months and expects no significant income tax payments in the current fiscal year because of federal and state net operating loss carryforwards.
- A $4.5 million Pulitzer Excess Cash Flow payment was scheduled to repay the second-lien term loan in May 2017. The company reported compliance with its debt covenants at March 26, 2017.
- Debt maturities range from December 2018 through December 2022. Continued liquidity depends on cash generation, asset sales, covenant compliance and the ability to refinance or amend debt as needed.
- Key operating risks include continued declines in print advertising and circulation, digital-advertising competition and technology changes, newsprint and energy costs, labor and health-care costs, interest rates, legal and tax matters, and the ability to achieve planned expense reductions.
- Newsprint cost per metric ton was approximately 18% higher year over year. A $10-per-ton increase in 30-pound newsprint would reduce annualized pretax income by approximately $0.5 million.
- Goodwill and other intangible assets remain significant, including $243.7 million of goodwill and $145.8 million of other intangible assets. Further deterioration in market conditions or projected cash flows could result in impairment charges.
Facts investors should verify
- Whether declining advertising and subscription revenue stabilizes and whether digital growth can continue to offset print declines.
- Whether the 6.0%–6.5% cash-cost reduction target and planned cost savings are achieved without impairing revenue or customer relationships.
- Cash flow coverage of mandatory debt amortization, the May 2017 second-lien repayment and future maturities, particularly the 2019 first-lien term-loan maturity and 2022 senior notes maturity.
- Liquidity levels, revolver availability and ongoing compliance with debt covenants.
- Potential effects of additional goodwill or intangible-asset impairments, pension or multiemployer-plan withdrawal liabilities, tax audits and ordinary-course litigation.