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 the Midwest, Mountain West and West. Its portfolio included 50 daily newspapers, 38 Sunday newspapers, nearly 300 weekly and niche publications, digital platforms and related services.
The filing covers the 13 and 26 weeks ended March 27, 2016, compared with the periods ended March 29, 2015. Fiscal-year results are seasonal and may not indicate full-year performance.
Financial Performance and Position
| Metric | 13 Weeks Ended March 27, 2016 | 13 Weeks Ended March 29, 2015 | 26 Weeks Ended March 27, 2016 | 26 Weeks Ended March 29, 2015 |
|---|---|---|---|---|
| Operating revenue | $146.8 million | $156.6 million | $315.2 million | $333.8 million |
| Operating income | $18.7 million | $20.2 million | $55.2 million | $57.7 million |
| Net income | $19.5 million | $2.0 million | $31.0 million | $12.0 million |
| Income attributable to Lee | $19.2 million | $1.8 million | $30.5 million | $11.6 million |
| Diluted EPS | $0.36 | $0.03 | $0.57 | $0.21 |
| Adjusted EBITDA | $31.1 million | $33.6 million | $79.7 million | $84.0 million |
For the 13-week quarter, revenue declined 6.2% and operating income declined 7.4%. For the six-month period, revenue declined 5.6% and operating income declined 4.5%. Reported net income benefited materially from a $30.6 million insurance settlement gain and a $0.7 million gain on debt extinguishment in the quarter.
- Advertising and marketing services revenue declined 9.5% in the quarter and 9.1% year to date. Retail and classified print advertising were the principal sources of decline.
- Subscription revenue decreased 3.0% in the quarter and 1.4% year to date, as subscriber losses exceeded the benefit of rate increases.
- Digital advertising and marketing services revenue increased 5.9% in the quarter and 6.6% year to date. Total digital revenue increased 6.7% in the quarter and 6.8% year to date.
- Cash costs decreased 5.4% in the quarter and 5.1% year to date, supported by lower staffing, newsprint usage and other operating expenses.
- Operating margin was approximately 12.8% in the quarter and 17.5% year to date, compared with approximately 12.9% and 17.3%, respectively, in the prior comparable periods.
- Cash provided by operating activities was $41.6 million year to date, compared with $39.5 million in the prior year.
- Investing activities provided $31.9 million, primarily because of the $30.6 million insurance settlement. Capital expenditures were $3.3 million, compared with $5.7 million.
- Financing activities used $68.1 million, including $73.1 million of debt repayments.
Debt, Liquidity and Balance Sheet
- Cash and cash equivalents were $16.5 million at March 27, 2016, compared with $11.1 million at September 27, 2015.
- Total principal debt was $656.5 million, consisting primarily of $385.0 million of 9.5% senior secured notes, $135.2 million under the first-lien term loan and $136.3 million under the second-lien term loan.
- Debt was $725.9 million at September 27, 2015; reductions included scheduled and voluntary repayments, debt repurchases and payments from asset-sale proceeds.
- Approximately $32.9 million remained available under the revolving facility. Including cash, reported liquidity was $49.4 million.
- Net debt to adjusted EBITDA for the last twelve months was 4.0 times, compared with 4.6 times at March 29, 2015.
- Total assets were $717.9 million and total liabilities were $844.9 million. Stockholders’ deficit was $127.8 million.
- The company stated that it was in compliance with its debt covenants at March 27, 2016 and expected existing cash flows and certain asset sales to fund interest and principal obligations due over the next 12 months.
Material Changes Versus the Prior Comparable Period
- Reported earnings improved substantially because of the insurance settlement, whereas underlying adjusted earnings were broadly stable. Adjusted diluted EPS was $0.20 for both six-month periods; adjusted quarterly EPS was a loss of $0.01 in both periods.
- Revenue pressure continued in print advertising, particularly retail and classified categories, while digital advertising, digital services and commercial printing grew.
- Cost reductions partly offset revenue declines. Compensation expense decreased 3.9% in the quarter and 4.6% year to date; newsprint and ink expense decreased 21.0% and 22.8%, respectively.
- Interest expense declined 11.5% in the quarter and 10.1% year to date as debt balances decreased, although the weighted average cost of debt increased to 9.6% from 9.4%.
- The company used most of the insurance proceeds to reduce debt, including a $20.0 million first-lien term-loan repayment and the repurchase of $10.0 million face value of notes at a discount.
Guidance, Outlook, Risks and Unusual Items
- Management expected fiscal 2016 cash costs, excluding workforce adjustments, to decrease 3.5% to 4.0%.
- Capital expenditures were expected to total up to $10.0 million in fiscal 2016.
- Management identified the continuing shift from print to digital advertising, declining print readership and subscriber volumes, competition, newsprint and energy costs, labor and health-care costs, and economic conditions as key operating risks.
- Liquidity and going-concern capacity depend on continued operating cash generation, compliance with debt covenants, debt repayment or refinancing, and potential asset sales. A debt default could permit lenders to accelerate outstanding obligations and exercise collateral remedies.
- Debt maturities extend from March 2019 through December 2022, but the filing notes substantial future obligations, including $521.3 million of minimum required maturities after 2020, excluding certain excess-cash-flow requirements.
- Interest-rate exposure is limited by predominantly fixed-rate debt; a 100-basis-point increase in LIBOR would reduce annualized pre-tax income by approximately $1.4 million, subject to stated rate floors.
- A $10-per-ton newsprint price increase would reduce annualized pre-tax income by approximately $0.5 million based on anticipated 2016 consumption.
- The company has significant goodwill and intangible assets and has recorded nearly $1.3 billion of impairment charges since 2007; further deterioration in markets or projected cash flows could result in additional impairment charges.
- Other contingencies include ongoing tax examinations, ordinary-course litigation and a potential multiemployer pension withdrawal liability whose amount and timing were not determinable.
Investor Verification Checklist
- Verify the sustainability of operating cash flow and adjusted EBITDA after excluding the nonrecurring insurance settlement.
- Monitor print advertising and subscription trends relative to digital revenue growth.
- Reconcile scheduled debt amortization, excess-cash-flow payments and expected asset-sale proceeds with available liquidity.
- Review compliance with debt covenants and refinancing requirements as 2019 maturities approach.
- Assess the effects of newsprint prices, interest rates, labor and health-care costs on margins.
- Evaluate potential impairment of goodwill and intangible assets and the ultimate exposure from tax, legal and pension matters.