Business Context and Reporting Period
Lee Enterprises, Incorporated filed this unaudited Form 10-Q for the 13 and 39 weeks ended June 28, 2015, compared with June 29, 2014. The company operates local print and digital news, advertising, subscription, commercial printing and digital-services businesses, including 50 daily newspapers, weekly publications and associated digital platforms.
Financial Performance and Position
| Metric | 13 Weeks Ended June 28, 2015 | 13 Weeks Ended June 29, 2014 | 39 Weeks Ended June 28, 2015 | 39 Weeks Ended June 29, 2014 |
|---|---|---|---|---|
| Total operating revenue | $157.5 million | $163.1 million | $489.2 million | $494.6 million |
| Operating income | $24.8 million | $28.6 million | $82.6 million | $92.5 million |
| Operating cash flow | $35.2 million | $39.3 million | $111.4 million | $121.3 million |
| Operating cash flow margin | 22.4% | 24.1% | 22.8% | 24.5% |
| Net income attributable to Lee | $1.9 million | $(9.7) million | $13.4 million | $3.6 million |
| Diluted earnings per share | $0.03 | $(0.19) | $0.25 | $0.07 |
| Adjusted EBITDA | $38.2 million | $42.3 million | $121.4 million | $130.9 million |
| Free cash flow | $16.2 million | $(5.8) million | $56.4 million | $37.4 million |
- Advertising and marketing-services revenue declined 8.9% in the quarter and 6.5% year to date, reflecting continued print and classified advertising weakness.
- Subscription revenue increased 9.4% in the quarter and 11.6% year to date on a reported basis, primarily from the full-access subscription model. Excluding a delivery-cost reclassification, subscription revenue increased 3.4% and 2.7%, respectively.
- Total digital revenue increased 28.6% in the quarter to $30.1 million and 29.3% year to date to $84.7 million. Digital revenue represented 19.1% and 17.3% of total operating revenue, respectively.
- Cash provided by operating activities was $66.1 million year to date, compared with $69.6 million in the prior-year period. Capital expenditures were $7.7 million versus $8.2 million.
- Cash and cash equivalents totaled $18.9 million at June 28, 2015, compared with $16.7 million at September 28, 2014.
- Total assets were $772.6 million and total liabilities were $935.1 million, resulting in a total deficit of $162.5 million.
Debt, Liquidity and Capital Resources
- Principal debt outstanding was $745.0 million at June 28, 2015, down from $804.8 million at September 28, 2014. Reported long-term debt, net of current maturities, was $712.1 million.
- Debt consisted primarily of $400.0 million of 9.5% senior secured notes maturing in 2022, a $195.0 million first-lien term loan, and a $150.0 million second-lien term loan bearing 12.0% interest and maturing in 2022.
- The company repaid the remaining New Pulitzer Notes on June 25, 2015. The repayment changed collateral and intercreditor arrangements for the remaining debt.
- Liquidity was $51.8 million, consisting of $18.9 million of cash and approximately $32.9 million available under the revolving facility after letters of credit.
- Management stated that expected cash flows should satisfy interest and principal payments due during the next 12 months. The company was in compliance with its debt covenants at June 28, 2015.
- Scheduled debt maturities total $14.2 million for the remainder of 2015, $25.0 million in each of 2016 through 2018, $105.9 million in 2019 and $550.0 million thereafter.
Material Changes Versus the Prior Comparable Period
- Quarterly revenue declined 3.4%, while year-to-date revenue declined 1.1% as reported, or 5.1% and 3.5%, respectively, excluding the subscription-related delivery-cost reclassification.
- Operating income fell 13.2% in the quarter and 10.8% year to date. Operating cash flow declined 10.4% in the quarter and 8.2% year to date.
- Newsprint and ink expense decreased 19.5% in the quarter and 17.8% year to date due to lower prices and lower newsprint volume.
- Interest expense decreased 7.8% in the quarter and 9.4% year to date because of lower debt balances and the absence of certain prior-year non-cash interest expense.
- Debt financing costs fell substantially to $1.4 million in the quarter and $4.0 million year to date, compared with $21.7 million and $21.9 million, respectively, in the prior-year periods, which included the 2014 refinancing.
- Reported net income improved because the prior-year periods included substantial refinancing costs, impairment charges and litigation-related costs. Adjusted diluted EPS declined to $0.09 from $0.11 in the quarter and to $0.32 from $0.40 year to date.
Guidance, Outlook, Risks and Unusual Items
- Management expected full-year 2015 subscription revenue, excluding the reclassification, to increase 2.5% to 3.0%.
- Management expected fourth-quarter cash costs, excluding the reclassification and unusual items, to decline 5.5% to 6.0%. Full-year 2015 capital expenditures were expected to total up to $12.0 million.
- The company identified continued declines in print advertising, print circulation and classified advertising as key operating challenges, partially offset by digital advertising, digital services and subscription initiatives.
- Unusual items included debt-financing-cost amortization, changes in the fair value of warrants, workforce adjustments and prior-year litigation and impairment charges. The warrant liability was $11.1 million at June 28, 2015.
- The company has significant goodwill and intangible assets, including $243.7 million of goodwill and $192.4 million of other intangible assets. Further deterioration in market conditions, the stock price or projected cash flows could result in additional non-cash impairment charges.
- Going-concern capacity depends on generating sufficient cash flow, remaining in compliance with debt covenants and refinancing or amending debt as needed. An event of default could permit creditors to accelerate debt and exercise collateral remedies.
- Other risks include advertising demand, competition, newsprint and energy costs, labor and pension costs, interest rates, regulatory changes, the ability to achieve cost reductions, and a potential withdrawal liability relating to a multiemployer pension plan.
- The company was involved in routine legal proceedings and tax examinations. Management did not expect other legal matters to have a material adverse effect, but the ultimate outcomes of tax and pension matters are uncertain.
Important Facts for Investors to Verify
- Whether advertising declines stabilize and whether digital growth and subscription pricing offset continuing print weakness.
- Whether projected cash flows are sufficient to fund mandatory debt amortization, interest, pension contributions and capital expenditures.
- Compliance with debt covenants and progress toward the substantial maturities beginning in 2018 and 2019.
- The sustainability of the reported liquidity balance of $51.8 million and availability under the revolving facility.
- The effect of the subscription-related revenue and expense reclassification when comparing future periods.
- Potential impairment of goodwill and intangible assets, warrant fair-value changes, tax audit outcomes and any multiemployer pension withdrawal liability.