Lee Enterprises, Inc. — Q3 FY2013 Form 10-Q Summary
Business context and reporting period
Lee Enterprises operates local newspapers, digital platforms, weekly publications, and related advertising and marketing businesses across primarily Midwest, Mountain West, and Western U.S. markets. The filing covers the unaudited 13 weeks and 39 weeks ended June 30, 2013, compared with the 13 weeks and 39 weeks ended June 24, 2012. Fiscal years end on the last Sunday in September. The company emerged from Chapter 11 in January 2012 and continues to operate with substantial leverage.
Key financial metrics
| Metric | Q3 FY2013 | Q3 FY2012 | 39 Weeks FY2013 | 39 Weeks FY2012 |
|---|---|---|---|---|
| Total operating revenue | $167.0 million | $171.7 million | $512.3 million | $527.5 million |
| Operating income | $26.9 million | $23.2 million | $85.1 million | $79.1 million |
| Operating income margin | 16.1% | 13.5% | 16.6% | 15.0% |
| Operating cash flow | $39.8 million | $37.7 million | $123.2 million | $122.8 million |
| Operating cash flow margin | 23.8% | 21.9% | 24.1% | 23.3% |
| Income attributable to Lee | $1.8 million | $(1.5) million | $10.4 million | $(13.5) million |
| Diluted EPS | $0.03 | $(0.03) | $0.20 | $(0.28) |
Advertising and marketing services revenue declined 5.7% in the quarter and 5.6% year to date. Subscription revenue increased 3.5% in the quarter and 3.6% year to date. Total digital revenue, including advertising, subscription, and other digital activities, increased 4.9% in the quarter to $19.9 million and 5.9% year to date to $57.2 million.
Quarterly compensation expense decreased 8.3%, newsprint and ink costs decreased 15.3%, and workforce adjustment costs decreased 60.7%. Other operating expenses increased 4.2%. Average full-time equivalent employees declined 8.4%.
Cash provided by operating activities of continuing operations was $56.1 million year to date, compared with $71.9 million in the prior-year period. Capital expenditures were $6.8 million, while proceeds from asset sales were $7.6 million. Financing activities used $73.1 million, primarily for debt repayment. Cash and cash equivalents declined from $13.9 million at September 30, 2012 to $11.6 million at June 30, 2013.
Debt and liquidity
Principal debt outstanding was $873.5 million at June 30, 2013; reported debt, net of the present-value adjustment, was $859.4 million. Total long-term debt on the balance sheet was $847.4 million. The debt consisted principally of a $618.5 million first-lien term loan at 7.5%, a $175.0 million second-lien term loan at 15.0%, and $80.0 million of New Pulitzer Notes at 9.0% fixed interest. Weighted average cost of debt was 9.1%.
Approximately $29.9 million remained available under the revolving credit facility after letters of credit. Including cash, reported liquidity was approximately $41.6 million. Aggregate scheduled maturities were $3.0 million for the remainder of 2013, $19.2 million in 2014, $19.9 million in 2015, $595.7 million in 2016, and $235.8 million in 2017.
Management stated that expected continuing cash flows should satisfy interest and principal payments due over the next 12 months. The company was in compliance with its debt covenants at June 30, 2013. The first-lien total leverage ratio was 6.26:1 versus a 10.0:1 maximum covenant, and the interest expense coverage ratio was 1.66:1 versus a 1.08:1 minimum.
Material changes and unusual items
- The remaining Pulitzer Notes were refinanced in May 2013 with $94.0 million of New Pulitzer Notes; the balance was $80.0 million at June 30 after repayments.
- The company sold The Garden Island newspaper and digital operations in March 2013 for $2.0 million in cash plus a working-capital adjustment, recognizing a $2.17 million after-tax loss in discontinued operations.
- Year-to-date results benefited from the absence of $37.6 million of reorganization costs recorded in the prior-year period.
- The company recorded a $7.1 million gain in December 2012 from a distribution related to the partial sale of assets in a private-equity investment.
- Interest expense decreased 10.1% in the quarter because of lower debt balances and the Pulitzer refinancing, but increased 18.9% year to date because the higher interest rates associated with the 2012 refinancing cycled into the current-year comparison.
- Adjusted diluted EPS, excluding unusual matters, was $0.06 in the quarter versus $0.03 in the prior-year quarter, but $0.22 year to date versus $0.35 in the prior-year period.
Outlook, risks, and contingencies
Management expected fiscal 2013 operating expenses, excluding depreciation, amortization, and unusual matters, to decrease 4.5% to 5.5% from fiscal 2012. Capital expenditures were expected to total approximately $9 million to $10 million for fiscal 2013. Management also expected interest expense to decline in the following quarter absent a significant increase in LIBOR.
The principal financial risk is the company’s ability to generate sufficient cash flow, remain compliant with debt covenants, and refinance or amend debt as it matures. A default could permit lenders to accelerate outstanding debt and exercise collateral remedies. Approximately 70.8% of principal debt carried floating interest rates; a 100-basis-point LIBOR increase would reduce annualized pretax income by approximately $6.2 million, subject to the applicable LIBOR floor.
Other risks include continued weakness in advertising demand, circulation declines, economic conditions, newsprint and energy costs, labor costs, competition, and potential impairment of goodwill and intangible assets. The company carried a total deficit of $102.6 million at June 30, 2013. It also disclosed an uninsured class-action lawsuit by newspaper carriers; the potential economic outcome could not be predicted.
The company’s first-lien covenants suspend dividends and share repurchases through December 2015 and restrict additional debt, acquisitions, dispositions, investments, and capital expenditures. The company returned to full compliance with NYSE continued-listing standards in January 2013.
Important facts for investors to verify
- Whether advertising declines stabilize, particularly in classified and national advertising, and whether digital growth offsets continued print deterioration.
- Actual cash generation versus scheduled debt amortization and the company’s ability to address the major 2016 and 2017 maturities.
- Continued compliance with leverage and interest-coverage covenants, including the impact of floating-rate debt and LIBOR changes.
- Progress toward the stated expense-reduction targets and the effect of workforce reductions and outsourcing on operating performance.
- Potential impairment charges for goodwill and other intangible assets, which had substantial accumulated impairment losses and significant remaining carrying values.
- The resolution and potential exposure from the newspaper-carrier class-action litigation and the final amount of the Herald Value redemption liability.
- The filing’s results are unaudited and affected by seasonality; quarterly results are not necessarily indicative of full-year performance.