Lee Enterprises, Inc. — Fiscal 2012 Second-Quarter Form 10-Q
Reporting period: The quarter covered the 13 weeks ended March 25, 2012; year-to-date comparisons cover 26 weeks ended March 25, 2012, versus March 27, 2011. Results are unaudited and may be affected by seasonality.
Business Context
Lee operates local print and digital news and advertising platforms, including 52 daily newspapers, approximately 300 weekly and niche publications, websites, mobile sites and applications across 52 markets in 23 states. March 2012 digital audiences included 25.9 million unique visitors and 43.9 million mobile page views.
The company emerged from Chapter 11 bankruptcy proceedings on January 30, 2012, following court approval of its prepackaged reorganization plan. The plan primarily refinanced the company’s debt and issued 6.7 million common shares to second-lien lenders.
Financial Performance
| Metric | 13 Weeks Ended March 25, 2012 | Year-over-Year Change |
|---|---|---|
| Total operating revenue | $172.3 million | Down 3.6% |
| Advertising revenue | $117.5 million | Down 5.3% |
| Operating income | $16.5 million | Up 17.2% |
| Operating cash flow | $32.1 million | Up 9.1% |
| Operating cash flow margin | 18.6% | Up from 16.5% |
| Loss attributable to Lee | $26.6 million | Prior-year loss of $1.5 million |
| Diluted loss per share | $0.54 | Prior-year loss of $0.03 |
For the 26-week period, revenue was $371.8 million, down 3.8%; operating income was $55.7 million, down 12.0%; operating cash flow was $85.6 million, up 2.5%; and operating cash flow margin was 23.0%, versus 21.6% in the prior year. Lee reported a $12.1 million attributable loss, or $0.26 per diluted share, compared with $17.5 million of income, or $0.39 per share, in the prior-year period.
Quarterly results included $36.6 million of reorganization costs. Excluding unusual matters, adjusted diluted loss per share was $0.03 versus $0.02 in the prior-year quarter. For the 26-week period, adjusted diluted earnings per share were $0.33 versus $0.30.
Revenue, Costs and Margins
- Quarterly advertising revenue declined across retail, classified, national and niche categories. Real estate classified advertising fell 12.2%, while total classified advertising declined 7.1%.
- Digital advertising increased 9.9% in the quarter and represented 13.4% of total advertising revenue; print advertising declined 7.3%.
- Circulation revenue was essentially flat in the quarter and increased 1.4% year to date, despite declines in average daily and Sunday circulation units.
- Quarterly compensation expense declined 5.2%, newsprint and ink expense declined 11.9%, and other operating expenses declined 6.0%, reflecting cost controls, lower staffing and reduced newsprint volume.
- Adjusted operating performance benefited from expense reductions, although higher interest expense and restructuring costs more than offset operating gains at the net income level.
Cash Flow, Debt and Liquidity
- Operating cash flow for the first 26 weeks was $63.2 million, compared with $57.3 million in the prior-year period.
- Cash and cash equivalents were $29.7 million at March 25, 2012, compared with $23.6 million at September 25, 2011.
- Total debt was $943.7 million, net of a $21.8 million present-value adjustment. Debt consisted primarily of a $674.5 million first-lien term loan, a $175.0 million second-lien term loan and $116.0 million of Pulitzer Notes.
- The weighted average cost of debt was 9.2%, compared with 5.0% in the prior-year period. Approximately 69.9% of principal debt carried floating interest rates.
- Liquidity totaled approximately $59.3 million, consisting of cash and approximately $29.6 million of availability under the revolving credit facility after letters of credit.
- Aggregate debt maturities were $5.0 million for the remainder of 2012, $17.4 million in 2013, $19.2 million in 2014, $19.9 million in 2015, $729.1 million in 2016 and $175.0 million in 2017.
- Management stated that it was in compliance with debt covenants at March 25, 2012 and expected continuing cash flows to fund 2012 interest and principal payments.
Material Changes and Unusual Items
- The January 2012 Chapter 11 emergence extended major debt maturities from April 2012 to December 2015 and April 2017, but materially increased interest costs.
- Reorganization, debt financing and related professional costs totaled approximately $41.9 million for the first 26 weeks, including $37.9 million of reorganization costs recognized in the statements of operations.
- The company’s accumulated deficit increased to $338.1 million, and total stockholders’ deficit was $103.0 million at March 25, 2012.
- Second-lien lenders received common stock representing approximately 13% of shares outstanding on a pro forma basis, contributing to increased share count and dilution.
- Pension benefits were frozen effective in 2012. The company expected to contribute approximately $2.7 million to pension plans during the remainder of the year.
Guidance, Outlook and Risks
- Excluding a 53rd week, management expected 2012 operating expenses, excluding depreciation, amortization and unusual items, to decline 3.5% to 4.5% from the comparable 2011 level.
- Capital expenditures were expected to total $10 million to $12 million in 2012 and to be funded from internally generated funds.
- Management expected revenue comparisons to improve as economic conditions in its markets improved, but acknowledged that advertising demand remained vulnerable to economic conditions.
- The company’s ability to remain a going concern depends on generating sufficient cash, maintaining covenant compliance and refinancing or amending debt as it becomes due. Defaults could permit lenders to accelerate debt and exercise collateral remedies.
- Key operating risks include declining print advertising and circulation, competition from other media, newsprint and energy costs, labor costs, interest-rate volatility, execution of expense reductions and additional impairment charges.
- A 100-basis-point change in LIBOR would affect annualized pretax income by approximately $6.7 million, subject to the applicable interest-rate floor. A $10-per-ton newsprint price increase was estimated to reduce annualized pretax income by approximately $0.9 million.
- A class-action lawsuit brought by newspaper carriers concerning employee classification remained unresolved. The company denied the allegations and could not predict the potential economic outcome.
- The NYSE had restored compliance with the minimum closing-price standard, but market-capitalization compliance had not yet been formally confirmed. Continued listing remained subject to reassessment.
Investor Verification Priorities
- Verify the company’s ability to generate sufficient cash to meet required debt amortization, interest payments and large 2016 and 2017 maturities.
- Review covenant cushions, including the 6.8-to-1 total leverage ratio versus the 10.0-to-1 maximum and the 2.8-to-1 interest coverage ratio versus the 1.5-to-1 minimum at March 25, 2012.
- Assess whether digital advertising growth can offset continued declines in print advertising and circulation.
- Separate recurring operating performance from Chapter 11, debt financing, tax and other unusual items when evaluating earnings.
- Monitor potential additional impairment charges, the newspaper-carrier litigation, NYSE listing status and the effects of floating-rate debt.