Lee Enterprises, Inc. — Form 10-Q Summary
Business context and reporting period
Lee Enterprises is a local news, publishing, advertising, subscription and digital-services company operating primarily in the Midwest, Mountain West and West. It operates 46 daily newspapers, 34 Sunday newspapers, nearly 300 weekly and niche publications, and TownNews.com, which provides digital infrastructure to approximately 1,600 media operations.
This filing covers the 13 and 39 weeks ended June 24, 2018, compared with the respective periods ended June 25, 2017. The financial statements are unaudited. The company entered into a five-year agreement on June 26, 2018 to manage Berkshire Hathaway’s newspaper and digital operations in 30 markets beginning July 2, 2018. The agreement provides a fixed annual fee of $5 million plus a variable performance-based fee.
Financial performance and key metrics
| Metric | 13 weeks ended June 24, 2018 | 13 weeks ended June 25, 2017 | Change |
|---|---|---|---|
| Total operating revenue | $132.6 million | $139.4 million | (4.8%) |
| Operating income | $20.9 million | $20.6 million | 1.5% |
| Operating margin | 15.7% | 14.8% | Improved |
| Net income | $4.8 million | $6.3 million | (24.4%) |
| Income attributable to Lee | $4.5 million | $6.0 million | (25.6%) |
| Diluted EPS | $0.08 | $0.11 | Down from prior period |
| Adjusted EBITDA | $31.8 million | $35.8 million | (11.3%) |
| Metric | 39 weeks ended June 24, 2018 | 39 weeks ended June 25, 2017 | Change |
|---|---|---|---|
| Total operating revenue | $404.2 million | $426.7 million | (5.3%) |
| Operating income | $68.7 million | $70.8 million | (3.0%) |
| Operating margin | 17.0% | 16.6% | Improved |
| Net income | $42.6 million | $25.1 million | 69.7% |
| Income attributable to Lee | $41.7 million | $24.3 million | 71.6% |
| Diluted EPS | $0.75 | $0.44 | 70.5% |
| Adjusted EBITDA | $98.9 million | $107.9 million | (8.3%) |
Revenue pressure primarily reflected lower advertising and marketing services revenue, which declined 9.5% in the quarter and 8.8% year to date. Subscription revenue increased 1.6% in the quarter and 0.8% year to date, while other revenue increased 2.0% in the quarter but declined 4.6% year to date.
Digital advertising increased 4.7% to $24.8 million in the quarter and 3.4% to $71.2 million year to date. Total digital revenue, including TownNews.com, increased 5.5% in the quarter and 4.1% year to date. TownNews.com revenue excluding intercompany revenue increased 13.7% in the quarter and 14.4% year to date.
Cash provided by operating activities was $57.0 million year to date, compared with $59.4 million in the prior-year period. Capital expenditures were $4.3 million, and the company expects full-year 2018 capital expenditures of up to $8.0 million. Cash used in financing activities was $49.5 million, primarily for debt repayment. Cash increased $5.4 million to $16.0 million at June 24, 2018.
Debt, liquidity and balance sheet
- Principal debt outstanding was $499.8 million at June 24, 2018, compared with $548.4 million at September 24, 2017.
- Debt consisted primarily of $385.0 million of 9.5% senior secured notes, $14.4 million of first-lien term debt and $100.4 million of 12.0% second-lien term debt.
- Total debt, net of unamortized issuance costs, was $463.5 million. The weighted average cost of debt was 10.0%.
- Cash was $16.0 million and revolver availability was approximately $33.8 million, resulting in reported liquidity of $49.9 million.
- Net debt was 3.57 times trailing-twelve-month adjusted EBITDA. The company reported compliance with its debt covenants.
- The revolving facility expires December 28, 2018, and the company was discussing an extension or replacement with investment advisers.
- Debt maturities range from December 2018 through December 2022, including $385.0 million of senior secured notes due in 2022.
Material changes versus the prior comparable period
- Advertising declines continued, particularly in print retail, large-format retail and classified advertising. Same-property advertising revenue declined 11.2% in the quarter and 11.0% year to date.
- Cost reductions partially offset revenue declines. Quarterly compensation expense decreased 8.5% on a same-property basis, while year-to-date compensation expense decreased 9.2% on that basis.
- Cash costs excluding restructuring declined 2.6% in the quarter and 4.3% year to date; restructuring costs also declined to $1.9 million from $3.9 million in the quarter and to $4.2 million from $6.4 million year to date.
- Interest expense declined 9.9% in the quarter and 9.3% year to date due to lower debt balances, although the cost of debt increased as repayments were concentrated in the lower-cost first-lien term loan.
- Year-to-date net income benefited from a provisional $24.9 million tax benefit related to remeasurement of deferred tax assets and liabilities under the 2017 Tax Cuts and Jobs Act.
- Year-to-date other non-operating income was materially lower, primarily because warrant valuation income declined to $0.5 million from $10.4 million.
Guidance, outlook, risks and unusual items
- Management expects 2018 cash costs excluding restructuring and other items to decline 6.0% to 6.5% on a same-property basis.
- Management expects operating cash flows and certain asset sales to fund scheduled interest and principal payments and maintain adequate liquidity.
- The provisional tax benefit may change, with finalization expected in the fourth quarter of fiscal 2018.
- The company’s ability to continue as a going concern depends on generating cash, maintaining covenant compliance, and repaying, refinancing or amending debt as it becomes due.
- Newsprint prices increased due to tight supply and preliminary duties and tariffs on Canadian imports. A $10-per-ton price increase for 30-pound newsprint would reduce annualized pretax income by approximately $365,000.
- A 100-basis-point increase in LIBOR would reduce annualized pretax income by approximately $144,000 based on floating-rate debt outstanding at period end.
- The company has significant goodwill and intangible assets and has recorded nearly $1.3 billion of impairment charges since 2007. Further impairment charges remain possible if market conditions or projected cash flows deteriorate.
- Other risks include advertising and subscription demand, technology and digital competition, labor costs, energy and commodity prices, debt refinancing, covenant compliance, interest rates, legal and regulatory matters, and the company’s NYSE listing status.
- The company contributed $0.8 million to pension plans during the quarter and expected to contribute an additional $4.2 million during the remainder of fiscal 2018.
- Legal proceedings arise in the ordinary course of business; management does not expect them to have a material adverse effect on the consolidated financial statements.
Investor verification checklist
- Verify progress toward extending or replacing the revolving facility before its December 28, 2018 expiration.
- Assess the company’s ability to refinance or repay the $385.0 million senior secured notes due in 2022.
- Separate recurring earnings and cash flow from the $24.9 million provisional tax benefit and warrant valuation adjustments.
- Monitor whether digital revenue growth can offset continuing declines in print advertising and circulation.
- Track compliance with debt covenants, leverage, required excess-cash-flow payments and available liquidity.
- Evaluate exposure to newsprint price increases, tariffs, labor costs and further restructuring requirements.
- Assess the financial contribution and execution risks associated with the new Berkshire Hathaway management agreement.