Lee Enterprises, Inc. — Fiscal 2015 Form 10-K Summary
Business context and reporting period
Lee Enterprises is a local news, information and advertising company operating primarily in midsize and small U.S. markets. Its portfolio included 50 daily and 38 Sunday newspapers, nearly 300 weekly and specialty publications, digital products, TownNews digital services, and 50% interests in TNI Partners and Madison Newspapers. The filing covers the 52-week fiscal year ended September 27, 2015; the fourth fiscal quarter ended the same date.
At year-end, Lee had approximately 4,500 employees, 0.9 million daily circulation units and 1.3 million Sunday circulation units. Digital revenue represented 18.0% of full-year operating revenue, up from 13.8% in 2014.
Financial performance and key metrics
| Metric | 2015 | 2014 | Change |
|---|---|---|---|
| Operating revenue | $648.5 million | $660.9 million | Down 1.9% |
| Advertising and marketing services | $412.1 million | $443.2 million | Down 7.0% |
| Subscription revenue | $194.5 million | $176.8 million | Up 10.0% |
| Digital services revenue | $12.5 million | $10.2 million | Up 23.0% |
| Total digital revenue | $116.9 million | $91.4 million | Up 27.8% |
| Operating income | $109.4 million | $113.2 million | Down 3.4% |
| Net income attributable to Lee | $23.3 million | $6.8 million | Improved |
| Diluted EPS | $0.43 | $0.13 | Improved |
| Operating cash flow | $74.5 million | $82.1 million | Down 9.3% |
| Operating cash flow margin | 22.6% | 23.5% | Down 0.9 points |
| Unlevered free cash flow | $149.3 million | $160.5 million | Down 7.0% |
| Free cash flow | $76.5 million | $51.9 million | Up 47.2% |
Fourth-quarter 2015 operating revenue was $156.1 million, compared with $163.2 million in the fourth quarter of 2014. Fourth-quarter net income was $10.1 million, compared with $3.4 million, and income attributable to Lee was $9.9 million, compared with $3.2 million.
Cash costs decreased 0.8% as reported and 3.1% excluding the subscription-related expense reclassification. Newsprint and ink costs declined 20.3%, reflecting lower prices and a 12.3% reduction in newsprint volume. Compensation expense declined 1.7%, while other operating expenses increased 2.5% as reported.
Debt, liquidity and balance sheet
- Principal debt declined $78.9 million to $725.9 million at September 27, 2015.
- Debt consisted primarily of $400.0 million of 9.5% senior secured notes, $180.9 million outstanding under the first-lien term loan, and $145.0 million under the 12.0% second-lien term loan.
- Cash was $11.1 million and available revolving-facility capacity was approximately $32.9 million, producing reported liquidity of $44.1 million.
- Net debt was 4.4 times 2015 adjusted EBITDA, compared with 4.7 times in 2014. Weighted-average debt cost was 9.4% before amortization of financing costs.
- Mandatory debt maturities were $25.0 million in each of 2016, 2017 and 2018, $105.9 million in 2019, and $545.0 million thereafter. Final maturities extended through December 2022.
- Stockholders’ deficit improved to $159.4 million from $178.3 million, but remained negative.
Material changes versus the prior comparable period
- Advertising and marketing services revenue declined 7.0%, with retail, classified and national advertising down 6.7%, 8.6% and 9.8%, respectively. Digital growth only partially offset print declines.
- Subscription revenue increased primarily from the full-access subscription model, pricing actions and premium content days, despite declining print units. Excluding a delivery-cost reclassification, subscription revenue increased 3.6%.
- Operating income declined modestly despite lower cash costs because revenue pressure continued.
- Reported net income and EPS improved substantially, partly because 2014 included $23.0 million of debt financing and administrative costs and $3.0 million of impairment charges. In 2015, no impairment charge was recorded.
- Interest expense decreased $7.3 million to $72.4 million because of lower debt balances and lower non-cash interest expense.
- Lee repaid the remaining $23.0 million of New Pulitzer Notes in June 2015. It also made $5.0 million of second-lien debt repayments related to asset sales during the fourth quarter.
- Revenue and cash costs were both increased by a $18.3 million subscription-related expense reclassification in 2015; management stated that the reclassification did not affect operating income, operating cash flow or net income.
Guidance, outlook, commentary and risks
- Management expected 2016 cash costs, excluding workforce adjustments, to decline 3.5% to 4.0% from 2015.
- Management expected 2016 capital expenditures of up to $10.0 million and anticipated meeting the next twelve months’ interest and principal obligations through operating cash flow and certain asset sales.
- Management expected to continue using substantially all free cash flow for debt reduction and anticipated significant additional debt reduction in 2016.
- Digital advertising, total digital revenue and TownNews continued to grow, but digital expansion did not fully offset declining print advertising and circulation.
- Newsprint suppliers announced potential price increases beginning in January and February 2016. A $10-per-ton increase in 30-pound newsprint was estimated to reduce annual pretax income by approximately $0.5 million.
- Approximately 24.9% of debt was floating-rate; a 100-basis-point increase in LIBOR, above applicable floors, was estimated to reduce annual pretax income by approximately $1.8 million.
- The company’s ability to continue as a going concern depends on generating sufficient cash flow, remaining within debt covenants, and repaying, refinancing or amending debt as required. Lee reported compliance with its covenants at year-end.
- Key risks include continued advertising and subscription declines, competition from digital media, technology and cybersecurity risks, newsprint and energy costs, pension funding requirements, potential multiemployer pension withdrawal liability, impairment charges, tax matters, and NYSE listing compliance.
- The company reported a future claim for multiemployer pension withdrawal liability; the amount and timing were not determinable and any liability would be funded over 20 years.
Most important facts for investors to verify
- Reconcile reported revenue and cash-cost trends for the subscription-related reclassification and evaluate comparable, adjusted results.
- Assess whether operating cash flow and asset sales are sufficient to fund mandatory debt amortization, interest, pension contributions and capital expenditures.
- Review debt covenants, excess-cash-flow payment requirements, collateral arrangements and the 2016–2019 maturity schedule.
- Monitor the pace of print advertising and circulation declines relative to digital advertising, digital subscriptions and TownNews growth.
- Evaluate the sensitivity of cash generation to newsprint price increases, interest rates and further revenue deterioration.
- Consider dilution and potential liquidity from 6.0 million warrants exercisable at $4.19 per share, as well as the warrant liability and change-of-control provisions.
- Review pension funding, multiemployer withdrawal liability, tax valuation allowances and potential impairment charges.
- Confirm subsequent developments after September 27, 2015, including additional asset-sale debt repayments and the December 2015 restricted-stock issuance.