Lee Enterprises, Inc. — Fiscal 2018 First-Quarter Form 10-Q
Business Context and Reporting Period
Lee Enterprises is a local news, information and advertising company operating primarily in the Midwest, Mountain West and West. Its operations include daily and weekly newspapers, digital platforms, TownNews.com, commercial printing, distribution and marketing services. The filing covers the unaudited 13 weeks ended December 24, 2017, compared with the 13 weeks ended December 25, 2016. Results are seasonal and are not necessarily indicative of the full fiscal year.
Key Financial Metrics
| Metric | 13 Weeks Ended Dec. 24, 2017 | Prior Comparable Period | Change |
|---|---|---|---|
| Total operating revenue | $143.8 million | $154.0 million | (6.6%) |
| Operating income | $30.5 million | $31.4 million | (2.9%) |
| Operating margin | 21.2% | 20.4% | +0.8 percentage points |
| Adjusted EBITDA | $40.4 million | $43.3 million | (6.7%) |
| Adjusted EBITDA margin | 28.1% | 28.1% | Stable |
| Income attributable to Lee | $35.0 million | $12.2 million | Significant increase |
| Diluted earnings per share | $0.63 | $0.22 | Significant increase |
| Cash provided by operating activities | $21.2 million | $22.9 million | (7.5%) |
Advertising and marketing services revenue was $84.7 million, down 9.0%; subscription revenue was $48.3 million, down 1.3%; and other revenue was $10.9 million, down 10.0%. Digital advertising increased 2.8% to $23.6 million, representing 27.9% of total advertising revenue. Total digital revenue increased 3.2% to $27.3 million, while TownNews.com revenue excluding intercompany revenue increased 12.7%.
Cash costs excluding workforce adjustments declined 6.6%. Compensation expense decreased 7.5%, newsprint and ink expense declined 15.3%, and other operating expenses declined 4.6%. Amortization expense decreased 31.9% to $4.3 million.
The reported net income increase was substantially affected by a provisional $24.9 million income tax benefit from revaluing deferred tax assets and liabilities under the Tax Cuts and Jobs Act. Excluding that tax adjustment and the warrant valuation adjustment, adjusted income attributable to Lee was $10.6 million, or $0.19 per diluted share, compared with $9.1 million, or $0.16 per diluted share, in the prior period.
Balance Sheet, Cash Flow, Debt and Liquidity
- Cash and cash equivalents were $13.8 million at December 24, 2017, compared with $10.6 million at September 24, 2017.
- Total assets were $625.2 million. Stockholders' deficit was $57.1 million, and total deficit including non-controlling interests was $56.1 million.
- Principal debt outstanding was $532.0 million, consisting primarily of $385.0 million of 9.5% senior secured notes, $33.9 million of first-lien term debt and $113.1 million of 12.0% second-lien term debt.
- Debt, net of cash, was 3.66 times trailing-twelve-month adjusted EBITDA. The weighted average cost of debt was 9.9%.
- Liquidity totaled $47.7 million, including $13.8 million of cash and approximately $33.8 million of revolver availability after letters of credit. The revolving facility expires December 28, 2018.
- Operating cash flow was $21.2 million. Investing activities used $1.1 million, including $1.1 million of capital expenditures, and financing activities used $16.9 million, primarily for debt repayment. Cash increased $3.2 million during the quarter.
- The company expects capital expenditures of up to $10.0 million in fiscal 2018 and expects required interest and principal payments during the next twelve months to be funded by operating cash flow and certain asset sales.
Material Changes Versus the Prior Comparable Period
- Revenue declined 6.6%, driven principally by continued weakness in print advertising, lower circulation and reduced commercial printing, third-party delivery and book-sale volumes.
- Cost reductions substantially offset the revenue decline, including a 12.0% same-property reduction in average full-time equivalent employees and lower newsprint usage.
- Operating income decreased modestly despite lower revenue because expense reductions and lower amortization partly offset the revenue decline.
- Interest expense declined 8.7% because of lower debt balances, although the average cost of debt increased as repayments primarily reduced lower-cost first-lien debt.
- Cash flow from operations declined despite higher reported net income, reflecting the noncash nature of the tax benefit and continued softness in advertising.
- The Dispatch-Argus acquisition and a related weekly publication acquired in 2017 affect year-over-year comparisons; management presents same-property trends to remove these effects.
Guidance, Outlook, Risks and Unusual Items
- Management expects fiscal 2018 cash costs excluding workforce adjustments and other items to decrease 6.0% to 6.5% on a same-property basis.
- The $24.9 million tax benefit is provisional. The company expects to finalize the Tax Cuts and Jobs Act transition impact by the fourth quarter of fiscal 2018, and the ultimate adjustment could differ materially.
- Pulitzer Excess Cash Flow of $5.6 million was required to repay the second-lien term loan in February 2018. The required Lee Legacy Excess Cash Flow payment for the quarter was zero.
- Debt maturities and required repayments create refinancing and liquidity risk. Aggregate minimum required maturities were $24.4 million for the remainder of 2018, $15.1 million in 2019, $385.0 million in 2022 and $107.4 million thereafter, excluding certain future excess-cash-flow payments.
- The company was in compliance with its debt covenants at December 24, 2017, but its ability to continue as a going concern depends on covenant compliance, cash generation and the ability to repay, refinance or amend debt as it becomes due.
- Newsprint prices increased, and potential antidumping and countervailing duties on Canadian newsprint could further increase costs. A $10-per-ton newsprint price increase would reduce annualized pretax income by approximately $0.4 million based on anticipated 2018 consumption, excluding TNI and MNI.
- Additional risks include declining print advertising and subscription demand, technology and competitive pressures, interest rates, labor costs, pension funding, asset impairments, legal and tax contingencies, and the ability to maintain NYSE listing status.
- The company has recorded nearly $1.3 billion of goodwill impairments since 2007 and may incur additional noncash impairment charges if market conditions or projected cash flows deteriorate.
Important Facts for Investors to Verify
- Whether advertising and subscription declines stabilize and whether digital growth can offset continued print weakness.
- The final amount of the Tax Cuts and Jobs Act deferred-tax remeasurement and its effect on future tax expense and cash taxes.
- Progress on required debt repayments, the February 2018 second-lien repayment and the December 2018 revolver maturity.
- Actual operating cash flow, asset-sale proceeds and covenant compliance relative to debt-service requirements.
- Potential newsprint duties and price increases, pension contributions and the $2.6 million estimated multiemployer pension withdrawal liability payable over twenty years.
- Any further goodwill or intangible-asset impairments and the effect of warrant remeasurement on reported earnings.