Lee Enterprises, Inc. Form 10-Q Summary
Business context and reporting period
Lee Enterprises operates local newspapers, digital platforms, weekly publications and related advertising businesses across 53 markets in 23 states. The filing covers the 13 and 39 weeks ended June 26, 2011, compared with the periods ended June 27, 2010. Approximately 71% of revenue is derived from advertising.
Financial performance and key metrics
| Metric | 13 weeks ended June 26, 2011 | 13 weeks ended June 27, 2010 | 39 weeks ended June 26, 2011 | 39 weeks ended June 27, 2010 |
|---|---|---|---|---|
| Total operating revenue | $187.3 million | $196.4 million | $573.7 million | $592.0 million |
| Operating cash flow | $40.2 million | $46.3 million | $123.7 million | $132.8 million |
| Operating cash flow margin | 21.4% | 23.6% | 21.6% | 22.4% |
| Operating income (loss) | $(171.6) million | $30.1 million | $(108.3) million | $124.6 million |
| Net income (loss attributable to Lee) | $(155.5) million | $10.0 million | $(138.0) million | $40.9 million |
| Diluted earnings (loss) per share | $(3.46) | $0.22 | $(3.08) | $0.91 |
- Quarterly advertising revenue declined 5.6%; year-to-date advertising revenue declined 4.0%. Digital advertising increased 22.0% in the quarter and 28.2% year to date, partially offsetting print declines.
- Quarterly circulation revenue declined 0.4% and was flat year to date. June digital sites recorded approximately 21.6 million unique visitors and 209.9 million page views; mobile views increased 219.6% year over year.
- Quarterly operating expenses excluding depreciation, amortization and unusual items declined 3.1%; year-to-date costs declined 2.4%. Compensation expense decreased, while newsprint and ink costs increased 7.4% in the quarter and 14.7% year to date.
- Cash provided by operating activities was $83.8 million versus $79.5 million in the prior-year period. Investing activities provided $2.8 million, including a $4.7 million reduction in restricted cash. Capital expenditures were $3.6 million.
- Cash used in financing activities was $82.1 million, principally reflecting $113.3 million of debt repayments. Cash and cash equivalents increased to $23.9 million from $19.4 million at September 26, 2010.
Material changes versus the prior comparable period
- Lee recorded estimated pretax, non-cash impairment charges of $174.1 million for goodwill, $13.2 million for nonamortized intangible assets and $12.0 million for its TNI investment. Related income tax benefits totaled $37.5 million.
- The impairment analysis was not complete at quarter-end. Management determined that impairment of customer and newspaper subscriber lists was probable but could not yet estimate the amount. Final asset reductions and tax effects may change significantly in the 2011 Form 10-K.
- Quarterly adjusted diluted earnings per share, excluding unusual items, were $0.21 versus $0.26; year-to-date adjusted diluted earnings per share were $0.51 versus $0.55.
- A new bargaining-unit agreement produced a $4.0 million non-cash postretirement curtailment gain and froze certain pension benefits. Year-to-date curtailment gains totaled $16.1 million, compared with $45.0 million in the prior-year period.
- Class B Common Stock converted into Common Stock in March 2011, giving all stockholders one vote per share.
Debt, liquidity, outlook and risks
- Total debt was $1.005 billion at June 26, 2011, consisting primarily of a $589.3 million term loan, $272.4 million revolving facility balance and $142.5 million of Pulitzer Notes. All debt was classified as current because the principal facilities mature in April 2012.
- Weighted average debt cost was 5.07%. Approximately 86% of principal debt was floating rate; a 100-basis-point LIBOR change would affect annual pretax income by approximately $8.6 million, subject to LIBOR floors.
- Available revolver capacity was approximately $89.7 million. Including cash and restricted cash, reported liquidity was $118.6 million. Remaining mandatory principal payments in 2011 totaled $20.0 million.
- Lee was in compliance with its debt covenants at quarter-end. Its total leverage ratio was 5.5:1 versus a 7.0:1 limit, and its interest coverage ratio was 2.83:1 versus a 1.8:1 minimum. Covenant thresholds become more restrictive in subsequent quarters.
- A planned offering of $680.0 million of first-priority notes, $375.0 million of second-priority notes and up to 8.9 million shares was terminated in May 2011 because of market conditions. The company incurred $4.2 million of related financing-cost expense and was discussing an extension with existing lenders in July 2011.
- Management stated that refinancing or amending the debt before April 2012 is a priority and that the company’s ability to continue as a going concern depends on maintaining covenant compliance and completing that refinancing. Management expects higher financial expense from the refinancing process.
- Management expected operating expenses excluding depreciation, amortization and unusual items to decline approximately 4% to 5% in the quarter ending September 25, 2011, cash costs to decline 1% to 2% in 2012, and 2011 capital expenditures to total $6 million to $10 million.
- Key risks include declining advertising demand, economic weakness, newsprint and energy costs, interest-rate exposure, tightening debt covenants, refinancing availability, potential debt acceleration after a default, NYSE minimum-price and market-capitalization deficiencies, and the certified class-action lawsuit brought by newspaper carriers.
Important facts for investors to verify
- Final goodwill, intangible-asset, real-estate and TNI impairment amounts and related tax effects in the 2011 Form 10-K.
- Progress and final terms of the extension or refinancing of the Credit Agreement and Pulitzer Notes before April 2012.
- Quarterly compliance with leverage and interest-coverage covenants as thresholds tighten.
- Whether advertising trends, digital growth and cost reductions offset continued print and real-estate advertising declines.
- The outcome and potential exposure from the newspaper-carrier class-action litigation and the NYSE listing deficiencies.