Business Context and Reporting Period
Lee Enterprises, Inc. operates local newspapers, digital platforms, weekly publications and related advertising businesses, primarily in small and midsize U.S. markets. This Form 10-Q covers the unaudited 13 weeks ended December 30, 2012, compared with the 13 weeks ended December 25, 2011. The company emerged from Chapter 11 on January 30, 2012 after completing a comprehensive debt refinancing.
At quarter-end, Lee reported 51 daily newspapers, 39 Sunday newspapers, nearly 300 weekly and niche publications, and digital platforms that generated 21.5 million unique visitors and 187.3 million page views in December 2012.
Key Financial Metrics
| Metric | Q1 2013 | Q1 2012 | Change |
|---|---|---|---|
| Operating revenue | $185.5 million | $192.0 million | Down 3.4% |
| Operating income | $39.3 million | $38.8 million | Up 1.2% |
| Operating income margin | 21.2% | 20.2% | Up 1.0 percentage point |
| Operating cash flow, non-GAAP | $51.5 million | $53.0 million | Down 2.8% |
| Operating cash flow margin, non-GAAP | 27.8% | 27.6% | Up 0.2 percentage point |
| Income from continuing operations | $13.5 million | $14.4 million | Down 6.2% |
| Income attributable to Lee | $14.6 million | $14.6 million | Approximately flat |
| Diluted earnings per share | $0.28 | $0.32 | Down 12.5% |
| Cash flow from continuing operations | $18.7 million | $24.6 million | Down $5.9 million |
Advertising revenue declined 6.3% to $128.7 million. Circulation revenue increased 3.9% to $46.2 million, while commercial printing and other revenue also increased modestly. Compensation expense declined 4.9%, newsprint and ink expense declined 13.1%, and total operating expenses declined 4.4% including depreciation and amortization.
Net income included $1.2 million of after-tax income from discontinued operations. The company also recognized a $7.1 million gain from a distribution related to the partial sale of assets in a private equity investment. Excluding unusual matters, adjusted diluted EPS was $0.20 versus $0.37 in the prior-year quarter.
Debt, Liquidity and Financial Position
- Debt carrying value was $898.6 million at December 30, 2012, including a $641.9 million first-lien term loan, $175.0 million second-lien term loan and $100.0 million of Pulitzer Notes, net of a $18.3 million present-value adjustment.
- Approximately $29.9 million was available under the revolving credit facility after letters of credit. Cash was $20.3 million, producing reported liquidity of approximately $50.2 million.
- The weighted-average cost of debt was 9.3%; approximately 70% of principal debt carried floating interest rates. The second-lien debt bears interest at 15%.
- Lee repaid $29.0 million of long-term debt during the quarter. Principal debt outstanding was $903.5 million as of February 8, 2013.
- Aggregate debt maturities were reported at $11.1 million for the remainder of 2013, $19.2 million in 2014, $19.9 million in 2015, $691.7 million in 2016 and $175.0 million in 2017.
- The company stated that it was in compliance with its debt covenants at December 30, 2012. Its first-lien total leverage ratio was 6.6:1 versus a 10.0:1 maximum covenant, and its interest coverage ratio was 1.67:1 versus a 1.1:1 minimum.
Stockholders’ deficit improved to $99.8 million from $114.6 million at September 30, 2012, primarily reflecting quarterly earnings, but total equity remained negative.
Material Changes Versus the Prior Comparable Period
- Total revenue decreased $6.6 million, driven primarily by declines in retail, classified and national advertising. Digital advertising increased but did not offset print declines.
- Daily circulation declined 4.5% and Sunday circulation declined 10.1%, while circulation revenue increased because of pricing and digital subscriber growth.
- Cost reductions exceeded the revenue decline, improving operating income and margins. Average full-time equivalent employees declined 8.7%.
- Financial expense increased 59.1% to $23.5 million because of the higher interest rates associated with the post-bankruptcy refinancing, partially offset by lower debt balances.
- Operating cash flow from continuing operations declined to $18.7 million, reflecting higher financial expense and changes in working capital and taxes.
- The prior-year quarter included $1.2 million of reorganization costs; the current quarter did not.
- Lee sold the North County Times in October 2012 for $12.0 million in cash, recognizing $1.2 million of after-tax gain and classifying its results as discontinued operations.
- The company’s common stock returned to full compliance with NYSE continued-listing standards in January 2013.
Guidance, Outlook, Risks and Unusual Items
- Management expected 2013 operating expenses, excluding depreciation, amortization and unusual matters, to decrease 3.5% to 4.5% from 2012 levels.
- Capital expenditures were expected to total approximately $12.0 million in 2013 and to be funded by internally generated cash or revolving-credit availability.
- Management expected interest and principal payments due over the next twelve months to be satisfied through continuing cash flows, but stated that the company’s going-concern status depends on covenant compliance and refinancing or amending debt as maturities approach.
- Most debt matures in December 2015, with additional debt maturing in April 2017. Debt agreements contain cross-default provisions, restrictions on additional debt, investments and capital expenditures, and require cash flows to be directed substantially toward debt reduction or cash collateral.
- Lee agreed in January 2013 to sell The Garden Island newspaper and digital operations for $2.0 million before taxes. The transaction was expected to close in the quarter ending March 31, 2013, with an estimated after-tax loss of approximately $2.5 million.
- A 100-basis-point change in LIBOR would affect annualized pretax income by approximately $6.4 million, subject to applicable rate floors.
- A $10-per-ton increase in 30-pound newsprint prices would reduce annualized pretax income by approximately $0.8 million based on anticipated 2013 consumption.
- Risks include declining advertising demand, economic weakness, newsprint and energy costs, interest rates, labor costs, execution of expense reductions, impairment of goodwill and intangible assets, litigation and the ability to refinance or remain compliant with debt covenants.
- A class action by newspaper carriers alleging employee status remained pending. Management disputed the claims and stated that the potential economic outcome could not be predicted.
Most Important Facts for Investors to Verify
- Whether advertising trends, particularly classified and national advertising, stabilize and whether digital growth can offset continuing print declines.
- Whether operating cash flow remains sufficient to fund interest, scheduled debt amortization, capital expenditures and required prepayments.
- The company’s ability to refinance or otherwise address the substantial 2015-2017 debt maturities.
- Compliance with first-lien leverage and interest-coverage covenants as operating performance changes.
- The actual closing terms and loss associated with the planned sale of The Garden Island.
- Potential impairment charges for goodwill and intangible assets, which totaled substantial carrying values at quarter-end and depend on future cash-flow and valuation assumptions.
- The outcome and potential exposure from the newspaper-carrier litigation and tax examinations.