Lee Enterprises, Inc. — Fiscal 2012 First Quarter Summary
Reporting period: Unaudited 13 weeks ended December 25, 2011, compared with the 13 weeks ended December 26, 2010. The company operates local print and digital news, information and advertising platforms across 52 markets in 23 states.
Financial performance
| Metric | Q1 2012 | Q1 2011 | Change |
|---|---|---|---|
| Total operating revenue | $199.6 million | $207.7 million | -3.9% |
| Advertising revenue | $142.5 million | $151.8 million | -6.1% |
| Circulation revenue | $46.7 million | $45.5 million | +2.7% |
| Operating cash flow | $53.5 million | $54.1 million | -1.1% |
| Operating cash flow margin | 26.8% | 26.1% | +0.7 points |
| Operating income | $39.2 million | $49.2 million | -20.3% |
| Net income | $14.6 million | $19.0 million | -23.0% |
| Income attributable to Lee | $14.6 million | $18.9 million | -23.2% |
| Diluted earnings per share | $0.32 | $0.42 | -23.8% |
Advertising weakness was concentrated in retail and classified categories. Retail declined 5.4%; classified declined 9.7%, including real estate down 17.9% and other classified down 15.1%. Stand-alone digital advertising increased 10.4% and represented 11.4% of total advertising revenue. Digital unique visitors rose 10.4% year over year and mobile views increased 179.2% in December 2011.
Cost reductions partly offset lower revenue. Compensation expense declined 5.7%, newsprint and ink expense declined 5.2%, and other operating expenses declined 4.1%. Reported operating income was affected by the absence of a $10.2 million postretirement curtailment gain recognized in the prior-year quarter. Excluding unusual matters, adjusted diluted EPS was $0.38 versus $0.32 in the prior-year quarter.
Cash flow, liquidity and debt
- Cash provided by operating activities was $23.7 million, essentially unchanged from the prior-year quarter.
- Investing activities provided $5.0 million, including a $5.0 million reduction in restricted cash; capital expenditures were $1.9 million.
- Financing activities used $20.8 million, including $31.8 million of debt repayments and $10.1 million of debt financing and reorganization costs paid.
- Cash and cash equivalents increased to $31.4 million from $23.6 million at September 25, 2011.
- Debt totaled approximately $983.8 million at December 25, 2011, consisting principally of the Credit Agreement and Pulitzer Notes. The debt was classified as liabilities subject to compromise following the Chapter 11 filing.
- Current assets were $155.2 million and total liabilities were $1.25 billion, resulting in a total deficit of $85.9 million.
- The weighted average cost of debt was 5.0%; approximately 87% of principal debt was subject to floating interest rates. A 100-basis-point change in LIBOR was estimated to affect annual pretax income by approximately $8.6 million, subject to applicable rate floors.
Material changes and restructuring
On December 12, 2011, Lee and certain affiliates filed voluntary prepackaged Chapter 11 petitions to implement debt amendments and maturity extensions. Operations continued normally, suppliers were paid, employees were not materially affected, and the company’s interests in TNI Partners and Madison Newspapers, Inc. were excluded from the filing.
The Bankruptcy Court confirmed the plan on January 23, 2012, and the company emerged on January 30, 2012. The refinancing extended principal maturities generally to December 2015, with second-lien debt maturing in April 2017. The refinancing is expected to increase the weighted average cost of debt to approximately 9.2%. The second-lien lenders received 6,743,640 common shares, approximately 13% of outstanding shares on a pro forma basis. The common stock par value was reduced to $0.01 per share upon emergence.
Guidance, outlook and risks
- Management expected comparable operating expenses, excluding depreciation, amortization and unusual items, to decline approximately 1.5% to 2.5% in fiscal 2012, excluding the 53rd week.
- Capital expenditures were expected to total approximately $10 million to $12 million in fiscal 2012 and be funded from internally generated cash.
- Management expected year-over-year revenue comparisons to improve as economic conditions in its markets improved, but results remained sensitive to advertising demand and broader economic conditions.
- The company’s ability to continue as a going concern depends on generating sufficient cash flow, complying with debt covenants and avoiding events of default. Substantially all assets secure the refinanced debt, and future cash flows are directed primarily toward debt reduction.
- Debt refinancing materially increases interest expense and includes cash-flow sweeps, mandatory repayments, capital expenditure limits, restrictions on dividends and substantially all share repurchases.
- Other significant risks include newsprint, energy and labor costs, interest-rate exposure, potential impairment of goodwill and intangible assets, NYSE listing compliance, tax matters and an uninsured class-action lawsuit brought by newspaper carriers.
Important facts for investors to verify
- Post-quarter emergence accounting, including the final debt balances, equity issuance, fresh-start or reorganization adjustments and post-emergence capital structure.
- Compliance with the refinanced debt covenants and the company’s ability to meet mandatory amortization and cash-flow sweep requirements.
- Whether advertising revenue stabilizes, particularly retail, classified and real estate advertising.
- The sustainability of cost reductions and the effect of the approximately 9.2% post-refinancing weighted average debt cost on cash flow.
- Potential additional impairment charges, NYSE listing status and the outcome or potential exposure from the newspaper-carrier litigation.