Dex Media, Inc. — Form 10-Q Summary
Reporting period: Three months ended March 31, 2015. The filing is by Dex Media, Inc.; the supplied filing does not identify Thryv Holdings, Inc. as the registrant. Amounts below are in millions except per-share data.
Business context and results
Dex Media provided local marketing services to more than 475,000 U.S. business clients, including print directories, online and mobile search, and digital marketing services. Management said revenue had been declining for years as advertisers shifted spending amid competition from other media, and expected the trend to continue.
| Metric | Q1 2015 | Q1 2014 | Change |
|---|---|---|---|
| Revenue | $406 | $456 | Down $50, or 11.0% |
| Operating expenses | $380 | $449 | Down $69, or 15.4% |
| Operating income | $26 | $7 | Up $19 |
| Operating margin | 6.4% | 1.5% | Improved |
| Interest expense, net | $85 | $90 | Down $5 |
| Net loss | $(59) | $(82) | Loss narrowed $23 |
| Loss per share, basic and diluted | $(3.39) | $(4.74) | Improved |
| Cash from operations | $46 | $100 | Down $54 |
Lower revenue primarily reflected reduced advertiser spending. Lower operating costs included a $54 reduction in intangible amortization, lower selling costs, and reduced printing and distribution costs. Cost of service also faced higher digital fulfillment costs. General and administrative expense rose to $37 from $23, reflecting $9 of transformation costs and the absence of substantial one-time expense credits recorded in 2014; the 2014 period also included $18 of merger integration costs.
The comparison is affected by acquisition accounting: Q1 2014 excluded approximately $30 of SuperMedia revenue and $14 of net income that would otherwise have been recognized. The company said the exclusion did not affect cash flows. Accordingly, reported year-over-year results are not fully comparable.
Cash, debt and liquidity
- Cash was $171 at March 31, unchanged from December 31, 2014. Operating cash flow was $46; capital spending was $3; financing cash outflow was $43. Operating cash flow fell mainly because of lower client collections and $28 of cash payments for business transformation costs.
- Total debt carrying value was $2,382, including $132 of current maturities and $2,250 of long-term debt. Cash less carrying-value debt was approximately $2,211. Debt maturities are concentrated in 2016 and 2017; stated facility rates ranged from 6.0% to 11.6%, while subordinated notes carried 14% PIK interest.
- The company repaid $38 of secured debt in Q1 and issued $9 of additional subordinated notes as PIK interest. After quarter-end, on April 8, DMW retired $8 of debt using $7 of cash.
- Current assets were $475 and current liabilities $360. Shareholders’ deficit was $1,177. Management said cash and operating cash flow were expected to cover working capital, debt service and other needs for the remainder of 2015.
- Management reported compliance with financial covenants at quarter-end and expected to comply in 2015. However, it said operating cash flow would not be sufficient to repay debt at maturity and that restructuring, amendment, refinancing or additional debt or equity financing would be needed in advance of maturities.
Outlook, risks and unusual items
- The business transformation program includes virtual sales offices, automation, systems consolidation and workforce reductions. Expected total charges were $70–$100; $52 had been incurred since inception, including $9 in Q1. Management expects no merger integration costs in 2015.
- The company amended the DMW credit facility to exclude specified one-time transformation cash costs from covenant EBITDA and paid a $5 amendment fee.
- Management identified refinancing and capital-market access, continued revenue declines, client cancellations and collections, competition and print-directory decline as risks. Floating-rate borrowings expose the company to interest-rate changes; management estimated a 12.5-basis-point rate movement would change quarterly interest expense by about $1.
- Disclosure controls and procedures were deemed ineffective because of a previously reported material weakness in general computing controls for systems used in accounts receivable and revenue recognition, including access, change-management and review controls. Remediation began in April 2015 and had not yet been tested over a sufficient period.
- The filing described ongoing litigation, including ERISA-related matters and a claim concerning SuperMedia’s formation and historical notes. The company said it did not expect resolution of pending legal matters to have a material adverse effect, while noting that some potential losses could not be reasonably estimated.
Important facts for investors to verify
- Progress and terms of refinancing or restructuring before the 2016 secured-debt and 2017 subordinated-note maturities.
- Revenue trends, advertiser retention and digital revenue performance, alongside the continuing decline in print advertising.
- Cash conversion and the impact of transformation costs, debt-service obligations and PIK interest on liquidity and leverage.
- Whether the material weakness in revenue and receivables controls is remediated and independently tested effectively.
- Actual transformation-program costs versus the $70–$100 expected range and realization of anticipated operating benefits.
- How acquisition-accounting exclusions affect comparisons with 2014; reported Q1 2014 results omitted approximately $30 of revenue and $14 of net income.