Lee Enterprises, Inc. 2018 Form 10-K Summary
Business context and reporting period
Lee Enterprises operates 49 local media operations across 20 states, providing newspapers, digital news and advertising, subscriptions, marketing services, commercial printing, distribution, and digital publishing services through TownNews. Fiscal 2018 ended September 30, 2018 and included 53 weeks, compared with 52 weeks in fiscal 2017. The filing was audited by KPMG LLP with unqualified opinions on the consolidated financial statements and internal controls.
Approximately 56% of revenue came from advertising and marketing services, 36% from subscriptions, and 8.3% from other revenue. Digital revenue totaled $112.8 million, or 21.7% of total revenue, and increased 6.3% year over year.
Financial performance and key metrics
| Metric | 2018 | 2017 | Change |
|---|---|---|---|
| Operating revenue | $544.0 million | $566.9 million | (4.1%) |
| Advertising and marketing services | $303.4 million | $331.4 million | (8.4%) |
| Subscription revenue | $195.1 million | $191.9 million | 1.7% |
| Other revenue | $45.4 million | $43.7 million | 4.0% |
| Operating income | $88.5 million | $92.5 million | (4.3%) |
| Net income | $47.0 million | $28.6 million | 64.5% |
| Income attributable to Lee | $45.8 million | $27.5 million | 66.5% |
| Diluted EPS | $0.82 | $0.50 | 64.0% |
| Adjusted EBITDA | $134.8 million | $144.6 million | (6.8%) |
| Cash provided by operations | $59.3 million | $72.3 million | (18.0%) |
Calculated margins were approximately 22.6% for revenue less cash costs, 16.3% for operating income, 8.4% for net income attributable to Lee, and 24.8% for adjusted EBITDA. Cash costs declined 3.1% to $420.9 million; on a same-property basis, cash costs declined 6.1%.
- Digital advertising increased 4.7% to $96.5 million; digital retail advertising increased 7.7%.
- TownNews stand-alone revenue increased 16.0% to $18.9 million, and digital services revenue grew 16.6%.
- Capital expenditures were $6.0 million, while investing activities used only $0.1 million after asset-sale proceeds.
- Cash and cash equivalents were $5.4 million at year-end, compared with $10.6 million in 2017.
- Total assets were $575.4 million and total liabilities were $611.7 million. Stockholders’ deficit was $37.4 million, and total deficit including non-controlling interests was $36.3 million.
Debt, liquidity, and cash flow
- Principal debt declined $63.5 million during 2018 to $484.9 million. Net debt was approximately 3.6 times adjusted EBITDA, compared with 3.7 times in 2017.
- Debt consisted primarily of $385.0 million of 9.5% senior secured notes due March 2022 and $93.6 million of 12.0% second-lien debt due December 2022, plus $6.3 million on the first-lien term loan at year-end.
- The remaining $6.3 million first-lien term loan was repaid in November 2018. The revolving facility, with approximately $34.2 million of availability at year-end, matured December 28, 2018; management expected to amend and extend it.
- Total liquidity, including cash and revolver availability, was approximately $39.6 million. Management expected operating cash flows and existing cash to satisfy interest and principal payments due in the following twelve months.
- Operating cash flow declined primarily because of lower operating performance and increased pension contributions. Pension liabilities, net of plan assets, were $26.7 million, and 2019 pension contributions were expected to be $0.7 million.
Material changes versus the prior comparable period
- Revenue declined primarily because of continued weakness in print advertising, particularly large retail, big-box, and classified advertising. Same-property advertising and marketing services revenue declined 11.4%.
- Subscription revenue grew on a reported basis because of pricing and premium-content initiatives, although it declined 1.7% on a same-property basis as paid print circulation fell.
- Compensation expense declined 6.4%, reflecting workforce reductions and operational outsourcing. Same-property average full-time equivalent employees declined 12.0%.
- Operating income declined despite cost reductions because revenue contraction exceeded expense savings.
- Interest expense declined $4.7 million to $52.8 million because of lower debt balances, although the weighted average cost of debt increased to approximately 10.0%.
- Net income benefited from a $24.9 million tax benefit associated with remeasuring deferred tax assets and liabilities under the Tax Cuts and Jobs Act. Excluding that benefit, adjusted income attributable to Lee was $21.1 million, or $0.38 per diluted share, versus $17.3 million, or $0.31 per share, in 2017.
- 2018 included a $6.4 million net asset loss, including an $8.2 million loss on asset sales, compared with a $1.2 million net asset gain in 2017. Non-cash impairment charges were $0.3 million.
Fourth-quarter information
For the quarter ended September 30, 2018, operating revenue was $139.7 million versus $140.2 million in the prior-year quarter. Net income was $4.4 million versus $3.5 million, and income attributable to Lee was $4.1 million versus $3.2 million. Diluted EPS was $0.07 in both quarters. The 2018 September quarter included $0.3 million of pretax non-cash impairment charges.
Outlook, management commentary, risks, and unusual items
- Management expected 2019 capital expenditures of approximately $11.0 million and intended to continue reducing debt through internally generated cash flow, asset sales, and required excess-cash-flow payments.
- Strategic priorities included expanding digital advertising and subscriptions, growing TownNews, improving local retail advertising performance, and continuing cost reductions.
- Management expected digital-only subscribers to remain a growth priority; the digital-only subscriber base grew more than 70% in 2018, although it remained small.
- Key risks include continued print advertising and circulation declines, competition from digital and other media, dependence on cash flow to service and refinance debt, covenant compliance, revolver maturity and refinancing, newsprint price volatility, labor and pension obligations, cybersecurity, impairment charges, and litigation or regulatory outcomes.
- The company had negative equity and stated that its ability to continue as a going concern depends on generating sufficient cash, maintaining covenant compliance, and repaying, refinancing, or amending debt as it matures.
- Two multiemployer pension plans were in critical status. The company had accrued $2.6 million for a withdrawal-liability claim, with the ultimate amount dependent on the plan’s funding status and other factors and expected to be funded over 20 years.
- Six million warrants remained outstanding with a $4.19 exercise price and potential proceeds of up to approximately $25.1 million if exercised, subject to stated conditions and reductions.
Most important facts for investors to verify
- Whether declining print advertising and circulation stabilize sufficiently to offset ongoing digital growth.
- The company’s ability to maintain positive free cash flow while meeting debt maturities, excess-cash-flow payments, pension obligations, and capital spending needs.
- Completion and terms of the revolving-facility amendment or extension and the effect of the November 2018 first-lien repayment.
- Whether adjusted EBITDA remains above the level needed to support the company’s leverage profile and refinancing plans.
- The treatment and cash impact of the Tax Cuts and Jobs Act benefit, warrant revaluations, asset-sale losses, restructuring costs, and other non-GAAP adjustments.
- Potential multiemployer pension withdrawal liability, future impairment charges, newsprint costs, and other contingencies not fully determinable from the filing.