Lee Enterprises, Inc. 2017 Form 10-K Summary
Business context and reporting period
Lee Enterprises operates local print and digital news, advertising, subscription, commercial printing and digital-services businesses across approximately 50 markets in 22 states. Its portfolio includes 47 daily newspapers, 34 Sunday newspapers, nearly 300 weekly and niche publications, and TownNews.com, an 82.5%-owned digital publishing-services business.
The filing covers the 52-week fiscal year ended September 24, 2017. The September 2017 quarter is also presented in the quarterly data. Lee operates as a single reportable segment.
Financial performance and position
| Metric | 2017 | 2016 | Change |
|---|---|---|---|
| Operating revenue | $566.9 million | $614.4 million | (7.7%) |
| Advertising and marketing services revenue | $331.4 million | $373.5 million | (11.3%) |
| Subscription revenue | $191.9 million | $194.0 million | (1.1%) |
| Operating income | $92.5 million | $104.0 million | (11.0%) |
| Net income | $28.6 million | $36.0 million | (20.6%) |
| Net income attributable to Lee | $27.5 million | $35.0 million | (21.4%) |
| Diluted EPS | $0.50 | $0.64 | (21.9%) |
| Adjusted EBITDA | $144.6 million | $153.8 million | (6.0%) |
| Cash provided by operating activities | $72.3 million | $79.2 million | (8.7%) |
Operating margin was approximately 16.3%, compared with 16.9% in 2016; adjusted EBITDA margin was approximately 25.5%, compared with 25.0%. Digital advertising increased 8.0% to $91.9 million, representing 28.0% of advertising and marketing-services revenue. Total digital revenue, including TownNews.com, increased 6.7% to $106.0 million, or 18.7% of total revenue.
Cash and cash equivalents were $10.6 million at year-end. Total principal debt was $548.4 million, down $68.8 million from 2016, and debt net of cash was 3.7 times adjusted EBITDA versus 3.9 times in 2016. Liquidity, including cash and available revolving capacity, was $44.4 million, including approximately $33.8 million available under the revolving facility.
Stockholders’ deficit was $92.2 million and total deficit, including noncontrolling interests, was $91.2 million. Pension obligations, net of plan assets, were $43.5 million.
Material changes versus the prior comparable period
- Print advertising remained the primary source of revenue pressure. Same-property retail advertising declined 10.0%, classified advertising declined 12.2%, national advertising declined 8.6%, and print advertising and print marketing-services revenue declined 16.2%.
- Digital growth partially offset print declines: digital retail advertising increased 9.4%, digital classified advertising increased 5.8%, digital national advertising increased 6.0%, and monthly page views increased 5.7%.
- Subscription revenue was broadly stable as selective price increases largely offset lower paid volume. Commercial printing revenue declined 20.0%.
- Cash costs excluding workforce adjustments declined 7.7%, driven by lower compensation, newsprint volume, delivery and postage costs. Average full-time-equivalent employees declined 8.5%.
- Interest expense declined $6.7 million to $57.6 million as debt balances fell, although the weighted-average cost of debt increased to 9.9% from 9.7% because repayments primarily reduced lower-cost first-lien debt.
- Lee acquired the Dispatch-Argus for approximately $7.2 million in June 2017, funded with cash, and reduced principal debt through mandatory, voluntary, excess-cash-flow and asset-sale payments.
Outlook, commentary, risks and unusual items
Management expects continued debt reduction, modest capital expenditures and ongoing cost efficiencies. Planned 2018 capital expenditures were expected to be up to $10.0 million, and pension contributions were expected to be approximately $4.9 million. Management stated that cash flows and certain asset sales were expected to fund interest and principal payments due during the next twelve months and maintain adequate liquidity.
The company’s ability to operate as a going concern depends on generating sufficient cash flow, maintaining debt-covenant compliance, and repaying, refinancing or amending debt as it becomes due. The company was in compliance with its debt covenants at September 24, 2017. Mandatory debt maturities included $30.2 million in 2018, $20.1 million in 2019 and $385.0 million in 2022, excluding required excess-cash-flow and asset-sale payments.
- 2017 included a $10.2 million non-operating gain from remeasurement of warrant liabilities. The warrants comprise 6.0 million potential shares with a $4.19 exercise price.
- 2016 benefited from a $30.6 million insurance-settlement gain; there was no comparable gain in 2017.
- Lee recorded $2.5 million of non-cash impairment charges in 2017 and accrued $2.6 million for a multiemployer pension-plan withdrawal liability.
- A $3.7 million non-cash curtailment gain resulted from terminating an unfunded postemployment medical plan.
- Newsprint supply constraints, announced price increases and a pending anti-dumping and countervailing-duty proceeding could increase costs in 2018. A $10-per-ton newsprint price increase was estimated to reduce annualized pretax income by approximately $0.4 million.
- Principal risks include continued print-revenue declines, migration of audiences and advertisers to digital platforms, competition, economic weakness, technology and cybersecurity risks, newsprint and labor costs, pension obligations, covenant compliance, refinancing needs and possible additional impairment charges.
Most important facts for investors to verify
- Whether digital revenue growth can offset the continuing decline in print advertising and circulation.
- Whether operating cash flow remains sufficient to meet mandatory debt amortization, excess-cash-flow payments, interest and pension contributions.
- The refinancing and covenant implications of the March 2019 first-lien maturity and the $385.0 million of senior secured notes due in 2022.
- The sustainability of the company’s approximately 25.5% adjusted EBITDA margin after further cost reductions become more difficult.
- The potential effect of newsprint price increases, tariffs, labor costs and multiemployer pension withdrawal liability.
- The dilution and liquidity effects of the outstanding warrants and the company’s ability to maintain NYSE listing standards.
- The filing’s audited financial statements and KPMG’s unqualified opinions on the financial statements and internal control over financial reporting.