Lee Enterprises, Inc. — Form 10-Q Summary
Business context and reporting period
Lee Enterprises is a local news, information and advertising company operating 50 daily and 38 Sunday newspapers, digital platforms, and approximately 300 weekly and niche publications. The filing covers the 13 and 39 weeks ended June 29, 2014, compared with the periods ended June 30, 2013. Results are unaudited and seasonal.
Digital platforms attracted 23.1 million unique visitors and 211.4 million page views in June 2014. In April 2014, the company began implementing a full-access subscription model combining print and digital access or offering digital-only subscriptions.
Financial performance and position
| Metric | 13 weeks ended June 29, 2014 | 13 weeks ended June 30, 2013 | 39 weeks ended June 29, 2014 | 39 weeks ended June 30, 2013 |
|---|---|---|---|---|
| Total operating revenue | $163.1 million | $167.0 million | $494.6 million | $512.3 million |
| Operating income | $28.6 million | $26.9 million | $92.5 million | $85.1 million |
| Operating income margin | 17.5% | 16.1% | 18.7% | 16.6% |
| Operating cash flow | $39.3 million | $39.8 million | $121.3 million | $123.2 million |
| Operating cash flow margin | 24.1% | 23.8% | 24.5% | 24.1% |
| Net income attributable to Lee | $(9.7) million | $1.8 million | $3.6 million | $10.4 million |
| Diluted earnings per share | $(0.19) | $0.03 | $0.07 | $0.20 |
| Adjusted diluted EPS | $0.11 | $0.06 | $0.40 | $0.22 |
Quarterly revenue declined 2.3%; excluding a subscription-related expense reclassification, revenue declined 3.4%. Advertising and marketing services fell 3.2%, subscription revenue fell 0.6% as reported, and other revenue was broadly stable. Digital advertising and marketing services revenue increased 13.0% in the quarter, while total digital revenue increased 17.4%.
For the first 39 weeks, revenue declined 3.5% as reported, or 3.9% excluding the reclassification. Advertising and marketing services declined 4.2%, subscription revenue declined 2.1% as reported, and digital revenue increased 14.5%.
Quarterly cash costs decreased 2.7%, and decreased 4.1% excluding the reclassification. Compensation declined 3.2% and newsprint and ink declined 11.9%. Operating income improved despite lower revenue, primarily due to cost reductions and lower amortization.
The quarterly net loss was driven primarily by $21.7 million of debt financing costs related to the March 2014 refinancing and a $2.3 million litigation settlement. First-39-week results included $21.9 million of debt financing costs and the same $2.3 million settlement. Adjusted results exclude these and other unusual items.
Cash flow, debt and liquidity
- Cash provided by operating activities was $69.6 million for the first 39 weeks, compared with $56.1 million in the prior-year period. The increase included $21.9 million of non-cash debt financing costs charged to expense.
- Investing activities used $6.2 million, including $8.2 million of capital expenditures. Management expected full-year 2014 capital expenditures of up to $12.0 million.
- Financing activities used $63.2 million, including $31.3 million of debt financing costs paid and substantial debt repayments.
- Cash and cash equivalents were $17.8 million at June 29, 2014, compared with $17.6 million at September 29, 2013.
- Principal debt outstanding was $815.0 million, with total debt carrying value of $815.0 million. The weighted-average cost of debt, excluding amortization of financing costs, was 9.3%.
- Debt consisted principally of $400.0 million of 9.5% senior secured notes, a $233.0 million first-lien term loan, a $150.0 million second-lien term loan, and $32.0 million of New Pulitzer Notes.
- Available revolving credit capacity was approximately $30.0 million; total stated liquidity, including cash, was $47.8 million.
- Debt maturities were extended through the March 2014 refinancing to dates ranging from March 2019 through December 2022. Management stated that the company was in compliance with its debt covenants at June 29, 2014.
Material changes versus the prior comparable period
- Quarterly revenue decreased $3.9 million, while operating income increased $1.7 million and operating margin improved 140 basis points.
- First-39-week revenue decreased $17.7 million, while operating income increased $7.4 million and operating margin improved 210 basis points.
- Interest expense declined 10.6% in the quarter and 10.8% for the first 39 weeks, reflecting lower debt balances and prior refinancing activity; however, the new debt structure increased the stated weighted-average cost of debt.
- The March 31, 2014 refinancing replaced the prior credit agreements and extended maturities, but generated significant financing fees and issued warrants for 6.0 million common shares at an exercise price of $4.19 per share. The warrant liability was $16.4 million at quarter-end.
- Common shares outstanding increased to approximately 53.7 million at July 31, 2014, from approximately 52.4 million at September 29, 2013, before considering potential warrant dilution.
- The company recorded a $0.3 million impairment charge in the quarter and first 39 weeks; goodwill remained $243.7 million, while other intangible assets declined to $221.5 million from $242.2 million at September 29, 2013.
Guidance, outlook, risks and unusual items
- Management expected 2014 cash costs to decrease approximately 3.0% to 3.5%, excluding the subscription-related expense reclassification.
- Management expected operating cash flows to fund interest and principal payments due over the following 12 months and to maintain adequate liquidity.
- The full impact of the full-access subscription initiative was not expected to be realized until 2016.
- Going-concern capacity depends on generating sufficient cash flow, maintaining debt-covenant compliance, and refinancing or amending debt as required. Defaults could permit lenders to accelerate debt and exercise collateral remedies.
- Key operating risks include continued declines in print advertising and subscribers, economic conditions, advertising demand, competition, newsprint and energy costs, labor costs, interest rates, regulatory changes, and the company’s ability to achieve planned expense reductions.
- A 100-basis-point change in LIBOR would affect annualized pretax income by approximately $2.3 million, subject to applicable rate floors. A $10-per-ton newsprint price increase would reduce annualized pretax income by approximately $0.7 million.
- The company recorded a $2.3 million liability for a newspaper-carrier class-action settlement reached in July 2014, subject to court approval.
- The filing states that disclosure controls were effective and that no material changes occurred in internal control over financial reporting during the quarter.
Important facts for investors to verify
- Whether declining print advertising and subscription revenue stabilize as digital revenue and pricing initiatives expand.
- Whether operating cash flow remains sufficient to service approximately $815 million of debt and meet scheduled maturities and mandatory repayments.
- Compliance with debt covenants, including the Pulitzer Notes’ minimum trailing-twelve-month EBITDA requirement and restrictions on cash flows and distributions.
- The future effect of the 2014 refinancing on interest expense, financing-cost amortization, liquidity and reported earnings.
- The potential dilution and cash proceeds associated with the 6.0 million warrants, including changes in the warrant liability and any change-of-control cash-settlement exposure.
- The final court-approved amount and accounting treatment of the newspaper-carrier settlement and the outcome of other legal and tax matters.
- The effect of the full-access subscription model and the pending revenue-recognition standard, whose adoption was required in 2018 and whose financial impact had not yet been determined.