Business context and reporting period
This is Dex Media, Inc.’s unaudited Form 10-Q for the quarter and nine months ended September 30, 2014. The filing describes a U.S. local-marketing business serving more than 500,000 clients through print directories, online and mobile search, and other digital services. The request identifies Thryv Holdings, Inc., but the supplied filing is for Dex Media, Inc.; the filing does not establish that they are the same reporting entity.
Comparisons with 2013 are materially affected by the April 30, 2013 merger with SuperMedia and acquisition accounting. In particular, prior-period SuperMedia results were excluded from reported 2013 results, so reported growth does not represent like-for-like organic growth.
Financial highlights
Amounts below are in millions except per-share data and percentages.
| Metric | Q3 2014 | Q3 2013 | Nine months 2014 | Nine months 2013 |
|---|---|---|---|---|
| Revenue | $452 | $392 | $1,382 | $1,015 |
| Operating income (loss) | $25 | $(147) | $37 | $(274) |
| Net loss | $(59) | $(135) | $(226) | $(263) |
| Basic and diluted loss per share | $(3.41) | $(7.85) | $(13.08) | $(18.55) |
| Operating cash flow | Not provided for quarter | Not provided for quarter | $305 | $250 |
- Operating margin was approximately 5.5% for Q3 2014 and 2.7% for the first nine months of 2014, calculated from reported revenue and operating income.
- Net cash decreased $11 during the first nine months to $145. Investing activities used $15, including $15 of capital expenditures; financing activities used $301, primarily for debt repayments.
- At September 30, 2014, total debt carrying value was $2,443 ($123 current and $2,320 long-term), versus $2,675 at year-end 2013. Cash was $145; shareholders’ deficit was $918.
- Cash interest paid was $209 for the first nine months. Debt includes floating-rate secured facilities due December 2016 and 14% senior subordinated notes due January 2017; the notes have cash and payment-in-kind interest provisions.
Changes versus prior comparable periods
- Reported Q3 revenue increased 15.3% and nine-month revenue increased 36.2%, but management attributes much of the increase to the different inclusion of SuperMedia results and acquisition-accounting effects. Combined net advertising sales declined 12.5% in Q3 and 12.7% for the nine months versus 2013.
- Operating results improved substantially against reported 2013 losses. Lower amortization, reduced selling and administrative costs, and 2014 benefit credits contributed; 2013 comparison periods included acquisition-accounting effects and, for the nine months, $37 of reorganization items.
- Interest expense fell 10.1% in Q3 to $89, but rose 21.7% for the nine months to $269, reflecting the periods’ differing merger-related debt inclusion and higher interest-rate effects, partly offset by lower debt balances.
- Operating cash flow rose to $305 from $250. The periods are not fully comparable; 2013 investing cash flow included $154 of cash acquired in the SuperMedia merger.
Outlook, risks, contingencies and unusual items
- Management stated that operating cash flow and existing cash were expected to cover working capital, estimated debt service and other cash needs for the remainder of 2014. No quantified revenue, earnings or longer-term guidance was provided.
- Management reported declining advertising sales and revenue over several years, citing reduced advertiser spending and competition from digital and other media. It said expense management and operational streamlining were intended to mitigate the decline.
- Q3 general and administrative expense included a $29 credit from long-term disability plan amendments, partly offset by a $3 charge to reduce the Los Alamitos property to estimated fair value and legal-settlement costs. Nine-month credits also included $13 for OPEB amendments, $10 for a publishing-agreement liability settlement and $5 for operating-tax liabilities. Merger integration costs were $33 for the nine months.
- The company retired $314 of secured debt for $300 cash during the nine months, including discounted repurchases. It recorded a $2 gain on early extinguishment. It reported compliance with debt covenants at September 30, 2014, but identified covenant compliance, leverage, restricted financial flexibility and refinancing as important risks. A 12.5-basis-point interest-rate change was estimated to affect nine-month interest expense by about $2.
- Significant risks include continued print-directory decline, advertising cancellations and spending reductions, customer credit and collections, competition and technological change, reliance on third-party providers and search/local-media relationships, and the company’s highly leveraged capital structure. The filing says pending legal matters were not expected to have a material adverse effect, while disclosing several lawsuits and an FLSA matter with a tentative settlement submitted for preliminary approval.
- CEO Peter J. McDonald retired effective October 14, 2014, and Joseph A. Walsh became CEO and a director. The filing also disclosed an ongoing Corwin trial, an ERISA appeal affirmed in the company’s favor subject to the appeal period, and other litigation matters.
- A prior-period revenue-recognition error for Dex Guaranteed Actions was corrected in 2013; it reduced revised 2013 revenue by $5 for Q3 and $15 for the nine months, with no effect on total cash flows. Management characterized the error as immaterial to affected prior periods.
Most important facts for investors to verify
- Confirm the reporting entity: the supplied 10-Q is for Dex Media, Inc., not identified in the filing as Thryv Holdings, Inc.
- Assess underlying revenue and advertising-sales trends using combined or otherwise comparable figures; reported revenue growth is distorted by the merger and acquisition accounting.
- Review liquidity and debt-service capacity against $145 cash, $2,443 debt carrying value, substantial cash interest, mandatory cash sweeps and 2016–2017 maturities.
- Separate recurring operating performance from benefit-plan and other one-time credits, merger integration costs, and acquisition-related amortization.
- Track covenant compliance, refinancing options, floating-rate exposure, and the status and potential exposure of disclosed litigation.