Lee Enterprises, Inc. — Fiscal 2017 Q3 Form 10-Q Summary
Business context and reporting period
Lee Enterprises operates local newspapers, digital media, advertising and marketing services, subscription products, commercial printing and related businesses across primarily Midwest, Mountain West and Western U.S. markets. The filing covers the 13 and 39 weeks ended June 25, 2017, compared with the periods ended June 26, 2016. Results are seasonal and may not indicate full-year performance.
Key financial metrics
| Metric | 13 weeks ended June 25, 2017 | 13 weeks ended June 26, 2016 | 39 weeks ended June 25, 2017 | 39 weeks ended June 26, 2016 |
|---|---|---|---|---|
| Operating revenue | $139.4 million | $150.9 million | $426.7 million | $466.2 million |
| Operating income | $20.6 million | $24.7 million | $70.8 million | $79.8 million |
| Operating margin | 14.8% | 16.3% | 16.6% | 17.1% |
| Net income | $6.3 million | $4.4 million | $25.1 million | $35.4 million |
| Income attributable to Lee | $6.0 million | $4.1 million | $24.3 million | $34.6 million |
| Diluted EPS | $0.11 | $0.08 | $0.44 | $0.64 |
| Adjusted EBITDA | $35.8 million | $36.9 million | $107.9 million | $116.6 million |
| Adjusted EBITDA margin | 25.7% | 24.5% | 25.3% | 25.0% |
- Revenue mix: Third-quarter advertising and marketing services revenue declined 12.0% to $81.2 million; subscription revenue increased 0.5% to $47.4 million. For the nine-month period, advertising declined 12.2% and subscription revenue declined 2.0%.
- Digital trends: Stand-alone digital advertising and marketing services revenue increased 7.8% in the quarter and 8.6% year to date. Total digital revenue increased 6.4% in the quarter and 7.6% year to date, partially offsetting print declines.
- Cash flow: Operating cash flow was $59.4 million for the 39 weeks, down from $65.8 million. Capital expenditures were $3.2 million, compared with $5.8 million. Financing activities used $49.1 million, primarily for debt repayments, and cash ended at $25.0 million.
- Debt and liquidity: Principal debt was $568.5 million at June 25, 2017, consisting primarily of $385.0 million of 9.5% senior secured notes, $59.0 million of first-lien term debt and $124.5 million of second-lien term debt. Reported debt, net of unamortized financing costs, was $545.4 million. Revolver availability was approximately $33.8 million, and total stated liquidity including cash was $58.8 million.
- Balance sheet: Total assets were $641.0 million and total liabilities were $741.7 million. Stockholders’ deficit was $101.6 million, compared with a deficit of $128.5 million at September 25, 2016.
Material changes versus the prior comparable period
- Quarterly revenue decreased 7.7%; same-property revenue decreased 6.6%. Nine-month revenue decreased 8.5%; same-property revenue decreased 7.2%.
- Print advertising continued to contract, with same-property print advertising and print marketing revenue down 16.7% in the quarter and 16.4% year to date. Retail, classified and national advertising all declined.
- Cost reductions partially offset revenue pressure. Quarterly compensation expense declined 9.1%, other operating expenses declined 6.8%, and cash costs excluding workforce adjustments declined 8.0%. Nine-month cash costs excluding workforce adjustments declined 7.4%.
- Operating income declined 16.6% in the quarter and 11.3% year to date. Operating margin fell to 14.8% from 16.3% in the quarter but increased slightly to 16.6% from 17.1% on a nine-month basis when considered with reported revenue changes.
- Reported net income increased in the quarter primarily because of lower income taxes and a $3.0 million favorable change in the fair value of warrants. Excluding the warrant adjustment, adjusted diluted EPS declined to $0.05 from $0.08.
- Year-to-date reported net income declined 29.0%, in part because the prior-year period included a $30.6 million insurance settlement gain. Adjusted diluted EPS was $0.25 versus $0.28.
- Debt principal declined from approximately $617.2 million at September 26, 2016 to $568.5 million at June 25, 2017, while interest expense declined 10.7% year to date.
Guidance, outlook, risks and unusual items
- Management expected fiscal 2017 cash costs excluding workforce adjustments to decrease approximately 6.5% and capital expenditures to total up to $6.0 million.
- Management stated that expected interest and principal payments for the following twelve months would be funded by operating cash flows and certain asset sales. The company was in compliance with its debt covenants at June 25, 2017.
- Debt maturities range from December 2018 through December 2022. Continued liquidity and going-concern capacity depend on cash generation, covenant compliance and the ability to repay, refinance or amend debt as required.
- On June 30, 2017, after the reporting date, the company acquired the Dispatch-Argus assets for $7.15 million plus a working-capital adjustment, funded with cash. The acquisition was expected to be included beginning in the quarter ended September 24, 2017.
- Workforce adjustments and other costs included a $2.6 million estimated partial-withdrawal liability for a multiemployer pension plan, payable in equal installments over 20 years.
- A postretirement medical-plan change produced a $3.7 million non-cash curtailment gain and reduced the related obligation by $5.2 million.
- Warrant fair-value adjustments produced $3.0 million of non-operating income in the quarter and $10.4 million year to date. Warrant fair value was $1.3 million at June 25, 2017, and exercise could provide up to $25.1 million of additional liquidity, subject to stated conditions.
- Key risks include continued advertising and subscription declines, digital transition and competition, newsprint and energy costs, labor costs, interest rates, covenant compliance, refinancing requirements, impairment of goodwill or intangible assets, and the company’s ability to maintain sufficient liquidity.
- A 100-basis-point increase in LIBOR would reduce annualized pretax income by approximately $0.6 million based on floating-rate debt outstanding. A $10-per-ton increase in newsprint prices would reduce annualized pretax income by approximately $0.5 million.
Investor verification checklist
- Verify the sustainability of operating cash flow and the company’s ability to meet scheduled debt amortization, excess-cash-flow payments and upcoming maturities.
- Separate recurring operating performance from warrant revaluations, the prior-year insurance settlement, the postretirement curtailment gain and workforce-related charges.
- Track whether digital revenue growth can offset continued print advertising, circulation and commercial-printing declines.
- Review the effect of the Dispatch-Argus acquisition on revenue, margins, leverage and liquidity after consolidation.
- Assess covenant compliance, revolver availability and refinancing needs as debt maturities approach.
- Monitor goodwill and intangible-asset impairment exposure, given substantial historical impairment charges and significant remaining balances.