LEE ENTERPRISES, Inc quarterly report, Q2 FY2013

Lee Enterprises, Inc. — Form 10-Q Summary

Business Context and Reporting Period

Lee Enterprises is a local news, information and advertising company operating primarily through newspapers, digital platforms, weekly publications and niche products. The filing covers the 13 weeks and 26 weeks ended March 31, 2013, compared with the respective periods ended March 25, 2012. Results are unaudited and may be affected by seasonality.

At March 31, 2013, the company reported 50 daily newspapers, 38 Sunday newspapers and nearly 300 weekly, classified and niche publications.
Digital properties attracted 23.2 million unique visitors and 203.1 million page views in March 2013; mobile page views increased 77.4% year over year.
The company emerged from Chapter 11 in January 2012 and remains highly leveraged.

Financial Performance and Key Metrics

Metric	13 Weeks Ended March 31, 2013	13 Weeks Ended March 25, 2012	26 Weeks Ended March 31, 2013	26 Weeks Ended March 25, 2012
Operating revenue	$160.6 million	$164.6 million	$345.3 million	$355.7 million
Operating income	$18.7 million	$16.9 million	$58.2 million	$55.9 million
Operating income margin	11.6%	10.3%	16.9%	15.7%
Operating cash flow, non-GAAP	$31.9 million	$32.2 million	$83.4 million	$85.1 million
Operating cash flow margin, non-GAAP	19.9%	19.6%	24.2%	23.9%
Income attributable to Lee	$(6.0) million	$(26.6) million	$8.6 million	$(12.1) million
Diluted earnings per share	$(0.12)	$(0.54)	$0.17	$(0.26)

Advertising revenue declined 5.3% in the quarter and 5.8% for the six-month period. Classified advertising was particularly weak, with automotive and real estate declining in both periods.
Circulation revenue increased 3.4% in the quarter and 3.7% year to date, driven by pricing and digital subscribers, despite lower print circulation.
Quarterly compensation expense decreased 6.2%, and newsprint and ink expense decreased 12.5%. Six-month decreases were 5.5% and 12.8%, respectively.
Financial expense increased to $22.9 million in the quarter and $46.4 million year to date, primarily because of higher interest rates following the 2012 refinancing.
Cash provided by operating activities of continuing operations was $45.3 million for the six months, compared with $62.7 million in the prior-year period.
Cash provided by investing activities of continuing operations was $2.0 million, including $7.2 million of asset-sale proceeds and $4.7 million of capital expenditures.
Cash used in financing activities of continuing operations was $52.9 million, primarily reflecting $52.9 million of debt repayments.
Cash and cash equivalents increased to $22.4 million at March 31, 2013, from $13.9 million at September 30, 2012.
Total assets were $1.01 billion, while total liabilities were $1.12 billion and total stockholders’ deficit was $105.5 million.

Debt, Liquidity and Capital Structure

Principal debt outstanding was approximately $893.0 million at March 31, 2013; reported debt, net of the unamortized present-value adjustment, was $876.1 million.
Debt consisted primarily of $624.0 million under the first-lien term loan, $175.0 million under the second-lien term loan and $94.0 million of Pulitzer Notes.
The weighted-average cost of debt was 9.4%. Approximately 69.9% of principal debt carried floating interest rates, creating LIBOR exposure.
Available revolver capacity was approximately $29.9 million, and total stated liquidity, including cash, was $52.4 million.
The company was in compliance with its debt covenants at March 31, 2013. The first-lien total leverage ratio was 6.4:1 versus a 10.0:1 maximum, and the interest coverage ratio was 1.62:1 versus a 1.08:1 minimum.
Management expected continuing cash flows to fund interest and principal payments due over the following 12 months, but stated that ongoing operations depend on covenant compliance and the ability to refinance or amend debt as it matures.

Material Changes Versus the Prior Comparable Period

Revenue declined because of lower advertising, while cost reductions and lower depreciation and amortization increased operating income margins.
Operating income increased 10.3% in the quarter and 4.1% for the six-month period despite revenue declines.
The prior-year periods included $36.6 million of quarterly and $37.9 million of six-month reorganization costs; no comparable reorganization costs were recorded in 2013.
Six-month income attributable to Lee improved to $8.6 million from a $12.1 million loss, although adjusted diluted EPS declined to $0.15 from $0.33 after excluding unusual items.
Debt declined by approximately $50.1 million from September 30, 2012, largely through scheduled and voluntary repayments and asset-sale proceeds.
Advertising mix continued shifting toward digital, but digital advertising did not fully offset print declines. Stand-alone digital advertising represented 14.1% of quarterly advertising revenue and 13.3% for the six-month period.

Guidance, Outlook, Risks and Unusual Items

Management expected 2013 operating expenses, excluding depreciation, amortization and unusual matters, to decrease 3.5% to 4.5% from 2012 levels.
Capital expenditures were expected to total up to $12.0 million in 2013.
In March 2013, Lee sold The Garden Island for $2.0 million in cash plus a working-capital adjustment and recorded a $2.2 million after-tax loss. The business is presented as discontinued operations.
In October 2012, Lee sold the North County Times and recorded a $1.2 million after-tax gain.
In December 2012, the company recognized a $7.1 million gain from a distribution related to the partial sale of assets in a private-equity investment.
In May 2013, after the reporting date, the company refinanced the remaining $94.0 million Pulitzer Notes with fixed-rate 9.0% New Pulitzer Notes. Management stated that this reduced the pro forma weighted-average cost of debt to 9.1%.
Adjusted results exclude debt financing costs, amortization of the debt present-value adjustment, investment gains, other unusual items and discontinued-operation items. These are non-GAAP measures and should not be viewed as substitutes for GAAP results.
Key risks include substantial debt maturities, floating-rate exposure, covenant compliance, refinancing requirements, declining print advertising and circulation, economic conditions, newsprint and energy costs, labor costs, pension obligations and potential impairment of goodwill and intangible assets.
A class-action lawsuit by newspaper carriers concerning employee status remains pending. The company denies the allegations and stated that the potential economic outcome cannot currently be predicted.
The company stated 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 advertising trends, particularly classified, automotive, real estate and national advertising, stabilize or continue to decline.
Whether operating cash flow remains sufficient to fund interest, mandatory debt amortization, pension contributions and capital expenditures.
The terms, covenants, collateral and maturity profile of the May 2013 Pulitzer Notes refinancing and its effect on interest expense.
Progress toward refinancing or repaying the large debt maturities scheduled for 2016 and 2017.
The company’s ability to maintain required leverage and interest-coverage ratios as operating results change.
Potential impairment charges affecting the substantial goodwill and intangible-asset balances.
The outcome and possible exposure from the newspaper-carrier litigation and the June 2013 redemption of the Herald Value.
The sustainability of digital audience growth and whether digital revenue can offset continuing print declines.