Lee Enterprises, Inc. — Fiscal 2011 Form 10-K Summary
Business context and reporting period
Lee Enterprises is a local news, information and advertising publisher operating primarily in midsize and small U.S. markets. Its portfolio included 52 daily and 39 Sunday newspapers, nearly 300 weekly and specialty publications, digital websites, mobile sites and applications, and an 82.5% interest in TownNews.com. The company reported as a single operating segment.
The filing covers the 52-week fiscal year ended September 25, 2011. The filing also provides unaudited quarterly data; fourth-quarter 2011 ended September 25, 2011.
Financial performance and key metrics
| Metric | FY 2011 | FY 2010 | Change |
|---|---|---|---|
| Operating revenue | $756.1 million | $780.6 million | (3.1%) |
| Advertising revenue | $536.8 million | $560.1 million | (4.2%) |
| Circulation revenue | $181.0 million | $179.9 million | 0.7% |
| Operating cash flow | $162.7 million | $170.9 million | (4.8%) |
| Operating cash flow margin | 21.5% | 21.9% | Down 40 bps |
| Operating income (loss) | $(103.3) million | $147.2 million | Unfavorable |
| Net income (loss) attributable to Lee | $(146.9) million | $46.1 million | Unfavorable |
| Diluted EPS | $(3.27) | $1.03 | Unfavorable |
| Cash flow from operating activities | $102.6 million | $106.6 million | $(4.0) million |
| Capital expenditures | $7.7 million | $9.5 million | Lower |
Fourth-quarter 2011 revenue was $182.4 million versus $188.7 million in the prior-year quarter. Net loss attributable to Lee was $8.8 million, or $(0.20) per diluted share, compared with net income of $5.2 million, or $0.11 per diluted share, in fourth-quarter 2010.
- Digital advertising revenue increased 27.0% for the year to $60.0 million and represented 11.2% of total advertising revenue. Digital sites generated 21.6 million unique visitors and 191 million page views in September 2011; mobile page views increased 230.6% year over year.
- Retail advertising declined 6.4%, classified advertising declined 7.1%, and national advertising declined 16.0%. Employment advertising increased 7.7%, while real estate classified advertising declined 21.5%.
- Compensation expense declined 5.2% and other operating expenses declined 3.2%, but newsprint and ink costs increased 8.5% because of higher prices, partly offset by lower volume.
- FY 2011 included $205.1 million of pretax, non-cash impairment charges, including $186.3 million for goodwill, $14.0 million for nonamortized intangible assets, $4.2 million for amortizable intangible assets and $0.7 million for property and equipment. A further $11.9 million reduction was recorded for the TNI investment.
- Excluding unusual matters, adjusted diluted EPS was $0.71 in both 2011 and 2010; this non-GAAP measure should not be viewed as a substitute for GAAP results.
Balance sheet, debt and liquidity
| Balance-sheet metric | September 25, 2011 | September 26, 2010 |
|---|---|---|
| Total assets | $1.158 billion | $1.440 billion |
| Total debt, including current maturities | $994.6 million | $1.082 billion |
| Cash and cash equivalents | $23.6 million | $19.4 million |
| Restricted cash and investments | $5.0 million | $9.6 million |
| Stockholders’ equity (deficit) | $(101.3) million | $56.8 million |
Approximately $994.6 million of debt was classified as current because substantially all debt matured in April 2012. The company had $286.4 million outstanding under its revolving facility, approximately $75.7 million of remaining availability after applicable adjustments, and total liquidity of approximately $104.2 million including cash and restricted cash. The weighted-average cost of debt was 5.1% at year-end.
Material changes versus the prior comparable period
- Revenue declined 3.1%, following a 7.3% decline in 2010, while operating cash flow declined 4.8% after increasing 2.3% in 2010.
- Reported operating results shifted from $147.2 million of operating income to a $103.3 million operating loss, primarily because of the 2011 impairment charges and the absence of most of the prior-year curtailment gains.
- Goodwill declined from $433.6 million to $247.3 million and other intangible assets declined from $558.1 million to $495.5 million after impairment charges and amortization.
- Stockholders’ equity declined from a $56.8 million surplus to a $101.3 million deficit, primarily reflecting the reported net loss and other comprehensive loss.
- All outstanding Class B common shares converted to Common Stock in March 2011, giving all stockholders one vote per share.
Guidance, outlook, risks and unusual items
Management expected comparable operating expenses and cash costs to decline approximately 1.5% to 2.5% in 2012, excluding the additional 53rd week of activity, and expected 2012 capital expenditures of approximately $10 million to $12 million. Management expected digital revenue and audiences to continue growing, but acknowledged that future cost reductions would be more difficult after substantial reductions since 2007.
The company announced a planned refinancing consisting of a $689.5 million first-lien term loan, a $40 million revolving facility and a $175 million second-lien term loan. The first-lien debt was expected to mature in December 2015, while the second-lien debt was expected to mature in April 2017 and carry a 15.0% interest rate. The amended Pulitzer Notes were expected to mature in December 2015, with an initial rate of 10.55%. The refinancing was expected to increase the weighted-average cost of debt to approximately 9.2% and provide for approximately $11.4 million of mandatory principal payments in 2012.
Because the refinancing was not completed when the Form 10-K was filed, the company planned a voluntary prepackaged Chapter 11 filing on or about December 12, 2011. Support agreements covered 94% of Credit Agreement lenders and 100% of Pulitzer Noteholders. Management expected a restructuring process of 60 days or less and had commitments for $40 million of debtor-in-possession financing. The independent auditor included explanatory going-concern language because available funds could not satisfy the short-term obligations without refinancing.
- Key risks included failure to obtain bankruptcy court approval, insufficient cash flow or liquidity, covenant breaches, debt acceleration, higher refinancing interest costs and the requirement that substantially all future cash flow be directed to debt repayment.
- The company was subject to NYSE continued-listing concerns because its average share price was below $1; compliance required an increase in the average closing price to $1.12, or $1.00 if the refinancing was completed.
- Advertising demand remained sensitive to economic conditions, especially employment, automotive and real estate markets. Print readership and circulation faced continuing secular pressure from digital media.
- Approximately 86% of principal debt was subject to floating interest rates. A 100-basis-point change in LIBOR, above applicable floors, was estimated to affect annual pretax income by approximately $8.6 million.
- A $10-per-ton increase in newsprint prices was estimated to reduce annual pretax income by approximately $0.9 million based on anticipated 2012 consumption.
- A class action by California newspaper carriers concerning employee classification remained pending; the company stated that the potential economic outcome could not be predicted.
Facts investors should verify
- Whether the prepackaged Chapter 11 restructuring and refinancing were approved and completed, and the final debt balances, interest rates, covenants and equity issuance.
- Actual post-restructuring liquidity, cash flow generation and compliance with leverage and interest-coverage covenants.
- The sustainability of digital advertising growth and whether it offsets declines in print, classified and national advertising.
- Whether further goodwill, intangible-asset or investment impairment charges are required.
- The company’s continued compliance with NYSE listing requirements and the effect of any reverse stock split or equity issuance.
- Developments in the newspaper-carrier litigation, pension funding requirements and other contingent obligations.