Lee Enterprises, Inc. — Fiscal 2015 First-Quarter 10-Q Summary
Business Context and Reporting Period
Lee Enterprises is a local news, information and advertising company operating primarily through newspapers, digital platforms and niche publications. The filing covers the unaudited 13 weeks ended December 28, 2014, compared with the 13 weeks ended December 29, 2013. The company reported 50 daily and 38 Sunday newspapers, approximately 1.1 million daily and 1.5 million Sunday subscribers, and 27.6 million digital unique visitors in December 2014.
Key Financial Metrics
| Metric | Q1 2015 | Q1 2014 | Change |
|---|---|---|---|
| Total operating revenue | $176.2 million | $177.4 million | (0.7%) |
| Operating income | $37.5 million | $40.2 million | (6.7%) |
| Operating margin | 21.3% | 22.7% | Down 140 bps |
| Operating cash flow | $46.0 million | $49.3 million | (6.8%) |
| Operating cash flow margin | 26.1% | 27.8% | Down 170 bps |
| Adjusted EBITDA | $50.2 million | $53.5 million | (6.2%) |
| Net income | $10.0 million | $12.1 million | (17.3%) |
| Income attributable to Lee | $9.8 million | $11.9 million | (18.0%) |
| Diluted EPS | $0.18 | $0.22 | (18.2%) |
| Cash flow from operations | $22.3 million | $12.0 million | Up $10.3 million |
| Capital expenditures | $3.5 million | $2.3 million | Up $1.3 million |
Unlevered free cash flow was $45.8 million versus $50.1 million in the prior-year quarter. Reported adjusted diluted EPS was $0.22 versus $0.24, excluding unusual items.
Revenue and Operating Performance
- Advertising and marketing services revenue declined 5.6% to $115.5 million. Retail declined 6.6%, automotive declined 9.9% and real estate declined 7.8%; employment classified advertising increased 3.0%.
- Standalone digital advertising and marketing services revenue increased 7.1% to $19.9 million, representing 17.3% of advertising and marketing services revenue. Total digital revenue increased 25.6% to $27.2 million.
- Reported subscription revenue increased 10.9% to $50.4 million. Excluding a $4.8 million expense and revenue reclassification related to fee-for-service delivery contracts, subscription revenue increased 0.3%.
- Cash costs increased 1.6% as reported, but decreased 2.1% excluding the subscription-related reclassification. Compensation declined 0.3%, newsprint and ink declined 16.2%, and other operating expenses increased 7.3% as reported.
- The full-access subscription model contributed to subscription revenue growth. Management stated that the bulk of the positive revenue impact was expected in fiscal 2015.
Cash, Debt and Liquidity
- Cash and cash equivalents were $15.9 million at December 28, 2014, compared with $16.7 million at September 28, 2014.
- Principal debt outstanding was $784.5 million, consisting primarily of $400.0 million of 9.5% senior secured notes, $215.5 million of first-lien term debt, $150.0 million of second-lien term debt and $19.0 million of New Pulitzer Notes.
- Total debt, net of cash, was 4.7 times trailing adjusted EBITDA, compared with 4.8 times at December 29, 2013. The weighted average cost of debt was 9.4%.
- Liquidity totaled $48.5 million, including $15.9 million of cash and approximately $32.6 million available under the revolving facility after letters of credit.
- Debt maturities total $21.2 million for the remainder of 2015, $31.4 million in 2016, $35.2 million in 2017, $25.0 million in 2018, $121.8 million in 2019 and $550.0 million thereafter.
- Management stated that it expects operating cash flow to satisfy interest and principal payments due over the next twelve months and reported compliance with debt covenants at quarter-end.
Material Changes Versus the Prior Comparable Period
- Revenue was broadly flat on a reported basis but declined 3.4% after removing the subscription-related reclassification.
- Advertising continued to contract, while digital advertising, digital services and subscription initiatives provided partial offsets.
- Operating income, operating cash flow, adjusted EBITDA and diluted EPS all declined.
- Interest expense decreased 9.8% to $18.8 million because of lower debt balances, but debt financing cost amortization increased to $1.1 million from $0.1 million.
- The company recorded a $1.3 million unfavorable change in the fair value of refinancing-related warrants, contributing to higher non-operating expense.
- Cash provided by operating activities increased substantially because of deferred tax adjustments and changes in operating assets and liabilities, despite lower net income.
- Stockholders’ deficit improved to $168.2 million from $178.3 million at the prior fiscal year-end, primarily reflecting current-period earnings and other equity changes.
Guidance, Outlook, Risks and Unusual Items
- Management expects subscription revenue, excluding the reclassification, to increase approximately 2.5% to 3.0% in fiscal 2015.
- Fiscal 2015 cash costs, excluding the reclassification, are expected to decrease approximately 0.5% to 1.0%.
- Capital expenditures are expected to total up to $12.0 million in fiscal 2015.
- The company’s ability to continue as a going concern depends on generating sufficient cash, maintaining covenant compliance and refinancing or amending debt as it matures.
- Key risks include declining print advertising and circulation, economic conditions, newsprint and energy costs, interest-rate exposure, labor costs, competition, regulatory changes and the company’s ability to achieve expense reductions.
- Approximately 27.5% of debt was floating-rate at quarter-end; a 100-basis-point LIBOR change would affect annualized pretax income by approximately $2.2 million, subject to applicable rate floors.
- Goodwill and other intangible assets remain substantial, including $243.7 million of goodwill and $205.9 million of other intangible assets. The company has recorded nearly $1.3 billion of impairment charges since 2007 and could incur additional non-cash impairments if conditions deteriorate.
- The company recorded a $2.3 million liability in 2014 for a settlement with newspaper carriers, subject to court approval. Other legal matters were not expected by management to have a material adverse effect.
- Refinancing-related unusual items included debt financing cost amortization, the warrant fair-value adjustment and other non-operating items; these reduced reported earnings but were excluded in management’s adjusted EPS presentation.
Important Facts for Investors to Verify
- Whether advertising declines stabilize and whether digital and subscription growth can offset continued print weakness.
- Whether projected cash cost reductions and operating cash flow are achieved while funding up to $12.0 million of capital expenditures.
- Debt covenant compliance, available revolver capacity and cash generation relative to scheduled maturities and high interest costs.
- The timing and terms of the $19.0 million New Pulitzer Notes maturity and other debt obligations beginning in 2017.
- The potential dilution and liquidity effects of 6.0 million warrants exercisable at $4.19 per share, including the $12.1 million reported warrant liability and possible proceeds of up to $25.1 million.
- Potential future goodwill or intangible-asset impairments, changes in newsprint pricing and exposure to floating interest rates.