Lee Enterprises, Inc. — Fiscal 2013 Form 10-K Summary
Business context and reporting period
Lee Enterprises is a local news, information and advertising company operating primarily in midsize and small U.S. markets. It publishes 50 daily and 38 Sunday newspapers, nearly 300 weekly and niche publications, and digital products across 22 states. Digital sites attracted 23.2 million unique visitors and 209.1 million page views in September 2013.
The filing covers the 52-week fiscal year ended September 29, 2013. The prior comparable fiscal year ended September 30, 2012 and contained 53 weeks, so reported year-over-year comparisons are affected by the extra week.
The Company emerged from Chapter 11 in January 2012 following a comprehensive debt refinancing. Its interests in TNI Partners and Madison Newspapers, Inc. were not included in the bankruptcy filings and are accounted for under the equity method.
Financial performance and key metrics
| Metric | 2013 | 2012 | Change |
|---|---|---|---|
| Operating revenue | $674.7 million | $706.9 million | (4.6%) |
| Advertising and marketing services revenue | $459.8 million | $495.2 million | (7.1%) |
| Subscription revenue | $177.1 million | $174.0 million | 1.8% |
| Operating cash flow | $160.7 million | $162.7 million | (1.2%) |
| Operating cash flow margin | 23.8% | 23.0% | Up 0.8 points |
| Adjusted EBITDA | $173.8 million | $174.4 million | (0.3%) |
| Unlevered free cash flow | $166.8 million | $159.4 million | 4.6% |
| Cash provided by operating activities | $90.1 million | $80.0 million | 12.5% |
| Loss attributable to Lee | $(78.3) million | $(16.7) million | Loss increased |
| Basic and diluted loss per share | $(1.51) | $(0.34) | Loss increased |
Reported operating loss was $57.3 million versus operating income of $103.4 million in 2012. Results included a $171.1 million pretax, non-cash impairment charge, principally related to amortizable intangible assets. Excluding unusual matters, adjusted income attributable to Lee was $24.4 million, or $0.47 per diluted share, compared with $20.9 million, or $0.42 per share, in 2012.
On a comparable 52-week basis, revenue declined 2.9%, while operating cash flow increased 1.2% and adjusted EBITDA increased 2.0%. Digital revenue increased 5.5% for the year; digital advertising and marketing services represented 14.4% of total advertising and marketing services revenue on a standalone basis.
Revenue, costs and operating trends
- Advertising declines were broad-based: retail decreased 5.0%, classified decreased 9.8%, and national advertising decreased 18.8% on a reported basis.
- Subscription revenue increased primarily from price increases and growth in digital subscribers, partially offset by declining print subscribers.
- Daily circulation decreased 3.5%, while Sunday circulation increased 7.4%, partly due to branded editions.
- Compensation expense declined 7.1%, reflecting an 8.3% reduction in average full-time-equivalent employees.
- Newsprint and ink expense decreased 15.8%, supported by a 13.6% reduction in newsprint volume.
- Cash costs of continuing operations have declined $285 million, or 36%, since 2007; management cautions that additional cost reductions will be more difficult.
Debt, liquidity and cash flow
- Principal debt outstanding was $847.5 million at September 29, 2013, compared with $945.9 million at the prior year-end. Debt net of cash was 4.8 times 2013 adjusted EBITDA versus 5.3 times in 2012.
- Debt, net of unamortized present-value adjustments, totaled $834.6 million; long-term debt was $820.2 million after current maturities.
- Debt consisted primarily of a $609.5 million first-lien term loan, a $175.0 million second-lien loan at 15%, and $63.0 million of New Pulitzer Notes. The weighted-average cost of debt was 9.2%.
- Liquidity totaled $47.5 million, including $17.6 million of cash and approximately $29.9 million of unused revolver capacity after letters of credit.
- Scheduled principal maturities were $19.2 million in 2014, $19.9 million in 2015, $589.7 million in 2016 and $218.8 million in 2017. These amounts exclude certain mandatory prepayments tied to excess cash flow and asset sales.
- The Company was in compliance with debt covenants at year-end and expected continuing cash flows to fund interest and principal obligations for the next twelve months.
- Dividends and share repurchases are suspended through December 2015 under the debt agreements.
Material changes, outlook and unusual items
- In May 2013, the Company refinanced the remaining Pulitzer Notes with Berkshire Hathaway subsidiary BH Finance LLC. The replacement notes carried a 9% fixed interest rate and had a $63.0 million balance at year-end.
- The Company sold The Garden Island operations for $2.0 million in March 2013, recording an after-tax loss of $2.2 million. The North County Times, sold in October 2012, generated an after-tax gain of $1.2 million.
- The Company recorded no goodwill impairment in 2013, but recorded $171.1 million of non-cash impairment charges against other intangible assets and property and equipment.
- Pension liabilities, net of plan assets, improved to $30.6 million from $68.6 million, primarily due to investment returns and higher discount rates. Expected 2014 pension contributions were approximately $1.4 million, a 77% reduction from 2013.
- Management expects capital expenditures of up to $12.0 million in 2014 and expects to fund them from internally generated cash or revolver availability.
- Management expects digital revenue and digital subscription initiatives to continue growing, while acknowledging continued pressure on print advertising, circulation and overall advertising demand. The filing does not provide formal revenue or earnings guidance.
Principal risks and contingencies
- Going-concern capacity depends on maintaining covenant compliance, generating sufficient cash flow and refinancing or amending debt as maturities approach.
- Debt agreements contain cross-default provisions and permit acceleration and enforcement remedies following uncured defaults.
- Advertising revenue is sensitive to economic conditions, competition, audience migration to digital media and weakness in classified categories.
- Floating-rate debt represented approximately 71.9% of principal debt. A 100-basis-point LIBOR increase above applicable floors would reduce annual pretax income by approximately $6.1 million.
- A $10-per-ton newsprint price increase would reduce annual pretax income by approximately $0.7 million based on anticipated 2014 consumption, excluding TNI and MNI.
- Future impairment charges remain possible if revenue, cash-flow projections, market value or industry conditions deteriorate.
- A class-action lawsuit by California newspaper carriers remains pending. The Company disputes the allegations and cannot predict whether the ultimate outcome could materially affect the financial statements.
- The Company faces pension, health care, self-insurance, tax, cybersecurity and regulatory risks. Management states that its disclosure controls and internal control over financial reporting were effective, and KPMG issued unqualified audit opinions.
Investor verification checklist
- Verify debt maturities, mandatory excess-cash-flow and asset-sale prepayment provisions, covenant thresholds and refinancing plans.
- Assess whether operating cash flow and digital growth can offset continued print advertising and circulation declines.
- Review the assumptions supporting the $171.1 million intangible-asset impairment and the potential for additional charges.
- Reconcile GAAP losses with adjusted EBITDA, adjusted earnings and unlevered free cash flow, including all exclusions and non-cash items.
- Review the pending carrier litigation, tax contingencies, self-insurance exposures and any subsequent developments after December 13, 2013.
- Confirm the effect of the dividend and repurchase restrictions, negative stockholders’ equity of $170.4 million, and the Company’s reliance on future refinancing.