Lee Enterprises, Inc. — Q1 Fiscal 2019 Form 10-Q
Reporting period: 13 weeks ended December 30, 2018, compared with 13 weeks ended December 24, 2017. The filing was signed February 8, 2019. Lee operated 49 local media markets and managed 30 additional Berkshire Hathaway media operations under a five-year management agreement.
Financial performance
| Metric | Q1 FY2019 | Q1 FY2018 | Change |
|---|---|---|---|
| Operating revenue | $136.2 million | $143.8 million | -5.3% |
| Operating income | $27.7 million | $29.8 million | -7.1% |
| Net income | $10.7 million | $35.3 million | -69.7% |
| Income attributable to Lee | $10.4 million | $35.0 million | -70.4% |
| Diluted EPS | $0.18 | $0.63 | -71.4% |
| Adjusted EBITDA | $36.1 million | $39.7 million | -8.8% |
| Operating cash flow | $19.4 million | $21.2 million | -8.4% |
Advertising and marketing services revenue declined 10.3% to $76.0 million, primarily because of weaker print advertising, including retail, big-box and classified demand. Digital advertising increased 8.0% to $25.5 million and represented 33.6% of advertising and marketing services revenue. Subscription revenue decreased 4.1% to $46.3 million. Other revenue increased 28.7% to $14.0 million, driven by TownNews and BH Media management fees.
Cash costs declined 4.4% to $103.1 million. Compensation expense decreased 8.9%, supported by a 13.9% reduction in average full-time-equivalent employees. Newsprint and ink costs increased 8.6% because of higher prices, partially offset by lower consumption. The resulting operating margin was approximately 20.4%, compared with 20.8% in the prior-year quarter.
Balance sheet, debt and liquidity
- Cash and cash equivalents were $15.9 million at December 30, 2018, compared with $5.4 million at September 30, 2018.
- Principal debt outstanding was $477.8 million, consisting primarily of $385.0 million of 9.5% senior secured notes and $92.8 million of a 12.0% second-lien term loan. Debt net of cash was 3.6 times trailing-twelve-month adjusted EBITDA.
- Total debt, net of unamortized issuance costs, was $460.1 million. The weighted average cost of debt was 10.0%.
- The first-lien term loan was repaid in full in November 2018. The revolver was undrawn, with approximately $21.4 million available after letters of credit.
- Total reported liquidity, including cash and revolver availability, was $37.3 million. Management expected operating cash flows and certain asset sales to fund interest and principal payments due over the next 12 months.
- The revolver commitment was amended and extended in December 2018, reduced to $27.2 million, with a further 15% reduction effective July 31, 2019; it expires December 28, 2019.
- The company was in compliance with its debt covenants at December 30, 2018. Substantial debt maturities are scheduled for 2022, including the $385.0 million notes, and December 2022 for the second-lien term loan.
Cash flow and capital allocation
Operating cash flow was $19.4 million. Investing activities used $1.4 million, including $1.0 million of capital expenditures. Financing activities used $7.5 million, primarily for debt repayment. Management expected 2019 capital expenditures of up to $11.0 million to be funded from internally generated funds or revolver availability.
Material changes and unusual items
- Net income comparisons were significantly affected by the prior-year $24.9 million discrete tax benefit from remeasuring deferred taxes under the 2017 Tax Act. The current quarter included $4.5 million of tax expense, representing a 29.6% effective tax rate.
- Lee adopted ASC 606 revenue guidance using the modified retrospective method. The company reported no material change to revenue recognition or opening retained earnings.
- Adoption of updated pension presentation guidance reclassified non-service pension and postretirement benefits to other non-operating income; the current-quarter benefit was $711,000.
- Restructuring costs declined to $62,000 from $468,000, and the company recorded a $100,000 net gain on asset sales, impairments and other items.
- Goodwill was $246.2 million and other intangible assets were $115.6 million. Management cautioned that future declines in market value or operating performance could result in additional impairment charges.
Outlook, risks and contingencies
Management stated that existing cash and expected operating cash flows should satisfy near-term interest and principal obligations and maintain adequate liquidity. However, the company’s ability to continue as a going concern depends on cash generation, covenant compliance and its ability to repay, refinance or amend debt as it matures.
- Key risks include declining advertising and subscription demand, changing technology, competition, labor costs, newsprint and energy prices, interest rates, and the ability to achieve planned expense reductions.
- Newsprint price increases were a material cost pressure. Management estimated that a $10-per-ton increase for 30-pound newsprint would reduce annual pretax income by approximately $400,000, excluding TNI and MNI and LIFO effects.
- All outstanding debt was fixed-rate at quarter-end, eliminating direct exposure to higher floating interest rates; no interest-rate hedges were in place.
- An event of default could permit lenders to accelerate debt and exercise collateral remedies. Debt refinancing risk is concentrated around the 2022 maturities and the 2019 revolver expiration.
- The company contributes to multiemployer pension plans and previously estimated a $2.6 million partial-withdrawal liability payable over 20 years.
- Routine legal and tax matters were disclosed; management did not expect them to have a material adverse effect, although ultimate outcomes cannot be assured.
Important facts for investors to verify
- Whether print advertising and subscription declines stabilize and whether digital growth continues to offset print weakness.
- Actual cash generation versus the amounts required for debt service, capital expenditures and mandatory excess-cash-flow repayments.
- Refinancing or repayment plans for the 2022 senior notes and second-lien term loan, as well as the revolver’s December 2019 expiration.
- Compliance with leverage and other debt covenants as operating conditions change.
- The effect of newsprint pricing, employee reductions, outsourcing and other cost actions on recurring adjusted EBITDA.
- Potential impairment charges affecting the company’s substantial goodwill and intangible-asset balances.
- The filing’s non-GAAP adjusted EBITDA and adjusted income measures, including the exclusions for restructuring, warrant valuation and tax effects.