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LEE > SEC Filings for LEE > Form 10-Q on 9-May-2014All Recent SEC Filings

Show all filings for LEE ENTERPRISES, INC

Form 10-Q for LEE ENTERPRISES, INC


9-May-2014

Quarterly Report


Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations

The following discussion includes comments and analysis relating to our results of operations and financial condition as of and for the 13 weeks and 26 weeks ended March 30, 2014. This discussion should be read in conjunction with the Consolidated Financial Statements and related Notes thereto, included herein, and our 2013 Annual Report on Form 10-K.


NON-GAAP FINANCIAL MEASURES

No non-GAAP financial measure should be considered as a substitute for any related GAAP financial measure. However, we believe the use of non-GAAP financial measures provides meaningful supplemental information with which to evaluate our financial performance, or assist in forecasting and analyzing future periods. We also believe such non-GAAP financial measures are alternative indicators of performance used by investors, lenders, rating agencies and financial analysts to estimate the value of a publishing business and its ability to meet debt service requirements.

The non-GAAP financial measures utilized by us are defined as follows:

Adjusted EBITDA is defined as operating income (loss), plus depreciation, amortization, impairment charges, stock compensation and 50% of EBITDA from TNI and MNI, minus equity in earnings of associated companies and curtailment gains.

Adjusted Income (Loss) and Adjusted Earnings (Loss) Per Common Share are defined as income (loss) attributable to Lee Enterprises, Incorporated and earnings
(loss) per common share adjusted to exclude both unusual matters and those of a substantially non-recurring nature.

Cash Costs are defined as compensation, newsprint and ink, other operating expenses and certain unusual matters, such as workforce adjustment costs. Depreciation, amortization, impairment charges, other non-cash operating expenses and other unusual matters are excluded.

Operating Cash Flow is defined as operating income (loss) plus depreciation, amortization and impairment charges, minus equity in earnings of TNI and MNI. Operating Cash Flow Margin is defined as operating cash flow divided by operating revenue.

Unlevered Free Cash Flow is defined as operating income (loss), plus depreciation, amortization, impairment charges, stock compensation, distributions from TNI and MNI and cash income tax refunds, minus equity in earnings of TNI and MNI, curtailment gains, cash income taxes, pension contributions and capital expenditures. Changes in working capital, asset sales, minority interest and discontinued operations are excluded. Free Cash Flow also includes financial income, interest expense and debt financing and reorganization costs.

Tables reconciling operating cash flow, adjusted EBITDA, unlevered free cash flow and free cash flow to operating income (loss), the most directly comparable measure under GAAP, are set forth in Item 2, included herein, under the caption "Selected Consolidated Financial Information".

Reconciliations of adjusted income (loss) and adjusted earnings (loss) per common share to income (loss) attributable to Lee Enterprises, Incorporated and earnings (loss) per common share, respectively, the most directly comparable measures under GAAP, are set forth in Item 2, included herein, under the caption "Overall Results".

We also present selected information for Lee Legacy and Pulitzer. Lee Legacy constitutes the business of the Company excluding Pulitzer. See "Selected Lee Legacy Financial Information" and "Selected Pulitzer Financial Information" in Item 2, included herein.

CRITICAL ACCOUNTING POLICIES

Our discussion and analysis of results of operations and financial condition are based upon our Consolidated Financial Statements, which have been prepared in accordance with GAAP. The preparation of these financial statements requires us to make estimates and judgments that affect the reported amounts of assets, liabilities, revenue and expenses, and related disclosure of contingent assets and liabilities. We evaluate these estimates and judgments on an ongoing basis. We base our estimates on historical experience and on various other assumptions that are believed to be reasonable under the circumstances, the results of which form the basis for making judgments about the carrying values of assets and liabilities that are not readily apparent from other sources. Actual results may differ from these estimates under different assumptions or conditions.

Our critical accounting policies include the following:

•Goodwill and other intangible assets;


Table of Contents

•Pension, postretirement and postemployment benefit plans;
•Income taxes;
•Revenue recognition; and
•Uninsured risks.

Additional information regarding these critical accounting policies can be found under the caption "Management's Discussion and Analysis of Financial Condition and Results of Operations" in our 2013 Annual Report on Form 10-K and the Notes to Consolidated Financial Statements, included herein.

IMPACT OF RECENTLY ISSUED ACCOUNTING STANDARDS

In 2013, the FASB issued an amendment to an existing accounting standard, which requires an entity to provide information about the amounts reclassified out of Accumulated Other Comprehensive Income ("AOCI") by component. In addition, an entity is required to present, either on the face of the financial statements or in the notes, significant amounts reclassified out of AOCI by the respective line items of net income, but only if the amount reclassified is required to be reclassified in its entirety in the same reporting period. For amounts that are not required to be reclassified in their entirety to net income, an entity is required to cross-reference to other disclosures that provide additional details about those amounts. This guidance does not change the current requirements for reporting net income or other comprehensive income in the financial statements and is effective beginning in 2014. The adoption of this standard did not have a material impact on our Consolidated Financial Statements.

EXECUTIVE OVERVIEW

We are a leading provider of local news and information, and a major platform for advertising, in the markets we serve, which are located primarily in the Midwest, Mountain West and West regions of the United States. With the exception of St. Louis, Missouri, our 50 daily newspaper markets, across 22 states, are principally midsize or small. Through our print and digital platforms, we reach an overwhelming majority of adults in our markets.

Our platforms include:

• 50 daily and 38 Sunday newspapers with subscribers totaling 1.1 million and 1.5 million, respectively, for the 13 weeks ended March 30, 2014, read by nearly four million people in print;

• Websites, mobile and tablet products in all of our markets that complement our newspapers and attracted 30.3 million unique visitors in March 30, 2014, with 235.9 million page views; and

• Nearly 300 weekly newspapers and classified and niche publications.

Our markets have established retail bases, and most are regional shopping hubs. We are located in four state capitals. Six of our top ten markets by revenue include major universities, and seven are home to major corporate headquarters. Based on data from the Bureau of Labor of Statistics as of March 2014, the unemployment rate in five of our top ten markets by revenue was lower than the national average. We believe that all of these factors have had a positive impact on advertising revenue.

We do not face significant competition from other local daily newspapers in most of our markets, although there is significant competition for audience in those markets from other media. In our top ten markets by revenue, only two have significant local daily print competition.

Our primary source of revenue is advertising and marketing services, followed by subscription revenue. Over the last several years, the advertising industry has experienced a shift toward digital advertising and away from print and other traditional media. This trend away from traditional advertising was compounded by the effects of the last recession, which had a significant impact on our advertising and marketing services revenue. In addition, our daily newspaper paid subscription and single copy unit sales have declined. We have attempted to offset our declines in advertising and marketing services revenue and print subscription revenue with our efforts to expand our digital advertising revenue and increase the numbers of our digital subscribers.

In April 2014, we began to implement a full access subscription model, which will provide subscribers with complete digital access, including desktop, mobile, tablet and replica editions. These will be offered as packages with print home delivery or as digital-only subscriptions, with subscription rates reflective of the expanded access. The full impact of this initiative on our revenue and subscriber base will not be realized until 2016.


During, and since, the last economic downturn, we have also transformed our business model and carefully managed our costs to maintain our margins and cash flows. Since 2007 and through 2013, we reduced annual cash costs of our continuing operations by $290 million, or 36%, net of costs incurred to achieve these savings and also net of cost increases that primarily support our revenue initiatives. We are continuing to pursue operating efficiencies in 2014.

ECONOMIC CONDITIONS

According to the National Bureau of Economic Research, the United States economy was in a recession from December 2007 until June 2009. It is widely believed that certain elements of the economy, such as housing, auto sales and employment, were in decline before December 2007, and some elements have still not recovered to pre-recession levels in either nominal or real (inflation adjusted) terms. Our revenue, operating results and cash flows were significantly impacted by the recession and its aftermath. The duration and depth of an economic recession, and pace of economic recovery, in markets in which we operate may influence our future results.

IMPAIRMENT OF GOODWILL AND OTHER ASSETS

Due primarily to our stockholders' deficit in 2013 and to the difference between our stock price and the per share carrying value of our net assets in 2011, we analyzed the carrying value of our net assets in 2013 and 2011. Continued deterioration in our revenue and the weak economic environment were also factors in the timing of the analyses.

In 2013, we concluded the fair value of our business was in excess of the carrying value of our net assets. As a result no goodwill impairment was recorded. However, we determined that the cash flows from nonamortized and amortizable intangible assets were not sufficient to recover their carrying values. As a result, we recorded non-cash charges to reduce the carrying values of such assets.

In 2011, we concluded the fair value of our business did not exceed the carrying value of our net assets. As a result, we recorded pretax, non-cash charges to reduce the carrying values of goodwill, nonamortized and amortizable intangible assets. Additional pretax, non-cash charges were recorded to reduce the carrying value of TNI.

We also recorded pretax, non-cash charges to reduce the carrying value of property and equipment in 2013, 2012 and 2011. We recorded deferred income tax benefits related to these charges.


DEBT AND LIQUIDITY

We have a substantial amount of debt, as discussed more fully (and certain capitalized terms used below defined) in Note 1 and Note 5 of the Notes to Consolidated Financial Statements, included herein. In February 2009, we completed a comprehensive restructuring of our then-existing credit agreement and a refinancing of our Pulitzer Notes debt, substantially enhancing our liquidity and operating flexibility. Since February 2009, we have satisfied all interest payments and substantially all principal payments due under our debt facilities with our cash flows.

Substantially all of our debt was scheduled to mature in April 2012. We used a voluntary, prepackaged petition under the U. S. Bankruptcy Code to accomplish a comprehensive refinancing that extended the maturity to December 2015 for most of our debt, with the remainder maturing in April 2017. Interest expense has increased as a result of the refinancing and mandatory principal payments were reduced. In May 2013, we again refinanced the remaining balance of the Pulitzer Notes. On March 31, 2014, we refinanced all of our other debt. Our ability to make payments on our indebtedness will depend on our ability to generate future cash flows. This ability, to a certain extent, is subject to general economic, financial, competitive, business, legislative, regulatory and other factors that are beyond our control.

At March 30, 2014, after consideration of letters of credit, we have approximately $29,942,000 available for future use under our revolving credit facility. Including cash, our liquidity at March 30, 2014 totals $44,821,000. This liquidity amount excludes any future cash flows. We expect all interest and principal payments due in the next twelve months will be satisfied by our cash flows, which will allow us to maintain an adequate level of liquidity. The Warrants, if and when exercised, would provide additional liquidity in an amount up to $25,140,000.

At March 31, 2014, subsequent to the refinancing, the principal amount of our outstanding debt totals $845,000,000. For the last twelve months ending March 30, 2014, the principal amount of our debt, net of cash and on a pro forma basis for the refinancing, is 4.8 times our adjusted EBITDA, compared to a ratio of 5.1 at March 31, 2013.

There are numerous potential consequences under the Notes, New 1st Lien Credit Facility, New 2nd Lien Term Loan, and the New Pulitzer Notes, if an event of default, as defined, occurs and is not remedied. Many of those consequences are beyond our control. The occurrence of one or more events of default would give rise to the right of the applicable lender(s) to exercise their remedies under the Notes, New 1st Lien Credit Facility, New 2nd Lien Term Loan, and the New Pulitzer Notes, respectively, including, without limitation, the right to accelerate all outstanding debt and take actions authorized in such circumstances under applicable collateral security documents.

Our ability to operate as a going concern is dependent on our ability to remain in compliance with debt covenants and to refinance or amend our debt agreements as they become due, or earlier if available liquidity is consumed. We are in compliance with our debt covenants at March 30, 2014. The Notes, New 1st Lien Credit Facility and New 2nd Lien Term Loan have only limited affirmative covenants with which we are required to maintain compliance.


13 WEEKS ENDED MARCH 30, 2014

Operating results, as reported in the Consolidated Financial Statements, are
summarized below. Certain prior period amounts have been reclassified to conform
with the current year presentation.
                                                                    13 Weeks Ended
                                                  March 30    March 31     Percent
(Thousands of Dollars, Except Per Share Data)         2014        2013      Change

Advertising and marketing services revenue:
Retail                                              64,821      66,387        (2.4 )
Classified:
Employment                                           8,060       8,657        (6.9 )
Automotive                                           6,889       8,304       (17.0 )
Real estate                                          4,125       4,425        (6.8 )
All other                                           10,303      11,512       (10.5 )
Total classified                                    29,377      32,898       (10.7 )
National                                             6,094       5,544         9.9
Niche publications and other                         2,427       2,553        (5.0 )
Total advertising and marketing services revenue   102,719     107,382        (4.3 )
Subscription                                        42,098      43,970        (4.3 )
Commercial printing                                  2,992       3,121        (4.1 )
Digital services and other                           6,284       6,130         2.5
Total operating revenue                            154,093     160,603        (4.1 )
Operating expenses:
Compensation                                        59,071      64,209        (8.0 )
Newsprint and ink                                    9,334      10,712       (12.9 )
Other operating expenses                            52,712      53,259        (1.0 )
Workforce adjustments                                  299         512       (41.6 )
                                                   121,416     128,692        (5.7 )
Operating cash flow                                 32,677      31,911         2.4
Depreciation and amortization                       12,051      14,833       (18.8 )
Loss (gain) on sales of assets, net                 (1,501 )       150          NM
Equity in earnings of associated companies           1,593       1,733        (8.1 )
Operating income                                    23,720      18,661        27.1
Non-operating expense, net                         (20,523 )   (23,031 )     (10.9 )
Income (loss) from continuing operations before
income taxes                                         3,197      (4,370 )        NM
Income tax expense (benefit)                         1,492        (808 )        NM
Income (loss) from continuing operations             1,705      (3,562 )        NM
Discontinued operations, net of income taxes             -      (2,293 )        NM
Net income (loss)                                    1,705      (5,855 )        NM
Net income attributable to non-controlling
interests                                             (219 )      (140 )      56.4
Income (loss) attributable to Lee Enterprises,
Incorporated                                         1,486      (5,995 )        NM
Other comprehensive loss, net of income taxes         (442 )       (93 )        NM
Comprehensive income (loss) attributable to Lee
Enterprises, Incorporated                            1,044      (6,088 )        NM
Income (loss) from continuing operations
attributable to Lee Enterprises, Incorporated        1,486      (3,702 )        NM
Earnings (loss) per common share:
Basic                                                 0.03       (0.12 )        NM
Diluted                                               0.03       (0.12 )        NM

References to the "2014 Quarter" refer to the 13 weeks ended March 30, 2014. Similarly, references to the "2013 Quarter" refer to the 13 weeks ended March 31, 2013.

Total operating revenue decreased $6,510,000, or 4.1%, in the 2014 Quarter, compared to the 2013 Quarter.


Advertising and Marketing Services Revenue

In the 2014 Quarter, advertising and marketing services revenue decreased $4,663,000, or 4.3%, compared to the 2013 Quarter. Retail advertising decreased 2.4%. Retail preprint insertion revenue decreased 1.3%. Digital retail advertising on a stand-alone basis increased 9.9%, partially offsetting print declines.

Classified revenue decreased 10.7% in the 2014 Quarter. Employment revenue decreased 6.9% while automotive advertising decreased 17.0%, real estate decreased 6.8% and other classified decreased 10.5%. Digital classified revenue on a stand-alone basis increased 1.0%, partially offsetting print declines.

National advertising increased $550,000, or 9.9%. Digital national advertising on a stand-alone basis increased 86.2% due to improved management of national advertising exchanges. Advertising in niche publications and other decreased 5.0%.

On a stand-alone basis, digital advertising and marketing services revenue increased 10.2% in the 2014 Quarter, representing 16.9% of total advertising and marketing services revenue. Total digital revenue for the 2014 Quarter, including advertising, subscriptions and all other digital business, totaled $20,469,000, an increase of 13.1% from a year ago. Print advertising and marketing services revenue on a stand-alone basis decreased 6.8%.

Subscription and Other Revenue

Subscription revenue decreased $1,872,000, or 4.3%, in the 2014 Quarter due to decreases in print subscribers, which were partially offset by price increases and increases in digital subscribers.

Our unaudited, average daily circulation, including TNI, MNI and digital subscribers, decreased 5.0% and Sunday circulation increased 9.9% in the 2014 Quarter compared to the 2013 Quarter. The increase in Sunday units is due to increases in branded editions.

Our mobile, tablet, desktop and app sites, including TNI and MNI, attracted 30.3 million unique visitors in the month of March 2014, an increase of 30.8% from a year ago, with 235.9 million page views. Research in our larger markets indicates we are maintaining our share of audience through the combination of digital audience growth and strong newspaper readership.

Commercial printing revenue decreased $129,000, or 4.1%, in the 2014 Quarter. Digital services and other revenue increased $154,000, or 2.5%, in the 2014 Quarter.

Operating Expenses

Cash costs decreased $7,276,000, or 5.7%, in the 2014 Quarter.

Compensation expense decreased $5,138,000, or 8.0%, in the 2014 Quarter, driven by a decline in average full-time equivalent employees of 6.0%.

Newsprint and ink costs decreased $1,378,000, or 12.9%, in the 2014 Quarter, primarily as a result of a reduction in newsprint volume of 13.5%. See Item 3, "Commodities", included herein, for further discussion and analysis of the impact of newsprint on our business.

Other operating expenses, which are comprised of all operating costs not considered to be compensation, newsprint, depreciation, amortization, or unusual matters, decreased $547,000, or 1.0%, in the 2014 Quarter.

Reductions in staffing resulted in workforce adjustment costs totaling $299,000 and $512,000 in the 2014 Quarter and 2013 Quarter, respectively.

For the full year, 2014 cash costs are expected to decrease 3.0-3.5% (an improvement from previous guidance), excluding the impact of subscription-related expense reclassification as a result of moving to fee-for-service delivery contracts at several of our newspapers. The reclassification will increase both revenue and operating expenses, with no impact on operating cash flow or operating income.


Certain results, excluding the impact of the subscription-related expense reclassification, are as follows:

                                                                            13 Weeks Ended
                                                             March 30   March 31   Percent
(Thousands of Dollars)                                           2014       2013    Change

Subscription revenue, as reported                              42,098     43,970      (4.3 )
Adjustment for subscription-related expense reclassification     (400 )        -        NM
Subscription revenue, as adjusted                              41,698     43,970      (5.2 )

Total operating revenue, as reported                          154,093    160,603      (4.1 )
Adjustment for subscription-related expense reclassification     (400 )        -        NM
Total operating revenue, as adjusted                          153,693    160,603      (4.3 )

Total cash costs, as reported                                 121,416    128,692      (5.7 )
Adjustment for subscription-related expense reclassification     (400 )        -        NM
Total cash costs, as adjusted                                 121,016    128,692      (6.0 )

Operating Cash Flow and Results of Operations

As a result of the factors noted above, operating cash flow increased 2.4%, to $32,677,000, in the 2014 Quarter compared to $31,911,000 in the 2013 Quarter. Operating cash flow margin increased to 21.2% from 19.9% a year ago, reflecting a larger percentage decrease in operating expenses than the decrease in operating revenue.

Depreciation expense decreased $159,000, or 3.0%, in the 2014 Quarter. Amortization expense decreased $2,623,000, or 27.5%, in the 2014 Quarter due to impairment charges recorded in 2013. Sales of operating assets resulted in a net gain of $1,501,000 in the 2014 Quarter compared to a net loss of $150,000 in the 2013 Quarter.

Equity in earnings in associated companies decreased $140,000 in the 2014 Quarter.

The factors noted above resulted in operating income of $23,720,000 in the 2014 Quarter compared to $18,661,000 in the 2013 Quarter. Operating income margin increased to 15.4% from 11.6% a year ago.

Nonoperating Income and Expense

Interest expense decreased $2,381,000, or 10.4%, to $20,552,000 in the 2014 Quarter due to lower debt balances and refinancing of the Pulitzer Notes in May 2013. Our weighted average cost of debt was 9.2% at the end of the 2014 Quarter compared to 9.4% at the end of the 2013 Quarter. Interest expense in the 2014 Quarter includes $1,196,000 of non-cash amortization of a present value adjustment of debt compared to $1,358,000 in the 2013 Quarter.

Absent a significant increase in LIBOR, and as a result of the refinancing of our debt as of March 31, 2014, we expect our annual interest payments to initially increase by approximately $3,400,000, due primarily to a $32,000,000 increase in the principal amount of our debt to fund fees and expenses related to the transaction. This amount is subject to the timing and amount of future payments. The pro forma weighted average cost of cash interest on our debt after the refinancing was 9.25%.

Overall Results

We recognized income tax expense of 46.7% of income from continuing operations before income taxes in the 2014 Quarter and a tax benefit of 18.5% of loss from continuing operations before income taxes in the 2013 Quarter. See Note 7 of the Notes to Consolidated Financial Statements, included herein, for a reconciliation of the expected federal income tax rate to the actual tax rates.


As a result of the factors noted above, income attributable to Lee Enterprises, Incorporated (which includes discontinued operations) totaled $1,486,000 in the 2014 Quarter compared to a loss of $5,995,000 in the 2013 Quarter. We recorded earnings per diluted common share of $0.03 in the 2014 Quarter and a loss per diluted common share of $0.12 in the 2013 Quarter. Excluding unusual matters, as detailed in the table below, diluted earnings per common share, as adjusted, were $0.05 in the 2014 Quarter, compared to a loss per common share, as adjusted, of $0.05 in the 2013 Quarter. Per share amounts may not add due to rounding.

                                                                       13 Weeks Ended
                                                      March 30               March 31
                                                          2014                   2013
(Thousands of Dollars, Except Per Share
Data)                                       Amount   Per Share     Amount   Per Share

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