Lee Enterprises Reports Results for First Fiscal Quarter

DAVENPORT, Iowa--()--Lee Enterprises, Incorporated (NYSE:LEE), a major provider of local news, information and advertising in 50 markets, today reported preliminary(1) earnings of 18 cents per diluted common share for its first fiscal quarter ended December 28, 2014, compared with earnings of 22 cents a year ago. Excluding unusual matters, adjusted earnings per diluted common share(2) totaled 22 cents, compared with earnings of 24 cents a year ago.

“Lee's full-access subscription model helped produce quarter-over-quarter subscription revenue growth, exceeding previously announced guidance. And through our business transformation efforts we exceeded our cash cost reduction goal for the quarter.”

Mary Junck, chairman and chief executive officer, said: "We're off to a strong start in FY2015 with total digital revenue continuing to grow at an impressive pace — up 25.6% in the quarter. Our audiences remain massive as mobile, tablet, desktop and app page views increased 7.7% to 226 million and unique visitors in the month of December 2014 increased 7.8% to 28 million. Our latest independent research shows that over the course of one week our newspapers and digital products reach almost 80% of all adults and almost three-quarters of adults ages 18-29 in our larger markets."

"Also of significant note, we continued our now more than six year run of strong and stable cash flow with unlevered free cash(2) flow totaling $154.9 million for the last twelve months ended December 28, 2014. And we aim to keep the string going."

She added: "Lee's full-access subscription model helped produce quarter-over-quarter subscription revenue growth, exceeding previously announced guidance. And through our business transformation efforts we exceeded our cash cost reduction goal for the quarter."

She also noted the following financial highlights for the quarter:

  • Total digital revenue increased 25.6% from the same quarter a year ago, our fifth consecutive quarter of double digit growth;
  • Digital advertising and marketing services revenue increased 7.1% and mobile advertising revenue, which is included in digital advertising, increased 32.4%;
  • Subscription revenue, excluding the subscription-related expense reclassification discussed more fully below, increased 0.3% and we expect full year 2015 subscription revenue, excluding the subscription-related expense reclassification, to increase 2.5%-3.0%;
  • Total cash costs(2), excluding the subscription-related expense reclassification, decreased 2.1%. Our ongoing cost control will continue and we anticipate full year cash costs, excluding the subscription-related expense reclassification, to decrease 0.5%-1.0% in 2015; and
  • Debt was reduced $20.3 million in the quarter and another $12.3 million since then.

FIRST QUARTER OPERATING RESULTS

Operating revenue for the 13 weeks ended December 28, 2014 totaled $176.2 million, a decrease of 0.7% compared with a year ago. Excluding the impact of a subscription-related expense reclassification as a result of moving to fee-for-service delivery contracts at several of our newspapers, operating revenue decreased 3.4%. This reclassification increases both print subscription revenue and operating expenses, with no impact on operating cash flow(2) or operating income. Certain delivery expenses were previously reported as a reduction of revenue. A table later in this release details the impact of the reclassification on revenue and cash costs.

Combined print and digital advertising and marketing services revenue decreased 5.6% to $115.5 million, with retail advertising down 6.6%, classified down 3.4% and national down 4.9%. Retail preprint advertising decreased 8.1%. Combined print and digital classified employment revenue increased 3.0%, while automotive decreased 9.9%, real estate decreased 7.8% and other classified decreased 0.9%. Digital advertising and marketing services revenue on a stand-alone basis increased 7.1% to $19.9 million and now totals 17.3% of total advertising and marketing services revenue. Mobile advertising revenue increased 32.4%. Print advertising and marketing services revenue on a stand-alone basis decreased 7.9%.

Subscription revenue increased 10.9%. Excluding the impact of the subscription-related expense reclassification, subscription revenue increased 0.3%. Our average daily newspaper circulation, including TNI, MNI and digital subscribers, totaled 1.1 million in the 2015 Quarter. Sunday circulation totaled 1.5 million. Amounts are not comparable to the prior year period due to changes in measurements by the Alliance for Audited Media.

Total digital revenue, including advertising, marketing services, subscriptions and digital businesses, totaled $27.2 million in the quarter, up 25.6%.

Cash costs increased 1.6% for the 13 weeks ended December 28, 2014. Compensation decreased 0.3%, with the average number of full-time equivalent employees down 3.5%. Newsprint and ink expense decreased 16.2%, primarily the result of a reduction in newsprint volume of 13.3%. Other operating expenses increased 7.3%. Excluding the impact of the subscription-related expense reclassification, cash costs decreased 2.1%. We expect our cash costs, excluding the subscription-related expense reclassification, to decrease 0.5%-1.0% in 2015.

Operating cash flow decreased 6.8% from a year ago to $46.0 million. Operating cash flow margin(2) decreased to 26.1%, compared to 27.8% a year ago. Including equity in earnings of associated companies, depreciation and amortization, as well as unusual matters in both years, operating income totaled $37.5 million in the current year quarter, compared with operating income of $40.2 million a year ago. Operating income margin was 21.3% in the current year quarter, compared with 22.7% a year ago. The subscription expense reclassification reduced operating cash flow margin and operating income margin by 0.8% and 0.6%, respectively.

Non-operating expenses increased 1.3% for the 13 weeks ended December 28, 2014. Amortization of debt financing costs were $1.1 million in the current year quarter compared to $0.1 million in the prior year quarter. We also recognized $1.3 million of non-operating expense in the current year quarter due to the change in fair value of stock warrants issued in connection with our refinancing in 2014. Interest expense decreased 9.8% in the current year quarter due to lower debt balances and non-cash interest expense of $1.2 million in the prior year quarter. Income attributable to Lee Enterprises, Incorporated for the quarter totaled $9.8 million, compared with income of $11.9 million a year ago.

ADJUSTED EARNINGS AND EPS FOR THE QUARTER

The following table summarizes the impact from unusual matters on income attributable to Lee Enterprises, Incorporated and earnings per diluted common share. Per share amounts may not add due to rounding.

                 
            13 Weeks Ended
  December 28     December 29
    2014     2013

(Thousands of Dollars, Except Per Share Data)

  Amount     Per Share     Amount     Per Share
   
Income attributable to Lee Enterprises, Incorporated, as reported 9,753 0.18 11,892 0.22
Adjustments:
Debt financing costs 1,102 104
Amortization of debt present value adjustment

1,198

 

Warrants fair value adjustment 1,302
Other, net   (54 )         163      
2,350 1,465
Income tax effect of adjustments, net   (367 )         (512 )    
    1,983     0.04     953     0.02
Income attributable to Lee Enterprises, Incorporated, as adjusted   11,736     0.22     12,845     0.24
 

SUBSCRIPTION EXPENSE RECLASSIFICATION

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

       
    13 Weeks Ended  
  December 28   December 29     Percent

(Thousands of Dollars)

  2014     2013     Change  
 
Subscription revenue, as reported 50,399 45,452 10.9
Adjustment for subscription-related expense reclassification   (4,807 )      

NM

 

Subscription revenue, as adjusted   45,592     45,452     0.3  
 
Total operating revenue, as reported 176,154 177,385 (0.7 )
Adjustment for subscription-related expense reclassification   (4,807 )       NM  
Total operating revenue, as adjusted   171,347     177,385     (3.4 )
 
Other cash costs, as reported 59,181 55,157 7.3
Adjustment for subscription-related expense reclassification   (4,807 )       NM  
Other cash costs, as adjusted   54,374     55,157     (1.4 )
 
Total cash costs, as reported 130,175 128,068 1.6
Adjustment for subscription-related expense reclassification   (4,807 )       NM  
Total cash costs, as adjusted   125,368     128,068     (2.1 )
 

Approximately $4,444,000, or 92.4% of the reclassification impacts revenue and cash costs of our Lee Legacy operations, and approximately $363,000, or 7.6% impacts Pulitzer.

FULL ACCESS SUBSCRIPTION INITIATIVE

As previously reported, we launched our full access subscription initiative in April 2014. As of today, 30 markets have been launched and we are on track to launch all of our markets before June 2015. More than 200,000 subscribers have activated their access to our digital content to date. As previously reported, due to the timing of the rollout and subscriber renewal dates, the bulk of the positive revenue from this initiative should be realized in 2015 and we expect 2015 subscriber revenue, excluding the subscription-related expense reclassification, to increase 2.5-3.0%.

DEBT AND FREE CASH FLOW(2)

Debt was reduced $20.3 million in the quarter and by an additional $12.3 million since then. Including $32.0 million borrowed to pay 2014 refinancing costs that has since been repaid, debt has been reduced $80.5 million in the last twelve months ended December 2014.

Unlevered free cash flow totaled $45.8 million in the current year quarter compared to $50.1 million in the same quarter a year ago and $154.9 million over the last twelve months. Liquidity at December 28, 2014 totaled $48.5 million compared to $28.2 million of required debt principal payments over the next twelve months.

CONFERENCE CALL INFORMATION

As previously announced, we will hold an earnings conference call and audio webcast later today at 9:00 a.m. Central Standard Time. The live webcast will be accessible at www.lee.net and will be available for replay two hours later. Several analysts have been invited to ask questions on the call. Questions from other participants may be submitted by participating in the webcast. The call also may be monitored on a listen-only conference line by dialing (toll free) 888-510-1767 and entering a conference passcode of 108037 at least five minutes before the scheduled start. Please note that this is a different number than what was previously communicated. Participants on the listen-only line will not have the opportunity to ask questions.

ABOUT LEE

Lee Enterprises is a leading provider of local news and information, and a major platform for advertising, in its markets, with 46 daily newspapers and a joint interest in four others, rapidly growing digital products and nearly 300 specialty publications in 22 states. Lee's newspapers have circulation of 1.1 million daily and 1.5 million Sunday, reaching over three million readers in print alone. Lee's websites and mobile and tablet products attracted 27.6 million unique visitors in December 2014. Lee's markets include St. Louis, MO; Lincoln, NE; Madison, WI; Davenport, IA; Billings, MT; Bloomington, IL; and Tucson, AZ. Lee Common Stock is traded on the New York Stock Exchange under the symbol LEE. For more information about Lee, please visit www.lee.net.

FORWARD-LOOKING STATEMENTS — The Private Securities Litigation Reform Act of 1995 provides a “safe harbor” for forward-looking statements. This release contains information that may be deemed forward-looking that is based largely on our current expectations, and is subject to certain risks, trends and uncertainties that could cause actual results to differ materially from those anticipated. Among such risks, trends and other uncertainties, which in some instances are beyond our control, are:

  • Our ability to generate cash flows and maintain liquidity sufficient to service our debt;
  • Our ability to comply with the financial covenants in our credit facilities;
  • Our ability to refinance our debt as it comes due;
  • That the warrants issued in our refinancing will not be exercised;
  • The impact and duration of adverse conditions in certain aspects of the economy affecting our business;
  • Changes in advertising demand;
  • Potential changes in newsprint, other commodities and energy costs;
  • Interest rates;
  • Labor costs;
  • Legislative and regulatory rulings;
  • Our ability to achieve planned expense reductions;
  • Our ability to maintain employee and customer relationships;
  • Our ability to manage increased capital costs;
  • Our ability to maintain our listing status on the NYSE;
  • Competition; and
  • Other risks detailed from time to time in our publicly filed documents.

Any statements that are not statements of historical fact (including statements containing the words “may”, “will”, “would”, “could”, “believes”, “expects”, “anticipates”, “intends”, “plans”, “projects”, “considers” and similar expressions) generally should be considered forward-looking statements. Readers are cautioned not to place undue reliance on such forward-looking statements, which are made as of the date of this release. We do not undertake to publicly update or revise our forward-looking statements, except as required by law.

 

CONSOLIDATED STATEMENTS OF OPERATIONS

(UNAUDITED)

     
  13 Weeks Ended  
December 28 December 29   Percent

(Thousands of Dollars, Except Per Share Data)

2014   2013   Change  
 
Advertising and marketing services:
Retail 76,814 82,279 (6.6 )
Classified:
Employment 7,425 7,209 3.0
Automotive 7,335 8,140 (9.9 )
Real estate 4,074 4,419 (7.8 )
All other 10,361   10,453   (0.9 )
Total classified 29,195 30,221 (3.4 )
National 7,151 7,517 (4.9 )
Niche publications and other 2,317   2,374   (2.4 )
Total advertising and marketing services revenue 115,477   122,391   (5.6 )
Subscription 50,399 45,452 10.9
Commercial printing 2,816 3,032 (7.1 )
Digital services and other 7,462   6,510   14.6  
Total operating revenue 176,154   177,385   (0.7 )
Operating expenses:
Compensation 61,937 62,142 (0.3 )
Newsprint and ink 8,846 10,562 (16.2 )
Other operating expenses 59,181 55,157 7.3
Workforce adjustments 211   207   1.9  
Cash costs 130,175   128,068   1.6  
Operating cash flow 45,979 49,317 (6.8 )
Depreciation 4,616 5,131 (10.0 )
Amortization 6,880 6,893 (0.2 )
Loss (gain) on sales of assets, net (257 ) 10 NM
Equity in earnings of associated companies 2,757   2,919   (5.5 )
Operating income 37,497   40,202   (6.7 )
 
 

CONSOLIDATED STATEMENTS OF OPERATIONS, continued

                   
    13 Weeks Ended  
  December 28   December 29   Percent

(Thousands of Dollars and Shares, Except Per Share Data)

  2014     2013     Change  
 
Non-operating income (expense):
Financial income 78 120 (35.0 )
Interest expense (18,790 ) (20,827 ) (9.8 )
Debt financing costs (1,102 ) (104 ) NM
Other, net   (1,178 )   94     NM  
    (20,992 )   (20,717 )   1.3  
Income before income taxes 16,505 19,485 (15.3 )
Income tax expense   6,498     7,383     (12.0 )
Net income 10,007 12,102 (17.3 )
Net income attributable to non-controlling interests   (254 )   (210 )   21.0  
Income attributable to Lee Enterprises, Incorporated   9,753     11,892     (18.0 )
 
Earnings per common share:
Basic 0.19 0.23 (17.4 )
Diluted   0.18     0.22     (18.2 )
 
Average common shares:
Basic 52,471 52,081
Diluted   53,954     53,259        
 
 

SELECTED CONSOLIDATED FINANCIAL INFORMATION

(UNAUDITED)

         
  13 Weeks Ended     52 Weeks Ended
December 28   December 29 December 28

(Thousands of Dollars)

2014     2013     2014  
 
Advertising and marketing services 115,477 122,391 435,087
Subscription 50,399 45,452 181,773
Other 10,278     9,542     38,606  
Total operating revenue 176,154     177,385     655,466  
Compensation 61,937 62,142 242,849
Newsprint and ink 8,846 10,562 36,278
Other operating expenses 59,181 55,157 223,353
Depreciation and amortization 11,496 12,024 47,983
Loss (gain) on sales of assets, net (257 ) 10 (1,605 )
Impairment of goodwill and other assets 2,980
Workforce adjustments 211     207     1,271  
Total operating expenses 141,414 140,102 553,109

Equity in earnings of TNI and MNI

2,757     2,919     8,135  
Operating income 37,497 40,202 110,492
Adjusted to exclude:
Depreciation and amortization 11,496 12,024 47,983
Loss (gain) on sales of assets, net (257 ) 10 (1,605 )
Impairment of intangible and other assets 2,980
Equity in earnings of TNI and MNI (2,757 )   (2,919 )   (8,135 )
Operating cash flow 45,979 49,317 151,715
Add:
Ownership share of TNI and MNI EBITDA(2) (50%) 3,756 3,921 11,071
Adjusted to exclude:
Stock compensation 443     264     1,660  
Adjusted EBITDA(2) 50,178 53,502 164,446
Adjusted to exclude:
Ownership share of TNI and MNI EBITDA (50%) (3,756 ) (3,921 ) (11,071 )
Add (deduct):
Distributions from TNI and MNI 2,944 2,815 10,125
Capital expenditures, net of insurance proceeds (3,547 ) (2,295 ) (13,076 )
Pension contributions (1,522 )
Cash income tax refunds (payments) (4 )   (14 )   6,032  
Unlevered free cash flow 45,815 50,087 154,934
Add (deduct):
Financial income 78 120 343
Interest expense to be settled in cash (18,790 ) (19,628 ) (76,492 )
Debt financing costs paid (17 )   (2 )   (31,602 )
Free cash flow 27,086     30,577     47,183  
 
   

SELECTED LEE LEGACY(2) ONLY FINANCIAL INFORMATION

(UNAUDITED)

         
    13 Weeks Ended   52 Weeks Ended
December 28   December 29 December 28

(Thousands of Dollars)

  2014   2013   2014
 
Advertising and marketing services 80,055 83,209 303,664
Subscription 33,546 28,749 118,789
Other   8,780     8,217     33,771  
Total operating revenue   122,381     120,175     456,224  
Compensation 46,246 45,826 181,061
Newsprint and ink 6,523 7,338 26,269
Other operating expenses 33,577 29,120 123,430
Depreciation and amortization 7,951 8,082 33,031
Loss (gain) on sales of assets, net (79 ) (15 ) (1,426 )
Impairment of goodwill and other assets 378
Workforce adjustments   72     49     576  
Total operating expenses 94,290 90,400 363,319
Equity in earnings of MNI   1,112     1,130     3,366  
Operating income 29,203 30,905 96,271
Adjusted to exclude:
Depreciation and amortization 7,951 8,082 33,031
Loss (gain) on sales of assets, net (79 ) (15 ) (1,426 )
Impairment of intangible and other assets 378
Equity in earnings of MNI   (1,112 )   (1,130 )   (3,366 )
Operating cash flow 35,963 37,842 124,888
Add:
Ownership share of MNI EBITDA (50%) 2,007 2,027 5,885
Adjusted to exclude:
Stock compensation   443     264     1,660  
Adjusted EBITDA 38,413 40,133 132,433
Adjusted to exclude:
Ownership share of MNI EBITDA (50%) (2,007 ) (2,027 ) (5,885 )
Add (deduct):
Distributions from MNI 1,750 1,500 5,000
Capital expenditures, net of insurance proceeds (2,080 ) (2,163 ) (8,775 )
Pension contributions (87 )
Cash income tax refunds (payments) (4 ) (14 ) (256 )
Intercompany charges not settled in cash (2,318 ) (2,099 ) (9,897 )
Other           (2,000 )
Unlevered free cash flow 33,754 35,330 110,533
Add (deduct):
Financial income 78 120 343
Interest expense to be settled in cash (18,330 ) (18,355 ) (73,466 )
Debt financing costs paid   (17 )   (2 )   (31,594 )
Free cash flow   15,485     17,093     5,816  
 
   

SELECTED PULITZER(2) ONLY FINANCIAL INFORMATION

(UNAUDITED)

         
    13 Weeks Ended   52 Weeks Ended
December 28   December 29 December 28

(Thousands of Dollars)

  2014   2013   2014
 
Advertising and marketing services 35,422 39,182 131,423
Subscription 16,853 16,703 62,984
Other   1,498     1,325     4,835  
Total operating revenue   53,773     57,210     199,242  
Compensation 15,691 16,316 61,788
Newsprint and ink 2,323 3,224 10,009
Other operating expenses 25,604 26,037 99,923
Depreciation and amortization 3,545 3,942 14,952
Loss (gain) on sales of assets, net (178 ) 25 (179 )
Impairment of goodwill and other assets 2,602
Workforce adjustments   139     158     695  
Total operating expenses 47,124 49,702 189,790
Equity in earnings of TNI   1,645     1,789     4,769  
Operating income 8,294 9,297 14,221
Adjusted to exclude:
Depreciation and amortization 3,545 3,942 14,952
Loss (gain) on sales of assets, net (178 ) 25 (179 )
Impairment of intangible and other assets 2,602
Equity in earnings of TNI   (1,645 )   (1,789 )   (4,769

)

Operating cash flow 10,016 11,475 26,827
Add:
Ownership share of TNI EBITDA (50%)   1,749     1,894     5,186  
Adjusted EBITDA 11,765 13,369 32,013
Adjusted to exclude:
Ownership share of TNI EBITDA (50%) (1,749 ) (1,894 ) (5,186 )
Add (deduct):
Distributions from TNI 1,194 1,315 5,125
Capital expenditures, net of insurance proceeds (1,467 ) (132 ) (4,301 )
Pension contributions (1,435 )
Cash income tax refunds (payments) 6,288
Intercompany charges not settled in cash 2,318 2,099 9,897
Other           2,000  
Unlevered free cash flow 12,061 14,757 44,401
Add (deduct):
Interest expense to be settled in cash (460 ) (1,273 ) (3,026 )
Debt financing costs paid           (8 )
Free cash flow   11,601     13,484

 

  41,367  
 
 

REVENUE BY REGION

       
    13 Weeks Ended  
December 28   December 29   Percent

(Thousands of Dollars)

  2014   2013   Change  
 
Midwest 109,266 111,945 (2.4 )
Mountain West 35,740 34,684 3.0
West 11,964 11,662 2.6
East/Other   19,184     19,094     0.5  
Total   176,154     177,385     (0.7 )
 
     

SELECTED BALANCE SHEET INFORMATION

             
February 5 December 28 September 28

(Thousands of Dollars)

  2015   2014   2014
Cash         15,943

 

16,704
   

Debt (Principal Amount):

Revolving Facility

 

5,000

1st Lien Term Loan 207,250 215,500 226,750
Notes 400,000 400,000 400,000
2nd Lien Term Loan 150,000 150,000 150,000
Pulitzer Notes   15,000   19,000   23,000
    772,250   784,500   804,750
 
   

SELECTED STATISTICAL INFORMATION

             
  13 Weeks Ended  
December 28 December 29 Percent
  2014   2013   Change  
 

Capital expenditures, net of insurance proceeds (Thousands of Dollars)

3,547 2,295 54.6

Newsprint volume (Tonnes)

13,816 15,931 (13.3 )
Average full-time equivalent employees 4,457 4,617 (3.5 )

Shares outstanding at end of period (Thousands of Shares)

54,492   53,449   2.0  
 

NOTES

(1)   This earnings release is a preliminary report of results for the periods included. The reader should refer to the Company's most recent reports on Form 10-Q and on Form 10-K for definitive information.
 
(2) The following are non-GAAP (Generally Accepted Accounting Principles) financial measures for which reconciliations to relevant GAAP measures are included in tables accompanying this release:
 

Adjusted EBITDA is defined as operating income (loss), plus depreciation, amortization, impairment charges, stock compensation and 50% of EBITDA from associated companies, 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 associated companies and curtailment gains. Operating Cash Flow margin is defined as operating cash flow divided by operating revenue. The terms operating cash flow and EBITDA are used interchangeably.
 

Unlevered Free Cash Flow is defined as operating income (loss), plus depreciation, amortization, impairment charges, stock compensation, distributions from associated companies and cash income tax refunds, minus equity in earnings of associated companies, 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.
 
We also present selected information for Lee Legacy and Pulitzer Inc. ("Pulitzer"). Lee Legacy constitutes the business of the Company excluding Pulitzer, a wholly-owned subsidiary of the Company.
 
No non-GAAP financial measure should be considered as a substitute for any related GAAP financial measure. However, the Company believes the use of non-GAAP financial measures provides meaningful supplemental information with which to evaluate its financial performance, or assist in forecasting and analyzing future periods. The Company also believes 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.
 

(3)

Certain amounts as previously reported have been reclassified to conform with the current period presentation. The prior periods have been adjusted for comparative purposes, and the reclassifications have no impact on earnings.

Contacts

Lee Enterprises, Incorporated
Charles Arms, 563-383-2100
Director of Communications
IR@lee.net

Release Summary

Lee Enterprises, Incorporated (NYSE: LEE) issued its earnings report for first quarter 2015.

Lee Enterprises, Incorporated