Business News
Lee Enterprises Reports Earnings Growth, Improving Revenue and 16% Increase in Operating Cash Flow
Friday 23. April 2010 - Lee Enterprises, Incorporated (NYSE:LEE) reported today that for its second fiscal quarter ended March 28, 2010, operating cash flow(1) increased 16.2 percent compared with a year ago, as online advertising revenue climbed 14.1 percent and the decline in total revenue moderated by more than half from the previous quarter to 6.6 percent.
Earnings per diluted common share were 7 cents, compared with a loss of $1.16 per share a year ago. Excluding adjustments(2) for curtailment gains, the impact of new health care legislation and other unusual items, earnings per diluted common share were 4 cents, compared with a loss of 7 cents a year ago.
Mary Junck, chairman and chief executive officer, said: “Lee posted another good quarter, with steadily improving revenue trends, a 14 percent jump in online advertising sales and continued earnings growth. Aggressive new sales initiatives have driven nearly 4,700 new online accounts since November and are gaining momentum. The gradually brightening business environment is also helping, and earlier Easter advertising caused March to be easily the best month of the quarter. We expect our revenue performance to continue improving in a still-rough economy, and we also remain focused on careful, long-term cost control.”
SECOND QUARTER OPERATING RESULTS
Operating revenue for the quarter totaled $185.7 million, a decline of 6.6 percent compared with a year ago. Combined print and online advertising revenue decreased 7.7 percent to $130.6 million, with retail advertising down 6.4 percent, national also down 6.4 percent and classified down 10.2 percent. Combined print and online employment advertising revenue decreased 16.5 percent, automotive decreased 11.9 percent, real estate decreased 17.7 percent and other classified declined 0.1 percent. Online advertising revenue on a standalone basis increased 14.1 percent to $11.3 million, representing 8.7 percent of total advertising revenue. Online retail advertising revenue rose 21.2 percent and online classified advertising increased 3.9 percent. The number of unique visitors at Lee online sites totaled 47.4 million for the quarter, an increase of 13.2 percent compared with a year ago.
Operating expenses, excluding depreciation, amortization and curtailment gains, decreased 10.4 percent. Compensation declined 5.9 percent, with the average number of full-time equivalent employees down 7.7 percent. Newsprint and ink expense decreased 36.8 percent, a result of a reduction in newsprint volume of 12.7 percent and reduced cost of newsprint. Cash costs are expected to decline 9 percent in total for the fiscal year.
Operating cash flow increased 16.2 percent from a year ago to $33.3 million. Operating cash flow margin(1) increased to 17.9 percent from 14.4 percent a year ago in the historically smallest revenue quarter of the year. Including equity in earnings of associated companies, depreciation and amortization, as well as impairment charges and other unusual items in both years, operating income totaled $26.7 million, compared with an operating loss of $146.3 million a year ago. Operating income margin was 14.4 percent in the quarter. Non-operating expenses, primarily interest expense and debt financing costs, declined $10.1 million. Income tax expense was adversely impacted by new health care legislation, all of which, combined, resulted in income available to common stockholders of $3.0 million, compared with a loss of $51.8 million a year ago.
NEW UNION CONTRACT RESULTS IN CURTAILMENT GAINS
Non-cash, pretax curtailment gains totaling $13.9 million resulted from a new union contract in St. Louis.
On March 27, 2010, members of the St. Louis Newspaper Guild, Local 36047 voted to approve a new, 5.5-year contract, effective April 1, 2010. Guild members had been operating under the provisions of a contract that expired in June 2009. Significant contract provisions that are changed from the previous contract include:
Wages
Reduction in wages of 6% as of April 1, 2010, excluding certain commissioned sales staff
Increase in base compensation for certain commissioned sales staff
One week unpaid furlough in the six months ending September 2010
One week unpaid furlough in each of the years ending September 2011 and 2012
2.5% wage increases effective on each of October 1, 2012, 2013 and/or 2014 if revenue of the St. Louis Post-Dispatch, including an associated business, achieves 2% growth levels in the immediately preceding fiscal year
Benefits
Elimination of postretirement medical coverage
Elimination of retiree life insurance
Freeze of defined benefit pension benefits
Increase in annual company 401(k) contributions of $300 per employee.
The new contract includes a six-month moratorium on layoffs for Guild members and relaxes seniority restrictions in the event of future layoffs. The contract continues through September 2015.
In addition to the curtailment gains, the contract changes reduced Lees liabilities for post-retirement medical benefit and pension obligations by $6.6 million and $2.0 million, respectively. Also, the changes are expected to reduce operating expenses for the six months ending September 2010 by $1.3 million and by an average of $1.8 million on an annual basis over the life of the contract.
IMPACT OF HEALTH CARE LEGISLATION
As a result of the Patient Protection and Affordable Care Act signed into law in March 2010, a one-time charge to earnings of $2.0 million was required in the quarter to reflect the write-off of deferred income tax assets due to the loss of future tax deductions for providing retiree prescription-drug benefits.
ADJUSTED EARNINGS AND EPS FOR THE QUARTER
Unusual items affecting year-over-year comparisons include, in 2010, curtailment gains, the impact of health care legislation and non-cash writedowns of equipment no longer in use due to streamlining of operations. In 2009, unusual items include impairment charges and nonrecurring debt financing costs. Also, $71.3 million of the liability related to the redemption of the minority interest in St. Louis initially recorded in 2008 was reversed in 2009, increasing 2009 results by $58.1 million. The following table summarizes the impact from unusual items on income (loss) available to common stockholders and earnings (loss) per diluted common share. Per share amounts may not add due to rounding.
13 Weeks Ended
March 28, 2010
March 29, 2009
(Thousands, Except Per Share) Amount Per Share Amount Per Share
Income (loss) available to common stockholders, as reported
$ 2,991 $ 0.07 $ (51,757 ) $ (1.16 )
Adjustments:
Curtailment gains (13,882 ) –
Impairment of goodwill and other assets, including TNI Partners
3,290 154,813
Debt financing costs 1,972 12,927
Other, net 306 2,443
(8,314 ) 170,183
Income tax adjustment related to new health care legislation
2,012 –
Income tax effect of adjustments, net, other unusual tax items, and impact on minority interest
5,223 (63,261 )
(1,079 ) (0.02 ) 106,922 2.41
Income available to common stockholders, as adjusted
1,912 0.04 55,165 1.24
Change in redeemable minority interest liability
– – (58,094 ) (1.31 )
Net income (loss), as adjusted $ 1,912 $ 0.04 $ (2,929 ) $ (0.07 )
YEAR TO DATE OPERATING RESULTS
Operating revenue for the six months totaled $395.6 million, a decline of 10.6 percent compared with a year ago. Combined print and online advertising revenue decreased 12.6 percent to $285.0 million, with retail advertising down 11.4 percent, national down 11.9 percent and classified down 15.3 percent. Combined print and online employment advertising revenue decreased 30.7 percent, automotive decreased 16.0 percent, real estate decreased 19.5 percent and other classified declined 0.4 percent. Online advertising revenue increased 2.0 percent to percent to $22.0 million.
Operating expenses, excluding depreciation, amortization and curtailment gains, decreased 14.3 percent, with compensation down 9.7 percent and newsprint and ink down 43.8 percent.
Operating cash flow increased 5.7 percent for the six months compared with a year ago to $86.4 million. Operating cash flow margin increased to 21.9 percent from 18.5 percent a year ago. Including equity in earnings of associated companies, depreciation and amortization, as well as impairment charges and other unusual items, operating income totaled $94.5 million, compared with a loss of $180.6 million a year ago. Operating income margin was 23.9 percent for the six months. Non-operating expenses, primarily interest expense and debt financing costs, declined $7.1 million. Income tax expense was adversely impacted by health care legislation, all of which, combined, resulted in income available to common stockholders of $30.9 million, compared with a loss of $100.4 million a year ago.
YEAR TO DATE ADJUSTED EARNINGS AND EPS
Unusual items affecting year-over-year comparisons include, in 2010, curtailment gains, the impact of health care legislation and non-cash writedowns of equipment no longer in use due to streamlining of operations. In 2009, unusual items include impairment charges and nonrecurring debt financing costs. Also, $71.3 million of the liability related to the redemption of the minority interest in St. Louis initially recorded in 2008 was reversed in 2009, increasing 2009 results by $57.1 million. The following table summarizes the impact from unusual items on income (loss) available to common stockholders and earnings (loss) per diluted common share. Per share amounts may not add due to rounding.
26 Weeks Ended
March 28, 2010
March 29, 2009
(Thousands, Except Per Share) Amount Per Share Amount Per Share
Income (loss) available to common stockholders, as reported
$ 30,897 $ 0.69 $ (100,434 ) $ (2.26 )
Adjustments:
Curtailment gains (45,012 ) –
Impairment of goodwill and other assets, including TNI Partners
3,290 224,858
Debt financing costs 3,967 14,850
Other, net 1,095 2,665
(36,660 ) 242,373
Income tax adjustment related to new health care legislation
2,012 –
Income tax effect of adjustments, net, other unusual tax items, and impact on minority interest
17,013 (77,131 )
(17,635 ) (0.40 ) 165,242 3.72
Income available to common stockholders, as adjusted
13,262 0.30 64,808 1.46
Change in redeemable minority interest liability
– – (57,055 ) (1.28 )
Net income, as adjusted $ 13,262 $ 0.30 $ 7,753 $ 0.17
DEBT AND FREE CASH FLOW(3)
Debt was reduced $27.1 million in the quarter and $34.3 million year to date. Debt, net of cash, has been reduced $83.2 million in the last 12 months.
Carl Schmidt, vice president, chief financial officer and treasurer, said Lee continues to meet all financial covenants and expects to continue repaying debt primarily with ongoing cash flow. Liquidity at the end of the quarter totaled $92.5 million, a level virtually identical to a year ago, against $72.0-76.5 million of debt repayments due in the next four quarters.
Free cash flow totaled $17.6 million for the quarter, compared with a deficit of $6.0 million a year ago. Year to date, free cash flow totaled $52.5 million, compared with $14.5 million a year ago, resulting from improvements in operating results and reduced non-operating costs.
