UNITED STATES SECURITIES AND EXCHANGE COMMISSION Washington, D.C. 20549
[ x ] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THESECURITIES EXCHANGE ACT OF 1934
For The Quarterly Period Ended March 31, 2004
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THESECURITIES EXCHANGE ACT OF 1934
Commission File Number 1-6227
LEE ENTERPRISES, INCORPORATED(Exact name of Registrant as specified in its Charter)
Delaware 42-0823980 (State or other jurisdiction of (I.R.S. Employer Identification No.)incorporation or organization)
201 N. Harrison Street, Suite 600, Davenport, Iowa 52801(Address of principal executive offices)
(563) 383-2100(Registrant’s telephone number, including area code)
CONSOLIDATED STATEMENTS OF INCOME(Unaudited)
The accompanying Notes are an integral part of the Consolidated Financial Statements.
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CONSOLIDATED BALANCE SHEETS(Unaudited)
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CONSOLIDATED STATEMENTS OF CASH FLOWS(Unaudited)
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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS(Unaudited)
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Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations
The following discussion includes comments and analysis relating to the Company’s results of operations and financial condition as of and for the three months and six months ended March 31, 2004. This discussion should be read in conjunction with the Consolidated Financial Statements and related Notes thereto and the 2003 Annual Report on Form 10-K.
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The Private Securities Litigation Reform Act of 1995 provides a “Safe Harbor” for forward-looking statements. This report contains information that may be deemed forward-looking and that is based largely on the Company’s 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 are changes in advertising demand, newsprint prices, interest rates, labor costs, legislative and regulatory rulings and other results of operations or financial conditions, difficulties in integration of acquired businesses or maintaining employee and customer relationships and increased capital and other costs. The words “may,” “will,” “would,” “could,” “believes,” “expects,” “anticipates,” “intends,” “plans,” “projects,” “considers” and similar expressions generally identify 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 report. The Company does not undertake to publicly update or revise its forward-looking statements.
Operating cash flow, which is defined as operating income before depreciation, amortization, and equity in net income of associated companies, and operating cash flow margin (operating cash flow divided by operating revenue) represent non-GAAP financial measures that are used in the analyses below. The Company believes that operating cash flow and the related margin percentage are useful measures of evaluating its financial performance because of their focus on the Company’s results from operations before depreciation and amortization. The Company also believes that these measures are several of the alternative financial measures of performance used by investors, rating agencies and financial analysts to estimate the value of a company and evaluate its ability to meet debt service requirements.
A reconciliation of operating cash flow to operating income, the most directly comparable measure under accounting principles generally accepted in the United States of America (GAAP), is included in the table below:
Certain information below, as noted, is presented on a same property basis, which is exclusive of acquisitions and divestitures consummated in the current or prior year. The Company believes such comparisons provide meaningful information for an understanding of changes in its revenue and operating expenses. Same property comparisons exclude Madison Newspapers, Inc. (MNI). The Company owns 50% of the capital stock of MNI, which for financial reporting purposes is reported using the equity method of accounting. Same property comparisons also exclude corporate office costs.
The Company’s discussion and analysis of its financial condition and results of operations are based upon the Company’s Consolidated Financial Statements, which have been prepared in accordance with GAAP. The preparation of these financial statements requires the Company to make estimates and judgments that affect the reported amounts of assets, liabilities, revenues and expenses, and related disclosure of contingent assets and liabilities. On an on-going basis, the Company evaluates its estimates, including those related to intangible assets and income taxes. The Company bases its 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. Additional information follows with regard to certain of the most critical of the Company’s accounting policies.
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In assessing the recoverability of the Company’s goodwill and other intangible assets, the Company must make assumptions regarding estimated future cash flows and other factors to determine the fair value of the respective assets. The Company analyzes its goodwill and indefinite life intangible assets for impairment on an annual basis or more frequently if impairment indicators are present.
Deferred income taxes are provided using the liability method, whereby deferred income tax assets are recognized for deductible temporary differences and loss carryforwards and deferred income tax liabilities are recognized for taxable temporary differences. Temporary differences are the difference between the reported amounts of assets and liabilities and their tax bases. Deferred income tax assets are reduced by a valuation allowance when, in the opinion of management, it is more likely than not that some portion or all of the deferred income tax assets will not be realized. Deferred income tax assets and liabilities are adjusted for the effects of changes in tax laws and rates on the date of enactment.
The Company files income tax returns with various state tax jurisdictions and the Internal Revenue Service. From time to time the Company is audited by those agencies, and those audits may result in proposed adjustments. The Company has considered the alternative interpretations that may be assumed by the various taxing agencies and does not anticipate any material adverse impact on its earnings as a result of such audits.
Advertising revenues are recorded when advertisements are placed in the publication and circulation revenues are recorded as newspapers are delivered over the subscription term. Other revenue is recognized when the related product or service has been delivered. Unearned revenue arises in the ordinary course of business from advance subscription payments for newspapers.
The Company directly, and through its ownership of associated companies, publishes 44 daily newspapers in 19 states and approximately 200 weekly, classified and specialty publications, along with associated online services. The Company was founded in 1890, incorporated in 1950, and listed on the New York Stock Exchange in 1978. Before 2001, the Company also operated a number of network-affiliated and satellite television stations.
The Company is focused on five key strategic priorities. They are to:
• Grow revenue creatively and rapidly; • Improve readership and circulation; • Emphasize strong local news; • Build the Company’s online future; and • Exercise careful cost controls.
Certain aspects of these priorities are discussed below.
In April 2002, the Company acquired ownership of 15 daily newspapers and a 50% interest in the Sioux City, Iowa daily newspaper (SCN) by purchasing Howard Publications, Inc. (Howard). This acquisition was consistent with the strategy the Company announced in 2000 to buy daily newspapers with daily circulation of 30,000 or more. In July 2002, the Company acquired the remaining 50% of SCN. These acquisitions increased the Company’s circulation by more than 75 percent, to 1.1 million daily and 1.2 million on Sunday, and increased its revenue by nearly 50 percent. In February 2004, two daily newspapers acquired in the Howard acquisition were exchanged for two daily newspapers in Burley, Idaho and Elko, Nevada.
More than 70% of the Company’s revenue is derived from advertising. The Company’s strategies are to increase its share of local advertising through increased sales pressure in its existing markets and, over time, to increase circulation through internal expansion into contiguous markets, as well as make selective acquisitions. Acquisition efforts are focused on newspapers with daily circulation of 30,000 or more, as noted above, and other publications that expand the Company’s operating revenue.
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Results for the three months and six months ended March 31, 2004 improved over the prior year due to the Company’s continuing emphasis on its strategic priorities, as described above, and the improvement in the overall economic environment both of which positively influence advertising revenue.
Operating results, as reported in the Consolidated Financial Statements, are summarized below:
Sundays generate substantially more advertising and circulation revenue than any other day of the week. The quarter ended March 31, 2004 had the same number of Sundays as the same period last year.
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In total, acquisitions accounted for $1,079,000 of revenue and $907,000 of operating expenses other than depreciation and amortization in the three months ended March 31, 2004.
For the quarter ended March 31, 2004, total same property revenue increased $6,975,000, or 4.6%, and total same property advertising revenue increased $6,418,000 or 5.9%. Same property retail revenue increased $1,753,000 or 2.9%. Same property average retail rate, excluding preprint insertions, increased 1.0%. Same property preprint insertion revenue increased 4.7%.
Same property classified advertising revenue increased 6.0% for the quarter ended March 31, 2004. Higher margin employment advertising at the daily newspapers increased 14.2% on a same property basis, the second consecutive quarterly increase, and same property real estate classified revenue increased 9.3%. Same property automotive classified advertising decreased 1.8%. Same property average classified rates increased 3.1%.
Advertising lineage, as reported on a same property basis for the Company’s daily newspapers, consists of the following:
Advertising in niche publications increased 25.2% on a same property basis, due to new publications in existing markets and penetration of new and existing markets. Online advertising increased 41.6% on a same property basis, due to expanded use of the Company’s online business model and cross-selling with the Company’s print publications. Both of these categories are a strategic focus for the Company, and have been experiencing higher rates of growth.
Same property circulation revenue decreased $44,000 or 0.1%, in the current year quarter. The Company’s unaudited average daily newspaper circulation units, including MNI, increased 0.2% and Sunday circulation increased 0.6% for the three months ended March 2004, compared to the prior year quarter. The Company remains focused on growing circulation units and revenue through a number of initiatives.
Same property commercial printing revenue increased $288,000 or 6.5%. Same property online services and other revenue increased $313,000 or 5.0%.
Same property compensation expense increased $1,977,000 or 3.2%, in the current year quarter. Same property full-time equivalent employees decreased 1.1% year over year, offsetting normal salary increases and higher medical costs. Same property newsprint and ink costs increased $1,280,000 or 9.7%, in the current year quarter due to newsprint price increases combined with an increase in usage. Newsprint prices have been increasing since the summer of 2002. Same property newsprint volume increased 2.7%. Same property other operating costs, which are comprised of all operating expenses not considered to be compensation, newsprint and ink, depreciation or amortization, increased $2,018,000 or 6.0%, in the current year quarter. A $550,000 accrual for the prospect that the Company, among many others, will be required to refund approved critical vendor payments received from Kmart Corporation following its bankruptcy proceedings in 2002 increased this category of costs in the current year quarter. Costs of new niche publications and to increase circulation also contributed to the growth in costs. Depreciation and amortization expense increased $268,000, or 2.4% on a same property basis.
Operating cash flow improved 4.7% to $38,772,000 in the current year quarter from $37,043,000 in the prior year. Operating cash flow margin decreased to 24.2% from 24.3% in the prior year. Same property operating cash flow increased 3.8%. Equity in net income of associated companies increased to $1,589,000 in the current year quarter from $1,553,000 in the prior year quarter. Operating income increased 4.5% to $28,390,000. Operating income margin decreased slightly to 17.7% from 17.8%.
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Financial expense decreased $872,000 due primarily to debt reduction from operating cash flow.
The Company’s effective income tax rate declined to 34.9% from 36.6% in the prior year quarter due primarily to favorable resolution of outstanding state tax issues. As a result of all of the above, earnings per diluted common share from continuing operations increased 9.1% to $0.36 per share from $0.33 per share in the prior year quarter.
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Sundays generate substantially more advertising and circulation revenue than any other day of the week. The six month period ended March 31, 2004 had the same number of Sundays as the same period last year.
In total, acquisitions accounted for $1,079,000 of revenue and $907,000 of operating expenses other than depreciation and amortization in the six months ended March 31, 2004.
For the six months ended March 31, 2004, total same property revenue increased $12,665,000, or 4.0%, and total same property advertising revenue increased $11,750,000 or 5.0%. Same property retail revenue increased $4,050,000 or 3.0%. Same property average retail rate, excluding preprint insertions, increased 2.5%. Same property preprint insertion revenue increased 5.1%.
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Same property classified advertising revenue increased 4.6% for the six month period ended March 31, 2004. Higher margin employment advertising at the daily newspapers increased 9.1% on a same property basis, and same property real estate classified revenue increased 11.4%. Same property automotive classified advertising decreased 1.9%. Same property average classified rates increased 1.4%.
Advertising in niche publications increased 27.9% on a same property basis, due to new publications in existing markets and penetration of new and existing markets. Online advertising increased 37.4% on a same property basis, due to expanded use of the Company’s online business model and cross-selling with the Company’s print publications. Both of these categories are a strategic focus for the Company, and have been experiencing higher rates of growth.
Same property circulation revenue increased $73,000 or 0.1%, in the current year six month period. The Company’s total average daily newspaper circulation units, including MNI, as measured by the Audit Bureau of Circulations was essentially unchanged and Sunday circulation increased 0.5% for the six months ended March 2004, compared to the prior year. The Company remains focused on growing circulation units and revenue through a number of initiatives.
Same property commercial printing revenue increased $43,000 or 0.5%. Same property online services and other revenue increased $799,000 or 6.7%.
Same property compensation expense increased $3,830,000 or 3.1%, in the current year six month period. Same property full-time equivalent employees decreased 1.3% year over year, offsetting normal salary increases and higher medical costs. Same property newsprint and ink costs increased $2,573,000 or 9.4%, in the current year six month period due to newsprint price increases combined with an increase in usage. Newsprint prices have been increasing since the summer of 2002. Same property newsprint volume increased 2.0%. Same property other operating costs, which are comprised of all operating expenses not considered to be compensation, newsprint and ink, depreciation or amortization, increased $2,944,000 or 4.2%, in the current year six month period. A $550,000 accrual for the prospect that the Company, among many others, will be required to refund approved critical vendor payments received from Kmart Corporation following its bankruptcy proceedings in 2002 increased this category of costs in the current year six month period. Costs of new niche publications and to increase circulation also contributed to the growth in costs. Depreciation and amortization expense increased $395,000, or 1.8% on a same property basis.
Operating cash flow improved 4.5% to $89,674,000 in the current year six month period from $85,807,000 in the prior year. Operating cash flow margin increased to 26.9% from 26.8% in the prior year. Same property operating cash flow increased 3.3%. Equity in net income of associated companies increased to $3,881,000 in the current year six month period from $3,771,000 in the prior year. Operating income increased 4.8% to $70,268,000. Operating income margin increased to 21.1% from 21.0%.
Financial expense decreased $2,026,000 primarily due to debt reduction from operating cash flow.
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The Company’s effective income tax rate declined to 36.1% from 36.6% in the prior year due primarily to favorable resolution of outstanding state tax issues. As a result of all of the above, earnings per diluted common share from continuing operations increased 8.4% to $0.90 per share from $0.83 per share in the prior year quarter.
Cash provided by operating activities of continuing operations was $60,068,000 for the six months ended March 31, 2004 and $66,114,000 for the same period in 2003. Increased income from continuing operations was more than offset by changes in working capital, accounting for the change between years.
Cash required for investing activities totaled $11,600,000 for the six months ended March 31, 2004, and $2,078,000 in the same period in 2003. Increased capital expenditures, additional funds required for acquisitions and lower proceeds from the sale of assets account for the change between years.
The Company anticipates that funds necessary for future capital expenditures, and other requirements, will be available from internally generated funds, availability under its existing credit agreement or, if necessary, by accessing the capital markets.
Cash required for financing activities totaled $45,162,000 during the six months ended March 31, 2004, and $66,181,000 in the prior year. Net debt repayments totaling $41,600,000 and dividends were the primary uses of funds in the current year and prior year periods. The Company’s cash dividend payments have been influenced primarily by timing.
Cash required by discontinued operations totaling $81,000 in the current year primarily reflects the operating cash flow of businesses sold. Cash provided for discontinued operations totaled $5,144,000 during the six months ended March 31, 2003 and primarily reflects net proceeds from the sale of businesses.
Cash and cash equivalents increased $3,225,000 for the six months ended March 31, 2004 and $2,999,000 for the same period in 2003.
The Company has not been significantly impacted by inflationary pressures over the last several years. The Company anticipates that changing costs of newsprint, its basic raw material, may impact future operating costs. Price increases (or decreases) for the Company’s products are implemented when deemed appropriate by management. The Company continuously evaluates price increases, productivity improvements and cost reductions to mitigate the impact of inflation.
In January 2004, several newsprint manufacturers announced price increases of $50 per metric ton, effective for deliveries in February 2004. The final extent of changes in prices, if any, is subject to negotiation between such manufacturers and the Company. See Item 3.
The Company is exposed to market risk stemming from changes in interest rates and commodity prices. Changes in these factors could cause fluctuations in earnings and cash flows. In the normal course of business, exposure to certain of these market risks is managed as described below.
The Company’s debt structure and interest rate risk are managed through the use of fixed and floating rate debt. The Company’s primary exposure is to the London Interbank Offered Rate (LIBOR). A one percent increase to LIBOR would decrease income from continuing operations before income taxes on an annualized basis by approximately $1,500,000, based on floating rate debt outstanding at March 31, 2004, excluding MNI.
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Interest rate risk in the Company’s investment portfolio is managed by investing only in securities with maturity at date of acquisition of 180 days or less. Only high-quality investments are considered.
Certain materials used by the Company are exposed to commodity price changes. The Company manages this risk through instruments such as purchase orders and non-cancelable supply contracts. The Company is also involved in continuing programs to mitigate the impact of cost increases through identification of sourcing and operating efficiencies. Primary commodity price exposures are newsprint and, to a lesser extent, ink.
A $10 per metric ton newsprint price increase would result in an annualized reduction in income from continuing operations before income taxes of approximately $1,107,000, based on anticipated consumption in 2004, excluding MNI.
The estimate that follows is intended to measure the maximum potential impact on fair value of fixed-rate debt of the Company in one year from adverse changes in market interest rates under normal market conditions. The calculation is not intended to represent the actual loss in fair value that the Company expects to incur. The estimate does not consider favorable changes in market rates. The position included in the calculation is fixed-rate debt, which totals $113,600,000 at March 31, 2004.
The estimated maximum potential one-year loss in fair value from a 100 basis point movement in interest rates on market risk sensitive instruments outstanding at March 31, 2004 is approximately $5,572,000. There is no impact on reported results from such changes in interest rates.
In order to ensure that the information that must be disclosed in filings with the Securities and Exchange Commission is recorded, processed, summarized and reported in a timely manner, the Company has disclosure controls and procedures in place. The Chief Executive Officer, Mary E. Junck, and Chief Financial Officer, Carl G. Schmidt, have reviewed and evaluated disclosure controls and procedures as of March 31, 2004, and have concluded that such controls and procedures are appropriate and that no changes are required.
There have been no significant changes in internal controls, or in other factors that could affect internal controls, since March 31, 2004.
The Annual Meeting of Shareholders of the Company was held on January 21, 2004. Mary E. Junck, Andrew E. Newman, and Gordon D. Prichett were elected as directors for three-year terms expiring at the 2007 annual meeting.
Votes were cast, all by proxy, for nominees for director as follows:
The Annual Incentive Bonus Program was also approved and requires that all bonuses paid to key executives under the plan be performance-based. Votes were 98,284,230 for the Annual Incentive Bonus Program and $3,435,465 against it, with 407,385 votes abstaining.
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Exhibit 10 Lee Enterprises, Incorporated Annual Incentive Bonus Program approved by the Shareholders of the Company on January 21, 2004 (Exhibit B to Schedule 14A Definitive Proxy Statement for 2004).
Exhibit 31 Rule 13a-14(a)/15d-14(a) Certifications
Exhibit 32 Section 1350 Certification
The following reports on Form 8-K were filed during the three months ended March 31, 2004.
Pursuant to the requirements of the Securities Exchange Act of 1934, the Registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.
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Exhibit 31
I, Mary E. Junck, certify that:
I have reviewed this quarterly report on Form 10-Q (Quarterly Report) of Lee Enterprises, Incorporated (Registrant);
Based on my knowledge, this Quarterly Report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this Quarterly Report;
Based on my knowledge, the Consolidated Financial Statements, and other financial information included in this Quarterly Report, fairly present in all material respects the financial condition, results of operations and cash flows of the Registrant as of, and for, the periods presented in this Quarterly Report;
The Registrant’s other certifying officer and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) for the Registrant and have:
designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, to ensure that material information relating to the Registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this Quarterly Report is being prepared;
evaluated the effectiveness of the Registrant’s disclosure controls and procedures and presented in this Quarterly Report our conclusions about the effectiveness of the disclosure controls and procedures as of the end of the period covered by this Quarterly Report based on such evaluation; and
disclosed in this Quarterly Report any change in the Registrant’s internal control over financial reporting that occurred during the Registrant’s most recent fiscal quarter (the Registrant’s fourth fiscal quarter in the case of an annual report) that has materially affected, or is reasonably likely to materially affect, the Registrant’s internal control over financial reporting;
The Registrant’s other certifying officer and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the Registrant’s auditors and the Audit Committee of Registrant’s Board of Directors (or persons performing the equivalent function):
all significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonably likely to affect the Registrant’s ability to record, process, summarize and report financial data; and
any fraud, whether or not material, that involves management or other employees who have a significant role in the Registrant’s internal control over financial reporting
Date: May 10, 2004
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I, Carl G. Schmidt, certify that:
all significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonably likely to affect the Registrant’s ability to record, process, summarize and report financial data and have identified for the Registrant’s auditors any material weaknesses in internal controls; and
any fraud, whether or not material, that involves management or other employees who have a significant role in the Registrant’s internal controls over financial reporting
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Exhibit 32
The following statement is being furnished to the Securities and Exchange Commission solely for purposes of Section 906 of the Sarbanes-Oxley Act of 2002 (18 U.S.C. 1350), which carries with it certain criminal penalties in the event of a knowing or willful misrepresentation.
Securities and Exchange Commission450 Fifth Street, NW
Washington, DC 20549
Re: Lee Enterprises, Incorporated
Ladies and Gentlemen:
In accordance with the requirements of Section 906 of the Sarbanes-Oxley Act of 2002 (18 U.S.C. 1350), each of the undersigned hereby certifies that to our knowledge:
this quarterly report on Form 10-Q for the period ended March 31, 2004 (Quarterly Report), fully complies with the requirements of section 13(a) or 15(d) of the Securities Exchange Act of 1934 (15 U.S.C. 78m or 78o(d)); and
the information contained in this Quarterly Report fairly presents, in all material respects, the financial condition and results of operations of Lee Enterprises, Incorporated for the periods presented in the Quarterly Report.
Dated as of this 10th day of May, 2004
A signed original of this written statement required by Section 906 has been provided to Lee Enterprises, Incorporated and will be retained by Lee Enterprises, Incorporated and furnished to the Securities and Exchange Commission upon request.
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