Lee Enterprises, Inc. — Fiscal 2024 Second-Quarter Form 10-Q
Business Context and Reporting Period
Lee Enterprises is a digital-first local media and subscription company serving 73 communities in 26 states. Its revenues come primarily from advertising and marketing services, print and digital subscriptions, and digital services through BLOX Digital. The filing covers the three and six months ended March 24, 2024, compared with the periods ended March 26, 2023. Fiscal 2024 contains 53 weeks.
Key Financial Metrics
| Metric | Three months ended March 24, 2024 | Year-over-year change | Six months ended March 24, 2024 | Year-over-year change |
|---|---|---|---|---|
| Total revenue | $146.6 million | Down 14.1% | $302.2 million | Down 15.1% |
| Operating income (loss) | $(4.6) million | Compared with $2.9 million income | $3.3 million | Down 76.6% |
| Net loss | $(11.6) million | Compared with $(5.4) million | $(10.4) million | Compared with $(3.5) million |
| Loss attributable to Lee | $(12.2) million | Compared with $(5.9) million | $(11.5) million | Compared with $(4.8) million |
| Diluted loss per share | $(2.06) | Compared with $(1.01) | $(1.94) | Compared with $(0.82) |
| Adjusted EBITDA | $15.1 million | Up 5.1% | $33.7 million | Up 5.5% |
| Cash Costs | $133.3 million | Down 15.6% | $272.6 million | Down 16.8% |
| Cash provided by operating activities | Not separately provided | Not applicable | $3.3 million | Compared with $1.0 million |
Approximate operating margin was negative 3.1% for the quarter and 1.1% for the six-month period. Approximate net margin was negative 7.9% for the quarter and negative 3.4% for the six-month period.
- Quarterly digital revenue was $70.8 million, up 8.9%, and represented 48.3% of total revenue. Six-month digital revenue was $141.7 million, up 9.1%, and represented 46.9% of total revenue.
- Digital-only subscribers increased 25% year over year to 745,000. Digital subscription revenue increased 44.8% in the quarter and 50.9% for the six-month period.
- Quarterly print advertising revenue fell 40.4%; print subscription revenue fell 24.2%.
- Cash and cash equivalents were $16.1 million at March 24, 2024, compared with $14.5 million at September 24, 2023.
- Long-term debt, net of current maturities, was $453.6 million. The debt is a 9% fixed-rate term loan maturing March 16, 2045. The company made $2.1 million of principal payments during the six months and reported no excess cash flow payment due.
- Total liabilities were $674.4 million versus total equity of $10.4 million at March 24, 2024.
Material Changes Versus the Prior Comparable Period
- Revenue declines continued to be driven by secular reductions in print advertising, print subscriptions and commercial printing. Digital growth partially offset these declines but did not prevent an overall revenue decrease.
- Operating expenses declined 9.6% in the quarter and 12.3% for the six-month period, primarily because of lower compensation, newsprint and ink, and print-related delivery costs.
- Compensation expense decreased 17.5% in the quarter and 19.3% for the six-month period, reflecting workforce reductions and business transformation efforts, partly offset by digital investments.
- A $7.6 million non-cash impairment charge reduced the carrying value of newspaper mastheads in the second quarter after continuing revenue declines were identified as a triggering event. No goodwill or property and equipment impairment was identified.
- Six-month results included $3.6 million of non-cash pension and postretirement curtailment and settlement gains, including a $2.4 million pension settlement gain and a $1.2 million postretirement curtailment gain.
- Restructuring costs increased to $8.4 million for the six-month period from $4.3 million, primarily due to facility closures, business transformation and severance.
Guidance, Outlook, Risks and Unusual Items
- Management expects 2024 capital expenditures of up to $10.0 million and expects required interest, principal payments and capital expenditures to be funded by cash on hand and internally generated cash flow.
- Management states that existing liquidity and expected cash flows should satisfy interest and principal payments due over the next twelve months, but operating cash flow was only $3.3 million for the first six months.
- Key risks include continued declines in print revenue and circulation, advertising and subscription demand, economic conditions, technology and digital advertising changes, newsprint and energy costs, labor costs, interest rates, cybersecurity, execution of expense reductions and acquisitions, competition, and NASDAQ listing status.
- The company continues to report a material weakness in internal control over financial reporting concerning the reliability of certain internally generated information and information received from third-party service providers relevant to revenue recognition. Disclosure controls and procedures were therefore not effective at period-end; remediation remains in progress.
- On March 28, 2024, the board adopted a stockholder rights plan, generally triggered if a person or group acquires 15% or more of the common stock. The plan is scheduled to remain effective through March 27, 2025, unless earlier terminated.
- Routine legal proceedings are ongoing. Management does not expect them to have a material adverse effect, although outcomes cannot be predicted.
Most Important Facts for Investors to Verify
- Whether digital subscriber growth and digital revenue can offset the continuing decline in print advertising and print subscriptions.
- Whether operating cash flow improves sufficiently to support the $453.6 million debt balance, 9% interest burden and planned capital expenditures.
- The assumptions supporting the $7.6 million masthead impairment and the risk of further impairment if revenue declines continue.
- Progress and testing results related to remediation of the material weakness in revenue-related controls.
- The sustainability of cost reductions, restructuring charges and Adjusted EBITDA growth, including the company’s disclosure that similar excluded items may recur.
- The terms and practical effect of the stockholder rights plan on potential ownership changes or acquisition proposals.