Lee Enterprises, Inc. — Fiscal 2022 Second-Quarter Form 10-Q
Reporting period: Three and six months ended March 27, 2022, compared with March 28, 2021. Fiscal quarters contain 13 weeks. The financial statements are unaudited.
Business context
Lee operates 77 principally midsized local media operations, including print and digital newspapers, digital advertising and marketing services, digital subscriptions, commercial printing, and TownNews web-hosting and content-management services. Management’s strategy emphasizes digital audience growth, digital subscriptions, and expanded digital advertising and e-commerce offerings.
- Approximately one million paid print and digital subscribers; digital-only subscribers totaled approximately 492,000, up 59.2% year over year.
- Digital platforms reached approximately 42 million monthly unique visitors in March 2022.
Financial performance
| Metric | Three months ended March 27, 2022 | Year-over-year change | Six months ended March 27, 2022 | Year-over-year change |
|---|---|---|---|---|
| Total operating revenue | $190.0 million | Down 1.3% | $392.3 million | Down 3.0% |
| Operating income (loss) | $(3.2) million | Down from $8.4 million income | $21.9 million | Down 25.1% |
| Net income (loss) | $(6.7) million | Down from $(0.6) million | $6.5 million | Down 58.8% |
| Income (loss) attributable to Lee | $(7.3) million | Down from $(1.1) million | $5.4 million | Down 63.6% |
| Diluted EPS | $(1.26) | Down from $(0.20) | $0.92 | Down from $2.55 |
| Adjusted EBITDA | $16.9 million | Down from $24.1 million | $43.0 million | Down from $64.1 million |
Margins: Operating margin was approximately negative 1.7% in the quarter versus 4.4% in the prior-year quarter, and 5.6% for the six-month period versus 7.2%. Net margin was approximately negative 3.5% in the quarter versus negative 0.3%, and 1.7% for six months versus 3.9%.
Revenue mix
- Quarterly advertising and marketing services revenue increased 2.4% to $87.6 million. Print advertising declined 17.6% to $44.2 million, while digital advertising and marketing services increased 36.0% to $43.4 million.
- Quarterly subscription revenue declined 2.7% to $87.3 million, reflecting lower full-access volume partly offset by price increases and digital-only subscriber growth.
- Quarterly other revenue declined 12.0% to $15.0 million, primarily due to lower commercial printing and digital-services revenue.
- Total digital revenue increased 33.0% to $58.1 million in the quarter and represented 30.6% of operating revenue. For six months, digital revenue increased 24.9% to $113.4 million, or 28.9% of revenue.
Costs, cash flow, and balance sheet
- Quarterly operating expenses increased 4.9% to $194.6 million, driven primarily by higher other operating expenses and restructuring costs. Six-month operating expenses decreased 1.2% to $373.6 million, but cash costs increased 2.7% to $353.6 million.
- Cash required by operating activities was $0.6 million for the six months, compared with $39.3 million provided in the prior-year period.
- Investing activities provided $9.9 million, including $14.7 million from sales of non-core assets. Capital expenditures were $4.6 million.
- Financing activities used $20.1 million, primarily for debt repayment. Cash declined from $26.1 million at September 26, 2021, to $15.3 million at March 27, 2022.
- Total debt was $462.6 million, consisting of a 9% fixed-rate term loan maturing March 16, 2045. The company repaid $20.1 million of principal during the six-month period and reported no excess-cash-flow payment due at quarter-end.
- Total current assets were $103.6 million versus current liabilities of $139.8 million. Management expects existing cash and operating cash flows to fund interest, principal payments, capital expenditures, and other requirements over the next 12 months.
- Debt reduction since the end of the comparable 2021 quarter totaled $36.4 million, and quarterly interest expense declined 6.4% to $10.5 million.
Material changes versus the prior comparable period
- Digital growth continued to offset, but did not fully replace, secular declines in print advertising, print subscriptions, and commercial printing.
- Quarterly operating results moved from $8.4 million of operating income to a $3.2 million operating loss. Restructuring costs and other increased to $10.6 million from $1.3 million, including severance, litigation, restructuring, and advisory costs related to the November 2021 unsolicited offer.
- Six-month results included a $12.4 million net gain on asset sales and other items, compared with a $6.7 million net loss in the prior-year period, primarily reflecting dispositions of non-core assets.
- The six-month period included a $1.0 million non-cash pension curtailment gain, compared with a $23.8 million curtailment gain in the prior-year period.
- The company’s pension and postretirement benefit position improved, but multiemployer pension withdrawal liabilities increased to $25.3 million from $23.5 million and are payable over 20 years.
- The company’s warrants expired March 31, 2022. Their fair value was zero at March 27, 2022.
Guidance, outlook, risks, and unusual items
- Management expects fiscal 2022 capital expenditures of approximately $12.0 million, funded from internally generated funds.
- Subsequent to quarter-end, the company initiated staffing reductions. It expects approximately $4.7 million of pretax charges and an annualized operating-expense reduction of approximately $45.0 million.
- Management expects no required pension-plan contributions during the remainder of fiscal 2022.
- Newsprint producers announced price increases totaling $50 per tonne through March 2022 and an additional $50 per tonne increase for May 2022. A $10 per tonne increase in 27.7-pound newsprint would reduce annual pretax income by approximately $0.34 million based on expected consumption.
- Key risks include continued print-revenue and circulation declines, advertising and subscription demand, inflation in newsprint and labor costs, economic conditions, cybersecurity and information-technology failures, execution of expense reductions and acquisitions, competition, interest rates, and potential indemnification obligations relating to BH Media and The Buffalo News.
- The company is involved in ordinary-course legal proceedings and states that their ultimate disposition is not expected to have a material adverse effect, although outcomes cannot be predicted.
- The company’s fixed-rate debt limits exposure to higher interest rates, but leverage and limited cash generation remain important liquidity considerations.
Most important facts for investors to verify
- Whether digital advertising and subscription growth can offset ongoing print-revenue declines.
- Progress toward the stated $45.0 million annualized savings target and the timing and total cost of staffing reductions.
- Operating cash flow, cash balances, mandatory debt repayments, and compliance with the term-loan agreement.
- The sustainability of asset-sale proceeds and whether recurring operations can fund approximately $12.0 million of fiscal 2022 capital expenditures.
- Exposure to rising newsprint, labor, distribution, and other operating costs.
- The effect of restructuring, litigation, pension withdrawal liabilities, and other unusual items on future earnings and cash flow.
- Whether management’s liquidity expectation remains valid if revenue declines accelerate or operating cash flow remains weak.