Lee Enterprises, Inc. — Fiscal 2023 First-Quarter Form 10-Q
Business context and reporting period
The filing covers the 13 weeks ended December 25, 2022, compared with the 13 weeks ended December 26, 2021. Lee operates 77 principally mid-sized local media operations, including print and digital newspapers, digital marketing services, niche publications, and digital hosting and content-management services. The fiscal year ends on the last Sunday in September.
Lee reported approximately one million paid subscribers, including 564,000 digital-only subscribers, which increased 25.3% year over year. Total digital revenue was $64.8 million, representing 35.0% of total operating revenue.
Financial performance and liquidity
| Metric | Q1 FY2023 | Q1 FY2022 | Change |
|---|---|---|---|
| Total operating revenue | $185.1 million | $202.3 million | Down 8.5% |
| Operating income | $11.2 million | $25.1 million | Down 55.5% |
| Net income | $1.8 million | $13.2 million | Down 86.2% |
| Income attributable to Lee | $1.1 million | $12.7 million | Down 91.3% |
| Diluted EPS | $0.19 | $2.17 | Down 91.2% |
| Adjusted EBITDA | $17.6 million | $26.1 million | Down 32.5% |
| Cash Costs | $169.7 million | $178.3 million | Down 4.9% |
| Cash flow from operating activities | $(1.7) million | $0.6 million | Decrease of $2.3 million |
Advertising and marketing services revenue declined 9.3% to $89.6 million. Print advertising fell 25.3% to $41.8 million, partially offset by an 11.6% increase in digital advertising and marketing services to $47.7 million. Subscription revenue declined 8.9% to $79.7 million as print subscription revenue fell 15.4%, while digital subscription revenue increased 56.2% to $12.3 million.
Total operating expenses decreased 1.8% to $175.6 million. Compensation expense declined 10.9% due primarily to reductions in full-time employees, partly offset by investments in digital talent. Restructuring costs declined to $0.6 million from $3.2 million. Net gains from asset sales, impairments and other items were $2.6 million, compared with $12.3 million in the prior-year quarter.
Cash and cash equivalents were $18.3 million at December 25, 2022, compared with $16.2 million at September 25, 2022. Capital expenditures were $1.2 million. Investing activities provided $4.0 million, primarily reflecting $4.1 million of proceeds from asset sales. Financing activities used $0.2 million, and no principal debt payments were made during the quarter.
Long-term debt was $462.6 million, consisting of a fixed-rate term loan bearing 9.0% annual interest and maturing March 16, 2045. Management stated that interest and principal payments due during the next 12 months are expected to be met through existing cash and operating cash flows. Capital expenditures for fiscal 2023 are expected to total up to $10.0 million.
Material changes versus the prior comparable period
- Revenue declined $17.2 million, primarily because of continued print advertising and print subscription declines.
- Digital advertising, digital subscriptions and digital services continued to grow, but did not offset print-related declines.
- Operating income decreased $13.9 million, reflecting lower revenue and the prior period’s substantially larger asset-sale gain.
- Net income declined $11.4 million. The prior-year quarter included a $1.0 million pension curtailment gain and more favorable pension and other postretirement benefits.
- Operating cash flow moved from $0.6 million provided to $1.7 million required, partly because of lower operating results and unfavorable working-capital changes.
- Debt remained unchanged during the quarter, whereas the prior-year period included approximately $20.1 million of financing cash use, principally debt repayment.
Guidance, outlook, risks and unusual items
Management expects internally generated funds and cash on hand to support operations, interest expense and capital expenditures. The filing does not provide formal revenue or earnings guidance. Management continues to focus on growing digital audiences, expanding digital subscriptions and diversifying advertising and marketing offerings.
Newsprint prices were described as steady after increases implemented in 2022, but supply remains constrained because of industry capacity reductions. A $10-per-ton increase in 27.7-pound newsprint would reduce annual pretax income by approximately $0.3 million based on anticipated 2023 consumption.
Material risks include continued print revenue and circulation declines, advertising and subscription demand, economic conditions, newsprint and energy costs, labor costs, cybersecurity and information-technology failures, competition, execution of expense reductions and digital initiatives, acquisition or investment risks, and the ability to maintain NASDAQ listing status. The company also identifies possible indemnification obligations related to prior owners of BH Media and The Buffalo News.
Disclosure controls and procedures were determined to be ineffective because three material weaknesses remained unremediated: information-technology user-access controls, controls over data from certain third-party service organizations, and controls validating the tax basis of certain deferred tax assets and liabilities. Management is implementing remediation plans, but the weaknesses will not be considered remediated until testing demonstrates effective design and implementation.
Legal proceedings arise in the ordinary course of business. Management believes their disposition will not have a material adverse effect on the consolidated financial statements, although outcomes cannot be predicted. Multiemployer pension withdrawal liabilities were $23.7 million at December 25, 2022.
Most important facts for investors to verify
- Whether digital revenue and digital-only subscriber growth can offset the continuing decline in print advertising, print subscriptions and overall revenue.
- Whether the company can consistently generate positive operating cash flow while servicing approximately $462.6 million of debt at a 9.0% fixed rate.
- The timing and effectiveness of remediation for the three identified material weaknesses in internal controls.
- The extent to which asset-sale proceeds, rather than recurring operations, have supported recent cash generation and liquidity.
- Progress toward the stated fiscal 2023 capital-expenditure ceiling of up to $10.0 million and management’s ability to maintain adequate liquidity.
- Exposure to newsprint supply and pricing, labor costs, pension and withdrawal liabilities, cybersecurity events, and potential indemnification or other legal obligations.