Lee Enterprises, Incorporated — Fiscal 2022 Third-Quarter Form 10-Q
Reporting period: Three and nine months ended June 26, 2022, compared with June 27, 2021. Fiscal years end on the last Sunday in September. Lee operates 77 local media operations, including print and digital news, advertising, subscriptions, Amplified Digital and TownNews.
Financial performance and position
| Metric | Three months ended June 26, 2022 | Year-over-year change | Nine months ended June 26, 2022 | Year-over-year change |
|---|---|---|---|---|
| Total operating revenue | $195.0 million | Down 0.7% | $587.3 million | Down 2.2% |
| Operating income | $6.4 million | Down 53.3% | $28.3 million | Down 34.1% |
| Net income | $0.2 million | Down 94.8% | $6.7 million | Down 65.7% |
| Income attributable to Lee | $(0.3) million | Compared with $3.2 million income | $5.1 million | Down from $18.0 million |
| Diluted EPS | $(0.05) | Compared with $0.55 | $0.87 | Down from $3.10 |
| Adjusted EBITDA | $23.0 million | Down from $26.7 million | $66.0 million | Down from $90.8 million |
Margins: Operating margin was approximately 3.3% for the quarter and 4.8% for the nine-month period, versus approximately 7.0% and 7.2%, respectively, in the prior comparable periods. Net margin was approximately 0.1% for the quarter and 1.1% year to date.
- Revenue mix: Quarterly advertising and marketing services revenue was $91.0 million, essentially flat year over year. Print advertising declined 18.0%, while digital advertising and marketing services increased 26.6% to $46.2 million.
- Quarterly subscription revenue increased 0.3% to $89.0 million. Digital-only subscribers reached approximately 501,000, up 48.6% from the prior year.
- Total digital revenue increased 26.8% in the quarter to $61.5 million, representing 31.5% of total revenue. For the nine-month period, digital revenue increased 25.5% to $174.9 million, or 29.8% of revenue.
- Costs: Quarterly operating expenses increased 2.8% to $189.6 million. Compensation declined 5.6%, but other operating expenses increased 7.2%, newsprint and ink increased 7.0%, and restructuring costs increased to $6.1 million.
- Nine-month Cash Costs, a non-GAAP measure, were $527.3 million, up 2.2%. Management cautions that non-GAAP measures should not be viewed as substitutes for GAAP results.
- Cash flow: Nine-month operating cash flow was $0.7 million, down from $42.8 million. Investing activities provided $8.5 million, including $14.8 million of proceeds from non-core asset sales. Financing activities used $19.7 million, primarily for debt repayment.
- Liquidity: Cash and cash equivalents were $15.7 million at June 26, 2022, compared with $26.1 million at September 26, 2021. Management expects existing cash and operating cash flows to fund the next 12 months of interest and principal payments and maintain adequate liquidity.
- Debt: The company had a $462.6 million fixed-rate term loan at 9.0%, maturing March 16, 2045. Nine-month principal repayments totaled $20.1 million; no principal payment was made during the quarter. No excess cash flow payment was due as of June 26, 2022.
- Total assets were $794.8 million and total liabilities were $740.2 million at June 26, 2022. Stockholders’ equity was $52.4 million.
Material changes versus the prior comparable period
- Digital growth continued to offset, but did not fully replace, secular print declines. Nine-month print revenue declined 17.1%, while digital revenue increased 26.8% in advertising and marketing services.
- Operating income and net income declined substantially because of lower revenue, increased digital-related and inflationary costs, higher restructuring expenses, and the absence of the larger prior-year pension-related curtailment gain.
- Nine-month restructuring costs increased to $19.9 million from $5.9 million, including severance, litigation, restructuring and advisor expenses associated with an unsolicited takeover offer received in November 2021.
- Nine-month assets gains, losses and impairments shifted to an $11.3 million net gain from a $6.9 million net loss, primarily reflecting dispositions of non-core assets, including real estate.
- The company froze future benefits for four additional defined benefit pension plans, producing a $1.0 million non-cash curtailment gain. Pension obligations declined to $0.9 million from $22.4 million at fiscal year-end, while multiemployer pension withdrawal liabilities increased to $24.3 million.
- The company’s warrants expired on March 31, 2022. The associated fair-value liability was $71,000 at September 26, 2021, and the company recognized $71,000 of related income during the nine-month period.
Guidance, outlook, risks and unusual items
- Management expects fiscal 2022 capital expenditures of up to $10.0 million, funded by internally generated funds.
- Management’s strategy emphasizes digital audience growth, expanding digital subscriptions and diversifying digital advertising and marketing offerings through Amplified Digital.
- Key risks include continuing print revenue and circulation declines, advertising and subscription demand, economic conditions, COVID-19 effects, newsprint and energy costs, labor costs, cybersecurity and information technology disruptions, competition, acquisition execution and the ability to achieve planned expense reductions.
- Newsprint producers implemented price increases in January, March and May 2022. Management estimated that a $10-per-ton increase in 27.7-pound newsprint would reduce annual pretax income by approximately $340,000 based on anticipated consumption.
- The company’s fixed-rate debt limits exposure to rising interest rates, although the substantial debt balance and 9.0% interest rate remain significant liquidity considerations.
- The company has approximately $24.3 million of estimated multiemployer pension withdrawal liabilities payable over 20 years. Legal proceedings arise in the ordinary course of business; management does not expect them to have a material adverse effect, although outcomes cannot be predicted.
- A stockholder rights plan adopted in November 2021 generally becomes exercisable if a person or group acquires 10% of the common stock, or 20% for certain passive investors, and was scheduled to remain effective through November 23, 2022 unless earlier terminated.
- Management reported effective disclosure controls and procedures and no material changes in internal control over financial reporting during the period.
Important facts for investors to verify
- Whether digital revenue growth can continue to offset accelerating print advertising, print subscription and commercial printing declines.
- The company’s ability to generate materially higher operating cash flow, given only $0.7 million of operating cash flow during the first nine months and cash of $15.7 million at quarter end.
- Debt repayment requirements, covenant calculations and the sustainability of liquidity under the $462.6 million term loan at 9.0%.
- The recurring nature of restructuring, litigation, advisor costs, asset-sale gains and pension-related items excluded or adjusted in non-GAAP results.
- Exposure to newsprint price increases, inflation, labor costs and supply-chain constraints.
- Subscriber retention, full-access circulation trends and the profitability of the 501,000 digital-only subscriber base.
- The status and potential consequences of the stockholder rights plan, the unsolicited takeover offer-related expenses and any future strategic transactions.