Lee Enterprises, Inc. — Fiscal 2023 Form 10-K Summary
Reporting period: Fiscal year ended September 24, 2023, consisting of 52 weeks. The filing is an annual Form 10-K, not a standalone fiscal fourth-quarter filing. Lee operates local media businesses in 75 communities across 26 states, with digital subscriptions, advertising and marketing services, print publications, and digital services through BLOX Digital.
Key Financial Metrics
| Metric | 2023 | 2022 | Change |
|---|---|---|---|
| Total operating revenue | $691.1 million | $781.0 million | Down 11.5% |
| Operating income | $37.2 million | $24.9 million | Up 49.6% |
| Operating margin | 5.4% | 3.2% | Improved |
| Net income attributable to Lee | $(5.3) million | $(2.0) million | Greater loss |
| Basic and diluted loss per share | $(0.90) | $(0.35) | Worsened |
| Adjusted EBITDA | $85.2 million | $96.1 million | Down 11.3% |
| Cash costs | $615.3 million | $692.8 million | Down 11.2% |
| Cash flow from operating activities | $(2.5) million | $3.4 million | Declined |
| Capital expenditures | $5.1 million | $7.5 million | Declined |
| Cash and cash equivalents | $14.5 million | $16.2 million | Declined |
| Term loan principal | $455.7 million | Not clearly provided in the filing text | 9.0% fixed rate |
Revenue and Operating Trends
- Advertising and marketing services: $319.0 million, down 12.9%. Print advertising fell 32.0% to $125.8 million, while digital advertising revenue increased 6.5% to $193.2 million.
- Subscriptions: $313.3 million, down 11.4%. Print subscription revenue declined 19.4% to $252.6 million, partly offset by digital-only subscription revenue growth of 51.3% to $60.7 million.
- Digital transformation: Total digital revenue increased 14.1% to $273.2 million, representing 39.5% of total revenue versus 30.7% in 2022.
- Digital subscribers: Digital-only subscribers increased 35.6% to more than 721,000 from 532,000.
- Amplified Digital: Revenue increased 20.3% to $91.2 million.
- BLOX Digital: Revenue including intercompany revenue totaled $35.0 million, up 13.2%.
Profitability, Cash Flow, Debt and Liquidity
- Operating expenses declined 13.3% to $660.5 million, driven primarily by lower compensation, newsprint and ink, depreciation and amortization, and restructuring costs.
- Compensation expense declined 16.0% to $266.9 million, reflecting workforce reductions and business transformation efforts, partially offset by investments in digital talent.
- Net loss attributable to Lee was $5.3 million, despite higher operating income, because net non-operating expense increased to $40.3 million, including $41.5 million of interest expense.
- Adjusted EBITDA declined to $85.2 million from $96.1 million. Adjusted EBITDA margin was approximately 12.3% versus 12.3% in 2022, with the reported figures indicating broadly stable margin.
- Operating activities used $2.5 million of cash, compared with $3.4 million provided in 2022. Investing activities provided $8.0 million, primarily from $12.0 million of asset-sale proceeds, while financing activities used $7.1 million, mainly for debt repayment.
- The company has no revolver and relies on operating cash flow and cash on hand. Management expects existing cash and cash flows to fund interest and principal payments over the next twelve months.
- The term loan matures in March 2045, is secured by substantially all company assets, and is subject to restrictions on additional debt, acquisitions, investments, dividends, share repurchases and other capital transactions.
- The credit agreement restricts common-stock dividends. The company was in compliance with its debt covenants at September 24, 2023, and the filing states there are no leverage or financial-performance covenants.
Material Changes Versus 2022
- Revenue declined $89.8 million, primarily because of continued structural declines in print advertising and print subscriptions.
- Operating income improved by $12.3 million as cost reductions more than offset the revenue decline.
- Adjusted EBITDA declined $10.8 million, reflecting lower revenue and continued digital investment.
- Cash flow from operations turned negative, declining $6.0 million.
- Debt principal declined by approximately $6.8 million through payments funded mainly by asset-sale proceeds.
- Masthead impairment charges declined to $7.7 million from $14.2 million, but the company stated that future impairment remains possible. Goodwill was not impaired.
- Restructuring costs declined to $12.7 million from $22.7 million, with 2023 costs primarily related to severance.
- The pension plans moved to a net overfunded position of approximately $10.3 million, compared with an underfunded position of $0.4 million in 2022.
Outlook, Risks and Unusual Items
- Management’s 2024 strategy emphasizes digital audience growth, higher digital-only subscriptions, digital advertising and marketing services, mobile product improvements, subscriber retention, and continued BLOX Digital expansion.
- Management expects digital-only subscribers to exceed 1.2 million by 2028; this is a forward-looking target, not a guarantee.
- Planned 2024 capital expenditures are approximately $10.0 million.
- The company recorded $7.7 million of non-cash masthead impairment charges in 2023. A 50-basis-point decrease in royalty rates would reportedly result in an additional $9.3 million of impairment, while a 100-basis-point increase in the discount rate would result in an additional $1.2 million.
- The company identified a material weakness in internal control over financial reporting related to controls over the reliability of certain internally generated information and third-party data used in revenue recognition. Management’s disclosure controls were therefore deemed ineffective, and BDO issued an adverse opinion on internal control effectiveness.
- Management has initiated remediation efforts, including a project team, enhanced third-party data controls, a new revenue IT system, user-access reviews, training, and improved documentation. Remediation was not complete as of the filing date.
- Key risks include continued print-revenue erosion, advertising weakness, economic and inflationary pressures, high interest costs, newsprint and labor costs, cybersecurity incidents, competition from large digital platforms, impairment of goodwill or mastheads, collectability of receivables, pension and multiemployer withdrawal liabilities, and covenant or debt-default risk.
- Withdrawal liabilities totaled approximately $27.3 million in contractual obligations, with payments expected over 20 years. The company also disclosed $57.1 million of operating lease obligations and $3.7 million of capital-expenditure commitments.
- Legal proceedings arise in the ordinary course of business; management does not expect them to have a material adverse effect on the consolidated financial statements.
Most Important Facts to Verify
- Whether digital subscription and digital advertising growth can offset the continuing decline in print revenue.
- Whether operating cash flow returns to positive levels and is sufficient to cover approximately $41 million of annual interest expense, capital expenditures and required debt repayments.
- The company’s progress in remediating the material weakness in revenue-related internal controls and whether future filings receive an unqualified internal-control opinion.
- Compliance with the BH Finance term-loan covenants and the company’s ability to reduce, refinance or otherwise manage its $455.7 million debt balance.
- The assumptions supporting the $329.5 million goodwill balance and remaining masthead assets, including sensitivity to revenue forecasts, royalty rates and discount rates.
- The sustainability of management’s projected digital subscriber growth and the expected $10.0 million of 2024 capital expenditures.