Lee Enterprises, Inc. — Fiscal 2022 First-Quarter Form 10-Q
Reporting period: 13 weeks ended December 26, 2021, compared with the 13 weeks ended December 27, 2020. Fiscal years end on the last Sunday in September. Financial statements are unaudited.
Business Context
Lee operates 77 principally mid-sized local media operations, including print and digital newspapers, digital marketing and advertising services, niche publications, community newspapers, and TownNews digital services. The company reported approximately one million paid print and digital subscribers, including approximately 450,000 digital-only subscribers, up 57% year over year.
Key Financial Metrics
| Metric | Q1 FY2022 | Q1 FY2021 | Change |
|---|---|---|---|
| Total operating revenue | $202.3 million | $211.8 million | (4.5%) |
| Operating income | $25.1 million | $20.8 million | 20.7% |
| Operating margin | 12.4% | 9.8% | Improved |
| Net income | $13.2 million | $16.4 million | (19.5%) |
| Income attributable to Lee | $12.7 million | $15.9 million | (20.4%) |
| Diluted EPS | $2.17 | $2.77 | (21.9%) |
| Adjusted EBITDA | $26.1 million | $40.0 million | (34.8%) |
| Cash Costs | $178.3 million | $173.9 million | 2.5% |
| Net cash from operating activities | $0.6 million | $18.9 million | Down $18.3 million |
Advertising and marketing services revenue was $98.8 million, down 3.8%. Print advertising declined 16.0% to $56.0 million, while digital advertising and marketing services increased 18.8% to $42.8 million. Subscription revenue declined 4.2% to $87.5 million, including a 6.4% decline in print subscriptions and a 25.7% increase in digital subscriptions.
Total digital revenue was $55.3 million, up 17.4% and representing 27.3% of operating revenue. Digital advertising represented 43.3% of advertising and marketing services revenue, compared with 35.0% in the prior-year quarter.
Operating expenses declined 7.2% to $178.9 million, primarily reflecting a $17.5 million favorable change in asset-sale gains and losses. Excluding selected non-cash and unusual items, Cash Costs increased 2.5%, reflecting investments in digital talent and digital growth initiatives.
The company’s reported operating margin improved to approximately 12.4% from 9.8%. Net margin declined to approximately 6.5% from 7.7%, primarily because the prior-year period included a substantially larger pension and postretirement curtailment gain and because of lower income before taxes in the current period.
Cash Flow, Debt and Liquidity
- Cash and cash equivalents were $18.6 million at December 26, 2021, compared with $26.1 million at September 26, 2021.
- Operating activities generated $0.6 million of cash, investing activities generated $12.0 million, and financing activities used $20.1 million.
- Investing cash flow included $14.4 million of proceeds from sales of non-core real estate and other assets.
- Capital expenditures were $1.8 million in the quarter; management expected approximately $12.0 million of capital expenditures for fiscal 2022.
- The company made $20.1 million of principal debt payments, including $10.5 million funded by asset-sale proceeds, $6.1 million from prior-year excess cash flow, and $3.5 million of voluntary prepayments.
- Long-term debt was $462.6 million at December 26, 2021. The debt is a 25-year fixed-rate term loan bearing interest at 9.0% and maturing March 16, 2045.
- Management stated that existing cash and operating cash flows are expected to satisfy interest and principal payments due over the next 12 months and maintain adequate liquidity.
Material Changes Versus the Prior Comparable Period
- Revenue continued to shift from print to digital: total revenue declined 4.5%, while digital revenue increased 17.4% and print revenue declined across advertising, subscriptions and other activities.
- Operating income increased $4.3 million because lower operating expenses and a $12.3 million net gain on asset sales more than offset lower revenue and higher cash operating costs.
- Net income attributable to Lee decreased $3.2 million. The prior-year period benefited from a $23.8 million non-cash postretirement curtailment gain and included a $12.3 million pension withdrawal charge; the current period included a smaller $1.0 million pension curtailment gain and no pension withdrawal charge.
- Interest expense declined 10.3% to $10.7 million as debt outstanding declined. Management reported that debt had been reduced by $113.4 million since the March 2020 refinancing.
- Other comprehensive income attributable to Lee changed from income of $1.1 million to a loss of $6.1 million, reflecting pension-related changes, including a $6.5 million reduction in accumulated other comprehensive income associated with plan enhancements.
- The company adopted a stockholder rights plan in November 2021. Rights generally become exercisable if a person or group acquires 10% or more of the common stock, or 20% for certain passive investors, and the plan is scheduled to remain in effect through November 23, 2022 unless earlier terminated.
Guidance, Outlook, Risks and Unusual Items
- Management expected fiscal 2022 capital expenditures of approximately $12.0 million and expected internally generated funds to provide required liquidity.
- Management’s strategy emphasizes digital audience growth, expansion of digital subscriptions, and broader digital advertising and marketing offerings, including video advertising and e-commerce initiatives.
- COVID-19 remained a significant source of uncertainty, with potential effects on advertising and subscription demand, operating costs, industry structure and consumer behavior.
- Print revenue and circulation remain subject to secular decline. The company faces competition, technology changes, labor cost pressures, cybersecurity and information-technology risks, and execution risk related to expense reductions and acquisitions.
- Newsprint prices increased during 2021, with additional increases announced for January and March 2022. Management estimated that a $10-per-ton increase in 27.7-pound newsprint would reduce annual pretax income by approximately $0.5 million based on expected 2022 consumption.
- The company’s fixed-rate debt limits exposure to increases in interest rates, but leverage and required debt payments remain material.
- Warrants exercisable at $41.90 per share were scheduled to expire March 31, 2022. Their fair value was $2.0 million at December 26, 2021, and potential exercise proceeds could provide up to $25.1 million of liquidity.
- The company froze future benefits under four additional defined benefit pension plans, producing a $1.0 million non-cash curtailment gain. Six frozen plans were expected to be merged into one plan in the second quarter of fiscal 2022.
- Legal proceedings arise in the ordinary course of business; management stated that their resolution is not expected to have a material adverse effect on the consolidated financial statements.
- Management concluded that disclosure controls were effective and reported no material changes in internal control over financial reporting.
Important Facts for Investors to Verify
- Whether digital advertising and subscription growth can offset continuing declines in print advertising, print subscriptions and commercial printing.
- The sustainability of operating cash flow, which was only $0.6 million in the quarter despite reported net income of $13.2 million.
- Debt repayment capacity, covenant requirements and the company’s ability to maintain adequate liquidity while funding approximately $12.0 million of planned annual capital expenditures.
- The effect of newsprint price increases, wage pressures and digital growth investments on Cash Costs and Adjusted EBITDA.
- The distinction between GAAP results and non-GAAP Adjusted EBITDA, particularly because asset-sale gains, pension items, restructuring costs and other adjustments materially affected comparability.
- The consequences of the stockholder rights plan, warrant expiration and any future strategic investments, acquisitions or takeover activity.