Lee Enterprises, Inc. 10-Q Summary
Business Context and Reporting Period
The filing covers the three months ended December 24, 2023, Lee Enterprises’ fiscal 2024 first quarter, compared with the three months ended December 25, 2022. Fiscal 2024 contains 53 weeks. Lee operates a digital-first local media business serving 73 communities in 26 states, with revenue from advertising and marketing services, print and digital subscriptions, and digital services, including BLOX Digital.
Financial Performance and Position
| Metric | Q1 FY2024 | Q1 FY2023 | Change |
|---|---|---|---|
| Total operating revenue | $155.7 million | $185.1 million | Down 15.9% |
| Operating income | $7.8 million | $11.2 million | Down 29.9% |
| Operating margin | 5.0% | 6.0% | Down approximately 100 basis points |
| Net income | $1.2 million | $1.8 million | Down 32.4% |
| Net income attributable to Lee | $0.7 million | $1.1 million | Down 37.4% |
| Diluted EPS | $0.12 | $0.19 | Down from prior year |
| Adjusted EBITDA | $18.6 million | $17.6 million | Up 5.8% |
| Cash Costs | $139.3 million | $169.7 million | Down 17.9% |
| Operating cash flow | $0.1 million | $(2.2) million | Improved by $2.3 million |
Advertising and marketing services revenue fell 20.9% to $70.9 million, driven primarily by a 41.6% decline in print advertising. Digital advertising declined 2.7% to $46.5 million but represented 65.5% of advertising and marketing services revenue, compared with 53.3% in the prior-year quarter.
Subscription revenue decreased 10.5% to $71.3 million. Print subscription revenue declined 23.0%, partially offset by a 57.9% increase in digital subscription revenue to $19.5 million. Digital-only subscribers increased 30.4% year over year to 735,000.
Total digital revenue increased 9.4% to $70.9 million and represented 45.5% of total operating revenue. Digital services revenue rose 4.9% to $5.0 million.
Compensation expense declined 20.9%, newsprint and ink expense declined 34.8%, and other operating expenses declined 13.8%, reflecting workforce reductions, lower print volumes and delivery costs, and ongoing business transformation. Restructuring costs increased to $4.3 million from $0.6 million.
Cash and cash equivalents were $15.4 million at December 24, 2023, compared with $14.5 million at September 24, 2023. Total debt was $454.2 million, consisting of a 9% fixed-rate term loan maturing March 16, 2045. The company made $1.6 million of principal payments during the quarter and reported no excess cash flow payment due under the credit agreement.
Total assets were $702.5 million and total liabilities were $680.3 million at quarter-end. Stockholders’ equity was $19.7 million, and accumulated deficit was $265.8 million.
Material Changes Versus the Prior Comparable Period
- Total revenue declined $29.5 million, primarily because of continued print advertising and print subscription declines.
- Digital subscription growth and cost reductions partially offset the decline in print revenue.
- Operating income declined despite lower operating expenses because revenue declined faster than costs.
- Adjusted EBITDA increased $1.0 million, reflecting substantial reductions in cash operating costs.
- Operating cash flow improved from an outflow of $2.2 million to near breakeven.
- The company recorded $3.6 million of curtailment and settlement gains, including a $2.4 million non-cash pension settlement gain and a $1.2 million non-cash postretirement benefit curtailment gain.
- The company sold non-core operations and real estate, generating $3.1 million of asset-sale proceeds and reducing goodwill by $1.3 million.
Guidance, Outlook, Risks and Unusual Items
Management expects 2024 capital expenditures to total up to $10.0 million and expects internally generated funds to support capital expenditures and other requirements. Management also expects interest and principal payments due over the next twelve months to be satisfied by existing cash and operating cash flows.
Management’s strategy emphasizes digital audience growth, expansion of digital subscriptions, digital advertising and marketing services, and BLOX Digital’s software-as-a-service platform. The filing does not provide specific revenue or earnings guidance.
- Key risks include continued declines in print revenue and circulation, changes in advertising and subscription demand, economic conditions, competition, technology changes, newsprint and energy costs, labor costs, interest rates, cybersecurity and information technology failures, and the ability to achieve planned expense reductions.
- The company has a material weakness in disclosure controls and procedures relating to the reliability of certain internally generated information and information received from third-party service providers relevant to revenue recognition. Management is implementing remediation measures, but the weakness had not been remediated as of the filing.
- Multiemployer pension withdrawal liabilities were approximately $24.8 million at December 24, 2023.
- The company is involved in ordinary-course legal proceedings and states that it does not expect them to have a material adverse effect, although outcomes cannot be predicted.
- The company offered a voluntary lump-sum pension settlement accepted by 522 participants, reducing pension plan liabilities and assets by $22.6 million.
Important Facts for Investors to Verify
- Whether digital subscription and digital revenue growth can offset continuing declines in print advertising and print subscriptions.
- Whether cost reductions are sustainable without impairing revenue growth, product quality or customer relationships.
- Whether operating cash flow can consistently support the company’s $454.2 million debt balance, 9% interest burden and planned capital expenditures.
- The timing and effectiveness of remediation of the material weakness in revenue-related controls.
- The continuing availability of asset-sale proceeds and internally generated cash to fund debt repayments and liquidity needs.
- The terms and covenant requirements of the BH Finance term loan, including future excess cash flow repayment obligations.