Lee Enterprises, Inc. — Fiscal 2023 Second-Quarter Form 10-Q
Business Context and Reporting Period
The filing covers the 13-week quarter and six months ended March 26, 2023, compared with the periods ended March 27, 2022. Lee operates 77 principally mid-sized local media operations, including print and digital news, advertising and marketing services, subscriptions, Amplified Digital and BLOX Digital. Digital-only subscribers totaled approximately 596,000, up 21.0% year over year for the quarter.
Financial Highlights
| Metric | Three Months Ended March 26, 2023 | Year-over-Year Change | Six Months Ended March 26, 2023 | Year-over-Year Change |
|---|---|---|---|---|
| Total operating revenue | $170.7 million | Down 10.2% | $355.8 million | Down 9.3% |
| Operating income | $2.9 million | Compared with $(3.2) million | $14.0 million | Down 35.9% |
| Net income attributable to Lee | $(5.9) million | Compared with $(7.3) million | $(4.8) million | Compared with $5.4 million income |
| Diluted earnings per share | $(1.01) | Compared with $(1.26) | $(0.82) | Compared with $0.92 |
| Adjusted EBITDA | $14.3 million | Down 15.4% | $31.9 million | Down 25.7% |
| Cash Costs | $157.9 million | Down 9.9% | $327.5 million | Down 7.4% |
Quarterly operating margin was approximately 1.7%, compared with negative 1.7% in the prior-year quarter. Six-month operating margin was approximately 3.9%, compared with 5.6% in the prior-year period. Quarterly net margin attributable to Lee was approximately negative 3.4%; the six-month net margin was approximately negative 1.3%.
Revenue mix continued to shift toward digital. Quarterly digital revenue, comprising digital advertising, digital subscriptions and digital services, was $65.0 million, up 11.8% and representing 38.1% of total revenue. Six-month digital revenue was $129.8 million, up 14.4% and representing 36.5% of total revenue.
Cash Flow, Debt and Liquidity
- Cash provided by operating activities was $0.6 million for the first six months, compared with cash used of $0.6 million in the prior-year period.
- Investing activities provided $5.0 million, including $5.3 million from asset sales. Prior-year investing cash flow included $14.7 million of asset-sale proceeds.
- Financing activities used $2.8 million, primarily for $2.6 million of long-term debt payments.
- Cash and cash equivalents were $19.0 million at March 26, 2023, compared with $16.2 million at September 25, 2022.
- Long-term debt was approximately $460.0 million, consisting of a 25-year term loan at a fixed 9.0% annual rate maturing March 16, 2045. The carrying amount, net of current maturities, was $460.0 million; fair value was $462.4 million.
- Management stated that existing cash and expected operating cash flow should be sufficient for interest and principal payments due over the next 12 months. No excess cash flow payment was due under the credit agreement as of March 26, 2023.
Material Changes Versus the Prior Comparable Period
- Print advertising declined 28.9% in the quarter and 26.9% for the six-month period, reflecting weaker advertising demand and the secular decline in print advertising.
- Digital advertising and marketing services increased 6.6% in the quarter and 9.1% for the six-month period. Six-month Amplified Digital revenue increased 83.1%.
- Print subscription revenue declined 16.4% in the quarter and 15.9% for the six-month period. Digital subscription revenue increased 38.7% and 46.4%, respectively.
- Compensation expense decreased 17.6% in the quarter and 14.2% for the six-month period, primarily from headcount reductions associated with business transformation, partly offset by investments in digital talent.
- Restructuring costs decreased to $3.7 million from $10.6 million in the quarter and to $4.3 million from $13.8 million for the six-month period. Current-period costs were primarily severance-related.
- Six-month operating income declined despite lower expenses because revenue fell, equity earnings decreased, and the prior-year period benefited from larger asset-sale gains and pension-related items.
Guidance, Outlook, Commentary and Risks
- Management expects 2023 capital expenditures of up to $10.0 million and expects funding to come from internally generated funds.
- Management’s strategy emphasizes digital audience growth, expansion of digital subscriptions and diversification of advertiser offerings through digital marketing, video and e-commerce initiatives.
- Management identified continued pressure from declining print revenue and circulation, a broad pullback in advertising, inflation and labor costs, newsprint and energy costs, competition, technology changes, cybersecurity risks and the ability to execute planned cost reductions.
- Newsprint prices were described as steady during the quarter after 2022 increases; price reductions effective in the third quarter of 2023 had been announced. A $10-per-ton newsprint price increase would reduce annualized pretax income by approximately $0.3 million based on expected 2023 consumption, excluding TNI and MNI and LIFO effects.
- Multiemployer pension withdrawal liabilities were $23.4 million at March 26, 2023, payable over 20 years. The company made no pension contributions during the six-month period and reported no required contributions for 2023.
- The company reported that its disclosure controls and procedures were not effective because material weaknesses in internal control over financial reporting had not been remediated. The weaknesses relate to information-technology user access, validation of data from certain third-party service organizations and validation of tax bases for deferred tax assets and liabilities. Remediation efforts were ongoing.
- Management stated that routine legal proceedings are not expected to have a material adverse effect, although outcomes cannot be predicted.
Important Facts for Investors to Verify
- Whether digital revenue growth and approximately 596,000 digital-only subscribers can offset continuing declines in print advertising and print subscriptions.
- The company’s ability to generate sufficient recurring operating cash flow while carrying approximately $460.0 million of fixed-rate debt and paying 9.0% interest.
- Progress in remediating the disclosed material weaknesses in internal control and disclosure controls.
- Actual capital expenditures versus the stated limit of up to $10.0 million and the availability of internally generated funds.
- The sustainability of cost reductions, restructuring activity and adjusted EBITDA, including the recurring nature of items excluded from non-GAAP measures.
- Exposure to newsprint, labor, distribution, energy and other operating-cost changes, as well as advertising demand and broader economic conditions.