Lee Enterprises, Inc. — Fiscal 2023 Third-Quarter Form 10-Q
Business context and reporting period
Lee Enterprises operates a digital-first local news, subscription, advertising and marketing platform, including newspapers, digital products, Amplified Digital and BLOX Digital. The filing covers the 13 weeks ended June 25, 2023, and the nine months ended June 25, 2023, compared with the periods ended June 26, 2022. Lee reported more than 606,000 digital-only subscribers serving 75 communities in 26 states.
Key financial metrics
| Metric | Three months ended June 25, 2023 | Year-over-year change | Nine months ended June 25, 2023 | Year-over-year change |
|---|---|---|---|---|
| Operating revenue | $171.3 million | Down 12.2% | $527.1 million | Down 10.3% |
| Operating income | $12.2 million | Up 89.6% | $26.2 million | Down 7.3% |
| Operating margin | 7.1% | Up from 3.3% | 5.0% | Down from 4.8% |
| Net income attributable to Lee | $1.5 million | Compared with a $0.3 million loss | $3.3 million loss | Compared with $5.1 million income |
| Diluted earnings per share | $0.25 | Compared with $(0.05) | $(0.56) | Compared with $0.87 |
| Adjusted EBITDA | $23.2 million | Up 1.2% | $55.2 million | Down 16.3% |
Digital revenue, comprising digital advertising, digital subscriptions and digital services, was $70.5 million in the quarter, up 14.7%, and $200.3 million year to date, up 14.5%. Digital revenue represented 41.1% and 38.0% of total revenue, respectively. Digital-only subscription revenue increased 43.3% in the quarter and 45.2% year to date.
Quarterly advertising and marketing services revenue declined 13.1%, driven by a 34.8% decline in print advertising, partially offset by 8.0% growth in digital advertising and marketing services. Subscription revenue declined 12.9%, as lower full-access volumes exceeded growth in digital-only subscriptions and pricing.
Operating expenses declined 15.5% in the quarter and 10.4% year to date. Compensation expense decreased 18.6% in the quarter and 15.6% year to date, primarily from headcount reductions and business transformation efforts. Cash Costs were $149.9 million in the quarter and $477.5 million year to date.
Cash flow, debt and liquidity
- Cash provided by operating activities was negative $1.5 million for the first nine months, compared with $0.7 million provided in the prior-year period.
- Investing activities provided $5.1 million, including $7.2 million of proceeds from non-core asset sales. Capital expenditures were $3.8 million.
- Financing activities used $2.8 million, including $2.6 million of debt repayments.
- Cash and cash equivalents were $17.0 million at June 25, 2023, compared with $16.2 million at September 25, 2022.
- The company had a $460.0 million fixed-rate term loan bearing interest at 9.0% and maturing March 16, 2045. Carrying-value debt, including current maturities, was approximately $460.0 million.
- Management expects 2023 capital expenditures of up to $5.0 million and anticipates that cash on hand and operating cash flows will fund interest, principal payments and other requirements. A further $2.0 million debt payment related to non-core asset-sale proceeds was expected in the fourth quarter.
Material changes, outlook and risks
Management continues to pursue its three-pillar strategy: grow digital audiences, expand digital subscriptions and broaden digital advertising and marketing offerings. Cost reductions and digital investments improved quarterly operating performance, but the nine-month results remained pressured by declining print revenue, weaker advertising demand and lower pension-related benefits.
The filing does not provide a clear consolidated revenue or earnings forecast. Management expects capital expenditures of up to $5.0 million for fiscal 2023 and expects adequate liquidity for the next twelve months. Newsprint prices declined in the third quarter, with additional reductions announced for the fourth quarter, although supply-chain constraints remain. A $10-per-ton newsprint price increase would reduce annualized pretax income by approximately $0.3 million based on current consumption assumptions.
Key risks include continued declines in print advertising and circulation, economic conditions, advertising and subscription demand, technology and cybersecurity risks, newsprint and labor costs, execution of expense reductions and digital investments, competition, maintenance of Nasdaq listing status, and potential indemnification obligations related to prior acquisitions. Routine legal proceedings are not expected by management to have a material adverse effect.
Disclosure controls and procedures were not effective at the end of the period because three material weaknesses had not been remediated: information-technology user access controls, validation of data from certain third-party service organizations, and controls over the tax basis of deferred tax assets and liabilities. Management described remediation initiatives but had not yet concluded that the weaknesses were remediated.
Important facts for investors to verify
- Whether print revenue declines stabilize and digital growth continues to offset print losses.
- Whether operating cash flow returns to positive levels and supports required debt amortization.
- Progress toward the expected $2.0 million fourth-quarter debt payment and longer-term deleveraging.
- Whether the $9.0% fixed-rate term loan and high leverage constrain investment, liquidity or strategic flexibility.
- Progress and testing results for remediation of the three material weaknesses in internal controls.
- Whether the stated digital subscriber growth converts into sustainable subscription revenue and profitability.
- The effect of advertising demand, newsprint availability and pricing, inflation, labor costs and cybersecurity events on future results.