Lee Enterprises, Inc. — Fiscal 2022 Form 10-K Summary
Business context and reporting period
Lee Enterprises is a digital-first local media company operating approximately 77 local media operations across 26 states, including newspapers, digital subscription platforms, digital advertising and marketing services, and BLOX Digital software-as-a-service offerings. The filing is a Form 10-K for the 52-week fiscal year ended September 25, 2022; the supplied metadata refers to “2022 Q4,” but the filing reports full-year results rather than a standalone quarter.
Lee reported more than 532,000 digital-only subscribers at fiscal year-end, up 32% from 2021. The company completed its acquisition of BH Media and The Buffalo News in March 2020, financed primarily through a long-term term loan.
Key financial metrics
| Metric | 2022 | 2021 | Change |
|---|---|---|---|
| Total operating revenue | $781.0 million | $794.6 million | Down 1.7% |
| Advertising and marketing services revenue | $366.4 million | $369.3 million | Down 0.8% |
| Subscription revenue | $353.6 million | $357.7 million | Down 1.1% |
| Digital revenue | $239.5 million | $188.6 million | Up 27.0% |
| Operating income | $24.9 million | $56.6 million | Down 56.1% |
| Net income attributable to Lee | $(2.0) million | $22.7 million | Declined $24.8 million |
| Diluted earnings per share | $(0.35) | $3.90 | Declined |
| Adjusted EBITDA | $96.1 million | $116.6 million | Down 17.6% |
| Cash provided by operating activities | $3.4 million | $50.1 million | Down $46.6 million |
| Capital spending | $7.5 million | $7.5 million | Approximately flat |
Digital advertising revenue increased 28.3% to $181.5 million and represented approximately half of advertising and marketing services revenue. Amplified Digital revenue increased 83% to approximately $75.8 million. Digital-only subscription revenue increased 42.1% to $40.1 million. BLOX Digital revenue, including intercompany revenue, increased 13.6% to approximately $30.9 million.
Print advertising revenue fell 18.8% to $185.0 million, while print subscription revenue declined 4.9% to $313.5 million. Total operating expenses increased 2.3% to $761.8 million. Cash costs increased 1.0% to $692.8 million, reflecting inflation, digital investments and higher digital cost of goods sold, partly offset by lower print-related costs.
Liquidity, debt and balance sheet
- Cash and cash equivalents were $16.2 million at September 25, 2022, compared with $26.1 million a year earlier.
- Outstanding debt principal was $462.6 million, compared with $482.6 million at September 26, 2021. The debt is fixed-rate, bears interest at 9.0%, is secured by company assets and matures in March 2045.
- Lee made $20.1 million of principal debt payments during 2022, including payments funded by asset-sale proceeds, excess cash flow and voluntary prepayments.
- Management stated that existing cash and expected operating cash flow should satisfy interest and principal payments due over the next twelve months. The company had no revolving credit facility and was in compliance with its debt covenants at year-end.
- The credit agreement restricts dividends, additional indebtedness, certain investments and acquisitions, asset sales, liens and other capital transactions.
- Total assets were $744.0 million and total liabilities were $726.8 million at year-end. Total stockholders’ equity was $15.0 million, and accumulated deficit was $261.2 million.
Material changes versus the prior comparable period
- Revenue declined modestly overall as strong digital growth was more than offset by continuing print declines.
- Operating income and Adjusted EBITDA fell substantially, primarily because of higher operating costs, digital investment, restructuring costs and impairment charges.
- Operating cash flow fell sharply to $3.4 million, driven by weaker operating results and unfavorable working-capital changes, including accounts receivable and income taxes payable.
- Restructuring costs increased to $22.7 million from $7.2 million, including severance, litigation, restructuring and advisor costs related to Alden Global Capital’s unsolicited acquisition proposal.
- Lee recorded approximately $13.5 million of masthead impairment, $7.8 million of lease impairment and $0.7 million related to disposal of a non-core business.
- Interest expense declined to $41.8 million from $44.8 million because of lower debt balances.
- 2021 benefited from a $23.8 million non-cash postretirement curtailment gain; the absence of that benefit materially reduced the 2022 comparison.
- The company froze future benefits in additional defined benefit plans, completed a pension annuity transaction transferring $85.6 million of liabilities in exchange for $81.4 million of plan assets, and recorded a $4.2 million non-cash settlement gain.
Guidance, outlook, commentary and risks
Management’s strategy is to expand digital audiences, grow digital subscriptions, diversify local advertising solutions and expand BLOX Digital. Lee expects continued digital subscriber growth and has stated a long-term objective of exceeding 900,000 digital-only subscribers by 2026. Management identified Amplified Digital as a key 2023 priority and expects modest BLOX Digital growth from market-share gains and higher revenue per customer.
Planned 2023 capital expenditures were approximately $12.0 million. Management expects internally generated funds to cover capital expenditures and other requirements, but noted that liquidity depends on maintaining operating performance and compliance with debt obligations.
- Structural declines in print advertising, print circulation and print-related revenue remain principal business risks.
- Advertising demand is exposed to local and national economic conditions, inflation, interest rates, retail weakness and consumer spending.
- Newsprint, energy, labor, transportation and distribution costs are rising. A $10-per-ton newsprint price increase was estimated to reduce annual pretax income by approximately $0.3 million based on anticipated 2023 consumption, excluding TNI and MNI.
- Debt service and limited financial flexibility create liquidity risk. A debt default could accelerate all outstanding principal and interest.
- The company may incur additional pension and multiemployer withdrawal liabilities. Accrued multiemployer withdrawal liabilities were approximately $25.0 million at year-end.
- Lee identified three material weaknesses in internal control over financial reporting involving information-technology user access, validation of data from certain third-party service organizations and deferred-tax-basis controls. Management concluded that disclosure controls and internal control over financial reporting were not effective, and BDO issued an adverse opinion on internal control effectiveness.
- The company identified and corrected an immaterial deferred-tax error affecting prior periods, including a $14.6 million adjustment to the opening accumulated deficit for fiscal 2020 and related deferred-tax liabilities.
- Cybersecurity incidents, competition, employee retention, legal matters, acquisition integration and potential impairment of goodwill or intangible assets could materially affect results.
- Alden’s unsolicited $24-per-share proposal was rejected in December 2021. Related legal, advisory and other costs affected 2022 results, and further takeover-related actions or litigation remained a risk.
Most important facts for investors to verify
- Whether digital revenue and subscriber growth can offset the continuing decline in print revenue and sustain positive operating cash flow.
- The pace and cost of remediation of the three internal-control material weaknesses and whether future filings receive an unqualified internal-control opinion.
- Compliance with the 9.0% secured term loan, mandatory excess-cash-flow and asset-sale prepayment provisions, and the company’s ability to refinance or repay debt over time.
- Whether the $16.2 million cash balance and expected operating cash flow are sufficient under weaker advertising conditions or higher operating costs.
- The sensitivity of goodwill and masthead values to lower revenue, higher discount rates or reduced royalty rates.
- Potential cash requirements from pension, postretirement, multiemployer withdrawal, tax and legal contingencies.