Lee Enterprises(LEE) - 2023 Q1 - Quarterly Report

PART I FINANCIAL INFORMATION This section presents the company's unaudited consolidated financial statements, management's discussion and analysis, market risk disclosures, and internal controls assessment Item 1. Financial Statements The unaudited consolidated financial statements for the quarterly period ended December 25, 2022, show a significant decrease in net income to $1.8 million from $13.2 million in the prior-year period, with total operating revenue declining to $185.1 million Consolidated Balance Sheets The balance sheet shows a slight increase in total assets and equity, with long-term debt remaining stable Consolidated Balance Sheet Highlights (in thousands) | Account | Dec 25, 2022 | Sep 25, 2022 | Change | | :--- | :--- | :--- | :--- | | Total Assets | $747,696 | $744,042 | +$3,654 | | Cash and cash equivalents | $18,346 | $16,185 | +$2,161 | | Goodwill | $329,504 | $329,504 | No Change | | Total Liabilities | $729,278 | $726,805 | +$2,473 | | Long-term debt, net | $462,554 | $462,554 | No Change | | Total Equity | $18,418 | $17,237 | +$1,181 | Consolidated Statements of Income (Loss) and Comprehensive Income (Loss) The income statement reflects an 8.5% decline in total operating revenue and a substantial 86.2% decrease in net income year-over-year Consolidated Statement of Income Highlights (in thousands, except per share data) | Metric | Three months ended Dec 25, 2022 | Three months ended Dec 26, 2021 | YoY Change | | :--- | :--- | :--- | :--- | | Total operating revenue | $185,131 | $202,282 | -8.5% | | Operating income | $11,178 | $25,114 | -55.5% | | Net income | $1,824 | $13,199 | -86.2% | | Diluted EPS | $0.19 | $2.17 | -91.2% | - The significant drop in net income was driven by lower operating revenue and a smaller gain on asset sales compared to the prior-year quarter[15] Consolidated Statements of Cash Flows The cash flow statement indicates a shift from operating cash inflow to outflow, with reduced cash from investing activities and lower cash required for financing activities Consolidated Statement of Cash Flows Highlights (in thousands) | Cash Flow Activity | Three months ended Dec 25, 2022 | Three months ended Dec 26, 2021 | | :--- | :--- | :--- | | Net cash (required for) provided by operating activities | ($1,692) | $570 | | Net cash provided by investing activities | $4,021 | $11,954 | | Net cash required for financing activities | ($168) | ($20,051) | | Net increase (decrease) in cash | $2,161 | ($7,527) | - The company experienced a net cash outflow from operating activities of $1.7 million, a reversal from a $0.6 million inflow in the prior year, primarily due to lower net income and unfavorable changes in working capital[18] - Investing activities provided less cash due to lower proceeds from asset sales[18] - Financing activities required significantly less cash as there were no major debt repayments in the quarter, unlike the prior year[18] Notes to Consolidated Financial Statements The notes detail the company's accounting policies and provide breakdowns of key financial statement items, highlighting a revenue shift from print to digital and stable debt structure Revenue by Source (in thousands) | Revenue Source | Q1 2023 (ended Dec 25, 2022) | Q1 2022 (ended Dec 26, 2021) | YoY Change | | :--- | :--- | :--- | :--- | | Print advertising | $41,836 | $55,970 | -25.3% | | Digital advertising | $47,749 | $42,784 | +11.6% | | Print subscription | $67,370 | $79,628 | -15.4% | | Digital subscription | $12,329 | $7,891 | +56.2% | | Total operating revenue | $185,131 | $202,282 | -8.5% | - The company's debt consists of a single 25-year term loan with BH Finance LLC, with a principal balance of $462.6 million at a 9% annual fixed rate, maturing in 2045[34][35] - No principal debt payments were made in the quarter[35] - The effective income tax rate for the quarter was 19.4%, compared to 28.8% in the prior-year quarter[39] Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations Management discusses the 8.5% decline in total operating revenue, attributing it to secular declines in print advertising and subscriptions, partially offset by strong digital growth, and outlines liquidity expectations Strategy The company's post-pandemic operating strategy is locally focused and built on three pillars - The company's post-pandemic operating strategy is locally focused and built on three pillars[49] - Grow digital audiences by transforming the presentation of local news[51] - Expand the digital subscription base through audience growth and conversion[51] - Diversify advertiser offerings with video and e-commerce initiatives via Amplified Digital[51] Results of Operations Operating results show an 8.5% decrease in total operating revenue and a 55.5% decline in operating income, despite strong growth in digital segments - Total operating revenue decreased 8.5% YoY to $185.1 million, while operating income fell 55.5% to $11.2 million[54][56] - Digital advertising and marketing services revenue grew 11.6% to $47.7 million, representing 53.3% of total advertising revenue, up from 43.3% in the prior year[57] - Digital-only subscribers grew 25.3% to 564,000, with revenue from this segment increasing 56% to $12.3 million[58] - Total digital revenue (advertising, subscriptions, services) increased 17.2% to $64.8 million, now comprising 35.0% of total operating revenue[60] - Compensation expense decreased 10.9% ($9.2 million) due to reductions in full-time employees as part of business transformation efforts[63] Non-GAAP Financial Measures This section provides reconciliations of non-GAAP financial measures, including Adjusted EBITDA and Cash Costs Reconciliation of Net Income to Adjusted EBITDA (in thousands) | Metric | Three months ended Dec 25, 2022 | Three months ended Dec 26, 2021 | YoY Change | | :--- | :--- | :--- | :--- | | Net income | $1,824 | $13,199 | -86.2% | | Adjusted EBITDA | $17,619 | $26,087 | -32.5% | Reconciliation of Operating Expenses to Cash Costs (in thousands) | Metric | Three months ended Dec 25, 2022 | Three months ended Dec 26, 2021 | YoY Change | | :--- | :--- | :--- | :--- | | Operating expenses | $175,621 | $178,922 | -1.8% | | Cash Costs | $169,652 | $178,320 | -4.9% | Liquidity and Capital Resources The company's liquidity stood at $18.3 million in cash, with operating activities requiring cash and capital expenditures expected to be funded internally - Cash required for operating activities was $1.7 million, a $2.3 million decrease from the $0.6 million provided in the prior year, driven by lower operating results[85] - The company's liquidity, consisting of cash on the balance sheet, totaled $18.3 million as of December 25, 2022[91] - Capital expenditures are expected to total up to $10.0 million in fiscal year 2023, funded by internally generated funds[87] Item 3. Quantitative and Qualitative Disclosures About Market Risk The company's market risk exposure is primarily related to newsprint prices, with minimal interest rate risk due to its fixed-rate debt structure - The company's debt is entirely fixed rate, eliminating the potential impact of an increase in interest rates[95] - Newsprint prices are expected to remain steady after increases in 2022, with the supply chain challenged by significant capacity reductions[96] - A $10 per tonne increase in newsprint price would result in an annualized reduction in income before taxes of approximately $0.3 million[99] Item 4. Controls and Procedures Management concluded that the company's disclosure controls and procedures were not effective due to unremediated material weaknesses in internal controls over financial reporting - The company concluded that its disclosure controls and procedures were not effective as of the end of the reporting period[101] - Material weaknesses were identified in three areas: IT general controls related to user access, controls over data provided by third-party service organizations without SOC 1 reports, and controls to validate the accuracy of the tax basis for certain deferred tax assets and liabilities[103] - Management is committed to remediating the weaknesses and has initiated several actions, including a complete user access review, enhancing controls around third-party data, and improving controls over tax basis validation[102][103][110] PART II OTHER INFORMATION This section covers legal proceedings, risk factors, and exhibits filed with the quarterly report Item 1. Legal Proceedings The company is involved in various routine legal actions, which management believes will not have a material adverse effect on its financial statements - The company is involved in routine legal actions, and management does not expect them to have a material adverse effect on its financial statements[107] Item 1.A. Risk Factors No material changes have occurred in the company's risk factors since the 2022 Form 10-K, though strategic growth initiatives carry inherent risks - No material changes have occurred in the risk factors disclosed in the 2022 Form 10-K[108] - The company highlights that strategic growth initiatives, such as acquisitions and joint ventures, carry inherent risks that could adversely affect the business[109] Item 6. Exhibits This section lists the exhibits filed with the Form 10-Q, including CEO and CFO certifications and Inline XBRL documents - The exhibits filed with this report include certifications from the Chief Executive Officer and Chief Financial Officer, as well as Interactive Data Files (XBRL)[112] Signatures This section contains the required certifications and signatures for the quarterly report