LEE ENTERPRISES, Inc 10-Q

Item 1. Financial Statements LEE ENTERPRISES, INCORPORATED CONSOLIDATED BALANCE SHEETS (Unaudited) (Thousands of Dollars) March 26, 2023 September 25, 2022 ASSETS Current assets: Cash and cash equivalents 19,030 16,185 Accounts receivable and contract assets, net 67,587 69,522 Inventories 10,347 8,265 Prepaid and other current assets 13,811 15,151 Total current assets 110,775 109,123 Investments: Associated companies 28,610 27,378 Other 5,813 5,971 Total investments 34,423 33,349 Property and equipment: Land and improvements 13,945 14,505 Buildings and improvements 92,304 95,111 Equipment 216,003 215,731 Construction in process 2,696 1,449 324,948 326,796 Less accumulated depreciation 256,571 253,083 Property and equipment, net 68,377 73,713 Operating lease right-of-use assets 46,529 47,490 Goodwill 329,504 329,504 Other intangible assets, net 111,743 121,373 Pension plan assets, net 154 528 Medical plan assets, net 19,430 19,066 Other 12,158 9,896 Total assets 733,093 744,042 The accompanying Notes are an integral part of the Consolidated Financial Statements. 1 (Unaudited) (Thousands of Dollars and Shares, Except Per Share Data) March 26, 2023 September 25, 2022 LIABILITIES AND EQUITY Current liabilities: Current portion of lease liabilities 8,173 7,859 Accounts payable 40,251 28,608 Compensation and other accrued liabilities 35,322 44,740 Unearned revenue 47,538 49,929 Total current liabilities 131,284 131,136 Long-term debt, net of current maturities 459,994 462,554 Operating lease liabilities 42,852 46,003 Pension obligations 706 966 Postretirement and postemployment benefit obligations 9,365 9,221 Deferred income taxes 42,351 42,719 Income taxes payable 8,531 8,292 Withdrawal liabilities and other 25,057 25,914 Total liabilities 720,140 726,805 Equity: Stockholders' equity: Serial convertible preferred stock, no par value; authorized 500 shares; none issued — — Common Stock, $ 0.01 par value; authorized 12,000 shares; issued and outstanding: 60 60 March 26, 2023; 6,040 shares; $0.01 par value September 25, 2022; 5,979 shares; $0.01 par value Class B Common Stock, $ 2 par value; authorized 3,000 shares; none issued — — Additional paid-in capital 259,964 259,521 Accumulated deficit ( 266,015 ) ( 261,229 ) Accumulated other comprehensive income 16,373 16,653 Total stockholders' equity 10,382 15,005 Non-controlling interests 2,571 2,232 Total equity 12,953 17,237 Total liabilities and equity 733,093 744,042 The accompanying Notes are an integral part of the Consolidated Financial Statements. 2 LEE ENTERPRISES, INCORPORATED CONSOLIDATED STATEMENTS OF INCOME (LOSS) AND COMPREHENSIVE INCOME (LOSS) (Unaudited) Three months ended Six months ended (Thousands of Dollars, Except Per Common Share Data) March 26, 2023 March 27, 2022 March 26, 2023 March 27, 2022 Operating revenue: Advertising and marketing services 77,700 87,633 167,285 186,387 Subscription 78,582 87,348 158,281 174,867 Other 14,405 15,033 30,252 31,042 Total operating revenue 170,687 190,014 355,818 392,296 Operating expenses: Compensation 68,831 83,513 144,277 168,207 Newsprint and ink 6,466 7,068 13,898 14,712 Other operating expenses 82,569 84,679 169,343 170,661 Depreciation and amortization 7,733 8,951 15,619 18,627 Assets gain on sales, impairments and other, net ( 792 ) ( 152 ) ( 3,355 ) ( 12,426 ) Restructuring costs and other 3,694 10,590 4,340 13,790 Total operating expenses 168,501 194,649 344,122 373,571 Equity in earnings of associated companies 672 1,407 2,340 3,161 Operating income (loss) 2,858 ( 3,228 ) 14,036 21,886 Non-operating (expense) income: Interest expense ( 10,501 ) ( 10,523 ) ( 20,909 ) ( 21,186 ) Curtailment gain — — — 1,027 Pension withdrawal cost — ( 2,335 ) — ( 2,335 ) Pension and OPEB related benefit (cost) and other, net 206 6,248 1,700 9,320 Total non-operating expense, net ( 10,295 ) ( 6,610 ) ( 19,209 ) ( 13,174 ) (Loss) income before income taxes ( 7,437 ) ( 9,838 ) ( 5,173 ) 8,712 Income tax (benefit) expense ( 2,071 ) ( 3,144 ) ( 1,631 ) 2,207 Net (loss) income ( 5,366 ) ( 6,694 ) ( 3,542 ) 6,505 Net income attributable to non-controlling interests ( 519 ) ( 582 ) ( 1,244 ) ( 1,123 ) (Loss) income attributable to Lee Enterprises, Incorporated ( 5,885 ) ( 7,276 ) ( 4,786 ) 5,382 Other comprehensive loss, net of income taxes ( 140 ) ( 1,167 ) ( 280 ) ( 7,279 ) Comprehensive loss attributable to Lee Enterprises, Incorporated ( 6,025 ) ( 8,443 ) ( 5,066 ) ( 1,897 ) Earnings per common share: Basic: ( 1.01 ) ( 1.26 ) ( 0.82 ) 0.94 Diluted: ( 1.01 ) ( 1.26 ) ( 0.82 ) 0.92 The accompanying Notes are an integral part of the Consolidated Financial Statements. 3 CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY (DEFICIT) (Unaudited) (Thousands of Dollars) Accumulated Deficit Common Stock Additional paid-in capital Accumulated Other Comprehensive Loss Total September 26, 2022 ( 261,229 ) 60 259,521 16,653 15,005 Shares issued (redeemed) — — ( 383 ) — ( 383 ) Income attributable to Lee Enterprises, Incorporated 1,099 — — — 1,099 Stock compensation — — 349 — 349 Other comprehensive loss — — — ( 200 ) ( 200 ) Deferred income taxes, net — — — 60 60 December 25, 2022 ( 260,130 ) 60 259,487 16,513 15,930 Shares issued (redeemed) — — ( 97 ) — ( 97 ) Loss attributable to Lee Enterprises, Incorporated ( 5,885 ) — — ( 5,885 ) Stock compensation — — 574 — 574 Other comprehensive loss — — ( 200 ) ( 200 ) Deferred income taxes, net — — 60 60 March 26, 2023 ( 266,015 ) 60 259,964 16,373 10,382 4 (Thousands of Dollars) Accumulated Deficit Common Stock Additional paid-in capital Accumulated Other Comprehensive Loss Total September 27, 2021 ( 259,212 ) 59 258,063 42,187 41,097 Shares issued (redeemed) — 1 ( 386 ) — ( 385 ) Income attributable to Lee Enterprises, Incorporated 12,658 — — — 12,658 Stock compensation — — 186 — 186 Other comprehensive loss — — — ( 8,174 ) ( 8,174 ) Deferred income taxes, net — — — 2,062 2,062 December 26, 2021 ( 246,554 ) 60 257,863 36,075 47,444 Shares issued (redeemed) — — ( 3 ) — ( 3 ) Loss attributable to Lee Enterprises, Incorporated ( 7,276 ) — — — ( 7,276 ) Stock compensation — — 663 — 663 Other comprehensive loss — — — ( 1,667 ) ( 1,667 ) Deferred income taxes, net — — — 500 500 March 27, 2022 ( 253,830 ) 60 258,523 34,908 39,661 The accompanying Notes are an integral part of the Consolidated Financial Statements. 5 LEE ENTERPRISES, INCORPORATED CONSOLIDATED STATEMENTS OF CASH FLOWS (Unaudited) Six months ended (Thousands of Dollars) March 26, 2023 March 27, 2022 Cash provided by (required for) operating activities: Net (loss) income ( 3,542 ) 6,505 Adjustments to reconcile net income to net cash provided by operating activities: Depreciation and amortization 15,619 18,627 Curtailment gain — ( 1,027 ) Pension withdrawal cost — 2,335 Stock compensation expense 922 699 Assets (gain) loss on sales, impairments and other, net ( 3,355 ) ( 12,426 ) Gain on sale of investment ( 1,408 ) — Deferred income taxes ( 368 ) 664 Return of letters of credit collateral 778 151 Other, net ( 895 ) ( 1,011 ) Changes in operating assets and liabilities: Decrease (increase) in receivables and contract assets 1,720 ( 3,060 ) Decrease in inventories and other ( 1,921 ) ( 1,033 ) (Decrease) increase in accounts payable and other accrued liabilities ( 4,977 ) 5,694 Decrease in pension and other postretirement and postemployment benefit obligations ( 37 ) ( 9,388 ) Change in income taxes payable 239 ( 3,686 ) Other ( 2,128 ) ( 3,650 ) Net cash provided by (required for) operating activities 647 ( 606 ) Cash provided by investing activities: Purchases of property and equipment ( 2,279 ) ( 4,570 ) Proceeds from sales of assets 5,309 14,744 Distributions less than earnings of TNI and MNI 374 ( 102 ) Other, net 1,619 ( 192 ) Net cash provided by investing activities 5,023 9,880 Cash required for financing activities: Payments on long-term debt ( 2,560 ) ( 20,062 ) Common stock transactions, net ( 265 ) 11 Net cash required for financing activities ( 2,825 ) ( 20,051 ) Net increase (decrease) in cash and cash equivalents 2,845 ( 10,777 ) Cash and cash equivalents: Beginning of period 16,185 26,112 End of period 19,030 15,335 The accompanying Notes are an integral part of the Consolidated Financial Statements. 6 LEE ENTERPRISES, INCORPORATED NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Unaudited) References to “we”, “our”, “us” and the like throughout this document refer to Lee Enterprises, Incorporated (the “Company”). References to “2023”, “2022" and the like refer to the fiscal years ended the last Sunday in September. 1 BASIS OF PRESENTATION AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES The accompanying unaudited, interim, Consolidated Financial Statements included herein have been prepared pursuant to the rules and regulations of the Securities and Exchange Commission for quarterly reports. In the opinion of management, these financial statements contain all adjustments (consisting of only normal recurring items) necessary to present fairly the financial position of Lee Enterprises, Incorporated and its subsidiaries (the “Company”) as of March 26, 2023, and our results of operations and cash flows for the periods presented. The Consolidated Financial Statements should be read in conjunction with the Consolidated Financial Statements and Notes thereto included in the Company's 2022 Annual Report on Form 10-K. The Company's fiscal year ends on the last Sunday in September. Fiscal year 2023 ends on September 24, 2023, and fiscal year 2022 ended September 25, 2022. Fiscal year 2023 and 2022 are 52-week years with 13 weeks in each quarter. Because of seasonal and other factors, the results of operations for the three and six months ended March 26, 2023, are not necessarily indicative of the results to be expected for the full year. The Consolidated Financial Statements include our accounts and those of our wholly owned subsidiaries, as well as our 82.5 % interest in INN Partners, L.C. (“BLOX Digital" , formerly "TownNews”). Our 50 % interest in TNI Partners ("TNI") and our 50 % interest in Madison Newspapers, Inc. ("MNI") are accounted for using the equity method and are reported at cost, plus our share of undistributed earnings since acquisition less, for TNI, amortization of intangible assets. 2 REVENUE The following table presents our revenue disaggregated by source: Three months ended Six months ended (Thousands of Dollars) March 26, 2023 March 27, 2022 March 26, 2023 March 27, 2022 Operating revenue: Print advertising revenue 31,450 44,248 73,286 100,218 Digital advertising revenue 46,250 43,385 93,999 86,169 Advertising and marketing services revenue 77,700 87,633 167,285 186,387 Print subscription revenue 64,586 77,255 131,956 156,883 Digital subscription revenue 13,996 10,093 26,325 17,984 Subscription revenue 78,582 87,348 158,281 174,867 Print other revenue 9,649 10,374 20,769 21,759 Digital other revenue 4,756 4,659 9,483 9,283 Other revenue 14,405 15,033 30,252 31,042 Total operating revenue 170,687 190,014 355,818 392,296 7 Recognition principles: Revenue is recognized when a performance obligation is satisfied by the transfer of control of the contracted goods or services to our customers, in an amount that reflects the consideration we expect to receive in exchange for those goods or services. Arrangements with multiple performance obligations: We have various advertising and subscription agreements which include both print and digital performance obligations. Revenue from sales agreements that contain multiple performance obligations are allocated to each obligation based on the relative standalone selling price. We determine standalone selling prices based on observable prices charged to customers. Contract Assets and Liabilities: The Company’s primary source of contract liabilities is unearned revenue from subscriptions paid in advance of the service provided. The Company expects to recognize the revenue related to unsatisfied performance obligations over the next twelve months in accordance with the terms of the subscriptions and other contracts with customers. Revenue recognized in the six months ended March 26, 2023, that was included in the contract liability as of September 25, 2022, was $ 41.2 million. Accounts receivable, excluding allowance for credit losses were $ 72.7 million and $ 74.8 million as of March 26, 2023, and September 25, 2022 , respectively. Allowance for credit losses was $ 5.1 million and $ 5.2 million as of March 26, 2023, and September 25, 2022 , respectively. Sales commissions are expensed as incurred as the associated contractual periods are one year or less. These costs are recorded within compensation. Most of our contracts have original expected lengths of one year or less and revenue is earned at a rate and amount that corresponds directly with the value to the customer. 3 INVESTMENTS IN ASSOCIATED COMPANIES TNI Partners In Tucson, Arizona, TNI, acting as agent for our subsidiary, Star Publishing Company (“Star Publishing”), and Gannets Co. Inc.'s subsidiary Citizen Publishing Company (“Citizen”), is responsible for printing, delivery, advertising, and subscription activities of the Arizona Daily Star as well as the related digital platforms and specialty publications. TNI collects all receipts and income and pays substantially all operating expenses incident to the partnership's operations and publication of the newspaper and other media. Income or loss of TNI (before income taxes) is allocated equally to Star Publishing and Citizen. Summarized results of TNI are as follows: Three months ended Six months ended (Thousands of Dollars) March 26, 2023 March 27, 2022 March 26, 2023 March 27, 2022 Operating revenue 8,169 8,594 16,710 17,575 Operating expenses 6,889 6,409 13,364 12,873 Operating income 1,280 2,185 3,346 4,702 Net Income 1,137 1,093 3,666 2,351 Equity in earnings of TNI 569 1,093 1,833 2,351 TNI makes periodic distributions of its earnings and for the three months ended March 26, 2023, and March 27, 2022, we received $ 1.4 million in distributions in both periods. In the six months ended March 26, 2023 and March 27, 2022, we received $ 2.3 million in distributions in both periods. 8 Madison Newspapers, Inc. We have a 50 % ownership interest in MNI, which publishes daily and Sunday newspapers, and other publications in Madison, Wisconsin, and other Wisconsin locations, and operates related digital platforms. Net income or loss of MNI (after income taxes) is allocated equally to us and The Capital Times Company (“TCT”). MNI conducts its business under the trade name Capital Newspapers. Summarized results of MNI are as follows: Three months ended Six months ended (Thousands of Dollars) March 26, 2023 March 27, 2022 March 26, 2023 March 27, 2022 Operating revenue 10,603 11,561 22,507 23,756 Operating expenses, excluding restructuring costs, depreciation and amortization (1) 8,681 9,344 18,026 18,720 Restructuring costs 101 — 127 — Depreciation and amortization 135 170 273 340 Operating income 1,686 2,047 4,081 4,696 Net income 207 627 1,014 1,620 Equity in earnings of MNI 104 314 507 810 (1) Amounts were reclassed to align with current year presentation MNI makes periodic distributions of its earnings and in the three months ended March 26, 2023 and March 27, 2022, we received $ 0.1 million and $ 0.5 million in distributions, respectively. In the six months ended March 26, 2023 and March 27, 2022 we received distributions of $ 0.4 million and $ 0.8 million, respectively. 4 GOODWILL AND OTHER INTANGIBLE ASSETS Goodwill and identified intangible assets consist of the following: (Thousands of Dollars) March 26, 2023 September 25, 2022 Goodwill, beginning of period 329,504 330,204 Impairment — ( 700 ) Goodwill, end of period 329,504 329,504 Non-amortized intangible assets: Mastheads 26,346 26,346 Amortizable intangible assets: Customer and newspaper subscriber lists 322,310 323,568 Less accumulated amortization ( 236,913 ) ( 228,541 ) 85,397 95,027 Total intangibles, net 441,247 450,877 The weighted average amortization period for amortizable assets is 11.95 years. 5 DEBT The Company has debt consisting of a single 25 -year term loan with BH Finance LLC, with an aggregate principal balance of $ 460.0 million at a 9 % annual fixed rate and maturing on March 16, 2045 9 (referred to herein as “Credit Agreement” and “Term Loan”). On March 26, 2023, the fair value is $ 462.4 million. This represents a level 2 fair value measurement. During the six months ended March 26, 2023, we made principal debt payments of $ 2.6 million. Future payments are contingent on the Company's ability to generate future excess cash flow, as defined in the Credit Agreement. As of March 26, 2023, there was no excess cash flow payment due. 6 PENSION, POSTRETIREMENT AND POSTEMPLOYMENT DEFINED BENEFIT PLANS We have a defined benefit pension plan that covers certain employees, including plans established under collective bargaining agreements. Additionally, we provide retiree medical and life insurance benefits under postretirement plans at several of our operating locations. Through March 26, 2023, our liability and related expense for benefits under the plans are recorded over the service period of employees based upon annual actuarial calculations. The net periodic pension and postretirement cost (benefit) components for our plans are as follows: PENSION PLANS Three months ended Six months ended (Thousands of Dollars) March 26, 2023 March 27, 2022 March 26, 2023 March 27, 2022 Service cost for benefits earned during the period 5 287 10 743 Interest cost on projected benefit obligation 2,592 2,001 5,184 3,938 Expected return on plan assets ( 2,548 ) ( 4,535 ) ( 5,096 ) ( 9,071 ) Amortization of net (gain) loss 2 ( 687 ) 4 ( 1,946 ) Amortization of prior service benefit 213 212 426 212 Curtailment gain — — — ( 1,027 ) Pension cost (benefit) 264 ( 2,722 ) 528 ( 7,151 ) POSTRETIREMENT MEDICAL PLANS Three months ended Six months ended (Thousands of Dollars) March 26, 2023 March 27, 2022 March 26, 2023 March 27, 2022 Service cost for benefits earned during the period 17 27 34 54 Interest cost on projected benefit obligation 149 85 298 170 Expected return on plan assets ( 295 ) ( 263 ) ( 590 ) ( 526 ) Amortization of net gain ( 254 ) ( 249 ) ( 508 ) ( 498 ) Amortization of prior service benefit ( 162 ) ( 162 ) ( 324 ) ( 324 ) Postretirement medical benefit ( 545 ) ( 562 ) ( 1,090 ) ( 1,124 ) In the six months ended March 26, 2023 and March 27, 2022, we made no contributions to our pension plans. W e have no required contributions to our pension plans for 2023. Multiemployer Pension Plans In prior periods, the Company effectuated withdrawals from several multiemployer plans. As of March 26, 2023, and September 25, 2022, we had $ 23.4 million and $ 25.0 million of accrued withdrawal liabilities. The liabilities reflect the estimated value of payments to the fund, payable over 20 years. 10 7 INCOME TAXES We recorded an income tax benefit of $ 2.1 million related to loss before taxes of $ 7.4 million for the three months ended March 26, 2023, and an income tax benefit of $ 1.6 million related to a loss before income taxes of $ 5.2 million for the six months ended March 26, 2023. We recorded an income tax benefit of $ 3.1 million related to income before taxes of $ 9.8 million for the three months ended March 27, 2022 and income tax expense of $ 2.2 million related to income before income taxes of $ 8.7 million for the six months ended March 27, 2022. The effective income tax rate for the three and six months ended March 26, 2023, were 27.8 % and 31.5 %, respectively. The effective income tax rate for the three and six months ended March 27, 2022, were 32.0 % and 25.3 %, respectively. The primary differences between these rates and the U.S. federal statutory rate of 21% are because of state taxes, non-deductible expenses, adjustments to reserves for uncertain tax positions, including any related interest, and mark-to-market adjustments to value stock warrants. We file a consolidated federal tax return, as well as combined and separate tax returns in approximately 27 state and local jurisdictions. We do not currently have any federal or material state income tax examinations in progress. Our income tax returns have generally been audited or closed to audit through 2015. 8 EARNINGS PER COMMON SHARE The following table sets forth the computation of basic and diluted earnings per common share: Three months ended Six months ended (Thousands of Dollars and Shares, Except Per Share Data) March 26, 2023 March 27, 2022 March 26, 2023 March 27, 2022 (Loss) income attributable to Lee Enterprises, Incorporated: ( 5,885 ) ( 7,276 ) ( 4,786 ) 5,382 Weighted average common shares 5,996 5,955 6,018 5,919 Less weighted average restricted Common Stock ( 173 ) ( 178 ) ( 172 ) ( 167 ) Basic average common shares 5,823 5,777 5,846 5,752 Dilutive stock options and restricted Common Stock — — — 107 Diluted average common shares 5,823 5,777 5,846 5,859 Earnings per common share: Basic ( 1.01 ) ( 1.26 ) ( 0.82 ) 0.94 Diluted ( 1.01 ) ( 1.26 ) ( 0.82 ) 0.92 For the three months ended March 26, 2023 and March 27, 2022, 68,186 and 600,000 shares, respectively, were not considered in the computation of diluted earnings per common share because their inclusion would result in an anti-dilutive effect on per share amounts. For the six months ended March 26, 2023 and March 27, 2022, 68,186 and 600,000 shares, respectively, were not considered in the computation of diluted earnings per common share because their inclusion would result in an anti-dilutive effect on per share amounts. 9 COMMITMENTS AND CONTINGENT LIABILITIES Legal Proceedings We are involved in a variety of legal actions that arise in the normal course of business. Insurance coverage mitigates potential loss for certain of these matters. While we are unable to predict the ultimate outcome of these legal actions, it is our opinion that the disposition of these matters will not have a material adverse effect on our Consolidated Financial Statements, taken as a whole. 11