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Item 2. Management’s Discussion and Analysis

2023-08-04 compared with 2023-05-04 · 63 added, 62 removed, 230 unchanged (35% of the section changed)

Management's Discussion and Analysis of Financial Condition and Results of Operations

The following discussion includes comments and analysis relating to our results of operations and financial condition as of and for the three months ended March 26, 2023.

The following discussion includes comments and analysis relating to our results of operations and financial condition as of and for the three and nine months ended June 25, 2023.

This discussion should be read in conjunction with the Consolidated Financial Statements and related Notes thereto, included herein, and our 2022 Annual Report on Form 10-K.

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EXECUTIVE OVERVIEW

Lee Enterprises, Incorporated is a leading provider of high quality, trusted, local news and information in the markets we serve with rapidly growing digital subscription and advertising platforms.

We operate 77 principally mid-sized local media operations.

We reach nearly 70% of all adults in our larger markets through a combination of our print and digital content offerings.

• Our web and mobile sites are the number one digital source of local news in most of our markets, reaching almost 38 m illion monthly unique visitors in 2023 with 356 million page views and 76 million visits.

• We have approximately one million paid subscribers to our print and digital products.

Digital-only subscribers totaled approximately 596,000 a 21.0% increase over the prior year.

Our products include daily newspapers, websites and mobile applications, mobile news and advertising, video products, a digital marketing agency, digital services including web hosting and content management, niche publications and community newspapers.

Our local media operations range from large daily newspapers and their associated digital products, such as the St.

Lee Enterprises, Incorporated, together with its subsidiaries, is a digital-first subscription platform providing local markets with valuable, high quality, trusted, intensely local news, information, advertising and marketing services.

We are a rapidly growing digital subscription platform with more than 606,000 digital subscribers serving 75 mid-sized local communities in 26 states.

Our core strategy aims to grow digital audiences and engagement through continuous improvements to subscriber experience, while offering a full suite of omni-channel advertising and marketing solutions local advertisers desire.

Our product portfolio includes digital subscription platforms, daily, weekly and monthly newspapers and niche publications, all delivering original local news and information.

Our products offer print and digital editions, and our content and advertising is available in real time through our websites and mobile apps.

We operate in predominately mid-sized communities with products ranging from large daily newspapers and associated digital products, such as the St.

Louis Post-Dispatch and The Buffalo News, to non-daily newspapers with news websites and digital platforms serving smaller communities.

We also operate Amplified Digital ® , a full-service digital marketing agency offering omnichannel marketing solutions, audience targeted display, social audience targeting, social media management, email marketing, banners, video streaming and much more.

Amplified Digital ® serves more than 4,500 customers in 49 states.

We also operate BLOX Digital which provides state-of-the-art web hosting, content management services and video management services to nearly 2,200 other media organizations including broadcast.

We have made talent and technology investments to improve user experience, content, data visualization, and marketing to align with the shift in spending habits to digital products by both consumers and advertisers.

We aim to grow our business through three main categories:

subscriptions to our product offerings, advertising and marketing solutions to local advertisers, and digital services to a diverse set of customers.

Execution of this strategy is expected to transform Lee into a vibrant, digitally centric company.

• Our digital subscription platforms are the fastest growing digital subscription platforms in local media.

• Amplified Digital ® , our digital marketing services agency, offers a full suite of digital marketing solutions to local advertisers.

• BLOX Digital (formerly known as TownNews), our software as a service (SaaS) content platform, is one of the largest web-hosting and content management SaaS providers in North America.

BLOX Digital represents a powerful opportunity to drive additional digital revenue by providing state-of-the-art web hosting and content management services to more than 2,000 customers who rely on BLOX Digital for their web, over-the-top display, mobile, video and social media products.

We generate revenue primarily through advertising and marketing services, subscriptions to our digital and print products, and digital services, primarily through our majority-owned subsidiary, BLOX DIgital.

Our operations also provide printing and distribution of third-party publications.

We are a major subscription and advertising platform, a trusted local news provider and innovative, digitally-focused marketing solutions company.

Our focus is on the local market - including local news and information, local advertising and marketing services to top local accounts, and digital services to local content curators.

To align with the core strength of our Company, our post-pandemic operating strategy is locally focused around three pillars:

To align with the core strength of our Company, our operating strategy is locally focused around three pillars:

• Grow digital audiences by transforming the way we present local news and information

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RESULTS OF OPERATIONS

Three Months Ended March 26, 2023

Three Months Ended June 25, 2023

Operating results are summarized below.

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Depreciation and amortization 7,478 8,818 (15.2) %

Assets gain on sales, impairments and other, net (792) (152) 421.1 %

Assets (gain) loss on sales, impairments and other, net (900) 1,086 (182.9) %

Restructuring costs and other 3,780 6,072 (37.7) %

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Equity in earnings of associated companies 1,194 1,050 13.7 %

Operating income (loss) 2,858 (3,228) (188.5) %

Operating income 12,208 6,439 89.6 %

Non-operating income (expense):

Interest expense (10,235) (10,292) (0.6) %

Pension withdrawal cost — (2,335) (100.0) %

Pension and OPEB related benefit (cost) and other, net 555 4,205 (86.8) %

Total non-operating expense, net (9,680) (6,087) 59.0 %

(Loss) income before income taxes (7,437) (9,838) (24.4) %

Income tax (benefit) expense (2,071) (3,144) (34.1) %

Net Loss (5,366) (6,694) (19.8) %

Income before income taxes 2,528 352 618.2 %

Income tax expense 394 156 152.6 %

Net income 2,134 196 988.8 %

Earnings (loss) per common share:

Basic (1.01) (1.26) 19.8 %

Diluted (1.01) (1.26) 19.8 %

References to the “2023 Quarter” refer to the three months ended March 26, 2023.

Similarly, references to the “2022 Quarter” refer to the three months ended March 27, 2022.

Basic 0.26 (0.05) NM

Diluted 0.25 (0.05) NM

References to the “2023 Quarter” refer to the three months ended June 25, 2023.

Similarly, references to the “2022 Quarter” refer to the three months ended June 26, 2022.

Operating Revenue

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Advertising and marketing services revenue totaled $79.1 million in the 2023 Quarter, down 13.1% compared to the 2022 Quarter.

Advertising revenue, print and digital, was adversely affected by a wide spread pull back in advertising spending.

Advertising revenue, print and digital, was adversely affected by a broader, industry-wide pull back in advertising spending.

Print advertising revenues were $29.2 million in the 2023 Quarter, down 34.8% compared to the 2022 Quarter due to the soft advertising environment and a continued secular declines in demand for print advertising.

Digital advertising and marketing services totaled $49.9 million in the 2023 Quarter, up 8.0% compared to the 2022 Quarter.

These gains resulted from an increase in Amplified Digital ® revenue.

These gains resulted from an increase in Amplified Digital ® revenue of $3.2 million or 15% compared to the 2022 Quarter.

Digital advertising and marketing services represented 63.1% of the 2023 Quarter total advertising and marketing services revenue, compared to 50.8% in the same period last year.

Subscription revenue totaled $77.6 million in the 2023 Quarter, down 12.9% compared to the 2022 Quarter.

Decline in full access volume, consistent with historical and industry trends was partially offset by selective price increases on our full access subscriptions, growth in digital-only subscribers and price increases on digital subscriptions.

Decline in full access volume, consistent with historical and industry trends was partially offset by marketing efforts driving price yield on our full access subscriptions, growth in digital-only subscribers and price increases on digital subscriptions.

Digital-only subscribers grew 21.0% since the 2022 Quarter and now total 606,000, and revenue from digital-only subscribers totaled $15.7 million, up 43.3% compared to the 2022 Quarter.

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Total Digital Revenue including digital advertising revenue, digital subscription revenue and digital services revenue totaled $70.5 million in the 2023 Quarter, an increase of 14.7% over the 2022 Quarter, and represented 41.1% of our total operating revenue in the 2023 Quarter.

Equity in earnings of TNI and MNI decreased 0.7 in the 2023 Quarter.

Equity in earnings of TNI and MNI increased $0.1 million in the 2023 Quarter.

Operating Expenses

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Compensation expense decreased $14.5 million in the 2023 Quarter, or 18.6%, compared to the 2022 Quarter from reductions in headcount due to continued business transformation efforts, partially offset by investments in digital talent.

Newsprint and ink costs decreased $0.6 in the 2023 Quarter, or 8.5%, compared to the 2022 Quarter.

Newsprint and ink costs decreased $1.2 million in the 2023 Quarter, or 15.9%, compared to the 2022 Quarter.

The decrease is attributable to declines in newsprint volumes offset by higher newsprint prices.

See Item 3, “Commodities”, included herein, for further discussion and analysis of the impact of newsprint on our business.

Other operating expenses decreased $2.1 in the 2023 Quarter, or 2.5%, compared to the 2022 Quarter.

Other operating expenses decreased $8.0 million in the 2023 Quarter, or 9.1%, compared to the 2022 Quarter.

Other operating expenses include all operating costs not considered to be compensation, newsprint, depreciation and amortization, or restructuring costs and assets loss on sales, impairments, and other, net.

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Restructuring costs and other include severance costs, litigation expenses, restructuring expenses, and advisor expenses.

Restructuring costs in the 2023 Quarter are predominately severance related to our ongoing business transformation, while restructuring costs In the 2022 quarter also include costs associated with the unsolicited offer in November 2021.

Restructuring costs in the 2023 Quarter are predominately severance related to our ongoing business transformation tied to our Three Pillar digital growth strategy, while restructuring costs in the 2022 quarter also include costs associated with the unsolicited offer in November 2021.

Depreciation and amortization expense decreased $1.3 million, or 15.2%, in the 2023 Quarter.

The decrease in both is attributable to assets becoming fully depreciated or amortized.

Assets gain on sales, impairments and other, was a net gain of $0.8 million in the 2023 Quarter compared to a net gain of $0.2 million in the 2022 Quarter.

Assets gain on sales, impairments and other, was a net gain of $0.9 million in the 2023 Quarter compared to a net loss of $1.1 million in the 2022 Quarter.

Assets gain on sales, impairments and other in the 2023 Quarter and in the 2022 Quarter were the result of the disposition of non-core assets, including real estate.

The factors noted above resulted in an operating income of $2.9 million in the 2023 Quarter compared to an operating loss of $3.2 million in the 2022 Quarter.

The factors noted above resulted in an operating income of $12.2 million in the 2023 Quarter compared to operating income of $6.4 million in the 2022 Quarter.

Non-operating Income and Expense

Interest expense was flat at $10.5 million in the 2023 Quarter, compared to the same period last year.

Interest expense was down 1.0% at $10.2 million in the 2023 Quarter, compared to the same period last year.

Our weighted average cost of debt was 9.0% at the end of the 2023 Quarter and 2022 Quarter.

Other non-operating income and expense consists of benefits associated with our pension and other postretirement plans and the fair value adjustment of our Warrants.

Other non-operating income and expense consists of benefits associated with our pension and other postretirement plans.

We recorded $0.3 million periodic pension and other postretirement benefits in the 2023 Quarter compared to $3.6 million in the 2022 Quarter.

We recognized pension withdrawal costs in the 2022 Quarter of $2.3 million, in connection with the withdrawal from a pension plan that covered certain employees.

This withdrawal liability will be paid in equal quarterly installments over the next 20 years.

Income Tax Expense (Benefit)

We recorded an income tax benefit of $2.1 million, or 27.8% of pretax loss in the 2023 Quarter.

In the 2022 Quarter, we recognized an income tax benefit of $3.1 million, or 32.0% of pretax loss.

We recorded an income tax expense of $0.4 million, or 15.6% of pretax income in the 2023 Quarter.

In the 2022 Quarter, we recognized an income tax expense of $0.2 million, or 44.3% of pretax income.

Net Income (Loss) and Earnings (Losses) Per Share

Net loss was $5.4 million and diluted losses per share were $ 1.01 for the 2023 Quarter compared to net loss of $6.7 million and diluted losses per share of $1.26 for the 2022 Quarter.

Net income was $2.1 million and diluted earnings per share were $0.25 for the 2023 Quarter compared to net income of $0.2 million and diluted losses per share of $0.05 for the 2022 Quarter.

The change reflects the various items discussed above.

Six Months Ended March 26, 2023

Nine Months Ended June 25, 2023

Operating results, as reported in the Consolidated Financial Statements, are summarized below.

(Thousands of Dollars, Except Per Common Share Data) March 26, 2023 March 27, 2022 Percent Change

(Thousands of Dollars, Except Per Common Share Data) June 25, 2023 June 26, 2022 Percent Change

Operating revenue:

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Pension withdrawal cost — (2,335) (100.0) %

Pension and OPEB related benefit (cost) and other, net 1,700 9,320 (81.8) %

Pension and OPEB related benefit and other, net 2,255 13,525 (83.3) %

Total non-operating expense, net (28,889) (19,261) 50.0 %

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Diluted (0.56) 0.87 (164.3) %

References to the “2023 Period” refer to the six months ended March 26, 2023.

Similarly, references to the “2022 Period” refer to the six months ended March 27, 2022.

References to the “2023 Period” refer to the nine months ended June 25, 2023.

Similarly, references to the “2022 Period” refer to the nine months ended June 26, 2022.

Operating Revenue

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Advertising and marketing services revenue totaled $246.4 million in the 2023 Period, down 11.2% compared to the prior year.

Advertising revenue, print and digital, was adversely affected by a wide spread pull back in advertising spending.

Advertising revenue, print and digital, was adversely affected by a broader, industry-wide pull back in advertising spending.

Print advertising revenues were $102.5 million in the 2023 Period, down 29.3% compared to the prior year due to the soft advertising environment and a continued secular decline in demand for print advertising.

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Subscription revenue totaled $235.8 million in the 2023 Period, down 10.6% compared to the 2022 Period.

The decline in full access volume, consistent with historical and industry trends were partially offset by growth in digital only subscribers and selective price increases on our full access subscriptions.

The decline in full access volume, consistent with historical and industry trends were partially offset by growth in digital only subscribers and marketing efforts driving price yield on our full access subscriptions.

Digital only subscribers grew 21.0% since the 2022 Period and now total 606,000.

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Our weighted average cost of debt was 9.0% at the end of the 2023 Period and 2022 Period.

Other non-operating income and expense consists of benefits associated with our pension and other postretirement plans and the fair value adjustment of our Warrants.

Other non-operating income and expense consists of benefits associated with our pension and other postretirement plans.

We recorded $0.9 million periodic pension and other postretirement benefits in the 2023 Period compared to $11.6 million in the 2022 Period.

We recorded non-operating income of $0.1 million in the 2022 Period related to changes in the value of the Warrants.

We recognized a non-cash curtailment gain of $1.0 million in the 2022 Period as a result of freezing certain pension plans.

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This measure also provides users with a benchmark that can be used when forecasting future operating performance of the Company that excludes unusual, nonrecurring or one-time transactions.

Adjusted EBITDA is also a component of the calculation used by stockholders and analysts to determine the value of our

business when using the market approach, which applies a market multiple to financial metrics.

It is also a measure used to calculate the leverage ratio of the Company, which is a key financial ratio monitored and used by the Company and its investors.

Adjusted EBITDA is also a component of the calculation used by stockholders and analysts to determine the value of our business when using the market approach, which applies a market multiple to financial metrics.

measure used to calculate the leverage ratio of the Company, which is a key financial ratio monitored and used by the Company and its investors.

Adjusted EBITDA is defined as net income (loss), plus non-operating expenses, income tax expense, depreciation and amortization, assets loss (gain) on sales, impairments and other, restructuring costs and other, stock compensation and our 50% share of EBITDA from TNI and MNI, minus equity in earnings of TNI and MNI.

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The table below reconciles the non-GAAP financial performance measure of Adjusted EBITDA to net income, the most directly comparable GAAP measure:

Three months ended Six months ended

(Thousands of Dollars) March 26, 2023 March 27, 2022 March 26, 2023 March 27, 2022

Net (loss) income (5,366) (6,694) (3,542) 6,505

Three months ended Nine months ended

(Thousands of Dollars) June 25, 2023 June 26, 2022 June 25, 2023 June 26, 2022

Net income (loss) 2,134 196 (1,407) 6,701

Adjusted to exclude

Income tax (benefit) expense (2,071) (3,144) (1,631) 2,207

Income tax expense (benefit) 394 156 (1,237) 2,363

Non-operating expenses, net 9,680 6,087 28,889 19,261

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Restructuring costs and other 3,780 6,072 8,120 19,862

Assets gain on sales, impairments and other, net (792) (152) (3,355) (12,426)

Assets (gain) loss on sales, impairments and other, net (900) 1,086 (4,255) (11,340)

Stock compensation 462 327 1,384 1,026

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The table below reconciles the non-GAAP financial performance measure of Cash Costs to Operating expenses, the most directly comparable GAAP measure:

Three months ended Six months ended

(Thousands of Dollars) March 26, 2023 March 27, 2022 March 26, 2023 March 27, 2022

Three months ended Nine months ended

(Thousands of Dollars) June 25, 2023 June 26, 2022 June 25, 2023 June 26, 2022

Operating expenses 160,296 189,648 504,418 563,219

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Operating Activities

Cash provided by operating activities totaled $0.6 million in 2023 compared to cash required for operating activities of $0.6 million in 2022, an increase of $1.3 million.

The increase was driven by an increase in working capital of $8.0 million primarily related to favorable changes to receivables and income taxes, partially offset by a decrease in operating results of $6.8 million, (defined as net income (loss) adjusted for non-working capital items).

Cash required by operating activities totaled $1.5 million in 2023 compared to cash provided by operating activities of $0.7 million in 2022, a change of $2.2 million.

The change was driven by a decrease in operating results of $10.5 million, (defined as net income (loss) adjusted for non-working capital items), partially offset by an increase in working capital of $8.3 million primarily related to favorable changes to accounts payable and other accrued liabilities.

Investing Activities

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Debt reduction accounted for nearly all the usage of funds in both periods.

We expect to make a $2.0 million principal payment in the 4th quarter related to disposition of non-core assets.

Additional Information on Liquidity

Our liquidity, consisting of cash on the balance sheet, totaled $19.0 million on March 26, 2023.

Our liquidity, consisting of cash on the balance sheet, totaled $17.0 million on June 25, 2023.

This liquidity amount excludes any future cash flows from operations.

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Compared sentence by sentence after normalising whitespace, quotation marks, case and digits, so re-formatting and restated figures do not read as changed language. Wording changes appear as one removal and one addition. The current filing and the prior one are authoritative.

What changed 10-Q

Item 2. Management’s Discussion and Analysis