LEE ENTERPRISES, Inc 10-K

ITEM 7. 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 year ended September 29, 2024, and for fiscal years 2023 and 2022. This discussion should be read in conjunction with the Consolidated Financial Statements and related Notes thereto, included herein. CRITICAL ACCOUNTING ESTIMATES The preparation of financial statements in conformity with generally accepted accounting principles requires management to make estimates and assumptions about future events that affect the amounts reported in the financial statements and accompanying notes. Actual results could differ significantly from those estimates. We believe the following discussion addresses our most critical accounting estimates, which are those that are important to the presentation of our financial condition and results of operations and require management's most subjective and complex judgments. Intangible Assets, Other Than Goodwill Local mastheads (e.g., publishing periodical titles, web site domain names, and trade names) are not subject to amortization. Non-amortized intangible assets are tested for impairment annually on the first day of the fourth fiscal quarter or more frequently if events or changes in circumstances suggest the asset might be impaired. The quantitative impairment test consists of comparing the fair value of each masthead with its carrying amount. We use a relief from royalty approach which utilizes a discounted cash flow model to determine the fair value of each masthead. Management's judgments and estimates of future operating results in determining the intangibles fair values are consistently applied to each underlying business in determining the fair value of each intangible asset. In 2024, 2023, and 2022, we recognized impairment charges of $7.8 million, $7.7 million, and $14.2 million, respectively. As of September 29, 2024 the masthead carrying value is $10.9 million. Our amortizable intangible assets consist mainly of customer relationships including subscriber lists and advertiser relationships. These asset values are amortized systematically over their estimated useful lives. Intangible assets subject to amortization are tested for recoverability whenever events or changes in circumstances indicate that their carrying amounts may not be recoverable. The carrying amount of each asset group is not recoverable if it exceeds the sum of the undiscounted cash flows expected to result from the use of such asset group. There were no indicators of impairment on intangible assets subject to amortization in 2024, 2023 or 2022. Our quantitative impairment analysis includes several inputs that are considered estimates, these include royalty rates, discount rates, five-year revenue forecast, and long term growth rates. All of these estimates are subject to uncertainty as future results may or may not be achieved. In 2024, the royalty rates utilized a range from 0% to 1.0%; a 50-basis point decrease in royalty rates would result in an additional $4.6 million of impairment. The Company’s discount rate utilized in the analysis has ranged from 11.0% in 2022 to 12.5% in 2024, depending on market conditions. Increasing the discount rate by 100 basis points would result in an additional $0.1 million of impairment. The Company has had various revenue forecasts utilized in the analysis over different years. Future decreases in our market value, or significant differences in revenue, expenses or cash flows from estimates used to determine fair value, could result in additional intangible asset impairment charges in the future. For information related to the Company's Goodwill impairment analysis, refer to Note 4 to the Consolidated Financial Statements. Pension, Postretirement and Postemployment Benefit Plans We, along with our subsidiaries, have various defined benefit retirement plans, postretirement plans and postemployment plans, under which substantially all of the benefits have been frozen in previous years. 17 Table of Contents We account for our pension, postretirement and postemployment plans in accordance with the applicable accounting guidance, which requires us to include the funded status of our pension plans in our balance sheets and to recognize, as a component of other comprehensive income (loss), the gains or losses that arise during the period but are not recognized in pension expense. The service cost component of net period benefit cost is reported on the Consolidated Statements of Income and Comprehensive Income and included in Compensation while all other components are included in other non-operating income/expense. The determination of pension and postretirement plan obligations and expense is based on a number of actuarial assumptions. Two critical assumptions are the discount rates applied to pension and postretirement plan obligations and the expected long-term rate of return on plan assets. The discount rate assumption is based on investment yields available at year-end on corporate bonds rated AA and above with a maturity to match the expected benefit payment stream. To determine the expected long-term rate of return of assets, we consider the current and expected asset allocations, as well as historical and expected returns on various categories of plan assets, input from the actuaries and investment consultants and long- term inflation assumptions. In 2024, we used an expected return of assets assumption of 5.0% for our pension plan assets and 6.0% for our postretirement and postemployment benefit plan assets. A 50-basis point decrease in discount rates would result in an increase of $9.5 million to pension and $0.5 million to postretirement and postemployment benefits liabilities. A 50-basis point decrease in expected rate of return of assets results would result in an increase of $0.9 million to pension and $0.1 million postretirement and postemployment benefits expense. Income Taxes We are subject to income taxes in the U.S. and record our tax provision for the anticipated tax consequences in our reported results of operations. Tax laws are complex and subject to different interpretations by the taxpayer and respective government taxing authorities. Significant management judgment is required in determining our provision for income taxes, deferred tax assets and liabilities, and the valuation allowance recorded against our net deferred tax assets, if any. Our current and deferred income tax provisions are calculated based on estimates and assumptions that could differ from the actual results reflected in income tax returns filed during the subsequent year. These estimates are reviewed and adjusted, if needed, throughout the year. Adjustments between our estimates and the actual results of filed returns are recorded when identified. Deferred tax assets and liabilities are determined based on the difference between the financial statement and tax basis of assets and liabilities using currently enacted tax rates. Deferred income tax assets are recognized for deductible temporary differences and loss carryforwards and deferred income tax liabilities are recognized for taxable temporary differences. Temporary differences are the difference between the reported amounts of assets and liabilities and their tax basis. Deferred income tax assets are reduced by a valuation allowance when, in our opinion, it is more likely than not that some portion or all of the deferred income tax assets will not be realized. Deferred income tax assets and liabilities are adjusted for the effects of changes in tax laws and rates on the date of enactment. We recognize the effect of income tax positions only if those positions are more likely than not of being sustained. Recognized income tax positions are measured at the largest amount that is greater than 50% likely of being realized. Changes in recognition or measurement are reflected in the period in which the change in judgment occurs. We record interest and penalties related to unrecognized tax benefits as a component of income tax expense. IMPACT OF RECENTLY ISSUED ACCOUNTING STANDARDS See Note 1 to the Consolidated Financial Statements for a description of new accounting standards issued and/or adopted in the year ended September 29, 2024. 18 Table of Contents OPERATIONS Operating results, as reported in the Consolidated Financial Statements, are summarized below: (Thousands of Dollars, Except Per Common Share Data) 2024 2023 Percent Change 2022 Percent Change Operating revenue: Print advertising revenue 81,488 125,804 (35.2) % 184,963 (32.0) % Digital advertising and marketing services revenue 194,213 193,173 0.5 % 181,465 6.5 % Advertising and marketing services revenue 275,701 318,977 (13.6) % 366,428 (12.9) % Print subscription revenue 197,584 252,591 (21.8) % 313,504 (19.4) % Digital subscription revenue 84,331 60,700 38.9 % 40,120 51.3 % Subscription revenue 281,915 313,291 (10.0) % 353,624 (11.4) % Print other revenue 33,257 39,508 (15.8) % 42,962 (8.0) % Digital other revenue 20,507 19,362 5.9 % 17,955 7.8 % Other revenue 53,764 58,870 (8.7) % 60,917 (3.4) % Total operating revenue 611,380 691,138 (11.5) % 780,969 (11.5) % Operating expenses: Compensation 234,581 266,907 (12.1) % 317,789 (16.0) % Newsprint and ink 16,813 25,346 (33.7) % 30,101 (15.8) % Other operating expenses 301,950 323,067 (6.5) % 344,905 (6.3) % Depreciation and amortization 27,616 30,621 (9.8) % 36,544 (16.2) % Assets loss on sales, impairments and other, net 11,193 1,882 NM 9,716 NM Restructuring costs and other 19,253 12,673 51.9 % 22,720 (44.2) % Total operating expenses 611,406 660,496 (7.4) % 761,775 (13.3) % Equity in earnings of associated companies 4,572 6,527 (30.0) % 5,657 15.4 % Operating income 4,546 37,169 (87.8) % 24,851 49.6 % Non-operating income (expense): Interest expense (41,232) (41,471) (0.6) % (41,770) (0.7) % Pension withdrawal cost — (1,200) (100.0) % (2,335) NM Pension and OPEB related benefit (cost) and other, net 1,910 2,420 (21.1) % 19,022 (87.3) % Curtailment/Settlement gains 3,593 — NM 1,027 (100.0) % Total non-operating expense, net (35,729) (40,251) (11.2) % (24,056) 67.3 % (Loss) income before income taxes (31,183) (3,082) NM 795 NM Income tax (benefit) expense (7,610) (349) NM 698 NM Net (loss) income (23,573) (2,733) NM 97 NM Loss per common share: Basic (4.35) (0.90) NM (0.35) NM Diluted (4.35) (0.90) NM (0.35) NM We disposed of certain properties in each of 2024, 2023 and 2022. Discussions of the year ended September 25, 2022 and comparison of the years ended September 24, 2023 and September 25, 2022 can be found in the " Management's Discussion and Analysis of Financial Condition 19 Table of Contents and Res ults of Operations" section of our Annual Report on Form 10-K for the year ended September 24, 2023, filed on December 8, 2023, which section is incorporated by reference herein. To facilitate a comparison of our results without the impact of the 53rd week of revenues and expenses, certain revenue and expense trends, as described below, are presented on a comparative basis which is calculated by removing the 53rd week of revenue or expense in 2024. OPERATING REVENUE Revenue Comparison 2024-2023 Total operating revenue totaled $611.4 million in 2024, down $79.8 million, or 11.5%, compared to 2023. On a comparative basis total operating revenue declined 13.0%. Advertising and marketing services revenue totaled $275.7 million in 2024, down $43.3 million, or 13.6% compared to 2023. On a comparative basis, Advertising and marketing services revenue declines 14.9%. Digital advertising and marketing services revenue totaled $194.2 million in 2024, up 0.5% compared to 2023. On a comparative basis, revenue declined 0.9%. Digital advertising and marketing services revenue represented 70.4% of 2024 total advertising and marketing services revenue compared to 60.6% in 2023. Print advertising revenues were $81.5 million in 2024, down $44.3 million, or 35.2% compared to 2023. On a comparative basis, print advertising revenue was down 36.5%. The decline is due to continued secular declines in demand for print advertising and a reduced product portfolio through sales and elimination of products that do not meet profitability standards. Subscription revenue totaled $281.9 million in 2024, or down 10.0%, compared to 2023. Decline in full access volume, consistent with historical and industry trends were partially offset by selective increases on our full access subscriptions, growth in digital-only subscribers and price increases on digital subscriptions. Digital-only subscribers grew 7.1% since 2023 and now total more than 771,000. Digital-only subscription revenue grew 38.9% compared to 2023. On a comparative basis, digital-only revenue grew 36.2%. Other revenue, which primarily consists of commercial printing revenue and digital services from BLOX Digital, totaled $53.8 million, a 8.7% decrease compared to 2023. On a comparative basis other revenue decreased 9.7%. Digital services revenue totaled $20.5 million in 2024, a 5.9% increase compared to 2023. On a comparative basis digital services revenue increased 5.3%. Commercial printing revenue totaled $17.5 million in 2024, a 13.0% decline compared to 2023, primarily driven by reduction in print volumes from our partners. On a comparative basis, commercial printing revenue was down 14.6%. Total digital revenue including digital advertising revenue, digital-only subscription revenue and digital services revenue totaled $299.1 million in 2024, a 9.4% increase over 2023, and represented 48.9% of our total operating revenue in 2024, compared to 39.5% in 2023. OPERATING EXPENSES Operating Expense Comparison 2024-2023 Total operating expenses were $611.4 million, a 7.4% decrease compared to 2023. Cash Costs (a non-GAAP financial measure discussed below) were $553.3 million, a 10.1% decrease compared to 2023. Compensation expense decreased $32.3 million in 2024, or a 12.1% decrease compared to 2023. The decrease is attributable to reductions in full time employees ("FTEs") due to continued business transformation efforts, partially offset by investments in digital talent. Newsprint and ink costs decreased $8.5 million in 2024, or a 33.7% decrease compared to 2023. This decrease was attributable to declines in newsprint volumes. Other operating expenses decreased $21.1 million in 2024, or a 6.5% decrease compared to 2023. 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. The largest components are costs associated with printing and distribution of our printed products, digital cost of goods sold 20 Table of Contents and facility expenses. The decrease is primarily attributable to lower delivery and other print-related costs due to lower volumes of our print edition. Restructuring costs and other totaled $19.3 million and $12.7 million in 2024 and 2023, respectively. Restructuring costs and other include severance costs, litigation expenses, and restructuring expenses. The increase is attributable to one-time costs to outsource certain operations. Depreciation expense decreased $1.2 million, or 10.1%, in 2024. Amortization expense decreased $1.8 million, or 9.6%, in 2024. The decrease in both is attributable to assets becoming fully depreciated or amortized. Assets loss (gain) on sales, impairments and other was a net loss of $11.2 million in 2024 compared to a net loss of $1.9 million in 2023. Impairment losses in 2024 and 2023 totaled $7.8 million and $7.7 million for mastheads. Additionally, $1.3 million and $1.3 million of goodwill was allocated to the sale of certain non-core operations in 2024 and 2023, respectively. Assets loss (gain) on sales are part the Company's ongoing real estate and non-core asset monetization. They totaled a net loss of $2.2 million in 2024 and a net gain of $6.0 million in 2023. Equity In Equity Investments Equity in earnings of TNI and MNI decreased $2.0 million in 2024, or 30.0%, compared to 2023. NON-OPERATING INCOME AND EXPENSES Non-operating Income and Expense Comparison 2024-2023 Interest expense decreased $0.2 million, or 0.6%, to $41.2 million in 2024 due to lower debt balances. Our weighted average cost of debt was 9.0% in 2024 and 2023. Other non-operating income and expense consists of benefits associated with our pension and other postretirement plans. We recorded $5.1 million of periodic pension and other postretirement benefits in 2024 compared to $1.2 million in 2023. The increase was attributable due to the Company recognizing a non-cash curtailment gain of $1.2 million in 2024 as a result of outsourcing certain postemployment defined benefit plan functions. Additionally, in 2024, the Company completed a voluntary lump sum payment of future benefits to terminated vested participants. The offer was accepted by 522 participants, representing a $22.6 million pension plan liability. As a result of the offer, a non-cash settlement gain of $2.4 million was recorded in Curtailment/Settlement gain on the Consolidated Statements of (Loss) Income and Comprehensive (Loss) Income. Both assets and liabilities of the plan were reduced by $22.6 million. INCOME TAX BENEFIT In 2024, we recorded income tax benefit of $7.6 million, or 24.4% of pretax loss and in 2023, we recorded an income tax benefit of $0.3 million, or 11.3% of pretax loss. See Note 12 of the Notes to the Consolidated Financial Statements, included herein, for a discussion of the difference between the expected federal income tax rate and the actual tax rates. NET INCOME AND EARNINGS PER SHARE Net loss was $23.6 million in 2024 compared to net loss of $2.7 million in 2023. Losses per share was $4.35 in 2024 compared to losses per share of $0.90 in 2023. NON-GAAP FINANCIAL MEASURES We use non-GAAP financial performance measures to supplement the financial information presented on a GAAP basis. These non-GAAP financial measures should not be considered in isolation or as a substitute for the relevant GAAP measures and should be read in conjunction with information presented on a GAAP basis. In this report, we present Adjusted EBITDA and cash costs, which are non-GAAP financial performance measures that exclude from our reported GAAP results the impact of certain items consisting primarily of restructuring charges and non-cash charges. We believe such expenses, charges, and gains are not indicative of normal, ongoing operations, and their inclusion in results makes for more difficult comparisons between years 21 Table of Contents and with peer group companies. In the future, however, we are likely to incur expenses, charges, and gains similar to the items for which the applicable GAAP financial measures have been adjusted and to report non-GAAP financial measures excluding such items. Accordingly, exclusion of those or similar items in our non-GAAP presentations should not be interpreted as implying the items are non-recurring, infrequent, or unusual. We define our non-GAAP measures, which may not be comparable to similarly titled measures reported by other companies, as follows: Adjusted EBITDA is a non-GAAP financial performance measure that enhances financial statement users' overall understanding of the operating performance of the Company. The measure isolates unusual, infrequent, or non-cash transactions from the operating performance of the business. This allows users to easily compare operating performance among various fiscal periods and how management measures the performance of the business. 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 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. Cash Costs represent a non-GAAP financial performance measure of operating expenses which are measured on an accrual basis and settled in cash. This measure is useful to investors in understanding the components of the Company’s cash-settled operating costs. Cash Costs can be used by financial statement users to assess the Company's ability to manage and control its operating structure. Cash Costs are defined as compensation, newsprint and ink and other operating expenses. Depreciation and amortization, assets loss (gain) on sales, impairments and other, restructuring costs and other non-cash operating expenses and other non-operating expenses are excluded. Tables reconciling Adjusted EBITDA to net income and Cash Costs to operating expenses, the most directly comparable measure under GAAP, are set forth below under the caption "Reconciliation of Non-GAAP Financial Measures". RECONCILIATION OF NON-GAAP FINANCIAL MEASURES (UNAUDITED) The table below reconciles the non-GAAP financial performance measure of Adjusted EBITDA to net income, the most directly comparable GAAP measure: (Thousands of Dollars) 2024 2023 2022 Net (loss) income (23,573) (2,733) 97 Adjusted to exclude Income tax (benefit) expense (7,610) (349) 698 Non-operating expenses, net 35,729 40,251 24,056 Equity in earnings of TNI and MNI (4,572) (6,527) (5,657) Assets loss on sales, impairments and other, net 11,193 1,882 9,716 Depreciation and amortization 27,616 30,621 36,544 Restructuring costs and other 19,253 12,673 22,720 Stock compensation 1,751 1,806 1,337 Add: Ownership share of TNI and MNI EBITDA (50%) 5,519 7,604 6,541 Adjusted EBITDA 65,306 85,228 96,052 22 Table of Contents The table below reconciles the non-GAAP financial performance measure of Cash Costs to Operating expenses, the most directly comparable GAAP measure: (Thousands of Dollars) 2024 2023 2022 Operating expenses 611,406 660,496 761,775 Adjustments Depreciation and amortization 27,616 30,621 36,544 Assets loss on sales, impairments and other, net 11,193 1,882 9,716 Restructuring costs and other 19,253 12,673 22,720 Cash Costs 553,344 615,320 692,795 23 Table of Contents LIQUIDITY AND CAPITAL RESOURCES Our operations have historically generated positive cash flow and are expected to provide sufficient liquidity, together with cash on hand, to meet our requirements, primarily operating expenses, interest expense and capital expenditures for at least the next twelve months. A summary of our cash flows is included in the narrative below. Operating Activities Cash provided from operating activities totaled $1.1 million in 2024 compared to cash required by operating activities of $3.2 million in 2023, an increase of $4.3 million. The increase was driven by an increase in working capital of $19.7 million, primarily related to favorable changes in accounts payable and unearned revenue partially offset by a decrease in operating results of $15.4 million (defined as net loss adjusted for non-working capital items). Investing Activities Cash provided by investing activities totaled $3.7 million in 2024 and $8.6 million in 2023. Capital spending totaled $9.2 million and $5.1 million in 2024 and 2023, respectively. Proceeds from sales of assets totaled $13.5 million and $12.0 million in 2024 and 2023, respectively. Financing Activities Cash required for financing activities totaled $9.8 million in 2024 and $7.1 million in 2023. Debt reduction accounted for the majority of the usage of funds in 2024 and 2023, respectively. Liquidity Our liquidity, consisting of cash on the balance sheet, totaled $9.6 million at September 29, 2024. This liquidity amount excludes any future cash flows from operations. We expect all interest and principal payments due in the next twelve months will be satisfied by existing cash and our cash flows, which will allow us to maintain an adequate level of liquidity. SEASONALITY Our largest source of advertising and marketing services revenue, retail advertising, is seasonal and tends to fluctuate with retail sales in markets served. Historically, retail advertising is higher in the December and June quarters. Advertising and marketing services revenue is lowest in the March quarter. INFLATION Price increases (or decreases) for our products are implemented when deemed appropriate by us. We continuously evaluate price increases, productivity improvements, sourcing efficiencies and other cost reductions to mitigate the impact of inflation. ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA Information with respect to this Item is included herein under the caption “Consolidated Financial Statements”. ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE None.