LEE ENTERPRISES, Inc 10-Q

Item 2. 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 December 29, 2024. This discussion should be read in conjunction with the Consolidated Financial Statements and related Notes thereto, included herein, and our 2024 Annual Report on Form 10-K. EXECUTIVE OVERVIEW Lee Enterprises, Incorporated, together with its subsidiaries, is a digital-first subscription business providing local markets with valuable, high quality, trusted, intensely local news, information, advertising and marketing services. We inform consumers in 72 mid-sized local communities in 25 states with a rapidly growing digital subscription platform including 774,000 digital subscribers. Our core strategy aims to grow audiences and engagement through creating, collecting, and distributing trusted local news and information, continuous improvements to subscriber experience, and offering a full suite of omni-channel advertising and marketing to more than 25,000 local advertisers. Our product portfolio includes digital subscription platforms, daily, weekly and monthly newspapers and niche products, all delivering original local news and information as well as national and international news. Our products offer digital and print 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 have made investments in talent and technology to improve user experience, content, data visualization and marketing to align with the shift in spending habits by both consumers and advertisers toward digital products. 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 growing and sustainable local media organization. • Our digital subscription platforms are the fastest growing digital subscription platforms in local media. • Amplified Digital® Agency ("Amplified"), 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. STRATEGY 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 operating strategy is locally focused around three pillars: • Grow digital audiences by transforming the way we present local news and information. • Expand our digital subscription base and revenue through audience growth and continued conversion of our massive digital audiences. • Diversify and expand offerings for advertisers through our vast array of rapidly growing digital products, our large digitally adept sales force, and Amplified, our full-service digital agency. 13 Table of Contents RESULTS OF OPERATIONS Three Months Ended December 29, 2024 Operating results are summarized below. (Thousands of Dollars, Except Per Common Share Data) December 29, 2024 December 24, 2023 Percent Change Operating revenue: Print advertising revenue 19,861 24,435 (18.7) % Digital advertising revenue 46,729 46,452 0.6 % Advertising and marketing services revenue 66,590 70,887 (6.1) % Print subscription revenue 43,432 51,872 (16.3) % Digital subscription revenue 21,565 19,467 10.8 % Subscription revenue 64,997 71,339 (8.9) % Print other revenue 7,888 8,492 (7.1) % Digital other revenue 5,087 4,960 2.6 % Other revenue 12,975 13,452 (3.5) % Total operating revenue 144,562 155,678 (7.1) % Operating expenses: Compensation 60,254 59,676 1.0 % Newsprint and ink 3,616 4,843 (25.3) % Other operating expenses 74,680 74,776 (0.1) % Depreciation and amortization 6,265 7,295 (14.1) % Assets gain on sales, impairments and other (929) (1,469) (36.8) % Restructuring costs and other 5,150 4,265 20.8 % Total operating expenses 149,036 149,386 (0.2) % Equity in earnings of associated companies 1,122 1,541 (27.2) % Operating (loss) income (3,352) 7,833 (142.8) % Non-operating income (expense): Interest expense (10,282) (10,131) 1.5 % Pension and OPEB related benefit and other, net 653 186 251.1 % Curtailment/Settlement gains — 3,593 NM Total non-operating expense, net (9,629) (6,352) 51.6 % (Loss) before income taxes (12,981) 1,481 NM Income tax expense 3,243 248 NM Net (loss) income (16,224) 1,233 NM (Loss) earnings per common share: Basic (2.80) 0.12 NM Diluted (2.80) 0.12 NM References to the “2025 Quarter” refer to the three months ended December 29, 2024. Similarly, references to the “2024 Quarter” refer to the three months ended December 24, 2023. 14 Table of Contents Operating Revenue Total operating revenue was $144.6 million in the 2025 Quarter, down $11.1 million, or 7.1%, compared to the 2024 Quarter. Advertising and marketing services revenue totaled $66.6 million in the 2025 Quarter, down 6.1% compared to the 2024 Quarter. Print advertising revenues were $19.9 million in the 2025 Quarter, down 18.7% compared to the 2024 Quarter 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. Digital advertising and marketing services totaled $46.7 million in the 2025 Quarter, up 0.6% compared to the 2024 Quarter. Digital advertising and marketing services represented 70.2% of the 2025 Quarter total advertising and marketing services revenue, compared to 65.5% in the same period last year. Subscription revenue totaled $65.0 million in the 2025 Quarter, down 8.9% compared to the 2024 Quarter. 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 5% since the 2024 Quarter and now total 774,000. Digital-only subscription revenue grew 10.8% compared to the 2024 Quarter. Other revenue, which primarily consists of commercial printing revenue and digital services from BLOX Digital, decreased $0.5 million, or 3.5%, in the 2025 Quarter compared to the 2024 Quarter. Digital services revenue totaled $5.1 million in the 2025 Quarter, a 2.6% increase compared to the 2024 Quarter. Commercial printing revenue totaled $4.1 million in the 2025 Quarter, a 9.8% decrease compared to the 2024 Quarter, primarily driven by reduction in print volumes from our partners. Total digital revenue including digital advertising revenue, digital subscription revenue and digital services revenue totaled $73.4 million in the 2025 Quarter, an increase of 3.5% over the 2024 Quarter, and represented 50.8% of our total operating revenue in the 2025 Quarter. Equity in earnings of TNI and MNI decreased $0.4 million in the 2025 Quarter. Operating Expenses Total operating expenses were $149.0 million in the 2025 Quarter, a 0.2% decrease compared to the 2024 Quarter. Cash Costs, a non-GAAP financial measure used to summarize certain operating expense (see reconciliation of Non-GAAP financial measures below), were down 0.5% in the 2025 Quarter. Compensation expense increased $0.6 million in the 2025 Quarter, or 1.0%, compared to the 2024 Quarter due to investments in digital talent. Newsprint and ink costs decreased $1.2 million in the 2025 Quarter, or 25.3%, compared to the 2024 Quarter. The decrease is attributable to declines in newsprint volumes. Other operating expenses decreased $0.1 million in the 2025 Quarter, or 0.1%, compared to the 2024 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. The largest components are costs associated with printing and distribution of our printed products, digital cost of goods sold 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 increased $0.9 million compared to the 2024 Quarter. Restructuring costs and other include severance costs, litigation expenses, and restructuring expenses. Depreciation and amortization expense decreased $1.0 million, or 14.1%, in the 2025 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 $0.9 million in the 2025 Quarter compared to a net gain of $1.5 million in the 2024 Quarter. Assets gain on sales, impairments and other in the 2025 Quarter were primarily due to the result of the disposition of non-core assets, including real estate. 15 Table of Contents The factors noted above resulted in an operating loss of $3.4 million in the 2025 Quarter compared to operating income of $7.8 million in the 2024 Quarter. Non-operating Income and Expense Interest expense increased $0.2 million, or 1.5%, to $10.3 million in the 2025 Quarter, compared to the same Quarter last year. Our weighted average cost of debt was 9% at the end of the 2025 Quarter and 2024 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. We recorded $0.7 million periodic pension and other postretirement benefits in the 2025 Quarter compared to $3.9 million in the 2024 Quarter. The decrease was a result of recognizing a non-cash curtailment gain of $1.2 million in the 2024 Quarter as a result of outsourcing certain postemployment defined benefit plan functions. Additionally, during the 2024 Quarter, the Company completed a voluntary lump sum payment of future benefits to terminated vested participants. The offer was accepted by 522 participants representing $22.6 million in plan liabilities. 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 Income and Comprehensive Income. Both assets and liabilities of the plan were reduced by $22.6 million. Income Tax (Benefit) Expense We recorded an income tax expense of $3.2 million, or (25.0)% of pretax loss in the 2025 Quarter. In the 2024 Quarter, we recognized an income tax expense of $0.2 million, or 16.7% of pretax income. Net income (loss) and Earnings (Loss) Per Share Net loss was $16.2 million and diluted loss per share were $2.80 for the 2025 Quarter compared to net income of $1.2 million and diluted earnings per share of $0.12 for the 2024 Quarter. The change reflects the various items discussed above. 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 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 16 Table of Contents 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. Generally, the Company provides forward-looking guidance of Cash Costs, which can be used by financial statement users to assess the Company's ability to manage and control its operating cost 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, other non-cash operating expenses and other expenses are excluded. Cash Costs also exclude restructuring costs and other, which are typically settled in cash. Adjusted EBITDA and Cash Costs are reconciled to net income (loss) and operating expenses, below, the closest comparable numbers under GAAP. 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: Three months ended (Thousands of Dollars) December 29, 2024 December 24, 2023 Net (loss) income (16,224) 1,233 Adjusted to exclude Income tax expense 3,243 248 Non-operating expenses, net 9,629 6,352 Equity in earnings of TNI and MNI (1,122) (1,541) Depreciation and amortization 6,265 7,295 Restructuring costs and other 5,150 4,265 Assets gain on sales, impairments and other, net (929) (1,469) Stock compensation 430 214 Add: Ownership share of TNI and MNI EBITDA (50%) 1,167 2,052 Adjusted EBITDA 7,609 18,649 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 (Thousands of Dollars) December 29, 2024 December 24, 2023 Operating expenses 149,036 149,386 Adjustments Depreciation and amortization 6,265 7,295 Assets (gain) loss on sales, impairments and other, net (929) (1,469) Restructuring costs and other 5,150 4,265 Cash Costs 138,550 139,295 17 Table of Contents LIQUIDITY AND CAPITAL RESOURCES Our operations have historically generated 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 required by operating activities totaled $7.3 million in 2025 Period compared to cash provided by operating activities of $0.1 million in 2024 Period, a decrease of $7.4 million. The decrease was driven by a decrease in operating results of $13.6 million (defined as net loss adjusted for non-working capital items) partially offset by an increase in working capital of $6.2 million, primarily related to favorable change in accounts receivable. Investing Activities Cash provided by investing activities totaled $3.9 million in the 2025 Period compared to cash provided by investing activities of $2.1 million in the 2024 Period. 2025 Period and 2024 Period included $5.4 million and $3.1 million, respectively, in proceeds from the sale of assets as the Company divested non-core real estate. We anticipate that funds necessary for capital expenditures, which are expected to total approximately $10.0 million in 2025, and other requirements, will be available from internally generated funds. Financing Activities No cash was required for financing activities in the 2025 Period compared to $1.4 million in 2024 Period. Debt reduction accounted for nearly all the usage of funds in the prior period. Additional Information on Liquidity Our liquidity, consisting of cash on the balance sheet, totaled $6.1 million on December 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. CHANGES IN LAWS AND REGULATIONS Wage Laws The United States and various state and local governments are considering increasing their respective minimum wage rates. Most of our employees are paid more than the current United States or state minimum wage rates. However, until changes to such rates are enacted, the impact of the changes cannot be determined. Item 3. Controls and Procedures EVALUATION OF DISCLOSURE CONTROLS AND PROCEDURES Under the supervision and with the participation of our senior management, including our Chief Executive Officer and Chief Financial Officer, we conducted an evaluation of the effectiveness of the design and operation of our disclosure controls and procedures, as defined in Rules 13a-15(e) and 15d-15(e) under the Exchange Act, as of the end of the period covered by this Quarterly Report on Form 10-Q (the “Evaluation Date”). Based on this evaluation, our Chief Executive Officer and Chief Financial Officer concluded that as of the Evaluation Date, our disclosure controls and procedures were effective. CHANGES IN INTERNAL CONTROL OVER FINANCIAL REPORTING There have been no changes in our internal control over financial reporting that occurred during the 13 weeks ended December 29, 2024 that have materially affected, or are reasonably likely to materially affect, our internal control over financial reporting. 18 Table of Contents PART II OTHER INFORMATION