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 March 30, 2025. 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 728,000 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. 15 Table of Contents RESULTS OF OPERATIONS Three Months Ended March 30, 2025 Operating results are summarized below. (Thousands of Dollars, Except Per Common Share Data) March 30, 2025 March 24, 2024 Percent Change Operating revenue: Print advertising revenue 16,532 18,742 (11.8) % Digital advertising revenue 43,941 45,392 (3.2) % Advertising and marketing services revenue 60,473 64,134 (5.7) % Print subscription revenue 41,079 48,966 (16.1) % Digital subscription revenue 23,789 20,261 17.4 % Subscription revenue 64,868 69,227 (6.3) % Print other revenue 7,213 8,069 (10.6) % Digital other revenue 4,826 5,120 (5.7) % Other revenue 12,039 13,189 (8.7) % Total operating revenue 137,380 146,550 (6.3) % Operating expenses: Compensation 56,659 56,803 (0.3) % Newsprint and ink 3,111 4,162 (25.3) % Other operating expenses 71,455 72,294 (1.2) % Depreciation and amortization 5,171 7,293 (29.1) % Assets loss (gain) on sales, impairments and other 126 7,617 (98.3) % Restructuring costs and other 6,516 4,139 57.4 % Total operating expenses 143,038 152,308 (6.1) % Equity in earnings of associated companies 1,155 1,206 (4.2) % Operating loss (4,503) (4,552) (1.1) % Non-operating income (expense): Interest expense (9,950) (10,214) (2.6) % Pension and OPEB related benefit and other, net 658 293 NM Total non-operating expense, net (9,292) (9,921) (6.3) % Loss before income taxes (13,795) (14,473) (4.7) % Income tax benefit (1,780) (2,837) (37.3) % Net loss (12,015) (11,636) 3.3 % Loss per common share: Basic (2.07) (2.06) 0.7 % Diluted (2.07) (2.06) 0.7 % References to the “2025 Quarter” refer to the three months ended March 30, 2025. Similarly, references to the “2024 Quarter” refer to the three months ended March 24, 2024. Operating Revenue Total operating revenue was $137.4 million in the 2025 Quarter, down $9.2 million, or 6.3%, compared to the 2024 Quarter. 16 Table of Contents Advertising and marketing services revenue totaled $60.5 million in the 2025 Quarter, down 5.7% compared to the 2024 Quarter. Print advertising revenues were $16.5 million in the 2025 Quarter, down 11.8% compared to the 2024 Quarter due to continued secular declines in demand for print advertising and impacts from the Cyber Incident, which limited capacity for print advertising for certain publications for a short period of time. Digital advertising and marketing services totaled $43.9 million in the 2025 Quarter, down 3.2% compared to the 2024 Quarter. Digital advertising and marketing services represented 72.7% of the 2025 Quarter total advertising and marketing services revenue, compared to 70.8% in the same period last year. Subscription revenue totaled $64.9 million in the 2025 Quarter, down 6.3% 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 now total 728,000. Digital-only subscription revenue grew 17.4% compared to the 2024 Quarter. Other revenue, which primarily consists of commercial printing revenue and digital services from BLOX Digital, decreased $1.2 million, or 8.7%, in the 2025 Quarter compared to the 2024 Quarter. Digital services revenue totaled $4.8 million in the 2025 Quarter, a 5.7% decrease compared to the 2024 Quarter. Commercial printing revenue totaled $3.8 million in the 2025 Quarter, a 8.5% 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 $72.6 million in the 2025 Quarter, an increase of 2.5% over the 2024 Quarter, and represented 52.8% of our total operating revenue in the 2025 Quarter. Equity in earnings of TNI and MNI decreased $0.1 million in the 2025 Quarter. Operating Expenses Total operating expenses were $143.0 million in the 2025 Quarter, a 6.1% 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 1.5% in the 2025 Quarter. Compensation expense decreased $0.1 million in the 2025 Quarter, or 0.3%, compared to the 2024 Quarter from reductions in full time employees ("FTEs") due to continued business transformation efforts, partially offset by investments in digital talent and higher expenses related to the Company's self-insured medical plan. Newsprint and ink costs decreased $1.1 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 $0.8 million in the 2025 Quarter, or 1.2%, 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 attributable to lower delivery and other print-related costs due to lower volumes of our print edition, partially offset by investments to fund our digital growth strategy. Restructuring costs and other increased $2.4 million, or 57.4%, compared to the 2024 Quarter. The increase is primarily driven from costs associated with recovering from the Cyber Incident, closing down outsourced production facilities, ongoing business transformation efforts, and severance. Restructuring costs and other include severance costs, litigation expenses, restructuring expenses, cyber restoration costs, and advisor expenses. Depreciation and amortization expense decreased $2.1 million, or 29.1%, in the 2025 Quarter. 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 $0.1 million in the 2025 Quarter compared to a net gain of $7.6 million in the 2024 Quarter. Assets loss (gain) on sales, impairments and other in the 2024 Quarter were primarily due to non-cash charges of $7.6 million that were recorded to reduce the carrying value of mastheads, which are non-amortized intangible assets. 17 Table of Contents The factors noted above resulted in an operating loss of $4.5 million in the 2025 Quarter compared to $4.6 million in the 2024 Quarter. Non-operating Income and Expense Non-operating income and expense decreased by $0.6 million , or 6.3%. The decrease is primarily driven by a decrease in Interest expense of $0.3 million, or 2.6%, to $10.0 million in the 2025 Quarter, compared to the same Quarter last year. The decrease was due to a lower average outstanding balance on our Term Loan. Our weighted average cost of debt was 9% at the end of the 2025 Quarter and 2024 Quarter. Income Tax Benefit We recorded an income tax benefit of $1.8 million, or 12.9% of pretax loss in the 2025 Quarter. In the 2024 Quarter, we recognized an income tax benefit of $2.8 million, or 19.6% of pretax loss. Net loss and Loss Per Share Net loss was $12.0 million and diluted loss per share were $2.07 for the 2025 Quarter compared to net loss of $11.6 million and diluted losses per share of $2.06 for the 2024 Quarter. The change reflects the various items discussed above. 18 Table of Contents Six Months Ended March 30, 2025 Operating results are summarized below. (Thousands of Dollars, Except Per Common Share Data) March 30, 2025 March 24, 2024 Percent Change Operating revenue: Print advertising revenue 36,393 43,177 (15.7) % Digital advertising revenue 90,670 91,844 (1.3) % Advertising and marketing services revenue 127,063 135,021 (5.9) % Print subscription revenue 84,511 100,838 (16.2) % Digital subscription revenue 45,354 39,728 14.2 % Subscription revenue 129,865 140,566 (7.6) % Print other revenue 15,101 16,561 (8.8) % Digital other revenue 9,913 10,080 (1.7) % Other revenue 25,014 26,641 (6.1) % Total operating revenue 281,942 302,228 (6.7) % Operating expenses: Compensation 116,913 116,479 0.4 % Newsprint and ink 6,727 9,005 (25.3) % Other operating expenses 146,135 147,070 (0.6) % Depreciation and amortization 11,436 14,588 (21.6) % Assets loss (gain) on sales, impairments and other (803) 6,148 NM Restructuring costs and other 11,666 8,404 NM Total operating expenses 292,074 301,694 (3.2) % Equity in earnings of associated companies 2,277 2,747 (17.1) % Operating (loss) income (7,855) 3,281 NM Non-operating income (expense): Interest expense (20,232) (20,345) (0.6) % Pension and OPEB related benefit and other, net 1,311 479 NM Curtailment/Settlement gains — 3,593 NM Total non-operating expense, net (18,921) (16,273) 16.3 % Loss before income taxes (26,776) (12,992) NM Income tax expense (benefit) 1,463 (2,589) NM Net loss (28,239) (10,403) NM Loss per common share: Basic (4.87) (1.94) 150.4 % Diluted (4.87) (1.94) 150.4 % References to the “2025 Period” refer to the six months ended March 30, 2025. Similarly, references to the “2024 Period” refer to the six months ended March 24, 2024. 19 Table of Contents Operating Revenue Total operating revenue was $281.9 million in the 2025 Period, down $20.3 million, or 6.7%, compared to the 2024 Period. Advertising and marketing services revenue totaled $127.1 million in the 2025 Period, down 5.9% compared to the 2024 Period. Print advertising revenues were $36.4 million in the 2025 Period, down 15.7% compared to the 2024 Period due to continued secular declines in demand for print advertising and impacts from the Cyber Incident, which limited capacity for print advertising for certain publications for a short period of time. Digital advertising and marketing services totaled $90.7 million in the 2025 Period, down 1.3% compared to the 2024 Period. Digital advertising and marketing services represented 71.4% of the 2025 Period total advertising and marketing services revenue, compared to 68.0% during the 2024 Period. Subscription revenue totaled $129.9 million in the 2025 Period, down 7.6% compared to the 2024 Period. 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 now total 728,000. Digital-only subscription revenue grew 14.2% compared to the 2024 Period. Other revenue, which primarily consists of commercial printing revenue and digital services from BLOX Digital, decreased $1.6 million, or 6.1%, in the 2025 Period compared to the 2024 Period. Digital services revenue totaled $9.9 million in the 2025 Period, a 1.7% decrease compared to the 2024 Period. Commercial printing revenue totaled $7.9 million in the 2025 Period, a 9.2% decrease compared to the 2024 Period, primarily driven by reductions in print volumes from our partners. Total digital revenue including digital advertising revenue, digital subscription revenue and digital services revenue totaled $145.9 million in the 2025 Period, an increase of 3.0% over the 2024 Period, and represented 51.8% of our total operating revenue in the 2025 Period. Equity in earnings of TNI and MNI increased $0.5 million in the 2025 Period. Operating Expenses Total operating expenses were $292.1 million in the 2025 Period, a 3.2% decrease compared to the 2024 Period. Cash Costs, a non-GAAP financial measure used to summarize certain operating expense (see reconciliation of Non-GAAP financial measures below), were down 1.0% in the 2025 Period. Compensation expense increased $0.4 million in the 2025 Period, or 0.4%, compared to the 2024 Period due to higher expenses related to the Company's self-insured medical plan, investments in digital talent, partially offset by reductions in full time employees ("FTEs") due to continued business transformation efforts. Newsprint and ink costs decreased $2.3 million in the 2025 Period, or 25.3%, compared to the 2024 Period. The decrease is attributable to declines in newsprint volumes. Other operating expenses decreased $0.9 million in the 2025 Period, or 0.6%, compared to the 2024 Period. Other operating expenses include all operating costs not considered to be compensation, newsprint, depreciation and amortization, or restructuring costs and assets loss (gain) 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 attributable to lower delivery and other print-related costs due to lower volumes of our print edition, partially increases in investments to fund our digital growth strategy partially offset by investments to fund our digital growth strategy. Restructuring costs and other increased $3.3 million in the 2025 Period, compared to the 2024 Period. The increase is primarily driven from costs associated with recovering from the Cyber Incident, closing down outsourced production facilities, ongoing business transformation efforts, and severance. Restructuring costs and other include severance costs, litigation expenses, restructuring expenses, cyber restoration costs, and advisor expenses. Depreciation and amortization expense decreased $3.2 million in the 2025 Period, or 21.6%, compared to the 2024 Period. The decrease in both is attributable to assets becoming fully depreciated or amortized. 20 Table of Contents Assets loss (gain) on sales, impairments and other, was a net gain of $0.8 million in the 2025 Period compared to a net loss of $6.1 million in the 2024 Period. Assets loss (gain) on sales, impairments and other in the 2024 Period were primarily due to non-cash charges of $7.6 million that were recorded to reduce the carrying value of mastheads, which are non-amortized intangible assets. Assets gain on sales, impairments and other in the 2025 Period were the result of the disposition of non-core assets, including real estate. The factors noted above resulted in an operating loss of $7.9 million in the 2025 Period compared to operating income of $3.3 million in the 2024 Period. Non-operating Income and Expense Interest expense decreased $0.1 million, or 0.6%, to $20.2 million in the 2025 Period, compared to the same period last year. The decrease was due to a lower average outstanding balance on our Term Loan. Our weighted average cost of debt was 9.0% at the end of the 2025 Period and 2024 Period. Other non-operating income and expense consists of benefits associated with our pension and other postretirement plans. We recorded $1.5 million of periodic pension and other postretirement benefits in the 2025 Period compared to $4.3 million in the 2024 Period. The decrease was attributable due to the Company recognizing a non-cash curtailment gain of $1.2 million in the 2024 Period as a result of outsourcing certain postemployment defined benefit plan functions. Additionally, during the 2024 Period, 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 and Comprehensive Loss. Both assets and liabilities of the plan were reduced by $22.6 million. Income Tax Benefit We recorded an income tax expense of $1.5 million, or 5.5% of pretax loss in the 2025 Period. In the 2024 Period, we recognized an income tax benefit of $2.6 million, or 19.9% of pretax loss. Net loss and Loss Per Share Net loss was $28.2 million and diluted loss per share were $4.87 for the 2025 Period compared to net loss of $10.4 million and diluted losses per share of $1.94 for the 2024 Period. 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 21 Table of Contents 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. 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 Six months ended (Thousands of Dollars) March 30, 2025 March 24, 2024 March 30, 2025 March 24, 2024 Net loss (12,015) (11,636) (28,239) (10,403) Adjusted to exclude Income tax (benefit) expense (1,780) (2,837) 1,463 (2,589) Non-operating expenses, net 9,292 9,921 18,921 16,273 Equity in earnings of TNI and MNI (1,155) (1,206) (2,277) (2,747) Depreciation and amortization 5,171 7,293 11,436 14,588 Restructuring costs and other 6,516 4,139 11,666 8,404 Assets loss (gain) on sales, impairments and other, net 126 7,617 (803) 6,148 Stock compensation 358 501 788 715 Add: Ownership share of TNI and MNI EBITDA (50%) 1,255 1,269 2,422 3,321 Adjusted EBITDA 7,768 15,061 15,377 33,710 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: Three months ended Six months ended (Thousands of Dollars) March 30, 2025 March 24, 2024 March 30, 2025 March 24, 2024 Operating expenses 143,038 152,308 292,074 301,694 Adjustments Depreciation and amortization 5,171 7,293 11,436 14,588 Assets loss (gain) on sales, impairments and other, net 126 7,617 (803) 6,148 Restructuring costs and other 6,516 4,139 11,666 8,404 Cash Costs 131,225 133,259 269,775 272,554 LIQUIDITY AND CAPITAL RESOURCES A summary of our cash flows is included in the narrative below. Operating Activities Cash required for operating activities totaled $8.1 million in the 2025 Period compared to cash provided by operating activities of $3.3 million in 2024 Period, a decrease of $11.4 million. The decrease was primarily driven by a decrease in operating results of $23.4 million (defined as net loss adjusted for non-working capital items), partially offset by non-cash interest expense of $6.8 million and an increase in working capital of $5.2 million. The increase in working capital is primarily related to the cyber incident, which increased both accounts payable and accounts receivable. Investing Activities Cash provided by investing activities totaled $3.2 million in the 2025 Period compared to cash provided by investing activities of $0.2 million in the 2024 Period. 2025 Period and 2024 Period included $6.1 million and $3.2 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 up to $7.0 million in 2025, and other requirements, will be available from internally generated funds. Financing Activities Cash provided by or required for financing activities totaled zero in the 2025 Period compared to $1.9 million required in the 2024 Period. The Debt reduction accounted for nearly all the usage of funds in the 2024 Period. Additional Information on Liquidity Our liquidity, consisting of cash on the balance sheet, totaled $4.7 million on March 30, 2025. This liquidity amount excludes any future cash flows from operations. For the six months ending March 30, 2025, cash required for operating activities totaled $8.1 million. The current operating environment, business transformation spending, and impacts from the Cyber Incident have reduced net cash flows and put pressure on the Company's liquidity. In response to the current challenges, the Company has implemented specific plans to maintain sufficient liquidity for the foreseeable future. The Company's plan includes reducing operating and capital spending and reducing outstanding accounts receivable. Reductions in operating expenses and capital spending largely impact the Company's print businesses and future products that are not generating revenue today. The Company's working capital was impacted by the Cyber Incident, as statements to customers were delayed and collection efforts were challenged. The Company expects improved collections as we recover from the Cyber Incident. In addition to these tactics, the Company was granted waivers of interest and rent for three months, two of which are already reflected in the financial statements. 23 Table of Contents Notwithstanding the aforementioned waivers of interest and rent, and considering the plans outlined above, 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 There have been no changes in our internal control over financial reporting that occurred during the 13 weeks ended March 30, 2025 that have materially affected, or are reasonably likely to materially affect, our internal control over financial reporting. PART II OTHER INFORMATION