LEE ENTERPRISES, Inc: Form 10-Q for the period ended Dec 24, 2023

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 24, 2023. This discussion should be read in conjunction with the Consolidated Financial Statements and related Notes thereto, included herein, and our 2023 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 73 mid-sized local communities in 26 states with a rapidly growing digital subscription platform including 735,000 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 30,000 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® ("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 adapt sales force, and Amplified, our full-service digital agency.

RESULTS OF OPERATIONS

Three Months Ended December 24, 2023

Operating results are summarized below.

References to the “2024 Quarter” refer to the three months ended December 24, 2023. Similarly, references to the “2023 Quarter” refer to the three months ended December 25, 2022.

Operating Revenue

Total operating revenue was $155.7 million in the 2024 Quarter, down $29.5 million, or 15.9%, compared to the prior year.

Advertising and marketing services revenue totaled $70.9 million in the 2024 Quarter, down 20.9% compared to the 2023 Quarter. Print advertising revenues were $24.4 million in the 2024 Quarter, down 41.6% compared to the 2023 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 met profitability standards. Digital advertising and marketing services totaled $46.5 million in the 2024 Quarter, down 2.7% compared to the 2023 Quarter. Digital advertising and marketing services represented 65.5% of the 2024 Quarter total advertising and marketing services revenue, compared to 53.3% in the same period last year.

Subscription revenue totaled $71.3 million in the 2024 Quarter, down 10.5% compared to the 2023 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 30.4% since the 2023 Quarter and now total 735,000, and revenue from digital-only subscribers totaled $19.5 million, up 57.9% compared to the 2023 Quarter.

Other revenue, which primarily consists of commercial printing revenue and digital services from BLOX Digital, decreased $2.4 million, or 15.1%, in the 2024 Quarter compared to the 2023 Quarter. Digital services revenue totaled $5.0 million in the 2024 Quarter, a 4.9% increase compared to the 2023 Quarter. Commercial printing revenue totaled $4.5 million in the 2024 Quarter, a 16.7% decrease compared to the 2023 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 $70.9 million in the 2024 Quarter, an increase of 9.4% over the 2023 Quarter, and represented 45.5% of our total operating revenue in the 2024 Quarter.

Equity in earnings of TNI and MNI decreased 0.1 in the 2024 Quarter.

Operating Expenses

Total operating expenses were $149.4 million in the 2024 Quarter, a 14.9% decrease compared to the 2023 Quarter. Cash Costs, a non-GAAP financial measure used to summarize certain operating expense (see reconciliation of Non-GAAP financial measures below), were down 17.9% in the 2024 Quarter.

Compensation expense decreased $15.8 million in the 2024 Quarter, or 20.9%, compared to the 2023 Quarter from reductions in full time employees ("FTEs") due to continued business transformation efforts, partially offset by investments in digital talent.

Newsprint and ink costs decreased $2.6 in the 2024 Quarter, or 34.8%, compared to the 2023 Quarter. The decrease is attributable to declines in newsprint volumes.

Other operating expenses decreased $12.0 in the 2024 Quarter, or 13.8%, compared to the 2023 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 increases in investments to fund our digital growth strategy partially offset by

Restructuring costs and other totaled $4.3 million and $0.6 million in the 2024 Quarter and 2023 Quarter, respectively. Restructuring costs and other include severance costs, litigation expenses, restructuring expenses, and advisor expenses. Restructuring costs in the 2024 and 2023 Quarter's are predominately severance related to our ongoing business transformation.

Depreciation and amortization expense decreased $0.6 million, or 7.5%, in the 2024 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 $1.5 million in the 2024 Quarter compared to a net gain of $2.6 million in the 2023 Quarter. Assets gain on sales, impairments and other in the 2024 Quarter and in the 2023 Quarter were the result of the disposition of non-core assets, including real estate.

The factors noted above resulted in an operating income of $7.8 million in the 2024 Quarter compared to operating income of $11.2 million in the 2023 Quarter.

Non-operating Income and Expense

Interest expense decreased $0.3 million, or 2.7%, to $10.1 million in the 2024 Quarter, compared to the same period last year. The decrease was due to a lower outstanding balance on our Term Loan. Our weighted average cost of debt was 9.0% at the end of the 2024 Quarter and 2023 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 $3.9 million periodic pension and other postretirement benefits in the 2024 Quarter compared to $0.3 million in the 2023 Quarter. The increase was a result of recognized a non-cash curtailment gain of $1.2 million in the 2023 Quarter as a result of outsourcing certain postemployment defined benefit plan functions. Additionally, during the 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 Expense

We recorded an income tax expense of $0.2 million, or 16.7% of pretax income in the 2024 Quarter. In the 2023 Quarter, we recognized an income tax expense of $0.4 million, or 19.4% of pretax income.

Net Income and Earnings Per Share

Net income was $1.2 million and diluted earnings per share were $0.12 for the 2024 Quarter compared to net income of $1.8 million and diluted earnings per share of $0.19 for the 2023 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 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:

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

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LIQUIDITY AND CAPITAL RESOURCES

Our operations have historically generated strong 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. A summary of our cash flows is included in the narrative below.

Operating Activities

Cash provided by operating activities totaled $0.1 million in 2024 compared to cash required for operating activities of $2.2 million in 2023, an increase of $2.3 million. The increase was driven by an increase in working capital of $3.7 million, primarily related to favorable change in accounts receivable and accounts payable, partially offset by a decrease in operating results of $1.5 million (defined as net income (loss) adjusted for non-working capital items).

Investing Activities

Cash provided by investing activities totaled $2.1 million in the 2024 Period compared to cash provided by investing activities of $4.5 million in the 2023 Period. 2024 and 2023 included $3.1 million and $4.1 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 up to $10.0 million in 2024, and other requirements, will be available from internally generated funds.

Financing Activities

Cash required for financing activities totaled $1.4 million in the 2024 Period compared to $0.2 million in the 2023 Period. Debt reduction accounted for nearly all the usage of funds in 2024.

Additional Information on Liquidity

Our liquidity, consisting of cash on the balance sheet, totaled $15.4 million on December 24, 2023. 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.

EVALUATION OF DISCLOSURE CONTROLS AND PROCEDURES

As of September 24, 2023, 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. Based on that evaluation the Company has concluded that, because the material weakness in the Company's internal control that existed as of September 24, 2023 and have not been remediated by the end of the period covered by this report, our disclosure controls and procedures were not effective.

The material weakness identified by the Company is described below:

• Management did not design and implement controls to assess the reliability of certain internally generated information, or evaluate information received from certain third-party service providers, that are relevant to certain revenue recognized in the Company's Consolidated Financial Statements.

Remediation Plans and Actions

Management is committed to remediating the material weakness that has been identified and maintaining an effective system of disclosure controls and procedures. During fiscal 2023, management executed certain actions steps to remediate the material weakness, including:

• Established a project team to review, evaluate and remediate the material weakness in internal controls over financial reporting. The Company's recently expanded Corporate Compliance function is leading management's efforts related to effective control design, documentation and implementation, as well as remediate ineffective controls.
• Enhanced the design of internal controls around evaluating data provided by third-parties, which included the initial implementation of a new revenue IT system.

Management will continue to execute the remediation steps outlined above until the material weakness is remediated. The material weakness will not be considered remediated until the remediated and/or newly implemented internal controls operate for a sufficient period of time and management has concluded, through testing, that these internal controls are operating effectively. We are working to have the material weakness remediated as soon as possible.

PART II

OTHER INFORMATION

Except as otherwise described herein, there have been no material changes in the risk factors previously disclosed in “Part I, Item 1A. Risk Factors” of our 2023 Form 10-K.

In addition, the Company may, from time to time, evaluate and pursue other opportunities for growth, including through strategic investments, joint ventures, and other acquisitions. These strategic initiatives involve various inherent risks, including, without limitation, general business risk, integration and synergy risk, market acceptance risk and risks associated with the potential distraction of management. Such transactions and initiatives may not ultimately create value for us or our stockholders and may harm our reputation and materially adversely affect our business, financial condition, and results of operations.