LEE ENTERPRISES, INCORPORATED The following discussion includes comments and analysis relating to our results of operations and financial condition as of and for the three months endedMarch 26, 2023 . This discussion should be read in conjunction with the Consolidated Financial Statements and related Notes thereto, included herein, and our 2022 Annual Report on Form 10-K. Statements that are not historical are forward-looking and involve risks and uncertainties. See "Forward-Looking Statements" at the end of this section for further information.
EXECUTIVE OVERVIEW
Lee Enterprises, Incorporated is a leading provider of high quality, trusted, local news and information in the markets we serve with rapidly growing digital subscription and advertising platforms.
We operate 77 principally mid-sized local media operations.
We reach nearly 70% of all adults in our larger markets through a combination of our print and digital content offerings.
•Our web and mobile sites are the number one digital source of local news in most of our markets, reaching almost 38 million monthly unique visitors in 2023 with 356 million page views and 76 million visits.
•We have approximately one million paid subscribers to our print and digital products. Digital-only subscribers totaled approximately 596,000 a 21.0% increase over the prior year.
Our products include daily newspapers, websites and mobile applications, mobile news and advertising, video products, a digital marketing agency, digital services including web hosting and content management, niche publications and community newspapers. Our local media operations range from large daily newspapers and their associated digital products, such as theSt. Louis Post-Dispatch andthe Buffalo News , to non-daily newspapers with news websites and digital platforms serving smaller communities. We also operate Amplified Digital®, a full-service digital marketing agency offering omnichannel marketing solutions, audience targeted display, social audience targeting, social media management, email marketing, banners, video streaming and much more. Amplified Digital® serves more than 4,500 customers in 49 states.
We also operate BLOX Digital which provides state-of-the-art web hosting, content management services and video management services to nearly 2,200 other media organizations including broadcast.
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 post-pandemic 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 by launching a portfolio of
video advertising initiatives and e-commerce sales strategies through Amplified
Digital® that will enable advertisers to leverage our vast data-rich digital
audiences and reach consumers in new ways.
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--------------------------------------------------------------------------------RESULTS OF OPERATIONS
Three Months Ended March 26, 2023 Operating results are summarized below.
(Thousands of Dollars, Except Per Common Share Data) 2023
2022 Percent Change
Operating revenue: Print advertising revenue 31,450 44,248 (28.9) % Digital advertising revenue 46,250 43,385 6.6 % Advertising and marketing services revenue 77,700 87,633 (11.3) % Print subscription revenue 64,586 77,255 (16.4) % Digital subscription revenue 13,996 10,093 38.7 % Subscription revenue 78,582 87,348 (10.0) % Print other revenue 9,649 10,374 (7.0) % Digital other revenue 4,756 4,659 2.1 % Other revenue 14,405 15,033 (4.2) % Total operating revenue 170,687 190,014 (10.2) % Operating expenses: Compensation 68,831 83,513 (17.6) % Newsprint and ink 6,466 7,068 (8.5) % Other operating expenses 82,569 84,679 (2.5) % Depreciation and amortization 7,733 8,951 (13.6) % Assets gain on sales, impairments and other, net (792) (152) 421.1 % Restructuring costs and other 3,694 10,590 (65.1) % Total operating expenses 168,501 194,649 (13.4) % Equity in earnings of associated companies 672 1,407 (52.2) % Operating income (loss) 2,858 (3,228) (188.5) % Non-operating income (expense): Interest expense (10,501) (10,523) (0.2) % Pension withdrawal cost - (2,335) (100.0) % Pension and OPEB related benefit (cost) and other, net 206 6,248 (96.7) % Total non-operating expense, net (10,295) (6,610) 55.7 % (Loss) income before income taxes (7,437) (9,838) (24.4) % Income tax (benefit) expense (2,071) (3,144) (34.1) % Net Loss (5,366) (6,694) (19.8) % Earnings (loss) per common share: Basic (1.01) (1.26) 19.8 % Diluted (1.01) (1.26) 19.8 %
References to the "2023 Quarter" refer to the three months ended
Operating Revenue
Total operating revenue was
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Advertising and marketing services revenue totaled $77.7 million in the 2023
Quarter, down 11.3% compared to the 2022 Quarter. Advertising revenue, print and
digital, was adversely affected by a wide spread pull back in advertising
spending. Print advertising revenues were $31.5 million in the 2023 Quarter,
down 28.9% compared to the 2022 Quarter due to the soft advertising environment
and a continued secular declines in demand for print advertising. Digital
advertising and marketing services totaled $46.3 million in the 2023 Quarter, up
6.6% compared to the 2022 Quarter. These gains resulted from an increase in
Amplified Digital® revenue. Digital advertising and marketing services
represented 59.5% of the 2023 Quarter total advertising and marketing services
revenue, compared to 49.5% in the same period last year.
Subscription revenue totaled $78.6 million in the 2023 Quarter, down 10.0%
compared to the 2022 Quarter. Decline in full access volume, consistent with
historical and industry trends was partially offset by selective price increases
on our full access subscriptions, growth in digital-only subscribers and price
increases on digital subscriptions. Digital-only subscribers grew 21.0% since
the 2023 Quarter and now total 596,000, and revenue from digital-only
subscribers totaled $14.0 million , up 38.7% compared to the 2022 Quarter.
Other revenue, which primarily consists of commercial printing revenue and
digital services from BLOX Digital, decreased $0.6 million , or 4.2%, in the 2023
Quarter compared to the 2022 Quarter. Digital services revenue totaled $4.8
million in the 2023 Quarter, a 2.1% increase compared to the 2022 Quarter.
Commercial printing revenue totaled $4.8 million in the 2023 Quarter, a 7.4%
decrease compared to the 2022 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 $65.0 million in the
2023 Quarter, an increase of 11.8% over the 2022 Quarter, and represented 38.1%
of our total operating revenue in the 2023 Quarter.
Equity in earnings of TNI and MNI decreased 0.7 in the 2023 Quarter.
Operating Expenses
Total operating expenses were
Compensation expense decreased
Newsprint and ink costs decreased$0.6 in the 2023 Quarter, or 8.5%, compared to the 2022 Quarter. The decrease is attributable to declines in newsprint volumes offset by higher newsprint prices. See Item 3, "Commodities", included herein, for further discussion and analysis of the impact of newsprint on our business. Other operating expenses decreased$2.1 in the 2023 Quarter, or 2.5%, compared to the 2022 Quarter. Other operating expenses 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 costs 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 editions partially offset by investments to fund our digital growth strategy. Restructuring costs and other totaled$3.7 million and$10.6 million in the 2023 Quarter and 2022 Quarter, respectively. Restructuring costs and other include severance costs, litigation expenses, restructuring expenses, and advisor expenses. Restructuring costs in the 2023 Quarter are predominately severance related to our ongoing business transformation, while restructuring costs In the 2022 quarter also include costs associated with the unsolicited offer inNovember 2021 .
Depreciation and amortization expense decreased
Assets gain on sales, impairments and other, was a net gain of$0.8 million in the 2023 Quarter compared to a net gain of$0.2 million in the 2022 Quarter. Assets gain on sales, impairments and other in the 2023 Quarter and in the 2022 Quarter were the result of the disposition of non-core assets, including real estate. 14 --------------------------------------------------------------------------------
The factors noted above resulted in an operating income of
Non-operating Income and Expense
Interest expense was flat at $10.5 million in the 2023 Quarter, compared to the
same period last year. Our weighted average cost of debt was 9.0% at the end of
the 2023 Quarter and 2022 Quarter.
Other non-operating income and expense consists of benefits associated with our
pension and other postretirement plans and the fair value adjustment of our
Warrants. We recorded $0.3 million periodic pension and other postretirement
benefits in the 2023 Quarter compared to $3.6 million in the 2022 Quarter.
We recognized pension withdrawal costs in the 2022 Quarter of
Income Tax Expense (Benefit)
We recorded an income tax benefit of $2.1 million , or 27.8% of pretax loss in
the 2023 Quarter. In the 2022 Quarter, we recognized an income tax benefit of
$3.1 million , or 32.0% of pretax loss.
Net Income (Loss) and Earnings (Losses) Per Share
Net loss was $5.4 million and diluted losses per share were $1.01 for the 2023
Quarter compared to net loss of $6.7 million and diluted losses per share of
$1.26 for the 2022 Quarter. The change reflects the various items discussed
above.
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Six Months Ended March 26, 2023 Operating results, as reported in the Consolidated Financial Statements, are summarized below.
(Thousands of Dollars, Except Per Common Share Data) March 26, 2023 March 27, 2022 Percent Change Operating revenue: Print advertising revenue 73,286 100,218 (26.9) % Digital advertising revenue 93,999 86,169 9.1 % Advertising and marketing services revenue 167,285 186,387 (10.2) % Print subscription revenue 131,956 156,883 (15.9) % Digital subscription revenue 26,325 17,984 46.4 % Subscription revenue 158,281 174,867 (9.5) % Print other revenue 20,769 21,759 (4.5) % Digital other revenue 9,483 9,283 2.2 % Other revenue 30,252 31,042 (2.5) % Total operating revenue 355,818 392,296 (9.3) % Operating expenses: Compensation 144,277 168,207 (14.2) % Newsprint and ink 13,898 14,712 (5.5) % Other operating expenses 169,343 170,661 (0.8) % Depreciation and amortization 15,619 18,627 (16.1) % Assets gain on sales, impairments and other (3,355) (12,426) (73.0) % Restructuring costs and other 4,340 13,790 (68.5) % Total operating expenses 344,122 373,571 (7.9) % Equity in earnings of associated companies 2,340 3,161 (26.0) % Operating income 14,036 21,886 (35.9) % Non-operating income (expense): Interest expense (20,909) (21,186) (1.3) % Curtailment gain - 1,027 (100.0) % Pension withdrawal cost - (2,335) (100.0) % Pension and OPEB related benefit (cost) and other, net 1,700 9,320 (81.8) % Total non-operating expense, net (19,209) (13,174) 45.8 % (Loss) income before income taxes (5,173) 8,712 (159.4) % Income tax (benefit) expense (1,631) 2,207 (173.9) % Net (loss) income (3,542) 6,505 (154.5) % Earnings (loss) per common share: Basic (0.82) 0.94 (187.1) % Diluted (0.82) 0.92 (189.0) % References to the "2023 Period" refer to the six months endedMarch 26, 2023 . Similarly, references to the "2022 Period" refer to the six months endedMarch 27, 2022 . Operating Revenue
Total operating revenue was
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Advertising and marketing services revenue totaled $167.3 million in the 2023
Period, down 10.2% compared to the prior year. Advertising revenue, print and
digital, was adversely affected by a wide spread pull back in advertising
spending. Print advertising revenues were $73.3 million in the 2023 Period, down
26.9% compared to the prior year due to the soft advertising environment and a
continued secular decline in demand for print advertising. Digital advertising
and marketing services totaled $94.0 million in the 2023 Period, up 9.1%
compared to the prior year. These gains resulted from an 83.1% increase in
Amplified Digital® revenue and an increase in advertising on our owned and
operated sites. Digital advertising and marketing services represented 56.2% of
the 2022 Period total advertising and marketing services revenue, compared to
46.2% in the same period last year.
Subscription revenue totaled $158.3 million in the 2023 Period, down 9.5%
compared to the 2022 Period. The decline in full access volume, consistent with
historical and industry trends were partially offset by growth in digital only
subscribers and selective price increases on our full access subscriptions.
Digital only subscribers grew 16.8% since the 2022 Period and now total 596,000.
Other revenue, which primarily consists of commercial printing revenue and
digital services from BLOX Digital, decreased $0.8 million , or 2.5%, in the 2023
Period compared to the 2022 Period. Digital services revenue totaled $9.5
million in the 2023 Period, a 6.8% increase compared to the 2022 Period.
Commercial printing revenue totaled $10.2 million in the 2023 Period, a 5.9%
decrease compared to the 2022 Period 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 $129.8 million in the
2023 Period, an increase of 14.4% over the 2022 Period, and represented 36.5% of
our total operating revenue in the 2023 Period.
Equity in earnings of TNI and MNI decreased
Operating Expenses
Total operating expenses were $344.1 million in the 2023 Period, a 7.9% decrease
compared to the 2022 Period. Cash Costs, a non-GAAP financial measure (see
reconciliation of non-GAAP financial measures below), were $327.5 million , a
7.4% decrease compared to the 2022 Period.
Compensation expense decreased
Newsprint and ink costs decreased$0.8 million in the 2023 Period, or 5.5%, compared to the 2022 Period. The decrease is attributable to declines in newsprint volumes offset by higher newsprint prices. See Item 3, "Commodities", included herein, for further discussion and analysis of the impact of newsprint on our business. Other operating expenses decreased$1.3 million in the 2023 Period, or 0.8%, compared to the 2022 Period. 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 editions increases partially offset by increases to digital costs of goods sold from Amplified Digital® growth, higher input costs due to inflation and investments to fund our digital growth strategy. Restructuring costs and other totaled$4.3 million and$13.8 million in the 2023 Period and 2022 Period, respectively. Restructuring costs and other include severance costs, litigation costs, restructuring expenses, and advisor expenses in the 2022 Period associated with an unsolicited takeover offer received inNovember 2021 . Restructuring costs in the 2023 Period are predominately severance related to our ongoing business transformation.
Depreciation and amortization expense decreased
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Assets (gain) loss on sales, impairments and other, was a net gain of $3.4
million in the 2023 Period compared to a net gain of $12.4 million in the 2022
Period. The gains and losses in the 2023 Period and 2022 Period were the result
of the disposition of non-core assets, including real estate.
The factors noted above resulted in operating income of
Non-operating Income and Expense
Interest expense decreased $0.3 million , or 1.3%, to $20.9 million in the 2023
Period, 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 2023 Period and 2022 Period.
Other non-operating income and expense consists of benefits associated with our
pension and other postretirement plans and the fair value adjustment of our
Warrants. We recorded $0.6 million periodic pension and other postretirement
benefits in the 2022 Period compared to $8.0 million in the 2022 Period. We
recorded non-operating income of $0.1 million in the 2022 Period related to
changes in the value of the Warrants.
We recognized a non-cash curtailment gain of
We recognized pension withdrawal costs in the 2022 Period of
Income Tax Expense (Benefit)
We recorded an income tax benefit of $1.6 million , or 31.5% of pretax loss, in
the 2023 Period. In the 2022 Period, we recognized an income tax expense of $2.2
million or 25.3% of pretax income.
Net Income (Loss) and Earnings (Losses) Per Share
Net loss was $3.5 million and diluted losses per share were $0.82 for the 2023
Period, compared to net income of $6.5 million and diluted earnings per share of
$0.92 for the 2022 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 EBITDA is also a component of the calculation used by stockholders and
analysts to determine the value of our
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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 26, 2023 Net (loss) income (5,366) (6,694) (3,542) 6,505 Adjusted to exclude Income tax (benefit) expense (2,071) (3,144) (1,631) 2,207 Non-operating expenses, net 10,295 6,610 19,209 13,174 Equity in earnings of TNI and MNI (672) (1,407) (2,340) (3,161) Depreciation and amortization 7,733 8,951 15,619 18,627 Restructuring costs and other 3,694 10,590 4,340 13,790 Assets gain on sales, impairments and other, net (792) (152) (3,355) (12,426) Stock compensation 573 512 922 699
Add:
Ownership share of TNI and MNI EBITDA (50%) 930 1,657 2,722 3,596
Adjusted EBITDA 14,324 16,923 31,944 43,011
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The table below reconciles the non-GAAP financial performance measure of Cash Costs to Operating expenses, the most directly comparable GAAP measure:
Three months ended Six months ended
(Thousands of Dollars) March 26, 2023 March 27, 2022 March 26, 2023 March 27, 2022
Operating expenses 168,501 194,649 344,122 373,571
Adjustments
Depreciation and amortization 7,733 8,951 15,619 18,627
Assets gain on sales, impairments and other, net (792) (152) (3,355) (12,426)
Restructuring costs and other 3,694 10,590 4,340 13,790
Cash Costs 157,866 175,260 327,518 353,580
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 $0.6 million in 2023 compared to
cash required for operating activities of $0.6 million in 2022, an increase of
$1.3 million . The increase was driven by an increase in working capital of $8.0
million primarily related to favorable changes to receivables and income taxes,
partially offset by a decrease in operating results of $6.8 million , (defined as
net income (loss) adjusted for non-working capital items).
Investing Activities
Cash provided by investing activities totaled $5.0 million in the 2023 Period
compared to cash provided by investing activities of $9.9 million in the 2022
Period. 2023 and 2022 included $5.1 million and $14.7 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 2023, and other requirements, will be available
from internally generated funds.
Financing Activities
Cash required for financing activities totaled
Additional Information on Liquidity
Our liquidity, consisting of cash on the balance sheet, totaled $19.0 million on
March 26, 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.
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--------------------------------------------------------------------------------FORWARD-LOOKING STATEMENTS
The Private Securities Litigation Reform Act of 1995 provides a "safe harbor" for forward-looking statements. This report contains information that may be deemed forward-looking that is based largely on our current expectations, and is subject to certain risks, trends and uncertainties that could cause actual results to differ materially from those anticipated. Among such risks, trends and other uncertainties, which in some instances are beyond our control, are: •The overall impact the COVID-19 pandemic has on the Company's revenues and costs; •The long-term or permanent changes the COVID-19 pandemic may have on the publishing industry, which may result in permanent revenue reductions and other risks and uncertainties; •We may be required to indemnify the previous owners of the BH Media orBuffalo News for unknown legal and other matters that may arise; •Our ability to manage declining print revenue and circulation subscribers; •The impact and duration of adverse conditions in certain aspects of the economy affecting our business; •Changes in advertising and subscription demand; •Changes in technology that impact our ability to deliver digital advertising; •Potential changes in newsprint, other commodities and energy costs; •Interest rates; •Labor costs; •Significant cyber security breaches or failure of our information technology systems; •Our ability to achieve planned expense reductions and realize the expected benefit of our acquisitions; •Our ability to maintain employee and customer relationships; •Our ability to manage increased capital costs; •Our ability to maintain our listing status on NASDAQ; •Competition; and •Other risks detailed from time to time in our publicly filed documents. Any statements that are not statements of historical fact (including statements containing the words "may", "will", "would", "could", "believes", "expects", "anticipates", "intends", "plans", "projects", "considers" and similar expressions) generally should be considered forward-looking statements. Statements regarding our plans, strategies, prospects and expectations regarding our business and industry, including statements regarding the impacts that the COVID-19 pandemic and our responses thereto may have on our future operations, are forward-looking statements. They reflect our expectations, are not guarantees of performance and speak only as of the date the statement is made. Readers are cautioned not to place undue reliance on such forward-looking statements, which are made as of the date of this report. We do not undertake to publicly update or revise our forward-looking statements, except as required by law.
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