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UNITED STATES SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

FORM 10-Q

 

☒ QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE

SECURITIES EXCHANGE ACT OF 1934

 

For The Quarterly Period Ended June 26, 2022

 

OR

 

☐ TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE

SECURITIES EXCHANGE ACT OF 1934

 

Commission File Number 1-6227

LEE ENTERPRISES, INCORPORATED

 

(Exact name of Registrant as specified in its Charter)

 

Delaware

42-0823980

(State or other jurisdiction of incorporation or organization)

(I.R.S. Employer Identification No.)

 

 4600 E. 53rd Street, Davenport, Iowa 52807

(Address of principal executive offices)

  

(563) 383-2100

(Registrant's telephone number, including area code)

 

Securities registered pursuant to Section 12(b) of the Act:

 

Title of each class

Trading Symbol(s)

Name of each exchange on which registered

Common Stock, par value $.01 per share

LEE

The Nasdaq Global Select Market

Preferred Share Purchase Rights LEE The Nasdaq Global Select Market

 

 

Indicate by check mark whether the Registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the Registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.

Yes ☒     No ☐

 

Indicate by check mark whether the Registrant has submitted electronically every Interactive Data File required to be submitted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the Registrant was required to submit such files. 

Yes ☒     No ☐

 

Indicate by check mark whether the Registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, a smaller reporting company or an emerging growth company. See the definitions of “large accelerated filer”, “accelerated filer”, “smaller reporting company,” and “emerging growth company” in Rule 12b-2 of the Exchange Act.

 

 

Large accelerated filer

Accelerated filer

 

Non-accelerated filer

Smaller reporting company

     

Emerging growth company

 

If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act. ☐

 

Indicate by check mark whether the Registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).

Yes ☐     No ☒

 

As of July 31, 2022, 5,977,315 shares of Common Stock of the Registrant were outstanding. 

 

 

 

 

Table Of Contents

 

PAGE

     

FORWARD LOOKING STATEMENTS

  1
       

PART I

FINANCIAL INFORMATION

  2
         
 

Item 1.

Financial Statements (Unaudited)

  2
         
   

Consolidated Balance Sheets - June 26, 2022, and September 26, 2021

  2
         
   

Consolidated Statements of Income (Loss) and Comprehensive Income (Loss) -Three and nine months ended June 26, 2022 and June 27, 2021

  4
         
   

Consolidated Statements of Stockholder's Equity - Three and nine months ended June 26, 2022, and June 27, 2021

  5
         
   

Consolidated Statements of Cash Flows - Nine months ended June 26, 2022, and June 27, 2021

  6
         
   

Notes to Consolidated Financial Statements

  7
         
 

Item 2.

Management's Discussion and Analysis of Financial Condition and Results of Operations

  12
         
 

Item 3.

Quantitative and Qualitative Disclosures About Market Risk

  18
         
 

Item 4.

Controls and Procedures

  19
         

PART II

OTHER INFORMATION

  19
         
 

Item 1.

Legal Proceedings

  19
         
  Item 1.A. Risk Factors   19
         
 

Item 6.

Exhibits

  19
         

SIGNATURES

  20

 

 

References to “we”, “our”, “us” and the like throughout this document refer to Lee Enterprises, Incorporated (the “Company”). References to “2022”, “2021" and the like refer to the fiscal years ended the last Sunday in September.

 

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 or Buffalo 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.

 

 

 

 

PART I

FINANCIAL INFORMATION

 

Item 1.       Financial Statements

 

LEE ENTERPRISES, INCORPORATED

CONSOLIDATED BALANCE SHEETS

 

      (Unaudited)          
      June 26,       September 26,  

(Thousands of Dollars)

 

2022

   

2021

 
                 

ASSETS

               
                 

Current assets:

               

Cash and cash equivalents

    15,661       26,112  

Accounts receivable and contract assets, net

    74,911       65,070  

Inventories

    8,661       6,297  

Prepaid and other current assets

    13,482       11,320  

Total current assets

    112,715       108,799  

Investments:

               

Associated companies

    27,052       26,682  

Other

    6,075       6,065  

Total investments

    33,127       32,747  

Property and equipment:

               

Land and improvements

    14,505       16,576  

Buildings and improvements

    93,888       106,890  

Equipment

    212,908       228,817  

Construction in process

    3,998       2,813  
      325,299       355,096  

Less accumulated depreciation

    249,519       271,830  

Property and equipment, net

    75,780       83,266  

Operating lease right-of-use assets

    58,193       65,682  

Goodwill

    329,504       330,204  

Other intangible assets, net

    140,231       156,671  

Pension plan assets, net

    16,571       35,855  

Medical plan assets, net

    18,200       16,695  

Other

    10,515       13,632  

Total assets

    794,836       843,551  

 

The accompanying Notes are an integral part of the Consolidated Financial Statements.

 

 

 

 

      (Unaudited)          
      June 26,       September 26,  

(Thousands of Dollars and Shares, Except Per Share Data)

 

2022

   

2021

 
                 

LIABILITIES AND EQUITY

               
                 

Current liabilities:

               

Current portion of lease liabilities

    7,811       8,612  

Current maturities of long-term debt

          6,112  

Accounts payable

    34,656       20,420  

Compensation and other accrued liabilities

    43,316       45,076  

Unearned revenue

    56,749       61,404  

Total current liabilities

    142,532       141,624  

Long-term debt, net of current maturities

    462,554       476,504  

Operating lease liabilities

    49,918       57,683  

Pension obligations

    928       22,444  

Postretirement and postemployment benefit obligations

    11,404       11,008  

Deferred income taxes

    37,295       40,295  

Income taxes payable

    9,543       9,174  

Other

    26,047       28,121  

Total liabilities

    740,221       786,853  

Equity:

               

Stockholders' equity:

               

Serial convertible preferred stock, no par value; authorized 500 shares; none issued

           

Common Stock, $0.01 par value; authorized 12,000 shares; issued and outstanding:

    60       59  

June 26, 2022; 5,977 shares; $0.01 par value

               

September 26, 2021; 5,889 shares; $0.01 par value

               

Class B Common Stock, $2 par value; authorized 3,000 shares; none issued

           

Additional paid-in capital

    259,221       258,063  

Accumulated deficit

    (240,631 )     (245,744 )

Accumulated other comprehensive income

    33,741       42,187  

Total stockholders' equity

    52,391       54,565  

Non-controlling interests

    2,224       2,133  

Total equity

    54,615       56,698  

Total liabilities and equity

    794,836       843,551  

 

The accompanying Notes are an integral part of the Consolidated Financial Statements.

 

 

 

LEE ENTERPRISES, INCORPORATED

CONSOLIDATED STATEMENTS OF INCOME (LOSS) AND COMPREHENSIVE INCOME (LOSS)

(Unaudited)

 

    Three months ended     Nine months ended  
   

June 26,

   

June 27,

   

June 26,

   

June 27,

 

(Thousands of Dollars, Except Per Common Share Data)

 

2022

   

2021

   

2022

   

2021

 
                                 

Operating revenue:

                               

Advertising and marketing services

    91,001       91,122       277,388       279,326  

Subscription

    89,048       88,792       263,915       269,905  

Other

    14,988       16,576       46,030       51,505  

Total operating revenue

    195,037       196,490       587,333       600,736  

Operating expenses:

                               

Compensation

    78,126       82,731       246,333       250,048  

Newsprint and ink

    7,542       7,051       22,254       22,222  

Other operating expenses

    88,004       82,117       258,665       243,749  

Depreciation and amortization

    8,818       10,836       27,445       33,794  

Assets loss (gain) on sales, impairments and other, net

    1,086       242       (11,340 )     6,938  

Restructuring costs and other

    6,072       1,419       19,862       5,880  

Total operating expenses

    189,648       184,396       563,219       562,631  

Equity in earnings of associated companies

    1,050       1,689       4,211       4,902  

Operating income

    6,439       13,783       28,325       43,007  

Non-operating (expense) income:

                               

Interest expense

    (10,292 )     (11,010 )     (31,478 )     (34,129 )

Curtailment gain

                1,027       23,830  

Pension withdrawal cost

                (2,335 )     (12,310 )

Other, net

    4,205       2,330       13,525       6,240  

Total non-operating (expense) income, net

    (6,087 )     (8,680 )     (19,261 )     (16,369 )

Income before income taxes

    352       5,103       9,064       26,638  

Income tax expense

    156       1,366       2,363       7,106  

Net income

    196       3,737       6,701       19,532  

Net income attributable to non-controlling interests

    (465 )     (510 )     (1,588 )     (1,537 )

(Loss) Income attributable to Lee Enterprises, Incorporated

    (269 )     3,227       5,113       17,995  

Other comprehensive (loss) income, net of income taxes

    (1,167 )     477       (8,446 )     2,097  

Comprehensive (loss) income attributable to Lee Enterprises, Incorporated

    (1,436 )     3,704       (3,333 )     20,092  

Earnings per common share:

                               

Basic:

    (0.05 )     0.56       0.89       3.15  

Diluted:

    (0.05 )     0.55       0.87       3.10  

 

The accompanying Notes are an integral part of the Consolidated Financial Statements.

 

 

 

CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY (DEFICIT)

(Unaudited)

 

(Thousands of Dollars)

 

Accumulated Deficit

   

Common Stock

   

Additional paid-in capital

   

Accumulated Other Comprehensive Income

   

Total

 
                               

September 27, 2021

  (245,744 )   59     258,063     42,187     54,565  

Shares issued (redeemed)

      1     (386 )       (385 )

Income attributable to Lee Enterprises, Incorporated

  12,658                 12,658  

Stock compensation

          186         186  

Other comprehensive loss

              (8,174 )   (8,174 )

Deferred income taxes, net

              2,062     2,062  

December 26, 2021

  (233,086 )   60     257,863     36,075     60,912  
                               

Shares issued (redeemed)

          (3 )       (3 )

Loss attributable to Lee Enterprises, Incorporated

  (7,276 )               (7,276 )

Stock compensation

          663         663  

Other comprehensive loss

              (1,667 )   (1,667 )

Deferred income taxes, net

              500     500  

March 27, 2022

  (240,362 )   60     258,523     34,908     53,129  
                               

Shares issued (redeemed)

          371         371  

Loss attributable to Lee Enterprises, Incorporated

  (269 )               (269 )

Stock compensation

          327         327  

Other comprehensive loss

              (1,667 )   (1,667 )

Deferred income taxes, net

              500     500  

June 26, 2022

  (240,631 )   60     259,221     33,741     52,391  

 

 

(Thousands of Dollars)

 

Accumulated Deficit

   

Common Stock

   

Additional paid-in capital

   

Accumulated Other Comprehensive Loss

   

Total

 
                               

September 28, 2020

  (268,529 )   58     256,957     (20,050 )   (31,564 )

Shares issued (redeemed)

      1     (55 )       (54 )

Income attributable to Lee Enterprises, Incorporated

  15,902                 15,902  

Stock compensation

          220         220  

Other comprehensive income

              1,347     1,347  

Deferred income taxes, net

              (205 )   (205 )

December 27, 2020

  (252,627 )   59     257,122     (18,908 )   (14,354 )
                               

Shares issued (redeemed)

          (8 )       (8 )

Loss attributable to Lee Enterprises, Incorporated

  (1,134 )               (1,134 )

Stock compensation

          214         214  

Other comprehensive income

              682     682  

Deferred income taxes, net

              (204 )   (204 )

March 28, 2021

  (253,761 )   59     257,328     (18,430 )   (14,804 )
                               

Shares issued (redeemed)

          318         318  

Income attributable to Lee Enterprises, Incorporated

  3,227                 3,227  

Stock compensation

          205         205  

Other comprehensive income

              682     682  

Deferred income taxes, net

              (205 )   (205 )

June 27, 2021

  (250,534 )   59     257,851     (17,953 )   (10,577 )

 

The accompanying Notes are an integral part of the Consolidated Financial Statements.

 

 

 

LEE ENTERPRISES, INCORPORATED

CONSOLIDATED STATEMENTS OF CASH FLOWS

(Unaudited)

 

    Nine months ended  
   

June 26,

   

June 27,

 

(Thousands of Dollars)

 

2022

   

2021

 
                 

Cash provided by operating activities:

               

Net income

    6,701       19,532  

Adjustments to reconcile net income to net cash provided by operating activities:

               

Depreciation and amortization

    27,445       33,794  

Curtailment gain

    (1,027 )     (23,830 )

Pension withdrawal cost

    2,335       12,310  

Stock compensation expense

    1,026       639  

Assets (gain) loss on sales, impairments and other, net

    (11,340 )     6,938  

Deferred income taxes

    62       (398 )

Pension contributions

          (965 )

Return of (Payments to collateralize) letters of credit

    2,451       1,686  

Other, net

    (1,492 )     (147 )

Changes in operating assets and liabilities:

               

(Increase) decrease in receivables and contract assets

    (8,004 )     (8,720 )

(Increase) decrease in inventories and other

    (2,369 )     1,080  

Increase (decrease) in accounts payable and other accrued liabilities

    1,775       2,494  

Decrease in pension and other postretirement and postemployment benefit obligations

    (13,910 )     (4,807 )

Change in income taxes payable

    (2,986 )     2,459  

Other

    49       706  

Net cash provided by operating activities

    716       42,771  

Cash provided by investing activities:

               

Purchases of property and equipment

    (5,738 )     (5,350 )

Proceeds from sales of assets

    14,824       3,095  

Distributions (less) greater than earnings of TNI and MNI

    (276 )     159  

Other, net

    (295 )     (369 )

Net cash provided by (required for) investing activities

    8,515       (2,465 )

Cash required for financing activities:

               

Payments on long-term debt

    (20,062 )     (53,128 )

Common stock transactions, net

    380       159  

Net cash required for financing activities

    (19,682 )     (52,969 )

Net (decrease) increase in cash and cash equivalents

    (10,451 )     (12,663 )

Cash and cash equivalents:

               

Beginning of period

    26,112       33,733  

End of period

    15,661       21,070  

 

The accompanying Notes are an integral part of the Consolidated Financial Statements.

 

 

 

LEE ENTERPRISES, INCORPORATED

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

 

1

BASIS OF PRESENTATION AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

 

Basis of Presentation

 

The accompanying unaudited, interim, Consolidated Financial Statements included herein have been prepared pursuant to the rules and regulations of the Securities and Exchange Commission for quarterly reports. In the opinion of management, these financial statements contain all adjustments (consisting of only normal recurring items) necessary to present fairly the financial position of Lee Enterprises, Incorporated and its subsidiaries (the “Company”) as of June 26, 2022, and our results of operations and cash flows for the periods presented. The Consolidated Financial Statements should be read in conjunction with the Consolidated Financial Statements and Notes thereto included in the Company's 2021 Annual Report on Form 10-K.

 

The Company's fiscal year ends on the last Sunday in September. Fiscal year 2022 ends on September 25, 2022, and fiscal year 2021 ended  September 26, 2021. Fiscal year 2022 and 2021 are 52-week years with 13 weeks in each quarter. Because of seasonal and other factors, the results of operations for the three and nine months ended June 26, 2022, are not necessarily indicative of the results to be expected for the full year.

 

The Consolidated Financial Statements include our accounts and those of our wholly owned subsidiaries, as well as our 82.5% interest in INN Partners, L.C. (“TownNews”).

 

Our 50% interest in TNI Partners ("TNI") and our 50% interest in Madison Newspapers, Inc. ("MNI") are accounted for using the equity method and are reported at cost, plus our share of undistributed earnings since acquisition less, for TNI, amortization of intangible assets.

 

On March 16, 2020, the Company completed the acquisition of BH Media Group, Inc. and The Buffalo News, Inc. for a combined purchase price of $140,000,000 (collectively, the "Transactions").

 

2

REVENUE

 

The following table presents our revenue disaggregated by source:

 

    Three months Ended     Nine months Ended  
   

June 26,

   

June 27,

   

June 26,

   

June 27,

 

(Thousands of Dollars)

 

2022

   

2021

   

2022

   

2021

 
                                 

Operating revenue:

                               

Print

    44,814       54,632       145,032       174,933  

Digital

    46,187       36,490       132,356       104,393  

Advertising and marketing services revenue

    91,001       91,122       277,388       279,326  

Print

    78,079       81,483       234,962       249,332  

Digital

    10,969       7,309       28,953       20,573  

Subscription revenue

    89,048       88,792       263,915       269,905  

Print

    10,671       11,880       32,430       37,177  

Digital

    4,317       4,696       13,600       14,328  

Other revenue

    14,988       16,576       46,030       51,505  

Total operating revenue

    195,037       196,490       587,333       600,736  

 

Recognition principles: Revenue is recognized when a performance obligation is satisfied by the transfer of control of the contracted goods or services to our customers, in an amount that reflects the consideration we expect to receive in exchange for those goods or services.

 

Total Digital Revenue in the prior year was reclassified to conform to the current year presentation. Total Digital Revenue is defined as digital advertising and marketing services revenue including revenue from our wholly owned digital marketing agency Amplified Digital TM("Amplified"), digital-only subscription revenue and digital services revenue.

 

Arrangements with multiple performance obligations: We have various advertising and subscription agreements which include both print and digital performance obligations. Revenue from sales agreements that contain multiple performance obligations are allocated to each obligation based on the relative standalone selling price. We determine standalone selling prices based on observable prices charged to customers.

 

Contract Assets and Liabilities: The Company’s primary source of contract liabilities is unearned revenue from subscriptions paid in advance of the service provided. The Company expects to recognize the revenue related to unsatisfied performance obligations over the next twelve months in accordance with the terms of the subscriptions and other contracts with customers. Revenue recognized in the nine months ended June 26, 2022, that was included in the contract liability as of September 26, 2021, was $52,718,000.

 

 

7

 

Accounts receivable, excluding allowance for credit losses was $82,369,000 and $71,644,000 as of June 26, 2022, and September 26, 2021, respectively. Allowance for credit losses was $7,458,000 and $6,574,000 as of June 26, 2022, and September 26, 2021, respectively.

 

Sales commissions are expensed as incurred as the associated contractual periods are one year or less. These costs are recorded within compensation. Most of our contracts have original expected lengths of one year or less and revenue is earned at a rate and amount that corresponds directly with the value to the customer.

 

3

INVESTMENTS IN ASSOCIATED COMPANIES

 

TNI Partners

 

In Tucson, Arizona, TNI, acting as agent for our subsidiary, Star Publishing Company (“Star Publishing”), and Gannets Co. Inc.'s subsidiary Citizen Publishing Company (“Citizen”), is responsible for printing, delivery, advertising, and subscription activities of the Arizona Daily Star as well as the related digital platforms and specialty publications. TNI collects all receipts and income and pays substantially all operating expenses incident to the partnership's operations and publication of the newspaper and other media.

 

Income or loss of TNI (before income taxes) is allocated equally to Star Publishing and Citizen.

 

Summarized results of TNI are as follows:

 

    Three months ended     Nine months ended  
   

June 26,

   

June 27,

   

June 26,

   

June 27,

 

(Thousands of Dollars)

 

2022

   

2021

   

2022

   

2021

 
                                 

Operating revenue

    8,229       8,389       25,805       26,548  

Operating expenses

    6,492       6,077       19,365       19,506  

Operating income

    1,737       2,312       6,440       7,042  

Company's 50% share of operating income

    869       1,156       3,220       3,521  

Equity in earnings of TNI

    869       1,156       3,220       3,521  

 

TNI makes periodic distributions of its earnings and for the three months ended June 26, 2022, and June 27, 2021, we received $676,000 and $544,000 in distributions, respectively. In the nine months ended June 26, 2022, and June 27, 2021, we received $2,935,000 and $3,161,000 in distributions, respectively.

 

Madison Newspapers, Inc.

 

We have a 50% ownership interest in MNI, which publishes daily and Sunday newspapers, and other publications in Madison, Wisconsin, and other Wisconsin locations, and operates their related digital platforms. Net income or loss of MNI (after income taxes) is allocated equally to us and The Capital Times Company (“TCT”). MNI conducts its business under the trade name Capital Newspapers.

 

Summarized results of MNI are as follows:

 

    Three months ended     Nine months ended  
   

June 26,

   

June 27,

   

June 26,

   

June 27,

 

(Thousands of Dollars)

 

2022

   

2021

   

2022

   

2021

 
                                 

Operating revenue

    11,921       11,479       35,677       34,425  

Operating expenses, excluding restructuring costs, depreciation and amortization

    9,682       8,657       28,402       29,324  

Restructuring costs

    122             122       106  

Depreciation and amortization

    167       188       507       480  

Operating income

    1,950       2,634       6,646       4,515  

Net income

    362       1,066       1,982       2,762  

Equity in earnings of MNI

    181       533       991       1,381  

 

MNI makes periodic distributions of its earnings and in the three months ended June 26, 2022 and June 27, 2021, we received $200,000 and $750,000, respectively. In the nine months ended June 26, 2022, and June 27, 2021, we received dividends of $1,000,000 and $1,900,000, respectively.

 

 

8

 
 

4

GOODWILL AND OTHER INTANGIBLE ASSETS

 

Goodwill and identified intangible assets consist of the following:

 

   

June 26,

   

September 26,

 

(Thousands of Dollars)

 

2022

   

2021

 
                 

Goodwill, beginning of period

    330,204       330,204  
Impairment     (700 )      
Goodwill, end of period     329,504       330,204  

Non-amortized intangible assets:

               

Mastheads

    39,849       39,672  

Amortizable intangible assets:

               

Customer and newspaper subscriber lists

    574,558       774,242  

Less accumulated amortization

    (474,176 )     (657,243 )
      100,382       116,999  

Total intangibles, net

    469,735       486,875  

 

The weighted average amortization period for amortizable assets is 12.7 years. 

 
5

DEBT

 

The Company has debt consisting of a single 25-year term loan with BH Finance LLC, with an aggregate principal balance of $462,554,000 at a 9% annual rate and maturing on March 16, 2045 (referred to herein as “Credit Agreement” and “Term Loan”). On  June 26, 2022, based on market quotations, the fair value approximates carrying value. This represents a level 2 fair value measurement.

 

During the three months ended June 26, 2022, we made no principal debt payments. During the nine months ended June 26, 2022, we made principal debt payments of $20,062,000.For the nine months ended, payments consisted of $10,450,000 from the sale of non-core assets, $6,112,000 from September 26, 2021 excess cash flow, and $3,500,000 in voluntary prepayments. Future payments are contingent on the Company's ability to generate future excess cash flow, as defined in the Credit Agreement. As of June 26, 2022, there was no excess cash flow payment due.

 

Warrants

 

We entered into a Warrant Agreement dated  March 31, 2014 (the “Warrant Agreement”). Under the Warrant Agreement, certain warrant holders received warrants to purchase, in cash, an initial aggregate of 600,000 shares of Common Stock, subject to adjustment pursuant to anti-dilution provisions and at an exercise price of $41.90 per share (the “Warrants”). The Warrants expired on March 31, 2022.

 

The Warrant Agreement required the Warrants to be measured at fair value and included in warrants and other liabilities in our Consolidated Balance Sheets. The initial fair value of the Warrants was $16,930,000. We re-measure the fair value of the liability each reporting period using the Black-Scholes option pricing model. The change in fair value of $71,000 for the nine months ended June 26, 2022 is reported as income in other, net non-operating income (expense). 

 

The Warrants expired on March 31, 2022. As of September 26, 2021, the fair value of the warrants was $71,000.
 

In connection with the issuance of the Warrants, we entered into a Registration Rights Agreement dated  March 31, 2014 (the “Registration Rights Agreement”). The Registration Rights Agreement required, among other matters, that we use our commercially reasonable efforts to maintain the effectiveness for certain specified periods of a shelf registration statement related to the shares of Common Stock to be issued upon exercise of the Warrants.

 
6

PENSION, POSTRETIREMENT AND POSTEMPLOYMENT DEFINED BENEFIT PLANS

 

We have several defined benefit pension plans that together cover certain employees, including plans established under collective bargaining agreements. As of September 26, 2021 two of seven plans had benefits under the plan frozen and no new participants are permitted. Additionally, we provide retiree medical and life insurance benefits under postretirement plans at several of our operating locations. Through June 26, 2022, our liability and related expense for benefits under the plans are recorded over the service period of employees based upon annual actuarial calculations.

 

During the quarter ended December 26, 2021, we notified participants in four of our defined benefit plans of changes to be made to the plans. The Company froze future benefits for an additional four of the defined benefit plans. The freeze of future benefits resulted in a non-cash curtailment gain of $1,027,000 related to the four plans. In connection with the freeze the Company provided certain plan enhancements that resulted in an increase to our net pension liability and a decrease to Accumulated Other Comprehensive income of $6,507,000. Additionally, the Company merged the six frozen plans into one defined benefit plan effective in the second quarter of fiscal 2022.

 

During the quarter ended December 27, 2020, we notified certain participants in one of our post-employment benefit plans of changes to be made to the plans, including elimination of coverage for certain participants. The changes resulted in a non-cash curtailment gain of $23,830,000 and a reduction in our benefit obligation by $23,830,000. This is recorded within Curtailment gain and Postretirement and postemployment benefit obligations. 

 

 

9

 

The net periodic pension and postretirement cost (benefit) components for our plans are as follows:

 

PENSION PLANS

  Three months ended     Nine months ended  
   

June 26,

   

June 27,

   

June 26,

   

June 27,

 

(Thousands of Dollars)

 

2022

   

2021

   

2022

   

2021

 
                                 

Service cost for benefits earned during the period

    287       633       1,030       1,899  

Interest cost on projected benefit obligation

    2,001       1,787       5,939       5,361  

Expected return on plan assets

    (4,535 )     (4,672 )     (13,606 )     (14,016 )

Amortization of net loss

    (687 )     1,004       (2,633 )     3,013  

Amortization of prior service benefit

    212             424       (1 )

Curtailment gain

                (1,027 )      

Pension benefit

    (2,722 )     (1,248 )     (9,873 )     (3,744 )

 

POSTRETIREMENT MEDICAL PLANS

  Three months ended     Nine months ended  
   

June 26,

   

June 27,

   

June 26,

   

June 27,

 

(Thousands of Dollars)

 

2022

   

2021

   

2022

   

2021

 
                                 

Service cost for benefits earned during the period

    27       240       81       690  

Interest cost on projected benefit obligation

    85       239       255       601  

Expected return on plan assets

    (263 )     (252 )     (789 )     (756 )

Amortization of net gain

    (249 )     (172 )     (747 )     (516 )

Amortization of prior service benefit

    (162 )     (162 )     (486 )     (485 )

Curtailment gain

                      (23,830 )

Postretirement medical benefit

    (562 )     (107 )     (1,686 )     (24,296 )

 

In the nine months ended June 26, 2022, we had no required contributions to our pension plans. In the nine months ended June 27, 2021, we contributed $965,000 to our pension plans. We have no required contributions to our pension plans for 2022 and therefore do not expect to make contributions to our pension trust during the remainder of fiscal 2022. 

 

Multiemployer Pension Plans

 

In prior periods, the Company effectuated withdrawals from several multiemployer plans. We recorded estimates of withdrawal liabilities as of the time the contracts agreeing to withdraw from those plans are ratified. As of June 26, 2022, and September 26, 2021, we had $24,337,020 and $23,471,000 withdrawal liabilities recorded in Other Liabilities in our Consolidated Balance Sheets. The liabilities reflect the estimated value of payments to the fund, payable over 20-years.

 

7

INCOME TAXES

 

We recorded an income tax expense of $156,000 related to income before taxes of $352,000 for the three months ended June 26, 2022, and income tax expense of $2,363,000 related to income before taxes of $9,064,000 for the nine months ended June 26, 2022. We recorded an income tax expense of $1,366,000 related to income before taxes of $5,103,000 for the three months ended June 27, 2021, and income tax expense of $7,106,000 related to income before taxes of $26,638,000 for the nine months ended June 27, 2021. The effective income tax rates for the three and nine months ended June 26, 2022, were 44.3% and 26.1%, respectively. The effective income tax rate for the three and nine months ended June 27, 2021, were 26.8% and 26.7%, respectively.

 

The primary differences between these rates and the U.S. federal statutory rate of 21% are because of state taxes, non-deductible expenses, adjustments to reserves for uncertain tax positions, including any related interest, and mark-to-market adjustments to value stock warrants.

 

We file a consolidated federal tax return, as well as combined and separate tax returns in approximately 27 state and local jurisdictions.  We do not currently have any federal or material state income tax examinations in progress. Our income tax returns have generally been audited or closed to audit through 2014. 

 

 

10

 

8

EARNINGS PER COMMON SHARE

 

The following table sets forth the computation of basic and diluted earnings per common share:

 

    Three months ended     Nine months ended  
   

June 26,

   

June 27,

   

June 26,

   

June 27,

 

(Thousands of Dollars and Shares, Except Per Share Data)

 

2022

   

2021

   

2022

   

2021

 
                                 

(Loss) income attributable to Lee Enterprises, Incorporated:

    (269 )     3,227       5,113       17,995  

Weighted average common shares

    5,965       5,881       5,935       5,867  

Less weighted average restricted Common Stock

    (170 )     (156 )     (168 )     (155 )

Basic average common shares

    5,795       5,725       5,767       5,712  

Dilutive stock options and restricted Common Stock

          123       93       102  

Diluted average common shares

    5,795       5,848       5,860       5,814  

Earnings per common share:

                               

Basic

    (0.05 )     0.56       0.89       3.15  

Diluted

    (0.05 )     0.55       0.87       3.10  

 

For the three months ended June 26, 2022 no shares were considered in the computation of diluted earnings per common share because the Company recorded net losses. For the nine months ended  June 26, 2022, 74,804 shares were not considered in the computation of diluted earnings per common share because their inclusion would result in an anti-dilutive effect on per share amounts. For the three and nine months ended June 27, 2021, 600,000 anti-dilutive shares were excluded.

 

Rights Agreement

 

On November 24, 2021, our Board of Directors adopted a stockholder rights plan (the “Rights Agreement”). Pursuant to the Rights Agreement, on November 24, 2021, our Board of Directors declared a dividend of one preferred share purchase right (a “Right”), payable on December 6, 2021, for each share of our Common Stock outstanding to the stockholders of record on that date. Each Right entitles the registered holder to purchase from the Company one-thousandth of a share of Series B Participating Convertible Preferred Stock, without par value (the “Preferred Shares”), of the Company at a price of $120.00 per one one-thousandth of a Preferred Share represented by a Right, subject to adjustment.

 

The Rights will initially trade with our Common Stock and will generally become exercisable only if any person or group, other than certain exempt persons, acquires beneficial ownership of 10% (or 20% in the case of certain passive investors) or more of our Common Stock outstanding. In the event the Rights become exercisable, each holder of a Right, other than the triggering person(s), will be entitled to purchase additional shares of our Common Stock at a 50% discount or the Company may exchange each Right held by such holders for one share of our Common Stock. The Rights Agreement will continue in effect until November 23, 2022, or unless earlier redeemed or terminated by the Company, as provided in the Rights Agreement. The Rights have no voting or dividend privileges, and, unless and until they become exercisable, have no dilutive effect on the earnings of the Company.

 

The Rights Agreement applies equally to all current and future stockholders and is not intended to deter offers or preclude our Board of Directors from considering acquisition proposals that are fair and otherwise in the best interest of our stockholders. However, the overall effect of the Rights Agreement may render it more difficult or discourage a merger, tender offer, or other business combination involving us that is not supported by our Board of Directors.

 

9

COMMITMENTS AND CONTINGENT LIABILITIES

 

Legal Proceedings

 

We are involved in a variety of legal actions that arise in the normal course of business. Insurance coverage mitigates potential loss for certain of these matters. While we are unable to predict the ultimate outcome of these legal actions, it is our opinion that the disposition of these matters will not have a material adverse effect on our Consolidated Financial Statements, taken as a whole.

 

 

 

 

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 and nine months ended June 26, 2022. This discussion should be read in conjunction with the Consolidated Financial Statements and related Notes thereto, included herein, and our 2021 Annual Report on Form 10-K.

 

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 43 million monthly unique visitors in 2022 with 349 million page views and 80 million visits.

 

 

We have approximately one million paid subscribers to our print and digital products. Digital-only subscribers totaled approximately 501,000, a 48.6% 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 the St. Louis Post-Dispatch and the 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 TownNews 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.

 

 

 

 

THREE MONTHS ENDED June 26, 2022

 

Operating results are summarized below.


      June 26,       June 27,       Percent  

(Thousands of Dollars, Except Per Share Data)

  2022     2021     Change  
                         

Operating revenue:

                       

Print

    44,814       54,632       (18.0 )

Digital

    46,187       36,490       26.6  

Advertising and marketing services revenue

    91,001       91,122       (0.1 )

Print

    78,079       81,483       (4.2 )

Digital

    10,969       7,309       50.1  

Subscription revenue

    89,048       88,792       0.3  

Print

    10,671       11,880       (10.2 )

Digital

    4,317       4,696       (8.1 )

Other revenue

    14,988       16,576       (9.6 )

Total operating revenue

    195,037       196,490       (0.7 )

Operating expenses:

                       

Compensation

    78,126       82,731       (5.6 )

Newsprint and ink

    7,542       7,051       7.0  

Other operating expenses

    88,004       82,117       7.2  

Depreciation and amortization

    8,818       10,836       (18.6 )

Assets loss on sales, impairments and other, net

    1,086       242       NM  

Restructuring costs and other

    6,072       1,419       NM  

Operating expenses

    189,648       184,396       2.8  

Equity in earnings of associated companies

    1,050       1,689       (37.8 )

Operating income

    6,439       13,783       (53.3 )

Non-operating income (expense):

                       

Interest expense

    (10,292 )     (11,010 )     (6.5 )

Other, net

    4,205       2,330       80.5  

Non-operating expenses, net

    (6,087 )     (8,680 )     (29.9 )

Income before income taxes

    352       5,103       (93.1 )

Income tax expense

    156       1,366       (88.6 )

Net income

    196       3,737       (94.8 )
                         

Earnings per common share:

                       

Basic

    (0.05 )     0.56       NM  

Diluted

    (0.05 )     0.55       NM  

 

References to the “2022 Quarter” refer to the three months ended June 26, 2022. Similarly, references to the “2021 Quarter” refer to the three months ended June 27, 2021. 

 

Operating Revenue

 

Total operating revenue was $195,037,000 in the 2022 Quarter, down $1,453,000, or 0.7%, compared to the prior year.

 

Advertising and marketing services revenue totaled $91,001,000 in the 2022 Quarter, down 0.1% compared to the 2021 Quarter. Print advertising revenues were $44,814,000 in the 2022 Quarter, down 18% compared to the 2021 Quarter due to continued secular declines in demand for print advertising. Digital advertising and marketing services totaled $46,187,000 in the 2022 Quarter, up 26.6% compared to the 2021 Quarter. These gains resulted from an increase in Amplified Digital revenue and an increase in digital advertising on our owned and operated sites. Digital advertising and marketing services represented 50.8% of the 2022 Quarter total advertising and marketing services revenue, compared to 40.1% in the same period last year.

 

Subscription revenue totaled $89,048,000 in the 2022 Quarter, up 0.3% compared to the 2021 Quarter. Selective increases on our full access subscriptions, growth in digital-only subscribers and price increases on digital subscriptions, were partially offset by a decline in full access volume, consistent with historical and industry trends. Digital-only subscribers grew 48.6% since the 2021 Quarter and now total 501,000.

 

Other revenue, which primarily consists of commercial printing revenue and digital services from TownNews, decreased $1,588,000, or 9.6%, in the 2022 Quarter compared to the 2021 Quarter. Digital services revenue totaled $4,317,000 in the 2022 Quarter, an 8.1% decrease compared to the 2021 Quarter. Commercial printing revenue totaled $5,341,000 in the 2022 Quarter, a 15.7% decrease compared to the 2021 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 $61,473,000 in the 2022 Quarter, an increase of 26.8% over the 2021 Quarter, and represented 31.5% of our total operating revenue in the 2022 Quarter.

 

Equity in earnings of TNI and MNI decreased $639,000 in the 2022 Quarter.

 

 

 

Operating Expenses

 

Total operating expenses were $189,648,000 in the 2022 Quarter, a 2.8% increase compared to the 2021 Quarter. Cash Costs a non-GAAP financial measure used to summarize certain operating expense (see reconciliation of Non-GAAP financial measures below) were up 1.0% in the 2022 Quarter. 

 

Compensation expense decreased $4,605,000 in the 2022 Quarter, or 5.6%, compared to the 2021 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 increased $491,000 in the 2022 Quarter, or 7.0%, compared to the 2021 Quarter. The increase is attributable to higher newsprint prices offset by declines in newsprint volumes. See Item 3, “Commodities”, included herein, for further discussion and analysis of the impact of newsprint on our business.

 

Other operating expenses increased $5,887,000 in the 2022 Quarter, or 7.2%, compared to the 2021 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 increase is attributable to increases in investments to fund our digital growth strategy partially offset by lower delivery and other print-related costs due to lower volumes of our print editions.

 

Restructuring costs and other totaled $6,072,000 and $1,419,000 in the 2022 Quarter and 2021 Quarter, respectively. Restructuring costs and other include severance costs, litigation expenses, restructuring expenses, and advisor expenses in the 2022 quarter associated with the unsolicited offer in November 2021. Restructuring costs in the 2021 Quarter are predominately severance related to our ongoing business transformation.

 

Depreciation and amortization expense decreased $2,018,000, or 18.6%, in the 2022 Quarter. The decrease in both is attributable to assets becoming fully depreciated or amortized.

 

Assets loss on sales, impairments and other, was a net loss of $1,086,000 in the 2022 Quarter compared to a net loss of $242,000 in the 2021 Quarter. The gains and losses and impairments in the 2022 Quarter and in the 2021 Quarter were the result of the disposition of non-core assets, including real estate.

 

The factors noted above resulted in an operating income of $6,439,000 in the 2022 Quarter compared to operating income of $13,783,000 in the 2021 Quarter.

 

Non-operating Income and Expense

 

Interest expense decreased $718,000, or 6.5%, to $10,292,000 in the 2022 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 2022 Quarter and 2021 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 $3,598,000 periodic pension and other postretirement benefits in the 2022 Quarter compared to $2,228,000 in the 2021 Quarter. We recorded non-operating income of $0 in the 2022 Quarter and non-operating expense of $237,000 in the 2021 Quarter, related to the changes in the value of the Warrants.

 

Income Tax Expense

 

We recorded an income tax expense of $156,000, or 44.3% of pretax income in the 2022 Quarter. In the 2021 Quarter, we recognized an income tax expense of $1,366,000, or 26.8% of pretax loss.

 

Net Income and Earnings (losses) Per Share

 

Net income was $196,000 and diluted losses per share were $0.05 for the 2022 Quarter compared to net income of $3,737,000 and diluted earnings per share of $0.55 for the 2021 Quarter. The change reflects the various items discussed above.

 

 

 

NINE MONTHS ENDED June 26, 2022

 

Operating results, as reported in the Consolidated Financial Statements, are summarized below.

 


   

June 26,

   

June 27,

   

Percent

 

(Thousands of Dollars, Except Per Share Data)

 

2022

   

2021

   

Change

 
                         

Operating revenue:

                       

Print

    145,032       174,933       (17.1 )

Digital

    132,356       104,393       26.8  

Advertising and marketing services revenue

    277,388       279,326       (0.7 )

Print

    234,962       249,332       (5.8 )

Digital

    28,953       20,573       40.7  

Subscription revenue

    263,915       269,905       (2.2 )

Print

    32,430       37,177       (12.8 )

Digital

    13,600       14,328       (5.1 )

Other revenue

    46,030       51,505       (10.6 )

Total operating revenue

    587,333       600,736       (2.2 )

Operating expenses:

                       

Compensation

    246,333       250,048       (1.5 )

Newsprint and ink

    22,254       22,222       0.1  

Other operating expenses

    258,665       243,749       6.1  

Depreciation and amortization

    27,445       33,794       (18.8 )

Assets (gain) loss on sales, impairments and other, net

    (11,340 )     6,938       NM  

Restructuring costs and other

    19,862       5,880       NM  

Operating expenses

    563,219       562,631       0.1  

Equity in earnings of associated companies

    4,211       4,902       (14.1 )

Operating income

    28,325       43,007       (34.1 )

Non-operating income (expense):

                       

Interest expense

    (31,478 )     (34,129 )     (7.8 )

Curtailment gain

    1,027       23,830       (95.7 )

Pension withdrawal cost

    (2,335 )     (12,310 )     (81.0 )

Other, net

    13,525       6,240       NM  

Non-operating expenses, net

    (19,261 )     (16,369 )     17.6  

Income before income taxes

    9,064       26,638       (66.0 )

Income tax expense

    2,363       7,106       (66.7 )

Net income

    6,701       19,532       (65.7 )
                         

Earnings per common share:

                       

Basic

    0.89       3.15       (71.8 )

Diluted

    0.87       3.10       (71.8 )

 

References to the “2022 Period” refer to the nine months ended June 26, 2022. Similarly, references to the “2021 Period” refer to the nine months ended June 27, 2021. 

 

Operating Revenue

 

Total operating revenue was $587,333,000 in the 2022 Period, down $13,403,000, or 2.2%, compared to the 2021 Period.

 

Advertising and marketing services revenue totaled $277,388,000 in the 2022 Period, down 0.7% compared to the prior year. Print advertising revenues were $145,032,000 in the 2022 Period, down 17.1% compared to the prior year due to continued secular declines in demand for print advertising. Digital advertising and marketing services totaled $132,356,000 in the 2022 Period, up 26.8% 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 47.7% of the 2022 Period total advertising and marketing services revenue, compared to 37.4% in the same period last year.

 

Subscription revenue totaled $263,915,000 in the 2022 Period, down 2.2% compared to the 2021 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 48.6% since the 2021 Period and now total 501,000.

 

Other revenue, which primarily consists of commercial printing revenue and digital services from TownNews, decreased $5,475,000, or 10.6%, in the 2022 Period compared to the 2021 Period. Digital services revenue totaled $13,600,000 in the 2022 Period, a 5.3% decrease compared to the 2021 Period. Commercial printing revenue totaled $16,195,000 in the 2022 Period, a 9.3% decrease compared to the 2021 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 $174,909,000 in the 2022 Period, an increase of 25.5% over the 2021 Period, and represented 29.8% of our total operating revenue in the 2022 Period.

 

Equity in earnings of TNI and MNI decreased $691,000 in the 2022 Period.

 

 

 

Operating Expenses

 

Total operating expenses were $563,219,000 in the 2022 Period, a 0.1% increase compared to the 2021 Period. Cash Costs, a Non-GAAP financial measure (see reconciliation of Non-GAAP financial measures below), were $527,252,000, a 2.2% increase compared to the 2021 Period.

 

Compensation expense decreased $3,715,000 in the 2022 Period, or 1.5%, compared to the 2021 Period due to reductions in FTE's due to continued business transformation efforts partially offset by investments in digital talent and increasing average compensation levels due to investments in digital talent.

 

Newsprint and ink costs increased $32,000 in the 2022 Period, or 0.1%, compared to the 2021 Period. The increase is attributable to higher newsprint prices offset by declines in newsprint volumes. See Item 3, “Commodities”, included herein, for further discussion and analysis of the impact of newsprint on our business.

 

Other operating expenses increased $14,916,000 in the 2022 Period, or 6.1%, compared to the 2021 Period. Other operating expenses include all operating costs not considered to be compensation, newsprint, depreciation and amortization, or restructuring costs and asset 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 increase is attributable to increases in digital costs of goods sold from Amplified Digital growth, higher input costs due to inflation and investments to fund our digital growth strategy partially offset by lower delivery and other print-related costs due to lower volumes of our print editions.

 

Restructuring costs and other totaled $19,862,000 and $5,880,000 in the 2022 Period and 2021 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 in November 2021. Restructuring costs in the 2021 Period are predominately severance related to our ongoing business transformation.

 

Depreciation and amortization expense decreased $6,349,000, or 18.8%, in the 2022 Period. The decrease in both is attributable to assets becoming fully depreciated or amortized.

 

Assets (gain) loss on sales, impairments and other, was a net gain of $11,340,000 in the 2022 Period compared to a net loss of $6,938,000 in the 2021 Period. The gains and losses in the 2022 Period and 2021 Period were the result of the disposition of non-core assets, including real estate.

 

The factors noted above resulted in operating income of $28,325,000 in the 2022 Period compared to $43,007,000 in the 2021 Period.

 

Non-operating Income and Expense

 

Interest expense decreased $2,651,000, or 7.8%, to $31,478,000 in the 2022 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 2022 Period and 2021 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 $11,643,000 periodic pension and other postretirement benefits in the 2022 Period compared to $6,799,000 in the 2021 Period. We recorded non-operating income of $71,000 in the 2022 Period and non-operating expense of $954,000 in the 2021 Period, related to changes in the value of the Warrants.

 

We recognized a non-cash curtailment gain of $1,027,000 in the 2022 Period as a result of freezing certain pension plans. We recognized a non-cash curtailment gain of $23,830,000 and a reduction in our benefit obligation in the 2021 Period by eliminating post-retirement medical coverage for certain employees.

 

We recognized pension withdrawal costs in the 2022 and 2021 Period of $2,335,000 and $12,310,000, respectively in connection with the withdrawal from a pension plan that covered certain employees. These withdrawal liabilities will be paid in equal quarterly installments over the next 20 years.

 

Income Tax Expense

 

We recorded an income tax expense of $2,363,000, or 26.1% of pretax income, in the 2022 Period. In the 2021 Period, we recognized an income tax expense of $7,106,000 or 26.7% of pretax income.

 

Net Income and Earnings Per Share

 

Net income was $6,701,000 and diluted earnings per share were $0.87 for the 2022 Period, compared to net income of $19,532,000 and diluted earnings per share of $3.10 for the 2021 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 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     Nine months ended  
   

June 26,

   

June 27,

   

June 26,

   

June 27,

 

(Thousands of Dollars)

 

2022

   

2021

   

2022

   

2021

 
                                 

Net income

    196       3,737       6,701       19,532  

Adjusted to exclude

                               

Income tax expense

    156       1,366       2,363       7,106  

Non-operating expenses, net

    6,087       8,680       19,261       16,369  

Equity in earnings of TNI and MNI

    (1,050 )     (1,689 )     (4,211 )     (4,902 )

Loss (gain) on sale of assets and other, net

    1,086       242       (11,340 )     6,938  

Depreciation and amortization

    8,818       10,836       27,445       33,794  

Restructuring costs and other

    6,072       1,419       19,862       5,880  

Stock compensation

    327       205       1,026       639  

Add:

                               

Ownership share of TNI and MNI EBITDA (50%)

    1,268       1,923       4,864       5,421  

Adjusted EBITDA

    22,960       26,719       65,971       90,777  

 

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       Nine Months ended  
      June 26,       June 27,       June 26,       June 27,  
(Thousands of Dollars)     2022       2021       2022       2021  
                                 
Operating expenses     189,648       184,396       563,219       562,631  
Adjustments                                
Depreciation and amortization     8,818       10,836       27,445       33,794  
Assets loss (gain) on sales, impairments and other, net     1,086       242       (11,340 )     6,938  
Restructuring costs and other     6,072       1,419       19,862       5,880  
Cash Costs     173,672       171,899       527,252       516,019  

 

 

 

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 $716,000 in 2022 compared to cash provided by operating activities of $42,771,000 in 2021, a decrease of $42,055,000.  The decrease was driven by a decrease in operating results of $23,400,000 (defined as net income (loss) adjusted for non-working capital items) and an increase in working capital of $18,654,000, primarily related to unfavorable changes in inventory, postretirement liabilities, income taxes payable and warrants, and accounts receivable.

 

Investing Activities

 

Cash provided by investing activities totaled $8,515,000 in the 2022 Period compared to cash required for investing activities of $2,465,000 in the 2021 Period. 2022 included $14,824,000 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 $10,000,000 in 2022, and other requirements, will be available from internally generated funds.

 

Financing Activities

 

Cash required for financing activities totaled $19,682,000 in the 2022 Period compared to $52,969,000 in the 2021 Period. Debt reduction accounted for nearly all the usage of funds in the 2022 and 2021 Periods.

 

Additional Information on Liquidity

 

Our liquidity, consisting of cash on the balance sheet, totaled $15,661,000 on June 26, 2022. 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.

 

In February 2020, our filing of a replacement Form S-3 registration statement ("Shelf") with the SEC was declared effective and expires February 2023. The Shelf registration gives us the flexibility to issue and publicly distribute various types of securities, including preferred stock, common stock, warrants, secured or unsecured debt securities, purchase contracts and units consisting of any combination of such securities, from time to time, in one or more offerings, up to an aggregate amount of $750,000,000. SEC issuer eligibility rules require us to have a public float of at least $75,000,000 to use the Shelf.

 

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. Among other provisions, the CARES Act allows the Company to defer payments of the employer’s share of social security taxes which shall be paid between December 31, 2021, and December 31, 2022. The CARES Act also provides for an Employee Retention Credit which can be applied to the employer’s share of payroll taxes. The Company has elected to defer the employer’s share of social security tax payments and is currently determining the applicability of the Employee Retention Credit.

 

Item 3.       Quantitative and Qualitative Disclosures About Market Risk

 

We are exposed to market risk stemming from changes in interest rates and commodity prices. Changes in these factors could cause fluctuations in earnings and cash flows. In the normal course of business, exposure to certain of these market risks is managed as described below.

 

INTEREST RATES ON DEBT

 

Our debt structure, which is entirely fixed rate, eliminates the potential impact of an increase in interest rates. We have no interest rate hedging in place.

 

COMMODITIES

 

All North American newsprint producers implemented a January 2022 price increases of $25 per tonne, $25 per tonne in March 2022 and another price increase in May of $50 per tonne. The newsprint supply chain is challenged due to significant capacity reductions taken in the last two years including paper machine permanent shutdowns, conversion to paper grades other than newsprint, and recovering demand, domestically and exports, for newsprint. Like other industries, the supply chain is further challenged by shipping delays due to restrictions of personnel crossing the US/Canada border.

 

Our long-term supply strategy continues to align the Company with those cost-effective suppliers most likely to continue producing and supplying newsprint to the North American market and geographically aligned with our print locations. Where possible the Company will align supply with the lowest cost material, but may be restricted due to shipping expenses and paper production availability.

 

A $10 per tonne price increase on 27.7-pound newsprint would result in an annualized reduction in income before taxes of approximately $340,000 based on current and anticipated consumption trends in 2022, excluding consumption of TNI and MNI and the impact of LIFO accounting.

 

 

 

SENSITIVITY TO CHANGES IN VALUE

 

Our fixed rate debt consists of $462,554,000 principal amount of the Term Loan recorded at carrying value.

 

Item 4.       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 three and nine months ended June 26, 2022, that have materially affected, or are reasonably likely to materially affect, our internal control over financial reporting.

 

PART II

OTHER INFORMATION 

 

Item 1.       Legal Proceedings

 

We are involved in a variety of legal actions that arise in the normal course of business. Insurance coverage mitigates potential loss for certain of these matters. While we are unable to predict the ultimate outcome of these legal actions, it is our opinion that the disposition of these matters will not have a material adverse effect on our Consolidated Financial Statements, taken as a whole.

 

Item 1.A          Risk Factors 

 

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 2021 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.

 

Item 6.       Exhibits

 

Exhibits marked with an asterisk (*) are incorporated by reference to documents previously filed by us with the SEC, as indicated. Exhibits marked with a plus (+) are management contracts or compensatory plan contracts or arrangements filed pursuant to Item 601(b)(10)(iii)(A) of Regulation S-K. All other documents listed are filed with this Quarterly Report on Form 10-Q.

 

Number

 

Description

 
       
31.1  

Rule 13a-14(a) Certification of Chief Executive Officer

Attached
31.2  

Rule 13a-14(a) Certification of Chief Financial Officer

Attached
32.1  

Section 1350 Certification of Chief Executive Officer

Attached
32.2   Section 1350 Certification of Chief Financial Officer Attached
101.INS   Inline XBRL Instance Document (the Instance Document does not appear in the Interactive Data File because its XBRL tags are embedded within the Inline XBRL document) Attached
101.SCH   Inline XBRL Taxonomy Extension Schema Document Attached
101.CAL   Inline XBRL Taxonomy Extension Calculation Linkbase Document Attached
101.DEF   Inline XBRL Taxonomy Extension Definition Linkbase Document Attached
101.LAB   Inline XBRL Taxonomy Extension Label Linkbase Document Attached
101.PRE   Inline XBRL Taxonomy Extension Presentation Linkbase Document Attached
104   Cover Page Interactive Data File (formatted as Inline XBRL and embedded within the Inline XBRL document) Attached

 

 

 

SIGNATURES

 

Pursuant to the requirements of the Securities Exchange Act of 1934, the Registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.

 

     

LEE ENTERPRISES, INCORPORATED

   
     

/s/ Timothy R. Millage

 

August 4, 2022

Timothy R. Millage

   

Vice President, Chief Financial Officer and Treasurer

   

(Principal Financial and Accounting Officer)

   

 

 

 

20
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