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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 endedJune 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 OVERVIEWLee 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 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 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.
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THREE MONTHS ENDED
Operating results are summarized below.
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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
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
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
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Operating Expenses
Total operating expenses were
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
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
severance related to our ongoing business transformation.
Depreciation and amortization expense decreased
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
2022 Quarter compared to operating income of
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
2022 Quarter. In the 2021 Quarter, we recognized an income tax expense of
Net Income and Earnings (losses) Per Share
Net income was
the 2022 Quarter compared to net income of
share of
discussed above.
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NINE MONTHS ENDED
Operating results, as reported in the Consolidated Financial Statements, are
summarized below.
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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 endedJune 26, 2022 . Similarly, references to the "2021 Period" refer to the nine months endedJune 27, 2021 . Operating Revenue
Total operating revenue was
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
Period compared to the 2021 Period. Digital services revenue totaled
Commercial printing revenue totaled
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
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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
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
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
Period are predominately severance related to our ongoing business
transformation.
Depreciation and amortization expense decreased
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
Period compared to
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
the 2022 Period. In the 2021 Period, we recognized an income tax expense of
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.
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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 1,086 242 (11,340 ) 6,938
and other, net
Restructuring costs and other 6,072 1,419 19,862 5,880
Cash Costs 173,672 171,899 527,252 516,019
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LIQUIDITY AND CAPITAL RESOURCES
Our operations have historically generated strong positive cash flow and are
expected to provide sufficient liquidity, together with cash on hand, to meet
our requirements, primarily operating expenses, interest expense and capital
expenditures. A summary of our cash flows is included in the narrative below.
Operating Activities
Cash provided by operating activities totaled $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.
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