UNITED STATES SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
x ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For The Fiscal Year Ended September 25, 2022
o 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)
|(State of incorporation)||(I.R.S. Employer Identification No.)|
4600 E 53rd Street, Davenport, Iowa 52807
(Address of principal executive offices)
Registrant's telephone number, including area code
Indicate by check mark if the Registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities Act. Yes o No x
|Securities registered pursuant to Section 12(b) of the Act:|
|Title of Each Class||Trading Symbol(s)||Name of Exchange On Which Registered|
|Common Stock - $0.01 par value||LEE|
The Nasdaq Global Select Market
Indicate by check mark if the Registrant is not required to file reports pursuant to Section 13 or Section 15(d) of the Act. Yes o No x
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 x No o
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 such shorter period that the Registrant was required to submit). Yes x No o
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 o Accelerated filer x Non-accelerated filer o Smaller Reporting Company x Emerging growth company o
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. o
Indicate by check mark whether the registrant has filed a report on and attestation to its management's assessment of the effectiveness of its internal control over financial reporting under Section 404(b) of the Sarbanes-Oxley Act (15 U.S.C. 7262(b)) by the registrant's public accounting firm that prepared or issued its audit report. x
Indicate by check mark whether the Registrant is a shell company (as defined in Rule 12b-2 of the Act). Yes o No x
As of March 31, 2022, the aggregate market value of the Registrant's common stock held by non-affiliates of the registrant was $150,009,735 based on the closing sale price as reported on the New York Stock Exchange. As of February 22, 2023, 6,039,856 shares of Common Stock $0.01 par value were outstanding on Nasdaq Global Select Market.
References to “we”, “our”, “us” and the like throughout this document refer to Lee Enterprises, Incorporated and subsidiaries (the "Company"). References to "2022", "2021", "2020" and the like refer to the fiscal years ended the last Sunday in September.
ITEM 1. BUSINESS
Lee Enterprises, Incorporated, together with its subsidiaries, (“Lee”, “the Company”, “we”, “our” or “us”) is a digital-first subscription platform providing local markets with valuable, high quality, trusted, intensely local news, information, advertising and marketing services. We are a rapidly growing digital subscription platform with more than 530,000 digital subscribers serving 77 mid-sized local communities in 26 states. Our core strategy aims to grow digital audiences and engagement through continuous improvements to subscriber experience, while offering a full suite of omni-channel advertising and marketing solutions local advertisers desire.
Our product portfolio includes digital subscription platforms, daily, weekly and monthly newspapers and niche publications, all delivering original local news and information. Our products offer print and digital editions, and our content and advertising is available in real time through our websites and mobile apps. We operate in predominately mid-sized communities with products ranging from large daily newspapers and associated digital products, such as the St. Louis Post-Dispatch and The Buffalo News, to non-daily newspapers with news websites and digital platforms serving smaller communities.
We have made talent and technology investments to improve user experience, content, data visualization, and marketing to align with the shift in spending habits to digital products by both consumers and advertisers. In 2022, total digital revenues, which includes digital advertising and marketing services revenues, digital-only subscription revenues, and digital services revenues, were $240 million, or 31% of our total revenues.
We aim to grow our business through three main categories: subscriptions to our product offerings, advertising and marketing solutions to local advertisers, and digital services to a diverse set of customers. Execution of this strategy is expected to transform Lee into a vibrant, digitally centric company.
•Our digital subscription platforms are the fastest growing digital subscription platforms in local media. At the end of 2022, we had more than 530,000 subscribers to our digital platforms, up 32% over 2021. Revenue from digital only subscribers totaled more than $40 million in 2022, up 42% over 2021.
•Amplified Digital® ("Amplified"), our digital marketing services agency, offers a full suite of digital marketing solutions to local advertisers. Revenue at Amplified totaled almost $76 million in 2022, up 83% over 2021.
•BLOX Digital (formerly known as TownNews), our software as a service (SaaS) content platform, is one of the largest web-hosting and content management SaaS providers in North America. BLOX Digital represents a powerful opportunity to drive additional digital revenue by providing state-of-the-art web hosting and content management services to more than 2,000 customers who rely on BLOX Digital for their web, over-the-top display, mobile, video and social media products. Revenue at BLOX Digital, including intercompany revenue, totaled $31 million in 2022, and has achieved a compound annual growth rate of 10.6% over the last ten years.
We generate revenue primarily through advertising and marketing services, subscriptions to our digital and print products, and digital services, primarily through our majority-owned subsidiary, BLOX DIgital. Our operations also provide printing and distribution of third-party publications.
On March 16, 2020, we completed the acquisition of BH Media Group, Inc. ("BH Media") and The Buffalo News, Inc. ("Buffalo News"), adding 31 local media operations and nearly doubling our audience size and total operating revenue. See Note 3 — Acquisitions, in the Consolidated Financial Statements for more information on the acquisition.
Advertising and Marketing Services - In 2022, advertising and marketing services revenue of $366.4 million comprised 47% of total operating revenue.
There are two primary categories of print advertising revenue: local and national.
•Local advertising takes the form of display advertising in daily and non-daily publications and preprinted advertising inserted in the publication.
•National advertising is revenue earned from the sale of print display advertising space, or from preprint advertising inserted in the publication, from national accounts that do not have a local retailer representing the account in the market.
There are three main categories of digital advertising and marketing services revenue: digital media, digital classified and digital marketing services.
•Digital media represents all display advertising delivered on our owned and operated digital products.
•Digital classified represents digital advertising revenue associated with our classified partnerships including auto, employment, real estate, legal and obituaries.
•Digital marketing services represents a full suite of marketing services provided through Amplified, including targeted display, video, OTT, custom content, web development, social media management, search, events, email marketing and other tactics.
Amplified remains a key strategic priority for us in 2023. Our sales force deploys an omni-channel sales approach that leverages the auction-based ad buying that is widely adopted by all major digital advertising channels, and tailors advertising and marketing solutions based on the size, scale, and needs of the advertiser. Through Amplified we create sophisticated digital campaigns on our owned and operated sites and on third-party sites that give advertisers the ability to target their message to reach their desired audiences. We collaborate with Google and other ad tech companies to provide key metrics and analytics to measure campaign effectiveness.
Advertising and marketing services revenues are subject to moderate seasonality primarily due to fluctuations in advertising volumes tied to holidays and seasonal advertising. Our advertising and marketing services revenues are typically highest during the first quarter due to holiday and seasonal advertising and lowest in the second quarter following the holiday season.
Subscription Revenue - In 2022, subscription revenue of $353.6 million comprised 45% of our total operating revenue. Subscription revenue is earned primarily from selling subscriptions to our content through our full access subscriptions, digital-only subscriptions and single copy sales.
Our full access subscriptions include access to all of our content on multiple platforms; including our print products delivered or made available to consumers, websites, smartphone and tablet applications, and e-editions with pricing varying significantly by market and by frequency. Consistent with general publishing industry trends, print subscription volumes declined in 2022.
We experienced rapid growth of our digital-only subscriptions. Digital-only subscriptions include access to our content on our digital platforms. At the end of the fiscal year, we had 532,000 digital-only subscribers, up 32% compared to 2021, with revenue totaling $40 million, or up 42% compared to 2021. Growing our digital-only subscribers and digital-only revenue remains a top strategic priority in 2023. Our primary digital-only subscriber acquisition tactics include:
•Converting our significant organic traffic through on-platform promotion, paywalls, and dynamic meters;
•Continuously improving our subscriber experience; and
•Brand marketing campaigns to raise awareness to the desirability of our content.
A variety of pricing strategies are also used, including discounted introductory periods and sales, to encourage trial and habituation before transitioning to the full price rate.
Digital Services Revenue – In 2022, digital services revenue of $18 million comprised 2.3% of our total operating revenue. In 2022, almost all of our digital services revenue is from BLOX Digital. BLOX Digital, operated through our 82.5% owned subsidiary INN Partners, L.C., is one of the largest web-hosting and content management SaaS providers in North America and offers state of the art integrated digital publishing and content management solutions for creating, distributing, and monetizing multimedia content.
•BLOX Digital is the engine that powers our digital products. In addition, BLOX Digital services nearly 2,000 daily customers, including legacy media publications, universities, television stations and niche publications.
•Including intercompany revenue generated from our markets, revenue at BLOX Digital grew almost 14% in 2022 and totaled $31 million.
•With strong product offerings, investments in video and streaming technology and diversifying the customer base into broadcast, BLOX Digital is positioned to continue to be a key component to our growth strategy.
Other Revenue - In 2022, Other Revenue of $60.9 million comprised 8% of total operating revenue. Excluding digital services revenue, other revenue is comprised mainly of commercial printing and delivery of third party products and until March 16, 2020 revenue from a Management Agreement between BH Media and the Company dated June 26, 2018 ("Management Agreement"). In 2022, other revenue excluding digital services of $18 million, comprised 5.5% of our total operating revenue, compared to $19 million and 6.1% in 2021.
We compete with other media and digital companies for advertising and marketing spend. Our print and digital products competed with other forms of media including national media providers and amateur content creators, as well as other news and information outlets for subscription spend. The market for local digital marketing solutions is highly competitive and evolving allowing opportunities for new competitors to enter the market.
Amplified competes with other digital marketing solutions agencies as well as other media companies who have a similar strategy for digital marketing solutions. While some of our competitors enjoy competitive advantages such as greater name recognition, longer histories as well as greater financial resources, we believe we compete favorably and our product capabilities meet customer requirements due to our data-driven, omni-channel sales approach, our experienced digital sales force and our overall customer satisfaction.
The number of competitors in any given market varies; however all of the forms of competition noted above exist to some degree in all of our markets.
We are committed to a strategy that transforms Lee into a vibrant, digitally-centric business with recurring, sustainable digital revenue. Aligning with that commitment, our Three Pillar Digital Growth Strategy is focused on the following:
Expand digital audiences by transforming the presentation of local news and information. We seek to maintain our position as the leading provider of news and information by providing best-in-class digital experiences to improve consumer engagement and grow our audiences. We aim to achieve this by delivering relevant, useful, and engaging content to the consumer using a multi-media approach with a heavy emphasis on video and audio.
In 2023, we plan to continuously improve the user experience with our digital products through targeted investments in top talent aimed at investigative journalism. Providing our local consumers with more and more high quality, trusted, engaging content is important to growing our digital audiences and driving subscription conversions.
We believe that our proprietary local content displayed in best-in-class multimedia platforms combined with new and engaging content and video channels will grow our audiences and increase our audience monetization capabilities.
Expand digital subscription base and revenue. We are the fastest growing digital subscription platform in local media. Digital-only subscriber growth continued at a rapid pace in 2022, offsetting the declines in our
traditional full access (print and digital) subscribers. Our digital audiences are comprised of full access subscribers, digital-only subscribers and non-subscribers who access our sites subject to our paywalls. More than 53% of our full access subscribers have activated their digital access, and digital-only subscribers increased 32% in 2022, reaching 532,000 digital-only subscribers.
Our acquisition and retention tactics are focused on growing our digital subscription base by using data and analytics to direct our huge addressable market of 34 million unique visitors toward obtaining a digital subscription. In 2023, our primary digital-only subscriber acquisition tactics include:
•Converting our significant organic traffic through on-platform promotion, paywalls, and dynamic meters;
•Continuously improving our subscriber experience; and
•Brand marketing campaigns to raise awareness to the desirability of our content.
Using these techniques, we expect digital-only subscribers to continue to grow substantially, reaching more than 900,000 digital-only subscribers by 2026.
We believe our digital transformation will have a favorable impact on the environment. A key component to our digital growth strategy is to accelerate the pace of digital subscriber growth. Growing our digital revenue streams as the print revenues mature will have a favorable impact on the environment as our production hubs will consume less energy, we will consume less newsprint, and there will be less environmental impact from our distribution channels that largely operate on fossil-fuel powered transportation.
Diversify and expand offerings for local advertisers. According to eMarketer, local advertising spending is expected to reach nearly $115 billion in 2023. Our vast array of rapidly growing digital products, our large, digitally adept salesforce and Amplified, our full service digital agency, creates a powerful opportunity to gain scale both in and outside of our local markets.
•Our local sales forces are larger than any local competitor, and we believe they are the most highly trained and proficient sales force in our markets.
•We have strong relationships with businesses in our markets and offer a wide array of products to deliver our advertisers' message.
Amplified remains a key strategic priority for us in 2023 as we expect it to fuel growth of our digital advertising and marketing services. Our salesforce deploys an omni-channel sales approach that leverages the auction-based ad buying that is widely adopted by all major digital advertising channels, and tailors advertising and marketing solutions based on the size, scale, and needs of the advertiser. Through Amplified we create sophisticated digital campaigns on our owned and operated sites and on third-party sites that give advertisers the ability to target their message to reach their desired audiences. We collaborate with Google and other ad tech companies to provide key metrics and analytics to measure campaign effectiveness.
BLOX Digitals represents a powerful opportunity for us to drive additional digital revenue through their SaaS content platform. In 2022, revenue at BLOX Digital, including intercompany revenue, totaled $31 million and since 2011 the compounded annual growth rate of BLOX Digital revenue has been 11%. Through continuous investment in product development and gaining essential technology, like world-class video and streaming technology, BLOX Digital is the leading CMS provider in the publishing CMS segment and is growing its market share in the broadcast CMS segment. In 2023, we believe we can grow revenue at BLOX Digital through modest market share gains in our core markets, increasing our average revenue per customer.
DAILY NEWSPAPERS AND MARKETS
The Company, including our investments in TNI Partners ("TNI") in Tucson, AZ and Madison Newspapers, Inc. ("MNI") in Madison, WI, publish the following daily newspapers and maintain the following primary digital sites:
Average Units (1)
2022 Monthly Average ('000s) (6)(7)
|Unique Visitors||Page Views|
St. Louis Post-Dispatch (2)
|stltoday.com||St. Louis, MO||104,199||126,756||3,981||36,773|
Buffalo News (2)
Omaha World Herald (2)
Richmond Times-Dispatch (1)
Wisconsin State Journal (1)(4)
Arizona Daily Star (5)(1)
The Times (2)
|nwitimes.com||Munster, Valparaiso, and Crown Point, IN||37,852||46,810||1,346||23,761|
Lincoln Journal Star (1)
Tulsa World (1)
Winston Salem Journal (2)
|Roanoke Times||roanoke.com||Roanoke, VA||24,889||25,794||852||6,640|
|Billings Gazette||billingsgazette.com||Billings, MT||24,119||24,656||988||11,072|
|The Press of Atlantic City||pressofatlanticcity.com||Atlantic City, NJ||19,943||23,381||863||7,393|
|The Pantagraph||pantagraph.com||Bloomington, IL||19,751||20,712||632||8,971|
|Greensboro News-Record||greensboro.com||Greensboro, NC||17,667||19,548||762||4,644|
|Quad-City Times||qctimes.com||Davenport, IA||17,449||19,467||686||6,512|
|The Courier||wcfcourier.com||Waterloo and Cedar Falls, IA||14,493||17,448||419||3,988|
|The Post-Star||poststar.com||Glens Falls, NY||16,423||17,201||452||5,740|
|La Crosse Tribune||lacrossetribune.com||La Crosse, WI||14,151||15,323||494||5,078|
|Napa Valley Register||napavalleyregister.com||Napa, CA||13,993||13,938||374||3,385|
|Casper Star-Tribune||trib.com||Casper, WY||12,609||13,391||369||2,942|
|Sioux City Journal||siouxcityjournal.com||Sioux City, IA||15,071||13,189||426||3,294|
|Waco Tribune-Herald||wacotrib.com||Waco, TX||12,222||13,020||548||3,843|
|Kenosha News||kenoshanews.com||Kenosha, WI||12,241||13,015||833||6,391|
|Independent Record||helenair.com||Helena, MT||12,728||12,817||372||4,522|
|Charlottesville Daily Progress||dailyprogress.com||Charlottesville, VA||11,107||11,621||330||2,685|
Average Units (1)
2022 Monthly Average ('000s) (6)(7)
|Unique Visitors||Page Views|
|The Daily News||tdn.com||Longview, WA||14,876||11,016||217||1,980|
|Lynchburg News & Advance||newsadvance.com||Lynchburg, VA||9,788||10,822||407||2,941|
|The Citizen||auburnpub.com||Auburn, NY||9,999||10,530||298||3,038|
|Montana Standard||mtstandard.com||Butte, MT||10,100||9,962||291||3,384|
|Bristol Herald Courier||heraldcourier.com||Bristol,VA||9,727||9,851||297||2,040|
|The Times-News||magicvalley.com||Twin Falls, ID||10,651||9,586||239||2,257|
|Dothan Eagle||dothaneagle.com||Dothan, AL||9,148||9,538||298||1,648|
|Grand Island Independent||theindependent.com||Grand Island, NE||8,851||9,508||302||2,768|
|Globe Gazette||globegazette.com||Mason City, IA||7,617||8,415||252||2,315|
|Corvallis Gazette-Times||gazettetimes.com||Corvallis, OR||11,240||8,306||— ||— |
|Statesville Record & Landmark||statesville.com||Statesville, NC||13,748||7,886||183||1,212|
|Bryan-College Station Eagle||theeagle.com||Bryan, TX||7,444||7,610||329||2,168|
|Arizona Daily Sun||azdailysun.com||Flagstaff, AZ||7,712||7,354||248||1,620|
|The Times and Democrat||thetandd.com||Orangeburg, SC||7,485||7,007||299||2,350|
|Florence Morning News||scnow.com||Florence, SC||6,691||6,848||234||1,453|
|Albany Democrat-Herald||democratherald.com||Albany, OR||4,039||6,757||363||3,391|
|Martinsville Bulletin||martinsvillebulletin.com||Martinsville, VA||5,517||5,887||155||1,129|
|Opelika Auburn News||oanow.com||Opelika, AL||5,468||5,548||339||2,392|
|Scottsbluff Star-Herald||starherald.com||Scottsbluff, NE||5,548||5,541||169||1,244|
|Hickory Daily Record||hickoryrecord.com||Hickory, NC||4,806||5,303||328||2,766|
|Danville Register & Bee||godanriver.com||Danville, VA||4,298||4,982||162||1,232|
|The News Herald||morganton.com||Morganton, NC||4,204||4,597||186||1,426|
|North Platte Telegraph||nptelegraph.com||North Platte, NE||4,220||4,207||138||876|
|Culpeper Star-Exponent||starexponent.com||Culpeper, VA||2,986||2,917||160||730|
|The Daily Nonpareil||nonpareilonline.com||Council Bluffs, IA||2,662||2,776||148||1,018|
|Winona Daily News||winonadailynews.com||Winona, MN||2,664||2,712||110||898|
|The McDowell News||mcdowellnews.com||Marion, NC||2,257||2,351||120||555|
|Ravalli Republic||ravallinews.com||Hamilton, MT||2,413||2,330||94||464|
|The News Virginian||newsvirginian.com||Waynesboro, VA||2,122||2,241||77||475|
|Daily Citizen||wiscnews.com/bdc||Beaver Dam, WI||2,663||— ||— ||— |
|Portage Daily Register||wiscnews.com/pdr||Portage, WI||1,406||— ||— ||— |
|Baraboo News Republic||wiscnews.com/bnr||Baraboo, WI||1,313||— ||— ||— |
|Muscatine Journal||muscatinejournal.com||Muscatine, IA||2,050||— ||100||642|
|Columbus Telegram||columbustelegram.com||Columbus, NE||4,314||— ||151||1,107|
|Fremont Tribune||fremonttribune.com||Fremont, NE||3,587||— ||145||1,033|
|Beatrice Daily Sun||beatricedailysun.com||Beatrice, NE||3,230||— ||88||622|
Average Units (1)
2022 Monthly Average ('000s) (6)(7)
|Unique Visitors||Page Views|
|Herald & Review||herald-review.com||Decatur, IL||10,499||— ||379||3,862|
|Journal Gazette & Times-Courier||jg-tc.com||Mattoon/Charleston, IL||4,393||— ||222||1,743|
|The Chippewa Herald||chippewa.com||Chippewa Falls, WI||2,028||— ||123||807|
|Rapid City Journal||rapidcityjournal.com||Rapid City, SD||15,366||— ||409||4,532|
|The Southern Illinoisan||thesouthern.com||Carbondale, IL||7,220||— ||274||1,840|
|The Sentinel ||cumberlink.com||Carlisle, PA||6,150||— ||226||2,013|
|Daily Journal||dailyjournalonline.com||Park Hills, MO||4,335||— ||195||1,524|
|York News-Times||yorknewstimes.com||York, NE||2,678||— ||114||664|
|The Journal Times||journaltimes.com||Racine, WI||1,996||— ||511||6,180|
|The Bismarck Tribune||bismarcktribune.com||Bismarck, ND||23,047||— ||439||5,638|
|Elko Daily Free Press||elkodaily.com||Elko, NV||5,899||— ||226||2,111|
(1)Source: AAM: September 20 Quarterly Executive Summary Data Report, unless otherwise noted. More recent data is not available.
(2)Source: AAM: March 2022 Quarterly Executive Summary Data Report, unless otherwise noted. More recent data is not available
(3)Not all newspapers are published Monday through Saturday or have a Sunday edition
(4)Owned by MNI
(5)Owned by Star Publishing and published through TNI
(6)Source: Company statistics.
(7)Excludes Agri-Media sites
The raw material of newspapers, and our other print publications, is newsprint. We purchase newsprint from U.S. and Canadian producers. We believe we will continue to receive a supply of newsprint adequate for our needs and consider our relationships with newsprint producers to be good. Newsprint purchase prices can be volatile and fluctuate based upon factors that include foreign currency exchange rates, tariffs and both foreign and domestic production capacity and consumption. Price fluctuations can affect our results of operations. We have not entered into derivative contracts for newsprint. For the quantitative impacts of these fluctuations, see Item 7A, “Quantitative and Qualitative Disclosures about Market Risk”, included herein.
EMPLOYEES AND HUMAN CAPITAL RESOURCES
We believe the foundation of our business is the people and employees who carry out the various tactics that support our business strategy. A major focus in 2022 was investing in the top digital talent to carry out our Three Pillar Digital Growth Strategy and position us to achieve our long-term growth targets
At September 25, 2022, we had approximately 4,365 employees, including approximately 788 part-time employees, exclusive of TNI and MNI. Full-time equivalent employees in 2022 totaled approximately 4,064 of which 722 are represented by unions. We consider our relationships with our employees to be good. We are committed to an equitable and inclusive workplace that also reflects the diversity of our local readers and communities in which we serve. In 2021, we hired a Director of News and Talent Development who is charged with improving diversity in our newsrooms and hiring practices that promote a more complete and inclusive news coverage of the communities in which we serve.
We continue to demonstrate our commitment to diversity, equity, and inclusion by assessing our hiring practices, extending our hiring reach, providing skill-building opportunities on diverse storytelling, and developing business strategies that include historically marginalized communities. These efforts and initiatives will help us reach our goal of a more diverse workforce at all levels of our company.
CORPORATE GOVERNANCE AND PUBLIC INFORMATION
We have a long history of sound corporate governance practices. Currently, our Board of Directors has affirmatively determined that eight of its nine members are independent, including all members of the Board's Audit, Executive Compensation, and Nominating and Corporate Governance committees. The Audit Committee approves all services to be provided by our independent registered public accounting firm and its affiliates.
At www.lee.net, one may access a wide variety of information, including news releases, SEC filings, financial statistics, annual reports, investor presentations, governance documents, newspaper profiles and digital links. We make available via our website all filings made by the Company under the Securities Exchange Act of 1934 ("Exchange Act"), including Forms 10-K, 10-Q and 8-K, and related amendments, as soon as reasonably practicable after they are filed with, or furnished to, the SEC. All such filings are available free of charge. The content of any website referred to in this Annual Report on Form 10-K ("Annual Report") is not incorporated by reference unless expressly noted.
The Private Securities Litigation Reform Act of 1995 provides a “safe harbor” for forward-looking statements. This Annual 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:
•We may be required to indemnify the previous owners of the BH Media Newspaper Business or Buffalo News for unknown legal and other matters that may arise;
•Our ability to manage declining print revenue;
•The impact and duration of adverse conditions in certain aspects of the economy affecting our business;
•Change 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;
•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;
•Other risks detailed from time to time in our publicly filed documents, including this Annual Report and particularly in "Risk Factors", Part I, Item 1A herein.
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. Readers are cautioned not to place undue reliance on such forward-looking statements, which are made as of the date of this Annual Report. We do not undertake to publicly update or revise our forward-looking statements, except as required by law.
ITEM 1A. RISK FACTORS
The risks described below could materially and adversely affect our business, financial condition and results of operations. We could also be affected by additional risks that apply to all companies operating in the U.S., as well as other risks that are not presently known to us or that we currently consider to be immaterial. These Risk Factors should be carefully reviewed in conjunction with Management's Discussion and Analysis of Financial Condition and Results of Operations in Item 7 and our Financial Statements and Supplementary Data in Item 8 of this Report. For ease of review, the risk factors generally have been grouped into categories, but many of the risks described in a given category relate to multiple categories.
Risks Related to our Business and Operations
Our advertising revenues may decline due to weakness in the brick-and-mortar retail sector.
A significant portion of our revenue is derived from advertising. The demand for advertising is sensitive to the overall level of economic strength, both in the markets in which we operate and nationally. Also, the decline in the financial or economic conditions of our advertisers could alter discretionary spending by advertisers. Certain segments of the economy have been challenged in recent years, particularly in the brick-and-mortar retail sector, and total advertising revenues have declined as a result. Advertising revenues may worsen if advertisers reduce their budgets, shift their spending priorities, are forced to consolidate, or cease operations.
Our ability to generate revenue is highly sensitive to the strength of the economies in which we operate and the demographics of the local communities that we serve.
Our advertising and marketing services revenues and subscription revenues depend upon a number of factors, including the size and demographic characteristics of the local population; the general local economic conditions; and the economic condition of the retail segments in the communities that our publications serve. In the case of an economic downturn in a market, our publications, revenues, and profitability in that market could be adversely affected. Our advertising and marketing services revenues could also be affected by negative trends in the general economy that affect consumer spending. The advertisers in our newspapers, other publications, and related websites are primarily retail businesses that can be significantly affected by regional or national economic downturns and other developments. Declines in the U.S. economy could also significantly affect key advertising revenue categories, such as help wanted, real estate, and automotive.
Uncertainty and adverse changes in the general economic conditions of markets in which we participate and increases in costs of raw materials, energy, labor and other factors may negatively affect our business.
The U.S. markets have weakened recently and are experiencing uncertainty and volatility due to higher inflation, increased interest rates, the war in Ukraine, the ongoing recovery from the COVID-19 pandemic, and other geopolitical events. In the past, these and other similar conditions have resulted in, and could lead to a tightening of credit and capital markets, lower levels of liquidity, lower consumer and business spending due to wavering of consumer confidence, unemployment, declines in real estate values, and other adverse economic conditions. These changes may negatively affect the sales of our products, increase exposure to losses from bad debts, increase the cost and decrease the availability of financing, or increase costs associated with publishing and distributing our publications. In addition, printing and distribution costs, including the costs of paper and ink, are a significant expense for the Company. We expect increases in these costs in the near-term from various factors, including increases in the cost of raw materials, energy, labor, transportation, and distribution, which can be attributed to inflation and other adverse factors on the economy.
If we fail to maintain an effective system of internal control over financial reporting, we may not be able to accurately or timely report our financial results. As a result, current and potential stockholders could lose confidence in our financial reporting, which would harm the business and trading price of our common stock.
As a public company, we are required to maintain effective internal controls for financial reporting and disclosure controls and procedures. In particular, Section 404 of the Sarbanes-Oxley Act requires us to perform system and process evaluations and testing of our internal controls over financial reporting to allow management to report on the effectiveness of our internal controls over financial reporting. Compliance with Section 404 may
require us to incur substantial accounting expenses and expend significant management efforts. Our testing has revealed and in the future may reveal deficiencies in our internal controls over financial reporting that are deemed to be material weaknesses. In the event we identify significant deficiencies or material weaknesses in our internal controls that we cannot remediate in a timely manner, the market price of our stock could decline if investors and others lose confidence in the reliability of our financial statements and we could be subject to sanctions or investigations by the SEC, Nasdaq, or other applicable regulatory authorities.
We have identified three material weaknesses in our internal control over financial reporting, which could result in loss of investor confidence in the Company and a negative impact on the value of our common stock.
Management assessed the effectiveness of our internal control over financial reporting as of September 25, 2022, and concluded we did not maintain effective internal control over financial reporting. Specifically, management identified three material weaknesses, including controls related to user access of our systems, information used by us in performing internal controls, and deferred taxes related to business combinations. For additional information, see Item 9A, "Controls and Procedures," below.
Until remediated, the material weaknesses could adversely affect our ability to report our financial condition and results of operations in a timely and accurate manner, which could negatively affect investor confidence in the Company and, in turn, the value of our common stock. While certain actions have been taken and planned to remediate and address the material weaknesses and enhance our internal control over financial reporting, we cannot be certain such remedial measures will be successful or otherwise sufficient to address the material weaknesses. In addition, if we are unable to remediate the material weaknesses, are otherwise unable to maintain effective internal control over financial reporting, or additional material weaknesses or significant deficiencies in our internal control over financial reporting are discovered or occur in the future, our ability to record, process and report financial information accurately, and to prepare financial statements within required time periods could be adversely affected, which, in addition to loss of investor confidence and a negative affect on the value of our common stock, could subject the Company to sanctions or investigations by the SEC, Nasdaq, or other regulatory authorities requiring additional financial and management resources to address.
The collectability of accounts receivable under adverse economic conditions could deteriorate to a greater extent than provided for in our financial statements and in our projections of future results.
Adverse economic conditions in the U.S. may increase our exposure to losses resulting from financial distress, insolvency, and the potential bankruptcy of our advertising and marketing services customers. Our accounts receivable is stated at net estimated realizable value, and our allowance for credit losses has been determined based on several factors, including receivable agings, significant individual credit risk accounts, and historical experience. If such collectability estimates prove inaccurate, adjustments to future operating results could occur.
The value of our intangible assets may become further impaired, depending upon future operating results.
At September 25, 2022, the carrying value of our goodwill was $329.5 million, the carrying value of mastheads was $26.3 million, and the carrying value of our amortizable intangible assets was $95.0 million. The indefinite-lived assets (goodwill and mastheads) are subject to annual impairment testing and more frequent testing upon the occurrence of certain events or significant changes in our circumstances that indicate all or a portion of their carrying values may no longer be recoverable, in which case a non-cash charge to earnings may be necessary in the relevant period. We may subsequently experience market pressures which could cause future cash flows to decline below our current expectations, or volatile equity markets could negatively impact market factors used in the impairment analysis, including earnings multiples, discount rates, and long-term growth rates. Any future evaluations requiring an asset impairment charge for goodwill or other intangible assets would adversely affect future reported results of operations and stockholders’ equity.
For further information on goodwill and intangible assets, see Note 6 — Goodwill and other intangible assets.
Attracting and Retaining Highly Qualified Personnel is Difficult and Costly, but the Failure to Do So Could Negatively Affect Our Operations.
Our businesses depend on the efforts, abilities, and talents of our executive team and other highly qualified employees who possess substantial business, information technology, and operational knowledge. The market for such personnel, including technology-related, product and software development, data science, and digital marketing and sales roles is very competitive, and we cannot ensure success in retaining these employees or hiring and training replacement employees in a timely and cost-effective manner, particularly as we continue to focus on our digital products and services. These risks have been exacerbated by recent labor constraints, a trend of increasing employee turnover, and inflationary pressures on employee wages and benefits.
Natural disasters, extreme weather conditions, public health emergencies or other catastrophic events could negatively affect our business, financial condition, and results of operations.
Natural disasters and extreme weather conditions, such as hurricanes, derecho windstorms, floods, earthquakes, wildfires; acts of terrorism or violence, including active-shooter situations; and public health issues, including pandemics and quarantines, could negatively affect our operations and financial performance. Such events could result in physical damage to our properties, disruptions to our IT systems, temporary or long-term disruption in the supply of products from our suppliers, and delays in the delivery of goods to our printing facilities. Public health issues, whether occurring in the U.S. or Canada, could disrupt our operations, the operations of suppliers, or have an adverse impact on consumer spending and confidence levels.
Risk Related to Competition from Digital Media
Our operating revenue may be materially adversely affected if we do not successfully respond to the shift in newspaper readership and advertising expenditures away from traditional print media and towards digital media. Significant capital investments may be needed to respond to this shift.
Currently, a primary source of revenue is from advertising and marketing services, which accounts for 47% of our revenue. Subscription revenue accounts for 45% of our revenue. The media publishing industry has experienced rapid evolution in consumer demands and expectations due to advances in technology, which have led to a proliferation of delivery methods for news and information. The number of consumers who access online services through devices other than personal computers, such as tablets and mobile devices, has increased dramatically in recent years and likely will continue to increase. The media publishing industry also continues to be affected by demographic shifts, with older generations preferring more traditional print newspaper delivery and younger generations consuming news through digital media. Also, the revenues generated by media publishing companies have been affected significantly by the shift in advertising expenditures towards digital media.
The future revenue performance of our digital business depends to a significant degree upon the growth, development, and management of our subscriber and advertising audiences. The growth of our digital business over the long term depends on various factors, including, among other things, the ability to:
•Continue to increase digital audiences;
•Attract advertisers to our digital platforms;
•Tailor our products to efficiently and effectively deliver content and advertising on mobile devices;
•Maintain or increase the advertising rates on our digital platforms;
•Exploit new and existing technologies to distinguish our products and services from those of competitors and develop new content, products and services;
•Invest funds and resources in digital opportunities;
•Partner with, or use services from, providers that can assist us in effectively growing our digital business; and
•Create digital content and platforms that attract and engage audiences in our markets.
If we are unable to grow our digital audience, distinguish our products and services from those of our competitors or develop compelling new products and services that engage users across multiple platforms, then our business, financial condition, and results of operations may be adversely affected. Responding to the changes described above may require us to make significant capital investments and incur significant research and development costs related to building, maintaining, and evolving our technology infrastructure, and our ability to make the level of investments required may be limited.
See “Audiences” in Item 1, included herein, for additional information on about our print and digital audiences.
We compete with a large number of companies in the local media industry, including digital media businesses and, if we are unable to compete effectively, our advertising and subscription revenues may decline.
We compete for audiences and advertising revenue with newspapers and other media such as the internet, magazines, broadcast, cable and satellite television, radio, direct mail, outdoor billboards and yellow pages. As the use of the internet and mobile devices has increased, we have lost some classified advertising and subscribers to online advertising businesses and our free Internet sites that contain abbreviated versions of our publications. Some of our current and potential competitors have greater financial and other resources than we do. If we fail to compete effectively with competing newspapers and other media, our results of operations may be materially adversely affected.
Risks Related to Takeover Attempts
Alden’s unsolicited proposal to acquire us diverted management’s attention and resources, caused us to incur substantial costs, and such actions have an adverse effect on our business.
On November 22, 2021, we received an unsolicited proposal from Alden Global Capital, LLC (with its affiliates, “Alden”) to acquire the Company for $24.00 per share in cash (the “Unsolicited Proposal”). On December 9, 2021, we announced that our Board of Directors, in consultation with its independent financial and legal advisors, unanimously determined to reject the Unsolicited Proposal, as it significantly undervalued the Company and was not in the best interests of the Company and its stockholders.
The events surrounding the Unsolicited Proposal and related circumstances and our response have required, and may continue to require, significant time and attention by management and our Board of Directors and have required us, and may continue to require us, to incur significant legal and advisory fees and expenses. Further, actions taken by Alden or other third parties as a result of the Unsolicited Proposal, including a proxy contest, and litigation by adverse parties, could disrupt our business, distract us from efforts to improve our business, cause us to incur substantial additional expense, create perceived uncertainties among current and potential employees, customers, clients, suppliers, and other constituencies as to our future direction as a consequence thereof that may result in lost sales or other business arrangements and the loss of potential business opportunities, and make it more difficult to attract and retain qualified personnel and business partners. Actions that our Board of Directors have taken, and may take in the future, in response to any offer or other related actions by Alden or other third parties, including the Unsolicited Proposal and Alden’s purported notice of nominations in connection with our 2022 annual meeting of stockholders (which our Board of Directors determined was invalid for failing to comply with requirements of our by-laws), or any other offer or proposal may result in litigation against us. In the event Alden or other third parties initiate litigation against us, these actions could harm our business and have a material adverse effect on our results of operations. We also believe the future trading price of our Common Stock could be subject to wide price fluctuations based on uncertainty associated with the Unsolicited Proposal and any future offer.
Risks Related to our Acquisitions of BH Media and Buffalo News
On March 16, 2020, the Company completed the purchase of certain assets and the assumption of certain liabilities of the newspaper and related community publications business of BH Media and the purchase of all of the issued and outstanding capital stock of Buffalo News (collectively, the “Transactions”). Under the terms of the Asset and Stock Purchase Agreement, dated January 29, 2020, with Berkshire Hathaway, Inc. (“Berkshire”), and BH Media (the “Purchase Agreement”), the aggregate purchase price for the Transactions was $140 million, which excluded $12 million in cash at closing of the Transactions. BH Finance, LLC (“BH Finance”), an affiliate
of Berkshire, financed the Purchase Agreement through a Credit Agreement, dated January 29, 2020 (the “Credit Agreement”).
The Company borrowed $576 million from BH Finance under the Credit Agreement in order to finance the Transactions and refinance its outstanding indebtedness.
We may not achieve the intended benefits of the BH Media and Buffalo News acquisition.
We completed the BH Media and Buffalo News acquisition in March 2020, and there can be no assurance that we will be able to realize the expected benefits of the transaction.
There are many challenges associated with integrating a material acquisition, such as our acquisition of BH Media and Buffalo News, including the integration of executive and other employee teams with historically different cultures and priorities; the coordination of personnel located across multiple geographic locations; retaining key management and other employees; consolidating corporate and administrative infrastructures and eliminating duplicative operations; the diversion of management’s attention from ongoing business concerns; retaining existing business and operational relationships, including customers, suppliers and other counterparties, and attracting new business and operational relationships; unanticipated issues in integrating information technology, communications and other systems; as well as unforeseen expenses associated with the acquisition. These and other challenges could result in unanticipated operational challenges and the failure to realize anticipated synergies in the expected timeframe or at all.
If we fail to realize anticipated synergies in the amount and within the timeframe expected, our actual financial condition and results of operations may differ materially from the illustrative unaudited financial information disclosed in connection with the acquisition, which was based on various assumptions and estimates that may prove to be incorrect. Such illustrative unaudited financial information did not constitute management’s projections of future financial performance or results of operations; however, any material variance from such illustrative unaudited financial information could result in negative investor reactions that materially and adversely affect the market price of our Common Stock.
Our actual financial condition and results of operations may differ materially even if synergies are realized, due to macroeconomic factors or a variety of other risks to our business that are independent of the acquisition.
Our future results will suffer if we do not effectively manage our expanded operations.
With the completion of the BH Media acquisition, the size of our business increased significantly. Our continued success depends, in part, upon our ability to manage this expanded business, which poses substantial challenges for management, including challenges related to the management and monitoring of new operations and associated increased costs and complexity. We cannot assure that we will be successful or that we will realize the expected operating efficiencies, cost savings, and other benefits from the combination that we currently anticipate.
Risks Related to Liquidity and Capital
We may not be able to generate sufficient cash to service all our debt and may be forced to take other actions to satisfy our obligations under our debt, which may not be successful.
Our ability to make scheduled payments depends on our financial condition and operating performance, which are subject to prevailing economic and competitive conditions and to certain financial, business, competitive, legislative, regulatory, and other factors beyond our control. We may be unable to maintain a level of cash flow sufficient to permit us to pay the principal and interest on our debt.
If our cash flow and capital resources are insufficient to fund our debt obligations, we could face liquidity issues and be forced to reduce or delay investments, acquisitions, and capital expenditures or sell assets or operations, seek additional capital or restructure or refinance our indebtedness. We cannot assure investors we would be able to take any of these alternative actions, such actions would be permitted under the terms of the Credit Agreement, and, even if successful,, that such actions would permit us to meet our scheduled debt service obligations
If we cannot make scheduled payments on our debt, the subsequent default proceedings under the Credit Agreement could lead to all principal and interest becoming due and payable.
Risks Related to Cybersecurity
Our business, operating results, and reputation may be negatively impacted, and we may be subject to legal and regulatory claims if there is a loss, destruction, disclosure, misappropriation, or alteration of or unauthorized access to data owned or maintained by us, or if we are the subject of a significant data breach or cyberattack.
We rely on our information technology and communications systems to manage our business data, including communications, news and advertising content, digital products, order entry, fulfillment and other business processes. These technologies and systems also help us manage many of our internal controls over financial reporting, disclosure controls and procedures and financial systems. Attempts to compromise information technology and communications systems occur regularly across many industries and sectors, and we may be vulnerable to security breaches resulting from accidental events (such as human error) or deliberate attacks. Moreover, the techniques used to attempt attacks and the perpetrators of such attacks are constantly expanding. We face threats both from use of malicious code (such as malware, viruses and ransomware), employee theft or misuse, advanced persistent threats, and phishing and denial-of-service attacks. The Company has complied with all applicable legal requirements relating to this activity. As cyberattacks become increasingly sophisticated, and as tools and resources become more readily available to malicious third parties, the Company will incur increased costs to secure its technology environment and there can be no guarantee that the Company’s and our third-party vendors’ actions, security measures and controls designed to prevent, detect or respond to security breaches, to limit access to data, to prevent destruction, alteration, or exfiltration of data, or to limit the negative impact from such attacks, can provide absolute security against compromise. As a result, our business data, communications, news and advertising content, digital products, order entry, fulfillment and other business processes may be lost, destroyed, disclosed, misappropriated, altered or accessed without consent and various controls, automated procedures and financial systems could be compromised.
A significant security breach or other successful attack could result in significant remediation costs, including repairing system damage, engaging third-party experts, deploying additional personnel or vendor support, training employees, and compensation or incentives offered to third parties whose data has been compromised. These incidents may also lead to lost revenues resulting from a loss in competitive advantage due to the unauthorized disclosure, alteration, destruction or use of business data, the failure to retain or attract customers, the disruption of critical business processes or systems, and the diversion of management’s attention and resources. Moreover, such incidents may result in adverse media coverage, which may harm our reputation. These incidents may also lead to legal claims or proceedings, including regulatory investigations and actions and private lawsuits, and related legal fees, as well as potential settlements, judgments and fines. We maintain insurance, but the coverage and limits of our insurance policies may not be adequate to reimburse us for losses caused by security breaches.
Our possession and use of personal information and the use of payment cards by our customers present risks and expenses that could harm our business. Unauthorized access to or disclosure or manipulation of such data, whether through breach of our network security or otherwise, could expose us to liabilities and costly litigation and damage our reputation.
Our online systems store and process confidential subscriber and other sensitive data, such as names, email addresses, addresses, and other personal information. Therefore, maintaining our network security is critical. Additionally, we depend on the security of our third-party service providers. Unauthorized use of or inappropriate access to our, or our third-party service providers’ networks, computer systems and services could potentially jeopardize the security of confidential information, including payment card (credit or debit) information, of our customers. Because the techniques used to obtain unauthorized access, disable or degrade service, or sabotage systems change frequently and often are not recognized until launched against a target, we or our third-party service providers may be unable to anticipate these techniques or to implement adequate preventative measures. A party that is able to circumvent our security measures could misappropriate our proprietary information or the information of our customers or users, cause interruption in our operations, or damage our computers or those of our customers or users. As a result of any such breaches, customers or users may assert claims of liability against us and these activities may subject us to legal claims, adversely
impact our reputation, and interfere with our ability to provide our products and services, all of which may have an adverse effect on our business, financial condition and results of operations. The coverage and limits of our insurance policies may not be adequate to reimburse us for losses caused by security breaches.
A significant number of our customers authorize us to bill their payment card accounts directly for all amounts charged by us. These customers provide payment card information and other personally identifiable information which, depending on the particular payment plan, may be maintained to facilitate future payment card transactions. Under payment card rules and our contracts with our card processors, if there is a breach of payment card information that we store, we could be liable to the banks that issue the payment cards for their related expenses and penalties. In addition, if we fail to follow payment card industry data security standards, even if there is no compromise of customer information, we could incur significant fines or lose our ability to give our customers the option of using payment cards. If we were unable to accept payment cards, our business would be seriously harmed.
There can be no assurance that any security measures we, or our third-party service providers, take will be effective in preventing a data breach. We may need to expend significant resources to protect against security breaches or to address problems caused by breaches. If an actual or perceived breach of our security occurs, the perception of the effectiveness of our security measures could be harmed and we could lose customers or users. Failure to protect confidential customer data or to provide customers with adequate notice of our privacy policies could also subject us to liabilities imposed by United States federal and state regulatory agencies or courts. We could also be subject to evolving state laws that impose data breach notification requirements, specific data security obligations, or other consumer privacy-related requirements. Our failure to comply with any of these laws or regulations may have an adverse effect on our business, financial condition and results of operations.
Risks Related to Pension Liabilities
Sustained increases in funding requirements of our pension and postretirement obligations may reduce the cash available for our business.
Pension plans were in a net underfunded position of $0.4 million at September 25, 2022, compared to an over funded position of $13.4 million at September 26, 2021.
Our pension and postretirement plans invest in a variety of equity and debt securities. Future volatility and disruption in the securities markets could cause declines in the asset values of our pension and postretirement plans. In addition, a decrease in the discount rates or changes to mortality estimates and other assumptions used to determine the liability could increase the benefit obligation of the plans. Unfavorable changes to the plan assets and/or the benefit obligations could increase the level of required contributions above what is currently estimated, which could reduce the cash available for our business and debt service.
We expect to be subject to additional withdrawal liabilities in connection with multiemployer pension plans, which may reduce the cash available for our business.
We contributed to various multiemployer defined benefit pension plans during 2022 under the terms of collective-bargaining agreements (“CBAs”). For plans that are in critical status, benefit reductions may apply/or we could be required to make additional contributions.
ITEM 1B. UNRESOLVED STAFF COMMENTS
ITEM 2. PROPERTIES
Our executive offices are located in leased facilities at 4600 E. 53rd Street, Davenport, Iowa. The initial lease term expires August 1, 2029.
We have 23 print sites which print most of our dailies with the exception of 13 that are printed at third-party printers.
Our newspapers and other publications have formal or informal backup arrangements for printing in the event of a disruption in production capability.
ITEM 3. 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 4. MINE SAFETY DISCLOSURES
ITEM 5. MARKET FOR THE REGISTRANT'S COMMON EQUITY,
RELATED STOCKHOLDER MATTERS AND ISSUER PURCHASES OF EQUITY SECURITIES
Our Common Stock is listed on the NASDAQ.
At November 30, 2022, we had 5,655 registered holders of record of our Common Stock.
Our Credit Agreement restricts us from paying dividends on our Common Stock. This restriction does not apply to dividends issued with the Company's Equity Interests or from the proceeds of a sale of the Company's Equity Interest. See Note 7 — Debt, of the Notes to Consolidated Financial Statements, included herein.
The following graph compares the percentage change in the cumulative total return of the Company, the Standard & Poor's 500 Stock Index, and a peer group index, in each case for the five years ended September 25, 2022 (with September 24, 2017, as the measurement point). Total return is measured by dividing (a) the sum of (i) the cumulative amount of dividends declared for the measurement period, assuming dividend reinvestment and (ii) the difference between the issuer's share price at the end and the beginning of the measurement period, by (b) the share price at the beginning of the measurement period.
Copyright© 2022 Standard & Poor's, a division of S&P Global. All rights reserved.
ITEM 6. RESERVED
ITEM 7. 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 year ended September 25, 2022, and for fiscal years 2021 and 2020. This discussion should be read in conjunction with the Consolidated Financial Statements and related Notes thereto, included herein.
CRITICAL ACCOUNTING POLICIES
The preparation of financial statements in conformity with generally accepted accounting principles requires management to make estimates and assumptions about future events that affect the amounts reported in the financial statements and accompanying notes. Actual results could differ significantly from those estimates. We believe the following discussion addresses our most critical accounting policies, which are those that are important to the presentation of our financial condition and results of operations and require management's most subjective and complex judgments.
Intangible Assets, Other Than Goodwill
Local mastheads (e.g., publishing periodical titles, web site domain names, and trade names) are not subject to amortization. Non-amortized intangible assets are tested for impairment annually on the first day of the fourth fiscal quarter or more frequently if events or changes in circumstances suggest the asset might be impaired.
The quantitative impairment test consists of comparing the fair value of each masthead or domain name with its carrying amount. We use a relief from royalty approach which utilizes a discounted cash flow model to determine the fair value of each masthead, domain name, or trade name. Management's judgments and estimates of future operating results in determining the intangibles fair values are consistently applied to each underlying business in determining the fair value of each intangible asset. In 2022, 2021, and 2020, we recognized impairment charges of $13,503,000, $787,000, and $972,000, respectively. Only one of our mastheads has a fair value that has headroom under 20% over their carrying value and could experience immaterial impairment in the future if we do not achieve our revenue projections.
Our amortizable intangible assets consist mainly of customer relationships including subscriber lists and advertiser relationships. These asset values are amortized systematically over their estimated useful lives. Intangible assets subject to amortization are tested for recoverability whenever events or changes in circumstances indicate that their carrying amounts may not be recoverable. The carrying amount of each asset group is not recoverable if it exceeds the sum of the undiscounted cash flows expected to result from the use of such asset group. In 2021, we recognized $190,000 of impairment on intangible assets subject to amortization. There were no indicators of impairment on intangible assets subject to amortization in 2022 or 2020.
Our quantitative impairment analysis includes several inputs that are considered estimates, these include royalty rates, discount rates, five-year revenue forecast, and long term growth rates. All of these estimates are subject to uncertainty as future results may or may not be achieved. The royalty rates utilized range from 0% to 1.5%, a 50 basis point decrease in royalty rates would result in an additional $6,992,000 of impairment. The Company’s discount rate utilized in the analysis has ranged from 9.50% to 11.50% in different years depending on market conditions. Increasing the discount rate by 100 basis points would result in an additional $257,000 of impairment. The Company has had various revenue forecasts utilized in the analysis over different years.
Future decreases in our market value, or significant differences in revenue, expenses or cash flows from estimates used to determine fair value, could result in additional masthead impairment charges in the future.
Pension, Postretirement and Postemployment Benefit Plans
We, along with our subsidiaries, have various defined benefit retirement plans, postretirement plans and postemployment plans, under which substantially all of the benefits have been frozen in previous years.
We account for our pension, postretirement and postemployment plans in accordance with the applicable accounting guidance, which requires us to include the funded status of our pension plans in our balance sheets
and to recognize, as a component of other comprehensive income (loss), the gains or losses that arise during the period but are not recognized in pension expense. The service cost component of net period benefit cost is reported on the Consolidated Statements of Income and Comprehensive Income and included in Compensation while all other components are included in other non-operating income/expense.
The determination of pension and postretirement plan obligations and expense is based on a number of actuarial assumptions. Two critical assumptions are the discount rates applied to pension and postretirement plan obligations and the expected long-term rate of return on plan assets.
The discount rate assumption is based on investment yields available at year-end on corporate bonds rated AA and above with a maturity to match the expected benefit payment stream. To determine the expected long-term rate of return of assets, we consider the current and expected asset allocations, as well as historical and expected returns on various categories of plan assets, input from the actuaries and investment consultants and long- term inflation assumptions. In 2022, we used an expected return of assets assumption of 5.0% for both our pension plan assets and our postretirement and postemployment benefit plan assets.
A 50 basis point change in discount rates would result in an increase to pension and postretirement and postemployment benefits liabilities of $12,100,000. A 50 basis point change in expected rate of return of assets results would result in an increase to pension and postretirement and postemployment benefits expense of $1,137,000.
We are subject to income taxes in the U.S. and record our tax provision for the anticipated tax consequences in our reported results of operations. Tax laws are complex and subject to different interpretations by the taxpayer and respective government taxing authorities. Significant management judgment is required in determining our provision for income taxes, deferred tax assets and liabilities, and the valuation allowance recorded against our net deferred tax assets, if any.
Our current and deferred income tax provisions are calculated based on estimates and assumptions that could differ from the actual results reflected in income tax returns filed during the subsequent year. These estimates are reviewed and adjusted, if needed, throughout the year. Adjustments between our estimates and the actual results of filed returns are recorded when identified.
Deferred tax assets and liabilities are determined based on the difference between the financial statement and tax basis of assets and liabilities using currently enacted tax rates. Deferred income tax assets are recognized for deductible temporary differences and loss carryforwards and deferred income tax liabilities are recognized for taxable temporary differences. Temporary differences are the difference between the reported amounts of assets and liabilities and their tax basis. Deferred income tax assets are reduced by a valuation allowance when, in our opinion, it is more likely than not that some portion or all of the deferred income tax assets will not be realized. Deferred income tax assets and liabilities are adjusted for the effects of changes in tax laws and rates on the date of enactment.
We recognize the effect of income tax positions only if those positions are more likely than not of being sustained. Recognized income tax positions are measured at the largest amount that is greater than 50% likely of being realized. Changes in recognition or measurement are reflected in the period in which the change in judgment occurs. We record interest and penalties related to unrecognized tax benefits as a component of income tax expense.
Accounting for business combinations requires us to make significant estimates and assumptions, especially at the acquisition date, with respect to tangible and intangible assets acquired and liabilities assumed. We use our best estimates and assumptions to accurately assign fair value to the tangible and intangible assets acquired and liabilities assumed at the acquisition date as well as the useful lives of those acquired intangible assets. The Company prepares its initial estimates of the fair values of intangible assets utilizing the multi-period excess earnings method for customer-related intangible assets and the relief from royalty method for indefinite lived
masthead assets. Examples of critical estimates in valuing certain of the intangible assets and goodwill we have acquired include but are not limited to:
•future expected cash flows from subscription, advertising and commercial print relationships and related assumptions about future revenue growth and customer retention;
•discount rates; and
•royalty rates used to value acquired mastheads.
Additional information regarding our accounting for business combinations can be found in Note 1 - Significant Accounting Policies in the Consolidated Financial Statements.
IMPACT OF RECENTLY ISSUED ACCOUNTING STANDARDS
See Note 1 to the Consolidated Financial Statements for a description of new accounting standards issued and/or adopted in the year ended September 25, 2022.
CERTAIN MATTERS AFFECTING CURRENT AND FUTURE OPERATING RESULTS
The following items affect period-over-period comparisons from 2022 to 2020 and will continue to affect period-over-period comparisons for future results.
Acquisitions and Divestitures
•In March 2020, we completed the acquisition of BH Media and Buffalo News for a purchase price of $140,000,000. The acquisition was funded by a 25-year term loan with BH Finance, in an aggregate principal amount of $576,000,000 at a 9% annual rate (referred to herein as "Credit Agreement" and "Term Loan"), as part of a broader comprehensive refinancing of all of our then outstanding debt.
•In the 13 weeks ended March 2020, we disposed of substantially all of the assets of certain of our smaller properties, including four daily newspapers and related print and digital publications, for an aggregate sales price of $3,950,000.
Operating results, as reported in the Consolidated Financial Statements, are summarized below:
|(Thousands of Dollars, Except Per Common Share Data)||2022||2021||Percent Change||2020||Percent Change|
|Print advertising revenue||184,963 ||227,892 ||(18.8)||%||183,164 ||24.4 ||%|
|Digital advertising revenue||181,465 ||141,391 ||28.3 ||%||106,491 ||32.8 ||%|
|Advertising and marketing services revenue||366,428 ||369,283 ||(0.8)||%||289,655 ||27.5 ||%|
|Print subscription revenue||313,504 ||329,484 ||(4.9)||%||230,949 ||42.7 ||%|
|Digital subscription revenue||40,120 ||28,229 ||42.1 ||%||37,336 ||(24.4)||%|
|Subscription revenue||353,624 ||357,713 ||(1.1)||%||268,285 ||33.3 ||%|
|Print other revenue||42,962 ||48,656 ||(11.7)||%||39,632 ||22.8 ||%|
|Digital other revenue||17,955 ||18,997 ||(5.5)||%||20,432 ||(7.0)||%|
|Other revenue||60,917 ||67,653 ||(10.0)||%||60,064 ||12.6 ||%|
|Total operating revenue||780,969 ||794,649 ||(1.7)||%||618,004 ||28.6 ||%|
|Compensation||317,789 ||330,896 ||(4.0)||%||243,023 ||36.2 ||%|
|Newsprint and ink||30,101 ||29,775 ||1.1 ||%||24,243 ||22.8 ||%|
|Other operating expenses||344,905 ||325,597 ||5.9 ||%||259,382 ||25.5 ||%|
|Depreciation and amortization||36,544 ||42,841 ||(14.7)||%||36,133 ||18.6 ||%|
|Assets loss (gain) on sales, impairments and other||9,716 ||8,214 ||18.3 ||%||(5,403)||NM|
|Restructuring costs and other||22,720 ||7,182 ||216.3 ||%||13,751 ||(47.8)||%|
|Total operating expenses||761,775 ||744,505 ||2.3 ||%||571,129 ||30.4 ||%|
|Equity in earnings of associated companies||5,657 ||6,412 ||(11.8)||%||3,403 ||88.4 ||%|
|Operating income||24,851 ||56,556 ||(56.1)||%||50,278 ||12.5 ||%|
|Non-operating income (expense):|
|Debt financing and administrative costs||— ||— ||NM||(11,966)||NM|
|Curtailment gain||1,027 ||23,830 ||(95.7)||%||— ||NM|
|Pension withdrawal cost||(2,335)||(12,862)||(81.8)||%||— ||NM|
|Pension and OPEB related benefit (cost) and other, net||19,022 ||9,296 ||104.6 ||%||12,274 ||(24.3)||%|
|Total non-operating expense, net||(24,056)||(24,509)||(1.8)||%||(47,435)||(48.3)||%|
|Income before income taxes||795 ||32,047 ||(97.5)||%||2,843 ||NM|
|Income tax (benefit) expense||698 ||7,255 ||(90.4)||%||2,973 ||NM|
|Net Income (loss)||97 ||24,792 ||(99.6)||%||(130)||NM|
|Earnings (loss) per common share:|
We acquired or disposed of certain properties in each of 2022, 2021 and 2020.
Revenue Comparison 2022-2021
Total operating revenue totaled $781.0 million in 2022, down $13.7 million, or 1.7%, compared to 2021.
Advertising and marketing services revenue totaled $366.4 million in 2022, down 0.8% compared to 2021.
Print advertising revenues were $185.0 million in 2022, down $42.9 million, or 18.8% compared to 2021. The decline is due to the secular downward trend in print advertising.
Digital advertising and marketing services revenue totaled $181.5 million in 2022, up 28.3% compared to 2021. Digital advertising and marketing services revenue represented 49.5% of 2022 total advertising and marketing services revenue compared to 38.3% in 2021. The increase in digital advertising is due to growth at Amplified, our full service digital marketing service. Revenue at Amplified increased 82.9% in 2022 totaling $75.8 million.
Subscription revenue totaled $353.6 million in 2022, or down 1.1%, compared to 2021. The change in subscription revenue is due to decline in full access volume, consistent with historical and industry trends. The decrease was partially offset by growth in selective price increases on our full access subscriptions and in digital-only subscribers and digital-only revenue which were up 65% and 26%, respectively. As of September 2022, we had 532,000 digital-only subscribers compared to 402,000 in 2021.
Other revenue, which primarily consist of digital services revenue from BLOX Digital and commercial printing revenue totaled $60.9 million, a 10.0% decrease compared to 2021. Digital services revenue totaled $17.9 million in 2022, a 5.4% decrease compared to 2021. Commercial printing revenue totaled $21.5 million in 2022, a 14.4% decline from 2021.
Revenue at BLOX Digital, including intercompany revenue, totaled $30,906,000, an increase of 13.6%, due to increased market share and increases in average revenue per user due to additional value added service offerings.
Total digital revenue including digital advertising revenue, digital-only subscription revenue and digital services revenue totaled $239.5 million in 2022, a 27.0% increase over 2021 and represented 30.7% of our total operating revenue in 2022, compared to 23.7% in 2021.
Revenue Comparison 2021-2020
Total operating revenue was $794.6 million in 2021, up $176.6 million, or 28.6%, compared to 2020. Total operating revenue from the Transactions totaled $403.6 million and $203.0 million, in 2021 and 2020, respectively. Total operating revenue on a pro forma basis was down 3.3% compared to 2020.
Advertising and marketing services revenue totaled $369.3 million in 2021, up 27.5% compared to 2020. Advertising and marketing services revenue from the Transactions totaled $170.7 million and $82.3 million, in 2021 and 2020, respectively. Total Advertising and marketing services revenue on a pro forma basis was down 6.0%.
Print advertising revenues were $227.9 million in 2021, down 12.9% compared to 2020 on a pro forma basis. The decline is due to the secular downward trend in print advertising. Print advertising revenue from the Transactions totaled $195.7 million and $81.3 million, in 2021 and 2020, respectively.
Digital advertising and marketing services totaled $141.4 million in 2021, up 32.8% compared to 2020. Digital advertising and marketing services represented 38.3% of 2021 total advertising and marketing services revenue compared to 36.8% in 2020. The increase in digital advertising is due to growth at Amplified, our full service digital marketing service. Revenue at Amplified increased 42.6% in 2021 totaling $41.6 million.
Subscription revenue totaled $357.7 million in 2021, or up 33.3%, compared to 2020. Subscription revenue from the Transactions totaled $203.1 million and $106.5 million, in 2021 and 2020, respectively. Subscription revenue on a pro forma basis was up 0.5%. The growth in subscription revenue is due to growth in selective price increases on our full access subscriptions and in digital-only subscribers and digital-only revenue which were up 65% and 26%, respectively. The increases were partially offset by a decline in full access volume,
consistent with historical and industry trends. As of September 2021, we had 402,000 digital-only subscribers compared to 244,000 in 2020.
Other revenue, which primarily consist of digital services revenue from BLOX Digital, commercial printing revenue and until March 16, 2020, revenue from the Management Agreement, totaled $67.6 million, a 12.6% increase compared to 2020. Other revenue from the Transactions totaled $49.4 million and $16.3 million in 2021 and 2020, respectively. On a pro forma basis, other revenue was down 13.5% primarily caused by the end of the Management Agreement in 2020, which generated $5.4 million prior to the Transactions in 2020. Digital services revenue totaled $19.0 million in 2021, a 0.3% decrease compared to 2020. Commercial printing revenue totaled $25.1 million in 2021, a 6.4% decrease on a pro forma basis.
Revenue at BLOX Digital, including intercompany revenue, totaled $27.2 million, an increase of 8.6%, due to increased market share and increases in average revenue per user due to additional value added service offerings.
Total digital revenue including digital advertising revenue, digital-only subscription revenue and digital services revenue totaled $188.6 million in 2021, and represented 23.7% of our total operating revenue in 2021, compared to 23.4% in 2020.
Operating Expense Comparison 2022-2021
Total operating expenses were $761.8 million, a 2.3% increase compared to 2021. Cash Costs were $692.8 million, a 1.0% increase compared to 2021.
Compensation expense decreased $13.1 million in 2022, or a 4.0% decrease compared to 2021. The decrease is attributable to reductions in full time employees ("FTEs") due to continued business transformation efforts, partially offset by investments in digital talent.
Newsprint and ink costs increased $0.3 million in 2022, or a 1.1% increase compared to 2021. This increase was attributable to higher newsprint prices offset by a declines in newsprint volumes. See Item 7A, “Commodities”, included herein, for further discussion and analysis of the impact of newsprint on our business.
Other operating expenses increased $19.3 million in 2022, or a 5.9% increase compared to 2021. Other operating expenses include all operating costs not considered to be compensation, newsprint and ink, depreciation and amortization, or restructuring costs and other. The largest components are costs associated with printing and distribution of our printed products, digital investments, 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 products.
Restructuring costs and other totaled $22.7 million and $7.2 million in 2022 and 2021, respectively. Restructuring costs and other in 2022 include severance costs, litigation expenses, restructuring expenses, and advisor expenses associated with the unsolicited offer in November 2021. Restructuring costs and other in 2021 are predominately severance.
Depreciation expense decreased $3.6 million, or 20.1%, in 2022. Amortization expense decreased $2.7 million, or 10.8%, in 2022.
Assets loss (gain) on sales, impairments and other was a net loss of $9.7 million in 2022 compared to a net loss of $8.2 million in 2021. Impairment losses in 2022 totaled $13.5 million for mastheads, $7.8 million for leases, and $0.7 million for the disposal of a non-core business, respectively. Impairment losses in 2021 totaled $1.0 million for mastheads. Assets loss (gain) on sales are part the Company's ongoing real estate and non-core asset monetization. They totaled a net gain of $12.3 million in 2022 and a net loss of $7.2 million in 2021.
Operating Expense Comparison 2021-2020
Total operating expenses were $744.5 million, a 30.4% increase compared to 2020. Total operating expenses from the Transactions totaled $347.8 million and $193.8 million in 2021 and 2020, respectively. Cash Costs were $686.3 million, a 30.3% increase compared to 2020. Cash Costs from the Transactions totaled $353.8
million and $176.8 million, in 2021 and 2020, respectively. Cash Costs on a pro forma basis were down 2.7% compared to 2020.
Compensation expense increased $87.9 million in 2021, or a 36.2% increase compared to 2020. Compensation expense from the Transactions totaled $165.4 million and $86.1 million in 2021 and 2020, respectively. Compensation was up 0.1% on a pro forma basis. The modest increase was due to a one time furlough and compensation reductions for all employees in 2020 in response to COVID-19 of approximately $10 million, investments in digital talent made throughout 2021, and the lack of incentive compensation in 2020. These increases were partially offset by a reduction in FTEs due to business transformation initiatives.
Newsprint and ink costs increased $5.5 million in 2021, or a 22.8% increase compared to 2020. Newsprint and ink costs from the Transactions totaled $19.7 million and $10.6 million, in 2021 and 2020, respectively. On a pro forma basis newsprint and ink expense decreased 19.8%. This decrease was attributable to declines in newsprint volume and outsourcing of our printing. See Item 7A, “Commodities”, included herein, for further discussion and analysis of the impact of newsprint on our business.
Other operating expenses increased $66.2 million in 2021, or a 25.5% increase compared to 2020. Other operating expenses include all operating costs not considered to be compensation, newsprint and ink, depreciation and amortization, or restructuring costs and other. The largest components are costs associated with printing and distribution of our printed products, digital cost of goods sold and facility expenses. Other operating expenses from the Transactions totaled $188.3 million and $79.9 million in 2021 and 2020, respectively. On a pro forma basis, other operating expenses were down 3.5%. The decrease is attributable to lower delivery and other print-related costs due to lower volumes of our print editions, partially offset by increases in investments to fund our digital growth strategy.
Restructuring costs and other totaled $7.2 million and $13.8 million in 2021 and 2020, respectively. In 2020, restructuring costs and other include an estimate of costs related to withdrawals from certain of our multiemployer pension plans totaling $4.4 million. The remaining restructuring costs in 2021 and 2020 are predominately severance.
Depreciation expense increased $2.6 million, or 16.9%, in 2021. Amortization expense increased $4.1 million, or 19.8%, in 2021. Increases in both are due to the acquired assets from the Transactions.
Assets loss (gain) on sales, impairments and other was a net expense of $8.2 million in 2021 compared to a net gain of $5.4 million in 2020. Impairment in 2021 and 2020 totaled $1.0 million and $1.0 million, respectively. Assets losses and gains are part the Company's ongoing real estate and non-core asset monetization.
Equity In Equity Investments
Equity in earnings of TNI and MNI decreased $0.8 million in 2022, or 11.8%, compared to 2021. Equity in earnings of TNI and MNI increased $3.0 million in 2021 compared to 2020.
NON-OPERATING INCOME AND EXPENSES
Non-operating Income and Expense Comparison 2022-2021
Interest expense decreased $3.0 million, or 6.7%, to $41.8 million in 2022 due to lower debt balances. Our weighted average cost of debt, excluding amortization of debt financing cost, was 9.0% in 2022 and 2021.
Included in other non-operating income and expense is income related to our defined benefit pension plans and other post-employment benefit plans, which totaled $20.5 million and $33.3 million in 2022 and 2021, respectively. We recognized a non-cash curtailment gain of $23.8 million and a reduction in our benefit obligation in 2021 by eliminating post-retirement medical coverage for certain employees. We recognized pension withdrawal costs in 2021 of $12.9 million in connection with the withdrawal from pension plans that covered certain employees. The withdrawal liabilities will be paid over the next 20 years.
During 2022 we notified certain participants in 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 $1.0 million related to the four plans. In connect 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 $6.1 million. Additionally, the Company merged the six frozen plans into one defined benefit plan effective in the second quarter of fiscal 2022.
During September of 2022, the Company, as sponsor of the Lee Enterprises Incorporated Pension Plan (the "Plan") executed an agreement pursuant to which the Plan used a portion of its assets to purchase annuities from an insurance company (the "Insurer") and thereby assumed $85,622,000 of the Plan's liabilities in exchange for $81,377,000 of Plan assets. The non-cash settlement gain of $4,245,000 is recorded in Pension and OPEB related benefit (cost) and other, net.
As more fully discussed in Note 7 of the Notes to the Consolidated Financial Statements, included herein, we recorded a liability for the Warrants, issued in connection with the Warrant Agreement in previous years. We re-measured the liability to fair value each reporting period, with changes reported in other non-operating income (expenses). Due to the fluctuation in the price of our Common Stock and changes in interest rates, the estimated fair value of the warrant liability can change each period. We recorded non-operating income of $0.1 million and $0.3 million in 2022 and 2021 respectively, due to the change in fair value of the Warrants.
Non-operating Income and Expense Comparison 2021-2020
Interest expense decreased $3.0 million, or 6.2%, to $44.8 million in 2021 due to lower debt balances. Our weighted average cost of debt, excluding amortization of debt financing cost, was 9.0% in 2021 and 2020. We recognized no debt financing and administrative costs in 2021 compared to $12.0 million in 2020. Expenses in the prior year are due to writing off unamortized financing costs paid in conjunction with a prior refinancing.
Included in other non-operating income and expense is income related to our defined benefit pension plans and other post-employment benefit plans, which totaled $33.3 million and $3.8 million in 2021 and 2020, respectively. We recognized a non-cash curtailment gain of $23.8 million and a reduction in our benefit obligation in 2021 by eliminating post-retirement medical coverage for certain employees. We recognized pension withdrawal costs in 2021 of $12.9 million in connection with the withdrawal from pension plans that covered certain employees. The withdrawal liabilities will be paid over the next 20 years.
As more fully discussed in Note 7 of the Notes to the Consolidated Financial Statements, included herein, we recorded a liability for the Warrants, issued in connection with the Warrant Agreement. We re-measured the liability to fair value each reporting period, with changes reported in other non-operating income (expenses). Due to the fluctuation in the price of our Common Stock and changes in interest rates, the estimated fair value of the warrant liability can change each period. We recorded non-operating income of $0.3 million and $0.8 million in 2021 and 2020 respectively, due to the change in fair value of the Warrants.
INCOME TAX EXPENSES
In 2022, we recorded income tax expense of $698,000, or 87.8% of pretax income and in 2021, we recorded an income tax expense of $7,255,000, or 22.6% of pretax income. In 2020, we recorded an income tax expense of $2,973,000, or 104.6% of pre-tax income. See Note 14 of the Notes to the Consolidated Financial Statements, included herein, for a discussion of the difference between the expected federal income tax rate and the actual tax rates.
NET INCOME AND EARNINGS PER SHARE
Net income was $0.1 million in 2022 compared to net income of $24.8 million in 2021. The decrease in net income is predominately due to cycling one-time non-cash benefits in 2021. In 2020, net loss was $0.1 million.
Diluted loss per share was $0.35 per share in 2022 compared to diluted earnings per share of $3.90 per share in 2021. In 2020, losses per share were $0.35 per share.
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. Cash Costs can be used by financial statement users to assess the Company's ability to manage and control its operating 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, restructuring costs and other non-cash operating expenses and other non-operating expenses are excluded.
Tables reconciling Adjusted EBITDA to net income and Cash Costs to operating expenses, the most directly comparable measure under GAAP, are set forth below under the caption "Reconciliation of Non-GAAP Financial Measures".
RECONCILIATION OF NON-GAAP FINANCIAL MEASURES
The table below reconciles the non-GAAP financial performance measure of Adjusted EBITDA to net income, the most directly comparable GAAP measure:
|(Thousands of Dollars)||2022||2021||2020|
|Net Income (loss)||97 ||24,792 ||(130)|
|Adjusted to exclude|
|Income tax expense||698 ||7,255 ||2,973 |
|Non-operating expenses, net||24,056 ||24,509 ||47,435 |
|Equity in earnings of TNI and MNI||(5,657)||(6,412)||(3,403)|
|Assets loss (gain) on sales, impairments and other||9,716 ||8,214 ||(5,403)|
|Depreciation and amortization||36,544 ||42,841 ||36,133 |
|Restructuring costs and other||22,720 ||7,182 ||13,751 |
|Stock compensation||1,337 ||854 ||1,051 |
|Ownership share of TNI and MNI EBITDA (50%)||6,541 ||7,317 ||4,764 |
|Adjusted EBITDA||96,052 ||116,552 ||97,171 |
The table below reconciles the non-GAAP financial performance measure of Cash Costs to Operating expenses, the most directly comparable GAAP measure:
|(Thousands of Dollars)||2022||2021||2020|
|Operating expenses||761,775 ||744,505 ||571,129 |
|Depreciation and amortization||36,544 ||42,841 ||36,133 |
|Assets loss (gain) on sales, impairments and other, net||9,716 ||8,214 ||(5,403)|
|Restructuring costs and other||22,720 ||7,182 ||13,751 |
|Cash Costs||692,795 ||686,268 ||526,648 |
LIQUIDITY AND CAPITAL RESOURCES
Our operations have historically generated strong positive cash flow, and are expected to continue providing sufficient liquidity, together with cash on hand, to meet our future cash requirements, which primarily relate to operating expenses, interest expense and capital expenditures. A summary of our cash flows is included in the narrative below.
Cash provided by operating activities totaled $3,429,000 in 2022 compared to $50,078,000 in 2021, a decrease of $46,649,000. The decrease was primarily driven by a decrease in operating results of $25,412,000 (defined as net income (loss) adjusted for non-working capital items) and a decrease in cash from working capital of $21,237,000, primarily related to unfavorable changes in accounts receivable and income taxes payable, partially offset by favorable changes in accounts payable and pension and postretirement obligations.
Cash provided by operating activities totaled $50,078,000 in 2021 compared to $49,869,000 in 2020, an increase of $209,000. The increase was primarily driven by an increase in operating results of $48,590,000 (defined as net income (loss) adjusted for non-working capital items) offset by a decrease in cash from working capital of $48,381,000, primarily related to unfavorable changes in accounts receivable and income taxes payable, partially offset by favorable changes in accounts payable and pension and postretirement obligations.
Cash required for investing activities totaled $6,337,000 in 2022 and $2,278,000 in 2021. Capital spending totaled $7,536,000 and $7,479,000 in 2022 and 2021, respectively. Proceeds from sales of assets totaled $14,835,000 and $4,616,000 in 2022 and 2021, respectively.
Cash required for investing activities totaled $2,278,000 in 2021 and $118,176,000 in 2020. 2020 included $130,985,000 in spending related to the Transactions. Capital spending totaled $7,479,000 and $8,096,000 in 2021 and 2020, respectively. Proceeds from sales of assets totaled $4,616,000 and $21,710,000 in 2021 and 2020, respectively.
We anticipate that funds necessary for capital expenditures, which are expected to be $12,000,000 in 2023, and other requirements, will be available from internally generated funds.
Cash required for financing activities totaled $19,693,000 in 2022 and $55,421,000 in 2021, while cash provided by financing activities totaled $93,395,000 in 2020. Debt reduction accounted for the majority of the usage of funds in 2022 and 2020, while proceeds from the Transactions accounted for the funds provided in the 2020 period.
Excluding payments required from the Company's future excess cash flow (as defined in Note 7), the only required principal payments include payments from net cash proceeds from asset sales (as defined in the Credit Agreement) and payments upon certain instances of change in control. Current maturities of long-term debt are from excess cash flows. There are no other scheduled mandatory principal payments required under the Credit Agreement.
Our liquidity, consisting of cash on the balance sheet, totals $16.2 million at September 25, 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.
At September 25, 2022, the principal amount of our outstanding debt totals $462.6 million.
The 2020 Refinancing as defined in Note 7, significantly extended our debt maturity profile with final maturity of our debt in 2045.
Our largest source of advertising and marketing services revenue, retail advertising, is seasonal and tends to fluctuate with retail sales in markets served. Historically, retail advertising is higher in the December and June quarters. Advertising and marketing services revenue is lowest in the March quarter.
Price increases (or decreases) for our products are implemented when deemed appropriate by us. We continuously evaluate price increases, productivity improvements, sourcing efficiencies and other cost reductions to mitigate the impact of inflation.
The following table summarizes our significant contractual obligations at September 25, 2022:
|(Thousands of Dollars)||Payments (or Commitments) Due (Years)|
|Nature of Obligation||Total||Less|
Debt (Principal Amount) (1)
|462,554 ||— ||— ||— ||462,554 |
Interest expense (2)
|936,673 ||41,630 ||124,890 ||124,890 ||645,263 |
|Operating lease obligations||71,144 ||12,921 ||22,501 ||16,923 ||18,799 |
|Withdrawal liabilities||27,305 ||1,564 ||3,127 ||3,127 ||19,487 |
|Capital expenditure commitments||3,872 ||3,872 ||— ||— ||— |
|1,501,548 ||59,987 ||150,518 ||144,940 ||1,146,103 |
(1)Maturities of long-term debt are limited to mandatory payments. See Note 7 of the Notes to the Consolidated Financial Statements, included herein.
(2)Interest expense includes an estimate of interest expense for the Term Note, until its maturity in March 2045. Interest expense under the Term Note is estimated using the 9.0% contractual rate applied to the outstanding balance as reduced by future contractual maturities of such debt. See Note 7 of the Notes to Consolidated Financial Statements, included herein.
The table above excludes future cash requirements for pension, postretirement and postemployment obligations. The periods in which these obligations will be settled in cash are not readily determinable and are subject to numerous future events and assumptions. See Notes 9 and 10 of the Notes to the Consolidated Financial Statements, included herein.
The contractual obligations above exclude unrecognized tax benefits to be recorded in accordance with FASB ASC Topic 740, Income Taxes. We are unable to reasonably estimate the ultimate amount or timing of cash settlements with the respective taxing authorities for such matters. A substantial amount of our deferred income tax liabilities will not result in future cash payments. See Note 14 of the Notes to the Consolidated Financial Statements, included herein.
ITEM 7A. 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 is entirely fixed rate as of September 25, 2022.
Declining structural demand trends and the COVID-19 impact on our industry and advertising led North American newsprint producers' efforts to permanently reduce manufacturing capacity by approximately 60% of pre-pandemic levels. As a result producers are experiencing high capacity utilization and increased backlogs which in turn led to numerous price increases during 2021 and 2022. We are still experiencing rising costs in our operations.
Our long term supply strategy continues to align and concentrate the Company's purchases with those cost effective suppliers most likely to continue producing and supply newsprint to the North American market. Where possible the Company will align supply with the lowest cost material.
A $10 per tonne price increase for 27.7 pound newsprint would result in an annualized reduction in income before taxes of approximately $308,000 based on anticipated consumption in 2023 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. At September 25, 2022, the fair value is $463,446,000.
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
Information with respect to this Item is included herein under the caption “Consolidated Financial Statements”.
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS
ON ACCOUNTING AND FINANCIAL DISCLOSURE
ITEM 9A. CONTROLS AND PROCEDURES
EVALUATION OF DISCLOSURE CONTROLS AND PROCEDURES
Under the supervision and with the participation of our management, including our principal executive officer and principal financial officer, we concluded an evaluation of our disclosure controls and procedures, as such term is defined under Rule 13a-15(e) promulgated under the Securities Exchange Act of 1934, as amended (the "Exchange Act").
Disclosure controls and procedures are controls and other procedures that are designed to ensure that information required to be disclosed in our reports filed or submitted under the Exchange Act is recorded, processed, summarized and reported, within the time periods specified in the Securities and Exchange Commission’s rules and forms. Disclosure controls and procedures include controls and procedures designed to ensure that information required to be disclosed in our Company’s reports filed under the Exchange Act is accumulated and communicated to management, including our Chief Executive Officer and Chief Financial Officer, to allow timely decisions regarding required disclosure. Based on this evaluation the Company identified material weaknesses in its internal control over financial reporting. Due to the material weaknesses, our principal executive officer and our principal financial officer concluded that, as of the end of the period covered by this report, our disclosure controls and procedures were not effective.
In light of the material weaknesses described below, management performed additional analysis and other procedures to ensure that our interim and annual consolidated financial statements were prepared in accordance with U.S. GAAP. Accordingly, management believes that the consolidated financial statements included in this Annual Report on Form 10-K fairly present, in all material respects, our financial position, results of operations, and cash flows as of and for the periods presented, in accordance with U.S. GAAP.
Management's Report on Internal Control Over Financial Reporting
The Company's management is responsible for establishing and maintaining adequate internal control over financial reporting as such term is defined in Rule 13a-15(f) of the Exchange Act. Any internal control system, no matter how well designed, has inherent limitations and may not prevent or detect misstatements. Accordingly, even those systems determined to be effective can provide only reasonable assurance with respect to financial statement preparation and presentation.
Under the supervision and with the participation of our senior management, including our chief executive officer and chief financial officer, we assessed the effectiveness of our internal control over financial reporting as of the Evaluation Date, using the criteria set forth in the Internal Control-Integrated Framework (2013) issued by the Committee of Sponsoring Organizations of the Treadway Commission. Based on this assessment, management has concluded that our internal control over financial reporting was not effective as of the Evaluation Date due to the material weaknesses in the Company's internal control over financial reporting described below. A material weakness is a deficiency, or combination of deficiencies, in internal control over financial reporting such that there is a reasonable possibility that a material misstatement of the Company's annual or interim financial statements will not be prevented or detected on a timely basis.
The material weaknesses identified by the Company are described below:
•Management did not maintain appropriately designed information technology general controls in the areas of user access for certain of its information systems that are relevant to the preparation of the Company’s consolidated financial statements and system of internal control over financial reporting.
•Management did not maintain appropriately designed controls over data provided by third-party service organizations for which a System and Organization Controls (SOC) 1 Type 2 report is not available. Specifically, management did not design and implement controls over the validation of the completeness and accuracy of information received from these service organizations and correspondingly relied upon by the Company in the preparation of the Company’s consolidated financial statements.
•Management did not maintain appropriately designed controls over validation of the accuracy of the tax basis associated with certain deferred tax assets and liabilities, which resulted in an immaterial error correction associated with the Company's previously issued consolidated financial statements.
BDO USA, LLP, our independent registered public accounting firm, has issued an attestation report on our internal control over financial reporting as of September 25, 2022, which is included herein. As a result of the material weaknesses described above, such report includes an adverse audit report on the effectiveness of internal control over financial reporting as of September 25, 2022.
Remediation Plans and Actions
Management is committed to remediating the material weaknesses that have been identified and maintaining an effective system of disclosure controls and procedures. These remediation efforts, summarized below, are intended to both address the identified material weaknesses and to enhance our overall financial control environment. In this regard, our initiatives include:
•Establishing a project team to review, evaluate, and remediate material weaknesses in internal controls over financial reporting. The Company's recently expanded Corporate Compliance function will lead management's efforts related to effective control design, documentation, and implementation, as well as remediate ineffective controls.
•Undergoing a complete user access review related to our information technology systems to refine user roles and establish appropriate user access to various systems that the Company relies upon in its internal controls over financial reporting, which includes enhancing user access provisioning and monitoring controls to enforce appropriate system access and segregation of duties.
•Providing training to relevant personnel reinforcing existing Company policies regarding user access and the steps and procedures required to perform the required reviews of access to Company systems.
•Enhancing the design of internal controls around evaluating data provided by third-party service organizations for which a SOC 1, Type 2 is not available to validate completeness and accuracy.
•Enhancing the design of internal controls to validate the accuracy of the tax basis for deferred tax assets and liabilities, including enhancing our record retention policy to include retaining documentation for complex tax items for as long as such tax items impact our consolidated financial statements.
The material weaknesses will be considered remediated when management concludes that, through testing, the applicable remedial controls are designed and implemented effectively.
When fully implemented and operational, we believe the measures described above will remediate the material weaknesses we have identified and strengthen our internal control over financial reporting. These material weaknesses will not be considered remediated until the remediated and/or newly implemented internal controls operate for a sufficient period of time and management has concluded, through testing, that these internal controls are operating effectively. We are working to have these material weakness remediated as soon as possible.
We are committed to continuing to improve our internal control processes and will continue to review and assess our financial reporting controls and procedures on an ongoing basis. As we continue to evaluate and
improve our internal control over financial reporting, our management may determine it is appropriate or necessary to take additional measures.
CHANGES IN INTERNAL CONTROL OVER FINANCIAL REPORTING
There have been no changes in our internal control over financial reporting that occurred during the 13 weeks ended September 25, 2022 that have materially affected or are reasonably likely to materially affect our internal control over financial reporting.
Report of Independent Registered Public Accounting Firm
Stockholders and Board of Directors
Lee Enterprises, Incorporated
Opinion on Internal Control over Financial Reporting
We have audited Lee Enterprises, Incorporated’s (the “Company”) internal control over financial reporting as of September 25, 2022, based on criteria established in Internal Control – Integrated Framework (2013) issued by the Committee of Sponsoring Organizations of the Treadway Commission (the “COSO criteria”). In our opinion, the Company did not maintain, in all material respects, effective internal control over financial reporting as of September 25, 2022, based on the COSO criteria.
We do not express an opinion or any other form of assurance on management’s statements referring to any corrective actions taken by the Company after the date of management’s assessment.
We also have audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States) (“PCAOB”), the consolidated balance sheet of the Company as of September 25, 2022, the related consolidated statements of income (loss) and comprehensive income (loss), stockholders’ equity (deficit), and cash flows for the fiscal year ended September 25, 2022, and the related notes (collectively referred to as the “consolidated financial statements”), and our report dated February 27, 2023, expressed an unqualified opinion thereon.
Basis for Opinion
The Company’s management is responsible for maintaining effective internal control over financial reporting and for its assessment of the effectiveness of internal control over financial reporting, included in the accompanying Item 9A, Management’s Report on Internal Control over Financial Reporting. Our responsibility is to express an opinion on the Company’s internal control over financial reporting based on our audit. We are a public accounting firm registered with the PCAOB and are required to be independent with respect to the Company in accordance with U.S. federal securities laws and the applicable rules and regulations of the Securities and Exchange Commission and the PCAOB.
We conducted our audit of internal control over financial reporting in accordance with the standards of the PCAOB. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether effective internal control over financial reporting was maintained in all material respects. Our audit included obtaining an understanding of internal control over financial reporting, assessing the risk that a material weakness exists, and testing and evaluating the design and operating effectiveness of internal control based on the assessed risk. Our audit also included performing such other procedures as we considered necessary in the circumstances. We believe that our audit provides a reasonable basis for our opinion.
A material weakness is a deficiency, or a combination of deficiencies, in internal control over financial reporting, such that there is a reasonable possibility that a material misstatement of the company’s annual or interim financial statements will not be prevented or detected on a timely basis. Material weaknesses were identified regarding the following:
1.Management’s failure to design and maintain effective information technology general controls relating to user access for certain of its information systems that are relevant to the preparation of the Company’s consolidated financial statements and system of internal control over financial reporting.
2.Management’s failure to design and implement effective controls over data provided by third-party service organizations for which a System and Organization Controls (SOC) 1 Type 2 report is not
available. Specifically, management did not design and implement effective controls to validate the completeness and accuracy of information received from these service organizations and correspondingly relied upon by the Company in its revenue recognition process and the preparation of the Company’s consolidated financial statements.
3.Management's failure to design and implement effective controls over validation of the accuracy of the tax basis associated with certain deferred tax assets and liabilities that are relevant to the preparation of the Company's consolidated financial statements.
These material weaknesses were considered in determining the nature, timing, and extent of audit tests applied in our audit of the consolidated financial statements, and this report does not affect our report dated February 27, 2023 on those consolidated financial statements.
Definition and Limitations of Internal Control over Financial Reporting
A company’s internal control over financial reporting is a process designed to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles. A company’s internal control over financial reporting includes those policies and procedures that (1) pertain to the maintenance of records that, in reasonable detail, accurately and fairly reflect the transactions and dispositions of the assets of the company; (2) provide reasonable assurance that transactions are recorded as necessary to permit preparation of financial statements in accordance with generally accepted accounting principles, and that receipts and expenditures of the company are being made only in accordance with authorizations of management and directors of the company; and (3) provide reasonable assurance regarding prevention or timely detection of unauthorized acquisition, use, or disposition of the company’s assets that could have a material effect on the financial statements.
Because of its inherent limitations, internal control over financial reporting may not prevent or detect misstatements. Also, projections of any evaluation of effectiveness to future periods are subject to the risk that controls may become inadequate because of changes in conditions, or that the degree of compliance with the policies or procedures may deteriorate.
/s/ BDO USA, LLP
February 27, 2023
ITEM 9B. OTHER INFORMATION
ITEM 10. DIRECTORS, EXECUTIVE OFFICERS AND CORPORATE GOVERNANCE
David T. Pearson, 57, Director since 2020
Mr. Pearson is a private investor and business consultant. He was Chief Financial Officer of Vonage (NASDAQ: VG) from May 2013 until August 2020. In that position, he managed Vonage’s Finance, Corporate Development and Investor Relations organizations. Before Mr. Pearson joined Vonage, he spent over nine years with Deutsche Bank Securities focused on Technology, Media & Telecom (TMT) as a Managing Director and Global Media & Telecom Group Head. Prior to joining Deutsche Bank, Mr. Pearson worked at Goldman, Sachs & Co. in the firm’s TMT practice for nine years, leaving as a Managing Director. He began his career at Coopers & Lybrand and holds a M.B.A. from Harvard Business School and his A.B. in Political Science and Organizational Behavior/Management from Brown University. Mr. Pearson is a member of the boards of directors of Magnite, Inc. (NASDAQ: MGNI) and Potbelly, Inc. (NASDAQ: PBPB), where he serves as Chairperson of each company’s Audit Committee.
Mr. Pearson is a member of the Audit Committee and serves as one of the Audit Committee’s designated financial experts.
Mr. Pearson has significant executive experience, including in the areas of operations, technology, finance, capital allocation, capital markets and mergers and acquisitions, as a result of his career as an executive at and advisor to companies in the technology, media and telecommunications sectors. Additionally, through his role as Chief Financial Officer of Vonage as well as his investment banking roles, Mr. Pearson has developed a strong understanding of financial and disclosure responsibilities, internal controls and procedures, and risk management functions, making him well-qualified to serve on the Audit Committee as one of its designated financial experts.
Margaret R. Liberman, 54, Director since 2019
Ms. Liberman is Senior Vice President, News, Talk & Entertainment at SiriusXM (NASDAQ: SIRI), where she has served since October 2017 and is responsible for content and strategic direction of the talk portfolio, overseeing 60 original and partner channels and all podcast programming produced under the Stitcher and Earwolf labels. Previously, she was Vice President and Editor in Chief of the Yahoo News Group from September 2013 to June 2017 and spent 13 years at The New York Times (NYSE: NYT), most recently as Deputy News Editor for Digital Development from 2010 to 2013. From 2001 to 2010, Ms. Liberman worked at The New York Times Magazine, first as a Story Editor before becoming Deputy Editor, where she oversaw numerous award-winning video and multimedia projects. Ms. Liberman began her career at a small children’s book publisher before assuming various editorial roles at Us Weekly, Swing Magazine, Martha Stewart Living, and Bridal Guide Magazine. Ms. Liberman earned a Bachelor of Arts degree from Barnard College in 1990 and a Master of Science degree from Columbia Graduate School of Journalism in 1995.
Ms. Liberman is a member of the Nominating and Corporate Governance Committee.
Ms. Liberman is a lifelong journalist and highly accomplished digital media executive. She brings top-tier experience and tremendous expertise developing and implementing effective digital platform strategies and directing award-winning editorial content. Her extensive experience and industry familiarity enables her to contribute effectively to the Board’s oversight of the Company’s strategy and operations.
Brent Magid, 58, Director since 2010
Mr. Magid is President and Chief Executive Officer of Frank N. Magid Associates, Inc., a research-based strategy consulting company with expertise in a wide range of media. From 2007 to 2009, Mr. Magid served as a director of Quattro Wireless, a mobile advertising company. From 1989 to 1991, Mr. Magid worked in the entertainment group of JPMorgan Chase & Co.
Mr. Magid is Chairman of the Audit Committee and serves as one of the Audit Committee’s designated financial experts and is also a member of the Executive Compensation Committee.
Mr. Magid provides the Board with experience and insight into key marketing and advertising trends and related media industry strategies, especially digital media and digital services. Also, Mr. Magid provides significant financial experience and contributes extensively to the oversight and integrity of the Company’s financial statements, risk management and risk assessment, ethics and compliance functions, and procedures and controls, which qualify him to serve as Chairman of the Company’s Audit Committee and as one of its designated financial experts.
Steven C. Fletcher, 55, Director since 2020
Mr. Fletcher has served as the Chief Executive Officer of technology company Explorer Parent LLC, a firm that sponsors special purpose acquisition companies (SPACs), since July 2020, an advisor to Carney Technology Acquisition Corp. II (NASDAQ: CTAQ) since December 2020, an advisor to Epiphany Technology Acquisition Corp. (NASDAQ: EPHY) since January 2021, an advisor to BioPlus Acquisition Corp. (NASDAQ: BIOS) since January 2021 and an advisor to Enterprise 4.0 Technology Acquisition Corp. (NASDAQ: ENTF) since October 2021. He served from 2013 to August 2022 as an independent director of atVenu, a leading live event commerce platform, where he was a member of the Audit and Compensation Committees, and as an independent director of Life Signals, Inc. a healthcare technology company since November 2021. From 2003 to May 2018, Mr. Fletcher was a Managing Director, Co-Head of the Digital Media Group and Head of the Software Group at GCA Savvian, a global investment bank. He was also a member of the firm’s Management Committee. From 1994 until 2002, Mr. Fletcher worked at Goldman, Sachs & Co., where he held a number of leadership roles including Head of the Private Placement Group, Head of the IT Services sector and Co-Head of the Hardware, Storage, EMS, and Internet Infrastructure sectors. He began his career at Deloitte & Touche as a CPA. Mr. Fletcher received a B.A. in Economics from UCLA and an M.B.A. from the Wharton School of the University of Pennsylvania.
Mr. Fletcher is the Chairman of the Nominating and Corporate Governance Committee, and a member of the Audit Committee and Executive Compensation Committee.
Mr. Fletcher brings to the Board more than 20 years of experience in the investment banking industry, and he has extensive expertise with respect to debt and equity financing, strategic transactions, capital allocation, capital markets and corporate financial management, particularly in the digital media sector. He also has significant experience with corporate governance through prior service on several boards. His experience enables him to provide strong oversight of financial and disclosure responsibilities, controls, and procedures, and he serves as one of the Audit Committee’s designated financial experts.
Shaun McAlmont, 57, Director since May 2022
Dr. McAlmont is a seasoned executive with deep experience overseeing successful digital transformations, change management and strategic partnerships. In early 2022, Dr. McAlmont joined a cybersecurity training company, NINJIO, LLC, as President and CEO, after serving since 2018 as the President of Career Learning at Stride, Inc. (NYSE: LRN), a $1.5 billion technology-based education company, where he led a multi-year digital transformation that doubled the size of the career learning business through the introduction of new IT, business and healthcare career training programs, three acquisitions, and strategic corporate and higher education partnerships. From 2015 to 2017, he was the President and CEO of Neumont College of Computer Science, a for-profit training institution. Dr. McAlmont also served as the President and CEO of Lincoln Educational Services (NASDAQ: LINC) from 2005 to 2015. Dr. McAlmont held senior-level manager positions at Alta Colleges, where he pioneered online learning at scale, and Heald Colleges from 1991 to 2005, after beginning his career at Stanford University. Dr. McAlmont received a Bachelor of Science degree in Psychology from Brigham Young University and multiple graduate degrees in the education field, including a Doctorate of Higher Education Management from the University of Pennsylvania. He recently completed the Board Education Program at Stanford University Directors College. Dr. McAlmont is a member of the BorgWarner (NYSE: BWA) board of directors, where he serves on its compensation committee.
Dr. McAlmont is a member of the Executive Compensation Committee.
Dr. McAlmont brings to the Board more than 25 years of career leading successful digital transformations at scale in online learning and workforce training and has leveraged past learnings to drive growth and generate value at several companies. He has significant executive leadership and public company board experience.
Gregory P. Schermer, 68, Director since 1999
Mr. Schermer served as Vice President — Strategy of the Company from March 2012 until his retirement in September 2016. From 1989 to July 2006, Mr. Schermer served as Corporate Counsel of the Company, and from July 2006 until October 2012, he served as Vice President — Interactive Media of the Company. Mr. Schermer led the development of the Company’s digital media strategies and platforms, including the successful expansion of BLOX Digital and represented the Company in several industry digital media initiatives, including The Local Media Consortium (the “Consortium”), a group of 82 companies that create digital partnerships for local media operations. Mr. Schermer served as a member of the Consortium’s executive committee.
Mr. Schermer is a member of the Audit Committee and Nominating and Corporate Governance Committee.
Mr. Schermer provides the Board with insight and operational perspective on the Company’s digital media strategies and his in-depth understanding of the Company’s business, strategy and operations makes him well-qualified to provide guidance to the Board in its oversight of the Company’s digital transformation. Through his former role as the Company’s corporate counsel, he also provides the Board with valuable insight on legal matters, compliance and risk assessment, and corporate governance.
Mary E. Junck, 75, Director since 1999
Mary E. Junck was elected Executive Chairman of the Company in February 2016 and elected Chairman in February 2019. She joined Lee in 1999 as Executive Vice President and Chief Operating Officer. She became president in 2000, Chief Executive Officer in 2001 and Chairman in January 2002. She previously held senior executive positions at the former Times Mirror Company, where she was responsible for the operations of Newsday, The Baltimore Sun (publisher and chief executive officer), the Hartford Courant, The Morning Call, Southern Connecticut Newspapers and St. Paul Pioneer Press (publisher and president). She also had responsibility for Times Mirror magazines and StayWell, Times Mirror’s consumer health company. She was a member of the board of directors of The Associated Press from 2004 to 2017 and was chairman from 2012 to 2017. Since October 2016, Ms. Junck has served as a director of Postmedia Network Canada Corp. (TSE: PNC.A), a public company based in Toronto, Canada, that owns numerous newspapers and associated online platforms throughout Canada.
Ms. Junck’s in-depth knowledge of the Company and the publishing industry, in which she has worked in executive and senior management positions for more than 32 years, enables her to lead the Board effectively in her capacity as Chairman. Ms. Junck provides a valuable and unique perspective in Board deliberations about the Company’s business, competitive landscape, strategic relationships and opportunities, senior leadership and operational and financial performance. As Chairman, Ms. Junck serves as an advisor to the Chief Executive Officer and provides overall leadership for the Board. Her experience provides her with a thorough understanding of strategic direction and partnerships, financial matters and board management.
Herbert W. Moloney III, 72, Director since 2001
From December 2006 until his retirement in July 2011, Mr. Moloney was President and Chief Operating Officer of Western Colorprint, Inc., a privately held company that provided advertising supplements and commercial printing services to the publishing industry. From April 2005 to November 2006, Mr. Moloney was President and Publisher of the Washington Examiner. From 2000 to March 2005, Mr. Moloney was the Chief Operating Officer, North America, and an Executive Vice President of Vertis, Inc., a premium provider of targeted advertising and marketing solutions to leading retail and consumer services companies.
Mr. Moloney is Chairman of the Executive Compensation Committee and a member of the Audit Committee, the Nominating and Corporate Governance Committee, and the Executive Committee. Mr. Moloney has been designated as the Company’s Lead Director by the independent directors to preside over executive sessions of non-management directors, among other duties.
Mr. Moloney brings to the Board more than 30 years of executive and management experience in the publishing and television industries. His extensive relevant industry and executive leadership experience provides him with substantive knowledge about a variety of issues that are related to the Company’s business, including digital and print advertising and marketing, operations and strategy development.
Kevin D. Mowbray, 61, Director since 2016
Mr. Mowbray was elected as the Company’s President and Chief Executive Officer (“CEO”) in February 2016. Prior to his election as CEO, Mr. Mowbray was the Company’s Executive Vice President and Chief Operating Officer from April 2015, and served as Vice President and Chief Operating Officer since 2013. He previously was publisher of the Company’s largest newspaper, the St. Louis Post-Dispatch, from 2006 to 2013, where he drove the Company’s digital efforts and piloted many significant digital products and initiatives. Mr. Mowbray is a member of the News Media Alliance board of directors, where he also serves on its executive committee and is the chair of the board of trustees of the American Press Institute. He is also a member of the board of directors of the Associated Press.
As President and CEO, Mr. Mowbray has direct responsibility for all aspects of the Company’s operations, including more than 77 markets in 26 states and the corporate staff, with special focus on digital growth, revenue expansion and business transformation. His familiarity with the Company and his role in spearheading the development of our five-year strategic plan and digital strategies and overseeing our transformation, coupled with his 36 years of executive and management experience in the publishing industry, makes him a valuable addition to our Board.
|Name||Offices or Positions to be Held||Biographical Information|
|Kevin D. Mowbray||President and Chief Executive Officer||Mr. Mowbray, age 61, has been President and Chief Executive Officer since February 2016. Previously, Mr. Mowbray held the titles of Executive Vice President and Chief Operating Officer from April 2015 to February 2016, Vice President and Chief Operating Officer from May 2013 to April 2015, Publisher of the St. Louis Post-Dispatch from 2006 to May 2013, and Vice President - Publishing from 2004 to May 2013. Mr. Mowbray joined the Company in 1986 and served in several positions in the Company’s sales and marketing and newspaper management functions, including as Vice President for Sales and Marketing and General Manager, the Missoulian.|
|Timothy R. Millage||Vice President, Chief Financial Officer and Treasurer||Mr. Millage, age 42, has been Vice President, Chief Financial Officer and Treasurer since August 2018. Mr. Millage served as the corporate controller of the Company from 2012 to 2018. Prior to joining the Company, Mr. Millage served as an audit manager with Deloitte, LLP and worked for multinational clients in various industries.|
|Nathan E. Bekke||Operating Vice President; Vice President - Audience Strategy||Mr. Bekke, age 53, has been Vice President - Consumer Sales and Marketing since February 2015. Previously, Mr. Bekke served as Publisher of the Casper Star-Tribune, a Company newspaper, from 2003 to February 2015. Mr. Bekke joined the Company in 1988 and served in several positions in the Company’s sales and marketing function, including as director of sales and marketing at Billings Gazette and the Independent Record.|
|Astrid J. Garcia||Vice President - Human Resources and Legal; Chief Legal Officer||Ms. Garcia, age 72, has been Vice President - Human Resources and Legal since 2013. Previously, Ms. Garcia served as Vice President of Human Resources and Operations at the St. Louis Post-Dispatch from December 2006 to 2013. Prior to joining the Company, Ms. Garcia served as a senior human resources professional and legal advisor for a number of companies in the publishing industry.|
|Joseph J. Battistoni||Vice President - Sales and Marketing||Mr. Battistoni, age 40, has been Vice President - Sales and Marketing since November 2020. Previously, Mr. Battistoni held the titles of Vice President - Local Advertising from January 2020 to November 2020 and General Manager and Vice President of Sales and Marketing at The Times of Northwest Indiana from November 2015 to January 2020. Mr. Battistoni joined the Company as Digital Director of The Times in March 2014. Prior to joining the Company, Mr. Battistoni was employed by Tribune Media Company in various leadership positions involving the delivery of digital services and targeted media.|
|Jolene Sherman||Vice President - Business Development and Market Strategy ||Ms. Sherman, age 41, has been Vice President - Business Development and Market Strategies since June 2022. Previously Ms. Sherman was Vice President - Digital Sales and Agency Strategies from March 2020 until June 2022. Prior to that, Ms. Sherman served as the Vice President and Managing Director of Amplified Digital from 2017 until March 2020. Ms. Sherman joined the Company in 2005 as a sales executive with the St. Louis Post-Dispatch. |
DELINQUENT SECTION 16(a) REPORTS
Section 16(a) of the Exchange Act requires our executive officers and directors to file initial reports of ownership and reports of changes in that ownership with the SEC. Specific due dates for these reports have been established and we are required to disclose in our Proxy Statement any failure to file by these dates in 2021.
Based solely on review of the reports received by the Company, and on written representations from certain reporting persons, the Company believes the persons subject to Section 16(a) reporting complied with applicable SEC filing requirements during fiscal year 2022, with the exception of a Form 3 filing on behalf of Dr. Shaun E. McAlmont, related to his election as a Director, which was effective May 9, 2022, and filed late on September 6, 2022.
CODE OF ETHICS
We have a Code of Business Conduct and Ethics ("Code") that applies to all of our employees, including our principal executive officer, and principal financial and accounting officer. The Code is monitored by the Audit Committee of our Board of Directors and is annually affirmed by our directors and executive officers. We maintain a corporate governance page on our website which includes the Code. The corporate governance page can be found at www.lee.net by clicking on “Governance” under the "About" tab. A copy of the Code will also be provided without charge to any stockholder who requests it. Any future amendment to, or waiver granted by us from, a provision of the Code will be posted on our website.
The Company’s Board of Directors has a separately designated standing Audit Committee. The Audit Committee of the Company’s Board of Directors consists of Messrs. Fletcher, Magid, Moloney, Pearson, and Schermer, with Mr. Magid serving as chairman. Each member of the Audit Committee meets the financial sophistication requirements of NASDAQ. Our Board has determined that Messrs. Magid, Fletcher, and Pearson meet the requirements of an audit committee financial expert, as defined by the SEC, and that all Audit Committee members are financially sophisticated and meet the NASDAQ’s independence requirements and definition of an independent director.
ITEM 11. EXECUTIVE COMPENSATION
References to “we,” “our” or “us” under “Executive Compensation” refer to the Executive Compensation Committee.
The following describes certain aspects, elements, and objectives of and information concerning the Company's executive compensation program with respect to the Company's NEOs in 2022.
2022 Corporate Performance Assessment
In 2022, the Company continued to grow digital revenue, managed print revenue in a difficult environment, controlled costs and significantly reduced debt. Significant results for the year included the following:
•Total operating revenue was $781 million, down 2% versus the prior year.
•Total Digital Revenue was $240 million, a 27% increase over the prior year, and represented 31% of our total operating revenue.
•Digital-only subscription revenue increased 42% in 2022 compared to 2021.
•Digital advertising and marketing services revenue represented 50% of our total advertising revenue and totaled $181 million, a 28% increase over the prior year. Digital marketing services revenue at Amplified Digital® fueled the growth, with revenue of $76 million, an 83% increase over the prior year.
•Digital services revenue, which is predominantly BLOX Digital, totaled $18 million in the year. On a standalone basis, revenue at BLOX Digital totaled $31 million, a 14% increase over the prior year.
•Operating expenses totaled $762 million and Cash Costs were up 1%. Rapidly rising prices, incremental investments in digital talent and technology tied to our digital growth strategy, and an increase in cost of goods sold attributed to revenue growth at Amplified Digital® were partially offset by reductions in costs tied to our legacy print revenue streams.
•Net income totaled $0.1 million and Adjusted EBITDA totaled $96 million.
The Named Executive Officers
The Company's NEOs include the principal executive officer, the principal financial officer and the other most highly compensated executive officer who was serving as an executive officer at September 25, 2022. In 2022, the NEOs were:
|Kevin D. Mowbray||President and Chief Executive Officer|
|Timothy R. Millage||Vice President, Chief Financial Officer & Treasurer|
|Nathan E. Bekke||Operating Vice President, Vice President - Audience Strategy|
Elements of Compensation
Our compensation program reinforces the key drivers of success in the Company’s business. Our financial emphasis is on revenue and operating cash flow. We believe these two measures are key measures of long and short-term success in our industry. Compensation for our NEOs includes the following:
•Annual cash incentives which are based, to a large extent, on annual performance of the Company and the operations the individual manages;
•Discretionary cash bonus awards in those circumstances where we believe exceptional performance is not adequately rewarded under our annual cash incentive compensation program;
•Long-term equity incentives in the form of stock options or restricted Common Stock awards that fully vest three years after grant; and
•Benefits, including health, life and disability insurance, a 401(K) plan and a supplemental deferred compensation plan.
Our annual cash incentive program places a portion of NEO compensation at risk, based on performance criteria. In addition, stock options, when granted, are inherently performance-based because an option only has value if the stock price rises after the option is granted. In some instances, we also make restricted Common Stock awards conditioned on the achievement of one or more specified performance goals under our Incentive Compensation Program.
At our 2017 annual meeting, we conducted a non-binding advisory vote of the shareholders on the frequency of advisory votes on the Company’s compensation of its NEOs (the “say-on-frequency” vote). Of the 4,273,000 shares represented at the meeting, a plurality of approximately 41.0% of the shares represented at the meeting were voted in favor of a one-year frequency vote; 25.2% of such shares were voted in favor of a three-year frequency for such votes; and due to broker non-votes, approximately 32.8% of the shares represented at the meeting were not voted in favor of any alternative.
Due to the inconclusive nature of the advisory voting results, the Executive Compensation Committee considered several factors in making its determination regarding the frequency of advisory shareholder votes on the Company’s executive compensation program.
•In 2011, 2014, and 2017, the shareholders recommended, on an advisory basis, the approval of the compensation philosophy, policies and procedures employed by the Executive Compensation Committee, substantially as described herein (the “say-on-pay” vote).
•In 2011, 2014, and 2017, 93.6%, 95.8%, and 95.4% of the votes cast were voted in favor of the say-on-pay proposal, respectively.
•Shareholder engagement and feedback findings do not indicate any concerns with the Company’s executive compensation program.
•Shareholders who have concerns about executive compensation during the interval between “say-on-pay” votes are welcome to bring their specific concerns to the attention of the Board and the Executive Compensation Committee.
Consistent with the recommendation of the Board as set forth in the Company’s proxy statement for its 2017 annual meeting, the Board determined, after consideration, to continue holding an advisory shareholder vote on the compensation of the Company’s NEOs every three years. This policy remains in effect until the “say-on-frequency” advisory vote regarding the compensation of the Company’s NEOs at the Annual Meeting. The next scheduled “say-on-pay” advisory vote related to executive compensation matters will be conducted at the 2023 Annual Meeting and the Board is recommending a change to an annual “say-on-pay frequency” advisory vote in order to reflect market trends and best practices.
Valuation of Equity Awards
The accounting value of equity awards is charged to expense over the vesting period of the equity award. The accounting value of equity awards to NEOs is summarized below:
|(Dollars)||Total Accounting Value of 2022 Grants||Accounting Charge|
Recorded in 2022
for 2022 Grants
Recorded in 2022 for 2021, 2020 and 2019 Grants
to be Recorded
for 2022 Grants
|Kevin D. Mowbray||400,000 ||105,556 ||327,500 ||294,444 |
|Timothy R. Millage||250,000 ||65,976 ||68,028 ||184,024 |
|Nathan E. Bekke||250,000 ||65,976 ||30,556 ||184,024 |
Summary Compensation Table
The following table summarizes the 2022 and 2021 compensation of the NEOs:
|Kevin D. Mowbray||2022||900,000 ||400,000 ||— ||1,008,056 ||23,779 ||2,331,835 |
|President and Chief Executive Officer||2021||900,000 ||168,000 ||— ||1,083,595 ||23,017 ||2,174,612 |
|Timothy R. Millage||2022||506,250 ||250,000 ||— ||283,516 ||11,570 ||1,051,336 |
|Vice President, Chief Financial Officer, and Treasurer||2021||450,000 ||56,000 ||— ||270,899 ||12,829 ||789,728 |
|Nathan E. Bekke||2022||500,833 ||250,000 ||— ||355,484 ||11,301 ||1,117,618 |
|Operating Vice President; Vice President - Audience Strategy||2021||400,000 ||39,823 ||— ||240,799 ||11,432 ||692,054 |
(1) Stock and option awards are granted at a price equal to the fair market value on the date of grant. Information with respect to stock awards granted to the NEOs is reflected in “Outstanding Equity Awards at September 25, 2022” below.
(2) Includes discretionary amounts paid under the annual cash incentive plan.
(3) Includes matching contributions made to the Company's Retirement Account Plan and Non-Qualified Plan during the year. To the extent qualifying compensation was not received during the year, such as certain non-equity incentive plan compensation, the related matching contribution may be reported in a subsequent year.
(4) The Lee Foundation, an affiliate of the Company, matches on a dollar-for-dollar basis up to $5,000 annually, charitable contributions made by NEOs to qualifying organizations. Such matching contributions are not considered compensation of the NEO.
Grants of Plan-Based Awards
The following table summarizes information related to 2022 grants of equity compensation under the LTIP and the Incentive Compensation Program for the CEO, and under the LTIP for the other NEOs.
|(Dollars)||2022 Grant Date||All Other Stock |
of Shares of Stock
|2022 Grant Date |
Fair Value of
|Kevin D. Mowbray||12/10/2021||13,329 ||400,000 |
|Timothy R. Millage||12/10/2021||8,331 ||250,000 |
|Nathan E. Bekke||12/10/2021||8,331 ||250,000 |
Outstanding Equity Awards at September 25, 2022
The following table summarizes outstanding equity awards to the NEOs as of September 25, 2022:
|(Dollars, Except Share Data)||Restricted Common Stock Awards|
|Number of Shares of Stock That Have Not Vested|
Market Value of Shares of Stock That Have Not Vested (1)
|Kevin D. Mowbray|
|2022 Stock Award||13,329||226,726|
|2021 Stock Award||15,000||255,150|
|2020 Stock Award||20,000||340,200|
|Timothy R. Millage|
|2022 Stock Award||8,331||141,710|
|2021 Stock Award||5,000||85,050|
|2020 Stock Award||5,400||91,854|
|Nathan E. Bekke|
|2022 Stock Award||8,331||141,710|
|2021 Stock Award||3,556||60,488|
|2020 Stock Award||3,200||54,432|
(1) Based on closing market price of $17.01 on September 23, 2022.
Option Exercises and Stock Vested
The following table summarizes information related to vesting of restricted Common Stock of the NEOs in 2022:
|Restricted Common Stock|
|(Dollars, Except Share Date)||Number of Shares Acquired on Vesting||Value Realized on Vesting|
|Kevin D. Mowbray||20,000 ||334,800 |
|Timothy R. Millage||5,400 ||90,396 |
|Nathan E. Bekke||3,200 ||53,568 |
Non-Qualified Deferred Compensation
The following table summarizes information related to 2022 activity in the Non-Qualified Plan for the NEOs.
|Distributions||Aggregate Balance at|
September 25, 2022
|Kevin D. Mowbray||44,197 ||17,679 ||3,611 ||— ||549,724 |
|Timothy R. Millage||13,674 ||5,470 ||(12,932)||— ||62,345 |
|Nathan E. Bekke||13,002 ||5,201 ||(6,788)||— ||75,148 |
(1) Amounts included in total compensation in the Summary Compensation Table under “Salary.”
(2) Amounts included in total compensation in the Summary Compensation Table under “All Other Compensation”.
(3) Earnings are based on the performance of investments selected by the NEO.
(4) Amounts include compensation to the NEO in the form of Company contributions prior to 2021.
For those NEOs continuing to participate in the Non-Qualified Plan in 2020 and thereafter, withdrawals are permitted following termination of employment. Employee contributions are limited to 45% of salary and bonus compensation. See “Primary Benefits” above for additional information with regard to the Non-Qualified Plan.
Change of Control, Employment and Other Agreements
In 2015, we entered into amended and restated employment agreements between the Company and eight senior executive officers, including all of our NEOs, with the exception of Messrs. Farris and Millage, who entered into such agreements in 2018. The employment agreements entitle these executives to severance and other benefits upon termination without cause or for good reason that becomes effective only upon a change of control. We approved the new agreements because we believe they better align our agreements with general industry change of control employment agreements.
A change of control is defined to include certain mergers and acquisitions, liquidation or dissolution of the Company, changes in the membership of the Company's Board and acquisition of 15% of the outstanding stock of the Company for the purpose of changing the control of the Company. The new agreements superseded agreements originally entered into in 1998 and amended and restated in 2008 and provide substantially lower benefits upon a change of control.
Absent a change of control, the agreements do not require the Company to retain the executives or to pay them any specified level of compensation or benefits, and they remain employees at will.
The agreements extend for two years from the date of signature. On each annual anniversary date of the agreements (each a “Renewal Date”), the change of control period will be automatically extended so as to terminate two years from such Renewal Date, unless at least 60 days prior to the Renewal Date the Company gives notice to the executive that the change of control period will not be extended.
The agreements are subject to the following triggers:
•The agreements become effective and the protective features vest upon a change of control or if an executive's employment is terminated as a consequence of such event.
•The agreements provide that each executive is to remain an employee for a two-year period following a change of control of the Company unless the executive resigns for good reason or is terminated for cause, each as defined in the agreement.
Under the agreements, a termination pursuant to the terms of the change of control agreement triggers the following compensation and benefits for the executives:
Employment Period Benefits
During the two-year employment period, the executives are entitled to:
•An annual base salary, payable monthly in an amount at least equal to their highest monthly base salary during the year prior to the change of control;
•An annual bonus, payable in a lump sum within 75 days following each fiscal year in an amount at least equal to their highest annual bonus in the three years prior to the change of control;
•Continued participation in the Company's incentive, savings, retirement, and welfare benefit plans; and
•Payment of expenses and fringe benefits (including office and support staff, tax and financial planning services, applicable club dues and use of an automobile and related expenses) to the extent paid or provided to such executive immediately prior to the change of control or to other peer executives of the Company.
Benefits Upon Termination
If the executive's employment is terminated during the two-year employment period other than for cause, death or disability, or the executive terminates employment for good reason, the executive will be entitled to the following benefits:
•All accrued and unpaid annual base salary and annual bonus for the prior fiscal year payable in a lump sum within 30 days of termination;
•A lump sum severance payment equal to the amount corresponding to the executive's title set forth in the following table:
•CEO 3x annual base salary and highest recent annual bonus
•Vice Presidents 1x annual base salary and highest recent annual bonus
•A payment equal to the payment multiple above of the Company's average annual contributions on behalf of the executive under all defined contribution plans maintained by the Company during the three-year period immediately preceding the termination;
•Any legal fees and expenses incurred by the executive in asserting legal rights in connection with the agreement; and
•Continued welfare benefits for the period equal to the multiple of their base salary payable plus certain outplacement services.
Under the agreements, termination for cause means termination of the executive's employment due to the (1) willful and continued failure of the executive to perform substantially the executive's duties with the Company or one of its affiliates, or (2) the willful engaging by the executive in illegal conduct or gross misconduct which is materially and demonstrably injurious to the Company.
Good reason means actions taken by the Company that result in a material negative change in the employment relationship, including a detrimental change in responsibilities, a reduction in salary or benefits or a relocation of office, as described in the agreement.
Excise Tax Cap on Payments
To reduce the impact of any excise tax imposed on the executive related to the change of control, the agreements also require the Company to cap the overall value of payments if such reduction results in a larger net after-tax payment than would result if such payments were not capped and subject to an excise tax.
For a period of one year after the agreements become effective, the executives are restricted from:
•Disclosing the confidential information of the Company and its affiliates;
•Competing against the Company and its affiliates;
•Soliciting the customers of the Company and its affiliates; and
•Soliciting the employees of the Company and its affiliates for employment and hiring them, unless the employee is responding to employment advertising of a general nature or unless approved by the President of the Company in advance.
There is no requirement in the agreements that the executives execute a release of claims in favor of the Company and its affiliates.
The agreements mandate that the Company require an acquirer to assume and satisfy the Company's obligations under the agreements.
The Company's LTIP was amended to provide that, if a change of control occurs, for early vesting and exercise and issuance or payment will be subject to a “double-trigger” for the following awards to executives (subject to certain limits):
•Awards of restricted Common Stock;
•Stock options and stock grants; or
•Amounts payable instead of such issuance in a lump-sum payment within 30 days of surrender of such stock options to the Company.
Generally, vesting and payment will not occur if replacement awards equal in value and vesting terms are granted to the affected executive in connection with the change of control, unless the executive is thereafter terminated within the specified protection period.
Potential Payments Upon Termination or Change of Control
The following summarizes information as of September 25, 2022, related to estimated potential cash payments upon a change of control to the NEOs. Amounts in the table do not reflect income tax benefits that may be realized by the Company. The estimated payments also make assumptions as to whether certain discretionary bonus payments made to NEOs are qualifying annual incentive plan payments under the agreements.
|(Dollars)||Estimated Net Present Value of Change of Control Severance and Benefits|
|Kevin D. Mowbray||7,178,428 |
|Timothy R. Millage||1,195,522 |
|Nathan E. Bekke||1,141,568 |
COMPENSATION OF NON-EMPLOYEE DIRECTORS
We desire to compensate our directors in a manner that is comparable to compensation levels at companies in our peer group and companies of a similar size (see “Peer Group Information” under “Executive Compensation” below) and provides stock ownership. Peer group proxy statements are provided to the Executive Compensation Committee with information on annual retainers and compensation for attendance at board and committee meetings. The Executive Compensation Committee reviews the information and makes a
recommendation to the full Board for its approval. In 2019, the Executive Compensation Committee also requested a comprehensive report on peer group director compensation from Korn Ferry, its independent consultant (the “Korn Ferry report”).
In December 2019, upon the recommendation of the Executive Compensation Committee after review and analysis of industry peer board compensation practices and the Korn Ferry report, as part of the Board's ongoing review of the Company's governance practices, the Board approved the following Board compensation program:
•Annual cash retainer to $100,000 in lieu of such fees;
•Implementation of an annual cash retainer for the following committee chairs and Lead Director:
•Lead Director $20,000
•Audit and ECC $15,000
•Implementation of non-employee director stock ownership guidelines, as reflected in the Company Corporate Governance Guidelines; and
•Annual restricted stock awards under the 2020 Long-Term Incentive Plan (“2020 Plan”) to non-employee directors, with the 2020 stock award to be shares of Company common stock with a fair market value of $50,000 on June 1, 2020, subject to shareholder approval of the 2020 Plan.
At the 2020 Annual Meeting, the shareholders approved the 2020 Plan, and the 2020 Plan was implemented in March 2020 and remains in effect in 2023. In 2022, the annual restricted stock award to non-employee directors was increased to $60,000.
Directors engaged to provide consultative services are normally compensated at the rate of $1,500 per day. None of our non-employee directors received compensation for consultative services in 2022.
The following table summarizes non-employee director compensation for calendar 2022:
|(Dollars)||Fees Earned or Paid in Cash|
|Value of Stock Awards|
|Steven C. Fletcher||105,000 ||60,000 ||165,000 |
|Margaret R. Liberman||100,000 ||60,000 ||160,000 |
|Brent M. Magid||115,000 ||60,000 ||175,000 |
|Shaun E. McAlmont||64,516 ||60,000 ||124,516 |
|Herbert W. Moloney lll||135,000 ||60,000 ||195,000 |
|David T. Pearson||100,000 ||60,000 ||160,000 |
|Gregory P. Schermer||105,000 ||60,000 ||165,000 |
|Mary E. Junck||250,000 ||180,000 ||430,000 |
(1) Cash compensation in excess of the 2022 annual retainer represents payment for directors as a committee chair or, in the case of Mr. Moloney, for his service as Lead Director.
(2) All restricted stock awards are fully vested on the first anniversary of the grant date. Restricted Stock awards are granted at a price equal to the fair market value of the date of the grant.
The Board has authorized non-employee directors, prior to the beginning of any calendar year, to elect to defer receipt of all or any part of the cash compensation a director might earn during such year under our Outside Directors Deferral Plan (Amended and Restated as of January 1, 2008). Amounts so deferred will be paid to the director upon his or her separation from service, death, or disability, adjusted for any investment gains (or losses) thereon. Alternatively, directors may elect to have deferred compensation credited to a “rabbi trust” established by us with an independent trustee, which administers the investment of amounts so credited for the
benefit and at the direction of the trust beneficiaries until their accounts are distributed under the deferred compensation plan. Amounts so credited for the benefit of non-employee directors are invested in investment alternatives selected by the director.
None of our employees receives any compensation for serving as a director.
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
AND RELATED STOCKHOLDER MATTERS
EQUITY COMPENSATION PLAN INFORMATION
Information as of September 25, 2022, with respect to equity compensation plans is as follows:
|Plan Category||Number of Securities to be Issued Upon Exercise of Outstanding Options, Warrants and Rights (A)||Weighted Average Exercise Price of Outstanding Options, Warrants and Rights (Dollars)|
|Number of Securities Remaining Available for Future Issuance Under Equity Compensation Plans|
(Excluding Shares in column A)
|Equity compensations plans approved by shareholders||— ||— ||279,810 |
(2) Includes the number of securities remaining available for future issuance under our LTIP
(3) Those securities not issued as a result of cancellation, forfeiture or surrender of previously outstanding options or adjustment of target restricted stock awards remain available for issuance, at the discretion of the Executive Compensation Committee, under the LTIP. Such shares are excluded from the total presented as the amount cannot be ascertained. Unvested restricted stock awards are not included in the number of shares presented as they are no longer available for future issuance once granted.
VOTING SECURITIES AND PRINCIPAL HOLDERS THEREOF
The following table sets forth information as of January 12, 2023, except as set forth below, as to each person known by us to own beneficially more than 5% of our Common Stock.
|Name and Address of Beneficial Owner||Title of Class||Shares of Common Stock||Percent of Class|
Cannell Capital, LLC (1)
|245 Meriwether Circle, Alta, WY 83414||Common Stock||546,935 ||9.15 ||%|
Praetorian Capital Fund LLC (2)
|330 Mangrove Thicket Blvd, Ponte Vedra, FL 32081||Common Stock||430,000 ||7.30 ||%|
Mason P. Slaine Revocable Trust (3)
|1000 S. Ocean Blvd, Unit 501, Boca Raton, FL 33432||Common Stock||299,000 ||5.00 ||%|
(1) Information is based solely on a report on Schedule 13D/A filed with the SEC on December 8, 2022.
(2) Information is based solely on a report on Schedule 13D, filed with the SEC on February 2, 2022.
(3) Information is based solely on a report on Schedule 13D filed with the SEC on September 23, 2022.
The following table sets forth information as to our Common Stock beneficially owned as of January 12, 2023, by each director and nominee, each of the NEOs listed in the Summary Compensation Table, and by all directors and executive officers as a group:
|Beneficial Owner||Shares of Common Stock||Percent of Class|
|Nathan E. Bekke||30,800||*|
|Astrid J. Garcia||18,991||*|
|Joseph J. Battistoni||16,047||*|
Ray G. Farris (1)
|Steven C. Fletcher||9,644||*|
|Mary E. Junck||185,784 ||3.1%|
|Margaret R. Liberman||8,644||*|
|Brent M. Magid||17,482||*|
|Shaun E. McAlmont||3,067|