LEE ENTERPRISES, Inc - Quarter Report: 2020 March (Form 10-Q)

References to “we”, “our”, “us” and the like throughout this document refer to Lee Enterprises, Incorporated (the “Company”). References to “2020”, “2019” and the like refer to the fiscal years ended the last Sunday in September.

FORWARD-LOOKING STATEMENTS

The Private Securities Litigation Reform Act of 1995 provides a “safe harbor” for forward-looking statements. This report contains information that may be deemed forward-looking that is based largely on our current expectations, and is subject to certain risks, trends and uncertainties that could cause actual results to differ materially from those anticipated. Among such risks, trends and other uncertainties, which in some instances are beyond our control, are:

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 report. We do not undertake to publicly update or revise our forward-looking statements, except as required by law.

EXPLANATORY NOTE

The Company relied on the SEC’s Order under Section 36 of the Securities and Exchange Act of 1934 Modifying Exemptions from the Reporting and Proxy Delivery Requirements for Public Companies dated March 25, 2020 (Release No. 34-88465) (“Order”) to delay the filing of its Quarterly Report on Form 10-Q for the period ended March 29, 2020, due to circumstances related to COVID-19. The original due date for filing of the Company’s Quarterly Report was May 8, 2020. On May 8, 2020, the Company filed a current report with the SEC which stated that it expected to file its Quarterly Report on Form 10-Q on or before June 22, 2020, 45 days from the original filing deadline of May 8, 2020, in compliance with the provisions of the Order.

The Company required additional time to finalize the Form 10-Q because its operations and business have experienced significant disruptions due to the unprecedented conditions surrounding the ongoing COVID-19 pandemic along with the various measures that Federal, state, and local jurisdictions have taken in response to the crisis. In response to these measures, the Company has implemented widespread work-from-home arrangements for all of the Company’s employees who are not engaged in newspaper production and distribution. The Company is experiencing disruptions in its normal processes and with interactions between its accounting personnel, legal advisors and others required to assess the impacts of the COVID-19 pandemic on the Company and complete its accounting procedures in order to finalize the Quarterly Report on Form 10-Q. The Company and its advisors have experienced delays and inefficiencies in the completion of the related Acquisition business combination accounting. In addition, the Company required additional time to assess the valuation of certain assets and determine if an impairment existed which should be reflected in the accompanying Consolidated Financial Statements and apply the applicable sections of the Coronavirus Aid, Relief, and Economic Security Act, enacted into law on March 27, 2020, (“CARES Act”), which had an impact on the complexity and timing of the Company’s first quarter tax provision.

PART I

FINANCIAL INFORMATION

Item 1.       Financial Statements

LEE ENTERPRISES, INCORPORATED

CONSOLIDATED BALANCE SHEETS

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

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

LEE ENTERPRISES, INCORPORATED

CONSOLIDATED STATEMENTS OF INCOME AND COMPREHENSIVE INCOME (LOSS)

(Unaudited)

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

CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY (DEFICIT)

(Unaudited)

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

LEE ENTERPRISES, INCORPORATED

CONSOLIDATED STATEMENTS OF CASH FLOWS

(Unaudited)

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

LEE ENTERPRISES, INCORPORATED

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

Item 2.       Management's Discussion and Analysis of Financial Condition and Results of Operations

The following discussion includes comments and analysis relating to our results of operations and financial condition as of and for the 13 and 26 weeks ended March 29, 2020. This discussion should be read in conjunction with the Consolidated Financial Statements and related Notes thereto, included herein, and our 2019 Annual Report on Form 10-K.

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, cash costs, and total operating revenue less cash costs which are non-GAAP financial performance measures that exclude from our reported GAAP results the impact of certain items consisting primarily of restructuring charges and non-cash charges. We believe such expenses, charges and gains are not indicative of normal, ongoing operations, and their inclusion in results makes for more difficult comparisons between years and with peer group companies. In the future, however, we are likely to incur expenses, charges and gains similar to the items for which the applicable GAAP financial measures have been adjusted and to report non-GAAP financial measures excluding such items. Accordingly, exclusion of those or similar items in our non-GAAP presentations should not be interpreted as implying the items are non-recurring, infrequent, or unusual.

We define our non-GAAP measures, which may not be comparable to similarly titled measures reported by other companies, as follows:

Adjusted EBITDA is a non-GAAP financial performance measure that enhances financial statement users overall understanding of the operating performance of the Company. The measure isolates unusual, infrequent or non-cash transactions from the operating performance of the business. This allows users to easily compare operating performance among various fiscal periods and how management measures the performance of the business. This measure also provides users with a benchmark that can be used when forecasting future operating performance of the Company that excludes unusual, nonrecurring or one time transactions. Adjusted EBITDA is also a component of the calculation used by stockholders and analysts to determine the value of our business when using the market approach, which applies a market multiple to financial metrics. It is also a measure used to calculate the leverage ratio of the Company, which is a key financial ratio monitored and used by the Company and its investors. Adjusted EBITDA is defined as net income (loss), plus non-operating expenses, income tax expense, depreciation and amortization, assets loss (gain) on sales, impairments and other, restructuring costs and other, stock compensation and our 50% share of EBITDA from TNI and MNI, minus equity in earnings of TNI and MNI.

Cash Costs represent a non-GAAP financial performance measure of operating expenses which are measured on an accrual basis and settled in cash. This measure is useful to investors in understanding the components of the Company’s cash-settled operating costs. Generally, the Company provides forward-looking guidance of Cash Costs, which can be used by financial statement users to assess the Company's ability to manage and control its operating cost structure. Cash Costs are defined as compensation, newsprint and ink and other operating expenses. Depreciation and amortization, assets loss (gain) on sales, impairments and other, other non-cash operating expenses and other expenses are excluded. Cash Costs also exclude restructuring costs and other, which are typically settled in cash.

Total Operating Revenue Less Cash Costs, or “margin”, represents a non-GAAP financial performance measure of revenue less total cash costs, also a non-GAAP financial measure. This measure is useful to investors in understanding the profitability of the Company after direct cash costs related to the production and delivery of products are paid. Margin is also useful in developing opinions and expectations about the Company’s ability to manage and control its operating cost structure in relation to its peers.

The subtotals of operating expenses representing cash costs and total operating revenue less cash costs can be found in tables included herein, under the caption “Continuing Operations”.

RECONCILIATION OF NON-GAAP FINANCIAL MEASURES

(UNAUDITED)

The table below reconciles the non-GAAP financial performance measure of Adjusted EBITDA to net income, the most directly comparable GAAP measure:

IMPACT OF RECENTLY ISSUED ACCOUNTING STANDARDS

In February 2016, the FASB issued a new standard for the accounting treatment of leases, known as Accounting Standards Codification 842 (“ASC 842”). The new standard is based on the principle that entities should recognize assets and liabilities arising from leases. The new standard's primary change is the requirement for entities to recognize a lease liability for payments and a right-of-use (“ROU”) asset representing the right to use the leased asset during the term on most operating lease arrangements. We adopted the standard effective September 30, 2019, the first day of fiscal year 2020.

We elected the package of practical expedients which permits the Company to not reassess under the new standard the prior conclusions about lease identification, lease classification, or initial direct costs. In addition, we did reassess whether existing land easements which were previously not accounted for as leases are or contain leases under the new guidance. We have elected to combine non-lease and lease components when accounting for leases. The Company has made a policy election to exclude short-term leases, those with an original term of less than twelve months, from recognition and measurement under ASC 842. As such, we have not recognized an ROU asset or lease liability for these leases. Additional information and disclosures required by this new standard are contained in Note 6. 

CRITICAL ACCOUNTING POLICIES

Our critical accounting policies include the following:

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 prepared its initial estimates of the fair values of intangible assets utilizing the multi-period excess earnings method for customer-related amortizable 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:

Additional information regarding our accounting for business combinations can be found in Note 1. Additional information regarding all other critical accounting policies can be found under the caption “Management's Discussion and Analysis of Financial Condition and Results of Operations” in our 2019 Annual Report on Form 10-K.

EXECUTIVE OVERVIEW

Lee Enterprises, Incorporated is a leading provider of high quality, trusted, local news and information, and a major platform for advertising in the markets we serve.

On March 16, 2020, we completed the acquisition of BHMG and The Buffalo News, nearly doubling the size of our operations. Currently, we operate 77 principally mid-sized local media operations.

We reach 72.5% of all adults in our larger markets through a combination of our print and digital content offerings.

Our products include daily newspapers, websites and mobile applications, mobile news and advertising, video products, a digital marketing agency, digital services including web hosting and content management, niche publications and community newspapers. Our local media operations range from large daily newspapers and their associated digital products, such as the St. Louis Post-Dispatch, to non-daily newspapers with news websites and digital platforms serving smaller communities.

We also operate TownNews, through our 82.5% owned subsidiary INN Partners, L.C. (“TownNews”). TownNews provides state-of-the-art web hosting, content management services and video management services to nearly 2,000 other media organizations including broadcast.

Purchase Agreement with Berkshire Hathaway

On March 16, 2020, the Company completed the Asset and Stock Purchase Agreement dated as of January 29, 2020 with Berkshire Hathaway Inc., a Delaware corporation (“Berkshire”) and BH Media Group, Inc., a Delaware corporation (“BHMG”) (“Purchase Agreement”). As part of the Purchase Agreement, the Company purchased certain assets and assumed certain liabilities of BHMG’s newspapers and related community publications business (“BH Media Newspaper Business”), excluding real estate and fixtures such as production equipment, and all of the issued and outstanding capital stock of The Buffalo News, Inc., a Delaware corporation (“Buffalo News”), for a combined purchase price of $140,000,000 (collectively, the “Transactions”). The Transactions were financed pursuant to a credit agreement dated as of January 29, 2020 between the Company and BH Finance LLC, a Delaware limited liability company affiliated with Berkshire (“Credit Agreement”). Our Consolidated Financial Statements show the combined results of the Company for the period of March 16, 2020 through and as of March 29, 2020.

BHMG includes 30 daily newspapers and digital operations, in addition to 49 paid weekly newspapers with websites and 32 other print products. Buffalo News is a provider of local print and digital news to the Buffalo, NY area. Between July 2, 2018 and March 16, 2020, the Company managed the BH Media Newspaper Business pursuant to a Management Agreement between BHMG and the Company dated June 26, 2018 (“Management Agreement”).

In connection with the Transactions, the Management Agreement terminated on March 16, 2020. As part of the settlement of the preexisting relationship, the Company received $5,425,000 at closing. This amount represented $1,245,000 in fixed fees pro-rated under the contract and $4,180,000 in variable fees based upon the pro-rated annual target. The Company did not recognize a gain or loss as a result of the settlement of this preexisting relationship.

In connection with the Transactions, the Company entered into a lease agreement between BH Media, as Landlord, and the Company, as Tenant, providing for the leasing of 68 properties and related fixtures (including production equipment) used in the BH Media Newspaper Business (“BH Lease”). The BH Lease was signed and commenced on March 16, 2020. The BH Lease requires the Company to pay annual rent of $8 million, payable in equal monthly payments, as well as all operating costs relating to the properties (including maintenance, repairs, property taxes and insurance). Rent payments will be subject to a Rent Credit (as defined in the BH Lease) equal to 8.00% of the net consideration for any leased real estate sold by BH Media during the term of the BH Lease.

IMPAIRMENT OF GOODWILL AND OTHER ASSETS

We have significant amounts of goodwill and identified intangible assets. Since 2007 we have recorded impairment charges totaling almost $1.3 billion to reduce the value of certain of these assets. 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 impairment charges in the future.

CERTAIN MATTERS AFFECTING CURRENT AND FUTURE OPERATING RESULTS

The following items affect period-over-period comparisons from 2020 to 2019 and will continue to affect period-over-period comparisons for future results:

Acquisitions and Divestitures

Impacts of COVID-19

With the outbreak of COVID-19 and the declaration of a pandemic by the World Health Organization on March 11, 2020, governments implemented a combination of shelter-in-place orders and other recommendations severely limiting or restricting economic activity in our local markets. Certain aspects of our operations have experienced lower revenue and profitability over the last several years and these trends are expected to continue in the future; however, the pandemic and government restrictions caused significant and immediate declines in demand for certain our products and services, and ultimately in advertising revenue.

The Company currently expects that the COVID-19 pandemic will have a significant negative impact, in the near term, on the Company’s business and operations. The long-term impact of the COVID-19 pandemic will depend on the length, severity and recurrence of the pandemic, the availability of antiviral medications and vaccinations, the duration and extent of government actions designed to combat the pandemic, as well as changes in consumer behavior, all of which are highly uncertain.

As a result, the Company has implemented, and continues to implement, measures to solidify our relationship with our local advertisers, reduce our cost structure and preserve liquidity. The Company believes these initiatives will allow us to meet our commitments; however, they may not be sufficient to fully offset the negative impact of the COVID-19 pandemic on the Company’s business and results of operations.

We have evaluated the current environment as of March 29, 2020 and have concluded that there is no event or circumstance that has occurred to trigger an impairment assessment of our long-lived or indefinite-lived assets. We will continue to monitor the environment to determine whether the impacts to the Company represent an event or change in circumstances that may trigger a need to reassess for useful life revision or impairment.

13 WEEKS ENDED March 29, 2020

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

References to the “2020 Quarter” refer to the 13 weeks ended March 29, 2020. Similarly, references to the “2019 Quarter” refer to the 13 weeks ended March 31, 2019. 

Operating Revenue

Total operating revenue was $121,367,000 in the 2020 Quarter, down $1,337,000, or 1.1%, which included $14,648,000 in revenue from the Transactions.

Advertising and marketing services revenue totaled $60,945,000 in the 2020 Quarter, down 3.2% compared to the prior year. Print advertising revenues were $36,248,000 in the 2020 Quarter, down 6.7% compared to the prior year, with $5,388,000 attributable to acquired print advertising revenue. Digital advertising and marketing services totaled $24,697,000 in the 2020 Quarter, up 2.6% compared to the prior year, with $1,389,000 attributable to acquired digital advertising and marketing services revenue. Digital advertising and marketing services represented 40.5% of the 2020 Quarter total advertising and marketing services revenue. Decreases in revenue are attributed to reduced demand for print advertising, consistent with general industry trends adversely affecting the publishing industry, and negative impacts from the COVID-19 pandemic.

Subscription revenue totaled $46,443,000 in the 2020 Quarter, up 3.0% compared to the 2019 Quarter. The increase is attributed to $6,564,000 of acquired subscription revenue and an increase in digital-only subscribers partially offset by lower print circulation units, consistent with industry trends and timing of price increases. As of March 29, 2020, we now have nearly 200,000 digital only subscribers.

Other revenue, which primarily consists of digital services revenue from TownNews, commercial printing revenue and until March 16, 2020, revenue from the Management Agreement, decreased $715,000, or 4.9%, in the 2020 Quarter compared to the 2019 Quarter.  Other revenue in the 2020 Quarter included $1,307,000 of acquired other revenue, primarily from commercial printing. The decline in other revenue is primarily related to the reduction of Management Agreement revenue due to the Transactions.

Digital services revenue totaled $5,211,000 in the 2020 Quarter, a 9.8% increase compared to the 2019 Quarter. On a stand-alone basis, revenue at TownNews totaled $6,149,000, an increase of 11.1%. Investments in video and streaming technology expanded product offerings that helped gain market share in publishing and broadcast, and increased revenue.

Commercial printing revenue totaled $2,322,000 in the 2020 Quarter, a 19.9% increase compared to the 2019 Quarter, due to $846,000 of acquired commercial printing revenue offset by declines in volume from our partners, consistent with general industry trends.

Management Agreement revenue totaled $1,836,000 in the 2020 Quarter compared to $3,850,000 in the 2019 Quarter.

Total digital revenue including digital advertising revenue, digital subscription revenue and digital services revenue totaled $36,742,000 in the 2020 Quarter, an increase of 4.9% over the 2019 Quarter, and represented 30.3% of our total operating revenue in the 2020 Quarter.

Equity in earnings of TNI and MNI decreased $355,000 in the 2020 Quarter.

Operating Expenses

Total operating expenses were $108,942,000, a 2.6% decrease compared to the 2019 Quarter, which included $13,351,000 in operating expenses from Transactions. Operating expenses include compensation expense, newsprint and ink, other operating expenses, depreciation, amortization, restructuring and other expenses, assets loss (gain) on sales, and impairments. Cash costs were $105,854,000, a 4.2% increase compared to the 2019 Quarter, which included $12,760,000 of acquired Cash Costs.

Compensation expense increased $906,000 in the 2020 Quarter, or 1.9%, compared to the 2019 Quarter. This increase was attributable to $6,578,000 of acquired compensation expense, partially offset by a 14.6% reduction in FTEs on a same property basis.

Newsprint and ink costs decreased $1,504,000 in the 2020 Quarter, or 25.8%, compared to the 2019 Quarter. The decrease is attributable to declines in newsprint volumes and prices, partially offset by $826,000 of acquired newsprint and ink expenses. See Item 3, “Commodities”, included herein, for further discussion and analysis of the impact of newsprint on our business.

Other operating expenses increased $4,826,000 in the 2020 Quarter, or 10.1%, compared to the 2019 Quarter. Other operating expenses include all operating costs not considered to be compensation, newsprint, 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. The increase is attributable to $5,357,000 of acquired other operating expenses and increases in digital investments, partially offset by lower delivery and other print-related costs due to lower volumes of our print editions.

Restructuring costs and other totaled $1,925,000 and $2,759,000 in the 2020 Quarter and 2019 Quarter, respectively. Restructuring costs in 2020 and 2019 are predominately severance.

Depreciation expense decreased $458,000, or 14.5%, and amortization expense increased $347,000, or 8.2%, in the 2020 Quarter. 

Assets loss (gain) on sales, impairments and other, was a net gain of $6,113,000 in the 2020 Quarter compared to a net expense of $83,000 in the 2019 Quarter. The gain in the 2020 Quarter was due to the disposition of non-core assets, including real estate.

The factors noted above resulted in operating income of $13,787,000 in the 2020 Quarter compared to $12,567,000 in the 2019 Quarter.

Non-operating Income and Expense

Interest expense decreased $1,013,000, or 8.3%, to $11,127,000 in the 2020 Quarter. Our weighted average cost of debt, excluding amortization of debt financing costs, was 9.0% at the end of the 2020 Quarter and 10.0% at the end of the 2019 Quarter. The reduction of the weighted average cost of debt is due to the 2020 Refinancing. 

We recognized $10,670,000 of debt financing and administrative expense in the 2020 Quarter compared to $962,000 in the 2019 Quarter. The increase in the 2020 Quarter is primarily driven by expensing previously unamortized financing costs of $9,583,000 and $470,000 of costs which were expensed as incurred as a result of the 2020 Refinancing.

Other non-operating income and expense consists of benefits associated with our pension and other postretirement plans and the fair value adjustment of our Warrants. We recorded $613,000 of periodic pension and other postretirement benefits in the 2020 Quarter and $710,000 in the 2019 Quarter. We recorded non-operating income of $20,000 in the 2020 Quarter and non-operating expenses of $2,753,000 in the 2019 Quarter, related to the changes in the value of the Warrants.

Income Tax Expense (Benefit)

We recorded an income tax benefit of $2,331,000, or 31.8% of pretax loss in the 2020 Quarter. In the 2019 Quarter, we recognized an income tax expense of $156,000, or 7.2% of pretax loss.

Net Income and Earnings Per Share

Net loss was $4,990,000 and diluted loss per share was $0.09 for the 2020 Quarter compared to net loss of $2,327,000 and diluted loss per share of $0.05 for 2019 Quarter. The change reflects the various items discussed above.

26 weeks ended March 29, 2020

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

References to the “2020 Period” refer to the 26 weeks ended March 29, 2020. Similarly, references to the “2019 Period” refer to the 26 weeks ended March 31, 2019. 

Operating Revenue

Total operating revenue was $243,710,000 in the 2020 Period, down $15,195,000, or 5.9%, compared to the prior year, which included $14,648,000 in revenue from acquisitions. 

Advertising and marketing services revenue totaled $126,672,000 in the 2020 Period, down 8.8% compared to the prior year. Print advertising revenues were $76,035,000 in the 2020 Period, down 14.9% compared to the prior year, with $5,387,000 attributable to acquired print advertising revenue. Digital advertising and marketing services totaled $50,637,000 in the 2020 Period, up 2.2% compared to the prior year, with $1,389,000 attributable to acquired digital advertising and marketing services revenue. Digital advertising and marketing services represented 40.0% of the 2020 Period total advertising and marketing services revenue. Decreases in revenue are attributed to reduced demand for print advertising, consistent with general industry trends adversely affecting the publishing industry, negative impacts from the COVID-19 pandemic and incremental advertising revenue in the 2019 Period from certain political campaigns.

Subscription revenue totaled $88,138,000 in the 2020 Period, down 3.5% compared to the 2019 period. The decrease is attributable to lower paid print circulation units, consistent with industry trends and timing of price increases, partially offset by $6,564,000 of acquired subscription revenue and an increase in digital only subscribers. As of March 29, 2020, we now have nearly 200,000 digital-only subscribers.

Other revenue, which primarily consists of digital services revenue from TownNews, commercial printing revenue and until March 16, 2020, revenue from the Management Agreement, totaled $28,900,000, a 0.8% increase compared to the 2019 Period. Other revenue in the 2020 Period includes $1,307,000 of acquired other revenue, primarily from commercial printing.

Digital services revenue totaled $10,429,000 in the 2020 Period, a 10.7% increase compared to the 2019 Period. On a stand-alone basis, revenue at TownNews totaled $12,330,000, an increase of 14.4%, and totaled $22,627,000 over the last twelve months. Investments in video and streaming technology expanded product offerings that helped gain market share in publishing and broadcast, and increased revenue.

Commercial printing revenue totaled $3,991,000 in the 2020 Period, a 9.6% decrease compared to the 2019 Period, due to declines in volume from our partners, consistent with general industry trends.

Management Agreement revenue totaled $5,814,000 in the 2020 Period compared to $6,450,000 in the 2019 Period.

Total digital revenue including digital advertising revenue, digital subscription revenue and digital services revenue totaled $73,909,000 in the 2020 Period, an increase of 3.3% over the 2019 Period. Total digital revenue represented 30.3% of our total operating revenue in the 2020 Period.

Equity in earnings of TNI and MNI decreased $915,000 in the 2020 Period.

Operating Expenses

Total operating expenses were $214,548,000, a 3.6% decrease compared to the 2019 Period, which included $13,351,000 in operating expenses from acquisitions. Operating expenses include compensation expense, newsprint and ink, other operating expenses, depreciation, amortization, restructuring and other expenses, assets loss (gain) on sales, and impairments. Cash Costs were $202,295,000, a 1.2% decrease compared to the 2019 Period, which included $12,760,000 of acquired Cash Costs. 

Compensation expense decreased $2,890,000 in the 2020 Period, or 3.0%, compared to the 2019 Period. The decrease was attributable to a 12.2% reduction in FTEs on a same property basis, partially offset by $6,578,000 of acquired compensation expense. 

Newsprint and ink costs decreased $3,107,000 in the 2020 Period, or 25.5%, compared to the 2019 Period. The decrease is attributable to declines in newsprint volumes and prices, partially offset by $826,000 of acquired newsprint and ink expenses. See Item 3, “Commodities” included herein, for further discussion and analysis of the impact of newsprint on our business. 

Other operating expenses increased $3,546,000 in the 2020 Period, or 3.6%, compared to the 2019 Period. Other operating expenses include all operating costs not considered to be compensation, newsprint, 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. The increase is attributable to $5,357,000 of acquired other operating expenses and increases in digital investments, partially offset by lower delivery and other print-related costs due to lower volumes of our print editions.

Restructuring costs and other totaled $3,557,000 and $2,820,000 in the 2020 Period and 2019 Period, respectively. Restructuring costs in 2020 and 2019 are predominately severance.

Depreciation decreased $1,055,000, or 16.6%, and amortization increased $134,000, or 1.6%, in the 2020 Period. Assets loss (gain) on sales, impairments and other, was a net gain of $5,299,000 in the 2020 Period compared to a net gain of $17,000 in the 2019 Period. The net gain in the 2020 was related to the disposition of non-core assets, including real estate.

The factors noted above resulted in operating income of $32,093,000 in the 2020 Period compared to $40,286,000 in the 2019 Period.

Non-operating Income and Expense

Interest expense decreased $2,155,000, or 8.8%, to $22,242,000 in the 2020 Period. Our weighted average cost of debt, excluding amortization of debt financing costs, was 9.0% at the end of the 2020 Period and 10.0% at the end of the 2019 Period. The reduction of the weighted average cost of debt is due to the 2020 Refinancing.

We recognized $11,865,000 of debt financing and administrative costs in the 2020 Period compared to $1,858,000 in the 2019 Period. The increase in the 2020 Period is primarily driven by expensing previously unamortized financing costs of $9,583,000 and $470,000 of expenses incurred as a result of the 2020 Refinancing.

Other non-operating income and expense consists of benefits associated with our pension and other postretirement plans and the fair value adjustment of our Warrants. We recorded $1,088,000 of periodic pension and other postretirement benefits in the 2020 Period and $1,420,000 in the 2019 Period. We recorded non-operating income of $1,037,000 in 2020 Period and $2,672,000 in the 2019 Period, related to the changes in the value of the Warrants.

Income Tax Expense (Benefit)

We recorded an income tax benefit of $460,000, or 171.6% of pretax income in the 2020 Period. In the 2019 Quarter, we recognized an income tax expense of $4,670,000, or 35.8% of pretax income.

The Company expects to realize a tax benefit attributable to the CARES Act legislation, which was enacted on March 27, 2020. The CARES Act permits the Company to defer certain employer payroll tax payments in 2020 to the end of 2021 and 2022. The Company intends to use this deferral, and is anticipating additional guidance from the Treasury and the Internal Revenue Service to determine whether additional tax benefits are available from this legislation.

Net Income and Earnings Per Share

Net income was $728,000 and diluted earnings per share was $0.00 for the 2020 Period compared to net income of $8,392,000 million and income per diluted common share of $0.14 for 2019 Period. The change reflects the various items discussed above.

LIQUIDITY AND CAPITAL RESOURCES 

Operating Activities

Cash provided by operating activities was $10,698,000 in the 2020 Period compared to $27,833,000 in the 2019 Period. Net income for the 2020 Period totaled $728,000 compared to $8,392,000 in the 2019 Period. The decrease in cash provided by operating activities in the 2020 Period is mainly attributed to year-over-year changes in operating income as well as changes in working capital.

Investing Activities

Cash required for investing activities totaled $119,711,000 in the 2020 Period compared to $7,538,000 in the 2019 Period. Acquisition spending totaled $5,708,000 in the 2019 Period. We spent $130,985,000 on acquisitions, net of cash, in the 2020 Quarter, primarily related to the acquisition of BHMG and the Buffalo News. Capital spending totaled $5,809,000 in the 2020 Period compared to $2,459,000 in the 2019 Quarter. Cash proceeds from asset sales totaled $17,637,000 in the 2020 Period compared to $770,000 in the 2019 Period.

Financing Activities

Cash provided by financing activities totaled $131,192,000 in the 2020 period compared to cash required for financing activities of $9,010,000 in the 2019 Period. Proceeds from the 2020 Refinancing totaled $576,000,000 in the 2020 Period. Debt reduction accounted for the majority of the remaining usage of funds in both the 2020 Period and the 2019 Period.

Term Loan

In March 2020, in connection with the Transactions, the Company completed a comprehensive refinancing of its debt, which consists of a 25-year term loan with BH Finance in an aggregate principal amount of $576,000,000. The Term Loan, which matures March 16, 2045, bears interest at an annual rate of 9.0%.

Debt is summarized as follows:

Excluding payments required from the Company’s future excess cash flow (as defined in the Credit Agreement), 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. There are no other scheduled mandatory principal payments required under the Credit Agreement.

The Credit Agreement contains certain customary representations and warranties, certain affirmative and negative covenants and certain conditions, including restrictions on incurring additional indebtedness, creating certain liens, making certain investments or acquisitions, issuing dividends, repurchasing shares of stock of the Company and certain other capital transactions. Certain existing and future direct and indirect material domestic subsidiaries of the Company are guarantors of the Company’s obligations under the Credit Agreement. There are no financial performance covenants under our Credit Agreement.

In connection with the Term Loan, the Company incurred $470,000 of fees and expenses that were expensed in the 13 weeks ended March 29, 2020.

In connection with closing of the transactions, we no longer have access to a Revolving Facility.

Additional Information on Liquidity

We continue to evaluate the effects of the COVID-19 pandemic on our results of operations and cash flows. To combat the negative impacts, we have taken significant and immediate action to manage cash flow by implementing various initiatives including reductions in force, compensation reductions, furloughs, and reductions in capital investments. We are also working with our large vendors to evaluate the amount and timing of significant expenses.

As part of the Company’s effort to preserve liquidity, we plan to defer remittance of our FICA taxes, and defer required pension contributions, as allowed by the CARES Act.

While we currently forecast sufficient near-term liquidity, the ultimate impact of the COVID-19 pandemic could have a material impact on the Company's liquidity and its ability to meet its ongoing obligations.

CHANGES IN LAWS AND REGULATIONS

Pension Plans

In 2012, the Surface Transportation Extension Act of 2012 (“STEA”) was signed into law. STEA provides for changes in the determination of discount rates that result in a near-term reduction in minimum funding requirements for our defined benefit pension plans. STEA will also result in an increase in future premiums to be paid to the Pension Benefit Guarantee Corporation (“PBGC”).

In 2014, the Highway and Transportation Funding Act (“HATFA”) was signed into law. HATFA generally extends the relief offered under STEA and further increases premiums to be paid to the PBGC.

In March 2020, the CARES Act was enacted into law. Among other provisions, the CARES Act allows the Company to defer required pension contributions until January 1, 2021.

Wage Laws

The United States and various state and local governments are considering increasing their respective minimum wage rates. Most of our employees earn an amount in excess of the current United States or state minimum wage rates. However, until changes to such rates are enacted, the impact of the changes cannot be determined. In March 2020, the CARES Act was enacted into law. Among other provisions, the CARES Act allows the Company to defer payments of the employer’s share of social taxes which shall be paid between December 31, 2021 and December 31, 2022. The CARES Act also provides for an Employee Retention Credit of up to $5,000 per eligible employee which can be applied to the employer’s share of payroll taxes. The Company has elected to defer the employer’s share of social security tax payments and is currently determining the applicability of the Employee Retention Credit.

INFLATION

Price increases (or decreases) for our products or services 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.

Item 3.       Quantitative and Qualitative Disclosures About Market Risk

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

INTEREST RATES ON DEBT

Our debt structure, which is entirely fixed rate, eliminates the potential impact of an increase in interest rates. At March 29, 2020, we had no floating debt outstanding. We have no interest rate hedging in place.

COMMODITIES

Newsprint prices decreased during the 2020 Quarter as a result of declining domestic and export demand.

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

A $10 per tonne price increase for 27.7 pound newsprint would result in an annualized reduction in income before taxes of approximately $536,000 annualized based on anticipated consumption in 2020, excluding consumption of TNI and MNI and the impact of LIFO accounting.

SENSITIVITY TO CHANGES IN VALUE

Our fixed rate debt consists of $576,000,000 principal amount of the Term Loan recorded at carrying value, which approximates fair value.

Item 4.       Controls and Procedures

EVALUATION OF DISCLOSURE CONTROLS AND PROCEDURES

Under the supervision and with the participation of our senior management, including our chief executive officer and chief financial officer, we conducted an evaluation of the effectiveness of the design and operation of our disclosure controls and procedures, as defined in Rules 13a-15(e) and 15d-15(e) under the Exchange Act, as of the end of the period covered by this Quarterly Report on Form 10-Q (the “Evaluation Date”). Based on this evaluation, our chief executive officer and chief financial officer concluded that as of the Evaluation Date, our disclosure controls and procedures were effective.

CHANGES IN INTERNAL CONTROL OVER FINANCIAL REPORTING

On March 16, 2020, we concluded the Transactions. The internal controls related to the acquired businesses have not been considered in our assessment over internal control over financial reporting. Other than the Transactions, there have been no changes in our internal control over financial reporting that occurred during the 13 weeks ended March 29, 2020 that have materially affected, or are reasonably likely to materially affect, our internal control over financial reporting.

PART II

OTHER INFORMATION 

Item 1.       Legal Proceedings

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

Item 1.A          Risk Factors 

Except as otherwise described herein, there have been no material changes in the risk factors previously disclosed in “Part I, Item 1A. Risk Factors” of our 2019 Form 10-K.

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

Item 5.A       Other Information - Compensatory Arrangements of Certain Officers

On February 21, 2020, the Company filed a Form 8-K Current Report disclosing the shareholder approval of the merger of the Company's amended and restated 1996 Stock Plan for Non-Employee Directors into and the amendment of the Company’s amended and restated 1990 Long-Term Incentive Plan (as amended and restated, the “2020 Plan”). This disclosure provides additional information pursuant to item 5.02(e) which is required for material amendments to compensatory arrangements of certain officers. This disclosure incorporates, by reference, the Company's 2020 Proxy Statement, which includes the 2020 Plan as an appendix to the filing.

Item 6.       Exhibits

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

SIGNATURES

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