LEE ENTERPRISES, Inc - Quarter Report: 2022 March (Form 10-Q)

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

FORWARD-LOOKING STATEMENTS

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

Any statements that are not statements of historical fact (including statements containing the words “may”, “will”, “would”, “could”, “believes”, “expects”, “anticipates”, “intends”, “plans”, “projects”, “considers” and similar expressions) generally should be considered forward-looking statements. Statements regarding our plans, strategies, prospects and expectations regarding our business and industry, including statements regarding the impacts that the COVID-19 pandemic and our responses thereto may have on our future operations, are forward-looking statements. They reflect our expectations, are not guarantees of performance and speak only as of the date the statement is made. Readers are cautioned not to place undue reliance on such forward-looking statements, which are made as of the date of this report. We do not undertake to publicly update or revise our forward-looking statements, except as required by law.

PART I

FINANCIAL INFORMATION

Item 1.       Financial Statements

LEE ENTERPRISES, INCORPORATED

CONSOLIDATED BALANCE SHEETS

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 (LOSS) 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)

Basis of Presentation

The accompanying unaudited, interim, Consolidated Financial Statements included herein have been prepared pursuant to the rules and regulations of the Securities and Exchange Commission for quarterly reports. In the opinion of management, these financial statements contain all adjustments (consisting of only normal recurring items) necessary to present fairly the financial position of Lee Enterprises, Incorporated and its subsidiaries (the “Company”) as of March 27, 2022, and our results of operations and cash flows for the periods presented. The Consolidated Financial Statements should be read in conjunction with the Consolidated Financial Statements and Notes thereto included in the Company's 2021 Annual Report on Form 10-K.

The Company's fiscal year ends on the last Sunday in September. Fiscal year 2022 ends on September 25, 2022 and fiscal year 2021 ended  September 26, 2021. Fiscal year 2022 and 2021 are 52-week years with 13 weeks in each quarter. Because of seasonal and other factors, the results of operations for the three and six months ended March 27, 2022, are not necessarily indicative of the results to be expected for the full year.

References to “we”, “our”, “us” and the like throughout the Consolidated Financial Statements refer to the Company. References to “2022”, “2021” and the like refer to the fiscal years ended the last Sunday in September.

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

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

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

The following table presents our revenue disaggregated by source:

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

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

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

Contract Assets and Liabilities: The Company’s primary source of contract liabilities is unearned revenue from subscriptions paid in advance of the service provided. The Company expects to recognize the revenue related to unsatisfied performance obligations over the next twelve months in accordance with the terms of the subscriptions and other contracts with customers. Revenue recognized in the six months ended March 27, 2022 that was included in the contract liability as of September 26, 2021 was $47,340,000.

Accounts receivable, excluding allowance for credit losses was $74,422,000 and $71,644,000 as of March 27, 2022 and September 26, 2021, respectively. Allowance for credit losses was $6,688,000 and $6,574,000 as of March 27, 2022 and September 26, 2021, respectively.

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

TNI Partners

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

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

Summarized results of TNI are as follows:

TNI makes periodic distributions of its earnings and for the three months ended March 27, 2022 and March 28, 2021, we received $1,401,000 and $1,561,000 in distributions, respectively. In the six months ended March 27, 2022 and March 28, 2021, we received $2,259,000 and $2,617,000 in distributions, respectively.

Madison Newspapers, Inc.

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

Summarized results of MNI are as follows:

MNI makes periodic distributions of its earnings and in the three months ended March 27, 2022 and March 28, 2021, we received $500,000 and $1,150,000, respectively. In the six months ended March 27, 2022 and March 28, 2021, we received dividends of $800,000 and $1,150,000, respectively.

Identified intangible assets consist of the following:

The weighted average amortization period for amortizable assets is 13 years.

The Company has debt consisting of a single 25-year term loan with BH Finance LLC, in an aggregate principal balance of $462,554,000 at a 9% annual rate and matures on March 16, 2045 (referred to herein as “Credit Agreement” and “Term Loan”). At March 27, 2022, based on market quotations, the fair value approximates carrying value. This represents a level 2 fair value measurement.

During the three months ended March 27, 2022 we made no principal debt payments. During the six months ended March 27, 2022, we made principal debt payments of $20,062,000.  Future payments are contingent on the Company's ability to generate future excess cash flow, as defined in the Credit Agreement. As of March 27, 2022 there was no excess cash flow payment due (as such term is defined in the Term Loan).

Warrants

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

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

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

We have several defined benefit pension plans that together cover certain employees, including plans established under collective bargaining agreements. At the end of September 2021 two of seven plans had benefits under the plan frozen and no new participants are permitted. Additionally, we provide retiree medical and life insurance benefits under postretirement plans at several of our operating locations. Through March 27, 2022, our liability and related expense for benefits under the plans are recorded over the service period of employees based upon annual actuarial calculations.

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

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

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

In the six months ended March 27, 2022, we had no required contributions to our pension plans. In the six months ended March 28, 2021 we contributed $965,000 to our pension plans. We have no required contributions to our pension plans for 2022 and therefore do not expect to make contributions to our pension trust during the remainder of fiscal 2022. 

Multiemployer Pension Plans

The Company has effecuated withdrawals from several multiemployer plans. We record estimates of withdrawal liabilities as of the time the contracts agreeing to withdraw from those plans are ratified. As of March 27, 2022 and September 26, 2021, we had $25,253,000 and $23,471,000 withdrawal liabilities recorded in Other Liabilities in our Consolidated Balance Sheets. The liabilities reflect the estimated value of payments to the fund, payable over 20-years.

We recorded an income tax benefit of $3,144,000 related to a loss before taxes of $9,838,000 for the three months ended March 27, 2022, and income tax expense of $2,207,000 related to income before taxes of $8,712,000 for the six months ended  March 27, 2022. We recorded an income tax benefit of $571,000 related to a loss before taxes of $1,179,000 for the three months ended March 28, 2021, and income tax expense of $5,740,000 related to income before taxes of $21,535,000 for the six months ended March 28, 2021. The effective income tax rates for the three and six months ended March 27, 2022 was negative 32% and 25.3%, respectively. The effective income tax rate for the three and six months ended March 28, 2021 was 48.4% and 26.7%, respectively.

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

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

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

For the three and six months ended  March 27, 2022 and March 28, 2021, 600,000 shares were not considered in the computation of diluted earnings per common share because their inclusion would result in an anti-dilutive effect on per share amounts.

Rights Agreement

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

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

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

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.

Subsequent Events

Subsequent to March 27, 2022, we developed, committed to, and began reductions in staffing in our operations. The Company expects to record pretax charges related to these reductions totaling approximately $4,700,000.

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

The following discussion includes comments and analysis relating to our results of operations and financial condition as of and for the three and six months ended March 27, 2022. This discussion should be read in conjunction with the Consolidated Financial Statements and related Notes thereto, included herein, and our 2021 Annual Report on Form 10-K.

EXECUTIVE OVERVIEW

Lee Enterprises, Incorporated is a leading provider of high quality, trusted, local news and information in the markets we serve with rapidly growing digital subscription and advertising platforms.

We operate 77 principally mid-sized local media operations.

We reach nearly 70% of all adults in our larger markets through a combination of our print and digital content offerings.

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

We also operate TownNews, through our 82.5% owned subsidiary INN Partners, L.C. TownNews provides state-of-the-art web hosting, content management services and video management services to nearly 2,200 other media organizations including broadcast.   

STRATEGY

We are a major subscription and advertising platform, a trusted local news provider and innovative, digitally focused marketing solutions company. Our focus is on the local market - including local news and information, local advertising and marketing services to top local accounts, and digital services to local content curators. To align with the core strength of our Company, our post-pandemic operating strategy is locally focused around three pillars:

THREE MONTHS ENDED March 27, 2022

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

References to the “2022 Quarter” refer to the three months ended March 27, 2022. Similarly, references to the “2021 Quarter” refer to the three months ended March 28, 2021. 

Operating Revenue

Total operating revenue was $190,014,000 in the 2022 Quarter, down $2,416,000, or 1.3%, compared to the prior year.

Advertising and marketing services revenue totaled $87,633,000 in the 2022 Quarter, up 2.4% compared to the 2021 Quarter. Print advertising revenues were $44,248,000 in the 2022 Quarter, down 17.6% compared to the 2021 Quarter due to continued secular declines in demand for print advertising. Digital advertising and marketing services totaled $43,385,000 in the 2022 Quarter, up 36% compared to the 2021 Quarter. These gains resulted from an increase in Amplified revenue and an increase in digital advertising on our owned and operated sites. Digital advertising and marketing services represented 49.5% of the 2022 Quarter total advertising and marketing services revenue, compared to 37.3% in the same period last year.

Subscription revenue totaled $87,348,000 in the 2022 Quarter, down 2.7% compared to the 2021 Quarter. Selective price increases on our full access subscriptions and growth in digital only subscribers, were partially offset by a decline in full access volume, consistent with historical and industry trends. Digital only subscribers grew 59.2% since the 2021 Quarter and now total 492,000.

Other revenue, which primarily consists of commercial printing revenue and digital services from TownNews, decreased $2,045,000, or 12.0%, in the 2022 Quarter compared to the 2021 Quarter. Digital services revenue totaled $4,659,000 in the 2022 Quarter, a 3.3% decrease compared to the 2021 Quarter. Commercial printing revenue totaled $5,172,000 in the 2022 Quarter, a 17.3% decrease compared to the 2021 Quarter primarily driven by reduction in print volumes from our partners.

Total digital revenue including digital advertising revenue, digital subscription revenue and digital services revenue totaled $58,137,000 in the 2022 Quarter, an increase of 33.0% over the 2021 Quarter, and represented 30.6% of our total operating revenue in the 2022 Quarter.

Equity in earnings of TNI and MNI decreased $64,000 in the 2022 Quarter.

Operating Expenses

Total operating expenses were $194,649,000 in the 2022 Quarter, a 4.9% increase compared to the 2021 Quarter. Operating expenses include compensation expense, newsprint and ink, other operating expenses, depreciation, amortization, restructuring and other expenses, assets gain (loss) on sales, and impairments. 

Compensation expense increased $359,000 in the 2022 Quarter, or 0.4%, compared to the 2021 Quarter due to increasing average compensation levels from investments in digital talent partially offset by reductions in FTE's due to continued business transformation efforts.

Newsprint and ink costs decreased $111,000 in the 2022 Quarter, or 1.5%, compared to the 2021 Quarter. The decrease is attributable to declines in newsprint volumes offset by higher newsprint prices. See Item 3, “Commodities”, included herein, for further discussion and analysis of the impact of newsprint on our business.

Other operating expenses increased $4,814,000 in the 2022 Quarter, or 6.0%, compared to the 2021 Quarter. Other operating expenses include all operating costs not considered to be compensation, newsprint, depreciation and amortization, or restructuring costs and 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 increases in investments to fund our digital growth strategy partially offset by lower delivery and other print-related costs due to lower volumes of our print editions.

Restructuring costs and other totaled $10,590,000 and $1,294,000 in the 2022 Quarter and 2021 Quarter, respectively. Restructuring costs and other include severance costs, litigation expenses, restructuring expenses, and advisor costs associated with the unsolicited offer in November 2021 in the 2022 Quarter. Restructuring costs in the 2021 Quarter are predominately severance related to our ongoing business transformation.

Depreciation and amortization expense decreased $3,566,000, or 28.5%, in the 2022 Quarter. The decrease in both is attributable to assets becoming fully depreciated or amortized.

Assets (gain) loss on sales, impairments and other, was a net gain of $152,000 in the 2022 Quarter compared to a net loss of $1,474,000 in the 2021 Quarter. The gains and losses in the 2022 Quarter and in the 2021 Quarter were the result of the disposition of non-core assets, including real estate.

The factors noted above resulted in an operating loss of $3,228,000 in the 2022 Quarter compared to operating income of $8,418,000 in the 2021 Quarter.

Non-operating Income and Expense

Interest expense decreased $714,000, or 6.4%, to $10,523,000 in the 2022 Quarter, compared to the same period last year. The decrease was due to a lower outstanding balance on our Term Loan. Debt has been reduced by $36,361,000 since the end of the 2021 Quarter. Our weighted average cost of debt was 9.0% at the end of the 2022 Quarter and 2021 Quarter.

Other non-operating income and expense consists of benefits associated with our pension and other postretirement plans and the fair value adjustment of our Warrants. We recorded $3,598,000 periodic pension and other postretirement benefits in the 2022 Quarter compared to $2,228,000 in the 2021 Quarter. We recorded non-operating income of $2,000,000 in the 2022 Quarter and non-operating expense of $833,000 in the 2021 Quarter, related to the changes in the value of the Warrants.

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

Income Tax (Benefit) Expense

We recorded an income tax benefit of $3,144,000, or 32% of pretax loss in the 2022 Quarter. In the 2021 Quarter, we recognized an income tax benefit of $571,000, or 48.4% of pretax loss.

Net (loss) Income and Earnings (losses) Per Share

Net loss was $6,694,000 and diluted losses per share were $1.26 for the 2022 Quarter compared to net loss of $608,000 and diluted losses per share of $0.20 for the 2021 Quarter. The change reflects the various items discussed above.

SIX MONTHS ENDED March 27, 2022

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

References to the “2022 Period” refer to the six months ended March 27, 2022. Similarly, references to the “2021 Period” refer to the six months ended March 28, 2021. 

Operating Revenue

Total operating revenue was $392,296,000 in the 2022 Period, down $11,952,000, or 3.0%, compared to the 2021 Period.

Advertising and marketing services revenue totaled $186,387,000 in the 2022 Period, down 1.0% compared to the prior year. Print advertising revenues were $100,218,000 in the Period Quarter, down 16.7% compared to the prior year due to continued secular declines in demand for print advertising. Digital advertising and marketing services totaled $86,169,000 in the 2022 Period, up 26.9% compared to the prior year. These gains resulted from in an increase in Amplified revenue and an increase in advertising on our owned and operated sites. Digital advertising and marketing services represented 46.2% of the 2022 Period total advertising and marketing services revenue, compared to 36.1% in the same period last year.

Subscription revenue totaled $174,867,000 in the 2022 Period, down 3.4% compared to the 2021 Period. The decline in full access volume, consistent with historical and industry trends were partially offset by growth in digital only subscribers and selective price increases on our full access subscriptions. Digital only subscribers grew 59.2% since the 2021 Period and now total 492,000.

Other revenue, which primarily consists of commercial printing revenue and digital services from TownNews, decreased $3,922,000, or 11.2%, in the 2022 Period compared to the 2021 Period. Digital services revenue totaled $9,283,000 in the 2022 Period, a 3.6% decrease compared to the 2021 Period. Commercial printing revenue totaled $10,895,000 in the 2022 Period, a 16.2% decrease compared to the 2021 Period primarily driven by reduction in print volumes from our partners.

Total digital revenue including digital advertising revenue, digital subscription revenue and digital services revenue totaled $113,436,000 in the 2022 Period, an increase of 24.9% over the 2021 Period, and represented 28.9% of our total operating revenue in the 2022 Period.

Equity in earnings of TNI and MNI decreased $52,000 in the 2022 Period.

Operating Expenses

Total operating expenses were $373,571,000 in the 2022 Period, a 1.2% decrease compared to the 2021 Period. Operating expenses include compensation expense, newsprint and ink, other operating expenses, depreciation, amortization, restructuring and other expenses, assets gain (loss) on sales, and impairments. Cash Costs were $353,580,000, a 2.7% increase compared to the 2021 Period.

Compensation expense increased $890,000 in the 2022 Period, or 0.5%, compared to the 2021 Period due to investments in digital talent and increasing average compensation levels partially offset by reductions in FTE's due to continued business transformation efforts.

Newsprint and ink costs decreased $459,000 in the 2022 Period, or 3.0%, compared to the 2021 Period. The decrease is attributable to declines in newsprint volumes offset by higher newsprint prices. See Item 3, “Commodities”, included herein, for further discussion and analysis of the impact of newsprint on our business.

Other operating expenses increased $9,029,000 in the 2022 Period, or 5.6%, compared to the 2021 Period. Other operating expenses include all operating costs not considered to be compensation, newsprint, depreciation and amortization, or restructuring costs and 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 increases in investments to fund our digital growth strategy partially offset by lower delivery and other print-related costs due to lower volumes of our print editions.

Restructuring costs and other totaled $13,790,000 and $4,461,000 in the 2022 Period and 2021 Period, respectively. Restructuring costs and other include severance costs, litigation costs, restructuring expenses, and advisor costs associated with the unsolicited offer in November 2021 in the 2022 Period. Restructuring costs in the 2021 Period are predominately severance related to our ongoing business transformation.

Subsequent to March 27, 2022, we developed, committed to, and began reductions in staffing in our operations. The Company expects to record pretax charges related to these reductions totaling approximately $4,700,000 and resulting in an annualized reduction in operating expenses totaling $45,000,000.

Depreciation and amortization expense decreased $4,331,000, or 18.9%, in the 2022 Period. The decrease in both is attributable to assets becoming fully depreciated or amortized.

Assets (gain) loss on sales, impairments and other, was a net gain of $12,426,000 in the 2022 Period compared to a net loss of $6,696,000 in the 2021 Period. The gains and losses in the 2022 Period and in the 2021 Period were the result of the disposition of non-core assets, including real estate.

The factors noted above resulted in operating income of $21,886,000 in the 2022 Period compared to $29,226,000 in the 2021 Period.

Non-operating Income and Expense

Interest expense decreased $1,933,000, or 8.4%, to $21,186,000 in the 2022 Period, compared to the same period last year. The decrease was due to a lower outstanding balance on our Term Loan. Debt has been reduced by $36,361,000 since the end of the March 2021. Our weighted average cost of debt was 9.0% at the end of the 2022 Period and 2021 Period.

Other non-operating income and expense consists of benefits associated with our pension and other postretirement plans and the fair value adjustment of our Warrants. We recorded $8,045,000 periodic pension and other postretirement benefits in the 2022 Period compared to $4,571,000 in the 2021 Period. We recorded non-operating income of $71,000 in the 2022 Period and non-operating expense of $717,000 in the 2021 Period, related to the changes in the value of the Warrants.

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

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

Income Tax Expense

We recorded an income tax expense of $2,207,000, or 25.3% of pretax income in the 2022 Period. In the 2021 Period, we recognized an income tax expense of $5,740,000 or 26.7% of pretax income.

Net Income and Earnings Per Share

Net income was $6,505,000 and diluted earnings per share were $0.92 for the 2022 Period compared to net income of $15,795,000 and diluted earnings per share of $2.55 for the 2021 Period. The change reflects the various items discussed above.

NON-GAAP FINANCIAL MEASURES

LIQUIDITY AND CAPITAL RESOURCES 

Our operations have historically generated strong positive cash flow and are expected to provide sufficient liquidity, together with cash on hand, to meet our requirements, primarily operating expenses, interest expense and capital expenditures. A summary of our cash flows is included in the narrative below.

Operating Activities

Cash required by operating activities totaled $606,000 in 2022 compared to cash provided by operating activities of $39,253,000 in 2021, a decrease of $39,859,000.  The decrease was driven by a decrease in operating results of $20,312,000 (defined as net income (loss) adjusted for non-working capital items) and a decrease in cash from working capital of $19,548,000, primarily related to unfavorable changes in inventory, postretirement liabilities, income taxes payable and warrants, partially offset by favorable changes in accounts receivable.

Investing Activities

Cash provided by investing activities totaled $9,880,000 in the 2022 Period compared to $301,000 in the 2021 Period. 2022 included $14,744,000 in proceeds from the sale of assets as the Company divested non-core real estate.

We anticipate that funds necessary for capital expenditures, which are expected to be $12,000,000 in 2022, and other requirements, will be available from internally generated funds.

Financing Activities

Cash required for financing activities totaled $20,051,000 in the 2022 Period compared to $39,534,000 in the 2021 Period. Debt reduction accounted for nearly all of the usage of funds in the 2022 and 2021 Periods.

Additional Information on Liquidity

Our liquidity, consisting of cash on the balance sheet, totals $15,335,000 at March 27, 2022. This liquidity amount excludes any future cash flows from operations. We expect all interest and principal payments due in the next twelve months will be satisfied by existing cash and our cash flows, which will allow us to maintain an adequate level of liquidity.

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

CHANGES IN LAWS AND REGULATIONS

Wage Laws

The United States and various state and local governments are considering increasing their respective minimum wage rates. Most of our employees 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. Among other provisions, the CARES Act allows the Company to defer payments of the employer’s share of social security taxes which shall be paid between December 31, 2021, and December 31, 2022. The CARES Act also provides for an Employee Retention Credit which can be applied to the employer’s share of payroll taxes. The Company has elected to defer the employer’s share of social security tax payments and is currently determining the applicability of the Employee Retention Credit.

Item 3.       Quantitative and Qualitative Disclosures About Market Risk

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

INTEREST RATES ON DEBT

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

COMMODITIES

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

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

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

SENSITIVITY TO CHANGES IN VALUE

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

Item 4.       Controls and Procedures

EVALUATION OF DISCLOSURE CONTROLS AND PROCEDURES

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

CHANGES IN INTERNAL CONTROL OVER FINANCIAL REPORTING

There have been no changes in our internal control over financial reporting that occurred during the three and six months ended March 27, 2022 that have materially affected, or are reasonably likely to materially affect, our internal control over financial reporting.

PART II

OTHER INFORMATION 

Item 1.       Legal Proceedings

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

Item 1.A          Risk Factors 

Except as otherwise described herein, there have been no material changes in the risk factors previously disclosed in “Part I, Item 1A. Risk Factors” of our 2021 Form 10-K.

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

Item 6.       Exhibits

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

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.