Item 7. Management’s Discussion and Analysis
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
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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.
Income Taxes
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.
Business Combinations
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
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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.
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OPERATIONS
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
Operating revenue:
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 %
Operating expenses:
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):
Interest expense (41,770) (44,773) (6.7) % (47,743) (6.2) %
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:
Basic (0.35) 3.98 NM (0.35) NM
Diluted (0.35) 3.90 NM (0.35) NM
We acquired or disposed of certain properties in each of 2022, 2021 and 2020.
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OPERATING REVENUE
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,
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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 EXPENSES
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
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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
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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
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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".
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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:
(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
Add:
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
Adjustments
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.
Operating Activities
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.
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Investing Activities
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.
Financing Activities
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.
Liquidity
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.
SEASONALITY
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.
INFLATION
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.
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CONTRACTUAL OBLIGATIONS
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
Than 1 1-3 3-5 More
Than 5
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.