DallasNews Corporation and Subsidiaries
Notes to the Consolidated Financial Statements
Note 1: Basis of Presentation and Recently Issued Accounting Standards
Description of Business. DallasNews Corporation, formerly A. H. Belo Corporation, and its subsidiaries are referred to collectively herein as “DallasNews” or the “Company.” DallasNews was formed in February 2008 through a spin-off from its former parent company and is registered on The Nasdaq Stock Market LLC (Nasdaq trading symbol: DALN). DallasNews is the Dallas-based holding company of The Dallas Morning News and Medium Giant.
The Company operates The Dallas Morning News (dallasnews.com), Texas’ leading newspaper and winner of nine Pulitzer Prizes, and various niche publications targeting specific audiences. These operations generate revenue from sales of advertising within the Company’s newspaper and digital platforms, subscriptions and retail sales of its newspapers, commercial printing and distribution services primarily related to national newspapers, and preprint advertising.
In addition, the Company has a full-service agency, Medium Giant, with capabilities including strategy, creative and media management with a focus on strategic and digital marketing, and data intelligence that provide a measurable return on investment to its clients.
Name Change and Stock Exchange Listing. The Company transferred its stock exchange listing from the New York Stock Exchange (“NYSE”) to The Nasdaq Stock Market LLC (“Nasdaq”) and changed its corporate name to DallasNews Corporation. The listing and trading of the Company’s Series A common stock on the NYSE ceased trading at market close on June 28, 2021, and began trading on Nasdaq at market open on June 29, 2021, under the ticker symbol “DALN.”
Reverse Stock Split. On May 13, 2021, at the Company’s 2021 annual meeting of shareholders, its shareholders approved a reverse stock split at a ratio of not less than one-for-three and not more than one-for-five, with the exact ratio to be determined by the Company’s board of directors. Following the annual meeting, the Company’s board of directors approved a one-for-four reverse stock split of its issued, outstanding and treasury shares of common stock, par value $0.01 per share, which became effective June 8, 2021. As a result, every four shares of the Company’s issued and outstanding Series A common stock and Series B common stock (and any such shares held in treasury) were converted into one share of Series A common stock and Series B common stock, respectively. No fractional shares were issued in connection with the reverse stock split. The par value of the Series A and Series B common stock was not adjusted as a result of the reverse stock split and the Company reclassified an amount equal to the reduction in the number of Company shares at par value to additional paid-in capital. All issued and outstanding Series A and Series B common stock and per share amounts in the interim consolidated financial statements and footnotes included herein have been retroactively adjusted to reflect this reverse stock split for all periods presented. Share amounts retroactively adjusted to reflect the reverse stock split exclude 90 fractional shares of Series A common stock and 26 fractional shares of Series B common stock, which were settled in cash on June 9, 2021.
COVID-19 Pandemic. Beginning in early 2020, the COVID-19 pandemic impacted, and may continue to impact, the Company’s customers, distribution partners, advertisers, production facilities, and third parties, and could result in additional loss of advertising revenue or supply chain disruption. Media was designated an essential business, therefore the Company’s operations have continued throughout the pandemic. The Company has been following the recommendations of local government and health authorities to minimize exposure risk for employees. Employees, including financial reporting staff, worked remotely since March 2020. Beginning in June 2021, the Company allowed its employees to return to the office on a voluntary basis and all employees returned to the office in the first quarter of 2022. If the pandemic were to affect a significant number of the workforce employed in printing operations, the Company may experience delays or be unable to produce, print and deliver its publications and other third-party print publications on a timely basis. The Company continues to evaluate for any future material impacts on its consolidated financial statements.
Basis of Presentation. The interim consolidated financial statements included herein are unaudited; however, they include adjustments of a normal recurring nature which, in the Company’s opinion, are necessary to present fairly the consolidated financial information as of and for the periods indicated in conformity with accounting principles generally accepted in the United States of America (“GAAP”) applicable to interim periods. All intercompany balances and transactions have been eliminated in consolidation. The Company consolidates its majority owned subsidiaries over which the Company exercises control. These financial statements should be read in conjunction with the consolidated financial statements and notes thereto included in the Company’s Annual Report on Form 10-K for the fiscal year ended December 31, 2021. All dollar amounts presented herein, except share and per share amounts, are in thousands, unless the context indicates otherwise.
Use of Estimates. The preparation of financial statements in conformity with GAAP requires management to make estimates and assumptions that affect (i) the reported amounts of assets and liabilities, (ii) the disclosure of contingent assets and liabilities known to exist as of the date the financial statements are published, and (iii) the reported amount of net operating revenues and expenses recognized during the periods presented. Adjustments made with respect to the use of estimates often relate to improved information not previously available. Uncertainties with respect to such estimates and assumptions are inherent in the preparation of financial statements; accordingly, actual results could differ from these estimates.
The COVID-19 pandemic has caused increased uncertainty in management’s estimates and assumptions affecting these interim consolidated financial statements. Areas where significant estimates are used include valuation allowances for doubtful accounts, fair value measurements, pension plan assets, pension and other post-employment benefit obligation assumptions, income taxes, leases, self-insured liabilities, and assumptions related to long-lived assets impairment review.
Segment Presentation. Based on the Company’s structure and organizational chart, the Company’s chief operating decision-maker (the “CODM”) is its Chief Executive Officer, Grant S. Moise. Based on how the Company’s CODM makes decisions about allocating resources and assessing performance, the Company determined it has one reportable segment.
New Accounting Pronouncements. The Financial Accounting Standards Board (“FASB”) issued the following accounting pronouncements and guidance, which may be applicable to the Company but have not yet become effective.
In June 2016, the FASB issued Accounting Standards Update 2016-13 – Financial Instruments – Credit Losses (Topic 326): Measurement of Credit Losses on Financial Instruments. This update requires financial assets measured at amortized cost basis to be presented at the net amount expected to be collected. The measurement of expected credit losses is based on relevant information about past events, including historical experience, current conditions, and reasonable and supportable forecasts that affect the collectibility of the reported amount. Since June 2016, the FASB issued clarifying updates to the new standard including changing the effective date for smaller reporting companies. The guidance will be effective for fiscal years beginning after December 15, 2022, and interim periods within those fiscal years. Early adoption is permitted. The Company is currently evaluating the requirements of this update and has not yet determined its impact on the Company’s consolidated financial statements.
Note 2: Revenue
Revenue Recognition
Revenue is recognized when obligations under the terms of a contract with our customer are satisfied. This occurs when control of the promised goods or services is transferred to our customers, in an amount that reflects the consideration the Company expects to be entitled to in exchange for those goods or services, typically at contract price or determined by stand-alone selling price. The Company has an estimated allowance for credits, refunds and similar obligations. Sales tax collected concurrent with revenue-producing activities are excluded from revenue.
Accounts receivable are reported net of a valuation reserve that represents an estimate of amounts considered uncollectible. The Company estimates the allowance for doubtful accounts based on historical write-off experience and the Company’s knowledge of the customers’ ability to pay amounts due. Accounts are written-off after all collection efforts fail; generally, after one year has expired. Expense for such uncollectible amounts is included in other production, distribution and operating costs. Credit terms are customary.
The table below sets forth revenue disaggregated by revenue source.
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| | Three Months Ended June 30, | | Six Months Ended June 30, |
| | 2022 | | 2021 | | 2022 | | 2021 |
Advertising and Marketing Services | | | | | | | | | | | | |
Print advertising | | $ | 11,416 | | $ | 12,265 | | $ | 22,013 | | $ | 23,491 |
Digital advertising and marketing services | | | 6,041 | | | 6,336 | | | 11,708 | | | 11,879 |
Total | $ | 17,457 | | $ | 18,601 | | $ | 33,721 | | $ | 35,370 |
| | | | | | | | | | | | |
Circulation | | | | | | | | | | | | |
Print circulation | | $ | 12,998 | | $ | 13,818 | | $ | 26,117 | | $ | 27,794 |
Digital circulation | | | 3,252 | | | 2,275 | | | 6,229 | | | 4,321 |
Total | $ | 16,250 | | $ | 16,093 | | $ | 32,346 | | $ | 32,115 |
| | | | | | | | | | | | |
Printing, Distribution and Other | | $ | 3,866 | | $ | 3,974 | | $ | 7,793 | | $ | 7,998 |
| | | | | | | | | | | | |
Total Revenue | | $ | 37,573 | | $ | 38,668 | | $ | 73,860 | | $ | 75,483 |
Advertising and Marketing Services
Print advertising is comprised of display, classified and preprint advertising revenue. Display revenue results from sales of advertising space within the Company’s core newspapers and niche publications to local, regional or national businesses with local operations, affiliates or resellers. Classified revenue, which includes automotive, real estate, employment, obituaries and other, results from sales of advertising space in the classified and other sections of the Company’s newspapers. Preprint revenue results from sales of preprinted advertisements or circulars inserted into the Company’s core newspapers, niche publications, and distributed to publications in other markets, or distributed by mail or third-party distributors to households in targeted areas in order to provide total market coverage for advertisers. The Company’s capabilities allow its advertisers to target preprint distribution selectively at the sub-zip code level in order to optimize coverage for the advertisers’ locations. Preprint advertising also includes other services revenue related to the Company’s niche publications.
Digital advertising and marketing services revenue consists of strategic marketing management, consulting, creative services, targeted and multi-channel (programmatic) advertising placed on third-party websites, digital sales of banner, classified and native advertisements on the Company’s news and entertainment-related websites and mobile apps, social media management, search optimization, direct mail and the sale of promotional materials.
Advertising and marketing services revenue is primarily recognized at a point in time when the ad or service is complete and delivered, based on the customers’ contract price. Barter advertising transactions are recognized at estimated fair value based on the negotiated contract price and the range of prices for similar advertising from customers unrelated to the barter transaction. The Company expenses barter costs as incurred, which is independent from the timing of revenue recognition. In addition, certain digital advertising revenue related to website access is recognized over time, based on the customers’ monthly rate. The Company typically extends credit to advertising and marketing services customers, although for certain advertising campaigns the customer may pay in advance.
For ads placed on certain third-party websites, the Company must evaluate and use judgment to determine whether it is acting as the principal, where revenue is reported on a gross basis, or acting as the agent, where revenue is reported on a net basis. Generally, the Company reports advertising revenue for ads placed on third-party websites on a net basis, meaning the amount recorded to revenue is the amount billed to the customer net of amounts paid to the publisher of the third-party website. The Company is acting as the agent because the publisher controls the advertising inventory. The Company will record certain arrangements gross when it has latitude in establishing price or it determines the placement of the ads as a value added service to the customer.
Circulation
Print circulation revenue is generated primarily by selling home delivery subscriptions, including premium publications, and from single copy sales to non-subscribers. Home delivery revenue is recognized over the subscription period based on the days of actual delivery over the total subscription days and single copy revenue is recognized at a point in time when the paper is purchased. Revenue is directly reduced for any non-payment for the grace period of home delivery subscriptions where the Company recorded revenue for newspapers delivered after a subscription expired.
Digital circulation revenue is generated by digital-only subscriptions and is recognized over the subscription period based on daily or monthly access to the content in the subscription period.
Payment of circulation fees is typically received in advance and deferred over the subscription period. There is little judgment required for valuation or timing of circulation revenue recognition.
Printing, Distribution and Other
Printing, distribution and other revenue is primarily generated from printing and distribution of other newspapers, as well as production of preprinted advertisements for other newspapers. Printing, distribution and other revenue is recognized at a point in time when the product or service is delivered, which requires little judgment to determine. The Company typically extends credit to printing and distribution customers.
Deferred Revenue
Deferred revenue is recorded when cash payments are received in advance of the Company’s performance, including amounts which are refundable. The Company’s primary sources of deferred revenue are from circulation subscriptions and advertising paid in advance of the service provided. These up-front payments are recorded upon receipt as contract liabilities in the Consolidated Balance Sheets and the revenue is recognized when the Company’s obligations under the terms of the contract are satisfied. In the three and six months ended June 30, 2022, the Company recognized $2,228 and $9,379, respectively, of revenue that was included in the contract liabilities balance as of December 31, 2021. The Company typically recognizes deferred revenue within 1 to 12 months.
Practical Expedients and Exemptions
The Company generally expenses sales commissions and circulation acquisition costs when incurred because the amortization period would have been one year or less. These costs are recorded within employee compensation and benefits expense and other production, distribution and operating costs expense, respectively.
The Company does not disclose the value of unsatisfied performance obligations for contracts with an original expected length of one year or less and contracts for which revenue is recognized at the amount invoiced for services performed.
Note 3: Leases
Lease Accounting
The Company has various operating leases primarily for office space and other distribution centers, some of which include escalating lease payments and options to extend or terminate the lease. The Company’s leases have remaining terms of less than 1 year to 12 years. The Company determines if a contract is a lease at the inception of the arrangement.
Operating lease right-of-use assets and liabilities are recognized at commencement date of lease agreements greater than one year based on the present value of lease payments over the lease term. In determining the present value of lease payments, the implicit rate was not readily determinable in the Company’s lease agreements. Therefore, the Company used an estimated secured incremental borrowing rate, based on the Company’s credit rating, adjusted for the weighted average term of each lease. Lease expense is recognized on a straight-line basis over the lease term and variable lease costs are expensed as incurred. For leases with terms of 12 months or less, no asset or liability is recorded and lease expense is recognized on a straight-line basis over the lease term. The exercise of lease renewal options are at the Company’s sole discretion and options are recognized when it is reasonably certain the Company will exercise the option. The recognized right-of-use assets and lease liabilities as calculated do not assume renewal options. The Company does not have lease agreements with residual value guarantees, sale leaseback terms or material restrictive covenants. Additionally, the Company does not separately identify lease and nonlease components, such as maintenance costs.
The Company subleases office space in Dallas, Texas, with a remaining lease term of approximately one year. Additionally, the Company has various subleases with distributors, for distribution center space, with varying remaining lease terms of less than one year to two years and are cancellable with notice by either party. In the second quarter, the Company terminated the lease and sublease agreements for the office space of the Denton Publishing Company, resulting in a right-of-use asset impairment of $102 recorded in the three months ended June 30, 2022. Sublease income is included in printing, distribution and other revenue in the Consolidated Statements of Operations. As of June 30, 2022, sublease income is expected to approximate $440 for the remainder of 2022, $540 in 2023, and $5 in 2024.
Note 4: Income Taxes
The Company calculated the income tax provision for the 2022 and 2021 interim periods using an estimated annual effective tax rate based on its expected annual loss before income taxes, adjusted for permanent differences, which it applied to the year-to-date loss before income taxes and specific events that are discretely recognized as they occur.
The Company recognized an income tax provision of $165 and $83 for the three months ended June 30, 2022 and 2021, respectively, and $349 and $402 for the six months ended June 30, 2022 and 2021, respectively. The income tax provision for the three and six months ended June 30, 2022 and 2021, was due to the effect of the Texas franchise tax. Effective income tax rates were (7.4) percent and (10.5) percent for the six months ended June 30, 2022 and 2021, respectively.
The American Rescue Plan Act of 2021 (the “ARP Act”), was passed and signed into law on March 11, 2021, and was designed to speed up the United States’ economic recovery. The ARP Act contains many provisions, including direct cash payments to eligible taxpayers below specified income limits, extended unemployment insurance benefits, additional relief designed to prevent layoffs and business closures at small businesses, and pension relief provisions. The pension relief provisions include extending the interest rate relief passed in previous years, permanently adding a floor to funding interest rates, and permanently changing the amortization period for pension underfunding from 7 to 15 years. All provisions are required to be effective for plan years beginning in 2022, but plan sponsors can elect certain provisions to apply to plan years beginning as early as 2019. The Company benefited from the shortfall amortization relief provisions and the segment interest rate relief provisions contained in the ARP Act effective for the 2020 plan year.
Note 5: Pension and Other Retirement Plans
Defined Benefit Plans. The Company sponsors the DallasNews Corporation Pension Plans (the “Pension Plans”), formerly the A. H. Belo Pension Plans, which provide benefits to approximately 1,350 current and former employees of the Company. DallasNews Pension Plan I provides benefits to certain current and former employees primarily employed with The Dallas Morning News or the DallasNews corporate offices. DallasNews Pension Plan II provides benefits to certain former employees of The Providence Journal Company. This obligation was retained by the Company upon the sale of the newspaper operations of The Providence Journal. No additional benefits are accruing under the DallasNews Pension Plans, as future benefits were frozen.
No contributions are required to the DallasNews Pension Plans in 2022 under the applicable tax and labor laws governing pension plan funding.
Net Periodic Pension Expense (Benefit)
The Company’s estimates of net periodic pension expense or benefit are based on the expected return on plan assets, interest on the projected benefit obligations and the amortization of actuarial gains and losses that are deferred in accumulated other comprehensive loss. Participation in and accrual of new benefits to participants has been frozen since 2007 and, accordingly, on-going service costs are not a component of net periodic pension expense (benefit). For 2022, based on the re-allocation of the Pension Plans’ assets, the Company assumed a lower rate of return on the assets resulting in net periodic pension expense.
The table below sets forth components of net periodic pension expense (benefit), which are included in other income, net in the Consolidated Statements of Operations.
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| | Three Months Ended June 30, | | Six Months Ended June 30, |
| | 2022 | | 2021 | | 2022 | | 2021 |
Interest cost | | $ | 1,327 | | $ | 1,174 | | $ | 2,655 | | $ | 2,348 |
Expected return on plans' assets | | | (1,237) | | | (2,575) | | | (2,474) | | | (5,149) |
Amortization of actuarial loss | | | 132 | | | 361 | | | 263 | | | 722 |
Net periodic pension expense (benefit) | | $ | 222 | | $ | (1,040) | | $ | 444 | | $ | (2,079) |
Defined Contribution Plans. The DallasNews Savings Plan (the “Savings Plan”), a defined contribution 401(k) plan, covers substantially all employees of DallasNews. Participants may elect to contribute a portion of their pretax compensation as provided by the Savings Plan and the Internal Revenue Code. Employees can contribute up to 100 percent of their annual eligible compensation less required withholdings and deductions up to statutory limits. The Company provides an ongoing dollar-for-dollar match of eligible employee contributions, up to 1.5 percent of the employees’ compensation. Aggregate expense for matching contributions to the Savings Plan was $177 and $173 for the three months ended June 30, 2022 and 2021, respectively, and $389 and $393 for the six months ended June 30, 2022 and 2021, respectively.
Note 6: Shareholders’ Equity
Reverse Stock Split. The Company’s board of directors approved a one-for-four reverse stock split of its issued, outstanding and treasury shares of common stock, par value $0.01 per share, which became effective June 8, 2021. See Note 1 – Basis of Presentation and Recently Issued Accounting Standards for additional information.
Dividends. On May 12, 2022, the Company’s board of directors declared a $0.16 per share dividend to shareholders of record as of the close of business on August 12, 2022, which is payable on September 2, 2022.
Outstanding Shares. The Company had Series A and Series B common stock outstanding of 4,737,638 and 614,852, respectively, net of treasury shares at June 30, 2022. At December 31, 2021, the Company had Series A and Series B common stock outstanding of 4,737,580 and 614,910, respectively, net of treasury shares.
Accumulated Other Comprehensive Loss. Accumulated other comprehensive loss consists of actuarial gains and losses attributable to the DallasNews Pension Plans, gains and losses resulting from Pension Plans’ amendments and other actuarial experience attributable to other post-employment benefit (“OPEB”) plans. The Company records amortization of the components of accumulated other comprehensive loss in other income, net in its Consolidated Statements of Operations. Gains and losses are amortized over the weighted average remaining life expectancy of the OPEB plans and Pension Plans’ participants.
The table below sets forth the changes in accumulated other comprehensive loss, net of tax, as presented in the Company’s consolidated financial statements.
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| | Three Months Ended June 30, |
| | 2022 | | 2021 |
| | Total | | Defined
benefit pension
plans | | Other post-
employment
benefit plans | | Total | | Defined
benefit pension
plans | | Other post-
employment
benefit plans |
Balance, beginning of period | | $ | (32,276) | | $ | (32,354) | | $ | 78 | | $ | (32,108) | | $ | (32,210) | | $ | 102 |
Amortization | | | 131 | | | 132 | | | (1) | | | 360 | | | 361 | | | (1) |
Balance, end of period | | $ | (32,145) | | $ | (32,222) | | $ | 77 | | $ | (31,748) | | $ | (31,849) | | $ | 101 |
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| | Six Months Ended June 30, |
| | 2022 | | 2021 |
| | Total | | Defined
benefit pension
plans | | Other post-
employment
benefit plans | | Total | | Defined
benefit pension
plans | | Other post-
employment
benefit plans |
Balance, beginning of period | | $ | (32,406) | | $ | (32,485) | | $ | 79 | | $ | (32,468) | | $ | (32,571) | | $ | 103 |
Amortization | | | 261 | | | 263 | | | (2) | | | 720 | | | 722 | | | (2) |
Balance, end of period | | $ | (32,145) | | $ | (32,222) | | $ | 77 | | $ | (31,748) | | $ | (31,849) | | $ | 101 |
Note 7: Earnings Per Share
The table below sets forth the net loss available to common shareholders and weighted average shares used for calculating basic earnings per share (“EPS”). The Company’s Series A and Series B common stock equally share in the distributed and undistributed earnings.
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| | Three Months Ended June 30, | | Six Months Ended June 30, |
| | 2022 | | 2021 | | 2022 | | 2021 |
Earnings (Numerator) | | | | | | | | | | | | |
Net loss available to common shareholders | | $ | (2,415) | | $ | (1,482) | | $ | (5,059) | | $ | (4,247) |
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Shares (Denominator) | | | | | | | | | | | | |
Weighted average common shares outstanding (basic) | | | 5,352,490 | | | 5,352,490 | | | 5,352,490 | | | 5,352,490 |
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Loss Per Share | | | | | | | | | | | | |
Basic | | $ | (0.45) | | $ | (0.28) | | $ | (0.95) | | $ | (0.79) |
There were no options or RSUs outstanding as of June 30, 2022 and 2021, that would result in dilution of shares or the calculation of EPS under the two-class method as prescribed under ASC 260 – Earnings Per Share.
Note 8: Contingencies
Legal proceedings. From time to time, the Company is involved in a variety of claims, lawsuits and other disputes arising in the ordinary course of business. Management routinely assesses the likelihood of adverse judgments or outcomes in these matters, as well as the ranges of probable losses to the extent losses are reasonably estimable. Accruals for contingencies are recorded when, in the judgment of management, adverse judgments or outcomes are probable and the financial impact, should an adverse outcome occur, is reasonably estimable. The determination of likely outcomes of litigation matters relates to factors that include, but are not limited to, past experience and other evidence, interpretation of relevant laws or regulations and the specifics and status of each matter. Predicting the outcome of claims and litigation and estimating related costs and financial exposure involves substantial uncertainties that could cause actual results to vary materially from estimates and accruals. In the opinion of management, liabilities, if any, arising from other currently existing claims against the Company would not have a material adverse effect on DallasNews’ results of operations, liquidity or financial condition.
Note 9: Disposal of Assets
In May 2019, the Company finalized a Purchase and Sale Agreement with Charter DMN Holdings, LP (the “Purchaser”) for the sale of the real estate assets in downtown Dallas, Texas, previously used as the Company’s headquarters for a sale price of $28,000 and a pretax gain of $25,908. The sale price consisted of $4,597 cash received, after selling costs of approximately $1,000, and a two year seller-financed promissory note of $22,400 (the “Promissory Note”), included in current notes receivable in the Consolidated Balance Sheets. The sale provided the Company an additional $1,000 contingency payment if certain conditions were met. The contingency expired in June 2020, with no payment made by the Purchaser related to the contingency.
The Promissory Note is secured by a first lien deed of trust covering the property and bears interest payable in quarterly installments that began on July 1, 2019, continuing through its maturity on June 30, 2021, and includes a pre-payment feature. Interest was accrued at 3.5 percent during the first year and at 4.5 percent during the second year.
As a direct result of COVID-19 uncertainties, on April 3, 2020, the Company and the Purchaser entered into an amendment to the Promissory Note deferring the Purchaser’s interest payment of $195 that was due April 1, 2020, and adding it to a second promissory note (the “Second Promissory Note”). In addition, the Second Promissory Note included a 2019 real property tax reconciliation payment due from the Purchaser under the Purchase and Sale Agreement in the amount of $180. The Second Promissory Note, in the principal amount of $375, was secured by a second lien deed of trust covering the property and was due June 30, 2021.
On June 29, 2021, the Company’s board of directors approved a second amendment and extension of the maturity date of the Promissory Note to June 30, 2022 (the “Second Modification Agreement”), effective June 30, 2021. In connection with the Second Modification Agreement, the Purchaser paid the Second Promissory Note in full. The unpaid, original principal balance of the Promissory Note continued to bear interest at the rate of 4.5 percent, with interest payable quarterly through June 30, 2022.
Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations
DallasNews Corporation (“DallasNews” or the “Company”) intends for the discussion of its financial condition and results of operations that follows to provide information that will assist in understanding its financial statements, the changes in certain key items in those statements from period to period, and the primary factors that accounted for those changes, as well as how certain accounting principles, policies and estimates affect its financial statements. The following information should be read in conjunction with the Company’s consolidated financial statements and related notes filed as part of this report. All dollar amounts presented herein, except share and per share amounts, are in thousands, unless the context indicates otherwise.
This section and other parts of this Quarterly Report on Form 10-Q contain certain forward-looking statements. Forward-looking statements are subject to risks, uncertainties and other factors that could cause actual results to differ materially from those statements. See Forward-Looking Statements of this Quarterly Report for further discussion.
OVERVIEW
DallasNews Corporation, formerly A. H. Belo Corporation, and its subsidiaries are referred to collectively herein as “DallasNews” or the “Company.” DallasNews was formed in February 2008 through a spin-off from its former parent company and is registered on The Nasdaq Stock Market LLC (Nasdaq trading symbol: DALN). DallasNews is the Dallas-based holding company of The Dallas Morning News and Medium Giant.
The Company operates The Dallas Morning News (dallasnews.com), Texas’ leading newspaper and winner of nine Pulitzer Prizes, and various niche publications targeting specific audiences. These operations generate revenue from sales of advertising within the Company’s newspaper and digital platforms, subscriptions and retail sales of its newspapers, commercial printing and distribution services primarily related to national newspapers, and preprint advertising.
In addition, the Company has a full-service agency, Medium Giant, with capabilities including strategy, creative and media management with a focus on strategic and digital marketing, and data intelligence that provide a measurable return on investment to its clients.
The Company transferred its stock exchange listing from the New York Stock Exchange (“NYSE”) to The Nasdaq Stock Market LLC (“Nasdaq”) and changed its corporate name to DallasNews Corporation. The listing and trading of the Company’s Series A common stock on the NYSE ceased trading at market close on June 28, 2021, and began trading on Nasdaq at market open on June 29, 2021, under the ticker symbol “DALN.”
On May 13, 2021, at the Company’s 2021 annual meeting of shareholders, its shareholders approved a reverse stock split at a ratio of not less than one-for-three and not more than one-for-five, with the exact ratio to be determined by the Company’s board of directors. Following the annual meeting, the Company’s board of directors approved a one-for-four reverse stock split of its issued, outstanding and treasury shares of common stock, par value $0.01 per share, which became effective June 8, 2021. As a result, every four shares of the Company’s issued and outstanding Series A common stock and Series B common stock (and any such shares held in treasury) were converted into one share of Series A common stock and Series B common stock, respectively. All fractional shares were settled in cash in connection with the reverse stock split on June 9, 2021. The par value of the Series A and Series B common stock were not adjusted as a result of the reverse stock split and the Company reclassified an amount equal to the reduction in the number of Company shares at par value to additional paid-in capital.
Beginning in early 2020, the COVID-19 pandemic impacted, and may continue to impact, the Company’s customers, distribution partners, advertisers, production facilities, and third parties, and could result in additional loss of advertising revenue or supply chain disruption. Media was designated an essential business, therefore the Company’s operations have continued throughout the pandemic. The Company has been following the recommendations of local government and health authorities to minimize exposure risk for employees. Employees, including financial reporting staff, worked remotely since March 2020. Beginning in June 2021, the Company allowed its employees to return to the office on a voluntary basis and all employees returned to the office in the first quarter of 2022. If the pandemic were to affect a significant number of the workforce employed in printing operations, the Company may experience delays or be unable to produce, print and deliver its publications and other third-party print publications on a timely basis. The Company continues to evaluate for any future material impacts on its consolidated financial statements.
Effective June 30, 2022, the Company and Charter DMN Holdings, LP (the “Purchaser”) entered into an agreement (the “Third Modification Agreement”) extending the maturity date of the promissory note of $22,400 (the “Promissory Note”), for the sale of the real estate assets previously used as the Company’s headquarters, to July 29, 2022. The unpaid, original principal balance of the Promissory Note will bear interest at the rate of 6.5 percent, due on July 29, 2022. The Promissory Note will continue to be secured by a first priority lien on the Property. See Note 10 – Subsequent Events for additional information regarding cash proceeds received from the Purchaser.
RESULTS OF OPERATIONS
Consolidated Results of Operations (unaudited)
This section contains discussion and analysis of net operating revenue, operating costs and expense and other information relevant to an understanding of results of operations for the three and six months ended June 30, 2022 and 2021. Based on how the Company’s chief operating decision-maker makes decisions about allocating resources and assessing performance, the Company determined it has one reportable segment.
The table below sets forth the components of the Company’s operating loss.
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| | Three Months Ended June 30, | | Six Months Ended June 30, |
| | 2022 | | Percentage
Change | | 2021 | | | 2022 | | Percentage
Change | | 2021 |
Advertising and marketing services | | $ | 17,457 | | (6.2) | % | | $ | 18,601 | | $ | 33,721 | | (4.7) | % | | $ | 35,370 |
Circulation | | | 16,250 | | 1.0 | % | | | 16,093 | | | 32,346 | | 0.7 | % | | | 32,115 |
Printing, distribution and other | | | 3,866 | | (2.7) | % | | | 3,974 | | | 7,793 | | (2.6) | % | | | 7,998 |
Total Net Operating Revenue | | | 37,573 | | (2.8) | % | | | 38,668 | | | 73,860 | | (2.2) | % | | | 75,483 |
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Total Operating Costs and Expense | | | 39,851 | | (4.4) | % | | | 41,680 | | | 78,616 | | (4.4) | % | | | 82,195 |
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Operating Loss | | $ | (2,278) | | 24.4 | % | | $ | (3,012) | | $ | (4,756) | | 29.1 | % | | $ | (6,712) |
Traditionally, the Company’s primary revenues are generated from advertising within its core newspapers, niche publications and related websites and from subscription and single copy sales of its printed newspapers. As a result of competitive and economic conditions, the newspaper industry has faced a significant revenue decline over the past decade. Therefore, the Company has sought to diversify its revenues through development and investment in new product offerings, increased circulation rates and leveraging of its existing assets to offer cost efficient commercial printing and distribution services. The Company continually evaluates the overall performance of its core products to ensure existing assets are deployed adequately to maximize return.
The Company’s advertising revenue from its core newspapers continues to be adversely affected by the shift of advertiser spending to other forms of media and the increased accessibility of free online news content, as well as news content from other sources, which resulted in declines in advertising and paid print circulation volumes and revenue. Decreases in print display and classified categories are indicative of continuing trends by advertisers towards digital platforms, which are widely available from many sources. In the current environment, companies are allocating more of their advertising spending towards programmatic channels that provide digital advertising on multiple platforms with enhanced technology for targeted delivery and measurement. In addition, the Company has experienced declines resulting from the COVID-19 pandemic and recent supply chain issues.
In response to the decline in print revenue, the Company has developed agency capabilities, including strategy, creative and media management with a focus on strategic and digital marketing, and data intelligence that provide a measurable return on investment to its clients. The Company leverages its news content to improve engagement on the Company’s digital platforms that results in increased digital subscriptions and associated revenue. The Company also continues to diversify its revenue base by leveraging the available capacity of its existing assets to provide print and distribution services for newspapers and other customers requiring these services, by introducing new advertising and marketing services products, and by increasing circulation prices.
Because of declining print circulation, the Company has developed broad digital strategies designed to provide readers with multiple platforms for obtaining online access to local news. The Company continues to obtain additional key demographic data from readers, which allows the Company to provide content desired by readers and to modify marketing and distribution strategies to target and reach audiences valued by advertisers. The Company has access to programmatic digital advertising platforms that provide digital ad placement and targeting efficiencies and increases utilization of digital inventory within the Company’s websites. Additionally, in order to optimize owned and operated digital advertising revenue, the Company has adopted a holistic yield management approach powered by real-time bidding technologies and data analysis to ensure the optimal mix of direct sales and programmatic ad sales is achieved.
Advertising and marketing services revenue
Advertising and marketing services revenue was 46.5 percent and 45.7 percent of total revenue for the three and six months ended June 30, 2022, respectively, and 48.1 percent and 46.9 percent of total revenue for the three and six months ended June 30, 2021, respectively.
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| | Three Months Ended June 30, | | Six Months Ended June 30, |
| | 2022 | | Percentage
Change | | | 2021 | | | 2022 | | Percentage
Change | | 2021 |
Print advertising | | $ | 11,416 | | (6.9) | % | | | $ | 12,265 | | $ | 22,013 | | (6.3) | % | | $ | 23,491 |
Digital advertising and marketing services | | | 6,041 | | (4.7) | % | | | | 6,336 | | | 11,708 | | (1.4) | % | | | 11,879 |
Advertising and Marketing Services | $ | 17,457 | | (6.2) | % | | | $ | 18,601 | | $ | 33,721 | | (4.7) | % | | $ | 35,370 |
Print advertising
Print advertising is comprised of display, classified and preprint advertising revenue.
Display and classified print revenue primarily represents sales of advertising space within the Company’s core and niche newspapers. Display and classified print revenue increased $111 and $377 in the three and six months ended June 30, 2022, respectively, primarily due to a volume increase in display advertisements.
Preprint revenue primarily reflects preprinted advertisements inserted into the Company’s core newspapers, niche publications, and distributed to publications in other markets, or distributed to non-subscribers through the mail. Preprint advertising also includes other services revenue related to the Company’s niche publications. Revenue decreased $960 and $1,855 in the three and six months ended June 30, 2022, respectively, primarily due to a volume decline in preprint advertisements and supply chain issues impacting advertisers.
Digital advertising and marketing services
Digital advertising and marketing services revenue consists of strategic marketing management, consulting, creative services, targeted and multi-channel (programmatic) advertising placed on third-party websites, digital sales of banner, classified and native advertisements on the Company’s news and entertainment-related websites and mobile apps, social media management, search optimization, direct mail and the sale of promotional materials. Revenue decreased $295 and $171 in the three and six months ended June 30, 2022, respectively, primarily due to a decline in marketing services revenue resulting from some contracts ending and some new contracts slower to start than expected, partially offset by an increase in digital advertising on dallasnews.com.
Circulation revenue
Circulation revenue was 43.2 percent and 43.8 percent of total revenue for the three and six months ended June 30, 2022, respectively, and 41.6 percent and 42.5 percent of total revenue for the three and six months ended June 30, 2021, respectively.
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| | Three Months Ended June 30, | | Six Months Ended June 30, |
| | 2022 | | Percentage
Change | | | 2021 | | | 2022 | | Percentage
Change | | 2021 |
Print circulation | | $ | 12,998 | | (5.9) | % | | | $ | 13,818 | | $ | 26,117 | | (6.0) | % | | $ | 27,794 |
Digital circulation | | | 3,252 | | 42.9 | % | | | | 2,275 | | | 6,229 | | 44.2 | % | | | 4,321 |
Circulation | | $ | 16,250 | | 1.0 | % | | | $ | 16,093 | | $ | 32,346 | | 0.7 | % | | $ | 32,115 |
Print circulation
Revenue decreased primarily driven by volume declines, partially offset by rate increases. Home delivery revenue decreased $683 or 5.4 percent in the three months ended June 30, 2022, and $1,367 or 5.4 percent in the six months ended June 30, 2022. Single copy revenue decreased $138 or 11.5 percent in the three months ended June 30, 2022, and $310 or 12.7 percent in the six months ended June 30, 2022.
Digital circulation
Revenue increased in the three and six months ended June 30, 2022, due to an increase in digital-only subscriptions of approximately 9,758 or 18.4 percent when compared to June 30, 2021, reflecting the Company’s continued focus on growing its paid digital memberships and improving the member experience.
Printing, distribution and other revenue
Printing, distribution and other revenue was 10.3 percent and 10.5 percent of total revenue for the three and six months ended June 30, 2022, respectively, and 10.3 percent and 10.6 percent of total revenue for the three and six months ended June 30, 2021, respectively.
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| | Three Months Ended June 30, | | Six Months Ended June 30, |
| | 2022 | | Percentage
Change | | | 2021 | | | 2022 | | Percentage
Change | | 2021 |
Printing, Distribution and Other | | $ | 3,866 | | (2.7) | % | | | $ | 3,974 | | $ | 7,793 | | (2.6) | % | | $ | 7,998 |
Revenue decreased in the three and six months ended June 30, 2022, primarily due to a decline in commercial printing and distribution revenue.
Operating Costs and Expense
The table below sets forth the components of the Company’s operating costs and expense.
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| | Three Months Ended June 30, | | Six Months Ended June 30, |
| | 2022 | | Percentage
Change | | 2021 | | 2022 | | Percentage
Change | | 2021 |
Employee compensation and benefits | | $ | 16,804 | | (7.2) | % | | $ | 18,116 | | $ | 33,214 | | (7.9) | % | | $ | 36,063 |
Other production, distribution and operating costs | | | 19,725 | | (2.1) | % | | | 20,151 | | | 38,974 | | (0.7) | % | | | 39,241 |
Newsprint, ink and other supplies | | | 2,504 | | 5.3 | % | | | 2,378 | | | 4,898 | | 3.8 | % | | | 4,719 |
Depreciation | | | 716 | | (30.8) | % | | | 1,035 | | | 1,428 | | (32.3) | % | | | 2,109 |
Amortization | | | — | | N/A | | | | — | | | — | | (100.0) | % | | | 64 |
Gain on sale/disposal of assets, net | | | — | | N/A | | | | — | | | — | | 100.0 | % | | | (1) |
Asset impairments | | | 102 | | N/A | | | | — | | | 102 | | N/A | | | | — |
Total Operating Costs and Expense | | $ | 39,851 | | (4.4) | % | | $ | 41,680 | | $ | 78,616 | | (4.4) | % | | $ | 82,195 |
Employee compensation and benefits – The Company continues to implement measures to optimize its workforce and evaluate strategies to reduce risk associated with future obligations for employee benefit plans. Employee compensation and benefits decreased $1,312 and $2,849 in the three and six months ended June 30, 2022, respectively, primarily due to headcount reductions of 53 since June 30, 2021.
Other production, distribution and operating costs – Expense decreased $426 and $267 in the three and six months ended June 30, 2022, respectively, primarily due to a decrease in distribution expense.
Newsprint, ink and other supplies – Expense increased $126 and $179 in the three and six months ended June 30, 2022, respectively. Competitive pricing is available under the Company’s paper supply agreement; however, the price of newsprint increased, partially offset by savings from reduced newsprint costs associated with lower circulation volumes. Newsprint consumption for the three months ended June 30, 2022 and 2021, approximated 1,902 and 2,204 metric tons, respectively, and 3,790 and 4,263 metric tons for the six months ended June 30, 2022 and 2021, respectively.
Depreciation – Expense decreased $319 and $681 in the three and six months ended June 30, 2022, respectively, due to a lower depreciable asset base as a higher level of in-service assets are now fully depreciated and the Company has reduced capital spending.
Amortization – Expense decreased due to all intangible assets being fully amortized in the first quarter of 2021.
Gain on sale/disposal of assets, net – The Company disposed assets that were no longer in use and from time to time, the Company will sell disposed assets.
Asset impairments – In the second quarter, the Company terminated the lease and sublease agreements for the office space of the Denton Publishing Company, resulting in a right-of-use asset impairment of $102 recorded in the three months ended June 30, 2022.
Other
The table below sets forth the other components of the Company’s results of operations.
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| | Three Months Ended June 30, | | Six Months Ended June 30, |
| | 2022 | | Percentage
Change | | 2021 | | 2022 | | Percentage
Change | | 2021 |
Other income, net | | $ | 28 | | (98.3) | % | | $ | 1,613 | | $ | 46 | | (98.4) | % | | $ | 2,867 |
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Income tax provision | | $ | 165 | | 98.8 | % | | $ | 83 | | $ | 349 | | (13.2) | % | | $ | 402 |
Other income, net – Other income, net includes net periodic pension and other post-employment expense (benefit) of $455 and $(2,070) for the six months ended June 30, 2022 and 2021, respectively. Interest income (expense) and gain (loss) from investments and are also included in other income, net. In the three months ended June 30, 2022 and 2021, the Company recorded $251 and $271, respectively, and $500 and $520 in the six months ended June 30, 2022 and 2021, respectively, of interest income related to the promissory notes from the sale of the Company’s former headquarters.
Income tax provision – The Company recognized an income tax provision of $165 and $83 for the three months ended June 30, 2022 and 2021, respectively, and $349 and $402 for the six months ended June 30, 2022 and 2021, respectively. The income tax provision for the three and six months ended June 30, 2022 and 2021, was due to the effect of the Texas franchise tax. Effective income tax rates were (7.4) percent and (10.5) percent for the six months ended June 30, 2022 and 2021, respectively.
Legal proceedings – From time to time, the Company is involved in a variety of claims, lawsuits and other disputes arising in the ordinary course of business. Management routinely assesses the likelihood of adverse judgments or outcomes in these matters, as well as the ranges of probable losses to the extent losses are reasonably estimable. Accruals for contingencies are recorded when, in the judgment of management, adverse judgments or outcomes are probable and the financial impact, should an adverse outcome occur, is reasonably estimable. The determination of likely outcomes of litigation matters relates to factors that include, but are not limited to, past experience and other evidence, interpretation of relevant laws or regulations and the specifics and status of each matter. Predicting the outcome of claims and litigation and estimating related costs and financial exposure involves substantial uncertainties that could cause actual results to vary materially from estimates and accruals. In the opinion of management, liabilities, if any, arising from other currently existing claims against the Company would not have a material adverse effect on DallasNews’ results of operations, liquidity or financial condition.
Liquidity and Capital Resources
The Company’s cash balances as of June 30, 2022 and December 31, 2021, were $26,560 and $32,439, respectively.
The Company intends to hold the majority of existing cash for purposes of future investment opportunities, potential return of capital to shareholders and for contingency purposes. Although revenue is expected to continue to decline in future periods, cash flows and other expense reduction measures are expected to be sufficient to fund operating activities and capital spending.
The future approval of dividends is dependent upon available cash after considering future operating and investing requirements and cannot be guaranteed. The Company continues to have a board-authorized repurchase authority. However, the agreement to repurchase the Company’s stock expired and was not renewed.
The American Rescue Plan Act of 2021 (the “ARP Act”) was passed and signed into law on March 11, 2021, and was designed to speed up the United States’ economic recovery. The ARP Act contains many provisions, including direct cash payments to eligible taxpayers below specified income limits, extended unemployment insurance benefits, additional relief designed to prevent layoffs and business closures at small businesses, and pension relief provisions. The pension relief provisions include extending the interest rate relief passed in previous years, permanently adding a floor to funding interest rates, and permanently changing the amortization period for pension underfunding from 7 to 15 years. All provisions are required to be effective for plan years beginning in 2022, but plan sponsors can elect certain provisions to apply to plan years beginning as early as 2019. The Company benefited from the shortfall amortization relief provisions and the segment interest rate relief provisions contained in the ARP Act effective for the 2020 plan year.
As a direct result of COVID-19 uncertainties, on April 3, 2020, the Company and Charter DMN Holdings, LP (the “Purchaser”) entered into an amendment to the two-year seller-financed promissory note of $22,400 (the “Promissory Note”), for the sale of the real estate assets previously used as the Company’s headquarters. The amendment (the “Second Promissory Note”), in the principal amount of $375, included a deferred interest payment of $195 that was due April 1, 2020, and a 2019 real property tax reconciliation payment due from the Purchaser. Subsequently, on June 29, 2021, the Company’s board of directors approved a second amendment and extension of the maturity date of the Promissory Note to June 30, 2022 (the “Second Modification Agreement”), effective June 30, 2021. In connection with the Second Modification Agreement, the Purchaser paid the Second Promissory Note in full. The unpaid, original principal balance of the Promissory Note continued to bear interest at the rate of 4.5 percent, with interest payable quarterly through June 30, 2022. Effective June 30, 2022, the Company and the Purchaser entered into an agreement extending the maturity date of the Promissory Note to July 29, 2022 (the “Third Modification Agreement”). The unpaid, original principal balance of the Promissory Note will bear interest at the rate of 6.5 percent, due on July 29, 2022. The Promissory Note will continue to be secured by a first priority lien on the Property. See Note 10 – Subsequent Events for additional information regarding cash proceeds received from the Purchaser.
The following discusses the changes in cash flows by operating, investing and financing activities.
Operating Cash Flows
Net cash used for operating activities for the six months ended June 30, 2022 and 2021, was $3,266 and $2,645, respectively. Cash flows used for operating activities increased by $621 during the six months ended June 30, 2022, when compared to the prior year period, primarily due to changes in working capital and other operating assets and liabilities.
Investing Cash Flows
Net cash provided by (used for) investing activities was $(900) and $113 for the six months ended June 30, 2022 and 2021, respectively. Cash flows from investing activities included $900 and $263 of capital spending in 2022 and 2021, respectively, and cash proceeds of $375 received in the second quarter of 2021 to pay the Second Promissory Note in full as discussed above.
Financing Cash Flows
Net cash used for financing activities was $1,713 and $1,713 for the six months ended June 30, 2022 and 2021, primarily attributable to dividend payments.
Financing Arrangements
None.
Contractual Obligations
The Company has contractual obligations for operating leases, primarily for office space and other distribution centers, some of which include escalating lease payments. See Note 3 – Leases for future lease payments by year.
Under the applicable tax and labor laws governing pension plan funding, no contributions to the DallasNews Pension Plans are required in 2022.
On May 12, 2022, the Company’s board of directors declared a $0.16 per share dividend to shareholders of record as of the close of business on August 12, 2022, which is payable on September 2, 2022.
Additional information related to the Company’s contractual obligations is available in Company’s Annual Report on Form 10-K for the year ended December 31, 2021, filed on March 7, 2022, with the Securities and Exchange Commission (“SEC”).
Critical Accounting Policies and Estimates
No material changes were made to the Company’s critical accounting policies as set forth in “Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations”, included in the Company’s Annual Report on Form 10-K filed with the SEC for the year ended December 31, 2021.
Forward-Looking Statements
Statements in this communication concerning DallasNews Corporation’s business outlook or future economic performance, revenues, expenses, and other financial and non-financial items that are not historical facts are “forward-looking statements” as the term is defined under applicable federal securities laws. Forward-looking statements are subject to risks, uncertainties and other factors that could cause actual results to differ materially from those statements. Such risks, trends and uncertainties are, in most instances, beyond the Company’s control, and include the current and future impacts of the COVID-19 pandemic on the Company’s financial reporting capabilities and its operations generally and the potential impact of the pandemic on the Company’s customers, distribution partners, advertisers, production facilities, and third parties, as well as changes in advertising demand and other economic conditions; consumers’ tastes; newsprint prices; program costs; labor relations; cybersecurity incidents; technological obsolescence; as well as other risks described in the Company’s Annual Report on Form 10-K and in the Company’s other public disclosures and filings with the Securities and Exchange Commission. Among other risks, there can be no guarantee that the board of directors will approve a quarterly dividend in future quarters. Forward-looking statements, which are as of the date of this filing, are not updated to reflect events or circumstances after the date of the statement.
Item 4. Controls and Procedures
Evaluation of Disclosure Controls and Procedures
Disclosure controls and procedures, as defined in Rules 13a-15(e) and 15d-15(e) under the Exchange Act, are controls that are designed to ensure that information required to be disclosed by the Company in reports filed or submitted under the Exchange Act is recorded, processed, summarized and reported within the time periods specified in the SEC’s rules and forms, and that such information is accumulated and communicated to management, including the Company’s Chief Executive Officer and Principal Financial Officer, as appropriate, to allow timely decisions regarding required disclosure. In designing disclosure controls and procedures, management is required to apply its judgment in evaluating the cost-benefit relationship of possible disclosure controls and procedures. The design of any disclosure controls and procedures is also based, in part, upon certain assumptions about the likelihood of future events and there can be no assurance that any design will succeed in achieving its stated goals under all potential future conditions.
The Company’s management, with the participation of its Chief Executive Officer and Principal Financial Officer, evaluated the effectiveness of the design and operation of its disclosure controls and procedures as of the end of the period covered by this report. Based on that evaluation, as of June 30, 2022, management concluded that the Company’s disclosure controls and procedures were effective.
Changes in Internal Control Over Financial Reporting
There have been no changes in the Company’s internal control over financial reporting that occurred during the second fiscal quarter ended June 30, 2022, that have materially affected, or are reasonably likely to materially affect, the Company’s internal control over financial reporting.