Dec 13, 2011 - Understanding the Latest Financial Reports of Some Newspaper Industry Leaders
Tuesday, December 13, 2011 3:47 PM
Dec 13, 2011 - For many in the newspaper business, the national media 'story' and 'spin' on our industry is frustrating. Who are these people who report on the financial strength of our companies, including on the performance of the publicly traded publishing companies?
And. why do they fail to understand the successful restructuring that most newspaper publishing companies have now achieved, either through creative and aggressive management decisions or through the benefit of beneficial bankruptcy filings?
There is no question that our revenues have declined significantly over the past five years, but so have our expenses. Unlike many business sectors, our expenses are tied very tightly to revenue. And, our industry, generally, is not burdened with significant research and development costs or patent attorneys, such as those in the drug or manufacturing sectors.
Take a restaurant, for example. It has to have employees standing there to cook and serve, and has to purchase the food items listed on the menu whether customers come in the door on Friday night or not.
Not so with the newspaper business. If our ad revenues decline, we cut newsprint/ink usage, we buy fewer stories and photographs, and we don't pay sales commissions (particularly optimum if sales reps are on straight commission.) Well-run newspaper companies have controlled all of their overhead and operating expenses, and changed their staffing strategies to be able to adjust to these vagaries.
Granted, some companies were late to that party and paid dearly in 2008 and 2009 as they struggled to believe that advertising revenues would not rebound - and took too long to cut.
But by 2010, most newspaper companies came to grips with the future, and began to admit to each other ... "It's amazing how few people it actually takes to run a newspaper company, isn't it?" as one distinguished newspaper owner in Georgia said to me last year.
And, we all began to cut like crazy.
The result? Many newspaper companies made more cash last year than they had seen in years and years.
Those owners still saddled with large buildings - Taj Mahals to themselves - have faired less well...with large overheads and property tax bills. But the clever have downsized, sold off buildings, leased out space, closed their presses and partnered with a competitor, sent people home to work virtually, and outsourced work to contractors.
Through the first nine months of 2011, the financial performance of three of the U.S's leading newspaper publishers shows solid operating cash levels, and make my point. These include results at Lee Enterprises, The McClatchy Company and Gannett.
Yes, Lee Enterprises recently filed for bankruptcy, but Lee's story is not about a failed operational strategy... it's about over-paying in the past for the newspapers purchased at just the wrong time - before our industry understood its future and the impact of the internet on future advertising revenues.
Now in bankruptcy proceedings, Lee will emerge lean and mean, and will continue to show strong cash performance, it appears.
A review of the recently released financial performance numbers as of Sept. 30, 2011 for these three companies proves the point.
Lee Enterprises is running its company at a significant profit, reporting $162 million in operating cash on $756 million in revenue for their fiscal year that ended Sept. 30, 2011 - a 21.5% EBITDA rate. What's killing Lee is a combination of the mistakes of the past - they overpaid for properties - and the general devaluation of their existing properties as GAAP accounting procedures dictate valuation writedowns. Lee booked a $205 million impairment of goodwill and other assets in 2011. But that's accounting...book value...not operating cash. Yes, they overpaid to acquire the assets, perhaps, but what is their future? To fail to step back and analyze this, is to fail to draw an accurate picture of their operations, we believe. From that $162 million in 2011, Lee had to spend $65 million on interest payments on their loans, down from a high of $92 million in 2009.
And, now that they've filed a pre-arranged bankruptcy, a successful emergence will erase the bulk of those loans and eliminate that major annual cost.
Lee also booked $71 million in depreciation and amortization for 2011 on aging printing presses, vehicles, coin racks, et all. But will it cost them $71 million to re-invest in that equipment? We would bet 'No' particularly if they are able to borrow the cash they need for annual capital expenditures. The annual carrying costs of that money will be 'peanuts' in the big picture, and there are significant tax incentives to purchase equipment, reducing taxable liabilities. Let's compare Lee Enterprises to the picture at The McClatchy Company.
THE McCLATCHY COMPANY
Through nine months in their current fiscal year, McClatchy has made $202 million profit on operations on revenue of $ 918 million - an EBITDA percentage of 22.00%. This compares to operating cash of $254 million last year on $1.005 billion - an EBITDA percentage of 25.27%.
Like Lee, McClatchy is carrying staggering debt, spending $127 million on interest payments so far in 2011, though that's down from $134 million last year...going in the right direction.
McClatchy has also aggressively cut their payroll, with total compensation expense down 10.66% in the first nine months of this year, saving the company $42 million. Annualized, that's a reduction of over $60 million. How does Gannett compare?
Through nine months, Gannett made $847 million in cash on $3.98 billion in revenue - an EBITDA percentage of 21.28%. Gannett's borrowing costs are up over last year, spending $132 million through 9/30/2011 versus $126 million last year in the first nine months. But, even after depreciation and amortization, Gannett still reported a very healthy $502 million taxable income through nine months on $3.98 billion revenue, a strong profit picture.
They're all still solid companies. So, why all the bad press we still see, and how do their results compare to other major companies, and other major industries?
Being in Georgia, my first thought was how do these companies compare to Coca Cola or Delta Airlines? I mean, we're not writing off the soft drink or airline industries as dead, correct?
Through the first nine months of Coca Cola's fiscal year, the company reported consolidated cash from operations of $8.2 billion on $35.5 billion in revenue as of 9/30/2011. That's a 23.09 EBITDA percentage - little better than the three U.S.'s newspaper companies illustrated above.
And, Delta? The airline reported operating cash of $2.390 billion on $26.716 billion in revenue - an EBITDA percentage of only 8.95%, considerably thinner than the newspaper industry examples above. Yet, we're not discussing the death of the airline industry.
While their results are not public information, many smaller and mid-sized news companies have no debt, or very low debt left on their balance sheets as companies have cut operating expenses and consolidated printing operations to improve operating cash.
And, the current federal tax incentives on purchasing equipment are particularly beneficial for smaller newspaper publishers, helping them to eliminate their taxable income. These companies represent the bulk of county and regional newspapers across the U.S.
For smaller publishers still operating their own presses who need to spend $150,000 for computer-to-plate equipment, or $250,000 on press improvements, these incentives will help them cut their payrolls and newsprint waste, helping to make their companies even stronger in future years.
We're far from dead, and all are investing in capturing our readers on the web, developing print and online paid subscription strategies that are reaping results, and positioning ourselves to continue to dominate in our local markets.
Editor's Note: Ms. Phelps is the President of Phelps, Cutler & Associates, Consultants to Media, Savannah, GA She is also a member of the board of directors of KPC Media Group, Ft. Wayne, Indiana, where she chairs the company's finance committee of the board. Her company also publishes the Savannah Daily News at www.SavDailyNews.com. Her email for consulting is firstname.lastname@example.org.