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by Eric Englund
As The
New York Times Company’s independent registered public accountant,
you – Ernst & Young, LLP – undoubtedly are conscious of
the grossly negligent financial management exercised by The
New York Times Company’s top executives during this decade.
As I conveyed in an essay
written earlier this year: "Since 2000, The New York
Times Company has generated a respectable cumulative net income
of $1,598,062,000. Yet management, over the same period, has
paid out $2,779,601,000 for stock buybacks and dividends.
This means, during the present decade, stock buybacks and
dividends have exceeded cumulative net income by an astonishing
$1,181,539,000." You are painfully aware this reckless
financial management has left The New York Times Company’s
balance sheet in tatters. Be assured, over the next couple
of years, in the context of preparing The New York Times Company’s
annual audited financial statement, you will wrestle with
the issue of whether or not your prestigious client has the
ability to continue as a going
concern. But, should you conclude The New York Times is
failing, will you have the fortitude to qualify your audit
report accordingly?
Per The
CPA Journal, public accounting firms do not have a reliable
track
record with respect to warning "…the investing public
of the financial distress and impending failure of their clients
through modification of the audit report in accordance with
SAS 59, The Auditor’s Consideration of an Entity’s Ability
to Continue as a Going Concern." I will give your
competitor, Deloitte & Touche, some credit as it did state
the following in General Motor’s fiscal year-end 2008 audited
financial statement: "As discussed in Note 2 to the consolidated
financial statements, the Corporation’s recurring losses from
operations, stockholders’ deficit, and inability to generate
sufficient cash flow to meet its obligations and sustain its
operations raise substantial doubt about its ability to continue
as a going concern." Deloitte & Touche published
this on March 4, 2009 and in less than three months, on June
1, 2009, General
Motors filed for Chapter 11 bankruptcy.
What
I have found, when identifying a financially distressed, publicly-held
company, is that it can linger for years – while destroying
more and more wealth – before being liquidated or reorganizing
in bankruptcy. For example, nearly three years before GM filed
for bankruptcy, Karen De Coster and I co-wrote an essay
questioning General Motor’s viability and stated "…bankruptcy
is a possibility – even if the aforementioned alliance with
Nissan and Renault is consummated." There is little doubt,
in my mind, The New York Times Company will linger for a while
longer before either being purchased for a paltry sum or succumbing
to bankruptcy. Either way, the Times will fail with respect
to its stated commitment
regarding "…the creation of long-term shareholder value
through investment and constancy of purpose."
As an
auditor, you know how to prepare and to read a financial statement.
As a financial analyst, I examine the financial statements,
prepared by you, in order to determine the financial health
of a company. I use a conservative "Graham and Dodd"
approach when it comes to financial analysis; which includes
fully discounting intangible assets such as goodwill and deferred
tax assets. With respect to the New York Times, what I see
is a company that has become quite sickly. To be sure, you
know this as well.
So let’s
analyze The New York Times Company’s balance sheet as of the
third-quarter ending September 27, 2009. It is not a pretty
sight.
- On
an as-given basis, The New York Times’ working capital position
stood at negative
$116,583,000. When fully discounting current deferred tax
assets of $51,732,000, allowable working capital drops to
negative $168,315,000.
- As
presented in the balance sheet, this company’s net worth
stood at $492,451,000. Keep in mind, however, The New York
Times’ balance sheet is grossly unbalanced in the sense
that over 36% of its assets are comprised of intangible
assets. The components, of intangible assets, are $428,478,000
of deferred tax assets, $658,282,000 of goodwill, and $45,233,000
of "other" intangible assets – which totals to
$1,131,993,000 of intangible assets. When fully discounting
intangibles, The New York Times’ net worth falls to negative
$639,542,000.
- Cash
stood at $28,092,000. This is a trifling sum for a company
on pace to generate over $2 billion of revenues in 2009.
- The
Times has tapped into its $400,000,000 bank line to the
tune of $104,500,000.
Oh, and
let’s not forget the Times lost $71,028,000 through the nine-months
ending September 27, 2009.
Over
the past decade, The New York Times Company’s irresponsible
financial management has left this company with a balance
sheet emaciated as a Giacometti
sculpture. I have no doubt, whatsoever, that the Times’ top
executives and board members would love to have back the above-mentioned
$2,779,601,000 they paid out for stock buybacks and dividends.
Such a cash war chest would have allowed management the financial
flexibility to re-engineer the company’s business mix knowing
that print media is in a dramatic decline; as shown by The
New York Times’ swing from profitability (in recent years)
to the losses it is now experiencing. Unfortunately, for shareholders,
past negligent financial management has left the very same
incompetent management team with few options – for financial
survival – such as selling assets and cutting costs. Yet,
when looking at the Times’ financial fragility, I do not see
it surviving this vicious economic depression.
So what
will it take for you, Ernst & Young, to truly call into
question The New York Times Company’s ability to continue
as a going concern? Two key factors come to mind. The first
factor is directly related to whether or not the Times can
swing back to consistent profitability. Should this not happen,
then The New York Times must write down its deferred tax assets
because it may not be able to generate enough earnings before
the tax benefits expire. If you recall, General
Motors wrote down $39 billion of deferred tax assets for
this very reason. The second factor is goodwill impairment.
Did the Times’ management overpay for the companies it acquired?
If The New York Times continues to lose money, then it certainly
calls into question if the companies acquired by the Times
are as valuable today as they were when the acquisitions were
made? As stated in this Information Management Magazine
article:
A company
must now conduct an annual impairment test to determine
whether its goodwill has permanently declined in value.
If an acquisition is no longer worth what a company paid
for it, the goodwill must be written down to reflect the
current value. Companies are now trading a ratable goodwill
amortization for goodwill impairment.
Let’s
not overlook AOL’s
$54 billion write down, of goodwill, in 2002.
It is
my hunch you will watch your client wither away, over the
next two years, as it continues to lose money, maxes out its
bank line, and struggles to stay afloat. Within this time
span, I am surmising a substantial chunk of goodwill will
be written down. As the spilling of red ink persists, moreover,
working capital will fall deeper into negative territory while
your tax people determine that the Times’ deferred tax assets
must be written down. At this point, your client’s intangible
assets will have evaporated; thus allowing the whole world
to see that The New York Times Company is broke. There will
be no hiding the fact that the Times’ balance sheet is terminally
ill suffering from both negative working capital and negative
equity. But will you be gutsy enough to issue a "going
concern" disclaimer before The New York Times goes bankrupt?
Deloitte & Touche did so with GM. Will you follow their
example?
November
24, 2009
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