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by Eric Englund
An insolvent
company can stay afloat much longer than anticipated. For
example, on July 5, 2006, Karen
De Coster and I published an essay titled General
Motors, Market Engineering, and Confidence "Protection."
In this essay, we stated: "With such a weak balance sheet,
GM will not survive a recession. Hence, bankruptcy is a possibility…"
On June 1, 2009, nearly three years after we wrote this essay,
General Motors filed
for Chapter 11 bankruptcy. I was amazed it took that long
for GM to throw in the towel. In May of 2005, I wrote an essay
critical of Bill Ford, Jr. and Ford Motor Company. I asserted,
in this piece, that Ford Motor Company will go bankrupt. Six
years later, Ford Motor Company is still standing; yet, I
steadfastly maintain it will go bankrupt as Ford’s balance
sheet remains a train-wreck. Twenty-six months ago, I penned
an essay titled The
New York Times Company’s Self-Inflicted Insolvency.
How is The
Gray Lady staying afloat even though, in my opinion, she
is still insolvent? In one word, debt.
So let’s
take a look at The New York Times Company’s financial condition
at fiscal
year-end 2010. Please note I adhere to a conservative
method of financial analysis which dictates that intangible
assets are always fully discounted. Without further ado, here
are the not-so-pretty highlights of The Gray Lady’s sad state
of financial disrepair:
- Long-term
debt and capital lease obligations stood at $996.4 million.
- From
fiscal year-end 2008 to fiscal year-end (FYE) 2010, long-term
debt and capital lease obligations have increased by $416
million; which is a 71.7% increase over this two-year period.
- Looking
at the balance sheet on an "as-given" basis, the
total-liabilities-to-equity ratio is 4 to 1. Anything over
3 to 1 indicates uncomfortably high leverage.
- After
discounting $1,004.5 million of intangible assets, The New
York Times Company has an allowable net worth of negative
$340.4 million.
What
may give some adoring supporters of The Gray Lady some solace
is her improvement, in working
capital, since fiscal year-end 2008. As of FYE 2010, allowable
working capital stood at $284 million. This is a vast improvement
over her allowable working capital position, of negative $460.8
million, at FYE 2008. Two consecutive years of profitability,
to be sure, will help rebuild working capital. On the other
hand, the improvement in working capital also came at the
price of going much deeper into debt over the past two years;
with three key debt transactions being highlighted below (amounts
owed are as of FYE 2010):
- $227.7
million owed to companies affiliated with Carlos
Slim. Proceeds from this loan netted The New York Times
$221.3 million in 2009. The effective interest rate, on
this transaction, is 17%
- $217.3
million owed in relationship to sale-leaseback financing
of The New York Times’ ownership interest in its
headquarters building. Proceeds from The Gray Lady’s sale-leaseback
arrangement netted her $210.5 million in 2009. The effective
interest rate, on this transaction, is 13%.
- $220.1
million owed on 6.625% senior unsecured notes issued in
November of 2010. This transaction netted the Times
$220.2 million in cash and has an effective interest rate
of 7%.
These
long-term borrowings, over the past two years, were instrumental
in helping The New York Times to pay down its bank
line to $0 (down from $380 million), to redeem $259.5 million
of long-term debt, to make debt repayments of $99.6 million,
and to bring working capital significantly into positive territory.
Unquestionably, replacing $380 million of short-term bank
debt, with long-term debt, gave working capital a considerable
boost.
Taking
on debt, at such high interest rates, clearly indicates The
New York Times Company’s management team is desperate. Keep
in mind that this heavy borrowing binge is a manifestation
of The Gray Lady’s reckless financial management during the
first decade of this millennium. Regarding the time period
of 2000 through the third quarter of 2008, I stated the following
in my essay The New York Times Company’s Self-Inflicted
Insolvency:
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. Is it any wonder
The New York Times' balance sheet is such a train-wreck?
Operationally, this company has done well during the past
nine years. Conversely, the company's balance sheet has
been hideously mismanaged by an incompetent executive management
team – as supervised by a grossly negligent board of directors.
So, as
a result of this negligent financial management, the Times
had to load up on debt in order to stay afloat a while longer
– how much longer is anyone’s guess.
In light
of the terrible economy and the grim prospects for print media,
what is the prognosis for The Gray Lady? As Gary North points
out in his excellent LRC piece titled Why
I Hung Up on a New York Times Reporter, 2011 is not
shaping up, so far, to be a good year for The New York Times.
In the first quarter of 2011, both operating profit and earnings
per share have declined dramatically when compared to the
first quarter of 2010. As Dr. North stated in his article:
"Profits are fading fast. It is clear what is happening.
The Times is going belly-up."
I agree
and the sooner the better.
May
5, 2011
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