Gannett Reports Dismal But Better Than Expected Q2 Results So Its Shares Soar 29%, But That Huge Debt Still Overhangs Everything

Philip M. Stone July 16, 2009 Follow on Twitter

Gannett turned in awful Q2 results Wednesday – publishing revenues, for instance, down 32% -- but the shares soared 29% because on Wall Street if you do better than expectation then you must be doing something right and that meant the short sellers had to buy real quick at any price to avoid losing their shirts.

But don’t let the big share price hike fool you into thinking the company did well – the results were terrible, just not as terrible as the so-called experts expected. They were looking for earnings of 37 cents a share but got instead 46 cents a share, but compare that to Q2 a year ago when the earnings were $1.04 a share and a truer picture of those Q2 earnings emerges. The revenue side was way down so to come up with such earnings means the savage cost cuts are taking hold, and Wall Street always applauds that. 

Look underneath the headline earnings figures  and it’s easy to spot that the revenue side remains in deep trouble -- publishing revenues  down 32%  over the same quarter last year (in the US 27% but Newsquest in the UK was down 36%) and that’s on top of 30% plus publishing declines for Q1 and Q4 last year. The company says the situation is showing some signs of stabilizing -- June was the best month this year for national print ads, and classifieds are showing signs of bottoming out according to Gracia C. Martore, chief financial officer who is running the company while Craig A. Dubow is on extended health leave fixing his back.

But again all things are relative, that good June month translates into revenue down 12%, but that’s much better than the mid 20s in April and May. Ad revenue fell 26% at USA Today but the positive spin there was that was a smaller decline than in Q1.

But no matter how you shake the can, total revenue was down by 18%, with print’s 26% decline offset somewhat by higher carriage fees for the TV stations. The company boasted that its online business is doing very well, but again better profits came more from the expense side upon consolidating CareerBuilder with its ShopLocal units which resulted in a 25% decline in operating expenses.

But even with earnings per share a third of what they were for the same quarter a year ago, and with operating income down and advertising revenues down the fact there was some positive spin and it wasn’t the absolute disaster everyone expected was all the market needed for the shares to take off in the pre-market trading by close to 20% and they continued up during the day. By the time the dust cleared the shares closed Wednesday at $4.50, a whopping 29% to the upside (the short sellers surely got their comeuppance on that stock Wednesday.) Even so it is still far lower than the $8 a share it started the year and the $21.68 of a year ago. 

What is really going on is that Gannett has always been a very tightly managed company where its very culture prevented approval of unnecessary expense and it has now tightened the cost screws even more. So the main reason the results were not as bad as forecast is not because revenue did great but rather the cost cutting is really biting. Remember, just last week the company let go some 1,400 employees and that’s on top of a previous 10% cull, it has closed down unprofitable newspapers (don’t forget Tucson), and its dividend is slashed 90%, but for all that its $1.5 billion in current liabilities is too close to its assets of $1.6 billion, not to mention its $4.3 billion of junk-rated debt. Combine all of that and it’s a little surprising the market reacted as it did. Ripe for a fallback?     

The Q2 results don’t mask the fact that what no-one had ever thought possible is now happening to Gannett – it is slowly but surely being threatened by its debt. One could wag one’s finger at the management of the country’s best run newspaper company and ask why it allowed so much debt to come due so soon – 2011 and 2012 – before the recession really hit the company could easily have stretched that debt out much further. Maybe that’s being an armchair quarterback and management never thought the recession would hit into print revenues as severely as it has, but one reason you pay seven figure salaries to senior executives is that they fix such things before they happen.

Now the company finds itself in a position where it has to pay off some $433 million of debt within a couple of years and there is no guarantee how much advertising revenue will return as the economy turns, so all-in-all if the revenue side doesn’t show some real improvement soon things are getting particularly dicey on the debt front, let alone the cost cuts still to come.

In April Gannett offered  private exchanges of  $1 billion in old debt  that carried 5.75% and 6.375% rates maturing in 2011 and 2012  for new bonds at 10% maturing in 2015 and 2016 and it offered several significant incentives for the bondholders to accept, but even so only a disappointing $261 million of those notes were exchanged. That leaves the company with $433 million in bonds maturing in 2011 and $307 million maturing in 2012.  

Bondholders have little incentive to extend debt even at higher rates because most have hedged their bets, taking out various debt instruments that are basically insurance for a full payout if a company goes bankrupt. So you have the silly situation where the bondholders would prefer a default and bankruptcy rather than exchanging old debt at low interest for new debt carrying higher interest but longer maturity.

If that’s not enough aggravation, Gannett’s executives also have to keep a close eye on restrictive loan covenants – come in over 3.5 times senior debt-to-Ebitda (Earnings Before Interest, tax, depreciation and amortization) and the debt can be called in. Gannett currently is sitting at around just below 3 times but if the advertising downturn continues it’s going to get close to that 3.5 even, perhaps, with more drastic cost savings.  Other companies have been successful in getting their revenue to debt ratios increased, but they had to pay through the nose with far higher interest rates for the privilege.

So with all these financial nooses around it wasn’t surprising that at the Gannett telephone conference with reporters and analysts after the Q2 earnings were announced that the financial side of the business got close scrutiny.

Acting CEO Martore put as positive a spin as she could on the numbers. She said classified ad revenue showed improvement in Q2, but even so those revenues were 44.9% less than the same period last year with employment down 58.4%, real estate down 43.8% and automotive down 37.3%. But she said real estate had actually trended up in the quarter while the other categories were somewhat stable. In national advertising, she said June was the best so far. And she said she was confident debt payments would be made on schedule.

And for the future? U.S. Community Publishing President Bob Dickey said that July’s US ad numbers are keeping in line with June’s better performance.

So it might just be a bottoming of the slide, but no one has any idea how long it is going to take to climb back up again. And meanwhile those debt payments loom.