The US Newspaper Spin Is That Things Are Much Better, But Are They?

Philip M. Stone September 29, 2010 Follow on Twitter

Layoffs and furloughs haven’t really been talked about much lately by US newspapers but they’re cropping up again and when McClatchy, the second largest group, starts layoffs at two of its larger newspapers, and orders Q4 one-week furloughs at one, then the signs are revenues still really aren’t where they to need to be, even given all of the cost cutting over the past few years.

It really was an ominous warning from McClatchy CEO Gary Pruitt when he announced dismal Q2 earnings down 83% over the same quarter a year before to just $7.3 million from $42.2 million, although to be fair debt restructuring had helped the 2009 figure. But revenues were down 6.4%, and he explained one big reason was because of “higher interest costs as we extended debt maturities.”

McClatchy had come too close for comfort with bankruptcy, but managed to steer clear by persuading enough bond holders to swap existing debt due relatively soon with higher interest debt that matured further down the road. ftm warned at the time, indeed we have warned many times as other newspaper companies have done the same for survival, that the industry would be affected for many years to come with  no real reinvestment in the editorial product because the number one target for the cash flow is meeting debt obligations that now cost more.

McClatchy is carrying $1.836 billion in debt and has paid back $113 million this year. Pat Talamantes, chief financial officer, explained,  "We were able to extend a majority of our debt maturities to 2017 with our debt refinancing in February this year, and we have continued to reduce our debt. We've repaid more than $113 million in debt in the first six months of 2010, and debt principal at the end of June was $1.836 billion. Our maturities through 2013 consist of only $35.7 million due in mid 2011 and $43.5 million due in mid 2013.  

"Our leverage profile also continued to improve. McClatchy's leverage ratio declined for the fifth consecutive quarter, ending the second quarter at 4.43 times cash flow, down from 4.65 times cash flow at the end of the first quarter.  Our interest coverage ratio was 3.0 times cash flow at the end of the second quarter. Both of these measurements are well within our bank covenants."

So that means the threat of immediate execution has been lifted but the added debt costs, plus the need to reduce the principal, will be a noose around the company’s neck for a long time to come, and thus cost cutting at various newspapers continues.

So there was the Charlotte Observer, the largest newspaper in North Carolina,  announcing last week  that it is making 20 layoffs and freezing job openings – no losses in editorial but hiring frozen – and full-time staffers must take a one-week furlough during Q4 and that does include editorial. Publisher Ann Caulkins explained that ad revenue had improved during the first half of the year but she also warned the economy was recovering slower than expected. And while digital revenues were up it is still print that rules the financial waves.

Or, put simply, she has her McClatchy cash flow targets to meet, let alone hitting her financial targets for the 2010 bonus,  so since revenue is not doing the expected job it’s back to cost cutting.

A week before the Miami Herald announced 49 job reductions and this does include editorial with seven full-time staffers and two part-timers to go as publisher David Landsberg blames a volatile economy. But if two McClatchy newspapers have made such announcements what can one expect from the remaining 28 in the weeks to come?  Cash flow to pay down debt remains the priority and there’s not much time left to hit bonus financial targets.

And reducing debt remains also the priority at Gannett, the largest US newspaper company. It repaid more than $1 billion of debt in 2009 and the first half of 2010, but it still had $2.6 billion outstanding as of June 30. Last week the company issued $250 million in senior notes due 2015 and $250 million in senior notes due 2018, and said it will use the proceeds to replace other debt with shorter maturity and repay revolving credit facilities.

So, while the economic outlook at Gannett is looking healthier – better for TV than for its newspapers -- again the top priority is paying down the debt, so don’t expect any big editorial investments there for years to come and if the economy doesn’t perform to par then cuts and furloughs will resume there, too.

Given that scenario there is even more reason to worry over a survey that says 20.3% of local advertisers are planning to cut their newspaper budgets while 23.3% of companies say they are planning digital ad increases with only 9.9% saying they would boost their print expenditures.

The survey by ITZBelden in association with the American Press Institute and reported by Alan Mutter’s Newsosaur web site is just what print doesn’t need to hear. The industry spin this year is that comparisons with the same quarters a year ago show the percentage rate of decline has diminished greatly with most groups reporting around 5 – 6% instead of the high 20s to 30% a year earlier, but if the survey is right and far more money is to be redirected into digital with less into print then that just compounds print’s problems. 

As Mutter wrote, “The aggressive shift of spending to digital media …suggests that local retail advertising may come under even more pressure that publishers have experienced to date.”

And some newspapers are even experiencing growth downturns in their digital business. Even the New York Times says it expects an overall Q3 loss in spite of the fact that digital revenues are expected to grow by 14% -- that growth sounded fine until you remember that the Q2 growth was 21%; meanwhile print will still show an advertising decline of some 5% and also because of higher newsstand and subscription pricing the circulation revenue is expected to be down some 5% -- yes, people do quit when the price goes up.

And The Times Company doesn’t want numbers like that while it has its own debt payments to worry about including, let’s not forget, the $250 million Carlos Slim loan at 14% that is said to cost about $35 million annually.

So, while the huge drops in quarterly revenue for most newspapers is waning, there are still declines all the same, and loan payments have become more expensive as the penalty for pushing out maturity dates. All of which says that the editorial product, that few even discuss these days, continues to suffer and won’t get better any time soon; indeed the signs are editorial will suffer even more in the months to come.