Letter to the Auditor of The New York Times Company

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."

Economics in One Lesso... Hazlitt, Henry Best Price: $2.43 Buy New $7.43 (as of 12:35 UTC - Details)

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.

The Hyperinflation Sur... Swanson, Gerald Best Price: $4.58 Buy New $9.13 (as of 08:40 UTC - Details)

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?

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