Recently by Eric Englund: The Duplicity of Warren Buffett
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.