Newspaper Earnings Are Better, But View Them With Caution

With the last of the fourth quarter earnings reports from public newspaper companies in this week, it’s safe to say business is looking up. Advertising revenue is not bleeding nearly as quickly. With draconian cost-cutting, all the companies — even A. H. Belo Corp. — operated at a profit for the quarter.
 
After ad revenue declined an average of 28.5 percent for the first three quarters of 2009, companies reported fourth quarter ad losses in the mid-teens to low-20 percent range. I think that figure will average out to 20 percent for the quarter and about 26 percent for the whole year. 
 
The better-than-expected results also raise hope that ad revenues may actually increase by the third or fourth quarter of 2010.
 
Cuts made in the middle of 2009 will continue to generate year-to-year savings through the fist two quarters of 2010. Companies, now much leaner, should be able to stay profitable. Watch for newsroom cuts to abate, if not actually stop.
 
But don’t break out the party hats yet. Here are three reasons to be cautious:
  • Several of the companies (McClatchy, Media General) have reported lowering their debt during 2009 but are projecting higher interest expenses in 2010. How so? The companies’ credit ratings were hammered in 2008 and 2009. So as they refinance old loans that are coming due, the new loans will carry higher interest rates — over 10 percent is not uncommon.
  • In the distressed financial climate of 2009, most newspaper companies (with plenty of companions in the rest of American industry) reduced or stopped making contributions to pension plans. So unfunded pension liabilities, running into the hundreds of millions of dollars, are common at the larger companies. That’s not an immediate obligation, but current federal law requires that companies restore their pension plans to full funding within six years.
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    As the economy improves later this year, some variable costs will pick up. The quarter that newspapers start running more print ads, they’ll start buying more paper. Some of the cost-cutting last year was achieved by running many fewer pages as the cost of paper fell sharply. With that multiplier effect, newsprint costs fell 40 to 50 percent at some companies. That can’t last through 2010.

The industry’s financial health is improved but hardly trouble-free. Still, we are looking at a better set of problems than a year ago, when advertising was in free fall and several leading metros seemed that they could go out of business any day.

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