As second quarter earnings season continues this week, two of the reporting companies — Media General and Lee — provided fresh evidence of how burdensome debt service can still be for newspaper companies.
Boosted by a political advertising windfall in the TV half of its business, on Wednesday Media General reported revenue growth compared to the same quarter last year. But it also booked a $4.3 million net loss for the quarter, thanks in large part to debt.
EBITDA (earnings before interest, taxes, depreciation and amortization) was $30 million for the quarter, a healthy 18 percent operating margin. But interest payments consumed $17.1 million of that (up from $11.2 million in the period a year ago). Another $20 million of earnings went to paying down debt.
Lee Enterprises, reporting Tuesday, had a similar mix of good and bad news. Without TV holdings, it saw revenues drop about 5 percent. But with strong cost controls and falling newsprint prices, it doubled profits from the 2009 period. However, with $33.2 million of free cash flow, Lee paid $14.5 million in interest and paid down $32 million in debt.
For both companies (and for bigger ones like McClatchy and New York Times) it makes business sense to reduce debt as aggressively as possible. As revenues have fallen over the last three years, the companies are smaller and are stuck with earlier borrowings for acquisitions and expansion.
Also, as loans come due, the companies, with weakened credit ratings, are faced with the choice of paying those obligations off or refinancing at much higher rates, typically well north of 10 percent. That beats bankruptcy but also inhibits big investments in rebuilding newsrooms or new ventures.
All this is old news to the investment community. Analysts asking questions on Media General’s earnings conference call praised the company for a good operating quarter, and Media General stock was up 5 percent in midday trading.
CEO Marshall Morton estimated that publishing revenues, down 7 percent year-to-year this quarter, will be down in the third quarter as well but only by 3 to 5 percent. Pressed by an analyst, Morton said he was not confident they would turn positive in the fourth quarter.
The call highlighted several bright spots for Media General:
- Like Gannett, it is forgoing the furloughs of 2009, so it didn’t reduce expenses for the quarter compared to the 2009 period.
- Digital revenues were up 8 percent, and the company will be part of a coming 11-company launch of digital TV feeds to mobile devices.
- Another growth business has been printing other papers and commercial jobs.
- The company is one of several consolidating many copy desk functions to regional centers. Morton said most of the savings will be reinvested in content gathering rather than dropped to the bottom line.
- After stopping spending altogether last year on promoting new subscriptions, Morton said, that has resumed in 2010.
Still the financial equation is only modestly better for now. Digital revenue growth falls far short of replacing lost publishing revenues. And the huge spending on political ads will go away one month into the fourth quarter of this year and all of next.
