The Financial Fragility of The New York Times Company
By Eric Englund
For the first quarter of 2015, The New York Times Company reported a net loss of $14.4 million. The Times would have been profitable, last quarter, had it not incurred a $40.3 million pension settlement charge. This sizable settlement charge made me curious; so I went to The New York Times Company’s 2014 Annual Report and discovered, on page 10, the following statement: “Our qualified defined benefit pension plans were underfunded by approximately $264 million as of December 28, 2014.” On the same page, it was also mentioned that: “The underfunded status of our pension plans may adversely affect our operations, financial condition and liquidity.” When throwing in the Times’ participation in multiemployer pension plans, which subjects the Times to significant liabilities, then the Times is facing a financial double-whammy of declining print ad revenues and unsustainable pension liabilities.
What prompted me to dig deeper, into The New York Times Company’s pension woes, was a recent article written by Gary North. In this article, Dr. North stated the Times’ loss
…had to do with pensions and falling ad revenue. Pensions are inescapable sources of losses. You do not get rid of these. They just keep adding up. The more people you have on your staff, the more people who will retire, and the more people who retire, the greater are your losses. This is not some one-time write-off. This is a permanent condition. This is terminal cancer.
To be sure, falling ad revenue is a serious issue for the Times. On page 17 of the Times’ March 29, 2015 10-Q, management acknowledged: “We remain in a challenging environment, reflecting an increasingly competitive and fragmented landscape, and visibility remains limited.” Management further stated: “We expect advertising trends to remain challenging and subject to significant month-to-month volatility.” Along these lines, when Jeff Bezos purchased the Washington Post, in 2013, an August 5, 2013 Wall Street Journal article said the following about Bezos’ acquisition:
It comes as many newspapers are struggling to survive. Print newspaper ad revenues fell 55% between 2007 and 2012, according to the Newspaper Association of America, as advertisers and readers have defected to the Web. Some newspapers have been forced to slash costs and in some cases file for bankruptcy. Just three days ago the New York Times Co. sold the Boston Globe for $70 million, having paid $1.1 billion for it in 1993.
Although a declining trend in newspaper advertising revenue is a grave problem for the Times, the more immediate threat, to its financial health, pertains to the Times’ underfunded pensions. For example, at fiscal year-end December 28, 2014, the Times’ pensions were underfunded by $532.1 million (per page 80 of the 2014 Annual Report, qualified plans were underfunded by $264.3 million while non-qualified plan liabilities were $267.8 million). Keep in mind that these figures are carried on the balance sheet with $15.8 million accounted for as a current liability and $516.3 million as a long-term liability.
To give The New York Times Company’s pension liabilities some context, let’s look at the Times’ tangible equity position. At the end of the first quarter of 2015, the Times is reporting $829.7 million of equity. However, when applying some basic analysis to the Times’ balance sheet, tangible equity drops by over 50%. Deferred tax assets, for instance, are intangible and the Times has $315.7 million of such intangibles on its balance sheet. Goodwill is another type of intangible asset and the Times is carrying $108.6 million of goodwill as a long-term asset. These intangible assets total to $424.3 million; which leaves the New York Times with tangible equity of $405.4 million at the quarter ending March 29, 2015—a troubling picture when considering the magnitude of the Times’ pension liabilities.
When a pension is underfunded, the benefit obligations exceed the fair value of the plan’s assets. At fiscal year-end 2014, the Times’ benefit obligations totaled to $2.369 billion while the fair value of its pension assets was $1.837 billion (which equals the above-mentioned underfunding figure of $532.1 million). All of the aforementioned assets are held in the Times’ qualified plans.
Per the Times’ 2014 10-K, the expected long-term rate of return on pension plan assets is 7.02%. The $1.837 billion of plan assets were allocated to multiple asset categories such as equities, mutual funds, corporate bonds, U.S. Treasuries, municipal bonds, private equity funds, hedge funds, along with cash of $128 million and annuities of $76 million; which means a little over $1.6 billion of assets are subject to market risk. With stock and bond markets at extreme valuations, presently, I believe a 7.02% expected rate of return is overly optimistic.
What I believe is more likely is for the Times’ pension assets to get hammered due to stocks and bonds being at bubbly valuations. As David Stockman conveys in his recent article Wall Street R.I.P——The Bubble Is Dying At The Zero Bound:
At 2X GDP in 1981, the financial market was valued at its multi-decade trend level. Since then, the market value of corporate equities has risen 17X and debt outstanding is up by 20X.
Accordingly, financial markets today are capitalized at 5X national income. That’s an elephantine bubble by any other name.
Charles Hugh Smith is in agreement that stocks and bonds are in extreme bubble territory. In his May 19, 2015 article Stocks and Bonds Are Due for a Generational Crash of 75% Smith states the following:
Measured in GDP, stocks and bonds have reached extremes that make no sense except as the result of an unprecedented global credit bubble. Credit bubbles have a history of not being as permanent and durable as those living in the peak of the bubble expect.
He goes on to conclude:
By any reasonable measure, the current credit-bubble boom in stocks and bonds is getting long in the tooth after 34 years of relentless expansion, and the rise of securities to 400% of GDP is reaching extremes that are increasingly difficult to support, much less push higher.
From the point of view of history, a reversion to generational lows is inevitable, and a valuation level around 50% of GDP for stocks is a fair target. This implies a 75% decline in both stocks and bonds within the next decade, if not sooner.
With what Smith and Stockman have asserted, it certainly appears The New York Times Company will not only fail to achieve the 7.02% return on its pension plans’ assets, but will take a massive haircut in its pensions’ holdings when the financial markets head deeply southward.
This is where The New York Times Company’s financial fragility is revealed. Should the above-mentioned $1.6 billion of pension assets take a 25% haircut (which is $400 million), then the Times’ tangible equity will drop to $0; using the Times’ tangible net worth, at 3/29/15, as the basis (yes, I said $0). Remember, when determining the funding status, of a pension plan, the fair market value of the plan’s assets is used in the calculation.
Such financial fragility is self-inflicted. As I detailed in my February 25, 2009 essay, about the Times, this company’s executive management team was reckless in managing the company’s balance sheet. Between 2000 and the date I wrote that essay, the Times had executed stock buybacks totaling $1,951,727,000 and paid out dividends of $827,874,000. Had the Times’ management team been financially conservative, and retained this cash, The New York Times Company’s cash, working capital, and equity positions would all be higher to the tune of $2,779,601,000.
It has taken longer than I had expected for the Times to go bankrupt. Falling print ad revenue is going to continue taking its toll. Past financial mismanagement has already taken a heavy toll. Throw into the mix the Times’ cancerous pension woes, and we have a company heading for the financial graveyard.