Newspaper profits swoon, more cuts likely

Relentless expense reductions at America’s newspapers this year have failed to stay ahead of falling sales and uncontrollable fixed costs, eviscerating the industry’s profitability and suggesting that more drastic cuts may lie ahead.

The average profitability of newspapers tumbled 18½ times faster than sales fell in the third quarter of this year, according to an analysis of a dozen companies that segment their financial statements in sufficient detail to isolate the performance of their newspaper divisions.

In a three-month period when advertising and circulation sales among the 12 publishers dropped by an average of 10.3% from the prior year’s level, the average operating profits of the group in the third quarter plunged by a staggering 198.3%.

The term “operating profits” refers to what is commonly called EBITDA, a newspaper’s earnings before interest, taxes, depreciation, amortization and one-time events like severance programs or accounting adjustments to write down the value of acquisitions that in retrospect are deemed to be overpriced. The respective sales and earnings drops at each of the 12 companies are presented in the table below. Click the image to read the fine print.

The steep plunge in profits suggests that the industry may have to be more aggressive at cutting expenses in the future, if it intends to either halt or reverse the earnings collapse.

The need would be seem to be particularly acute for the companies that borrowed heavily in recent years to finance acquisitions. Because GateHouse Media, Journal Register, Lee Enterprises, McClatchy and Tribune Co. are committed to steadily increasing principal and interest payments to satisfy their debts, they would appear to be candidates for some of the most draconian expense cutting.

But they are not alone. Heavy cutting may lie ahead, as well, for three companies that suffered not just earnings declines in the third period but outright losses.

They are A.H. Belo, whose operating loss of $12.8 million represented a 189.9% drop in earnings from the same quarter in 2007; the newspaper division of the Washington Post Co., which lost $10.6 million for a 220.6% drop from the prior year, and the Sun-Times Media Group, which lost $7.8 million, representing a 1523.5% decline from the prior year.

The losses at these three companies significantly skew the average earnings performance of the dozen companies covered in this analysis. Even when you back out the trio's losses, however, the average drop in operating profits at the remaining nine companies is 51.8%, or five times greater than the 10.3% decline in sales.

Among the nine companies that did post operating profits in the quarter, several reported enormous drops in their margins. EBITDA skidded 91.2% at Tribune, 87.7% at Journal Communications and 78.7% at New York Times Co.

Every publisher covered in this analysis has been cutting expenses throughout the year, concentrating notably on headcount and newsprint consumption. In some markets, ad production, customer service, printing or delivery have been outsourced in the face of disintegrating ad sales and sharply rising costs for newsprint, energy and health care. A few papers have eliminated print editions on some or all of the days of the week. Other publishers are talking about shutting down newspapers altogether.

Notwithstanding these efforts, not one publisher in the group of 12 was able to prevent its profits from falling faster than its revenues.

As discussed previously here, many publishers until now had been more profitable than many Fortune 500 companies. If the deteriorating economy leads to a further ad sales decline in the fourth quarter and beyond – which seems increasingly likely – publishers will have only two alternatives: Cutting significantly more expenses or accepting lower profitability.

With profits already seriously pinched, publishers may have no choice but to take up their hatchets before the year is out.