McClatchy suffers 1Q loss of $37.5 million as ad revenue wilts, raising more analyst concerns

By Michael Liedtke, Gaea News Network
Thursday, April 23, 2009

mcclatchy_logoMcClatchy 1Q loss widens amid advertising meltdown

SAN JOSE, Calif. — The McClatchy Co.’s losses widened in the first quarter amid an advertising meltdown that is increasing pressure on the publisher to meet commitments to lenders. The report released Thursday was far worse than analysts had anticipated, raising questions about whether the owner of The Miami Herald, The Sacramento Bee and 28 other daily newspapers will be able to generate enough cash to keep its lenders happy through the rest of the year.

“We are definitely concerned,” said Fitch Ratings analyst Mike Simonton. “A lot of their financial flexibility has been exhausted.”

In a Thursday conference call with analysts, McClatchy executives repeatedly expressed confidence that they will remain in compliance with two key measures that lenders require the company to meet. The company has debt of roughly $2 billion.

But both Simonton and Benchmark Co. analyst Edward Atorino are worried McClatchy will violate those requirements in the second half of the year unless the advertising market improves. The main fear is McClatchy’s cash flow will drop if the slump drags on, causing the company to miss the lender-imposed financial targets, which hinge on cash flow.

Falling out of compliance could force McClatchy to enter prickly negotiations with its lenders, as it had to do last fall to win greater flexibility at the cost of higher interest rates and requirements for more collateral. Simonton said those lenders might be reluctant to give the publisher much more leeway because of the widespread decay decimating the newspaper industry.

Debt problems already have played a key role in the bankruptcy filings of five newspaper publishers since December.

Newspapers have been staggered by a one-two punch of a recession-related decline in advertising just as more marketing budgets are shifting to less expensive options on the Internet.

McClatchy ranked among the hardest-hit publishers during the first three months of the year.

The Sacramento-based company lost $37.5 million, or 45 cents per share, partly because of a nearly $20 million charge for severance pay and other costs incurred with 1,600 layoffs announced last month. With the latest round of job cuts, McClatchy has trimmed its payroll by about one-third, or more than 4,000 workers, in less than a year.

McClatchy lost $849,000, or a penny per share, at the same time last year.

Even without this year’s one-time charges, McClatchy still would have lost $22.9 million, or 28 cents per share. That was much higher than the average loss estimate of 11 cents per share among analysts polled by Thomson Reuters.

McClatchy shares fell 2 cents to close Thursday at 54 cents. The company’s puny market value has threatened its continued listing on the New York Stock Exchange. Management said Thursday that it believes it can prevent the stock from being de-listed.

The first-quarter setback would have been even deeper if McClatchy hadn’t slashed its compensation expenses by 18 percent in the first quarter.

The company’s first-quarter revenue fell even more, a 25 percent decline to $366 million. That, too, was below the average analyst estimate of $391 million.

In another disturbing sign, the advertising revenue at McClatchy’s newspapers dropped at a more dramatic rate than the amount of space devoted to advertising. The company’s print advertising volume plunged 33 percent to $241 million while total advertising lineage fell 24 percent.

“That shows their pricing power is evaporating,” Simonton said.

And the bad news didn’t stop there: Total circulation at McClatchy’s newspapers fell 9 percent from the same time last year to end March at just under 2.5 million. Despite the decline, the company boosted its circulation revenue 1 percent to $68.5 million by raising prices.

In an unsettling change from earlier quarters, McClatchy’s online advertising slipped nearly 5 percent to $43.4 million even though traffic to the company’s Web sites climbed. Like its industry peers, McClatchy has been counting on Internet advertising growth to help offset the sharp downturn on the print side.

McClatchy said the revenue slide has continued during the first few weeks of the current quarter.

The erosion threatens to tighten lenders’ financial clamps on McClatchy, although the company ended the first quarter with ample wiggle room.

Its leverage ratio — the company’s debt divided by its cash flow — stood at 5.9 for the quarter, below the permitted ceiling of 7.0. Its interest coverage ratio — the ratio of cash flow to its interest payments — was at 2.8, above the minimum requirement of 2.0.

McClatchy ended the quarter with $36 million in cash and available credit of $145 million.

McClatchy doesn’t have any debt maturing until June 2011, though it plans to continue pay down loans. Debt, net of cash on hand, stood at $2.02 billion at the end of the quarter, compared with $2.03 billion at the end of 2008. Much of the debt came from McClatchy’s 2006 purchase of the Knight Ridder chain.

If ad revenue keeps falling at recent rates, the company will likely “have to go back to the well and cut costs even more,” Atorino said.

Gary Pruitt, McClatchy’s chief executive, didn’t announce any new plans to reduce expenses, but said the company will “remain focused on realigning our cost structure.”

Simonton said he doesn’t know how much more McClatchy can afford to cut without alienating readers and advertisers.

“At some point, you cut to a level where you are left with a product no one wants to buy,” Simonton said.

AP Business Writer Peter Svensson in New York contributed to this story.

will not be displayed