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| MEG > SEC Filings for MEG > Form 10-Q on 7-May-2009 | All Recent SEC Filings |
7-May-2009
Quarterly Report
OVERVIEW
Media General is an independent, publicly owned communications company situated primarily in the Southeast with interests in newspapers, television stations and interactive media.
The Company's fiscal year ends on the last Sunday in December.
RESULTS OF OPERATIONS
The Company recorded a net loss of $21.3 million in the first quarter of 2009, which was not significantly higher than the loss of $20.3 million recorded in the equivalent quarter of 2008. However, more than half of the 2008 loss was due to an $11.3 million loss related to the divestiture of certain television stations. The company sold four TV stations and their associated Web sites in 2008: WTVQ in Lexington, Kentucky, WMBB in Panama City, Florida, KALB/NALB in Alexandria, Louisiana, and WNEG in Toccoa, Georgia. Subsequent to the end of the first quarter of 2009, the Company completed the sale of its final held-for-sale station, WCWJ in Jacksonville, Florida. The remainder of this discussion focuses only on results from continuing operations.
The Company experienced losses from continuing operations of $21.5 million and $9.8 million in the first quarters of 2009 and 2008, respectively. This $11.7 million quarter-over-quarter decline included lower divisional results, severance expense related to workforce reductions, and the absence of any income tax benefit in 2009, partially offset by lower interest, bonus, and intangibles amortization expense. Divisional results decreased from a $13 million profit in the first quarter of 2008 to a loss of $1 million in 2009 (a 73% decline excluding $4.5 million in severance expense in 2009) due primarily to approximately 20% declines in Publishing and Broadcast revenues as all advertising categories were down in both Divisions. The divisions significantly reduced operating expenses to temper the revenue decline. Additionally, no income tax benefit was recorded in the first quarter of 2009 due to a full tax valuation allowance being established at the end of 2008 (see the Income Taxes section of this MD&A for a further discussion). Also benefiting the bottom line were a 19% decrease in interest expense (driven by reduced average debt levels and a small drop in average interest rates), a 53% decline in intangibles amortization expense (due to 2008 impairment write-downs of network affiliation agreement intangibles), and the virtual absence of bonus expense (due to reduced current-year operating expectations).
PUBLISHING
The Publishing Division recorded an operating loss of $2.1 million in the first quarter of 2009 compared to operating income of $8.2 million in the equivalent prior-year quarter. A $12.5 million reduction in operating expense (even though 2009 included $3.4 million in severance expense) appreciably mitigated a $22.8 million decline in revenues. As shown in the following chart, all advertising categories suffered from secular changes within the industry and the effects of the weakened economy, with Classified advertising falling farthest from the year-ago period as employment, automotive and real estate advertising declined in all markets. Retail revenues were also down due to lower advertising levels in most categories with the largest shortfall in the department store category. Comparatively, National revenues declined moderately due primarily to decreases in a number of key categories in the metro markets. Circulation revenues rose 6% in the first quarter due to rate increases in several markets, partially offset by Daily and Sunday volume declines.
As noted, Publishing Division operating expense decreased a substantial $12.5 million (including $3.4 million in severance expense) from the first quarter of 2008 due largely to lower compensation and benefit costs. Compensation and benefit expense declined 21% excluding severance due to the elimination of positions at nearly all newspapers, lower commissions, the absence of profit-sharing accruals in 2009 and savings from the mandatory unpaid furlough days. Despite markedly higher average newsprint prices, up $135/ton (to $675/ton), newsprint costs were down 7% in the first quarter of 2009 due to reduced consumption as a result of newspaper redesigns, lower advertising linage, decreased circulation volumes, and concerted conservation efforts including web-width reductions. The Division has reacted to the challenging advertising environment by reducing costs across all markets while achieving greater efficiencies and by implementing aggressive actions to better align expenses with the current economic reality. In addition to savings realized from workforce reductions (resulting in an approximate 17% decrease in Publishing personnel from the first quarter of 2008), the Division also achieved departmental savings in the areas of circulation sales, repairs and maintenance, production supplies and reduced discretionary spending.
BROADCAST
Broadcast operating income decreased $5.4 million in the first quarter of the year compared to the first three months of 2008 as a $14.3 million decline in revenues more than offset an $8.9 million reduction in operating expenses (even though there were $1 million more in severance costs in 2009). As displayed in the following chart, all revenue advertising categories struggled in the first quarter of 2009 as compared to 2008's same quarter. National and Local time sales dropped approximately 20% each due predominantly to a near 50% decline in Automotive advertising, historically the Division's largest category. Decreased advertising in the services and furniture categories also contributed to the quarter-over-quarter slide. As expected, Political advertising was negligible in this off-election year.
The Broadcast Division achieved an $8.9 million decrease in operating expenses in the first quarter of this year over the equivalent quarter in 2008 in spite of a $1 million increase in severance expense. The primary reason for the savings was a 19% decline in benefits and compensation costs excluding severance expense which was facilitated by an approximate 16% workforce reduction in the first quarter as compared to last year's equivalent quarter. Benefits and compensation costs were also aided by reduced commissions, mandatory furlough days, favorable medical experience and the absence of profit sharing accruals in 2009. Additionally, the Division remained vigilant in its efforts to control discretionary spending, achieving savings in areas such as employee relocation, outside services and travel.
INTERACTIVE MEDIA
The Interactive Media Division's (IMD) operating loss decreased to $1.1 million in 2009's first quarter compared to $2.7 million in the first quarter of 2008 due primarily to a $1.9 million increase in revenues. The Advertising Services Group was responsible for virtually all of this improvement, while the Website Group remained essentially level with the prior-year first quarter. The revenue increase in the first quarter resulted from $2.3 million of revenues generated from Dealtaker.com, an online social shopping portal that was acquired at the beginning of the second quarter of 2008. Revenues at the Website Group fell 11% as online Classified advertising dropped 36%. Online Classified advertising is directly impacted by Classified performance in the Publishing Division and has suffered similar volume declines. National revenues decreased a moderate 6% as the current economic environment took its toll. Local online advertising generated a robust 31% increase as banner advertising and sponsorships showed solid growth. The following chart illustrates that, for the first time in the Division's history, Local advertising has overtaken Classified as the Division's largest source of revenues. Improved training and incentives have elevated Local advertising performance while serving to increase sales focus and revenues.
IMD's operating expenses increased $.3 million in the quarter as compared to 2008's first quarter due to $.8 million of costs generated by Dealtaker.com, which was not acquired until the second quarter of 2008. The Website Group's costs were down modestly in virtually all areas including compensation and benefits, production and advertising.
The Interactive Media Division remains focused on positioning itself for strong long-term growth by increasing visitor and page-view growth, creating a dynamic online presence across all the Company's Websites, and generating revenue growth with a focus on expanded product offerings and attracting new customers. The "Web-First" approach to news reporting provides an immediate platform for breaking news and helps stimulate audience growth, as evidenced by an 11% increase in visits to Web sites and a 4% increase in pages views at the Division's online group in 2009's first quarter over the equivalent period last year. Additionally, the Company has a heightened awareness of the importance of its interactive Advertising Services Group as well as the importance of relationships with established online presences (such as Yahoo! and Zillow), and continues to cultivate these valuable revenue streams.
INTEREST EXPENSE
Interest expense decreased $2.3 million in the first quarter of 2009 from the prior-year equivalent quarter due primarily to an approximate $125 million decline in average debt levels and, to a much smaller degree, to a small drop in the average interest rate to 5.3%. Proceeds from the sales of SP Newsprint and four television station in 2008 drove the debt reduction.
In the third quarter of 2006, the Company entered into three interest rate swaps (where it pays a fixed rate and receives a floating rate) to manage interest cost and cash flows associated with variable interest rates, primarily short-term changes in LIBOR, not to trade such instruments for profit or loss. These interest rate swaps are cash flow hedges with notional amounts totaling $300 million and maturities of either three or five years. Changes in cash flows of the interest rate swaps offset changes in the interest payments on the Company's $300 million bank term loan. These swaps effectively convert the Company's variable rate bank term loan to fixed rate debt with a weighted average interest rate approximating 7.3% at March 29, 2009.
INCOME TAXES
The effective tax rate for the quarter was zero percent compared to 40.4% a year ago. There was no net income tax expense or benefit recorded in the quarter due to the fact that the Company had recorded a full deferred tax asset valuation allowance at the beginning of the year and expects to have a full valuation allowance at the end of the year. Therefore, any income tax expense or benefit that would otherwise be recognized is being offset by the change in the valuation allowance. Absent the valuation allowance the effective tax rate for the quarter would have been approximately 39%.
LIQUIDITY
Net cash generated from operating activities in the first quarter of 2009 was $.4 million. During the quarter, the Company collected a $5 million note receivable related to its sale of SP Newsprint in 2008 and made capital expenditures of $4 million. Based on the general economic environment and outlook, the Company has reduced its capital spending plans by postponing various projects.
At March 29, 2009, the Company had in place a $588 million revolving credit facility and a $294 million variable-rate bank term loan facility (together the "Facilities"). The term loan is with essentially the same syndicate of banks that provides the Company's revolving credit facility. At the end of the first quarter, there were borrowings of $436 million outstanding under the revolving credit facility and $294 million under the bank term loan; the total amount remained largely unchanged in the quarter. The Facilities have both interest coverage and leverage ratio covenants. Under the terms of the Facilities, the maximum leverage ratio covenant will be reduced slightly for the remainder of 2009 (beginning with the second quarter) and for the first three quarters of 2010, and will remain at a constant level thereafter. Also effective for the second quarter of 2009, the minimum interest coverage ratio will be increased slightly for the remaining term of the Facilities. These covenants, which involve debt levels, interest expense, and a rolling four-quarter calculation of EBITDA (a measure of cash earnings as defined in the revolving credit agreement), can affect the Company's maximum borrowing capacity allowed by the Facilities (approximately $768 million at March 29, 2009). Annual borrowing capacity reductions will be made based on the Company's excess cash flow, as defined. Because the leverage ratio exceeds certain present levels, the Facilities contain restrictions on dividends, capital spending, indebtedness, capital leases, and investments, as defined. The Company was in compliance with all covenants at quarter-end and, as covenants tighten, the Company expects to remain in compliance with them going forward by taking the steps necessary to maintain EBITDA.
As the economy has deteriorated, the Company has responded to the economic crisis with several aggressive actions to improve its cash flow. These actions include suspending the Company's match for the 401(k) Plan for the last three quarters of 2009, a minimum of ten mandatory unpaid furlough days for all employees spread across the first three quarters of 2009 (4 days in the first quarter and 3 days in each of the second and third quarters), and the Board of Directors suspending the Company dividend. As discussed earlier, the Company has significantly reduced its workforce, and effective May 31, will freeze benefits under its retirement plan. All of these actions will conserve cash in either the short- or long-term, or both.
Subsequent to the end of the first quarter, the Company completed the sale of WCWJ in Jacksonville, Florida and used the proceeds to reduce debt. The combined commitment under the Facilities is now $866 million. The Company believes that internally generated funds provided by operations, together with the unused portion of the Facilities as well as the proceeds generated by the sale of WCWJ, provide it with the flexibility to manage working capital needs and finance capital expenditures.
OUTLOOK
The Company anticipates a continuation of the fundamental shift of business within the Publishing industry as well as the challenging economic environment which it has been experiencing and expects revenue declines in most of its advertising categories. However, aggressive actions aimed at dramatically reshaping and reducing the Company's cost structure are expected to more than offset the impact of lower revenues in the second quarter, particularly at the Publishing Division. The Broadcast Division is not expected to reach 2008 profit levels due to the virtual absence of Political revenues in this off-election year. The Interactive Media Division anticipates solid second quarter-over-quarter improvement based mainly on heightened performance in its interactive Advertising Services Group. Media General is not alone in the challenges that it faces, but it has taken appropriate actions to weather the short-term and emerge from the recession in a position of strength.
Certain statements in this quarterly report that are not historical facts are "forward-looking" statements, as that term is defined by the federal securities laws. Forward-looking statements include statements related to accounting estimates and assumptions, expectations regarding credit facilities, acquisitions and dispositions, the impact of cost-containment measures, staff reductions, retirement plan changes, the Internet, the Yahoo! agreements, debt compliance, general advertising levels and political advertising levels. Forward-looking statements, including those which use words such as the Company "believes," "anticipates," "expects," "estimates," "intends," "projects," "plans," "may" and similar words, are made as of the date of this filing and are subject to risks and uncertainties that could cause actual results to differ materially from those expressed in or implied by such statements.
Some significant factors that could affect actual results include: the effect of the credit crisis on advertising demand, interest rates or energy prices, the availability and pricing of credit and newsprint, changes to pending accounting standards, health care cost trends, a natural disaster, the level of political advertising, the performance of acquisitions, and regulatory rulings and laws.
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