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| MEG > SEC Filings for MEG > Form 10-Q on 5-Aug-2009 | All Recent SEC Filings |
5-Aug-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 net income of $20.6 million in the second quarter of 2009 and a net loss of $.7 million in the first six months of the year, as compared to a net loss of $532.2 million and $552.5 million in the equivalent 2008 periods. Embedded within these results are two items which merit separate discussion: discontinued operations and impairment charges. 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. The Company completed the sale of its final held-for-sale station, WCWJ in Jacksonville, Florida, in the second quarter of 2009. The Company recognized an after-tax gain of $7.1 million in 2009 and an after-tax loss of $11.3 million in 2008 related to these divestitures. See Note 4 of this Form 10-Q for a further discussion of discontinued operations. Challenging business conditions and the market's perception of the value of media company stocks prompted the Company to perform an interim impairment test as of the end of the second quarter of 2008. As a result of this testing, the Company recorded impairment charges in 2008 related to goodwill in the Publishing Division of $512 million, FCC licenses in the Broadcast Division of $198 million, network affiliation agreements in the Broadcast Division of $67 million, trade names in the Broadcast Division of $0.5 million, and investments and assets held for sale of $4.4 million, resulting in an after-tax non-cash impairment charge of $532 million. For a more complete discussion regarding this impairment charge, see Note 3 of this Form 10-Q. The remainder of this discussion focuses only on results from continuing operations.
In the second quarter of 2009, the Company had income from continuing operations of $13.3 million as compared to a loss from continuing operations of $533.5 million in the comparable quarter of 2008; excluding the $532 million after-tax impairment charge in 2008 the loss was $1.4 million. Most of the improvement was due to income taxes. The quarter included an $11 million tax benefit that was the result of a favorable determination concerning a state tax issue and an intraperiod tax allocation of tax benefits recorded on the Company's loss from continuing operations (see the Income Taxes section of this MD&A for a further discussion). Lower operating costs were the catalyst for the remainder of the improved results; divisional expenses were down more than 27% in the Publishing Division and over 20% in the Broadcast Division as the result of reductions in workforce, employee benefit changes, and a company-wide effort to eliminate or curtail costs to match the revenue available in this challenging economic environment. In the Publishing Division, a 20% reduction in revenues was more than offset by lower costs which led to a 76% increase in quarter-over-quarter operating profits. Additionally, the bottom line benefited from a 55% decline in intangibles amortization expense (due to the 2008 impairment write-downs of network affiliation agreement intangibles), a mandatory employee furlough program, the suspension of the company match on the 401(k) plan, and lower employee counts which prompted a favorable adjustment for medical expense and reduced compensation costs.
The Company recorded a loss from continuing operations of $8.1 million in the first six months of 2009 as compared to a loss of $543.3 million in the first half of 2008; excluding the $532 million after-tax impairment charge in 2008 in the first half of 2008, loss was $11.2 million. As with the quarter, reduced operating costs played a large role in the Company's improved year-over-year results. Expenses were down 19% and 17% in the Publishing and Broadcast Divisions, respectively, which served to temper 20% revenue declines in both of those Divisions. The Interactive Media Division's loss decreased by $1.3 million due to operating profit contributed by DealTaker.com (acquired in the second quarter of 2008) for six months in 2009 as compared to three months in 2008. Additional cost savings were achieved for reasons similar to those in the second quarter such as lower intangibles expense, the furlough program, the absence of the company match on the 401(k) plan, and workforce reductions.
PUBLISHING
In the Publishing Division, operating income increased $5.2 million in the second quarter as reduced operating costs more than offset a $23.1 million revenue decline. In the first half of 2009, a $5.1 million drop in operating income was the result of a $45.9 million decline in revenues that was appreciably mitigated by acutely lower operating costs in that year-to-date period. As shown in the following chart, all advertising categories suffered due to a combination of the effects of a weakened economy and ongoing changes within the industry. Classified advertising struggled as employment, automotive and real estate advertising declined in all markets. Retail revenues were also down due to lower advertising levels in most categories and to the loss of several advertisers which fell victim to the harsh economy and consequently closed their doors or filed for bankruptcy. Comparatively, the National revenue decline was less severe, but was still down due primarily to decreases in a number of key categories in the largest markets. Circulation revenues rose 12% and 9% in the second quarter and first half of 2009, respectively, due to rate increases in most markets, partially offset by Daily and Sunday volume declines.
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Publishing Division operating expenses decreased a substantial $28.3 million and $40.8 million from the second quarter and first half of 2008, respectively, due largely to lower salary and benefit costs. Salary and benefit expense declined approximately 31% and 23% in the second quarter and first six months of 2009 due to the elimination of positions at all newspapers, lower commissions, the consolidation of certain production facilities, the absence of profit-sharing accruals in 2009 and savings from the mandatory unpaid furlough days (discussed in further detail in the Liquidity section of this MD&A). Despite higher average newsprint prices, up $39/ton (to $633/ton) in the second quarter and up $90/ton (to $656/ton) in the first half of 2009, newsprint costs were down 29% and 18% in those similar periods due to reduced consumption as a result of 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, the Division also achieved meaningful departmental savings in the areas of circulation sales, production supplies and reduced discretionary spending.
BROADCAST
In the second quarter, Broadcast operating income was down $3.6 million as compared to the same quarter a year ago as reduced quarter-over-quarter operating expenses were unable to offset a $17.7 million drop in revenues. In the first half of 2009, operating income declined $9 million as compared to the first six months of 2008 due to a $32 million year-over-year decrease in revenues which was partially offset by a $23 million decline in operating expenses. As displayed in the following chart, all advertising categories declined in 2009 as compared to the prior year. National and Local time sales dropped approximately 25% each in the quarter and 23% each in the year-to-date period due predominantly to an approximate 50% decline in Automotive advertising, historically the Division's largest advertising category. Decreased advertising in the telecommunications and services categories also contributed to the downslide. As expected, Political advertising was negligible in this off-election year.
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The Broadcast Division achieved a $14.1 million reduction (including a $.8 million decrease in severance expense) and a $23 million reduction in operating expenses in the second quarter and first half of this year over the equivalent periods in 2008. The primary reason for the savings was a 29% and 22% decline in salary and benefits costs in the second quarter and first half of 2009, respectively, due in large part for reasons similar to those in Publishing. Additionally, the Division remained vigilant in its efforts to control discretionary spending, achieving meaningful savings in areas such as outside services, advertising, travel and employee relocation.
INTERACTIVE MEDIA
The Interactive Media Division's (IMD) operating loss increased $.4 million in 2009's second quarter and decreased $1.3 million in the first half of 2009 as compared to equivalent prior-year periods. The Advertising Services Group was responsible for all of this improvement in the first half of the year, while the Website Group was down 51% and 23% in the quarter and year to date. IMD revenues were down $.6 million in the second quarter, but up $1.3 million in the first six months of 2009. Dealtaker.com, an online social shopping portal that was acquired at the beginning of the second quarter of 2008, continued to make meaningful contributions to the Division which were reflected in the Advertising Services Group's higher revenues (up 21% and 72%, respectively) and operating profits (up 24% and four times the prior-year level, respectively) in the second quarter and first half of 2009. Revenues at the Website Group fell 18% and 15% in the quarter and year to date,
respectively, as online Classified advertising dropped over 40% in each of those periods. Online Classified advertising is directly impacted by Classified performance in the Publishing Division and has suffered similar volume declines. National revenues decreased a more moderate 23% and 15% in the quarter and year-to-date period as the recession-driven economic environment took its toll. The Company generated robust growth of 23% and 27% in online Local advertising in the quarter and year-to-date periods as banner advertising and sponsorships showed solid growth. The following chart illustrates the shift from Classified to Local 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.
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IMD's operating expenses remained relatively flat in the quarter and year to date as compared to 2008. Costs were down modestly in many areas (particularly compensation), but were up in other areas such as advertising and promotion, as direct-sale initiatives translated into strong Local advertising sales.
The Interactive Media Division is focused on 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 a 17% increase in visits to Web sites and a 9% increase in page views at the Division's Website Group in 2009's second quarter over the equivalent period last year. Additionally, the Division continues to grow its interactive Advertising Services Group and expand its relationships with established online presences (such as Yahoo! and Zillow).
INTEREST EXPENSE
Interest expense increased $.7 million in the second quarter from 2008's same quarter due to a 100 basis point increase (to 5.9%) in the Company's all-in borrowing rate, partially offset by an approximate $90 million decline in average debt levels. Interest expense declined $1.6 million in the year to date from the first half of 2008 due to a $105 million decline in average debt levels, partially offset by a small increase in the average interest rate to 5.5%. 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 borrowings. These swaps effectively convert the Company's variable rate bank term loan to fixed rate debt with a weighted average interest rate approximating 8.3% at June 28, 2009.
INCOME TAXES
In the second quarter and first half of 2009, the Company recorded an income tax benefit attributable to continuing operations and income tax expense on discontinued operations and other comprehensive income. The income tax benefit was comprised of two components: a $7.5 million tax benefit on its loss from continuing operations for the year-to-date period and a discrete tax benefit related to a favorable determination of a state tax issue ($3.6 million) resulting in an unusual effective tax rate. In the first six months of 2009, the Company benefitted income from continuing operations at a 39% rate (excluding the one-time tax benefit related to the state tax issue) compared to 32.2% a year ago. The increase in the 2009 tax rate was primarily due to the relatively low effective tax rate related to the impairment charge recorded in the second quarter of last year.
LIQUIDITY
Net cash generated from operating activities in the first half of 2009 was $3.3 million. Additionally, the Company completed the sale of its fifth held-for-sale television station, WCWJ, which yielded proceeds of approximately $17 million. During the year, the Company collected a $5 million note receivable related to its sale of SP Newsprint in 2008, incurred capital expenditures of $8 million and made a retirement plan contribution of $5 million. Based on the general economic environment and outlook, the Company has reduced its capital spending plans by postponing various projects.
At June 28, 2009, the Company had in place a $578 million revolving credit facility and a $288 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 second quarter, there were borrowings of $424 million outstanding under the revolving credit facility and $288 million under the bank term loan. The Facilities have both interest coverage and leverage ratio covenants. Under the terms of the Facilities, the maximum leverage ratio covenant was reduced slightly for the remainder of 2009 beginning with the second quarter and will reduce again for the first three quarters of 2010; it will remain at a constant level thereafter. Also effective for the second quarter of 2009, the minimum interest coverage ratio 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 (which was approximately $33.5 million as of the filing date). Annual borrowing capacity reductions will be made based on the Company's excess cash flow, as defined. Because the leverage ratio exceeds certain preset 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 and reduce debt.
As the economy has deteriorated, the Company responded to the economic crisis with several aggressive actions to improve its cash flow. These actions included 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, froze benefits under its retirement plan. All of these actions will conserve cash in either the short- or long-term, or both.
In the second 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, provide it with the flexibility to manage working capital needs and finance planned 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 third quarter. This strategy produced a quarter-over-quarter profit improvement in excess of 75% at the Publishing Division in the second quarter, and the Company expects the third quarter to yield similar success. The Broadcast stations are not expected to reach 2008 profit levels due to the virtual absence of Political revenues in this off-election year. The Company anticipates the continuation of meaningful contributions from Dealtaker.com throughout the remainder of 2009. Effective on the first day of the third quarter, the Company realigned its operating structure to focus on geographic markets rather than platform-based segments. The Company's operations are now organized in five geographic market segments and a sixth segment that includes its interactive advertising services and certain other operations. Under the new structure, all resources are available to the Company's Web sites from both a content and sales perspective as online media continues to become an increasingly important component of the overall media equation. These actions should allow Media General to weather the short-term while maintaining its vision for the long-term.
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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, asset impairments, 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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