Media General Inc. is an independent publicly owned communicationscompany with interests in newspapers broadcast television interactive media recycled newsprint production and diversified information services. Media General Inc. has a market cap of $65.8 million; its shares were traded at around $2.89 with and P/S ratio of 0.1.
Highlight of Business 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).
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 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 2008s same quarter. National and Local time sales dropped approximately 20% each due predominantly to a near 50% decline in Automotive advertising, historically the Divisions 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 Interactive Media Divisions (IMD) operating loss decreased to $1.1 million in 2009s 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 Divisions history, Local advertising has overtaken Classified as the Divisions largest source of revenues. Improved training and incentives have elevated Local advertising performance while serving to increase sales focus and revenues.
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 Companys 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 Companys maximum borrowing capacity allowed by the Facilities (approximately $768 million at March 29, 2009). Annual borrowing capacity reductions will be made based on the Companys 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.
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