Media General Inc. Reports Operating Results (10-Q)
Media General Inc. has a market cap of $280.9 million; its shares were traded at around $12.22 with a P/E ratio of 50.9 and P/S ratio of 0.4. MEG is in the portfolios of Chuck Royce of Royce& Associates.
Highlight of Business Operations: The Company recorded a net loss of $17 million ($0.75 per share) in the first quarter of 2010, as compared to a net loss of $21 million ($0.96) in the equivalent prior-year quarter. The driving force behind the quarter-over-quarter improvement was a 12% reduction in operating expenses which created a turnaround in operating results from an $11.6 million operating loss in the first quarter of 2009 to operating income of $8.7 million in 2010. Considerable expense savings were achieved in the areas of compensation and newsprint costs as revenues remained essentially even with the prior-year level. However, increased interest and income tax expense partially offset the operating improvement. As a direct result of a new financing structure put into place in February 2010, interest expense nearly doubled (including $5.5 million of non-recurring expense); see the Liquidity section of this Form 10-Q for further discussion. Income taxes of $6 million in 2010, as compared to none in 2009, were the result of a non-cash naked credit issue that is described in the Income Taxes section of this Form 10-Q. The Companys loss from continuing operations before income taxes was only half of 2009s first quarter loss due to substantially improved operating profits as all segments contributed to the encouraging performance. In 2009, the Company completed the sale of its final held-for-sale station, WCJW in Jacksonville, Florida, and a small business magazine located in the Virginia/Tennessee Market. These results were reported as discontinued operations and had limited impact on the Companys results in the first quarter of 2009.
Interest expense increased $9.9 million in the first quarter of 2010 from the prior-year equivalent quarter as a direct result of the Companys new financing structure that was completed in February 2010. Over half of the quarter-over-quarter increase in interest expense was attributable to debt issuance costs totaling $5.5 million that were immediately expensed upon entering into the financing structure. A $55 million decline in average debt levels in the first quarter of 2010 as compared to 2009, only partially mitigated a 280 basis point increase in the average rate from 5.2% in 2009 to approximately 8% in the current quarter (excluding the impact of debt issuance costs immediately expensed). See the Liquidity section of this Form 10-Q for a more detailed discussion of the new financing structure.
estimated amounts the Company would have received or paid to terminate the swaps. These interest rate swaps were cash flow hedges with notional amounts originally totaling $300 million; swaps with notional amounts of $100 million matured in 2009, and $200 million will mature in 2011. Changes in cash flows of the interest rate swaps offset changes in the interest payments on the Companys bank debt. These swaps effectively convert the Companys variable rate bank debt to fixed rate debt with a weighted average interest rate approximating 10.1% at March 28, 2010.
The Company recorded income tax expense of $6 million in the first quarter of 2010 compared to none in the prior year. The Companys tax provision for both periods had an unusual relationship to the pre-tax loss from continuing operations due primarily to the existence of a full deferred tax asset valuation allowance at the beginning of both periods. This circumstance generally results in a zero net tax provision since the income tax expense or benefit that would otherwise be recognized is offset by the change to the valuation allowance, as it did in the first quarter of 2009. The tax expense recorded in the first quarter of 2010 reflects the accrual of an additional $7.5 million valuation allowance in connection with the tax amortization of the Companys indefinite-lived intangible assets that is not available to offset existing deferred tax assets, partially offset by an increase (from the amount estimated at the end of 2009) in the Companys expected net operating loss (NOL) carryback benefit. The Company expects the naked credit to result in approximately $30 million of income tax expense for the full-year 2010 (as previously discussed in the Companys Form 10-K for the year ended December 27, 2009).
Net cash generated from operating activities in the first quarter of 2010 was $21 million compared to $0.4 million in the year-ago period. During the quarter, the Company paid debt issuance costs of $12 million, made capital expenditures of $2.1 million and reduced debt by $19 million.
As of March 28, 2010, the Company has in place with its syndicate of banks a $400 million term loan, fully drawn, and a $70 million revolving credit line with nothing outstanding. Additionally, the Company has 11.75% Senior Notes with a par value of $300 million that were sold at a discount. The amended bank credit facilities mature in March 2013 and bear an interest rate of LIBOR plus a margin (5.0% at the close of the first quarter) based on the Companys leverage ratio, as defined in the agreement. Total debt outstanding was $693 million on March 28, 2010. The new agreements have two main financial covenants: a leverage ratio and a fixed charge coverage ratio which involve debt levels, interest expense as well as other fixed charges, and rolling four-quarter calculations of EBITDA all as defined in the agreements. These ratios have been amended and they position the Company to emerge solidly from the current economic downturn. The Company has pledged its cash and assets as well as the stock of its subsidiaries as collateral; the Companys subsidiaries also guaranteed the debt securities of the parent company. Additionally, there are restrictions on the Companys ability to pay dividends (none are allowed in 2010 or 2011), make capital expenditures above certain levels, repurchase its stock, and engage in certain other transactions such as making investments or entering into capital leases above certain preset levels.
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