SALM » Topics » Three months ended March 31, 2009 compared to the three months ended March 31, 2008

These excerpts taken from the SALM 10-Q filed May 11, 2009.

Three months ended March 31, 2009 compared to the three months ended March 31, 2008

NET BROADCAST REVENUE.  Net broadcast revenue decreased $5.9 million, or 12.3%, to $42.0 million for the three months ended March 31, 2009, from $47.9 million for the same period of the prior year.  On a same station basis, net broadcast revenue declined $5.7 million, or 12.5%, to $40.3 million for the three months ended March 31, 2009, from $46.0 million for the same period of the prior year.  Revenue from advertising as a percentage of our net broadcast revenue decreased to 41.9% for the three months ended March 31, 2009, from 45.6% for the same period of the prior year.  Revenue from block program time as a percentage of our net broadcast revenue increased to 42.0% for the three months ended March 31, 2009, from 39.2% for the same period of the prior year.  The decline in net broadcast revenue includes a $4.0 million decrease in local advertising revenues, a $0.2 million decrease in national advertising revenue, a $1.2 million decrease in national program revenue, and a $0.5 million decrease in infomercial revenue.  Block programming revenues continue to increase as a percentage of our total broadcasting revenue, particularly on our Christian Teaching and Talk stations.  The trend in the radio broadcasting industry is of declining advertising revenues resulting in the use of block programming or infomercials to offset the declines.  The growth of block programming and infomercial revenue has slowed.  We expect these trends to continue; however, we cannot quantify the financial impact on our future operating results.

NON-BROADCAST REVENUE.  Non-broadcast revenue increased $0.2 million, or 2.1%, to $6.3 million for the three months ended March 31, 2009, from $6.1 million for the same period of the prior year.  The increase is comprised of higher revenues associated with Townhall.com, Salem Consumer Products and Salem Publishing, specifically Townhall Magazine, offset by small declines in revenue on Salem Web Network and Xulon Press.  

BROADCAST OPERATING EXPENSES.  Broadcast operating expenses decreased $5.5 million, or 17.1% to $26.3 million for the three months ended March 31, 2009, from $31.8 million for the same period of the prior year.  On a same station basis, broadcast operating expense decreased $5.6 million, or 18.3%, to $24.8 million for the three months ended March 31, 2009, compared to $30.4 million for the same period of the prior year.  The decline in broadcast operating expenses include a $4.8 million decrease in personnel related costs, and a $1.0 million decrease in advertising expenses, offset by a $0.3 million increase in bad debt expense.  The reduction in personnel related costs reflects our overall cost reduction initiative, including a reduction in work force, salary reductions and redemption of accrued vacation benefits required by March 31, 2009.  We expect our staffing levels to remain at reduced levels given



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the weakened United States economy.  We also expect increasing levels of bad debt charges that may have a material impact on our consolidated financial position, results of operations, and cash flows.

NON-BROADCAST OPERATING EXPENSES.   Non-broadcast operating expenses decreased $0.4 million, or 7.1%, to $5.8 million for the three months ended March 31, 2009, compared to $6.2 million for the same period of the prior year.  The decrease includes a $0.3 million decline in circulation expenses associated with print magazines on Salem Publishing and a $0.2 million reduction in advertising and promotion expenses on Salem Web Network, offset by a $0.1 million increase in streaming expenses on Salem Web Network.  

CORPORATE EXPENSES.  Corporate expenses decreased $2.0 million, or 36.6%, to $3.3 million for the three months ended March 31, 2009, compared to $5.3 million for the same period of the prior year.  The decrease is attributable to an overall cost reduction initiative, including a reduction in work force, salary reductions and redemption of accrued vacation benefits required by March 31, 2009, resulting in a $1.3 million reduction in personnel related costs, and a $0.5 million decrease in non-cash stock based compensation expense due primarily to substantially no new grants being offered, as well as a $0.1 million decrease in professional services and fees.

DEPRECIATION.  Depreciation expense increased $0.2 million, or 3.9%, to $3.4 million for the three months ended March 31, 2009, compared to $3.2 million for the same period of the prior year.  The increase reflects the impact of recent capital expenditures associated with computer software, data processing and office equipment that have shorter estimated useful lives than towers and broadcast assets.

AMORTIZATION.   Amortization expense decreased $0.1 million, or 9.1%, to $0.6 million for the three months ended March 31, 2009, compared to $0.7 million for the same period of the prior year.  The decrease is due to higher amortization recognized in early 2008 on intangibles such as advertising agreements and other business contracts that were acquired in 2007 with an estimated useful life of one year.

GAIN ON DISPOSAL OF ASSETS.   The gain on disposal of assets of $6.0 million for the three months ended March 31, 2008, was primarily comprised of the sale of radio station KTEK-AM, Houston, Texas for $7.8 million resulting in a pre-tax gain of $6.1 million offset by various fixed assets disposals.   

OTHER INCOME (EXPENSE).  Interest income of $74,000 for the three months ended March 31, 2009 and $21,000 for the same period of the prior year was interest earned on excess cash.  Interest expense decreased $1.7 million, or 28.2%, to $4.4 million for the three months ended March 31, 2009, compared to $6.1 million for the same period of the prior year due to a lower outstanding debt balance and lower interest rates.  Change in fair value of interest rate swaps of $0.1 million for the three months ended March 31, 2009, represents the change in the fair market value of our swaps.  Other expense, net, decreased to $21,000 from $51,000 primarily due to bank commitment fees associated with our credit facility offset with royalty income from real estate properties.

PROVISION FOR INCOME TAXES.  In accordance with FASB Interpretation No. 48, “Accounting for Uncertainty in Income Taxes” (“FIN No. 48”), our provision for income taxes was $1.7 million for the three months ended March 31, 2009 compared to $3.1 million for the same period of the prior year.  Provision for income taxes as a percentage of income before income taxes (that is, the effective tax rate) was 37.9% for the three months ended March 31, 2009 compared to 46.6% for the same period of the prior year.  The effective tax rate for each period differs from the federal statutory income rate of 35.0% due to the effect of state income taxes, certain expenses that are not deductible for tax purposes, and changes in the valuation allowance from the utilization of certain state net operating loss carryforwards.

INCOME FROM DISCONTINUED OPERATIONS, NET OF TAX.   The income from discontinued operations of $34,000, net of taxes, for the three months ended March 31, 2009 includes the operating results of WRFD-AM, Columbus, Ohio.  The $1.4 million, net of taxes, income from discontinued operations for the same period of the prior year, includes the operating results of WRFD-AM, Columbus, Ohio, the operating results of WRRD-AM, Milwaukee, Wisconsin and WFZH-FM, Milwaukee, Wisconsin through the date of the sale, and the $2.2 million pre-tax gain on the sale of WFZH-FM, Milwaukee, and the operating results of the CCM Magazine.  

NET INCOME.   We recognized net income of $2.9 million for the three months ended March 31, 2009 compared to net income of $5.0 million for the same period of the prior year.  This decrease of $2.1 million is primarily due to a decrease in operating income from continuing operations of $4.1 million and income from discontinued operations of $1.4 million, offset by a decrease of interest expense of $1.7 million and a decrease in our tax provision of $1.4 million.



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NON-GAAP FINANCIAL MEASURES

The performance of a radio broadcasting company is customarily measured by the ability of its stations to generate station operating income. We define station operating income (“SOI”) as net broadcasting revenue less broadcasting operating expenses.  Accordingly, changes in net broadcasting revenue and broadcasting expenses, as explained above, have a direct impact on changes in SOI.

SOI is not a measure of performance calculated in accordance with GAAP; as a result it should be viewed as a supplement to and not a substitute for our results of operations presented on the basis of GAAP. Management believes that SOI is a useful non-GAAP financial measure to investors, when considered in conjunction with operating income, the most directly comparable GAAP financial measure, because it is generally recognized by the radio broadcasting industry as a tool in measuring performance and in applying valuation methodologies for companies in the media, entertainment and communications industries. This measure is used by investors and analysts who report on the industry to provide comparisons between broadcasting groups. Additionally, our management uses SOI as one of the key measures of operating efficiency and profitability. SOI does not purport to represent cash provided by operating activities. Our statement of cash flows presents our cash flow activity and our income statement presents our historical performance prepared in accordance with GAAP. SOI as defined by and used by our company is not necessarily comparable to similarly titled measures employed by other companies.

Three months ended March 31, 2009 compared to the three months ended March 31, 2008

STATION OPERATING INCOME.   SOI decreased $0.4 million, or 2.7%, to $15.7 million for the three months ended March 31, 2009, compared to $16.1 million for the same period of the prior year.  As a percentage of net broadcast revenue, SOI increased to 37.3% for the three months ended March 31, 2009 from 33.7% for the same period of the prior year.  On a same station basis, SOI decreased $0.2 million, or 0.9%, to $15.4 million for the three months ended March 31, 2009 from $15.6 million for the same period of the prior year.  As a percentage of same station net broadcast revenue, same station SOI increased to 38.3% for the three months ended March 31, 2009 compared to 33.8% for the same period of the prior year.   

The following table provides a reconciliation of SOI (a non-GAAP financial measure) to operating income (as presented in our financial statements) for the three months ended March 31, 2008 and 2009:

 

 

Three Months Ended March 31,

 

 

2008

 

2009

 

 

(Dollars in thousands)

Station operating income

 

$                 16,130

 

$                15,687

Plus non-broadcast revenue

 

6,133

 

6,261

Less non-broadcast operating expenses

 

(6,240)

 

(5,798)

Less depreciation and amortization

 

(3,915)

 

(3,981)

Less gain (loss) on disposal of assets

 

6,014

 

(1)

Less corporate expenses

 

(5,277)

 

(3,343)

Operating income

 

$                 12,845

 

$                 8,825

CRITICAL ACCOUNTING POLICIES, JUDGMENTS AND ESTIMATES

The discussion and analysis of our financial condition and results of operations are based upon our condensed consolidated financial statements, which have been prepared in accordance with GAAP. The preparation of these financial statements requires management to make estimates and judgments that affect the reported amounts of assets, liabilities, revenues and expenses, and related disclosure of contingent assets and liabilities. On an ongoing basis, we evaluate our estimates, including those related to allowance for doubtful accounts, acquisitions and upgrades of radio station and network assets, goodwill and other intangible assets, income taxes, and long-term debt and debt covenant compliance. We base our estimates on historical experience and on various other assumptions that are believed to be reasonable under the circumstances, the results of which form the basis for making judgments about the carrying values of assets and liabilities that are not readily apparent from other sources. Actual results may differ from these estimates under different assumptions or conditions.

We believe the following accounting policies and the related judgments and estimates are critical accounting policies which affect the preparation of our condensed consolidated financial statements.



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Accounting for acquisitions and upgrades of radio station and network assets

A majority of our radio station acquisitions are acquisitions of selected assets and not acquisitions of businesses. Such asset acquisitions have consisted primarily of the FCC licenses to broadcast in a particular market. We often do not acquire the existing format, or we change the format upon acquisition when we find it beneficial. As a result, a substantial portion of the purchase price for the assets of a radio station is allocated to the FCC license.  Generally, it is our policy to retain third-party appraisers to value radio stations, networks or non-broadcast properties. The allocations assigned to acquire FCC licenses and other assets are subjective by their nature and require our careful consideration and judgment. We believe the allocations represent appropriate estimates of the fair value of the assets acquired. As part of the valuation and appraisal process, the third-party appraisers prepare reports which assign values to the various asset categories in our financial statements. Our management reviews these reports and determines the reasonableness of the assigned values used to record the acquisition of the radio station, network or non-broadcast properties at the close of the transaction.

We undertake projects from time to time to upgrade our radio station technical facilities and/or FCC licenses. Our policy is to capitalize costs incurred up to the point where the project is complete, at which time we transfer the costs to the appropriate fixed asset and/or intangible asset categories. When the completion of a project is contingent upon FCC or other regulatory approval, we assess the probable future benefit of the asset at the time that it is recorded and monitor it through the FCC or other regulatory approval process. In the event the required approval is not considered probable, we write-off the capitalized costs of the project.

EXCERPTS ON THIS PAGE:

10-Q (2 sections)
May 11, 2009

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