Townsquare Media, Inc. — 2016 Form 10-K
Reporting period: Fiscal year ended December 31, 2016. The filing is an annual report, not a standalone fourth-quarter filing; selected fourth-quarter results are included below.
Business context
Townsquare is a media, entertainment and digital marketing company focused on small and mid-sized U.S. markets. At year-end, it operated 312 radio stations and more than 325 local websites in 66 markets, served about 10,700 small businesses through Townsquare Interactive, and produced about 550 live events. Its two reportable segments are Local Marketing Solutions and Entertainment.
Financial performance
| Metric | 2016 | 2015 |
|---|---|---|
| Net revenue | $516.9 million | $441.2 million |
| Operating income | $77.4 million | $84.7 million |
| Net income | $23.3 million | $10.2 million |
| Diluted EPS | $0.85 | $0.37 |
| Cash from operating activities | $59.8 million | $25.9 million |
| Capital expenditures | $20.9 million | $14.7 million |
| Cash at year-end | $51.5 million | $33.3 million |
| Total debt, including current maturities | $571.2 million | $588.8 million |
Revenue increased 17.1%, while operating income declined 8.6%. Approximate operating margin fell to 15.0% from 19.2%; approximate net margin was 4.5% versus 2.3%. Cash flow from operations improved substantially, partly because 2015 included a $27.7 million debt-redemption payment. Working capital was $57.5 million at year-end. The company had $50 million available under its revolving facility and no revolver borrowings.
Local Marketing Solutions revenue rose 4.8% to $342.2 million; Entertainment revenue rose 52.5% to $174.7 million. The reported Entertainment increase principally reflected the acquisition of North American Midway Entertainment (NAME). On a pro forma basis, consolidated revenue increased 3.0%; excluding 2016 political advertising, it increased 1.8%.
Fourth quarter: Revenue was $119.5 million, compared with $113.0 million in Q4 2015; operating income was $14.9 million versus $13.6 million, and net income was $3.2 million versus $2.4 million.
Changes, debt and liquidity
- 2016 revenue growth included $63.1 million attributable to NAME; organic growth accounted for $12.5 million of the reported increase. Pro forma Entertainment revenue decreased 0.9%, which management attributed mainly to inclement weather affecting NAME events and lower music-festival revenue.
- Operating income was lower despite higher revenue, reflecting increased direct costs, depreciation and the absence of the prior-year gain on the sale of towers. The 2015 tower sale generated a reported $12.0 million net gain on asset sales; 2016 had a $0.3 million net loss on asset sales.
- Net income improved partly because 2015 included $30.3 million of debt-cancellation costs. 2016 included a $4.2 million investment impairment. The company also recorded $3.4 million of stock-option repricing expense.
- Year-end debt included $280.1 million of 2023 Notes and $298.5 million of term loans, before deferred financing costs. Debt service was about $32.4 million in 2016. The company expected approximately $37.4 million of debt service over the next 12 months and a $6.3 million excess-cash-flow term-loan payment in Q1 2017.
- On February 8, 2017, the term-loan margin was reduced by 25 basis points to 300 basis points; management estimated annual interest savings of about $750,000 at the year-end principal balance. A 1% rise in LIBOR would increase annual interest expense by approximately $2.3 million, based on year-end borrowings.
Outlook, risks and unusual items
The filing provides no formal revenue, earnings or cash-flow guidance. Management stated that cash, operating cash generation and revolving-credit availability were expected to fund operations, debt service and other needs for at least the next 12 months. Its strategy emphasizes growth in digital and live-event revenue, advertiser cross-selling, operating efficiencies and disciplined acquisitions.
Key risks include advertising weakness or local economic downturns; competition and audience shifts across radio and digital media; event attendance, weather, safety and talent availability; NAME’s seasonal staffing and Canadian-dollar exposure; fuel costs; digital audience, search-engine and ad-blocking changes; acquisition integration and financing; substantial leverage and variable-rate interest exposure; FCC licensing and regulatory requirements; and potential impairment of goodwill or broadcast licenses. Oaktree controls significant voting power, and the company is a controlled company that relies on certain NYSE governance exemptions. The company reported that its disclosure controls and internal control over financial reporting were effective at December 31, 2016; its auditor did not provide an internal-control attestation.
Other notable items: the company reclassified its segment presentation in 2016, applying it retrospectively to segment disclosures without changing consolidated financial statements. It paid no cash dividends. Management stated that ordinary-course legal matters were not expected to have a material adverse effect.
Important facts for investors to verify
- How much of future growth and cash generation is organic versus attributable to acquisitions, especially NAME, and whether Entertainment performance recovers from 2016 weather and festival weakness.
- Debt repayment capacity, covenant headroom, floating-rate exposure, and the effect of the February 2017 term-loan repricing.
- Whether Local Marketing Solutions’ growth and digital-marketing subscriber retention can offset pressure on traditional radio advertising.
- Whether event attendance, operating costs, seasonal labor availability, and Canadian-dollar movements materially affect NAME results.
- Potential impairment sensitivity for FCC licenses and goodwill, which together represented a substantial portion of consolidated assets.