Business context and reporting period
Radio One, Inc. (the registrant identified in this filing; now known as Urban One) filed this unaudited Form 10-Q for the quarter and nine months ended September 30, 2012. It operated 55 radio stations in 16 U.S. markets and reported four segments: Radio Broadcasting, Reach Media, Internet, and Cable Television (TV One). TV One had been consolidated since April 2011, making year-to-date comparisons with 2011 less comparable.
Key financial metrics
Amounts below are in millions of dollars unless stated otherwise.
| Metric | Three months ended September 30 | Nine months ended September 30 |
|---|---|---|
| Net revenue | 2012: $110.0; 2011: $104.4 | 2012: $318.9; 2011: $266.5 |
| Operating income | 2012: $21.5; 2011: $13.1 | 2012: $56.8; 2011: $34.5 |
| Net income (loss) attributable to common stockholders | 2012: $(13.1); 2011: $(9.9) | 2012: $(49.6); 2011: $24.4 |
| Operating cash flow | Not provided as a quarterly figure | 2012: $29.2; 2011 restated: $16.4 |
- Margins and non-GAAP measures: Station operating income was $40.9 million for Q3 and $115.3 million year to date, versus $35.8 million and $88.4 million, respectively. The corresponding margins were 37.2% and 36.2%, compared with 34.3% and 33.2%. Adjusted EBITDA was $31.3 million for Q3 and $86.3 million year to date. These are company-defined non-GAAP measures.
- Cash and liquidity: Cash and cash equivalents were $48.7 million at September 30, 2012, up from $35.9 million at December 31, 2011. Current assets were $175.3 million and current liabilities $68.1 million. The company reported $23.9 million available under its revolving facility after covenant restrictions.
- Debt: Total debt was $825.0 million, including $378.3 million of senior bank term debt, $327.0 million of 12.5%/15% senior subordinated notes, and $119.0 million of TV One senior secured notes. Long-term debt, net of current portion and original issue discount, was $814.7 million. The 12.5% subordinated notes became payable wholly in cash after the PIK election ended May 15, 2012. Cash interest paid was $52.0 million for the nine months.
- Capital spending and other cash uses: Nine-month property and equipment purchases were $9.5 million; content asset payments were $43.6 million. Financing cash outflow was $12.6 million, including $7.7 million of dividends to TV One noncontrolling interest holders.
Material changes versus the prior comparable period
- Q3 revenue rose 5.3% and operating income rose 64.1%; common-stockholder loss widened to $13.1 million from $9.9 million. Higher deferred tax expense, principally associated with indefinite-lived intangible assets, weighed on results despite stronger operating income.
- For the nine months, reported revenue increased 19.7%, but the comparison includes only part of TV One’s results in 2011 versus a full nine months in 2012. 2012 operating income improved, while common-stockholder results shifted from income to loss; 2011 included a $146.9 million gain related to consolidating TV One.
- Q3 segment revenue increased in Radio Broadcasting and Cable Television, while Reach Media revenue fell 11.3% and Internet revenue fell 8.9%. Year-to-date, Radio Broadcasting revenue rose 5.5%, Reach Media revenue declined 10.3%, and Internet revenue increased 15.4%.
- Operating cash flow increased year over year, partly due to improved operating results and working capital, offset by greater content payments. Investing cash flow moved from a $59.8 million inflow in 2011, which included cash acquired in the TV One consolidation, to a $3.9 million outflow in 2012.
- The filing restated 2011 cash-flow classification: $12.8 million of TV One content payments moved from investing to operating activities. The restatement did not change total cash, balance sheets, or reported operating results.
Outlook, management commentary, risks and unusual items
- Management stated that, based on current projections, it expected to comply with the credit agreement’s financial ratios and other covenants over the next 12 months. At September 30, covenant ratios were 4.12x senior secured leverage versus a 4.50x limit, 7.93x total leverage versus an 8.50x limit, and 1.49x interest coverage versus a 1.25x minimum. The covenant calculations exclude Reach Media and TV One results and related debt.
- Reach Media missed budgeted Q3 operating cash flow; an interim goodwill test found no impairment. Interactive One’s revenue and cash flows declined, and projections were revised; its impairment test also found no goodwill impairment. The company recorded a $313,000 impairment charge for Charlotte radio broadcasting licenses.
- NASDAQ notified the company that its Class D and Class A shares did not meet the $1.00 minimum bid-price requirement. The disclosed compliance deadlines were January 9, 2013 for Class D and January 22, 2013 for Class A; the company said a reverse stock split was among options under consideration. Delisting was a stated risk.
- The company reported $747,000 of 6⅜% subordinated notes due February 2013 and substantial debt maturities and interest obligations thereafter. High leverage, refinancing constraints, covenant limits, advertising demand, economic weakness, and potential impairment of goodwill and intangibles were identified risks.
- Subsequent events: the company signed an agreement to sell Columbus station WJKR-FM, subject to customary conditions and FCC approval; Salem began providing programming under an LMA on November 1, 2012. CEO Alfred Liggins was set to assume oversight and the CEO title at TV One effective November 1, with TV One CEO Wonya Lucas stepping down at October’s end.
- The CEO’s TV One award liability was valued at $11.1 million; the award is contingent on the company recovering its TV One investment and receiving qualifying proceeds. The company was negotiating a new CEO employment agreement, while the 2008 agreement remained in effect.
- Management said routine legal claims were not expected to have a material adverse effect. Four standby letters of credit totaled approximately $1.1 million. Reach Media minority holders had an annual put right; they did not exercise it in 2012, but future exercise could affect liquidity.
Most important facts for investors to verify
- Whether the Class A and Class D shares regained NASDAQ bid-price compliance, and any subsequent listing or reverse-split developments.
- Debt-service capacity and covenant headroom, including the shift to cash-only interest on the 12.5% notes and refinancing needs.
- Comparable operating trends excluding the impact of TV One’s partial consolidation in 2011, and whether weakness at Reach Media and Interactive One continued.
- Cash generation after content payments, and the potential liquidity impact of Reach Media put rights, contractual obligations, and planned station-sale proceeds.
- Assumptions supporting goodwill and broadcast-license valuations, deferred tax expense, and any future impairment charges.
- The effect of TV One leadership changes and the final terms of the CEO employment agreement and related award.