URBAN ONE, INC. quarterly report, Q2 FY2016

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Urban One, Inc. (filed as Radio One, Inc.) — Q2 2016 Form 10-Q

Reporting period: Three and six months ended June 30, 2016. The filing identifies the registrant as Radio One, Inc.; it describes an urban-focused multimedia company operating 56 radio stations in 16 U.S. markets, alongside Reach Media, digital media and TV One. Unless stated otherwise, amounts below are in millions of dollars.

Financial results and key metrics

  • Q2 revenue: $122.7, up 2.4% from $119.8. Operating income was $27.7, up 11.8%; net income attributable to common stockholders was $7.3, versus a $13.0 loss in Q2 2015. Diluted EPS was $0.15 versus a loss of $0.27.
  • First-half revenue: $231.8, up 2.8% from $225.6. Operating income rose to $46.5 from $40.4. Net income attributable to common stockholders was $3.4, versus a $31.5 loss; diluted EPS was $0.07 versus a loss of $0.66.
  • Margins and adjusted measures: Management-reported station operating income was $48.9 in Q2 and $88.6 for the first half; its margin increased to 39.9% from 38.7% and to 38.2% from 36.7%, respectively. Adjusted EBITDA, a non-GAAP measure, was $39.9 in Q2 versus $36.4 and $70.7 for the first half versus $63.5.
  • Cash flow: First-half operating cash flow was $12.2, down from $28.1. Investing cash outflow was $4.4 versus $216.4, largely reflecting the prior-year TV One buyout. Financing cash outflow was $21.0, compared with $181.0 of inflow in 2015. Cash declined $13.2 to $54.1.
  • Liquidity and balance sheet: Current assets were $203.2 and current liabilities $86.6 at June 30. Total assets were $1,350.6. Stockholders’ deficit was $65.4. The company had a $25 million asset-backed revolving facility, with no borrowings outstanding at quarter-end; advances are subject to a receivables-based borrowing limit.
  • Debt: Principal debt totaled $1,023.4 at June 30 (balance-sheet long-term debt, net of discounts and costs, was $1,001.8, plus $3.5 current). Debt included $346.5 under the 2015 Credit Facility, $315.0 of 9.25% notes due 2020, $350.0 of 7.375% secured notes due 2022, and an $11.9 Comcast note due 2019. First-half interest expense was $41.2. The credit facility matures December 2018; scheduled principal payments include $341.3 in 2018.

Changes versus prior comparable periods

  • Growth was led by cable affiliate fees, up 9.7% in Q2 and 11.0% for the first half, primarily from higher rates at certain affiliates. Cable advertising declined 2.1% in Q2 but rose 0.7% for the half.
  • Core radio broadcasting revenue declined 0.2% in Q2 and 0.3% for the first half. Management cited mixed market results: Washington, Charlotte and Cleveland were among stronger markets; Columbus, Houston, Philadelphia and Detroit were among weaker markets in the quarter.
  • Reach Media revenue increased 2.8% in Q2 and 2.7% for the half. Internet revenue rose 7.9% in Q2, but was essentially flat for the first half.
  • Operating income improved despite higher interest expense. Lower tax expense contributed to the year-over-year earnings improvement; the 2015 comparison also included a $7.1 loss on debt retirement, while 2016 included a $2.6 gain.
  • First-half operating cash flow fell primarily because of higher payments for content assets and higher cash interest expense. Content-asset payments were $34.4 versus $29.6.

Outlook, commentary, risks and unusual items

  • The filing provides no specific revenue, earnings or cash-flow guidance. Management describes operating results as dependent on advertising demand, audience ratings, market conditions and subscriber-related affiliate fees.
  • At June 30, the company reported compliance with its credit-facility financial covenants: interest coverage was 1.78x against a 1.25x minimum; senior secured leverage was 4.91x against a 5.85x maximum. High leverage, covenant headroom and the 2018 term-loan maturity remain important financing risks.
  • During Q2, the company repurchased approximately $20 million face value of 2020 Notes at about 86% of par, recording a $2.6 gain. The filing’s cash-flow statement reports $17.2 million of repayments of those notes for the first half.
  • TV One content recoverability testing led to approximately $1.9 million of additional amortization expense in the first half. The company reported no impairment of goodwill or broadcasting licenses in the period, although slower market revenue growth prompted interim license testing. Some license valuations have limited or no fair-value cushion.
  • The CEO Employment Agreement Award liability was valued at $25.3 million, up from $20.9 million at year-end; the first-half related expense was approximately $4.8 million. Payment is contingent on receipt of TV One distributions or liquidity-event proceeds.
  • Other disclosed exposures include $159.9 million of unrecorded contractual operating commitments, a $908,000 cash-collateralized letter of credit, and Reach Media noncontrolling shareholders’ annual put rights beginning in 2018. Management says routine legal proceedings are not expected to have a material adverse effect and anticipates no difficulty renewing music-license agreements.
  • Management identified economic and advertising volatility, leverage and financing access, local-market weakness, competition, audience measurement changes, FCC regulation, key-personnel risks, programming costs and potential future impairment charges as risks. The company reported effective disclosure controls and no material change in internal control over financial reporting.

Important facts for investors to verify

  • Whether the issuer identification and share classes in this 2016 Radio One filing correspond to the requested Urban One entity and the relevant security.
  • The company’s ability to refinance or repay the substantial 2018 credit-facility maturity, maintain covenant compliance and manage interest costs.
  • Whether operating cash flow can recover after the first-half decline, particularly given content spending and cash interest requirements.
  • The sustainability of cable affiliate-fee growth and the trajectory of radio advertising across weaker markets.
  • The assumptions underlying goodwill, broadcast-license and content-asset valuations, and the fair value and payment conditions of the CEO award.
  • The terms and potential liquidity effect of Reach Media put rights, contractual commitments and any future stock repurchases.