Business context and reporting period
Radio One, Inc. (identified as Urban One in the request) filed this unaudited Form 10-Q for the quarter and six months ended June 30, 2015. The company operated 54 radio stations in 16 U.S. markets and also owned Reach Media, Interactive One and, following an April transaction, approximately 99.6% of TV One.
Financial performance
| Metric | Three months ended June 30, 2015 | Prior-year quarter | Six months ended June 30, 2015 | Prior-year six months |
|---|---|---|---|---|
| Net revenue | $119.8 million | $108.4 million | $225.6 million | $219.5 million |
| Operating income | $24.8 million | $22.4 million | $40.4 million | $38.2 million |
| Net loss attributable to common stockholders | $13.0 million | $10.8 million | $31.5 million | $36.0 million |
| Adjusted EBITDA | $36.1 million | $32.3 million | $62.7 million | $58.5 million |
| Station operating income margin | 39.2% | 37.9% | 37.2% | 34.7% |
Adjusted EBITDA and station operating income/margin are non-GAAP measures. For the six-month period, operating cash flow was $28.1 million, versus $25.3 million; investing cash flow was negative $216.4 million, largely reflecting the TV One acquisition; financing cash flow was positive $181.0 million. Cash was $60.5 million at June 30, down from $67.8 million at year-end.
At June 30, total debt principal was approximately $1.047 billion, against $60.5 million of cash. Current assets were $198.3 million and current liabilities were $70.5 million. The company reported a stockholders’ deficit of $31.3 million and total assets of $1.384 billion. Six-month tax expense was $18.5 million despite a $6.2 million pretax loss, primarily reflecting deferred taxes on indefinite-lived intangible assets; the company maintained a valuation allowance on substantially all deferred tax assets.
Material changes versus the prior comparable period
- Second-quarter reported revenue rose 10.5%, but the company’s timing-adjusted comparison showed growth of 2.9%, as the Tom Joyner Fantastic Voyage promotional event shifted from the first quarter of 2014 to the second quarter of 2015. The event generated about $8.6 million of Reach Media revenue and about $7.5 million of expense in the 2015 quarter.
- TV One revenue increased on higher advertising demand and affiliate fees: cable television revenue rose to $45.6 million from $38.0 million in the quarter. Reach Media’s reported quarterly revenue increased 81.4%, principally due to event timing.
- Radio broadcasting revenue declined 4.5% in the quarter and 6.8% for the six months, with weakness in several major markets, including Atlanta, Baltimore, Houston and Washington, D.C. Internet revenue fell 23.6% in the quarter and 16.9% year to date, mainly due to lower alliance revenue.
- In April, the company acquired Comcast’s additional TV One membership interest for approximately $221.7 million, bringing its ownership to 99.6%. The transaction was financed alongside a debt refinancing. The company issued $350 million of 7.375% secured notes due 2022 and borrowed $350 million under a new credit facility; it also issued an approximately $11.9 million Comcast note.
- Debt retirement and refinancing generated a $7.1 million loss in the first half of 2015. Total debt principal increased from $822.5 million at December 31, 2014, to $1.047 billion at June 30, 2015.
Outlook, risks and unusual items
- The filing provides no formal revenue or earnings guidance. Management cited continued declines in key radio markets and risks from economic and advertising fluctuations, competition, high leverage, refinancing conditions, FCC regulation, talent and programming costs, and execution of its diversification strategy.
- The new credit facility requires minimum interest coverage of 1.25x and maximum senior leverage of 5.85x. At June 30, reported ratios were 1.84x and 4.66x, respectively; the company said it was in compliance. The facility’s $350 million balance was outstanding. The filing does not clearly state unused borrowing availability.
- The company performed interim impairment tests after identifying weaker market revenue-growth indicators for certain radio markets; it reported no goodwill or broadcast-license impairment. It noted that some licenses have limited fair-value cushions, so weaker assumptions could lead to future impairment.
- Management said routine legal proceedings were not expected to have a material adverse effect. Reach Media noncontrolling shareholders may require a purchase of their interests beginning in 2018. The filing also reported $1.0 million of cash-collateralized letters of credit.
- Unusual items include the substantial TV One buyout and associated refinancing costs, increased stock-based compensation, and a CEO employment-agreement award liability valued at approximately $19.5 million. The filing said a new CEO employment agreement had been approved in principle but had not been executed as of the filing date.
Most important facts for investors to verify
- Whether radio advertising declines in major markets persist, and whether cable and Reach Media growth can offset them after adjusting for event timing.
- The sustainability and cash-conversion quality of reported adjusted EBITDA growth, including the effects of event timing, working-capital movements and non-GAAP adjustments.
- Post-refinancing cash interest, scheduled debt amortization and covenant headroom, particularly the 2018 credit-facility maturity and the company’s ability to refinance.
- TV One’s operating performance and the assumptions underlying the acquisition valuation, tax liabilities and CEO award valuation.
- Potential future impairment exposure, the 2018 Reach Media put rights and any material developments in legal proceedings or broadcasting-license renewals.