Urban One, Inc. (then Radio One, Inc.) — Form 10-Q summary
Reporting period: Quarter and nine months ended September 30, 2011. The filing identifies the registrant as Radio One, Inc.; the company later became Urban One. Financial statements are unaudited. Dollar amounts below are in millions unless noted.
Business context and reporting period
The company operated 52 radio stations in 15 U.S. markets and had radio, internet and cable television segments. It held approximately 53.5% of Reach Media and, after a change in governance and related transactions, began consolidating its approximately 50.9%-owned TV One on April 14, 2011. The inclusion of TV One makes year-over-year revenue and expense comparisons materially less like-for-like.
Key financial metrics
| Metric | Q3 2011 | Q3 2010 | Nine months 2011 | Nine months 2010 |
|---|---|---|---|---|
| Net revenue | $104.4 | $74.4 | $266.5 | $208.6 |
| Operating income | $13.1 | $17.3 | $34.5 | $35.0 |
| Operating margin | 12.6% | 23.3% | 12.9% | 16.8% |
| Station operating income and margin (non-GAAP) | $35.8; 34.3% | $28.3; 38.1% | $88.4; 33.2% | $74.6; 35.8% |
| Net income (loss) attributable to common stockholders | $(9.9) | $1.0 | $24.4 | $(1.5) |
| Basic EPS | $(0.20) | $0.02 | $0.48 | $(0.03) |
For the nine months, the reported $24.4 million attributable income includes a $146.9 million non-cash gain from obtaining control of TV One. This was substantially offset by $81.9 million of income tax expense, $65.2 million of interest expense and a $7.7 million debt-retirement loss. The tax expense was largely associated with deferred tax liabilities. Q3 common-stockholder loss reflected higher interest expense and operating costs following TV One consolidation.
Q3 revenue rose 40.3%; TV One contributed $29.5 million. Radio station revenue increased 0.3% (radio excluding Reach Media increased 1.4%), Reach Media revenue declined 4.7%, and internet revenue increased 11.5%. For the nine months, radio revenue declined 1.9%, internet rose 3.0%, and Reach Media rose 16.6%, including approximately $6.6 million from the Tom Joyner Fantastic Voyage event. TV One contributed $54.7 million of nine-month revenue.
Cash flow and liquidity: Nine-month operating cash flow was $29.1 million versus $16.8 million. Investing cash flow was positive $47.1 million, principally reflecting $65.2 million of cash and investments acquired in the TV One consolidation; financing cash flow was negative $52.2 million. Cash was $33.2 million at September 30, 2011, compared with $9.2 million at December 31, 2010. Current assets of $159.0 million exceeded current liabilities of $65.2 million. The company reported $23.8 million available under its revolving facility.
Debt: Total debt was approximately $810.7 million before the $7.1 million original issue discount; balance-sheet long-term debt, net of current portion and discount, was $798.8 million, with $4.9 million current. Major borrowings included $384.1 million of senior bank term debt, $305.9 million of 12.5%/15% subordinated notes and TV One’s $119.0 million 10% secured notes. The company was in compliance with its credit covenants at quarter-end, but reported limited headroom: senior secured leverage was 4.59x against a 5.00x limit, total leverage 8.37x against 9.25x, and interest coverage 1.71x against a 1.25x minimum. Covenant calculations excluded Reach Media and TV One.
Material changes versus the prior comparable period
- TV One consolidation drove much of the revenue increase and also added programming costs, depreciation and amortization, interest expense and noncontrolling interests. Station operating income increased, but its margin declined year over year.
- Q3 operating expenses increased 59.9%, faster than revenue, and operating income fell 24.3%. Interest expense increased 89.5% in Q3 and 110.0% for the nine-month period, reflecting refinancing terms and TV One debt.
- Nine-month operating income was broadly flat despite higher revenue; the company’s reported net income improvement was dominated by the TV One remeasurement gain, not recurring operating performance.
- Debt increased from $642.2 million at year-end 2010 to $810.7 million, including TV One debt and additional payment-in-kind interest on the subordinated notes.
Outlook, risks, contingencies and unusual items
- Management expected to comply with financial ratios and other covenants over the next 12 months based on current projections. The filing provides no specific revenue or earnings guidance.
- The company anticipated continuing the PIK election on its 12.5%/15% notes through May 15, 2012. Under the current election, interest is split between cash and additional notes; interest accruing from that date must be paid in cash at 12.5%.
- Management cited economic and advertising-market weakness, competition, audience-measurement changes, programming and talent costs, FCC and licensing matters, customer concentration, and the ability to meet cash needs and debt covenants as risks. Radio license and goodwill impairment estimates are sensitive to market and cash-flow assumptions. No radio-license or goodwill impairment was recorded in the 2011 interim tests.
- Reach Media’s sales representation agreement was commission-based without minimum revenue guarantees. Reach Media gave notice to terminate it effective December 31, 2011 and was negotiating a replacement.
- Reach Media minority holders can begin exercising annual put rights on February 28, 2012, requiring purchase at fair market value; payment may be in cash or Radio One Class D stock at the company’s discretion, and could constrain liquidity.
- The CEO’s TV One award liability was valued at $10.4 million at quarter-end, up from $6.8 million at year-end. The award equals 8% of qualifying TV One proceeds above the company’s invested capital and is payable only upon qualifying distributions or a liquidity event. A new CEO employment agreement was under negotiation.
- Subsequent events included a Detroit station local marketing agreement beginning October 24, 2011, and the launch of Houston station KROI-FM as a full-service news station on November 14. The company also repurchased shares after quarter-end.
- The filing describes an unresolved appeal in an IPO-related shareholder settlement matter; management said ordinary-course legal matters were not expected to have a material adverse effect. Letters of credit totaled approximately $1.7 million.
Important facts for investors to verify
- How much of revenue and operating performance is attributable to TV One, and how comparable are reported growth rates after its consolidation?
- Whether operating cash flow and underlying earnings can support the high debt burden, cash interest payments and scheduled principal payments.
- Current covenant headroom and the sensitivity of covenant calculations, particularly because TV One and Reach Media are excluded from those calculations.
- Whether Reach Media secures a replacement sales agreement and how much the 2012 put rights could require the company to fund.
- The effect of the PIK election ending in May 2012, when cash interest on the subordinated notes becomes payable at 12.5%.
- The assumptions supporting the $146.9 million TV One gain, related deferred tax liabilities, and the $10.4 million CEO award valuation.
- Whether weakening radio-market and Reach Media performance could trigger future impairment charges or reduce liquidity and covenant cushion.