Urban One, Inc. — Q3 2019 Form 10-Q
Reporting period: Three and nine months ended September 30, 2019; comparative periods are the corresponding 2018 periods. Urban One operates radio, syndicated media, digital platforms and cable television, targeting African-American and urban audiences. Unless stated otherwise, financial amounts below are in millions of dollars.
Financial performance and liquidity
- Third-quarter revenue: $111.1, up 0.3% year over year. GAAP operating income was $32.5, up 1.1%; net income attributable to common stockholders was $5.4, down 76.7%. Basic and diluted EPS were each $0.12, versus $0.51 and $0.49, respectively, in Q3 2018.
- First nine months: Revenue was $331.1, up 1.7%; GAAP operating income was $79.1, up 23.2%; common-stockholder net income was $8.8, down 63.3%. Diluted EPS was $0.19 versus $0.50.
- Revenue mix: Q3 cable television advertising rose 7.8% to $20.6, while affiliate fees fell 3.5% to $25.3. Radio advertising declined 0.9% to $50.8 and digital advertising declined 6.4% to $8.2. Event and other revenue increased 32.1% to $5.8. For the first nine months, Reach Media revenue rose 8.7%, largely from special events; digital revenue was nearly flat.
- Margins and adjusted results: Management’s non-GAAP broadcast and digital operating income was $44.8 in Q3, up 3.2%, with a 40.3% margin versus 39.2%. For nine months, it was $125.6, up 4.5%, with a 37.9% margin versus 36.9%. Adjusted EBITDA, a non-GAAP measure, was $40.0 in Q3 versus $37.8 and $110.1 for nine months versus $105.3.
- Cash flow: For the nine months, operating cash flow was $51.0 versus $44.2; investing cash flow was positive $9.6 versus $4.3; financing cash flow was negative $44.6 versus negative $40.2. Cash and cash equivalents were $31.4 at September 30, up from $15.3 at year-end; restricted cash was another $0.5. Investing cash flow included $13.5 of proceeds from the Detroit station sale.
- Debt and liquidity: Gross debt was $893.8 at September 30, compared with $929.9 at December 31, 2018. The company had $31.4 cash and no ABL borrowings; current assets were $181.7 and current liabilities $101.2. Interest expense rose 14.5% to $65.7 for nine months. Debt includes $350.0 of 7.375% notes due April 2022, $321.5 outstanding on the 2017 credit facility, $170.7 on the 2018 facility and $51.6 on the MGM National Harbor loan. The company reported compliance with debt covenants; 2017 facility interest coverage was 1.98x against a 1.25x minimum, and 2018 facility gross leverage was 5.99x against an 8.00x maximum.
Material changes versus the prior period
- Revenue growth was modest, while reported net income fell sharply. Q3 income-tax expense was $6.5 versus an $8.2 tax benefit in Q3 2018; nine-month tax expense was $8.3 versus a $10.9 benefit. The prior-year comparison included substantial deferred-tax benefits.
- Higher interest expense partly offset improved operating income. Management attributed the increase to higher rates on debt and lease accounting under ASC 842; nine-month lease-related interest expense was approximately $4.1.
- Corporate SG&A excluding stock compensation increased $6.0 in Q3, primarily reflecting the CEO employment award valuation. The comparable 2018 quarter included a one-time $6.6 reduction in that award liability following a methodology change.
- Depreciation and amortization declined substantially as certain assets, notably affiliate agreements, approached or reached the end of their useful lives. Nine-month impairment expense was $3.8, related to Detroit radio licenses, versus $6.6 in 2018, which included Detroit licenses and Charlotte goodwill.
- On August 31, 2019, Urban One sold WDMK-FM and three Detroit translators for approximately $13.5 and recorded a $0.5 loss. It also completed redemption of the remaining 2020 notes and repayment of the $11.9 Comcast Note in February 2019.
Outlook, risks and unusual items
- No quantified revenue, earnings or cash-flow guidance is provided. Management stated that operating cash flow, cash and other liquidity sources are expected to be sufficient for foreseeable requirements; interim results may not indicate full-year results.
- Leverage and substantial interest commitments are key risks. The 2018 facility bears 12.875% interest until specified repayment thresholds are met; the MGM loan carries 7.0% cash interest plus 4.0% paid-in-kind interest. Significant debt maturities cluster in 2022, including the $350.0 notes and MGM loan.
- Management identified material weaknesses in internal control over financial reporting, involving review of out-of-period adjustments and controls over deferred taxes, tax provisions and uncertain tax positions. Disclosure controls were deemed ineffective. Remediation plans include added accounting resources, enhanced review and stronger tax controls; effectiveness remains to be tested.
- Other risks include advertising demand and local-market conditions, music royalty negotiations with BMI, FCC license renewal and regulation, competition and content costs, possible future impairments, and potential exercise of Reach Media noncontrolling shareholders’ annual put rights. The company said ordinary-course legal matters were not expected to have a material adverse effect.
- ASC 842 adoption added approximately $49.8 of right-of-use assets and $54.1 of lease liabilities, with a $5.8 net-of-tax increase to retained earnings. The company recorded a $3.4 tax adjustment in Q1 relating to Q4 2018 and subsequently disclosed additional tax-account adjustments. Deferred tax assets were considered more likely than not to be realizable, but realization depends on future taxable income.
Important facts for investors to verify
- Progress and independent validation of remediation for the disclosed material weaknesses, including any subsequent corrections or restatements.
- Debt repayment capacity, covenant headroom, refinancing plans and the cash demands from 2022 maturities and high interest costs.
- Whether modest revenue growth and segment trends persist, particularly cable affiliate-fee declines, digital performance and radio-market weakness.
- Basis and sensitivity of the tax provision and deferred-tax-asset realizability assumptions, including the impact of future taxable income.
- Potential additional license or goodwill impairments, music royalty outcomes, and any exercise of Reach Media put rights.