Urban One, Inc. — Q3 2018 Form 10-Q
Business context and reporting period
Unaudited results cover the three and nine months ended September 30, 2018, compared with the same periods in 2017. Urban One operates radio, syndicated programming, digital media and TV One cable television businesses, with 59 broadcast stations in 15 U.S. markets. Figures below are in U.S. dollars; financial statement amounts are converted from thousands to millions.
Financial performance and liquidity
| Metric | Q3 2018 | Q3 2017 | Nine months 2018 | Nine months 2017 |
|---|---|---|---|---|
| Net revenue | $110.7m | $112.1m | $325.6m | $331.0m |
| Operating income | $32.1m | $3.5m | $64.2m | $32.1m |
| Net income (loss) attributable to common stockholders | $23.0m | ($7.9m) | $24.1m | ($9.4m) |
| Adjusted EBITDA (non-GAAP) | $37.8m | $34.0m | $105.3m | $98.4m |
| Broadcast and digital operating income margin (non-GAAP) | 39.2% | 36.3% | 36.9% | 35.5% |
- Revenue declined 1.2% in Q3 and 1.6% for the nine-month period. Q3 radio advertising grew 2.5% and digital advertising grew 7.7%, while cable television advertising fell 7.9% and event and other revenue fell 35.6%. For nine months, digital advertising rose 15.2%, but radio advertising declined 2.3% and cable television advertising declined 7.7%.
- Operating income improved substantially year over year, partly because Q3 2017 included a $16.4m impairment charge; nine-month 2018 impairment was $6.6m, versus $29.1m in 2017. Q3 2018 also benefited from lower corporate expenses, including a $6.6m benefit from revising the CEO Employment Agreement Award valuation method.
- Cash from operations was $44.2m for the nine months, up from $19.8m. Management attributed the increase primarily to collection timing, lower accrued compensation payments and lower content-asset payments. Investing activities provided $4.3m and financing activities used $40.2m; cash, cash equivalents and restricted cash ended at $46.1m.
- At September 30, cash and cash equivalents were $45.3m; current assets were $197.9m and current liabilities $92.2m. The $25m asset-backed revolver had no borrowings outstanding.
- Gross debt was $951.6m: $344.8m under the 2017 Credit Facility, $245.0m of 9.25% notes due February 2020, $350.0m of 7.375% secured notes due April 2022 and an $11.9m Comcast note due April 2019. Net debt carrying value was $940.2m. The company repurchased about $30m of 2020 notes during the first nine months.
- Urban One reported compliance with credit covenants. Interest coverage was 2.05x against a 1.25x minimum; senior secured leverage was 4.54x against a 5.85x maximum. The 2017 Credit Facility’s average rate was 5.91% in 2018 through September; the stated rate at quarter-end was 6.25%.
Material changes, outlook and risks
- Segment trends were mixed: Q3 radio broadcasting revenue increased 1.7%, Reach Media revenue increased 3.2%, and digital revenue increased 7.9%; cable television revenue declined about 6%. For the nine months, radio, Reach Media and cable television revenues declined, while digital revenue grew.
- The company sold Detroit station WPZR-FM in August for approximately $12.7m, receiving about $12.2m in cash, and acquired Washington, D.C. station WTEM (The Team 980). It recorded $6.6m of non-cash impairments for Charlotte goodwill and Detroit radio licenses for the nine months; no impairment was recorded in Q3.
- The nine-month income tax benefit was $10.9m on $13.8m of pretax income, an unusually negative effective tax rate of 78.9%. Management cited interest-deduction limitations and discrete tax benefits. It said a material release of its deferred-tax-asset valuation allowance was reasonably possible, but timing and amount depend on future profitability.
- Management provided no specific revenue, earnings or cash-flow guidance in this filing. It cautioned that interim results are not necessarily indicative of full-year results. Revenue recognition guidance adopted in 2018 had no material financial-statement impact; the company expected lease accounting adoption in 2019 to increase reported assets and liabilities, but had not quantified the impact.
- Key risks include high leverage and refinancing needs, advertising demand and local-market weakness, interest-rate exposure, debt covenant compliance, FCC licensing and regulation, competition, programming costs and potential further impairment. Some broadcasting licenses had little or no fair-value cushion. The 2020 notes and Comcast note create near-term maturities; the ABL facility matures in October 2019. The Reach Media minority holders have an annual put right, not exercised in January 2018.
- Music licensing remains an uncertainty: the BMI license expired in 2016 and negotiations continued; the temporary Global Music Rights license ran through March 31, 2019. Management said ordinary-course legal proceedings were not expected to have a material adverse effect. Disclosure controls were reported effective, with no material quarterly change in internal control over financial reporting.
Important facts for investors to verify
- How recurring operating performance compares with reported earnings, given impairment charges, tax benefits and the $6.6m CEO award valuation-method change.
- Whether operating cash flow remains strong after the noted collection and payment timing effects, and how much cash is available after debt service and required payments.
- Plans and available financing to address the 2019–2020 maturities, especially the $245m notes due February 2020, and covenant headroom under weaker operating conditions.
- Whether radio-market weakness, declining cable advertising and digital investment affect future segment profitability or trigger additional impairment charges.
- The potential cash or share dilution from the Reach Media put right, and the outcome and cost of BMI/GMR licensing arrangements.