URBAN ONE, INC. annual report, FY2012

Full document

Urban One, Inc. (then Radio One, Inc.) — FY 2012 Form 10-K

Reporting period: Fiscal year ended December 31, 2012; the filing also provides fourth-quarter results. The company operated an urban-oriented, multi-platform media business, including radio stations, Reach Media, Interactive One and TV One. TV One has been consolidated since April 2011, affecting year-over-year comparisons.

Business context and financial performance

  • Revenue: $424.6 million, up 16.6% from $364.2 million. Management said revenue grew 5.5% excluding TV One consolidation effects. Radio Broadcasting revenue rose 6.9%; Internet revenue increased 13.3% to $19.9 million; Reach Media revenue declined 12.6% to $42.3 million. Cable Television contributed $131.2 million for the full year.
  • Revenue mix: Core radio, excluding Reach Media, generated 56.4% of net revenue. Local advertising represented 41.4% and national advertising, including network advertising, 34.2% of consolidated revenue. TV One accounted for 30.9%.
  • Operating results: GAAP operating income was $71.5 million, versus $25.6 million in 2011. Net loss attributable to common stockholders was $66.9 million, compared with net income of $2.9 million; basic and diluted loss per share was $1.34. Consolidated net loss before noncontrolling interests was $54.1 million.
  • Non-GAAP operating measures: Station operating income was $151.1 million, up 22.0%, and its margin rose to 35.6% from 34.0%. Adjusted EBITDA was $110.7 million, compared with $90.2 million. These company-defined measures are not GAAP cash flow or operating income.
  • Cash flow and capital spending: Operating cash flow was $45.4 million, versus $31.6 million. Investing activities used $8.0 million, compared with $55.8 million provided in 2011, which included cash and investments acquired with TV One consolidation. Financing activities used $16.1 million. Capital expenditures were $12.5 million; cash interest paid was $73.3 million.
  • Liquidity and debt: Cash and cash equivalents were $57.3 million; current assets were $175.7 million and current liabilities $61.0 million. Gross debt was $824.1 million, including TV One debt; the balance sheet reported $818.7 million after current maturities and original-issue discount. The company had $21.5 million available to borrow under its revolver after covenant limitations. Debt carried high stated rates: 7.50% average on the bank facility in 2012, 12.50% on the senior subordinated notes, and 10.00% on TV One notes.
  • Margins and balance sheet: GAAP operating margin was approximately 16.8%. Total assets were $1.46 billion; goodwill and radio broadcast licenses totaled $946.0 million, or 64.8% of assets. Stockholders’ equity was $143.8 million; total equity including noncontrolling interests was $354.5 million.

Material changes versus prior comparable period

  • Revenue growth and improved reported operating income reflected, in significant part, a full year of TV One consolidation in 2012 versus a partial year in 2011. TV One generated $48.3 million of station operating income in 2012, versus $27.9 million for the 2011 post-consolidation period.
  • Revenue growth was partly offset by a 12.6% decline at Reach Media, attributed to revised affiliate agreements and lower-than-expected event sponsorships. Radio market results varied: Atlanta, Baltimore, Cincinnati, Cleveland, Columbus, Detroit, Indianapolis, Raleigh and Washington grew; Philadelphia and St. Louis had the most significant declines.
  • Interest expense increased to $91.2 million from $88.3 million, primarily reflecting TV One debt consolidation. The option to pay part of interest on the 12.5%/15% notes in additional notes ended May 15, 2012; subsequent interest was payable in cash. The company issued approximately $14.2 million of additional notes under the option before it expired.
  • 2012 net loss included a $33.2 million income tax provision despite a pretax loss, primarily reflecting deferred taxes on indefinite-lived intangible assets and valuation-allowance accounting. In 2011, results included a one-time $146.9 million gain on obtaining control of TV One.
  • Impairment charges fell to $0.3 million from $22.3 million in 2011. The 2012 charge related to Charlotte radio licenses; annual testing found no other impairment, though the company disclosed sensitivity to weaker assumptions.
  • Fourth-quarter 2012 revenue was $105.9 million, versus $98.0 million in fourth-quarter 2011. Operating income was $14.7 million, compared with an operating loss of $8.8 million; common-stockholder net loss was $17.2 million versus $21.5 million. The 2011 quarter included approximately $22.3 million of impairment charges.

Outlook, risks and notable items

  • Management expected 2013 results to improve and projected revenue growth, citing a gradually recovering economy and advertising environment, market-share initiatives, audience improvement and continued development of online and cable operations. It expected to meet liquidity needs and comply with debt covenants through at least December 31, 2013, but emphasized that projections depended on continued economic and advertising recovery.
  • At year-end the company was covenant-compliant, but covenant headroom was limited: total leverage was 8.17x against an 8.50x maximum, senior secured leverage was 4.23x against 4.50x, and interest coverage was 1.32x against a 1.10x minimum. These covenant calculations exclude TV One’s operations and related debt, unlike consolidated debt figures.
  • Management identified substantial leverage, refinancing and covenant risk; reliance on advertising and a few markets; competition from digital and other media; audience-rating and technology changes; FCC licensing and ownership regulation; and possible further impairment of goodwill and broadcast licenses. A two-percentage-point increase in LIBOR borrowing rates would raise annual term-loan interest expense by approximately $3.0 million.
  • On December 31, 2012, Radio One increased its Reach Media ownership from approximately 53.5% to 80% for $2.0 million and moved its syndicated programming operations into Reach Media. Minority shareholders’ put right was deferred to January 1, 2018.
  • Subsequent events: the Columbus WJKR-FM station was sold for $4.0 million, closing February 15, 2013; the remaining $747,000 of 6⅜% notes was repaid February 15, 2013. After year-end the company also authorized a $2 million stock repurchase program and reported repurchases through March 26, 2013.
  • The CEO had an 8% award right on qualifying TV One proceeds exceeding the company’s investment; the recorded liability was $11.4 million at year-end. The chairperson and CEO together held approximately 93% of voting power, creating concentrated control. No cash dividends were anticipated in the foreseeable future.
  • The auditor issued an unqualified opinion on the financial statements. Management concluded disclosure controls and internal control over financial reporting were effective; the auditor did not provide an internal-control attestation.

Important facts for investors to verify

  • Reconcile reported 2012 revenue growth and segment performance for the effects of TV One consolidation and the Reach Media restructuring.
  • Review debt maturities, cash interest burden, covenant definitions and headroom, including the exclusion of TV One from the disclosed covenant ratios and the post-year-end repayment and station sale.
  • Assess whether 2013 revenue and cash-flow assumptions support covenant compliance, liquidity needs and scheduled debt service.
  • Examine the sensitivity of the $946.0 million goodwill and broadcast-license balance to revenue, margin and discount-rate assumptions, and the tax valuation allowance and deferred-tax liability.
  • Consider advertising concentration, audience trends, affiliate and distribution agreements, FCC license renewals, and the implications of concentrated voting control and related compensation arrangements.