URBAN ONE, INC. quarterly report, Q2 FY2020

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Urban One, Inc. — Q2 2020 Form 10-Q

Business context and period: Unaudited results for the three and six months ended June 30, 2020. Urban One operates radio stations and Reach Media, digital platforms, and cable networks TV One and CLEO TV. The company attributed significant business disruption to COVID-19.

Financial performance

  • Revenue: Q2 net revenue was $76.0 million, down 37.5% year over year. First-half revenue was $170.9 million, down 22.3%.
  • Revenue drivers: Q2 radio advertising fell 51.0%, digital advertising fell 20.3%, cable advertising fell 4.4%, and affiliate fees fell 7.4%. Event revenue and other fell 95.9%, principally reflecting postponed or impaired events. First-half radio segment revenue declined 35.6%; cable segment revenue declined 3.2%.
  • Profit: Q2 operating income was $20.4 million versus $29.1 million; net income attributable to common stockholders was $1.4 million versus $6.6 million (diluted EPS $0.03 versus $0.14). For the first half, operating loss was $6.9 million versus operating income of $43.9 million; common-stockholder net loss was $21.8 million versus income of $3.5 million (EPS $(0.48) versus $0.08).
  • Margins and adjusted results: Management’s non-GAAP broadcast and digital operating income was $30.2 million in Q2 and $67.8 million for the first half, with margins of 39.7% in both periods. Adjusted EBITDA was $24.5 million in Q2 versus $39.6 million and $56.8 million for the first half versus $67.3 million. These non-GAAP measures are not substitutes for GAAP results.
  • Cash flow: First-half operating cash flow was $33.3 million, compared with $28.2 million in 2019. Investing cash outflow was $3.1 million; financing cash inflow was $6.5 million. Cash and cash equivalents were $69.7 million at June 30, up from $33.1 million at year-end.
  • Liquidity: Current assets were $204.1 million and current liabilities $120.8 million. The company drew $27.5 million on its asset-backed credit facility (ABL) in March; management reported cash of approximately $78.7 million on July 28.
  • Debt: Total debt was $900.0 million before discounts and issuance costs, versus $889.9 million at December 31; debt net of those costs was $838.4 million. The balance included $350.0 million of 7.375% notes due April 2022, $319.0 million on the 2017 credit facility, $146.8 million on the 2018 credit facility, $56.7 million on the MGM National Harbor loan, and $27.5 million on the ABL. Interest expense was $18.4 million in Q2 and $37.5 million for the first half.

Material changes and unusual items

  • COVID-19 reduced advertiser spending, especially among local radio advertisers, and led to postponement of the 2020 Fantastic Voyage cruise and disruption to other events. The Tom Joyner Morning Show had ceased in December 2019 following the host’s retirement.
  • The company recorded $53.7 million of non-cash impairment charges in the first half: approximately $47.7 million for radio broadcasting licenses in nine markets and $6.0 million for Atlanta and Indianapolis goodwill. No impairment was recorded in Q2; additional impairment remains possible if market conditions or estimates worsen.
  • First-half results included a $21.4 million income tax benefit, including a $12.5 million benefit from an IRS-accepted extension of time to file certain subsidiary tax elections and the related reduction in valuation allowance. Realization of deferred tax assets is not assured.
  • Cost reductions included furloughs, layoffs, salary reductions, reduced discretionary spending, deferred marketing and programming costs, and a hiring freeze. First-half selling and administrative costs fell, partly reflecting these actions and lower activity.
  • The board authorized a potential reverse split of common stock, at a ratio between 1-for-2 and 1-for-50, exercisable before December 31, 2021. The company repurchased 3.2 million Class D shares for approximately $2.4 million during the first half.

Outlook, risks, and controls

  • Management said it expects adequate liquidity for the next 12 months and projected covenant compliance over that period, relying on cash reserves, cost controls, potential further actions, and the ability to manage or defer capital expenditures. Management emphasized substantial uncertainty around the pandemic; the filing provides no numerical revenue or earnings guidance.
  • At June 30, the company reported compliance with debt covenants. Under the 2017 facility, interest coverage was 1.93x against a 1.25x minimum and senior secured leverage was 4.87x against a 5.85x maximum. Under the 2018 facility, gross leverage was 6.55x against a 7.50x maximum. A covenant breach could trigger default; the company stated it could not repay debt if lenders called it.
  • Debt maturities are concentrated: the filing’s scheduled principal table shows approximately $528.0 million due in 2022, including the $350.0 million notes and amounts under other facilities. The ABL matures in 2021, subject to its contractual maturity provisions.
  • The company does not carry business interruption insurance for COVID-related losses. Other risks include advertising-market weakness, high leverage, covenant headroom, potential asset impairments, FCC license renewals, and uncertainty around the duration and geographic course of the pandemic.
  • Management concluded disclosure controls and procedures were not effective at quarter-end because of previously identified material weaknesses. Remediation was substantially completed but was not considered complete until controls had operated and been tested; management expected to finish remediation in 2020.
  • Management considered ordinary-course legal matters not likely to have a material adverse effect. Reach Media’s noncontrolling shareholders retain annual put rights; they did not exercise them in January 2020.

Investor verification priorities

  • Track advertising recovery, particularly local radio, and the timing or financial effects of postponed events.
  • Verify cash generation, cash balances, ABL availability, debt maturities, interest burden, and covenant headroom against subsequent filings.
  • Assess whether further impairment charges or changes to deferred-tax-asset valuation assumptions are warranted.
  • Review progress and testing of remediation for the disclosed material weaknesses in disclosure controls.
  • Confirm the timing and terms of any reverse stock split and monitor future share repurchases and dilution.