URBAN ONE, INC. (then Radio One, Inc.) — Q2 2014 Form 10-Q
Reporting period: Three and six months ended June 30, 2014; unaudited. Amounts below are in millions of dollars except per-share data and ratios.
Business context
The company operated 54 radio stations in 16 U.S. markets and reported four segments: radio broadcasting, Reach Media, internet, and cable television (TV One). Radio advertising was its core business. The filing also says the company had executed a letter of intent to invest in MGM’s planned MGM National Harbor casino project, then anticipated to open around July 2016; the filing text provided here does not state the proposed investment amount.
Key financial results
| Metric | Q2 2014 | Q2 2013 | Six months 2014 | Six months 2013 |
|---|---|---|---|---|
| Revenue | $108.4 | $119.6 | $219.5 | $218.7 |
| Operating income | $22.4 | $18.3 | $38.2 | $33.8 |
| Net loss attributable to common stockholders | $(10.8) | $(14.2) | $(36.0) | $(32.3) |
| Loss per share, basic and diluted | $(0.23) | $(0.29) | $(0.76) | $(0.67) |
| Station operating income, a company-defined non-GAAP measure | $41.0 | $45.6 | $76.2 | $81.5 |
| Station operating income margin | 37.9% | 38.2% | 34.7% | 37.3% |
| Adjusted EBITDA, a company-defined non-GAAP measure | $31.7 | $37.7 | $56.8 | $64.1 |
Cash from operating activities was $25.3 for the first six months, compared with $4.9 in 2013. Investing activities used $11.1, including $7.1 for the Gaffney station acquisition; financing activities used $10.8. Cash and cash equivalents were $60.0 at June 30, 2014, versus $56.7 at year-end 2013. Short-term investments were $2.6.
At June 30, total debt was $824.4: $370.4 of senior bank term debt, $335.0 of 9.25% subordinated notes due 2020, and $119.0 of TV One notes bearing 10% and due March 2016. The balance-sheet carrying amount of long-term debt, net of current portion and discount, was $817.6. Approximately $24.0 of revolving capacity was available. The company reported $193.0 of current assets and $59.6 of current liabilities.
Changes versus comparable periods
- Q2 revenue fell 9.4%; first-half revenue was nearly flat, up 0.4%. Q2’s decline reflected weaker radio revenue, lower Reach Media revenue related largely to event timing, and an 8.2% decline in internet revenue. Cable revenue increased slightly in Q2.
- Reach Media’s Q2 revenue fell 43.9%, primarily because the Tom Joyner Fantastic Voyage generated about $7.2 of revenue in Q2 2013 but took place in Q1 2014. Excluding the event timing, Reach Media revenue declined 6.9% in Q2, which management attributed to customer turnover and lower rates.
- First-half segment revenue was lower for radio broadcasting and Reach Media, while cable television and internet revenue increased. Radio weakness included competition in a large market and declines in some major markets. TV One’s first-half costs rose, including programming content amortization and marketing.
- Operating income increased despite lower Q2 revenue, helped by lower selling, general and administrative expenses and the absence of the $9.8 radio-license impairment recorded in Q2 2013. First-half operating income also benefited from no comparable 2013 impairment, but station operating income and its margin declined.
- Interest expense declined in both periods after refinancing the 12.5%/15% notes due 2016 with $335.0 of 9.25% notes due 2020. The refinancing generated a $5.7 first-half loss on debt retirement, including a $4.1 write-off of financing costs and a $1.6 premium.
Outlook, risks, and unusual items
- The filing provides no quantified revenue, earnings, or cash-flow guidance. Management cautions that interim results are not necessarily indicative of full-year results.
- The company reported compliance with its credit-facility covenants at June 30. Covenant ratios included interest coverage of 1.54x against a 1.20x minimum, senior secured leverage of 3.57x against a 4.25x maximum, and total leverage of 7.12x against an 8.25x maximum. The filing describes tighter covenant limits in subsequent quarters.
- Debt concentration is significant: scheduled principal payments include approximately $483.7 due in 2016, comprising the bank facility and TV One notes. The revolving facility was scheduled to mature in March 2015, and the bank term loan in March 2016.
- Income tax expense was $17.2 for the first half despite a $8.5 pretax loss from continuing operations. Management attributes the tax charge principally to deferred tax liabilities on indefinite-lived intangible assets and notes that the effective tax rate can vary materially. A valuation allowance remained on substantially all deferred tax assets.
- Management identified below-assumption market revenue growth as an impairment indicator and performed interim tests; no goodwill or radio-license impairment was recorded in the first half of 2014. The company noted limited fair-value cushion for some licenses and possible future impairment risk.
- Other risks include advertising demand and audience changes, competition, high leverage and refinancing needs, interest-rate exposure on variable-rate debt, FCC licensing and regulation, and execution of the diversification strategy. Management said ordinary-course legal matters were not expected to have a material adverse effect. Standby letters of credit totaled about $1.0.
- The CEO’s TV One-related award liability was valued at $15.2; payment depends on qualifying distributions or a liquidity event after recovery of the company’s TV One investment. Reach Media noncontrolling shareholders have put rights beginning in 2018.
Important facts for investors to verify
- Whether radio advertising trends, competitive conditions, and performance in weaker markets improved after June 30.
- Whether operating cash generation is sustainable; first-half cash flow benefited from receivable collections, accrued-interest timing, and lower content-asset payments.
- The company’s ability to refinance or repay the 2015–2016 maturities and maintain compliance as leverage and interest-coverage covenants tighten.
- How event timing, customer turnover, and pricing affect Reach Media’s comparable revenue and profitability.
- Whether the MGM National Harbor investment proceeded, and its amount, funding, terms, and effect on liquidity and debt capacity.
- The assumptions supporting radio-license and goodwill valuations, and the extent of any remaining impairment cushion.