Business context and reporting period
Radio One, Inc. (the filing issuer; the request metadata identifies Urban One, Inc.) filed this unaudited Form 10-Q for the quarter and six months ended June 30, 2013. The company operated 54 radio stations in 16 U.S. markets and also owned interests in TV One, Reach Media and Interactive One. Its primary revenue source was advertising.
Financial performance and liquidity
Amounts are in millions of dollars except per-share data and ratios.
| Metric | Q2 2013 | Q2 2012 | Six months 2013 | Six months 2012 |
|---|---|---|---|---|
| Net revenue | $119.6 | $105.8 | $218.7 | $208.8 |
| Operating income | $18.4 | $21.5 | $33.9 | $35.3 |
| Net income (loss) attributable to common stockholders | $(14.2) | $42.7 | $(32.3) | $(36.6) |
| Adjusted EBITDA, a non-GAAP measure | $37.7 | $31.6 | $64.2 | $55.1 |
| Station operating income and margin, non-GAAP | $45.7; 38.2% | $41.4; 39.1% | $81.6; 37.3% | $74.5; 35.7% |
| Interest expense | $22.4 | $22.9 | $44.7 | $46.7 |
| Operating cash flow | Not separately presented | Not separately presented | $4.9 | $18.2 |
- At June 30, 2013, cash and cash equivalents were $40.2 million and short-term investments were $3.2 million, versus cash of $57.3 million and short-term investments of $1.6 million at December 31, 2012. Current assets were $173.1 million and current liabilities $56.9 million.
- Total debt at face amount was $821.4 million: $375.4 million of senior bank term debt, $327.0 million of senior subordinated notes and $119.0 million of TV One notes. The balance sheet reported $812.9 million of long-term debt, net of current portion and original issue discount, plus $3.8 million current debt.
- The company reported $24.0 million available under its revolving facility after covenant considerations. Its credit agreement ratios were 1.30x interest coverage versus a 1.10x minimum, 3.84x senior secured leverage versus a 4.50x maximum, and 7.37x total leverage versus an 8.50x maximum. It stated that it was in compliance with all financial covenants at quarter-end.
- Six-month investing cash flow was $(3.2) million and financing cash flow was $(18.7) million. Financing outflows included $11.8 million of TV One dividends to noncontrolling holders and $4.3 million of share repurchases.
Material changes versus comparable periods
- Revenue rose 13.0% in Q2 and 4.8% for the first half. Cable Television revenue increased to $37.7 million for Q2 and $73.7 million for the first half; Internet revenue also grew. Core radio revenue, adjusted for the transfer of syndication activities, was down 0.6% in Q2 after adjusting for the timing of the Gospel Cruise, and up 0.8% for the first half.
- Reported Reach Media revenue increased sharply in Q2, mainly reflecting the transfer of syndicated programming and the timing of the Tom Joyner Fantastic Voyage. Adjusted for the transfer and event timing, Reach Media revenue declined 7.2% in Q2 and 4.0% for the first half.
- Operating income fell despite higher revenue, principally reflecting a $9.8 million Q2 impairment charge on Philadelphia, Cincinnati and Cleveland radio licenses. The six-month impairment charge was $11.2 million, compared with $0.3 million in the 2012 periods. No goodwill impairment was reported.
- Q2 2013 common-stockholder results were a loss, compared with a profit in Q2 2012. The comparison is substantially affected by the prior-year $48.5 million income-tax benefit; Q2 2013 recorded a $4.7 million tax provision. The company said tax expense is not closely correlated with pretax earnings, partly due to deferred tax liabilities on indefinite-lived intangible assets.
- Operating cash flow for the first half declined to $4.9 million from $18.2 million, which management attributed mainly to higher receivables and content-asset payments. Cash decreased $17.0 million during the period.
Outlook, risks, contingencies and unusual items
- The filing gives no quantified revenue, earnings or cash-flow guidance. Management cited advertising demand, local economic conditions, competition, execution of diversification plans, key personnel and talent, programming costs, FCC regulation, leverage, refinancing and covenant compliance as risks. Management also warned that weaker market growth could lead to further radio-license impairment; some licenses had little or no fair-value cushion.
- On July 22, 2013, Katz Communications gave notice that it would end national sales representation effective September 23, 2014. Radio One was negotiating a new agreement and expected to arrange representation by Katz or another firm before that date; it could not guarantee an agreement with Katz.
- Other subsequent events included a July 30 format change at a Cincinnati station and notice that TV One would buy the former CEO’s outstanding interest, which was expected to increase Radio One’s TV One ownership to approximately 51.9%.
- Management reported disclosure controls were ineffective and identified a material weakness in preparing and reviewing condensed consolidating guarantor footnotes. The company said prior 2012 Form 10-K and Q1 2013 Form 10-Q footnotes should no longer be relied upon and would be amended; it stated the errors did not affect previously reported consolidated financial statements. Separately, it planned to correct an immaterial Q1 cash-flow classification that overstated operating cash flow and understated investing cash flow by approximately $4.0 million, with no effect on continuing operating cash flow.
- Management believed ordinary-course legal proceedings would not have a material adverse effect. The company had four standby letters of credit totaling $1.0 million. Reach Media minority holders’ put right was deferred until January 1, 2018. The company also disclosed a CEO award tied to TV One liquidity proceeds, valued at $12.6 million; payment is contingent on recovery of Radio One’s aggregate TV One investment and receipt of qualifying proceeds.
- As of June 30, goodwill and radio broadcasting licenses totaled $934.8 million, approximately 65.4% of total assets, making impairment assumptions material. The company also disclosed sensitivity of certain Level 3 fair-value measurements to discount-rate and growth assumptions.
Most important facts for investors to verify
- Whether the amended 2012 and Q1 2013 filings were made, and whether the remediation actions resolved the disclosed control weakness.
- Cash generation, receivables collections and content-asset cash requirements, given the decline in first-half operating cash flow.
- Debt-service capacity and covenant headroom as covenant thresholds tighten, including the large 2016 maturities and the 12.5% subordinated-note rate.
- Radio-market performance and the potential for additional license impairments; also distinguish reported results from event timing and the Reach Media segment transfer.
- Whether national sales representation was secured before Katz’s stated termination date and whether TV One’s planned ownership-interest purchase was completed.