Business context and reporting period
Radio One, Inc. (announcing a change to Urban One, Inc. effective January 1, 2017) filed this unaudited Form 10-Q for the quarter and nine months ended September 30, 2016. Its businesses include radio broadcasting, Reach Media, internet media, and cable television (TV One). It owned or operated 56 radio stations in 16 U.S. markets. Amounts below are in millions unless noted.
Financial performance and liquidity
| Metric | Q3 2016 | Q3 2015 | Nine months 2016 | Nine months 2015 |
|---|---|---|---|---|
| Net revenue | $110.9 | $115.9 | $342.7 | $341.5 |
| Operating income | $24.5 | $7.1 | $71.1 | $47.5 |
| Net income (loss) attributable to common stockholders | $(0.4) | $(18.1) | $2.9 | $(49.7) |
| Adjusted EBITDA (non-GAAP) | $34.9 | $33.0 | $105.5 | $96.6 |
| Broadcast and internet operating income margin (non-GAAP) | 38.8% | 36.0% | 38.4% | 36.4% |
For the first nine months, operating cash flow was $34.6 million, versus $30.2 million a year earlier; investing cash flow was $(6.0) million and financing cash flow was $(23.8) million. Cash increased to $72.2 million from $67.4 million at year-end 2015. Current assets were $218.2 million and current liabilities $88.9 million at quarter-end.
Total debt principal was $1,022.5 million (net balance-sheet debt was $1,002.3 million), compared with $1,045.1 million principal at December 31, 2015. Debt included $345.6 million under the 2015 Credit Facility, $315.0 million of 9.25% notes due 2020, $350.0 million of 7.375% secured notes due 2022, and an $11.9 million Comcast note due 2019. Interest expense was $61.5 million for the nine months. The company had no borrowings under its $25 million asset-backed revolver. It reported compliance with debt covenants: interest coverage was 1.79x against a 1.25x minimum, and senior secured leverage was 4.73x against a 5.85x maximum.
Material changes versus prior comparable periods
- Q3 revenue declined 4.3%; nine-month revenue increased 0.3%. Q3 radio broadcasting revenue fell 6.2%, Reach Media revenue fell 7.1%, TV One revenue fell 1.6%, and internet revenue fell 2.3%, according to management.
- Nine-month TV One revenue rose to $143.9 million from $138.9 million, primarily from higher affiliate fees; radio revenue declined 2.3%. Affiliate fees increased 7.7% for the nine months, while cable advertising declined 1.5%.
- Operating income improved substantially, in part because 2015 included a $14.5 million Interactive One goodwill impairment charge. Lower operating expenses also contributed. Nine-month 2016 included a $2.6 million gain from repurchasing 2020 Notes at a discount, versus a $7.1 million debt-retirement loss in 2015.
- Nine-month interest expense increased 3.1% to $61.5 million, which management attributed primarily to higher debt balances, partly offset by lower rates. The company repurchased approximately $20 million principal of 2020 Notes at about 86% of par during Q2.
Outlook, commentary, risks and unusual items
The filing provides no quantified earnings or revenue guidance. Management emphasized its strategy to diversify beyond core radio. It cited weak radio-market revenue conditions and declines in markets including Columbus, Detroit, Houston, and Philadelphia; cost reductions and improved TV One affiliate revenue supported operating performance. Interim impairment tests found no impairment in 2016, but management noted that some broadcast licenses have limited fair-value cushion and could require future impairment if assumptions or conditions worsen.
- Leverage and refinancing risk are significant: $341.3 million of the 2015 Credit Facility principal is scheduled for 2018, and the filing identifies the company’s high leverage and covenant compliance as key risks.
- Music-license agreements with ASCAP and BMI expired December 31, 2016; negotiations were ongoing. SESAC rate arbitration was expected by the end of Q1 2017, with rates retroactive to January 1, 2016.
- Reach Media noncontrolling shareholders gain annual put rights beginning January 1, 2018, exercisable for 30 days; settlement may be in cash and/or registered Class D stock.
- Contractual obligations totaled $1,581.5 million, including debt interest, operating contracts, and leases. Approximately $148.1 million of other operating commitments was not recorded on the balance sheet because it did not meet recognition criteria.
- Routine legal matters were not expected by management to have a material adverse effect. The company had $0.9 million of letters of credit, required to be cash-collateralized. The CEO employment-agreement award liability was valued at $25.7 million; its valuation relies on Level 3 assumptions.
- A land, tower, and equipment sale was under a letter of intent, subject to definitive documentation and other conditions. A previously acquired translator was sold for $0.4 million on October 21, 2016.
Important facts for investors to verify
- Confirm the current liquidity, covenant headroom, and refinancing plan for the 2018 credit-facility maturity.
- Assess whether revenue and advertising trends in weaker radio markets improve, and whether cost reductions are sustainable.
- Track TV One affiliate-fee growth, cable advertising, and the company’s assumptions supporting goodwill and broadcast-license valuations.
- Review the outcome and financial impact of ASCAP/BMI negotiations and SESAC arbitration, including any retroactive rate changes.
- Evaluate the timing and potential cash or share impact of Reach Media put rights and the CEO award, as well as completion and proceeds of the proposed asset sale.