Urban One, Inc. — Form 10-Q Summary
Reporting period: Quarter and six months ended June 30, 2017. The interim financial statements are unaudited. Effective May 5, 2017, the company changed its name from Radio One, Inc. to Urban One, Inc.; its radio business continues to operate under the Radio One brand.
Business context and financial performance
Urban One is a multi-media company focused on African-American and urban audiences. Its four reportable segments are radio broadcasting, Reach Media, digital, and cable television (TV One). It owned or operated 57 broadcast stations in 15 U.S. markets at quarter-end.
| Metric | Q2 2017 | Q2 2016 | Six months 2017 | Six months 2016 |
|---|---|---|---|---|
| Net revenue | $117.6 million | $122.7 million | $218.9 million | $231.8 million |
| Operating income | $12.1 million | $27.7 million | $28.6 million | $46.5 million |
| Net income (loss) attributable to common stockholders | $0.8 million | $7.3 million | $(1.5) million | $3.4 million |
| GAAP operating margin | 10.3% | 22.6% | 13.0% | 20.1% |
| Broadcast and digital operating income, a non-GAAP measure | $41.8 million | $48.9 million | $76.7 million | $88.6 million |
| Broadcast and digital operating income margin, non-GAAP | 35.5% | 39.9% | 35.0% | 38.2% |
For Q2, revenue declined 4.1% year over year; for the first half, it declined 5.6%. Q2 revenue fell in radio, Reach Media, and cable, partly offset by digital growth. First-half revenue declined across radio, Reach Media, digital, and cable. Management cited softer advertising demand and declines in several radio markets. Digital operating losses widened as the company invested in video content.
Cash flow, debt, and liquidity
- Cash and restricted cash: $65.5 million at June 30, 2017, including $64.4 million of cash and cash equivalents. Cash and cash equivalents were $45.8 million at December 31, 2016.
- First-half cash flow: Operating cash flow was $11.7 million, versus $12.2 million in the prior-year period. Investing activities provided $14.5 million, including $25.0 million of sale-leaseback proceeds; financing activities used $7.5 million. Cash, cash equivalents, and restricted cash increased $18.7 million.
- Debt: Gross debt was approximately $1.026 billion; reported long-term debt, net of current portion, discounts, and issuance costs, was $1.007 billion. Main borrowings were $349.1 million under the new 2017 Credit Facility, $315 million of 9.25% notes due 2020, $350 million of 7.375% secured notes due 2022, and an $11.9 million Comcast note due 2019. First-half interest expense was $40.2 million.
- Refinancing and covenants: On April 18, 2017, the company replaced its former credit facility with a $350 million senior secured term loan. At June 30, it reported covenant interest coverage of 1.72x against a 1.25x minimum and senior secured leverage of 5.00x against a 5.85x maximum, and stated it was in compliance.
- Other liquidity: The company had no borrowings under its $25 million asset-backed revolving facility. Borrowing capacity is subject to the facility’s borrowing-base terms. Current assets were $225.0 million and current liabilities $83.0 million; current assets include substantial content assets.
Material changes and unusual items
- Q2 operating results included a $12.8 million non-cash impairment charge on Houston radio broadcasting licenses. No goodwill impairment was recorded, although management identified impairment indicators in radio markets and Reach Media and used revised, lower Reach Media projections.
- The May sale-leaseback of land, towers, and equipment generated $25.0 million in proceeds and an overall net gain of approximately $22.5 million. The company recognized $14.4 million in Q2 and deferred approximately $8.1 million for recognition over the ten-year lease.
- The new credit facility refinancing generated a $7.1 million loss on retirement of debt, including write-off of prior financing costs and original issue discount.
- Other income included income from the company’s MGM National Harbor investment. First-half adjusted EBITDA, a non-GAAP measure, was $64.4 million versus $70.7 million; Q2 was $36.7 million versus $39.9 million.
- Acquisitions included digital brands and websites Bossip, HipHopWired, and MadameNoire for $5 million upfront, with potential additional earn-outs of up to $5 million, and radio stations in Washington, D.C., and Richmond for approximately $2 million. The Detroit WCHB-AM station sale for approximately $2 million closed August 3, 2017.
- The company repurchased approximately $3.0 million of Class D common stock during the first half. It also disclosed subsequent repurchases of $597,000 through August 1, 2017.
Outlook, risks, and contingencies
- The filing provides no quantified revenue, earnings, or cash-flow guidance. Management identifies advertising demand, market-level economic conditions, audience ratings, competition, and execution of its diversification strategy as factors that can affect results.
- Leverage and debt service remain significant risks. The new term loan has financial maintenance covenants and its maturity may accelerate to 91 days before the 2020 or 2022 notes’ maturity if those notes are not refinanced or repaid. The company also has large scheduled debt obligations, including the $315 million notes due in 2020.
- Radio license renewal and valuation are important uncertainties: licenses expire at various dates from 2019 through 2022, and some licenses have limited or no fair-value cushion. Further market deterioration could lead to additional impairments.
- Performance-rights licensing remains an exposure: a new ASCAP agreement runs through 2021; BMI negotiations continued; SESAC rates were in binding arbitration with retroactive application; and the company had a temporary GMR license.
- Reach Media noncontrolling shareholders may exercise annual put rights beginning January 1, 2018, requiring purchase at fair market value; payment may be in cash and/or registered Class D shares at Urban One’s discretion. Routine legal proceedings were not expected by management to have a material adverse effect. Letters of credit totaled $815,000 and are required to be cash-collateralized.
- Management reported disclosure controls and procedures were effective and no material change in internal control over financial reporting during the quarter. The company maintained a full valuation allowance on deferred tax assets for substantially all entities and jurisdictions.
Important facts for investors to verify
- Whether advertising trends and revenue performance in the company’s key radio markets, Reach Media, and TV One improve or continue to weaken.
- Whether operating cash flow can support interest payments and debt maturities, and whether the company maintains covenant headroom under the 2017 Credit Facility.
- Whether lower market or segment projections lead to further impairment charges, particularly for radio licenses and Reach Media goodwill.
- The accounting and cash-flow effects of the sale-leaseback, acquisitions and earn-outs, and the Reach Media shareholder put rights.
- Outcomes of BMI and SESAC licensing matters, and the status and terms of the temporary GMR license.