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DIAL > SEC Filings for DIAL > Form 10-Q on 14-Aug-2012All Recent SEC Filings

Show all filings for DIAL GLOBAL, INC. /DE/

Form 10-Q for DIAL GLOBAL, INC. /DE/


14-Aug-2012

Quarterly Report


Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations
(In thousands, except share and per share amounts)

OVERVIEW

The following discussion should be read in conjunction with our unaudited condensed consolidated financial statements and notes thereto included elsewhere in this report and the annual audited consolidated financial statements and notes thereto included in our Annual Report on Form 10-K filed on March 30, 2012 for the year ended December 31, 2011 ("2011 Form 10-K").

We are organized as a single business segment, which is our Radio business. We are an independent, full-service network radio company that distributes, produces, and/or syndicates programming and services to more than 8,500 radio stations nationwide. We produce and/or distribute over 200 news, sports, music, talk and entertainment radio programs, services and digital applications, as well as audio content from live events, turn-key music formats (the 24/7 Radio Formats), prep services, jingles and imaging. In addition, we are the largest sales representative for independent third party providers of audio content. We have no operations outside the United States, but sell to customers outside of the United States.

We derive substantially all of our revenue from the sale of 30 and 60 second commercial airtime to advertisers. Our advertisers that target national audiences generally find that a cost effective way to reach their target consumers is to purchase 30 or 60 second advertisements, which are principally broadcast in our formats, news, talk, sports, music and entertainment related programming and content. In addition in exchange for services we receive airtime from radio stations.

We produce and distribute regularly scheduled and special sporting events and sports features, news programs, exclusive live events, music and interview shows, national music countdowns, lifestyle short features and talk programs.

Our revenue is influenced by a variety of factors, including but not limited to:
(1) economic conditions and the relative strength or weakness in the United States economy; (2) advertiser spending patterns, the timing of the broadcasting of our programming, principally the seasonal nature of sports programming and the perceived quality and cost-effectiveness of our programming by advertisers and affiliates; (3) advertiser demand on a local/regional or national basis for radio related advertising products; (4) increases or decreases in our portfolio of program offerings and the audiences of our programs, including changes in the demographic composition of our audience base; and (5) competitive and alternative programs and advertising mediums.

Commercial airtime is sold and managed on an order-by-order basis. We take the following factors, among others, into account when pricing commercial airtime:
(1) length and breadth of the order; (2) the desired reach and audience demographic; (3) the quantity of commercial airtime available for the desired demographic requested by the advertiser for sale at the time their order is negotiated; and (4) the proximity of the date of the order placement to the desired broadcast date of the commercial airtime.

Our revenue consists of gross billings, net of the fees that advertising agencies receive from the advertisements broadcast on our airtime (generally 15% is industry-standard), fees to the producers of and stations that own the programming during which the advertisements are broadcast, and certain other less significant fees. Revenue from radio advertising is recognized when the advertising has aired. Revenue generated from charging fees to radio stations and networks for music libraries, audio production elements, and jingle production services are recognized upon delivery or on a straight-line basis over the term of the contract, depending on the terms of the respective contracts. Our revenue reflects a degree of seasonality, with the first and fourth quarters historically exhibiting higher revenue as a result of our professional football and college basketball programming.

In those instances where we function as the principal in the transaction, the revenue and associated operating costs are presented on a gross basis. In those instances where we function as an agent or sales representative, our effective commission is presented within revenue. Although no individual relationship is significant, the relative mix of such arrangements is significant when evaluating our operating margin and/or increases and decreases in operating expenses.

The principal components of our cost of revenue are programming, production and distribution costs (including affiliate compensation and broadcast rights fees), as well as compensation costs directly related to our revenue.

Our significant other operating expenses are rental of premises for office facilities and studios, promotional expenses, research, and accounting and legal fees. Depreciation and amortization is shown as a separate line item in our financial statements.

Our compensation costs consist of compensation expenses associated with our personnel who are not associated with the cost of revenue, including our corporate staff and all stock-based compensation related to stock option awards and RSUs. Stock-based compensation is recognized using a straight-line basis over the requisite service period for the entire award.


Transaction costs include one-time expenses associated with the merger with Westwood One, Inc. (the "Merger") on October 21, 2011 (see below for additional details). Restructuring charges include the costs related to the restructuring program we announced in the fourth quarter of 2011 ("2011 Program") that includes the consolidation of certain operations that reduced our workforce levels, the termination of certain contracts and the assumption of Westwood's restructuring program liabilities related to closed facilities from its former Metro Traffic business. In the second quarter of 2012, we announced plans to reduce our workforce (the "2012 Program).

RESULTS OF OPERATIONS

Presentation of Results

On October 21, 2011 ("Merger Date"), we announced the consummation of the Merger contemplated by the Merger Agreement, by and among Westwood, Radio Network Holdings, LLC, a Delaware corporation (since renamed Verge Media Companies LLC), and Verge. The Merger is accounted for as a reverse acquisition of Westwood by Verge under the acquisition method of accounting in conformity with the FASB ASC
- 805 Business Combinations. Under this guidance, the transaction has been recorded as the acquisition of Westwood by the Company. The preliminary purchase accounting allocations have been recorded in the consolidated financial statements appearing in this report as of, and for the period subsequent to, the Merger Date. The valuation of the net assets acquired and allocation of the consideration transferred will be finalized within a year of the Merger Date (see Note 3 - Acquisition of Westwood One, Inc. for a summary of changes in the first six months of 2012). As a result of the Merger, Westwood's results are included in the consolidated results for the first six months of 2012, but are not included in the consolidated results for the first six months of 2011 in accordance with generally accepted accounting principles in the United States.

In the second quarter of 2012, we recorded $1,240 of costs related to the severance of employees for the 2012 Program. The liability of $927 as of June 30, 2012 related to the 2012 Program is expected to be paid within the next year. We estimate additional charges of approximately $600 to complete the 2012 Program.

The 2011 Program was initiated in the fourth quarter of 2011 to restructure certain areas of our business in connection with the acquisition of Westwood. The 2011 Program includes charges related to the consolidation of certain facilities and operations that reduced our workforce levels during 2011 and 2012. As of June 30, 2012, payments for the 2011 Program are expected to be $3,986 within the next year, with an additional $1,386 to be paid in subsequent years until 2018. We also recognized charges in 2012 for a content agreement which we ceased to utilize after March 31, 2012 and costs of temporary office space related to the consolidation of our New York offices. We estimate additional charges for severance of approximately $400 and do not expect significant additional charges for closed facilities and contract terminations to complete the 2011 Program.

On July 29, 2011, the then Board of Directors of Verge (pre-Merger) approved a spin-off of the Digital Services business to Triton Media LLC ("Triton"). For all periods presented in this report, the results of the Digital Services business are presented as a discontinued operation and will continue to be presented as discontinued operations in all future filings in accordance with generally accepted accounting principles in the United States.

We evaluate our performance based on revenue and operating income (as described below). Westwood's former operations and financial information were integrated and as a result of this integration, we no longer have financial information to clearly determine the impact of Westwood's former operations to revenue, cost of revenue or operating expenses.

Three Months Ended June 30, 2012 Compared with the Three Months Ended June 30, 2011

Revenue, Cost of Revenue and Gross Profit

Revenue, cost of revenue and gross profit for the three months ended June 30,
2012 and 2011, respectively, are as follows:
                    Three Months Ended June 30,
                      2012               2011          Change     Percent
Revenue         $      54,654       $      21,291     $ 33,363     156.7 %
Cost of revenue        32,602               9,214       23,388     253.8 %
Gross profit    $      22,052       $      12,077     $  9,975      82.6 %
Gross margin             40.3 %              56.7 %


For the three months ended June 30, 2012, revenue increased $33,363 to $54,654 compared with $21,291 for the three months ended June 30, 2011. The increase is primarily the result of an increase in advertising revenue from the acquisition of Westwood. For the three months ended June 30, 2012, cost of revenue increased $23,388 to $32,602 compared with $9,214 for the three months ended June 30, 2011. The increase in cost of revenue for the three months ended June 30, 2012 were from increases in expenses for station compensation of $10,246, revenue sharing of $4,456, news content of $4,068, employee compensation of $2,599, broadcast rights of $1,170, and costs associated with talent, contractors and production of $667. These increases are primarily a result of the acquisition of Westwood. These increases were partially offset by cost reductions as a result of the 2011 and 2012 Programs to reduce our workforce expense.

For the three months ended June 30, 2012, gross profit increased $9,975 to $22,052 compared with $12,077 for the three months ended June 30, 2011. The increase is primarily due to the acquisition of Westwood which increased our revenue and cost of revenue.

Our gross margin declined from 56.7% for the three months ended June 30, 2011, to 40.3% for the three months ended June 30, 2012 primarily as a result of the Westwood acquisition. Prior to the acquisition of Westwood, our mix of business was almost equally split between being an agent and a principal. After the acquisition, our mix of business shifted towards being more of a principal as a result of Westwood's business. In those instances where we function as the principal, the revenue and associated operating costs are presented on a gross basis which results in a lower gross margin. In those instances where we function as an agent, our effective commission is presented within net revenue which results in a higher gross margin.

Compensation Costs

Compensation costs increased $3,418 to $6,850 for the three months ended June 30, 2012 compared to $3,432 for the same period in 2011, primarily due to the additional employees assumed as part of our acquisition of Westwood and stock-based compensation expense of $1,602 for the three months ended June 30, 2012. These increases were partially offset by cost reductions as a result of the 2011and 2012 Programs to reduce our workforce expense.

Other Operating Costs

Other operating costs for the three months ended June 30, 2012 increased $4,630 to $8,662 from $4,032 for the three months ended June 30, 2011. The increase is the result of higher professional fees primarily related to integration activities (primarily accounting, legal, technology and management) of $1,627, research fees of $1,424, facility costs (including rent, repairs, and communications) of $1,160, travel-related costs of $644, and advertising and promotional costs of $166, all primarily resulting from our acquisition of Westwood. These increases were partially offset by the absence in the second quarter of 2012 of the $660 license fee previously due quarterly as part of our management of the 24/7 Formats business that we purchased in July 2011.

Depreciation and Amortization

Depreciation and amortization increased $2,517 to $5,854 for the three months ended June 30, 2012 from $3,337 for the comparable period of 2011. The increase is primarily attributable to the amortization of intangible assets related to the acquisition of Westwood of $2,035 and higher depreciation expense of $589, also primarily as a result of the Westwood acquisition.

Restructuring and Other Charges

For the three months ended June 30, 2012, we recorded $2,740 for restructuring charges related to the 2011 Program, $1,240 for the severance of employees related to the 2012 Program, and $463 for other charges. The restructuring charges for the 2011 Program include costs for closed Westwood facilities of $1,738, costs associated with the reduction in our workforce levels of $976, and contract termination costs of $26. The other charges of $463 are for costs of temporary office space related to the consolidation of the Westwood and Dial Global New York offices.

Operating Loss

The operating loss for the three months ended June 30, 2012 is $3,757, an increased loss of $5,033, compared to operating income of $1,276 for the comparable period of 2011. The increase in operating loss is the result of increases in compensation costs of $3,418, other operating costs of $4,630, depreciation and amortization of $2,517, and restructuring and other charges of $4,443, partially offset by an increase in gross profits of $9,975 as more fully described above.

Interest Expense, Net

Interest expense, net for the three months ended June 30, 2012, is $9,119, compared to $5,461 for the three months ended June


30, 2011, an increase of $3,658, primarily from higher interest expense due to higher average levels of debt (approximately $76,400 of additional average debt balances) incurred as a result of the Merger and an increase of amortization of original issue discount and deferred financing costs of $946.

Preferred Stock Dividend

For the three months ended June 30, 2012, we recognized an expense of $226 for the accrued Series A Preferred Stock dividends.

Provision for Income Taxes

Income tax provision for continuing operations for the three months ended June 30, 2012 is $2,045 compared to an income tax benefit for the three months ended June 30, 2011 of $29. The 2012 income tax provision for continuing operations is primarily the result of a $7,030 valuation allowance recorded in 2012, partially offset by the benefits of approximately $5,000 from our second quarter 2012 loss from continuing operations before taxes of $13,102. The income tax benefit for continuing operations for the three months ended June 30, 2011 is primarily the result of a change in our interim tax calculation methodology.

Loss from Discontinued Operations

Our loss from discontinued operations, net of taxes was $90 for the three months ended June 30, 2011. The Digital Services business was spun-off on July 29, 2011.

Net Loss

Our net loss for the three months ended June 30, 2012 increased $11,081 to $15,147 from a net loss of $4,066 for the three months ended June 30, 2011. Net loss per share for basic and diluted shares for the three months ended June 30, 2012 and 2011 was $0.27 and $0.12, respectively. Weighted average shares increased in 2012 primarily as a result of the shares issued for the Merger.

Six Months Ended June 30, 2012 Compared with the Six Months Ended June 30, 2011

Revenue, Cost of Revenue and Gross Profit

Revenue, cost of revenue and gross profit for the six months ended June 30, 2012
and 2011, respectively, are as follows:
                   Six Months Ended June 30,
                      2012             2011        Change     Percent
Revenue         $     122,940       $  41,368     $ 81,572     197.2 %
Cost of revenue        83,185          18,893       64,292     340.3 %
Gross profit    $      39,755       $  22,475     $ 17,280      76.9 %
Gross margin             32.3 %          54.3 %

For the six months ended June 30, 2012, revenue increased $81,572 to $122,940 compared with $41,368 for the six months ended June 30, 2011. The increase is primarily the result of an increase in advertising revenue from the acquisition of Westwood.

For the six months ended June 30, 2012, cost of revenue increased $64,292 to $83,185 compared with $18,893 for the six months ended June 30, 2011. The increase in cost of revenue for the six months ended June 30, 2012 were from increases in expenses for station compensation of $20,015, broadcast rights of $15,071, revenue sharing of $10,671, news content of $9,175, employee compensation of $5,811, and costs associated with talent, contractors and production of $2,959. These increases are primarily a result of the acquisition of Westwood. These increases were partially offset by cost reductions as a result of the 2011 and 2012 Programs to reduce our workforce expense.

For the six months ended June 30, 2012, gross profit increased $17,280, or 76.9%, to $39,755 compared with $22,475 for the six months ended June 30, 2011. The increase is primarily due to the acquisition of Westwood which increased our revenue and cost of revenue.

Our gross margin declined from 54.3% for the six months ended June 30, 2011, to 32.3% for the six months ended June 30, 2012 primarily as a result of the Westwood acquisition. Prior to the acquisition of Westwood, our mix of business was almost equally


split between being an agent and a principal. After the acquisition, our mix of business shifted towards being more of a principal as a result of Westwood's business. In those instances where we function as the principal, the revenue and associated operating costs are presented on a gross basis which results in a lower gross margin. In those instances where we function as an agent, our effective commission is presented within net revenue which results in a higher gross margin.

Compensation Costs

Compensation costs increased $7,899 to $14,907 for the six months ended June 30, 2012 compared to $7,008 for to the same period in 2011, primarily due to the additional employees assumed as part of our acquisition of Westwood and stock-based compensation expense of $3,277 for the six months ended June 30, 2012. These increases were partially offset by cost reductions as a result of the 2011 and 2012 Programs to reduce our workforce expense.

Other Operating Costs

Other operating costs for the six months ended June 30, 2012 increased $8,023 to $16,202 from $8,179 for the six months ended June 30, 2011. The increase is the result of higher professional fees primarily related to integration activities (primarily accounting, legal, technology and management) of $2,650, research fees of $2,384, travel-related costs of $1,676, facility costs (including rent, repairs, and communications) of $1,563, increased advertising, promotional costs of $525, and greater bad debt expense of $273, all primarily resulting from our acquisition of Westwood. These increases were partially offset by the absence in 2012 of the $1,320 license fee previously due as part of our management of the 24/7 Formats business that we purchased in July 2011.

Depreciation and Amortization

Depreciation and amortization increased $5,612 to $12,324 for the six months ended June 30, 2012 from $6,712 for the comparable period of 2011. The increase is primarily attributable to the amortization of intangible assets related to the acquisition of Westwood of $4,773 and higher depreciation expense of $1,052, also primarily as a result of the Westwood acquisition.

Restructuring and Other Charges

For the six months ended June 30, 2012, we recorded $5,110 for restructuring charges related to the 2011 Program, $1,240 for severance of employees related to the 2012 Program, and other charges of $3,988. The restructuring charges for the 2011 Program include costs associated with the reduction in our workforce levels of $2,540, contract termination costs of $509, and costs of $2,061 related to closed Westwood facilities. The other charges included charges of $3,525 in connection with a content agreement which we ceased to utilize after March 31, 2012 and charges of $463 for costs of temporary office space related to the consolidation of the Westwood and Dial Global New York offices.

Operating Loss

The operating loss for the six months ended June 30, 2012 is $14,016, an increased loss of $14,592, compared to operating income of $576 for the comparable period of 2011. The increase in operating loss is the result of increases in compensation costs of $7,899, other operating costs of $8,023, depreciation and amortization of $5,612, and restructuring and other charges of $10,338, partially offset by an increase in gross profits of $17,280 as more fully described above.

Interest Expense, Net

Interest expense, net for the six months ended June 30, 2012, is $18,184, compared to $10,770 for the six months ended June 30, 2011, an increase of $7,414, primarily from higher interest expense due to higher average levels of debt (average outstanding debt was higher in the six months ended June 30, 2012 by approximately $75,500) incurred as a result of the Merger and an increase of amortization of original issue discount and deferred financing costs of $1,891.

Preferred Stock Dividend

For the six months ended June 30, 2012, we recognized an expense of $447 for the accrued Series A Preferred Stock dividends.

Provision for Income Taxes

Income tax benefit from continuing operations for the six months ended June 30, 2012 is $5,135, compared to an income tax provision for continuing operations of $711 for the year ended June 30, 2011. The 2012 income tax benefit from continuing operations is primarily the result of income tax benefits of approximately $12,200 from losses from continuing operations before


taxes of $32,647, partially offset by the valuation allowance recorded in June 2012 of $7,030. The 2011 tax provision is the result of our provision for state and local taxes and the tax amortization of goodwill, a portion of which is not presumed to reverse in a definite period of time and therefore, cannot be utilized to support our deferred tax assets.

Loss from Discontinued Operations

Our loss from discontinued operations, net of taxes was $1,060 for the six months ended June 30, 2011. The Digital Services business was spun-off on July 29, 2011.

Net Loss

Our net loss for the six months ended June 30, 2012 increased $15,547 to $27,512 from a net loss of $11,965 for the six months ended June 30, 2011. Net loss per share for basic and diluted shares for the six months ended June 30, 2012 and 2011 was $0.48 and $0.35, respectively. Weighted average shares increased in 2012 primarily as a result of the shares issued for the Merger.

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