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| ETM > SEC Filings for ETM > Form 10-Q on 31-Oct-2012 | All Recent SEC Filings |
31-Oct-2012
Quarterly Report
In preparing the discussion and analysis contained in this Item 2, we presume that readers have read or have access to the discussion and analysis contained in our Annual Report on Form 10-K filed with the Securities and Exchange Commission (the "SEC") on February 29, 2012. In addition, you should read the following discussion and analysis of our financial condition and results of operations in conjunction with our consolidated financial statements and related notes included elsewhere in this report. The following results of operations include a discussion of the nine and three month periods ended September 30, 2012 as compared to the comparable periods in the prior year. Our results of operations during the relevant periods represent the operations of the radio stations owned and operated by us.
We evaluate net revenues, station operating expenses and operating income by comparing the performance of stations owned or operated by us throughout a relevant period to the performance of those same stations in the prior period whether or not owned or operated by us. Same station comparisons are used by us and those in the industry to assess the effect of acquisitions and dispositions on our operations throughout the periods measured. For those acquisitions and dispositions that management considers as material, we include these stations in our same station computations. None of the acquisitions noted below were considered material.
On May 1, 2012, we commenced operations under a time brokerage agreement ("TBA") of KBLX-FM, a station licensed to San Francisco, California. On June 28, 2012, we acquired KBLX-FM for $25.0 million in cash.
On January 19, 2011, we commenced operations under a TBA of KUFX-FM, a station licensed to San Jose, California. During January 2011, we began simulcasting the format of KUFX-FM on the frequency of one of our three San Francisco stations owned and operated by us, thereby providing a complement to the signal coverage of the KUFX-FM format in the San Francisco metropolitan market. On February 28, 2011, we acquired KUFX-FM for $9.0 million in cash.
Results Of Operations For The Year-To-Date
The following significant factors affected our results of operations for the nine months ended September 30, 2012 as compared to the nine months ended September 30, 2011:
In the third quarter of 2012, we recorded a $2.0 million music royalty expense credit as a result of an industry settlement with Broadcast Music, Inc. ("BMI") for fees paid in prior years.
In June 2012, we acquired KBLX-FM, a station in San Francisco, California, which complemented our existing San Francisco station cluster. We commenced operations of KBLX-FM under a TBA on May 1, 2012 that increased our revenues and station operating expenses.
During the second quarter of 2012, we recorded an impairment loss of $22.3 million as a result of a write-down in the carrying value of our broadcasting licenses.
During November 2011, we refinanced our debt by entering into a new $425 million senior secured credit agreement (the "Credit Facility") and issued $220 million of senior unsecured notes (the "Senior Notes"). The Credit Facility included a $50 million revolving facility (the "Revolver") and a $375 million term B loan (the "Term B Loan"). The refinancing increased our interest expense as our new debt has higher borrowing rates than our prior credit facility (the "Former Facility"). In addition, our interest expense increased as we incurred new deferred financing fees as part of the refinancing.
In February 2011, we acquired KUFX-FM, a station in San Jose, California, which complemented our existing San Francisco station cluster. The KUFX-FM acquisition provided enhanced coverage of the San Francisco market and allowed us to launch the first classic rock superstation in the Bay Area.
During the second quarter of 2011, management determined that, on a more likely than not realization basis, a full valuation allowance against our deferred tax assets was no longer required. As a result, management reversed the valuation allowance, which reduced our income tax rate in 2011.
Nine Months Ended September 30, 2012 As Compared To The Nine Months Ended
September 30, 2011
Net Revenues
Nine Months Ended
September 30, 2012 September 30, 2011
(dollars in millions)
Net Revenues $ 286.8 $ 287.6
Amount of Change $ (0.8 )
Percentage Change (0.3 %)
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Net revenues for the nine months ended September 30, 2012 were down slightly versus the prior year. While net revenues grew in the third quarter of 2012, that increase was offset by a decline in revenues in the first half of the year due to the negative impact of a number of significant format changes made to key brands in 2011. The reformatted brands contributed to revenue growth in the third quarter and we believe that the format changes improved their growth prospects.
Net revenues increased the most for our stations in the Greensboro and Indianapolis markets, offset by revenue decreases for our stations located in the Portland and Austin markets and, to a lesser degree, the Boston market. Net revenues in San Francisco were favorably impacted by our acquisition of KBLX-FM which we began operating on May 1, 2012.
Due to the uncertainties surrounding the economy, it is difficult for management to provide any guidance on future revenue trends.
Station Operating Expenses
Nine Months Ended
September 30, 2012 September 30, 2011
(dollars in millions)
Station Operating Expenses $ 191.1 $ 202.9
Amount of Change $ (11.8 )
Percentage Change (5.8 %)
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Station operating expenses decreased primarily due to cost reduction initiatives and an industry settlement with BMI resulting in an expense credit of $2.0 million.
Management expects that station operating expenses will increase in the fourth quarter of 2012 as compared to the prior year period.
Depreciation And Amortization Expense
Nine Months Ended
September 30, 2012 September 30, 2011
(dollars in millions)
Depreciation And Amortization Expense $ 8.2 $ 8.5
Amount of Change $ (0.3 )
Percentage Change (3.5 %)
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Depreciation and amortization expense decreased in 2012 primarily due to a trend of lower capital expenditures over the past several years.
Corporate General And Administrative Expenses
Nine Months Ended
September 30, 2012 September 30, 2011
(dollars in millions)
Corporate General And Administrative Expenses $ 19.2 $ 20.6
Amount of Change $ (1.4 )
Percentage Change (6.8 %)
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Corporate general and administrative expenses decreased primarily due to a decline in non-cash compensation expense of $2.1 million. In the first quarter of 2011, certain equity awards were issued and vested in that quarter which increased non-cash compensation expense.
The decrease in corporate general and administrative expenses was offset by an increase in deferred compensation expense of $0.9 million as our deferred compensation liability generally tracks movements in the stock market.
Operating Income
Nine Months Ended
September 30, 2012 September 30, 2011
(dollars in millions)
Operating Income $ 45.6 $ 53.6
Amount of Change $ (8.0 )
Percentage Change (14.9 %)
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Operating income declined primarily due to an impairment loss of $22.3 million in our Boston market in connection with our annual review of broadcasting licenses during the second quarter of 2012.
The decrease in operating income was offset by: (1) a reduction in station operating expenses; (2) a reduction of $1.5 million in merger and acquisition costs; and (3) a decrease in corporate general and administrative expenses.
Interest Expense
Nine Months Ended
September 30, 2012 September 30, 2011
(dollars in millions)
Interest Expense $ 40.9 $ 16.5
Amount of Change $ 24.4
Percentage Change 147.9 %
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The increase in interest expense was primarily due to higher interest rates under our new financing which we entered into during the fourth quarter of 2011.
Income Before Income Taxes (Benefit)
Nine Months Ended
September 30, 2012 September 30, 2011
(dollars in millions)
Income Before Income Taxes (Benefit) $ 6.2 $ 37.1
Amount of Change $ (30.9 )
Percentage Change (83.3 %)
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The decrease was primarily attributable to the decrease in operating income and an increase in net interest expense.
Income Taxes (Benefit)
Nine Months Ended
September 30, 2012 September 30, 2011
(dollars in millions)
Income Taxes (Benefit) $ 2.2 $ (20.9 )
Amount of Change $ 23.1
Percentage Change 110.5 %
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For the current period, the income tax rate was 36.4%. We estimate that our 2012 annual tax rate before discrete items, which may fluctuate from quarter to quarter, will be in the high 40% range. The estimated rate was negatively impacted by the impairment loss recorded in the second quarter of 2012.
For the prior period, the income tax rate was 56.3%. During the second quarter of 2011, management determined that on a more likely than not realization basis, a full valuation allowance against our deferred tax assets was no longer required (the full valuation allowance was initially established in 2008). Excluding the impact of the valuation allowance reversal and a $6.0 million prior period correction, the income tax rate was 41.2%.
As of September 30, 2012 and December 31, 2011, net deferred tax liabilities were $11.4 million and $8.3 million, respectively. The deferred tax liabilities primarily relate to differences between the book and tax bases of our broadcasting licenses and goodwill.
Net Income
Nine Months Ended
September 30, 2012 September 30, 2011
(dollars in millions)
Net Income $ 3.9 $ 58.0
Amount of Change $ (54.1 )
Percentage Change (93.3 %)
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The increase in Net Income was primarily attributable to the reasons described above under Income Before Income Taxes (Benefit).
Results Of Operations For The Quarter
The following significant factors affected our results of operations for the three months ended September 30, 2012 as compared to the same period in the prior year:
On May 1, 2012, we commenced operations of KBLX-FM, a station licensed to San Francisco, California, under a TBA. On June 28, 2012, we acquired KBLX-FM for $25.0 million in cash.
During the second quarter of 2012, we recorded an impairment loss of $22.3 million as a result of a write-down in the carrying value of our broadcasting licenses.
During November 2011, we refinanced our existing debt by entering into a new Credit Facility and issuing Senior Notes. The refinancing increased our interest expense as our new debt has higher borrowing rates than our Former Facility. In addition, our interest expense increased as we incurred new deferred financing fees.
During the second quarter of 2011, management determined that on a more likely than not realization basis, a full valuation allowance against our deferred tax assets was no longer required. Based on this assessment, management reversed the valuation allowance, which was a significant factor in the reduction of our income tax rate in 2011.
Three Months Ended September 30, 2012 As Compared To The Three Months Ended
September 30, 2011
Net Revenues
Three Months Ended
September 30, 2012 September 30, 2011
(dollars in millions)
Net Revenues $ 102.3 $ 100.4
Amount of Change $ 1.9
Percentage Change 1.9 %
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Net revenues increased in the third quarter of 2012 due to the acquisition of KBLX-FM, which we began operating on May 1, 2012.
Net revenues increased the most for our stations in the Buffalo, Kansas City and New Orleans markets, offset by a decrease for our stations in the Portland, Providence and Sacramento markets.
Station Operating Expenses
Three Months Ended
September 30, 2012 September 30, 2011
(dollars in millions)
Station Operating Expenses $ 63.7 $ 69.8
Amount of Change $ (6.1 )
Percentage Change (8.7 %)
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The decrease in station operating expenses was primarily due to cost reduction initiatives and a $2.0 million expense credit as a result of an industry settlement with BMI.
Depreciation And Amortization Expense
Three Months Ended
September 30, 2012 September 30, 2011
(dollars in millions)
Depreciation And Amortization Expense $ 2.7 $ 2.8
Amount of Change $ (0.1 )
Percentage Change (3.6 %)
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Depreciation and amortization expense was flat versus the prior year due to our recent history of consistent levels of capital expenditures.
Corporate General And Administrative Expenses
Three Months Ended
September 30, 2012 September 30, 2011
(dollars in millions)
Corporate General And
Administrative Expenses $ 6.3 $ 5.6
Amount of Change $ 0.7
Percentage Change 12.5 %
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A contributing factor to the growth in corporate general and administrative expenses was an increase in deferred compensation expense of $0.9 million as our deferred compensation liability generally tracks movements in the stock market.
Operating Income
Three Months Ended
September 30, 2012 September 30, 2011
(dollars in millions)
Operating Income $ 29.4 $ 22.3
Amount of Change $ 7.1
Percentage Change 31.8 %
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The increase in operating income was primarily due to the increase in net revenues and the decrease in station operating expenses.
Interest Expense
Three Months Ended
September 30, 2012 September 30, 2011
(dollars in millions)
Interest Expense $ 13.3 $ 5.3
Amount of Change $ 8.0
Percentage Change 150.9 %
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The increase in interest expense was primarily due to the higher interest rates under our new financing, entered into during the fourth quarter of 2011.
Income Before Income Taxes
Three Months Ended
September 30, 2012 September 30, 2011
(dollars in millions)
Income Before Income Taxes $ 16.1 $ 17.0
Amount of Change $ (0.9 )
Percentage Change (5.3 %)
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The decrease was primarily attributable to the increase in interest expense, offset by the increase in operating income.
Income Taxes
Three Months Ended
September 30, 2012 September 30, 2011
(dollars in millions)
Income Taxes $ 7.9 $ 8.8
Amount of Change $ (0.9 )
Percentage Change (10.2 %)
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For the current period, the income tax rate was 49.2%, which primarily reflects adjustments for expenses that are not deductible for tax purposes. This rate was negatively impacted by the $22.3 million impairment loss in the second quarter of 2012.
For the prior period, income tax expense was $7.3 million or 42.7% (after excluding an income tax expense adjustment of $1.5 million related to the overstatement of our deferred tax assets following the release of our valuation allowance in the second quarter of 2011). During the second quarter of 2011, management determined that on a more likely than not realization basis, a full valuation allowance against our deferred tax assets was no longer required (the full valuation allowance was initially established in 2008).
Net Income
The net change was primarily attributable to the reasons described above under Income Before Income Taxes.
Future Impairments
We may find it necessary to take impairment charges in future periods based on conditions at that time. Any such impairment could be material.
Liquidity And Capital Resources
Liquidity
As of September 30, 2012, we had $369.5 million outstanding under our Credit Facility and $220 million in principal for our Senior Notes. In addition, we have outstanding financing method lease obligations of $12.6 million and a $0.6 million letter of credit. As of September 30, 2012, we had $6.6 million in cash and cash equivalents.
The Credit Facility
On November 23, 2011, we entered into a new credit agreement with a syndicate of lenders for a $425 million Credit Facility, which is comprised of: (a) a $50 million Revolver that matures on November 23, 2016; and (b) a $375 million Term B Loan that matures on November 23, 2018. The Term B Loan amortizes in quarterly installments of $0.9 million with the first such payment due and payable on March 31, 2012 and any remaining principal and interest is due at maturity (except for certain mandatory principal prepayments of excess cash flow and other events as described below).
The undrawn amount of the Revolver was $33.4 million as of September 30, 2012. The amount of the Revolver available to us is a function of covenant compliance at the time of borrowing. Based on our financial covenant analysis as of September 30, 2012, we would not be limited in these borrowings.
The Term B Loan requires annual mandatory prepayments of a portion of our Excess Cash Flow. We estimate that the Excess Cash Flow payment due in the first quarter of 2013, which is net of prepayments made through September 30, 2012, will be approximately $11 million. The amount is included under the current portion of long-term debt and is subject to change based on actual results, which could differ materially.
As of September 30, 2012, we are in compliance with all financial covenants and all other terms of the Credit Facility in all material respects. Our ability to maintain compliance with our covenants will be highly dependent on our results of operations. A default under our Credit Facility or the indenture governing our Senior Notes could cause a cross default in the other. Any event of default could have a material adverse effect on our business and financial condition.
We believe that over the next 12 months we can continue to maintain our compliance with these covenants. We believe that cash on hand and cash from operating activities, together with available borrowings under the Revolver, will be sufficient to permit us to meet our liquidity requirements over the next 12 months, including our debt repayments. Our operating cash flow remains positive, and we believe that it is adequate to fund our operating needs. As a result, we have not been required to rely upon, and we do not anticipate being required to rely upon, the Revolver to fund our operations.
Failure to comply with our financial covenants or other terms of our Credit Facility and any subsequent failure to negotiate and obtain any required relief from our lenders could result in the acceleration of the maturity of all outstanding debt. Under these circumstances, the acceleration of our debt could have a material adverse effect on our business. We may seek from time to time to amend our Credit Facility or obtain other funding or additional financing, which may result in higher interest rates.
Credit Facility's Financial Covenants
As of September 30, 2012, our Consolidated Leverage Ratio was 5.1 times versus a covenant maximum of 7.0 times and our Consolidated Interest Coverage Ratio was 2.5 times versus a covenant minimum of 1.5 times. These covenants become more restrictive over time.
The following tables present the computations as defined under our Credit Facility:
Consolidated Leverage Ratio Computations: (amounts in thousands, except ratios) Numerator: Consolidated Funded Indebtedness Senior debt outstanding $ 369,600 Senior Notes at maturity 220,000 Letter of credit outstanding 570 Total debt outstanding 590,170 Less cash outstanding, not to exceed $40 million (6,603 ) Consolidated Funded Indebtedness $ 583,567 Denominator: Consolidated Operating Cash Flow Net income $ 14,445 Income taxes 6,695 Depreciation and amortization 10,983 Impairment loss 22,307 Interest expense 49,308 Loss on early extinguishment of debt 1,144 Non-cash compensation expense 5,429 Non-recurring expenses for restructuring or similar charges 174 Deferred non-cash charges 1,467 Investment loss 80 Pro forma adjustment to reflect the seven-month period prior to the commencement of KBLX-FM operations on May 1, 2012 2,211 Pro forma for tower disposition as of beginning of period (741 ) Consolidated Operating Cash Flow $ 113,502 Consolidated Leverage Ratio 5.14 |
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