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DIAL > SEC Filings for DIAL > Form 10-Q on 15-Nov-2012All Recent SEC Filings

Show all filings for DIAL GLOBAL, INC. /DE/ | Request a Trial to NEW EDGAR Online Pro

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


15-Nov-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 and other related costs (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 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 nine months of 2012). As a result of the Merger, Westwood's results are included in the consolidated results for the first nine months of 2012, but are not included in the consolidated results for the first nine months of 2011 in accordance with generally accepted accounting principles in the United States.

In the second and third quarters of 2012, we recorded $2,256 of costs, primarily related to the severance of employees of $1,875 and closed facilities expenses of $366 for the 2012 Program. The liability of $1,239 as of September 30, 2012 related to the 2012 Program is expected to be paid within the next year. We anticipate no additional future charges to the 2012 Program other than true-ups to closed facilities lease charges.

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 September 30, 2012, payments for the 2011 Program are expected to be $2,959 within the next year, with an additional $1,246 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 anticipate no additional future charges for the 2011 Program other than true-ups to closed facilities lease charges.

We normally perform the required impairment testing of goodwill on an annual basis in December of each year. However, as a result of several factors, which had a significant impact on our fourth quarter bookings and sales, we performed an interim analysis of our goodwill carrying value as required by ASC 350, Intangibles-Goodwill and Other.

We performed an interim impairment test of our goodwill as of September 30, 2012. We completed step one of the impairment analysis and concluded that as of September 30, 2012 our fair value was below the carrying value of our goodwill. Step two of the impairment test was initiated but due to the time consuming nature of the analysis and the complexity of determining the fair value of our tangible and intangible assets, has not been completed. Although we have done substantial work, we were not able to complete the interim impairment test by the filing deadline of our Form 10-Q for the three-month and nine-month periods ended September 30, 2012. However, we have recorded an estimated goodwill impairment charge of $67,218 for the three and nine months ended September 30, 2012. See Note 7 - Goodwill for additional details on goodwill and goodwill impairment. We intend to complete this analysis and reflect any modifications in our annual consolidated financial statements for the year ended December 31, 2012. As the result of our goodwill impairment during the three and nine months ended September 30, 2012, the impact of which was allocated between tax deductible and nondeductible goodwill, the tax deductible goodwill impairment resulted in a benefit of $9,354 from the reduction of deferred tax liabilities related to the cumulative book and tax basis difference, and the nondeductible goodwill is permanently nondeductible for tax purposes.

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

Revenue, Cost of Revenue and Gross Profit

Revenue, cost of revenue and gross profit for the three months ended September
30, 2012 and 2011, respectively, are as follows:
                   Three Months Ended September 30,
                       2012                 2011           Change     Percent
Revenue         $        58,208       $        25,018     $ 33,190     132.7 %
Cost of revenue          39,625                10,870       28,755     264.5 %
Gross profit    $        18,583       $        14,148     $  4,435      31.3 %
Gross margin               31.9 %                56.6 %

For the three months ended September 30, 2012, revenue increased $33,190 to $58,208 compared with $25,018 for the three months ended September 30, 2011. The increase is primarily the result of an increase in advertising revenue from the acquisition of Westwood. For the three months ended September 30, 2012, cost of revenue increased $28,755 to $39,625 compared with $10,870 for the three months ended September 30, 2011. The increase in cost of revenue for the three months ended September 30, 2012 were from increases in expenses for station compensation of $9,846, broadcast rights of $5,593, revenue sharing of $5,429, news content of $4,068, employee compensation of $2,069, and costs associated with talent, contractors and production of $1,123. 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 September 30, 2012, gross profit increased $4,435 to $18,583 compared with $14,148 for the three months ended September 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 56.6% for the three months ended September 30, 2011, to 31.9% for the three months ended September 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 $3,625 to $6,859 for the three months ended September 30, 2012 compared to $3,234 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 $1,676 for the three months ended September 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 September 30, 2012 increased $2,838 to $6,222 from $3,384 for the three months ended September 30, 2011. The increase is the result of higher professional fees primarily related to integration and debt financing activities (primarily accounting, legal, technology and management) of $1,518, research fees of $965, facility costs (including rent, repairs, and communications) of $529, and travel-related costs of $472, all primarily resulting from our acquisition of Westwood. These increases were partially offset by a decrease in non-income related state taxes and fees of $607.

Depreciation and Amortization

Depreciation and amortization increased $2,680 to $5,571 for the three months ended September 30, 2012 from $2,891 for the comparable period of 2011. The increase is primarily attributable to the amortization of intangible assets related to the acquisition of Westwood of $1,728 and higher depreciation expense of $1,059, also primarily as a result of the Westwood acquisition. These


increases were partially offset by the absence in the third quarter of 2012 of amortization of non-compete intangible assets of $107.

Goodwill Impairment

For the three months ended September 30, 2012, we recorded a charge of $67,218 for the impairment of goodwill, as described in Presentation of Results above.

Restructuring and Other Charges

For the three months ended September 30, 2012, we recorded $1,016 for restructuring charges related to the 2012 Program, $658 for restructuring charges related to the 2011 Program, and $463 for other charges. The restructuring charges for the 2012 Program include costs associated with the reduction in our workforce levels of $635, closed facilities expenses of $366, and contract termination costs of $15. The restructuring charges for the 2011 Program include costs associated with the reduction in our workforce levels of $625, contract termination costs of $27, and costs for closed Westwood facilities of $6. 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.

Transaction Costs

For the three months ended September 30, 2011, transaction costs for the Merger were $3,245, which were principally fees for professional services.

Operating Loss

The operating loss for the three months ended September 30, 2012 is $69,424, an increased loss of $70,818, compared to operating income of $1,394 for the comparable period of 2011. The increase in operating loss is the result of an increase in goodwill impairment of $67,218, compensation costs of $3,625, other operating costs of $2,838, depreciation and amortization of $2,680, and restructuring and other charges of $2,137, partially offset by increases in gross profits of $4,435 as more fully described above and the absence of the 2011 transaction costs of $3,245.

Interest Expense, Net

Interest expense, net for the three months ended September 30, 2012, is $9,084, compared to $5,674 for the three months ended September 30, 2011, an increase of $3,410, primarily from higher interest expense due to higher average levels of debt (approximately $82,300 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 $952.

Preferred Stock Dividend

For the three months ended September 30, 2012, we recognized an expense of $234 for accrued Series A Preferred Stock dividends.

Benefit from Income Taxes

Income tax benefit from continuing operations for the three months ended September 30, 2012 is $7,587 compared to an income tax provision for the three months ended September 30, 2011 of $356. The 2012 income tax benefit from continuing operations is primarily the result of benefits of $13,591 from our third quarter 2012 loss from continuing operations before taxes of $78,742, which includes tax benefits from goodwill impairment charge of $9,354, as described in Presentation of Results above, partially offset by a valuation allowance of $6,004. The income tax provision for continuing operations for the three months ended September 30, 2011 was 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 $566 for the three months ended September 30, 2011. The Digital Services business was spun-off on July 29, 2011.


Net Loss

Our net loss for the three months ended September 30, 2012 increased $65,953 to $71,155 from a net loss of $5,202 for the three months ended September 30, 2011. Net loss per share for basic and diluted shares for the three months ended September 30, 2012 and 2011 was $1.25 and $0.15, respectively. Weighted average shares increased in 2012 primarily as a result of the shares issued for the Merger.

Nine Months Ended September 30, 2012 Compared with the Nine Months Ended
September 30, 2011

Revenue, Cost of Revenue and Gross Profit

Revenue, cost of revenue and gross profit for the nine months ended September
30, 2012 and 2011, respectively, are as follows:
                    Nine Months Ended September 30,
                       2012                  2011           Change     Percent
Revenue         $        181,148       $       66,386     $ 114,762     172.9 %
Cost of revenue          122,810               29,763        93,047     312.6 %
Gross profit    $         58,338       $       36,623     $  21,715      59.3 %
Gross margin                32.2 %               55.2 %

For the nine months ended September 30, 2012, revenue increased $114,762 to $181,148 compared with $66,386 for the nine months ended September 30, 2011. The increase is primarily the result of an increase in advertising revenue from the acquisition of Westwood.

For the nine months ended September 30, 2012, cost of revenue increased $93,047 to $122,810 compared with $29,763 for the nine months ended September 30, 2011. The increase in cost of revenue for the nine months ended September 30, 2012 were from increases in expenses for station compensation of $29,861, broadcast rights of $20,664, revenue sharing of $16,100, news content of $13,243, employee compensation of $7,880, and costs associated with talent, contractors and production of $4,082. 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 nine months ended September 30, 2012, gross profit increased $21,715, or 59.3%, to $58,338 compared with $36,623 for the nine months ended September 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 55.2% for the nine months ended September 30, 2011, to 32.2% for the nine months ended September 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 $11,524 to $21,766 for the nine months ended September 30, 2012 compared to $10,242 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 $4,953 for the nine months ended September 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 nine months ended September 30, 2012 increased $10,861 to $22,424 from $11,563 for the nine months ended September 30, 2011. The increase is the result of higher professional fees primarily related to integration activities (primarily accounting, legal, technology and management) of $4,168, research fees of $3,349, facility costs (including rent, repairs, and communications) of $2,092, travel-related costs of $2,148, increased advertising, promotional costs of $462, and greater bad debt expense of $203, 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 and by a decrease in non-income related state taxes and fees of $645 in 2012.


Depreciation and Amortization

Depreciation and amortization increased $8,292 to $17,895 for the nine months ended September 30, 2012 from $9,603 for the comparable period of 2011. The increase is primarily attributable to the amortization of intangible assets related to the acquisition of Westwood of $6,501 and higher depreciation expense of $2,111, also primarily as a result of the Westwood acquisition. These increases were partially offset by the absence in the nine months of 2012 of amortization of non-compete intangible assets of $320. Goodwill Impairment

For the nine months ended September 30, 2012, we recorded a charge of $67,218 for the impairment of goodwill as described in Presentation of Results above.

Restructuring and Other Charges

For the nine months ended September 30, 2012, we recorded $5,768 for restructuring charges related to the 2011 Program, $2,256 related to the 2012 Program, and other charges of $4,451. The restructuring charges for the 2011 Program include costs associated with the reduction in our workforce levels of $3,165, contract termination costs of $536, and costs of $2,067 related to closed Westwood facilities. The restructuring charges for the 2012 Program include costs associated with the reduction in our workforce levels of $1,875, closed facilities expenses of $366, and contract termination costs of $15. 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 $926 for costs of temporary office space related to the consolidation of the Westwood and Dial Global New York offices.

Transaction Costs

For the nine months ended September 30, 2011, transaction costs for the Merger were $3,245, which were principally fees for professional services.

Operating Loss

The operating loss for the nine months ended September 30, 2012 is $83,440, an increased loss of $85,410, compared to operating income of $1,970 for the comparable period of 2011. The increase in operating loss is the result of increases in goodwill impairment of $67,218, restructuring and other charges of $12,475, compensation costs of $11,524, other operating costs of $10,861, depreciation and amortization of $8,292, partially offset by an increase in gross profits of $21,715 as more fully described above and the absence of the 2011 transaction costs of $3,245.

Interest Expense, Net

Interest expense, net for the nine months ended September 30, 2012, is $27,268, compared to $16,444 for the nine months ended September 30, 2011, an increase of $10,824, primarily from higher interest expense due to higher average levels of debt (average outstanding debt was higher in the nine months ended September 30, 2012 by approximately $78,800) incurred as a result of the Merger and an increase of amortization of original issue discount and deferred financing costs of $2,843.

Preferred Stock Dividend

For the nine months ended September 30, 2012, we recognized an expense of $681 for accrued Series A Preferred Stock dividends.

Benefit from Income Taxes

Income tax benefit from continuing operations for the nine months ended September 30, 2012 is $12,722, compared to an income tax provision for continuing operations of $1,067 for the nine months ended September 30, 2011. The 2012 income tax benefit from continuing operations is primarily the result of benefits of $25,756 from losses from continuing operations before taxes of $111,389, which includes benefits from the goodwill impairment of $9,354, as described in Presentation of Results above, partially offset by the valuation allowance of $13,034. The 2011 tax provision was 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 $1,626 for the nine months ended September 30, 2011. The Digital Services business was spun-off on July 29, 2011.


Net Loss . . .

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