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| ETM > SEC Filings for ETM > Form 10-K on 27-Feb-2013 | All Recent SEC Filings |
27-Feb-2013
Annual Report
Overview
We are one of the five largest radio broadcasting companies in the United States, with a nationwide portfolio in excess of 100 stations in 23 markets, including San Francisco, Boston, Seattle, Denver, Portland, Sacramento and Kansas City.
A radio broadcasting company derives its revenues primarily from the sale of broadcasting time to local and national advertisers. Net revenues are gross revenues minus agency commissions. The revenues are determined by the advertising rates charged and the number of advertisements broadcast. We maximize our revenues by managing the inventory of advertising spots available for broadcast, which can vary throughout the day but is consistent over time. Advertising rates are primarily based on four factors:
• a station's audience share in the demographic groups targeted by advertisers as measured principally by periodic reports issued by The Arbitron Ratings Company;
• the number of radio stations in the market competing for the same demographic groups;
• the supply of, and demand for, radio advertising time, both nationally and in the region in which the station operates; and
• the market's size based upon available radio advertising revenue.
In 2012, we generated 74% of our net revenues from local advertising, which is sold primarily by each individual local radio station's sales staff, and 21% from national advertising, which is sold by an independent advertising sales representative. Local and national revenues include revenues from the sale of advertising on our stations' websites, the sale of advertising during audio streaming of our radio stations over the Internet, and e-commerce. We generated the balance of our 2012 revenues principally from network compensation and non-spot revenue.
Our most significant station operating expenses are employee compensation, programming and promotional expenses. Other significant expenses that impact our profitability are interest and depreciation and amortization expense.
Our performance is based upon the aggregate performance of our radio stations. The following are some of the factors that impact a radio station's performance at any given time: (i) audience ratings; (ii) program content; (iii) management talent and expertise; (iv) sales talent and expertise; (v) audience characteristics; (vi) signal strength; and (vii) the number and characteristics of other radio stations and other advertising media in the market area.
In the radio broadcasting industry, seasonal revenue fluctuations are common and are due primarily to variations in advertising expenditures by local and national advertisers. Typically, revenues are lowest in the first calendar quarter of the year.
As opportunities arise, we may, on a selective basis, change or modify a station's format due to changes in listeners' tastes or changes in a competitor's format. This could have an initial negative impact on a station's ratings and/or revenues, and there are no guarantees that the modification or change will be beneficial at some future time. Our management is continually focused on these opportunities as well as the associated risks and uncertainties. We strive to develop compelling content and strong brand images to maximize audience ratings that are crucial to our stations' financial success.
You should read the following discussion and analysis of our financial condition and results 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 year ended December 31, 2012 as compared to the prior year and a discussion of the year ended December 31, 2011 as compared to the prior year.
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") for KBLX-FM, a station in the San Francisco, California market. On June 28, 2012, we acquired KBLX-FM for $25.0 million in cash.
On January 19, 2011, we commenced operations under a TBA for KUFX-FM, a station in the San Jose, California, market. 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
Year ended December 31, 2012 compared to the year ended December 31, 2011
The following significant factors affected our results of operations for the year ended December 31, 2012 as compared to the prior year:
In connection with the preparation of our financial statements for the year ended December 31, 2012, we identified a prior period error in the income taxes reported for the year ended December 31, 2011. We assessed the materiality of this error and concluded that it was not material to any of our previously issued financial statements. We have revised the affected period presented herein to reflect the correct accounting. This non-cash item did not impact our operating income or operating cash flows for the current or prior period and had no impact on our cash taxes. For further discussion, refer to Note 1 in the accompanying notes to the financial statements.
In June 2012, we acquired KBLX-FM, a station in the San Francisco, California, market for $25.0 million in cash. We commenced operations of KBLX-FM under a TBA on May 1, 2012 that increased our revenues, station operating expenses, depreciation and amortization expense and interest expense.
In the third quarter of 2012, we recorded a $2.0 million music royalty expense credit as a result of an industry settlement with BMI for fees paid in prior years.
During the second quarter of 2012, we recorded an impairment loss of $22.3 million in our Boston market 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 senior secured credit facility (as later modified in November 2012 that resulted in a 125 basis point decrease in LIBOR under our Term B Loan) and issued new unsecured senior notes that increased our interest expense due to: (1) an increase in borrowing rates incurred under these agreements on our outstanding debt; (2) an increase in deferred financing expense, which will be amortized over the terms of the new debt agreements; and (3) a loss on extinguishment of debt.
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 expense in 2011.
On February 28, 2011, we acquired KUFX-FM, a station in the San Jose, California, market for $9.0 million in cash. We began operating this station on January 19, 2011 under a TBA that in 2011 increased our station operating expenses, depreciation and amortization expense and interest expense.
In 2011, we incurred $1.5 million in merger and acquisition costs from:
(1) legal and advisory expenses from an unsuccessful effort to acquire a large
radio group operator; and (2) lease abandonment costs associated with the
acquisition of KUFX-FM.
Net Revenues
Years Ended
December 31, December 31,
2012 2011
(dollars in millions)
Net Revenues $ 388.9 $ 382.7
Amount of Change $ 6.2
Percentage Change 1.6 %
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Net revenues increased in 2012 primarily due to growth during the second half of 2012. This growth was due to operational improvements from stations reformatted in 2011, the contribution of political revenue, and incremental revenues from an acquisition during the second quarter of 2012.
Net revenues increased the most for our stations in the Indianapolis, New Orleans and Norfolk markets, offset by revenue decreases for stations in our Austin and Portland markets. Net revenues for stations in our Boston market, which were down for the year, experienced revenue growth during the second half of 2012. Net revenues in San Francisco were favorably impacted by our acquisition of KBLX-FM which we began operating on May 1, 2012.
Station Operating Expenses
Years Ended
December 31, December 31,
2012 2011
(dollars in millions)
Station Operating Expenses $ 252.9 $ 263.4
Amount of Change $ (10.5 )
Percentage Change (4.0 %)
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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.
Depreciation And Amortization Expense
Years Ended
December 31, December 31,
2012 2011
(dollars in millions)
Depreciation And Amortization Expense $ 10.8 $ 11.3
Amount of Change $ (0.5 )
Percentage Change (4.4 %)
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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
Years Ended
December 31, December 31,
2012 2011
(dollars in millions)
Corporate General And Administrative Expenses $ 25.9 $ 26.6
Amount of Change $ (0.7 )
Percentage Change (2.6 %)
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Corporate general and administrative expenses decreased primarily due to a decline in non-cash compensation expense of $1.7 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 was offset by an increase in deferred compensation expense of $0.7 million as our deferred compensation liability generally tracks movements in the stock market and an increase in legal expenses of $0.7 million.
Operating Income
Years Ended
December 31, December 31,
2012 2011
(dollars in millions)
Operating Income $ 76.6 $ 79.5
Amount of Change $ (2.9 )
Percentage Change (3.6 %)
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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; and (2) a reduction of $1.5 million in merger and acquisition costs.
Interest Expense
Years Ended
December 31, December 31,
2012 2011
(dollars in millions)
Interest Expense $ 53.4 $ 24.9
Amount of Change $ 28.5
Percentage Change 114.5 %
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The increase in interest expense was primarily due to higher interest rates under our Senior Notes and our new financing agreement which we entered into during the fourth quarter of 2011 and which was subsequently modified during the fourth quarter of 2012.
The rates are higher under our Credit Facility and Senior Notes as compared to our prior credit facility ("Former Facility"). For example, under the Former Facility, the applicable borrowing rate was a function of LIBOR plus 0.5% to 2.5%. By contrast, under the present Credit Facility, as modified, the applicable borrowing rate is a function of LIBOR plus 4.5% to 5.0% for the Revolver and LIBOR plus 3.5% to 3.75% for the Term B Loan (prior to the Term B modification, the applicable borrowing rate was LIBOR plus 4.75% to 5.0%). The Term B Loan includes a LIBOR floor of 1.25%. The Senior Notes bear interest at 10.5% annually.
Income Before Income Taxes (Benefit)
Years Ended
December 31, December 31,
2012 2011
(dollars in millions)
Income Before Income Taxes (Benefit) $ 23.7 $ 52.1
Amount of Change $ (28.4 )
Percentage Change (54.5 %)
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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)
Years Ended
December 31, December 31,
2012 2011
(dollars in millions)
Income Taxes (Benefit) $ 12.5 $ (14.2 )
Amount of Change $ 26.7
Percentage Change 188.0 %
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Income Tax Rate For The Year Ended December 31, 2012
The income tax rate was 52.5%, which includes adjustments for expenses that are not deductible for tax purposes, and the recognition of tax benefits related to discrete items arising during the period. Our 2012 annual tax rate before discrete items was higher than the expected low 40% range primarily due to the negative impact of the impairment loss recorded in the second quarter of 2012.
Income Tax Rate For The Year Ended December 31, 2011
The income tax rate was 27.3%. The income tax rate in 2011 would have been in the low 40% range if we excluded primarily the impact of the valuation allowance reversal and the $6.0 million prior period correction.
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 deferred tax asset valuation allowance was initially established in 2008 as we were impacted by the economic downturn during this period which resulted in impairments to our broadcast licenses and goodwill in 2007 and 2008. These impairment losses negatively impacted our three-year cumulative income.
Contributing to management's assessment during the second quarter of 2011 that a full valuation allowance was no longer required, were sufficient positive indicators such as, but not limited to: (1) the then present economic conditions (as compared to the economic conditions when the valuation allowance was established); (2) a recent return to net profitability due to the absence of impairment losses; and (3) management's expectation of future profitability, including available future taxable income under the current tax law to realize all of the tax benefits for deductible temporary differences and carryforwards.
The recoverability of our net deferred tax assets was assessed utilizing projections based on current operations. The projections reflected a significant decrease in the tax amortization in the early years of the carryforward period as a significant portion of our intangible assets will be fully amortized. These projections indicated that the recoverability of the net deferred tax assets was not dependent on material improvements to operations, material asset sales or other non-routine transactions.
Estimated Income Tax Rate For 2013
We estimate that our 2013 annual tax rate before discrete items, which may
fluctuate from quarter to quarter, will be in the low 40% range. We anticipate
that our rate in 2013 could be affected primarily by: (1) changes in the level
of income in any of our taxing jurisdictions; (2) adding facilities in states
that on average have different income tax rates from states in which we
currently operate and the resulting effect on previously reported temporary
differences between the tax and financial reporting bases of our assets and
liabilities; (3) the effect of recording changes in our liabilities for
uncertain tax positions; (4) taxes in certain states that are dependent on
factors other than taxable income; and (5) the limitations on the deduction of
cash and certain non-cash compensation expense for certain key employees. Our
annual effective tax rate may also be materially impacted by: (i) tax expense
associated with non-amortizable assets such as broadcasting licenses and
goodwill; (ii) regulatory changes in certain states in which we operate;
(iii) changes in the expected outcome of tax audits; (iv) changes in the
estimate of expenses that are not deductible for tax purposes; and (v) changes
in the deferred tax valuation allowance.
In the event we determine at a future time that it is more likely than not that we will not realize our net deferred tax assets, we will increase our deferred tax asset valuation allowance and increase income tax expense in the period when we make such determination.
Net Deferred Tax Liabilities
As of December 31, 2012 and 2011, net deferred tax liabilities were $23.8
million and $10.5 million, respectively. Our net deferred tax liabilities
primarily relate to differences between book and tax bases of certain of our
indefinite-lived intangibles (broadcasting licenses and goodwill). Under
accounting guidance, we do not amortize our indefinite-lived intangibles for
financial statement purposes, but instead test them annually for impairment. The
amortization of our indefinite-lived assets for tax purposes but not for book
purposes creates deferred tax liabilities. A reversal of deferred tax
liabilities may occur when indefinite-lived intangibles: (1) become impaired; or
(2) are sold, which would typically only occur in connection with the sale of
the assets of a station or groups of stations or the entire company in a taxable
transaction. Due to the amortization for tax purposes and not book purposes of
our indefinite-lived intangible assets, we expect to continue to generate
deferred tax liabilities in future periods (without consideration for any
impairment loss in future periods).
Net Income
Years Ended
December 31, December 31,
2012 2011
(dollars in millions)
Net Income $ 11.3 $ 66.3
Amount of Change $ (55.0 )
Percentage Change (83.0 %)
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The net change was primarily attributable to the impairment loss, the increase in interest expense and for the reasons described under Income Taxes (Benefit).
Results Of Operations
Year ended December 31, 2011 compared to the year ended December 31, 2010
The following significant factors affected our results of operations for the year ended December 31, 2011 as compared to the prior year:
In connection with the preparation of our financial statements for the year ended December 31, 2012, we identified a prior period error in the income taxes reported for the year ended December 31, 2011. We assessed the materiality of this error and concluded that it was not material to any of our previously issued financial statements. We have revised the affected period presented herein to reflect the correct accounting. This non-cash item did not impact our operating income or operating cash flows for the current or prior period and had no impact on our cash taxes. For further discussion, refer to Note 1 in the accompanying notes to the financial statements.
In March 2010, we amended our Former Facility, which increased our interest expense due to an increase in the amortization of deferred financing expense of $5.2 million and an increase in the on-going fees we pay under our Former Facility.
In March 2010, we repurchased the remaining $6.6 million of our then outstanding 7.625% Notes at par and recognized a net loss on extinguishment of debt of $0.1 million due to the write-off of deferred financing expenses.
For the year ended December 31, 2009, we repurchased $76.9 million of our 7.625% Notes and recognized a net gain on extinguishment of debt of $20.8 million.
During the fourth quarter of 2009, another party commenced operation of certain of our tower sites as part of our plan to exit the operation of non-strategic tower sites, which decreased net revenues (tower rental income) and station operating expenses for same station considerations, but had a marginal impact on our reported results of operations. We also received $12.6 million in cash that was reflected as financing method lease obligations due to our ability to participate in future profits from these towers.
During the year ended 2009, we recorded an impairment loss of $67.7 million in connection with our review of goodwill and broadcasting licenses. See Note 4 in the accompanying notes to the financial statements for further discussion of the contributing factors to the impairment loss.
The income tax benefit in 2009 was favorably impacted by the passage of federal tax legislation during the fourth quarter of 2009 that allowed us to carryback our 2008 net operating loss for five years rather than for two years. As a result, we reversed the federal portion of our valuation allowance for deferred tax assets associated with a net operating loss carryforward and recovered $6.8 million in 2010.
Net Revenues
Years Ended
December 31, December 31,
2011 2010
(dollars in millions)
Net Revenues $ 382.7 $ 391.4
Amount of Change $ (8.7 )
Percentage Change (2.2 %)
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Net revenues in 2011 decreased in the low single digits compared to 2010. Contributing factors to our lower net revenues were format changes in a few of our key markets, overall market weakness in several markets where we operate and general sluggishness in advertiser demand. We believe, however, that the new formats will improve the longer-term growth prospects for these brands.
Net revenues increased in the majority of our markets. Our net revenues increased the most for those radio stations located in our Indianapolis, Kansas City and Seattle markets, offset by a decrease for those radio stations located in our Boston, Denver and San Francisco markets.
Station Operating Expenses
Years Ended
December 31, December 31,
2011 2010
(dollars in millions)
Station Operating Expenses $ 263.4 $ 258.9
Amount of Change $ 4.5
Percentage Change 1.7 %
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The increase in station operating expenses was primarily due to: (1) an increase in our audience ratings expense primarily due to the continued rollout across our markets of PPM, a new audience measurement methodology; (2) costs associated with the continued expansion of our digital initiatives; and (3) an increase in employee compensation and benefits related to the lifting of our multi-year wage freeze at the beginning of the year and the reinstatement of our 401(k) employer contribution.
Depreciation And Amortization Expense
Years Ended
December 31, December 31,
2011 2010
(dollars in millions)
Depreciation And Amortization Expense $ 11.3 $ 12.7
Amount of Change $ (1.4 )
Percentage Change (11.0 %)
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Depreciation and amortization expense decreased in 2011 primarily due to the decrease over the past several years in: (1) acquisitions; and (2) capital expenditures.
Corporate General And Administrative Expenses
Years Ended
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