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CMLS > SEC Filings for CMLS > Form 10-Q on 7-May-2013All Recent SEC Filings

Show all filings for CUMULUS MEDIA INC

Form 10-Q for CUMULUS MEDIA INC


7-May-2013

Quarterly Report


Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations

General

The following discussion of our financial condition and results of operations should be read in conjunction with our unaudited condensed consolidated financial statements and notes thereto included elsewhere in this quarterly report. This discussion, as well as various other sections of this quarterly report, contains and refers to statements that constitute "forward-looking statements" within the meaning of the Private Securities Litigation Reform Act of 1995 and other federal securities laws. Such statements relate to our intent, belief or current expectations primarily with respect to our future operating, financial and strategic performance. Any such forward-looking statements are not guarantees of future performance and may involve risks and uncertainties. Actual results may differ from those contained in or implied by the forward-looking statements as a result of various factors, including, but not limited to, risks and uncertainties relating to the need for additional funds to execute our business strategy, our inability to renew one or more of our broadcast licenses, changes in interest rates, the timing, costs and synergies resulting from the integration of any completed acquisitions, our ability to eliminate certain costs, our ability to manage rapid growth, the popularity of radio as a broadcasting and advertising medium, changing consumer tastes, any material changes from the preliminary to final purchase price allocations in completed acquisitions, the impact of general economic conditions in the United States or in specific markets in which we currently do business, industry conditions, including existing competition and future competitive technologies, cancellation, disruptions or postponements of advertising schedules in response to national or world events, and our ability to generate revenue from new sources, including technology-based initiatives. Many of these risks and uncertainties are beyond our control, and the unexpected occurrence or failure to occur of any such events or matters could significantly alter our actual results of operations or financial condition.

For additional information about certain of the matters discussed and described in the following Management's Discussion and Analysis of Financial Condition and Results of Operations, including certain defined terms used herein, see the notes to the accompanying unaudited condensed consolidated financial statements included elsewhere in this quarterly report.

Our Business

We own and operate commercial radio station clusters throughout the United States. We believe we are the largest pure-play radio broadcaster in the United States based on number of stations owned and operated. At March 31, 2013, we owned or operated


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approximately 520 radio stations (including under LMAs) in 108 United States media markets and operated nationwide radio networks serving over 5,000 affiliates. At March 31, 2013, under LMAs, we provided sales and marketing services for 14 radio stations in the United States.

Operating Overview

We believe that following the completion of the CMP Acquisition and the Citadel Merger, which included the acquisition of our radio networks, consisting of 5,000 station affiliates and 9,000 program affiliates, in 2011 we have created a leading radio broadcasting company with a true national platform with an opportunity to further leverage and expand upon our strengths, market presence and programming. Specifically, with the completion of these acquisitions, we now have an extensive radio station portfolio consisting of approximately 520 radio stations, including a presence in eight of the top 10 markets, and broad diversity in format, listener base, geography, advertiser base and revenue stream, all of which are designed to reduce dependence on any single demographic, region or industry. Our increased scale has allowed larger, more significant investments in the local digital media marketplace allowing our local digital platforms and strategies, including our social commerce initiatives, to be applied across significant additional markets. We believe our one national platform will allow us to optimize our available advertising inventory while providing holistic and comprehensive solutions for our customers.

Cumulus believes that our capital structure provides for adequate liquidity and scale for Cumulus to pursue and finance strategic acquisitions in the future.

Liquidity Considerations

Historically, our principal needs for funds have been for acquisitions of radio stations, expenses associated with our station and corporate operations, capital expenditures, and interest and debt service payments. We believe that our funding needs in the future will be for substantially similar matters.

Our principal sources of funds historically have been cash flow from operations and borrowings under credit facilities in existence from time to time. Our cash flow from operations is subject to such factors as shifts in population, station listenership, demographics, or audience tastes, and fluctuations in preferred advertising media. In addition, customers may not be able to pay, or may delay payment of, accounts receivable that are owed to us, which risks may be exacerbated in challenging economic periods. In recent periods, management has taken steps to mitigate this risk through heightened collection efforts and enhancements to our credit approval process, although no assurances as to the longer-term success of these efforts can be provided. In addition, we believe the acquisition of the broad diversity in format, listener base, geography, advertiser base and revenue stream that accompanied the CMP Acquisition and the Citadel Merger will help us reduce dependence on any single demographic, region or industry.

At March 31, 2013 we had $1.318 billion outstanding under the First Lien Facility, $790.0 million outstanding under the Second Lien Facility and no amounts outstanding under the Revolving Credit Facility.

On December 20, 2012, we entered into an amendment and restatement (the "Amendment and Restatement") of our First Lien Facility Credit Agreement, dated as of September 16, 2011, among the Company, Cumulus Media Holdings, Inc., as borrower (the "Borrower"), and the lenders and the agents thereto (the "Original Agreement"). Pursuant to the Amendment and Restatement, the terms and conditions contained in the Original Agreement remained substantially unchanged, except as follows: (i) the amount outstanding thereunder was increased to $1.325 billion;
(ii) the margin for LIBOR (as defined below) -based borrowings was reduced from 4.5% to 3.5% and for Base Rate (as defined below) -based borrowings was reduced from 3.5% to 2.5%; and (iii) the LIBOR floor for LIBOR-based borrowings was reduced from 1.25% to 1.0%.

In the event amounts are outstanding under the Revolving Credit Facility, the First Lien Facility requires compliance with a consolidated total net leverage ratio. At March 31, 2013, this ratio would have been 6.5 to 1.0. Such ratio will be reduced in future periods if amounts are outstanding under the Revolving Credit Facility at an applicable date. At March 31, 2013 we would not have been in compliance with this ratio. As a result, borrowings under the revolving credit facility were not available at that date. The Second Lien Facility does not contain any financial covenants. At March 31, 2013 our long-term debt consisted of $2.1 billion in total term loans and $610.0 million in 7.75% Senior Notes.

Based upon the calculation of excess cash flow at December 31, 2012, the Company was required to make a mandatory prepayment on the First Lien Term Loan. Due to certain rights retained by the lenders to decline proportionate shares of such prepayments, the final prepayment amount was reduced from 63.2 million to $35.6 million of which a portion was applied to the Second Lien Term Loan. The prepayment was made on April 1, 2013 and has been classified in the current portion of long-term debt caption of the condensed consolidated balance sheet

The 2011 Credit Facilities contain provisions requiring the Company to use the proceeds from the disposition of assets of the Company to prepay amounts outstanding under the First Lien Facility and the Second Lien Facility (to the extent proceeds remain after the required prepayment of all amounts outstanding under the First Lien Facility), subject to the right of the Company to use such proceeds to acquire, improve or repair assets useful in its business, all within one year from the date of receipt of such proceeds. As of March 31, 2013, we have complied with these provisions and reinvested the proceeds from the Townsquare Asset Exchange as such, we will not be required to prepay principal outstanding under the 2012 Credit Facilities.


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We have assessed the current and expected conditions of our business climate, our current and expected needs for funds and our current and expected sources of funds and determined, based on our financial condition as of March 31, 2013, that cash on hand and cash expected to be generated from operating activities will be sufficient to satisfy our anticipated financing needs for working capital, capital expenditures, interest and debt service payments, and any repurchases of securities and other debt obligations through at least March 31, 2014.

Advertising Revenue and Adjusted EBITDA

Our primary source of revenues is the sale of advertising time on our radio stations and networks. Our sales of advertising time are primarily affected by the demand for advertising time from local, regional and national advertisers and the advertising rates charged by us. Advertising demand and rates are based primarily on a station's ability to attract audiences in the demographic groups targeted by its advertisers, as measured principally by various ratings agencies on a periodic basis. We endeavor to develop strong listener loyalty and we believe that the diversification of formats and programs helps to insulate us from the effects of changes in the musical tastes of the public with respect to any particular format. In addition, we believe that the portfolio that we own and operate, which has increased diversity in terms of format, listener base, geography, advertiser base and revenue stream as a result of our recent acquisitions and the development of our strategy to focus on radio stations in larger markets and geographically strategic regional clusters, will further reduce our revenue dependence on any single demographic, region or industry.

We strive to maximize revenue by managing our on-air inventory of advertising time and adjusting prices up or down based on supply and demand. The optimal number of advertisements available for sale depends on the programming format of a particular station or program network. Each sales vehicle has a general target level of on-air inventory available for advertising. This target level of advertising inventory may vary at different times of the day but tends to remain stable over time. We seek to broaden our base of advertisers in each of our markets by providing a wide array of audience demographic segments across each cluster of stations, thereby providing each of our potential advertisers with an effective means of reaching a targeted demographic group. In the broadcasting industry, we sometimes utilize trade or barter agreements that exchange advertising time for goods or services such as travel or lodging, instead of for cash. Trade revenue totaled $4.9 million and $6.8 million in the three months ended March 31, 2013 and 2012, respectively. Our advertising contracts are generally short-term. We generate most of our revenue from local and regional advertising, which is sold primarily by a station's sales staff. Local advertising represented approximately 71.9% and 72.7% of our total revenues during the three months ended March 31, 2013 and 2012, respectively.

In addition to local advertising revenues, we monetize our available inventory in both national spot and network sales market places using our national platform. To effectively deliver our network advertising for our customers, we distribute content and programming through third party affiliates in order to achieve a broader national audience. Typically, in exchange for the right to broadcast radio network programming, third party affiliates remit a portion of their advertising time, which is then aggregated into packages focused on specific demographic groups and sold by us to our advertiser clients that want to reach the listeners who comprise those demographic groups on a national basis. Revenues derived from third party affiliates represented less than 10% of consolidated revenues.

Our advertising revenues vary by quarter throughout the year. As is typical in the radio broadcasting industry, our first calendar quarter typically produces the lowest revenues of a last twelve month period, as advertising generally declines following the winter holidays. The second and fourth calendar quarters typically produce the highest revenues for the year. Our operating results in any period may be affected by the incurrence of advertising and promotion expenses that typically do not have an effect on revenue generation until future periods, if at all. We continually evaluate opportunities to increase revenues through new platforms, including technology-based initiatives.

Adjusted EBITDA is the financial metric utilized by management to analyze the cash flow generated by the Company's business. This measure isolates the amount of income generated by the Company's radio stations apart from the incurrence of non-cash and non-operating expenses. Management also uses this measure to determine the contribution of the Company's radio station portfolio, including the corporate resources employed to manage the portfolio, to the funding of its other operating expenses and to the funding of debt service and acquisitions. In addition, Adjusted EBITDA is a key metric for purposes of calculating and determining our compliance with certain covenants contained in our First Lien Credit Agreement, as amended and restated, (the "First Lien Facility").

In deriving this measure, management excludes depreciation, amortization and stock-based compensation expense, as these do not represent cash payments for activities directly related to the operation of the radio stations. In addition, we exclude LMA fees from our calculation of Adjusted EBITDA, even though such fees require a cash settlement, because they are excluded from the definition of Adjusted EBITDA contained in our First Lien Facility. Management excludes any gain or loss on the exchange of assets or stations as they do not represent a cash transaction. Management also excludes any realized gain or loss on derivative instruments as they do


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not represent a cash transaction nor are they associated with radio station operations. Interest expense, net of interest income, income tax (benefit) expense including franchise taxes, and expenses relating to acquisitions are also excluded from the calculation of Adjusted EBITDA as they are not directly related to the operation of radio stations. Management excludes impairment of goodwill and intangible assets as they do not require a cash outlay. Management believes that Adjusted EBITDA, although not a measure that is calculated in accordance with GAAP, nevertheless is commonly employed by the investment community as a measure for determining the market value of a radio company. Management has also observed that Adjusted EBITDA is routinely employed to evaluate and negotiate the potential purchase price for radio broadcasting companies, and is a key metric for purposes of calculating and determining compliance with certain covenants in our First Lien Facility. Given the relevance to the overall value of the Company, management believes that investors consider the metric to be extremely useful.

Adjusted EBITDA should not be considered in isolation or as a substitute for net income, operating income, cash flows from operating activities or any other measure for determining the Company's operating performance or liquidity that is calculated in accordance with GAAP.

A quantitative reconciliation of Adjusted EBITDA to net loss, the most directly comparable financial measure calculated and presented in accordance with GAAP, follows in this section.

Results of Operations

Analysis of the Unaudited Condensed Consolidated Results of Operations.

The following analysis of selected data from our unaudited condensed
consolidated statements of operations and other supplementary data should be
referred to while reading the results of operations discussion that follows
(dollars in thousands):




                                            Three Months Ended                                  % Change
                                                 March 31,                2013 vs 2012        Three Months
                                           2013            2012             $ Change              Ended
STATEMENT OF OPERATIONS DATA:
Net revenues                             $ 232,872       $ 235,995       $       (3,123 )              -1.3 %
Direct operating expenses (excluding
depreciation, amortization and LMA
fees)                                      164,172         153,627               10,545                 6.9 %
Depreciation and amortization               28,930          34,882               (5,952 )             -17.1 %
LMA fees                                       969             839                  130                15.5 %
Corporate, general and administrative
expenses (including stock-based
compensation expense)                       13,866          16,692               (2,826 )             -16.9 %
Loss on station sale                         1,309              -                 1,309                   * *
Gain on derivative instrument                 (738 )           (88 )               (650 )                 * *

Operating income                            24,364          30,043               (5,679 )             -18.9 %
Interest expense, net                      (44,252 )       (50,803 )              6,551               -12.9 %
Other income, net                              133             262                 (129 )             -49.2 %
Loss from continuing operations
before income taxes                        (19,755 )       (20,498 )                743                -3.6 %
Income tax benefit                          10,767           7,892                2,875                36.4 %

Income from continuing operations           (8,988 )       (12,606 )
Income from discontinued operations,
net of taxes                                    -              476                 (476 )                 * *

Net loss                                 $  (8,988 )     $ (12,130 )     $        3,142                25.9 %

OTHER DATA:
Adjusted EBITDA                          $  59,888       $  76,865       $      (16,977 )             -22.1 %

** Calculation is not meaningful.


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Three Months Ended March 31, 2013 Compared to the Three Months Ended March 31, 2012

Net Revenues. Net revenues for the three months ended March 31, 2013 decreased $3.1 million, or 1.3%, to $232.9 million, compared to $236.0 million for the three months ended March 31, 2012. This decrease was attributable to lower political revenues and general lower advertising spending in some of our markets.

Direct Operating Expenses, Excluding Depreciation and Amortization. Direct operating expenses for the three months ended March 31, 2013 increased $10.6 million, or 6.9%, to $164.2 million, compared to $153.6 million for the three months ended March 31, 2012. The increase was primarily attributable to a $1.0 million increase in sales salaries, a $1.6 million increase in Arbitron fees and a $4.9 million increase in expense at our network division as we invest in various content initiatives.

Depreciation and Amortization. Depreciation and amortization for the three months ended March 31, 2013 decreased $6.0 million, or 17.1%, to $28.9 million, compared to $34.9 million for the three months ended March 31, 2012. This decrease was primarily due to a $7.0 million decrease in amortization expense on the Company's definite lived intangibles offset by a $1.0 million increase in depreciation expense.

Corporate General and Administrative Expenses, Including Stock-based CompensationExpense. Corporate general and administrative expenses, including stock-based compensation expense, for the three months ended March 31, 2013 decreased $2.8 million, or 16.9%, to $13.9 million, compared to $16.7 million for the three months ended March 31, 2012. The decrease is primarily due to a decrease in stock based compensation expense of $4.3 million, partially offset by a $1.2 million increase in acquisition related costs. Acquisition related costs for the three months ended March 31, 2013 included exit costs associated with a lease for vacated Citadel office space.

Realized Losses on Derivative Instrument. For the three months ended March 31, 2013, we recorded a $0.7 million gain related to the fair value adjustment of the put option on five Green Bay stations we operate under an LMA, compared to a $0.1 million gain recorded for the three months ended March 31, 2012.

Interest Expense, net. Total interest expense, net of interest income, for the three months ended March 31, 2013 decreased $6.5 million, or 12.9%, to $44.3 million compared to $50.8 million for the three months ended March 31, 2012. Interest expense associated with outstanding debt decreased by $6.5 million to $41.5 million as compared to $48.0 million in the prior year period. Interest expense decreased due to a lower average amount of indebtedness outstanding as a result principal repayments and a lower weighted average cost of debt due to the December 2012 Amendment and Restatement. The following summary details the components of our interest expense, net of interest income (dollars in thousands):

                                               Three Months Ended
                                                   March 31,                      2013 vs 2012
                                              2013            2012         $ Change         % Change
7.75% Senior Notes                          $  11,819       $ 11,819       $      -                 * *
Bank borrowings - term loans and
revolving credit facilities                    29,680         36,219          (6,539 )          -18.1 %
Other interest expense                          3,018          2,897             121              4.2 %
Change in fair value of interest rate
cap and swap                                        5             84             (79 )              * *
Interest income                                  (270 )         (216 )           (54 )           25.0 %

Interest expense, net                       $  44,252       $ 50,803       $  (6,551 )          -12.9 %

** Calculation is not meaningful.

Income Taxes. For the three months ended March 31, 2013, the Company recorded tax benefits of $10.8 million, on a pre-tax loss from continuing operations of $19.8 million, resulting in an effective tax rate for the three months ended March 31, 2013 of approximately 54.5%. For the three months ended March 31, 2012, the Company recorded income tax benefit of $7.9 million, on pre-tax loss from continuing operations of $20.5 million, resulting in an effective tax rate for the three months ended March 31, 2012 of approximately 38.5%.

The difference between the effective tax rate for each period and the federal statutory rate of 35.0% primarily relates to state and local income taxes and the tax amortization of broadcast licenses and goodwill; and assets classified as having an indefinite life for book purposes.

Adjusted EBITDA. As a result of the factors described above, Adjusted EBITDA for the three months ended March 31, 2013 decreased $17.0 million to $59.9 million from $76.9 million for the three months ended March 31, 2012.


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Reconciliation of Non-GAAP Financial Measure. The following table reconciles Adjusted EBITDA to net loss (the most directly comparable financial measure calculated and presented in accordance with GAAP) as presented in the accompanying consolidated statements of operations (dollars in thousands):

                                                    Three Months Ended              % Change
                                                        March 31,                 Three Months
                                                  2013             2012               Ended
Net loss                                        $  (8,988 )      $ (12,130 )               25.9 %
Income tax benefit                                (10,767 )         (7,892 )               36.4 %
Non-operating expenses, including net
interest expense                                   44,119           50,541                -12.7 %
LMA fees                                              969              839                 15.5 %
Depreciation and amortization                      28,930           34,882                -17.1 %
Stock-based compensation expense                    2,663            6,978                -61.8 %
Loss on station sale                                1,309               -                     * *
Gain on derivative instrument                        (738 )            (88 )                  * *
Acquisition-related costs                           2,214            1,023                116.4 %
Franchise taxes                                       177               -                     * *
Discontinued operations:
Depreciation and amortization                          -               796                    * *
Income tax expense                                     -             1,916                    * *

Adjusted EBITDA                                 $  59,888        $  76,865                -22.1 %

** Calculation is not meaningful.

Liquidity and Capital Resources

Cash Flows provided by Operating Activities

Three Months Ended March 31, 2013 2012

(Dollars in thousands)

Net cash provided by operating activities $ 54,806 $ 60,278

For the three months ended March 31, 2013 compared to the three months ended March 31, 2012, net cash provided by operating activities decreased $5.5 million as compared to the three months ended March 31, 2012. The decrease was primarily due to a decrease in net revenues of $12.4 million, partially offset by an aggregate increase in cash provided by operating assets and liabilities of $8.4 million.

Cash Flows used in Investing Activities

Three Months Ended
March 31,
(Dollars in thousands) 2013 2012 Net cash used in investing activities $ (53,760 ) $ (800 )

For the three months ended March 31, 2013 compared to the three months ended March 31, 2012, net cash used in investing activities increased $53.0 million, primarily due to completing $52.1 million in acquisitions during the three months ended March 31, 2013.


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Cash Flows used in Financing Activities

Three Months Ended
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