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ETM > SEC Filings for ETM > Form 10-Q on 7-Aug-2013All Recent SEC Filings

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Form 10-Q for ENTERCOM COMMUNICATIONS CORP


7-Aug-2013

Quarterly Report


ITEM 2. Management's Discussion And Analysis Of Financial Condition And Results Of Operations

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 27, 2013. 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 six and three months ended June 30, 2013 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. The acquisition noted below was not 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.

Results Of Operations For The Year-To-Date

The following significant factors affected our results of operations for the six months ended June 30, 2013 as compared to the six months ended June 30, 2012:

During the second quarter of 2013, we recorded a non-cash gain of $1.6 million on the sale of certain towers under sale and leaseback accounting.

During November 2012, a modification of our Credit Facility reduced our interest rates.

In June 2012, we acquired KBLX-FM, a station serving 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.

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.


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Six Months Ended June 30, 2013 As Compared To The Six Months Ended June 30, 2012



                                                           SIX MONTHS ENDED
                                                   2013         2012        % Change
                                                         (dollars in millions)
  NET REVENUES                                    $ 179.6      $ 184.5             (3 %)
  OPERATING EXPENSE:
  Station operating expenses                        123.9        127.4             (3 %)
  Depreciation and amortization expense               4.5          5.5            (18 %)
  Corporate general and administrative expenses      11.8         12.8             (8 %)
  Other operating expenses                           (0.6 )       22.5

  Total operating expense                           139.6        168.2            (17 %)

  OPERATING INCOME (LOSS)                            40.0         16.3            145 %

  OTHER (INCOME) EXPENSE:
  Net interest expense                               22.8         27.6            (17 %)
  Other income and expense                           (0.1 )       (1.4 )

  TOTAL OTHER EXPENSE                                22.7         26.2            (13 %)

  INCOME (LOSS) BEFORE INCOME TAXES (BENEFIT)        17.3         (9.9 )           NM

  INCOME TAXES (BENEFIT)                              7.7         (5.6 )           NM

  NET INCOME (LOSS)                               $   9.6      $  (4.3 )           NM

Net Revenues

Net revenues were down versus the prior year due to sluggish demand for advertising since the beginning of the year. Advertising demand continues to fluctuate and reflects the uneven performance of the general economy.

Net revenues increased the most for our stations in the Kansas City and Indianapolis markets, offset by revenue decreases for our stations located in the Boston and Greensboro markets. Net revenues were favorably impacted by:
(1) our acquisition of KBLX-FM which we began operating on May 1, 2012 under a TBA; and (2) our joint sales agreement that was effective July 1, 2012 with two Gainesville stations not owned by us.

Due to the continued uncertainties surrounding the economy, it is difficult for management to provide any guidance on future revenue trends.

Station Operating Expenses

Station operating expenses decreased primarily due to cost reduction initiatives. In addition, certain sales costs, which vary with revenue, decreased due to the decline in net revenues.

Depreciation And Amortization Expense

Depreciation and amortization expense decreased in 2013 primarily due to a trend of lower capital expenditures over the past several years.

Corporate General And Administrative Expenses

Corporate general and administrative expenses decreased primarily due to a decline in non-cash compensation expense of $0.6 million.


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Operating Income

Operating income increased as the prior year included an impairment loss of $22.3 million in our Boston market in connection with our review of broadcasting licenses and goodwill. Operating income also increased due to: (1) a $3.5 million decrease in station operating expenses; (2) a $1.6 million increase on gain on the net gain on sale or disposal of assets, primarily due to the recognition of the gain on the tower sale; (3) a $1.0 million decrease in depreciation and amortization expense; and (4) a $1.0 million decrease in corporate general and administrative expenses.

The increase in operating income was offset by a decrease in net revenues of $4.9 million.

Interest Expense

The decrease in interest expense was primarily due to: (1) lower interest rates as a result of the November 2012 modification to our Credit Facility; and
(2) lower outstanding debt upon which interest is computed.

Income (Loss) Before Income Taxes (Benefit)

The increase was primarily attributable to: (1) an increase in operating income as the prior year's operating income was negatively impacted by an impairment loss of $22.3 million; and (2) a decrease in interest expense.

Income Taxes (Benefit)

For the current period, the income tax rate was 44.4%, which includes an adjustment for expenses that are not deductible for tax purposes and an increase in net deferred tax liabilities associated with non-amortizable assets such as broadcasting licenses and goodwill. 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.

For the prior period, the income tax rate was 57.1%, which includes an adjustment for expenses that are not deductible for tax purposes, and the recognition of an additional tax benefit related to discrete items arising during the period. The income tax rate before discrete items was higher than the expected low 40% range primarily due to the negative impact to income before income taxes of the impairment loss recorded during the second quarter of 2012.

As of June 30, 2013 and December 31, 2012, our net deferred tax liabilities were $31.5 million and $23.8 million, respectively. The deferred tax liabilities primarily relate to differences between the book and tax bases of our broadcasting licenses and goodwill.

Net Income (Loss)

The increase in net income (loss) was primarily attributable to the reasons described above under Income (Loss) Before Income Taxes (Benefit) and Income Taxes (Benefit).

Results Of Operations For The Quarter

The following significant factors affected our results of operations for the three months ended June 30, 2013 as compared to the same period in the prior year:

During the second quarter of 2013, we recorded a non-cash gain of $1.6 million on the sale of certain towers under sale and leaseback accounting.

During November 2012, a modification of our Credit Facility reduced our interest rates.

In June 2012, we acquired KBLX-FM, a station serving 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.

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.


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Three Months Ended June 30, 2013 As Compared To The Three Months Ended June 30, 2012

                                                          THREE MONTHS ENDED
                                                               JUNE 30,
                                                   2013         2012        % Change
                                                         (dollars in millions)
  NET REVENUES                                    $ 101.2      $ 104.6             (3 %)
  OPERATING EXPENSE:
  Station operating expenses                         65.9         67.7             (3 %)
  Depreciation and amortization expense               2.2          2.7            (19 %)
  Corporate general and administrative expenses       5.6          6.2            (10 %)
  Other operating expenses                           (0.8 )       22.6

  Total operating expense                            72.9         99.2            (27 %)

  OPERATING INCOME (LOSS)                            28.3          5.4            424 %

  OTHER (INCOME) EXPENSE:
  Net interest expense                               11.3         13.5            (16 %)
  Other income and expense                             -          (0.6 )

  TOTAL OTHER EXPENSE                                11.3         12.9            (12 %)

  INCOME (LOSS) BEFORE INCOME TAXES (BENEFIT)        17.0         (7.5 )          327 %

  INCOME TAXES (BENEFIT)                              7.1         (4.3 )          265 %

  NET INCOME (LOSS)                               $   9.9      $  (3.2 )          409 %

Net Revenues

Net revenues decreased due to the sluggish demand for advertising that was symptomatic of the general economy.

Net revenues increased the most for our stations in the Kansas City and New Orleans markets, offset by a decrease for our stations in the Boston and Seattle markets.

Station Operating Expenses

The decrease in station operating expenses was primarily due to cost reduction initiatives. In addition, certain sales costs, which vary with revenue, decreased due to the decline in net revenues for the current quarter.

Depreciation And Amortization Expense

Depreciation and amortization expense decreased due to our recent history of decreased levels of capital expenditures.

Corporate General And Administrative Expenses

Corporate general and administrative expenses decreased primarily due to a decline in non-cash compensation expense of $0.4 million and a decrease in legal expense of $0.3 million.

Operating Income

Operating income increased as the prior year included an impairment loss of $22.3 million in our Boston market in connection with our review of broadcasting licenses and goodwill. Operating income also increased due to: (1) a $1.8 million decrease in station operating expenses; (2) a $1.6 million increase on gain on the net gain on sale or disposal of assets, primarily due to the recognition of the gain on the tower sale; (3) a $0.6 million decrease in corporate general and administrative expenses; and (4) a $0.5 million decrease in depreciation and amortization expense.


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The increase in operating income was offset by a decrease in net revenues of $3.4 million.

Interest Expense

The decrease in interest expense was primarily due to: (1) lower interest rates as a result of the November 2012 modification to our Credit Facility; and
(2) lower outstanding debt upon which interest is computed.

Income (Loss) Before Income Taxes (Benefit)

The increase was primarily attributable to the decrease in interest expense and the increase in operating income.

Income Taxes (Benefit)

For the current period, the income tax rate was 41.9%, which primarily reflects adjustments for expenses that are not deductible for tax purposes and an increase in net deferred tax liabilities associated with non-amortizable assets such as broadcasting licenses and goodwill.

For the prior period, income tax expense was 57.4%, 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. The income tax rate before discrete items was higher than the expected low 40% range primarily due to the negative impact to income before income taxes of the impairment loss recorded during the second quarter of 2012.

Net Income (Loss)

The net change in net income (loss) was primarily attributable to the reasons described above under Income (Loss) Before Income Taxes (Benefit) and Income Taxes (Benefit).

Liquidity And Capital Resources

Liquidity

As of June 30, 2013, we had $328.0 million outstanding under our Credit Facility and $220 million in principal for our 10.5% senior unsecured notes ("Senior Notes"). In addition, we have a $0.4 million letter of credit. As of June 30, 2013, we had $6.3 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 revolving credit facility (the "Revolver") that matures on November 23, 2016; and (b) a $375 million term loan (the "Term B Loan") that matures on November 23, 2018. The Term B Loan amortizes in quarterly installments of $0.9 million 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 $44.6 million as of June 30, 2013. 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 June 30, 2013, 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 2014, which is net of prepayments made through June 30, 2013, will be approximately $18 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 June 30, 2013, 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.


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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 June 30, 2013, our Consolidated Leverage Ratio was 4.7 times versus a covenant maximum of 6.75 times and our Consolidated Interest Coverage Ratio was 2.7 times versus a covenant minimum of 1.6 times. These covenants become more restrictive over time.


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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                                        $ 328,000
    Senior Notes at maturity                                         220,000
    Letter of credit outstanding                                         370

    Total debt outstanding                                           548,370
    Less cash outstanding, not to exceed $40 million                  (6,339 )

    Consolidated Funded Indebtedness                               $ 542,031

    Denominator: Consolidated Operating Cash Flow
    Net income                                                     $  25,165
    Income taxes                                                      25,844
    Depreciation and amortization                                      9,859
    Impairment loss                                                      850
    Interest expense                                                  48,668
    Non-cash compensation expense                                      5,134
    Deferred non-cash charges                                          1,731
    Unusual gains not in the ordinary course of business              (1,647 )
    Loss on debt extinguishment                                          747
    Pro forma for tower disposition as of beginning of period           (769 )

    Consolidated Operating Cash Flow                               $ 115,582

    Consolidated Leverage Ratio                                         4.69

    Consolidated Interest Coverage Ratio Computations:
    (amounts in thousands, except ratios)
    Numerator: Consolidated Operating Cash Flow                    $ 115,582

    Denominator: Consolidated Interest Charges
    Interest expense                                               $  48,668
    Less: Interest income and certain deferred financing expense      (4,550 )
    Less: Interest expense associated with the tower transaction        (769 )

    Consolidated Interest Charges                                  $  43,349

    Consolidated Interest Coverage Ratio                                2.67

The Senior Notes

Simultaneously with entering into the Credit Facility on November 23, 2011, we issued the Senior Notes which mature on December 1, 2019 in the amount of $220 million. Interest on the Senior Notes is payable semi-annually in arrears on June 1 and December 1 of each year.

In addition to the parent, Entercom Communications Corp., all of our existing subsidiaries (other than Entercom Radio, LLC, which is a finance subsidiary and is the issuer of the Senior Notes), jointly and severally guaranteed the Senior Notes. Under certain covenants, our subsidiary guarantors are restricted from paying dividends or distributions in excess of amounts defined under the Senior Notes, and the subsidiary guarantors are limited in their ability to incur additional indebtedness under certain restrictive covenants.

A default under our Senior Notes could cause a default under our Credit Facility. Any event of default could have a material adverse effect on our business and financial condition.


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Finance Method Lease Obligation

On June 23, 2013, we eliminated our finance method lease obligation of $12.6 million and recorded a current and deferred gain on the disposition of the towers of $1.6 million and $9.9 million, respectively. We recorded this transaction during this quarter as a non-cash reduction of debt and non-cash recognition of gain.

As background, during the fourth quarter of 2009, we completed the sale of certain tower facilities for $12.6 million in cash. At the same time, we entered into leases for space on the towers at most of these sites for use by our radio stations. The agreement of sale provided for a possible earn-out to us of additional cash consideration, depending on whether the buyer meets certain revenue targets. The period during the earn-out constituted a continuing involvement by us that precluded sale and leaseback accounting during the period of the earn-out. On June 23, 2013, the earn-out ended and it was determined that we were not entitled to receive any additional compensation.

Operating Activities

Net cash flows provided by operating activities were $25.4 million and $21.7 million for the six months ended June 30, 2013 and 2012, respectively. The cash flows from operating activities increased primarily due to the decrease in interest expense as a result of the modification to the Term B Loan during the fourth quarter of 2012; and the $3.5 million decrease in station operating expenses primarily due to the decrease in the variable expenses associated with the decrease in net revenues. The increase in operating activities was offset by a decrease in net revenues of $4.9 million.

Investing Activities

Net cash flows used in investing activities were $2.3 million and $26.3 million for the six months ended June 30, 2013 and 2012, respectively.

For the six months ended June 30, 2013, the cash used in investing activities primarily reflects the additions to property and equipment of $2.4 million. For the six months ended June 30, 2012, the cash used in investing activities primarily reflects the acquisition of radio station assets of $25.0 million.

Financing Activities

Net cash flows used in financing activities were $25.6 million and net cash flows provided by financing activities were $7.7 million for the six months ended June 30, 2013 and 2012, respectively.

For the six months ended June 30, 2013, the cash flows used in financing activities primarily reflect the reduction to our net borrowings of $24.5 million, and for the six months ended 2012 cash flows provided by financing activities primarily reflect the increase to our net borrowings of $8.5 million.

Dividends

We do not currently pay, and have not paid for the past several years, any dividends on our common stock. Any future dividends will be at the discretion of the Board of Directors based upon the relevant factors at the time of such consideration, including, without limitation, compliance with the restrictions set forth in our Credit Facility and the Indenture governing our Notes.

Income Taxes

During the six months ended June 30, 2013, we paid a nominal amount in state income taxes. We anticipate that it will not be necessary to make any quarterly estimated federal or state income tax payments for the remainder of 2013 based upon available net operating loss carryovers, existing prepayments and expected quarterly income subject to tax.

Contractual Obligations

There have been no material changes from the contractual obligations listed in our Form 10-K for the year ended December 31, 2012, filed with the SEC on February 27, 2013.


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Off-Balance Sheet Arrangements

As of June 30, 2013, we had no off-balance sheet arrangements, other than as disclosed in our Annual Report on Form 10-K for the year ended December 31, 2012, filed with the SEC on February 27, 2013.

Critical Accounting Policies

The SEC defines critical accounting policies as those that are most important to the portrayal of a company's financial condition and results and that require management's most difficult, subjective or complex judgments, often as a result of the need to make estimates about the effect of matters that are inherently uncertain.

There have been no material changes to our critical accounting policies from the information provided in Part II, Item 7, Management's Discussion and Analysis of Financial Condition and Results of Operations-Critical Accounting Policies, in our Annual Report on Form 10-K for the year ended December 31, 2012. We have, however, provided additional disclosures to one of our critical accounting policies for impairment testing of radio broadcasting licenses and goodwill, as we conducted our annual impairment test of broadcasting licenses and goodwill during the second quarter of 2013.

Radio Broadcasting Licenses And Goodwill

We have made acquisitions in the past for which a significant amount of the purchase price was allocated to broadcasting licenses and goodwill assets. As of June 30, 2013, we have recorded approximately $757.8 million in radio broadcasting licenses and goodwill, which represents 83% of our total assets at that date. We must conduct impairment testing at least annually, or more frequently, if events or changes in circumstances indicate that the assets might be impaired, and charge to operations an impairment expense only in the periods in which the recorded value of these assets is more than their fair value. Any such impairment could be material. After an impairment expense is recognized, the recorded value of these assets will be reduced by the impairment recognized and will be the assets' new accounting basis. In 2012, 2009 and 2008, we recorded impairment losses of $22.3 million, $67.7 million and $835.7 million, respectively.

We believe our estimate of the value of our radio broadcasting licenses and goodwill assets is a critical accounting estimate as the value is significant in relation to our total assets, and our estimate of the value uses assumptions that incorporate variables based on past experiences and judgments about future performance of our stations.

Broadcasting Licenses Impairment Test

We perform our broadcasting license impairment test by evaluating our . . .

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