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ETM > SEC Filings for ETM > Form 10-Q on 12-Nov-2013All Recent SEC Filings

Show all filings for ENTERCOM COMMUNICATIONS CORP

Form 10-Q for ENTERCOM COMMUNICATIONS CORP


12-Nov-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 nine and three months ended September 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 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 nine months ended September 30, 2013 as compared to the nine months ended September 30, 2012:

During the second quarter of 2013, we recorded a non-cash gain of $1.6 million from the sale in 2009 of certain towers under sale and leaseback accounting.

During November 2012, a modification of our senior secured credit facility (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 certain broadcasting licenses.

In the third quarter of 2012, we recorded a $2.0 million music royalty expense credit as a result of an industry settlement with Broadcast Music, Inc. ("BMI") for fees paid in prior years.


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                Nine Months Ended September 30, 2013 As Compared To The Nine Months Ended September 30, 2012
                                                                                 NINE MONTHS ENDED
                                                             2013                         2012                    % Change
                                                                               (dollars in millions)
NET REVENUES                                           $           278.0            $           286.8                     (3 %)
OPERATING EXPENSE:
Station operating expenses                                         191.0                        191.1                     (0 %)
Depreciation and amortization expense                                6.6                          8.2                    (20 %)
Corporate general and administrative expenses                       17.9                         19.2                     (7 %)
Other operating expenses                                            (0.8 )                       22.7

Total operating expense                                            214.7                        241.2                    (11 %)

OPERATING INCOME (LOSS)                                             63.3                         45.6                     39 %

OTHER (INCOME) EXPENSE:
Net interest expense                                                33.8                         40.9                    (17 %)
Other income and expense                                            (0.1 )                       (1.4 )

TOTAL OTHER EXPENSE                                                 33.7                         39.5                    (15 %)

INCOME (LOSS) BEFORE INCOME TAXES (BENEFIT)                         29.6                          6.1                    385 %

INCOME TAXES (BENEFIT)                                              13.1                          2.2                    495 %

NET INCOME (LOSS)                                      $            16.5            $             3.9                    323 %

Net Revenues

Net revenues were down versus the prior year due to sluggish demand for advertising as total radio ad sales in our markets declined in the first nine months of the year. In addition, the prior year benefited from the influx of advertising from political candidates and groups primarily due to the high number of state and federal elections during this period.

Net revenues increased the most for our stations in the Kansas City and Portland markets, offset by revenue decreases for our stations located in the Boston and Seattle 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 marginally primarily due to cost reduction initiatives and a reduction in certain variable sales costs that were dependent on the decline in net revenues. Also, last year's expenses benefited from a $2.0 million music royalty expense credit as a result of an industry settlement with BMI for fees paid by us to BMI in prior years.

Depreciation And Amortization Expense

Depreciation and amortization expense decreased in 2013 primarily due to a trend of lower capital expenditure requirements 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 $1.0 million related to the issuance of equity awards.


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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 $1.6 million decrease in depreciation and amortization expense; and (2) a $1.3 million decrease in corporate general and administrative expenses.

The increase in operating income was offset by a decrease in net revenues of $8.8 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 44.2%, 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 36.4%, 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.

As of September 30, 2013 and December 31, 2012, our net deferred tax liabilities were $36.9 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 Before Income Taxes and Income Taxes (Benefit).

Results Of Operations For The Quarter

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

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

During 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 by us to BMI in prior years.


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               Three Months Ended September 30, 2013 As Compared To The Three Months Ended September 30, 2012
                                                                                  THREE MONTHS ENDED
                                                                                     SEPTEMBER 30,
                                                                2013                       2012                   % Change
                                                                                 (dollars in millions)
NET REVENUES                                              $           98.4          $            102.3                     (4 %)
OPERATING EXPENSE:
Station operating expenses                                            67.1                        63.7                      5 %
Depreciation and amortization expense                                  2.0                         2.7                    (26 %)
Corporate general and administrative expenses                          6.0                         6.3                     (5 %)
Other operating expenses                                                -                          0.2

Total operating expense                                               75.1                        72.9                      3 %

OPERATING INCOME (LOSS)                                               23.3                        29.4                    (21 %)

OTHER (INCOME) EXPENSE:
Net interest expense                                                  11.0                        13.3                    (17 %)
Other income and expense                                               0.1                          -

TOTAL OTHER EXPENSE                                                   11.1                        13.3                    (17 %)

INCOME (LOSS) BEFORE INCOME TAXES (BENEFIT)                           12.2                        16.1                    (24 %)

INCOME TAXES (BENEFIT)                                                 5.3                         7.9                    (33 %)

NET INCOME (LOSS)                                         $            6.9          $              8.2                    (16 %)

Net Revenues

Net revenues decreased due to a combination of limited growth in radio advertising sales in our markets during the quarter as well as the Company's relative sales performance. In addition, the prior year benefited from the influx of advertising from political candidates and groups primarily due to the high number of state and federal elections during this period.

Net revenues increased the most for our stations in the Portland and Sacramento markets, offset by a decrease for our stations in the Boston and Seattle markets.

Station Operating Expenses

The increase in station operating expenses was primarily due to: (1) the unfavorable comparison to the prior year which included a $2.0 million music royalty expense credit as a result of an industry settlement with BMI for fees paid by us to BMI in prior years; and (2) an increase in marketing expenses associated with the launch of several new radio station formats.

The increase in station operating expenses was offset by a decrease in sales costs, which vary with revenues, due to the decrease in net revenues.

Depreciation And Amortization Expense

Depreciation and amortization expense decreased due to our recent history of decreased levels of capital expenditure requirements over the past several years.

Corporate General And Administrative Expenses

Corporate general and administrative expenses decreased primarily due to: (1) a decline in estimated incentive compensation; and (2) a decline in non-cash compensation expense related to the issuance of equity awards.


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Operating Income

Operating income decreased primarily due to: (1) a $3.8 million decrease in net revenues; and (2) a $3.4 million increase in station operating expenses.

Interest Expense

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

Income (Loss) Before Income Taxes (Benefit)

The decrease was primarily attributable to the decrease in operating income, offset by a decrease in interest expense.

Income Taxes (Benefit)

For the current period, the income tax rate was 43.9%, 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 49.2 %, 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 Before Income Taxes and Income Taxes (Benefit).

Liquidity And Capital Resources

Liquidity

As of September 30, 2013, we had $308.0 million outstanding under our Credit Facility and $220 million in principal for our 10.5% senior unsecured notes (the "Senior Notes"). In addition, we have a $0.4 million letter of credit. As of September 30, 2013, we had $6.6 million in cash and cash equivalents.

The Credit Facility

On November 23, 2011, we entered into a new credit agreement with a syndicate of lenders for a $425 million Credit Facility, which is comprised of: (a) a $50 million 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 $49.6 million as of September 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 September 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, which is due in the first quarter of 2014, has been fully paid as of September 30, 2013. The amount of the Excess Cash Flow prepayment required is subject to change based on actual results, which could differ materially from our financial projections as of September 30, 2013. We funded the prepayment using cash from operating activities.


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As of September 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.

We believe that over the next 12 months we can continue to maintain our compliance with these covenants. We believe that cash on hand and cash from operating activities, together with available borrowings under the Revolver, will be sufficient to permit us to meet our liquidity requirements over the next 12 months, including our debt repayments. Our operating cash flow remains positive, and we believe that it is adequate to fund our operating needs. As a result, we have not been required to rely upon, and we do not anticipate being required to rely upon, the Revolver to fund our operations.

Failure to comply with our financial covenants or other terms of our Credit Facility and any subsequent failure to negotiate and obtain any required relief from our lenders could result in the acceleration of the maturity of all outstanding debt. Under these circumstances, the acceleration of our debt could have a material adverse effect on our business. We may seek from time to time to amend our Credit Facility or obtain other funding or additional financing, which may result in higher interest rates.

Credit Facility's Financial Covenants

As of September 30, 2013, our Consolidated Leverage Ratio was 4.8 times versus a covenant maximum of 6.5 times and our Consolidated Interest Coverage Ratio was 2.6 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                                        $ 308,069
    Senior Notes at maturity                                         220,000
    Letter of credit outstanding                                         370

    Total debt outstanding                                           528,439
    Less cash outstanding, not to exceed $40 million                  (6,569 )

    Consolidated Funded Indebtedness                               $ 521,870

    Denominator: Consolidated Operating Cash Flow
    Net income                                                     $  23,864
    Income taxes                                                      23,309
    Depreciation and amortization                                      9,154
    Impairment loss                                                      850
    Interest expense                                                  46,418
    Non-cash compensation expense                                      4,749
    Deferred non-cash charges                                          1,728
    Unusual gains not in the ordinary course of business              (1,646 )
    Loss on debt extinguishment                                          747
    Pro forma for tower disposition as of beginning of period           (581 )

    Consolidated Operating Cash Flow                               $ 108,592

    Consolidated Leverage Ratio                                         4.81

    Consolidated Interest Coverage Ratio Computations:
    (amounts in thousands, except ratios)
    Numerator: Consolidated Operating Cash Flow                    $ 108,592

    Denominator: Consolidated Interest Charges
    Interest expense                                               $  46,418
    Less: Interest income and certain deferred financing expense      (4,451 )
    Less: Interest expense associated with the tower transaction        (581 )

    Consolidated Interest Charges                                  $  41,386

    Consolidated Interest Coverage Ratio                                2.62

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 the second quarter of 2013 as a non-cash reduction of debt and non-cash recognition of gain.

Operating Activities

Net cash flows provided by operating activities were $46.5 million and $46.6 million for the nine months ended September 30, 2013 and 2012, respectively. The cash flows from operating activities remained relatively flat as the following factors primarily offset each other: a decrease in net revenues of $8.8 million and a decrease in accounts receivable working capital needs of $8.7 million.

Investing Activities

Net cash flows used in investing activities were $3.4 million and $27.4 million for the nine months ended September 30, 2013 and 2012, respectively.

For the nine months ended September 30, 2013, the cash used in investing activities primarily reflects the additions to property and equipment of $3.5 million. For the nine months ended September 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 $45.5 million and $16.1 million for the nine months ended September 30, 2013 and 2012, respectively.

For the nine months ended September 30, 2013 and 2012, the cash flows used in financing activities primarily reflect the reduction to our net borrowings of $44.5 million and $15.5 million, respectively.

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 Senior Notes.

Income Taxes

During the nine months ended September 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.

Off-Balance Sheet Arrangements

As of September 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.


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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 September 30, 2013, we have recorded approximately $757.8 million in radio broadcasting licenses and goodwill, which represents 84% 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 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 amount of the impairment expense and that result 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.

. . .

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