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ETM > SEC Filings for ETM > Form 10-K on 3-Mar-2014All Recent SEC Filings

Show all filings for ENTERCOM COMMUNICATIONS CORP

Form 10-K for ENTERCOM COMMUNICATIONS CORP


3-Mar-2014

Annual Report


ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

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 Nielson Audio;

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 2013, we generated the majority of our net revenues from local advertising, which is sold primarily by each individual local radio station's sales staff, and the next largest amount 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 2013 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, 2013 as compared to the prior year and a discussion of the year ended December 31, 2012 as compared to the prior year.


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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. 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, 2013 compared to the year ended December 31, 2012

The following significant factors affected our results of operations for the year ended December 31, 2013 as compared to the prior year:

During each of the fourth quarters of 2013 and 2012, our Term B Loan was modified that reduced interest rates on outstanding debt upon which interest is computed thereby lowering our interest expense.

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.

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.

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.

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.


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                                                       YEARS ENDED DECEMBER 31,
                                                   2013          2012        % Change
                                                         (dollars in millions)
 NET REVENUES                                    $   377.6      $ 388.9             (3 %)
 OPERATING EXPENSE:
 Station operating expenses                          252.6        252.9             (0 %)
 Depreciation and amortization expense                 8.5         10.8            (21 %)
 Corporate general and administrative expenses        24.4         25.9             (6 %)
 Other operating expenses                             (0.4 )       22.7

 Total operating expense                             285.1        312.3             (9 %)

 OPERATING INCOME (LOSS)                              92.5         76.6             21 %

 OTHER (INCOME) EXPENSE:
 Net interest expense                                 44.2         53.4            (17 %)
 Other income and expense                             (0.1 )       (0.5 )

 TOTAL OTHER EXPENSE                                  44.1         52.9            (17 %)

 INCOME (LOSS) BEFORE INCOME TAXES (BENEFIT)          48.4         23.7            104 %
 INCOME TAXES (BENEFIT)                               22.4         12.4             81 %

 NET INCOME (LOSS)                               $    26.0      $  11.3            130 %

Net Revenues

Net revenues were down versus the prior year due to sluggish demand for advertising as total radio ad revenues in the markets in which we operate declined for 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 that period.

Net revenues increased the most for our stations in the Kansas City and Memphis markets, offset by revenue decreases for our stations located in the Boston and Norfolk markets. Net revenues were favorably impacted by: (1) our acquisition of KBLX-FM, San Francisco, 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.

Station Operating Expenses

Station operating expenses remained flat primarily as this year's expenses benefited from certain cost reduction initiatives and a reduction in certain variable sales costs that were dependent on the decline in net revenues. This was offset by a benefit to last year's expense of 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 equity compensation expense of $1.6 million and a decrease in management bonus incentives of $0.9 million. The decrease was offset by an increase in deferred compensation expense of $0.8 million, as our deferred compensation liability generally tracks movements in the stock market.


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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 $2.3 million decrease in depreciation and amortization expense; and (2) a $1.5 million decrease in corporate general and administrative expenses.

The increase in operating income was offset by a decrease in net revenues of $11.3 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 Term B Loan; and (2) lower outstanding debt upon which interest is computed.

The Term B Loan was further modified during the fourth quarter of 2013 which is expected to contribute in 2014 to lower interest expense on outstanding debt.

Income Before Income Taxes

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. The increase was offset by a decrease in net revenues.

Income Taxes

Income Tax Rate For The Year Ended December 31, 2013

The income tax rate was 46.3%, which includes an adjustment for expenses that are not deductible for tax purposes, an increase in net deferred tax liabilities associated with non-amortizable assets such as broadcasting licenses and goodwill and tax benefit shortfalls associated with share-based awards.

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.

Estimated Income Tax Rate For 2014

We estimate that our 2014 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 2014 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; (5) the limitations on the deduction of cash and certain non-cash compensation expense for certain key employees; and (6) any tax benefit shortfall associated with share-based awards. 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.


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Net Deferred Tax Liabilities

As of December 31, 2013 and 2012, our total net deferred tax liabilities were $41.4 million and $19.0 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

The increase in net income was primarily due to the impact to the prior year of an impairment loss, net of income taxes.

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 consolidated financial statements for the year ended December 31, 2013, 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 consolidated 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 periods and had no impact on our cash taxes. For further discussion, refer to Note 1 in the accompanying notes to the consolidated financial statements.

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.

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 and station operating expenses. With the acquisition of the station on June 1, 2012, our depreciation and amortization expense and interest expense increased.

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: (1) increased our interest expense due to: (a) an increase in borrowing rates incurred under these agreements on our outstanding debt; and (b) an increase in deferred financing expense, which will be amortized over the terms of the new debt agreements; and (2) resulted in 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.


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                                                       YEARS ENDED DECEMBER 31,
                                                   2012          2011        % Change
                                                         (dollars in millions)
 NET REVENUES                                    $   388.9      $ 382.7              2 %
 OPERATING EXPENSE:
 Station operating expenses                          252.9        264.2             (4 %)
 Depreciation and amortization expense                10.8         11.3             (4 %)
 Corporate general and administrative expenses        25.9         26.6             (3 %)
 Other operating expenses                             22.7          1.1

 Total operating expense                             312.3        303.2              3 %

 OPERATING INCOME (LOSS)                              76.6         79.5             (4 %)

 OTHER (INCOME) EXPENSE:
 Net interest expense                                 53.4         24.9            114 %
 Other income and expense                             (0.5 )        2.5

 TOTAL OTHER EXPENSE                                  52.9         27.4             93 %

 INCOME (LOSS) BEFORE INCOME TAXES (BENEFIT)          23.7         52.1            (55 %)
 INCOME TAXES (BENEFIT)                               12.4        (19.0 )          165 %

 NET INCOME (LOSS)                               $    11.3      $  71.1            (84 %)

Net Revenues

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

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

Depreciation and amortization expense decreased in 2012 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 equity 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.


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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

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 $0.7 million in merger costs.

Interest Expense

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 senior secured credit facility ("Credit Facility") as compared to our prior credit facility ("Former Facility"). For example, under the Former Facility, the applicable borrowing rate was a function of the London Interbank Offered Rate ("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 revolving credit facility
("Revolver") and LIBOR plus 3.5% to 3.75% for the term loan ("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 unsecured senior notes ("Senior Notes") bear interest at 10.5% annually. Our Credit Facility and the Former Facility are variable rate debt.

The weighted average variable interest rate as of December 31, 2012 and 2011 (before taking into account the subsequent year's impact of the Company's outstanding derivative interest rate instruments), was 5.01% and 6.24%, respectively.

Income Before Income Taxes (Benefit)

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

Income Taxes (Benefit)

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 36.5%. 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.

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.


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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.

Net Income

The net change was primarily attributable to the impairment loss, the increase in interest expense and for the reasons described under Income Taxes (Benefit).

Future Impairments

We may determine that it will be necessary to take impairment charges in future periods if we determine the carrying value of our intangible assets is more than the fair value. Our annual impairment test of our broadcasting licenses and goodwill was performed in the second quarter of 2013. We may be required to retest prior to our next annual evaluation, which could result in a material impairment. As of December 31, 2013, no interim impairment test was required for our broadcasting licenses and goodwill.

Liquidity And Capital Resources

Liquidity

Over the past several years, we have used a significant portion of our cash flow to reduce our indebtedness. We may from time to time seek to repurchase and retire our outstanding debt through open market purchases, privately negotiated transactions or otherwise. Such repurchases, if any, will depend on prevailing market conditions, our liquidity requirements, contractual restrictions and other factors. The amounts involved may be material.

We may also use our capital resources to repurchase shares of our Class A common stock, pay dividends to our shareholders and to purchase radio station assets. Generally, our cash requirements are funded from one or a combination of internally generated cash flow and borrowings under our credit agreements.

As of December 31, 2013, we had $299.5 million outstanding under our Credit Facility and $220 million principal amount of our Senior Notes. In addition, we have outstanding a $0.4 million letter of credit. During the year ended December 31, 2013, we decreased our outstanding debt by $53.0 million (excluding the impact of amortization of the Original Issue Discount on our Senior Notes). During the year ended 2012, we decreased our outstanding debt by $32.5 million. As of December 31, 2013, we had $12.2 million in cash and cash equivalents.

The Refinancing

The Credit Facility

. . .

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