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CMLS > SEC Filings for CMLS > Form 10-K on 17-Mar-2014All Recent SEC Filings

Show all filings for CUMULUS MEDIA INC

Form 10-K for CUMULUS MEDIA INC


17-Mar-2014

Annual Report


Item 7. Management's Discussion and Analysis of Financial Condition and Results of Operations

The following Management's Discussion and Analysis is intended to provide the reader with an overall understanding of our financial condition, changes in financial condition, results of operations, cash flows, sources and uses of cash, contractual obligations and financial position. This section also includes general information about our business and management's analysis of certain trends, risks and opportunities in our industry. We also provide a discussion of accounting policies that require critical judgments and estimates. This discussion 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. 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. You should read the following information in conjunction with our consolidated financial statements and notes to our consolidated financial statements beginning on page F-1 in this Annual Report on Form 10-K, as well as the information set forth in Item 1A. "Risk Factors."
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 December 31, 2013, we owned or operated approximately 450 radio stations (including under LMAs) in 93 United States media markets and operated a


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fully distributed programming network serving more than 10,000 affiliates nationwide, which contains a portfolio of iconic media, sports and entertainment brands. At December 31, 2013, under LMAs, we provided sales and marketing services for 7 radio stations in the United States.

Operating Overview and Highlights
We believe that we have created a leading radio broadcasting company and a true national platform with an opportunity to further leverage and expand upon our strengths, market presence and programming. Specifically, we now have an extensive radio station portfolio, including a presence in eight of the top 10 markets, and broad diversity in format, listener base, geography, advertiser base and revenue stream, designed to reduce our dependence on any single demographic, region or industry. Our nationwide radio networks platform generates premium content distributable through broadcast and digital platforms. Our scale allows larger, significant investments in the local digital media marketplace enabling us to apply our local digital platforms and strategies, including our social commerce initiatives across additional markets. We believe national platform perspective will allow us to optimize our available advertising inventory while providing holistic and comprehensive solutions for our customers.
Cumulus believes that its capital structure provides adequate liquidity and scale for Cumulus to operate and grow its current business operations, as well as to pursue and finance potential 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 have primarily 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, and 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 that our broad diversity in format, listener base, geography, advertiser base and revenue stream helps us to reduce our dependence on any single demographic, region or industry. We continually monitor our capital structure, and from time to time have evaluated, and expect that we will continue to evaluate, future opportunities to, obtain other public or private capital from the divestiture of radio stations or other assets that are not a part of, or do not compliment, our strategic operations, and the issuance of equity and/or debt securities, in each case subject to market and other conditions in existence at the appropriate time. No assurances can be provided that any source of funds would be available when needed on terms acceptable to the Company, or at all.
In furtherance of our strategy, we undertook a number of transactions to further strengthen our balance sheet and improve our cash flows. On December 23, 2013, we entered into the Credit Agreement. The Credit Agreement consists of a $2.025 billion term loan (the "Term Loan") maturing in December 2020 and the $200.0 million Revolving Credit Facility maturing in December 2018. Under the Revolving Credit Facility, up to $30.0 million of availability may be drawn in the form of letters of credit. Upon entry into the Credit Agreement, we used Term Loan borrowings of $2.025 billion to repay in full all amounts outstanding under the first lien term loan and second lien term loan under our pre-existing credit agreements.
As of the last day of any fiscal quarter beginning with the quarter ending December 31, 2013, in the event amounts are outstanding under the Revolving Credit Facility or any letters of credit are outstanding that have not been collateralized by cash, the Credit Agreement requires compliance with a consolidated first lien net leverage ratio covenant. The required ratio at December 31, 2013 and 2014 is 5.75 to 1. The ratio periodically decreases until it reaches to 4.00 to 1 on March 31, 2018. As of December 31, 2013, we were in compliance with all of our covenants under the Credit Agreement.
On December 6, 2013, we entered into a 5-year, $50.0 million revolving accounts receivable securitization facility (the "Securitization Facility") with General Electric Capital Corporation, as a lender, as swing line lender and as administrative agent (together with any other lenders party thereto from time to time, the "Lenders"). In connection with the entry into the Securitization Facility, pursuant to a Receivables Sale and Servicing Agreement, dated as of December 6, 2013 (the "Sale Agreement"), certain subsidiaries of the Company (collectively, the "Originators") sell and/or contribute their existing and future accounts receivable and related assets to a special purpose entity and wholly owned subsidiary of the Company (the "SPV"). The SPV may thereafter make borrowings from the Lenders, which borrowings are secured by those receivables and related assets, pursuant to a Receivables Funding and Administration Agreement, dated as of December 6, 2013 (the "Funding Agreement").


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In October 2013, we issued and sold 18,860,000 shares of our Class A common stock for net proceeds of approximately $89.8 million, and used approximately $78.0 million of the net proceeds from the offering to redeem all then-outstanding shares of our Series B preferred stock, including accrued and unpaid dividends thereon. In addition, in August 2013, we redeemed all then-outstanding shares of our Series A preferred stock in connection with the issuance of our Series B preferred stock.
At December 31, 2013 our long-term debt consisted of $2.025 billion in total term loans and $610.0 million in 7.75% Senior Notes. In addition, as of December 31, 2013, we had $25.0 million outstanding under the Securitization Facility. 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 December 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 repurchases of securities and other debt obligations through December 31, 2014.

Advertising Revenue and Adjusted EBITDA
Our primary source of revenues is the sale of advertising time. Our sales of advertising time are primarily affected by the demand from local, regional and national advertisers which impacts 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 our 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 as a substantial portion of our revenue comes from non-music format and proprietary content. 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 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 radio program. 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 $31.1 million, $27.7 million and $21.2 million in the years ended December 31, 2013, 2012 and 2011, 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 and regional advertising typically represents a majority of our net revenues. In addition to local advertising revenues, we monetize our available inventory in both national spot and network sales marketplaces 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 in 2013 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


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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 Credit Agreement. 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, even though such fees require a cash settlement, because they are excluded from the definition of Adjusted EBITDA contained in our Credit Agreement. We also exclude any gain or loss on any 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 also do 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 any 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 Credit Agreement. 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) income, the most directly comparable financial measure calculated and presented in accordance with GAAP, follows in this section.
Results of Operations
Analysis of Consolidated Statements of Operations The following analysis of selected data from our consolidated statements of operations should be referred to while reading the results of operations discussion that follows (dollars in thousands):


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                                Year Ended December 31,                   2013 vs 2012               2012 vs 2011
                          2013            2012           2011        $ Change      % Change      $ Change      % Change
STATEMENT OF
OPERATIONS DATA:
Net revenues          $ 1,026,138     $ 1,002,272     $ 466,044     $  23,866         2.4  %   $  536,228       115.1  %
Direct operating
expenses (excluding
depreciation,
amortization and LMA
fees)                     668,252         622,884       284,921        45,368         7.3  %      337,963       118.6  %
Depreciation and
amortization              112,511         135,575        48,730       (23,064 )     -17.0  %       86,845       178.2  %
LMA fees                    3,716           3,465         2,425           251         7.2  %        1,040        42.9  %
Corporate general and
administrative
expenses (including
stock-based
compensation expense)      59,830          57,438        90,761         2,392         4.2  %      (33,323 )     -36.7  %
Gain on exchange of
assets or stations         (3,685 )             -       (14,217 )      (3,685 )       **           14,217       100.0  %
Realized (gain) loss
on derivative
instrument                 (1,852 )           (12 )       3,368        (1,840 )       **           (3,380 )    -100.4  %
Impairment of
intangible assets and
goodwill                        -         125,985             -      (125,985 )    -100.0  %      125,985         **
Operating income          187,366          56,937        50,056       130,429       229.1  %        6,881        13.7  %
Interest expense, net    (176,981 )      (198,628 )     (86,989 )      21,647        10.9  %     (111,639 )     128.3  %
Loss on early
extinguishment of
debt                      (34,934 )        (2,432 )      (4,366 )     (32,502 )       **            1,934        44.3  %
Other (expense)
income, net                  (302 )        (2,479 )          61         2,177        87.8  %       (2,540 )       **
Gain on equity
investment in Cumulus
Media Partners, LLC             -               -        11,636             -         **          (11,636 )    -100.0  %
Loss from continuing
operations before
income taxes              (24,851 )      (146,602 )     (29,602 )     121,751        83.0  %     (117,000 )       **
Income tax benefit         68,464          34,670        11,259        33,794        97.5  %       23,411         **
Income (loss) from
continuing operations      43,613        (111,932 )     (18,343 )     155,545       139.0  %      (93,589 )       **
Income from
discontinued
operations, net of
taxes                     132,470          79,203        82,203        53,267        67.3  %       (3,000 )      -3.6  %
Net income (loss)         176,083         (32,729 )      63,860       208,812       638.0  %      (96,589 )       **
Less: dividends
declared and
accretion of
redeemable preferred
stock                      10,676          21,432         6,961       (10,756 )     -50.2  %       14,471         **
Income (loss)
attributable to
common shareholders   $   165,407     $   (54,161 )   $  56,899     $ 219,568       405.4  %   $ (111,060 )       **
OTHER DATA:
Adjusted EBITDA       $   330,018     $   358,054     $ 110,531     $ (28,036 )      -7.8  %   $  247,523       223.9  %

** Calculation is not meaningful.

Our management's discussion and analysis of results of operations for the three years ended December 31, 2013, has been presented on a historical basis. Year Ended December 31, 2013 compared to Year Ended December 31, 2012 Net Revenues. Net revenues for the year ended December 31, 2013 increased $23.8 million, or 2.4%, to $1,026.1 million compared to $1,002.3 million for the year ended December 31, 2012. This increase was attributable to a $11.5 million increase in local spot advertising revenue, an increase of $15.5 million in national advertising and live event revenue, a $10.1 million increase in revenue due to the December 2013 acquisition of WestwoodOne, a $1.6 million increase attributable to the five stations the Company acquired in the Fresno market in the Townsquare Transaction and a $5.9 million increase attributable to


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the addition of stations in the Bloomington and Peoria markets which we acquired in July 2012, partially offset by a decrease of $20.8 million in cyclical political revenue.
Direct Operating Expenses, Excluding Depreciation, Amortization and LMA Fees. Direct operating expenses for the year ended December 31, 2013 increased $45.4 million, or 7.3%, to $668.3 million compared to $622.9 million for the year ended December 31, 2012. The increase was primarily attributable to a $31.3 million increase in our national content initiatives, as well as ongoing investments in our sales infrastructure, a $9.0 million increase in expenses attributable to the WestwoodOne acquisition, a $1.0 million increase attributable to the five stations the Company acquired in the Fresno market in the Townsquare Transaction and a $4.1 million increase in expenses due to the addition of the stations in the Bloomington and Peoria markets we acquired from Townsquare in July 2012.
Depreciation and Amortization. Depreciation and amortization for the year ended December 31, 2013 decreased $23.1 million, or 17.0%, to $112.5 million compared to $135.6 million for the year ended December 31, 2012. This decrease was primarily due to a $23.0 million decrease in amortization expense on our definite lived intangible assets, resulting from increased expense in the prior year due to the accelerated amortization methodology we have applied since acquisition of these assets based on the pattern in which the underlying assets' economic benefits are expected to be consumed.
LMA Fees. LMA fees for the year ended December 31, 2013 increased $0.2 million, or 7.2%, to $3.7 million compared to $3.5 million for the year ended December 31, 2012.
Corporate General and Administrative Expenses, Including, Stock-based Compensation Expense. Corporate, general and administrative expenses, including stock-based compensation expense for year ended December 31, 2013 increased $2.4 million to $59.8 million, or 4.2% compared to $57.4 million for the year ended December 31, 2012. The increase was primarily due to a $7.9 million increase in expenses relating to the December 2013 refinancing and a $2.4 million net increase in various other corporate expenses, including acquisition costs, offset by an $8.0 million decrease in stock-based compensation expense. Gain on Exchange of Assets or Stations. During the year ended December 31, 2013 we recorded a gain of $3.7 million. There were no similar transactions during the 2012 period.
Realized (Gain) Loss on Derivative Instrument. During the years ended December 31, 2013 and 2012, we recorded gains of $1.9 million and less than $0.1 million, respectively, related to our recording of the fair value of the Green Bay Option.
Impairment of Intangible Assets and Goodwill. For the year ended December 31, 2012, we recorded impairment charges of $98.9 million and $14.7 million related to goodwill and indefinite lived intangible assets (FCC Licenses), respectively, and a definite-lived intangible asset impairment of $12.4 million related to the cancellation of a contract. In the fourth quarter of 2012, as the Company began the process of its annual impairment test of goodwill and FCC Licenses, format and structural changes made in the first half of 2012 at certain markets acquired during the second half of 2011 did not achieve the expected results for fiscal year 2012 and certain markets failed step 1 of our annual impairment test of goodwill.
Interest Expense, net. Interest expense, net of interest income, for the year ended December 31, 2013 decreased $21.6 million to $177.0 million compared to $198.6 million for the year ended December 31, 2012. Interest expense associated with outstanding debt decreased by $22.8 million to $165.0 million as compared to $187.8 million in the prior year period. The following summary details the components of our interest expense, net of interest income (dollars in thousands):

                                              Year Ended December 31,
                                                2013            2012        $ Change      % Change
7.75% Senior Notes                         $     47,275      $  47,275     $       -            -  %
Bank borrowings - term loans and revolving
credit facilities                               117,687        140,525       (22,838 )      -16.3  %
Other, including debt cost amortization          11,487         11,443            44          0.4  %
Preferred stock dividend                          1,802              -         1,802         **
Change in fair value of interest rate cap            23            331          (308 )      -93.1  %
Interest income                                  (1,293 )         (946 )        (347 )      -36.7  %
Interest expense, net                      $    176,981      $ 198,628     $ (21,647 )      -10.9  %

** Not meaningful


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Loss on Early Extinguishment of Debt. For the years ended December 31, 2013 and 2012, we recorded $34.9 million and $2.4 million in losses on early extinguishment of debt primarily as a result of our debt refinancings in December 2013 and 2012, respectively.
Income Tax Benefit (Expense). We recorded an income tax benefit on continuing operations of $68.5 million in 2013 as compared to a $34.7 million benefit during the prior year. The tax benefit recorded in 2013 is primarily the result of the release of our valuation allowance on the future recovery of deferred tax assets (primarily net operating loss carryforwards) while the tax benefit recorded on continuing operations in the prior year was primarily the result of the intra-period tax allocation rules requiring the tax benefit being allocated to continuing operations be the lesser of the tax benefit of the loss from continuing operations or the total tax avoided with the presence of the income from discontinued operations. The total tax avoided from the presence of income from discontinued operations was the lesser of the two amounts in 2012. Adjusted EBITDA. As a result of the factors described above, Adjusted EBITDA for the year ended December 31, 2013 decreased $28.0 million, or 7.8%, to $330.0 million compared to $358.0 million for the year ended December 31, 2012. Reconciliation of Non-GAAP Financial Measure. The following table reconciles Adjusted EBITDA to net income (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):

                                                   Year Ended December 31,
                                                     2013             2012         % Change
Net income (loss)                               $    176,083      $  (32,729 )        **
Income tax benefit                                   (68,464 )       (34,670 )       (97.5 )%
Non-operating expenses, including net interest
expense                                              177,283         201,107         (11.8 )%
LMA fees                                               3,716           3,465           7.2  %
Depreciation and amortization                        112,511         135,575         (17.0 )%
. . .
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