Entravision Communications Corporation — Q1 2016 Form 10-Q
Reporting period: Three months ended March 31, 2016; comparisons are with Q1 2015 unless otherwise noted. Entravision operates television, radio and digital media businesses serving Hispanic audiences. Amounts below are in U.S. dollars; financial statement amounts are in millions unless stated otherwise.
Financial performance
| Metric | Q1 2016 | Q1 2015 | Change |
|---|---|---|---|
| Revenue | $58.1 | $59.6 | Down 2% |
| Operating income | $7.6 | $12.0 | Down 37% |
| Operating margin | 13.2% | 20.2% | Down 7.0 percentage points |
| Net income | $2.3 | $5.3 | Down 57% |
| Diluted EPS | $0.02 | $0.06 | Down |
| Adjusted EBITDA (non-GAAP) | $12.6 | $16.8 | Down 25%; margin 22% vs. 28% |
| Cash from operations | $10.5 | $24.8 | Down 58% |
| Capital expenditures | $2.2 | $3.2 | Down |
Revenue by segment: television $36.6 million, down 7%; radio $16.9 million, up 3%; digital $4.7 million, up 26%. Television segment operating profit fell to $13.2 million from $17.0 million; radio segment operating profit was $0.3 million versus $0.8 million; digital recorded a $0.2 million operating loss, narrower than the $0.7 million loss a year earlier.
Expense growth pressured results: total operating expenses rose 6% to $50.5 million. Direct operating expenses increased 3%, selling, general and administrative expenses 9%, and corporate expenses 12%. Interest expense rose 20% to $3.9 million, principally due to $0.8 million of interest related to swaps. The effective tax rate was approximately 40% in both periods.
Liquidity, debt and capital
- At March 31, 2016, cash and cash equivalents were $23.0 million and short-term investments were $30.0 million. The investment was a six-month certificate of deposit purchased during the quarter; cash plus short-term investments totaled $53.0 million.
- Debt had a $315.6 million principal balance and a $312.6 million carrying value, net of debt issuance costs. The balance sheet included $3.8 million of current maturities and $308.8 million of long-term debt. The effective interest rate was 3.5%.
- The company reported a 4.1x total leverage ratio at March 31, 2016, versus 3.9x a year earlier, and said it was in compliance with the applicable covenant. The 6.50x maximum applies if the revolving facility is drawn. The filing does not state the revolver’s current availability or drawn balance clearly.
- Three interest-rate swaps fix the LIBOR component on $186.0 million of debt through December 31, 2018. The swap liability was $7.7 million. Management estimates a 100-basis-point LIBOR increase would raise annual interest expense and reduce operating cash flow by about $0.8 million.
- Quarter-end cash declined by $24.9 million, reflecting $32.1 million of investing outflows—primarily the $30.0 million certificate of deposit—partly offset by operating cash generation. Financing outflows were $3.3 million, including $2.8 million of dividends and $0.9 million of debt payments.
- The quarterly dividend declared was $0.03 per common share. No shares were repurchased during the quarter.
Changes, outlook and key risks
- The $2.9 million television revenue decline was primarily associated with a $5.0 million one-time channel-modification revenue item recorded in Q1 2015 that did not recur. Higher national, political and retransmission-consent revenue partly offset the decline.
- Retransmission-consent revenue was $7.4 million, compared with $6.4 million. Management expects 2016 revenue from this source to exceed 2015 and anticipates full-year revenue growth from digital media, retransmission consent and political advertising.
- Management expects positive operating cash flow for full-year 2016, approximately $10.5 million of capital expenditures, and says cash, operating cash flow and available credit should cover anticipated needs for at least the next twelve months. It also expects direct operating, selling and administrative, and corporate expenses to rise during the remainder of 2016, mainly due to salary increases. No specific full-year revenue or earnings guidance was provided.
- The first quarter is generally the company’s seasonally lowest-revenue quarter. Management noted that advertising may be canceled or reduced without penalty, and that 2016 political advertising may support results.
- The Univision proxy agreement for negotiating retransmission-consent terms was extended through May 31, 2016. Entravision said it intended to negotiate an extension or replacement, but gave no assurance an agreement would be reached or on what terms. Univision affiliation agreements expire in 2021; substantially all of the company’s television stations are affiliated with Univision or UniMás.
- Other identified risks include substantial indebtedness and debt covenants, variable interest rates, advertising-market and competitive pressures, digital-media changes, and dependence on Univision. Management said ordinary-course litigation was not expected to materially adversely affect the company; no material change to reported risk factors was disclosed.
- Management concluded disclosure controls were effective and reported no material change in internal control over financial reporting during the quarter.
Most important facts for investors to verify
- Whether Univision and Entravision extend or replace the retransmission-consent proxy agreement before its May 31, 2016 expiration, and the resulting economics.
- Whether retransmission-consent, political and digital revenue growth offsets ongoing television softness and rising operating costs.
- Cash generation and liquidity after separating the $30.0 million certificate of deposit from cash, and the actual availability and status of the revolving credit facility.
- Debt principal, leverage and covenant headroom, including exposure to interest-rate increases despite swaps covering $186.0 million of debt.
- Whether adjusted EBITDA and operating cash flow recover from their year-over-year declines; adjusted EBITDA is a non-GAAP measure and should be assessed alongside GAAP results and cash flow.