Entravision Communications Corporation — Q3 2011 Form 10-Q
Reporting period: Three and nine months ended September 30, 2011; unaudited. Entravision operates television and radio broadcasting businesses, primarily serving U.S. Hispanic audiences. Amounts below are in millions unless stated otherwise.
Financial performance and liquidity
| Metric | Q3 2011 | Q3 2010 | Nine months 2011 | Nine months 2010 |
|---|---|---|---|---|
| Net revenue | $50.1 | $53.3 | $144.4 | $149.8 |
| Operating income | $10.0 | $13.4 | $25.8 | $32.2 |
| Net income (loss) | $(1.4) | $6.4 | $(6.2) | $11.2 |
| Operating margin | 20.0% | 25.1% | 17.9% | 21.5% |
- Cash flow: Nine-month operating cash flow was $4.7, down from $17.0 a year earlier. Investing cash outflow was $7.1 and financing cash outflow was $1.0. Cash declined $3.4 from year-end 2010 to $69.0.
- Debt and interest: Long-term debt carrying value was $395.5 at September 30; the notes have $400 million principal, bear 8.75% interest, and mature in 2017. Nine-month interest expense was $28.3, versus $15.2 in 2010.
- Liquidity: Current assets were $117.8 and current liabilities $30.4. The company had no revolver borrowings and approximately $0.7 of letters of credit outstanding under its $50 million revolving facility, which expires in July 2013.
- Covenants: The total leverage ratio was 6.9x against a 7.0x maximum at September 30. If leverage exceeds 6.5x, the revolver’s maximum loan balance is limited to $25 million. The filing reports compliance with the leverage covenant.
- Other metrics: Nine-month adjusted EBITDA, a non-GAAP measure, was $41.1 versus $46.9, or 28% versus 31% of revenue. Stockholders’ equity was $5.6 at quarter-end.
Changes versus the prior comparable period
- Revenue fell 6% in Q3 and 4% for the first nine months. Radio revenue declined 13% in Q3 and 8% year to date; television revenue declined 2% and 1%, respectively.
- Management attributed weaker comparisons largely to 2010 World Cup and political advertising and a large Los Angeles promotional event that did not recur in 2011. National television advertising also declined.
- Direct operating expenses rose 7% in Q3 and 3% year to date, including salary restoration and LER-related costs. Lower SG&A partly offset this increase.
- Operating income declined 25% in Q3 and 20% year to date. The net loss contrasts with 2010 profits; higher reported interest expense partly reflects the prior-year impact of interest-rate swap fair-value changes.
Outlook, commentary, and risks
- Management expected positive operating cash flow for full-year 2011 and said cash, operating cash flow, and available revolver capacity should meet anticipated needs for at least 12 months. Planned 2011 capital expenditures were approximately $8.2.
- Management anticipated a challenging advertising environment through at least the remainder of 2011, while expecting retransmission-consent revenue to exceed 2010 levels and to grow as a revenue source. Television retransmission-consent revenue was $4.2 in Q3 and $12.8 for nine months, compared with $3.7 and $10.1, respectively, in 2010.
- The company acquired the remaining 50% of Lotus/Entravision Reps LLC (LER) in January for approximately $1.1, subject to adjustment. A $0.7 remeasurement gain on its previously held interest was recorded as other income; LER’s results were not significant to the periods presented.
- Univision is a major television affiliation and sales representative partner and held approximately 10% of Entravision’s common stock on a fully converted basis. Univision owed Entravision $5.3 for station-carriage agreements at September 30.
- Debt documents impose financial covenants and restrictions on additional debt, liens, distributions, asset sales, and other actions. Other disclosed risks include advertising weakness, competition, economic uncertainty, retransmission-consent revenue, and the company’s substantial indebtedness.
- Management said ordinary-course litigation was not expected to materially affect the company. No material change to risk factors was reported. Disclosure controls were assessed as effective; no material change in internal control over financial reporting was reported.
Key investor verification points
- Monitor leverage headroom against the 7.0x covenant and the related restriction on revolver availability above 6.5x.
- Reconcile operating cash flow with the net loss and assess the sustainability of cash generation; nine-month cash flow included a $11.1 decrease in accounts payable, accrued expenses, and other liabilities.
- Verify collection and terms of the $5.3 due from Univision and track the growth, economics, and contractual arrangements for retransmission-consent revenue.
- Assess whether advertising weakness, higher direct costs, and lower segment operating profits persist beyond comparisons affected by 2010 events.
- Consider the fixed 8.75% debt cost, 2017 maturity, limited equity cushion, and the filing’s expectation of approximately $8.2 in 2011 capital expenditures.