Entravision Communications Corporation — 2018 Form 10-K
Business context and reporting period. This annual filing covers the fiscal year ended December 31, 2018; it is not a standalone fourth-quarter filing. Entravision operates television and radio stations serving U.S. Hispanic audiences and a primarily international digital advertising business. It reports television, radio and digital segments. The company filed the report on May 6, 2019.
Financial performance and liquidity
| Metric | FY 2018 | FY 2017 |
|---|---|---|
| Total revenue | $297.8 million | $536.0 million |
| Revenue excluding spectrum-usage-rights revenue | $294.8 million | $272.1 million |
| Operating income | $33.6 million | $277.9 million |
| Net income | $12.2 million | $175.7 million |
| Diluted EPS | $0.13 | $1.91 |
| Operating cash flow | $33.8 million | $301.5 million |
| Adjusted EBITDA (non-GAAP) | $54.0 million | $50.6 million |
- Total revenue fell 44%, chiefly because 2017 included $263.9 million of FCC spectrum-auction revenue; 2018 spectrum-usage-rights revenue was $3.0 million. Operating and net margins in 2018 were approximately 11.3% and 4.1%, respectively. Adjusted EBITDA margin was approximately 18.1%; this non-GAAP measure excludes or adjusts for significant items and is not a substitute for GAAP results or cash flow.
- Advertising and retransmission-consent revenue increased 8% to $294.8 million. Digital revenue rose 42% to $81.0 million; television advertising and retransmission-consent revenue increased 1% to $149.9 million; radio revenue declined 4% to $63.9 million. Television, digital and radio represented approximately 51%, 27% and 22% of total revenue, respectively.
- Fourth-quarter revenue was $82.1 million versus $73.5 million a year earlier; quarterly net income was $6.9 million versus $12.7 million, and diluted EPS was $0.08 versus $0.14.
- At year-end, cash and cash equivalents were $46.7 million and marketable securities were $132.4 million. Current assets totaled $271.0 million and current liabilities $54.0 million. Cash plus marketable securities totaled $179.2 million; these balances should be considered alongside debt, commitments and restrictions.
- Gross term-loan debt was $246.2 million, down from $299.3 million at 2017 year-end, following a $50.0 million prepayment in December 2018. The balance-sheet debt carrying amount, net of issuance costs and including current maturities, was $243.5 million. The loan’s reported interest rate was 5.09%, variable, and maturity is November 2024. The company reported a 3.2-to-1 total leverage ratio, versus 4.4-to-1 in 2017.
- Cash used in investing was $159.5 million, including $159.4 million of marketable-security purchases; financing used $88.6 million, including debt payments, dividends and share repurchases. Capital expenditures were $15.7 million.
Material changes, outlook and notable matters
- The 2017 comparison is unusually elevated by the FCC auction: the company received approximately $264 million for relinquishing spectrum rights related to four stations. Auction proceeds were largely reflected in restricted cash at 2017 year-end and were subsequently deployed, including into marketable securities and debt reduction. The 2017 comparative financial statements were revised for immaterial Headway-related errors, including accrued liabilities and digital cost of revenue.
- Digital growth reflected the Headway acquisition and the June 2018 acquisition of Smadex. Management cited continuing shifts in digital advertising toward video and programmatic buying, and declines in traditional-media advertising associated in part with ratings and demographic changes. Radio revenue also benefited from 2018 political advertising and FIFA World Cup revenue.
- Management anticipated 2019 growth in digital, retransmission-consent and spectrum-related revenue, but lower political revenue than in 2018. It expected positive operating cash flow, approximately $20.3 million in 2019 capital expenditures (including repack costs expected to be reimbursed by the FCC), and lower direct operating costs from personnel and discretionary-spending reductions implemented in 2018. The company said existing cash, operating cash flow and available credit were expected to cover requirements for at least the following 12 months.
- The company had $81.8 million of operating-lease commitments and $321.4 million of scheduled long-term debt and related interest payments. It adopted the new lease standard on January 1, 2019 and anticipated a material increase in reported assets and liabilities.
- Management and the auditor concluded internal control over financial reporting was ineffective at December 31, 2018. Three material weaknesses were identified: insufficient accounting resources and controls over complex transactions; controls over Headway financial reporting; and revenue controls in broadcast and legacy digital operations. Remediation was incomplete. The auditor issued an adverse opinion on internal controls, while issuing an unqualified opinion on the 2018 financial statements. Smadex was excluded from the 2018 internal-control assessment.
- The 2018 audit and related information were delivered late under the credit agreement. Lenders waived any resulting default and extended the delivery deadline to May 31, 2019; the company stated that filing this report by that date satisfied the requirement. A fee of approximately $0.2 million was due to consenting lenders.
- Other notable items included a $1.3 million impairment of an equity investment, $1.6 million of foreign-currency loss, a $1.2 million gain from remeasurement of Headway contingent consideration, and a $1.2 million gain related to station repacking. No litigation was identified as likely to have a material adverse effect, according to management.
- Key risks include substantial variable-rate debt and restrictive covenants, reliance on Univision programming and retransmission arrangements, advertising volatility and audience migration to digital media, foreign-currency and international operating exposure, privacy regulation, spectrum repacking and monetization uncertainty, and potential impairment of goodwill or broadcast licenses.
Important facts for investors to verify
- Review the 2018 cash-flow statement and marketable-security holdings to understand the use, liquidity and risk profile of auction-related cash and subsequent investments.
- Check debt amortization, interest-rate exposure, covenant requirements and any excess-cash-flow prepayment obligations; a 100-basis-point rate increase was estimated to raise annual interest expense by about $2.5 million at year-end debt levels.
- Track remediation of all three material weaknesses, including whether subsequent filings or audits identify errors or control improvements.
- Assess the sustainability and economics of digital growth, retransmission-consent revenue and spectrum-related revenue against traditional television and radio declines.
- Confirm the final Headway contingent-consideration calculation. The filing says the 2018 amount had not been finalized and could cause future fair-value adjustments.
- Review the digital goodwill impairment headroom: the filing gives differing disclosures, with MD&A stating a 5% cushion and the financial-statement note stating 1%. This inconsistency should be clarified.