Entravision Communications Corporation — Q2 2020 Form 10-Q
Business context and reporting period. The filing covers the three and six months ended June 30, 2020, compared with the same 2019 periods. Entravision operates television, radio and digital media businesses serving U.S. Hispanic and international audiences. Amounts below are in U.S. dollars; financial statement amounts are in millions unless otherwise noted.
Financial performance
| Metric | Q2 2020 | Q2 2019 | Six months 2020 | Six months 2019 |
|---|---|---|---|---|
| Revenue | $45.1 | $69.2 | $109.4 | $133.9 |
| Operating income (loss) | $(1.4) | $(11.6) | $(36.7) | $(6.6) |
| Net income (loss) | $2.3 | $(16.3) | $(33.3) | $(14.9) |
| Operating cash flow | Not provided by quarter | Not provided by quarter | $19.5 | $19.7 |
| Capital expenditures | $1.9 | $8.0 | $5.6 | $14.8 |
- Revenue and segment trends: Q2 revenue fell 35%. Television revenue declined 29% to $27.0 million, digital fell 32% to $11.4 million, and radio fell 53% to $6.8 million. For the first half, revenue declined 18%. The radio business had the steepest quarterly decline.
- Profit and margins: Q2 net income included a $5.3 million income tax benefit despite a $2.9 million pretax loss and $1.4 million operating loss. The six-month loss included $39.8 million of impairment charges. Q2 segment operating profit was $1.8 million, down 86% year over year; television contributed $5.8 million, while digital and radio recorded losses of $1.2 million and $2.8 million. Six-month adjusted EBITDA, a non-GAAP measure, was $11.4 million (10% of revenue), versus $20.6 million (15%) a year earlier.
- Cash flow: Six-month operating cash flow was nearly flat year over year despite the larger net loss, reflecting noncash impairment and working-capital movements, including a $19.5 million decrease in receivables. Investing activities provided $25.0 million, including marketable-security maturities and proceeds from a station sale. Financing activities used $8.4 million, primarily dividends and debt repayment.
- Liquidity and debt: At June 30, cash and cash equivalents were $69.3 million, marketable securities were $65.1 million, and restricted cash was $0.7 million. Current assets were $206.5 million and current liabilities $59.4 million. Debt principal was approximately $216.7 million; its carrying value was $214.7 million net of issuance costs and discount. The term loan matures November 30, 2024; its stated interest rate was 2.92%. The company reported a 4.4-to-1 total leverage ratio, versus 3.2-to-1 at June 30, 2019, and said it was in compliance with its credit agreement. The facility has no financial covenants, but includes other restrictive covenants.
- Dividends: Dividends declared were $0.03 per share in Q2 2020 versus $0.05 a year earlier; six-month dividends were $0.08 versus $0.10.
Material changes and unusual items
- COVID-19-related advertiser cancellations and reduced new placements drove broad revenue weakness. Radio was especially affected as commuting and driving fell; the company also cut some advertising rates, mainly in radio, and eased credit terms for certain clients.
- First-quarter 2020 impairment charges totaled $39.8 million: $32.3 million for television and radio FCC licenses, $5.3 million for digital amortizable intangibles, $1.5 million for digital property and equipment, and $0.8 million for digital goodwill. No impairment was recorded in Q2. The six-month charge compares with $22.4 million in the first half of 2019.
- The company reported Q2 other operating gains of $2.0 million, primarily from asset sales and broadcast-repack-related station relocations. It sold KMCC-TV for $4.0 million, recognizing a $0.6 million gain; proceeds were included in investing cash flow.
- Cost reductions included salary cuts of 2.5%–22.5%, furloughs and a small number of layoffs, suspension of 401(k) matching, a 20% reduction in non-employee director fees, and suspension of share repurchases. The dividend was reduced by 50% in Q2.
Outlook, risks and controls
- Management expected full-year 2020 revenue and operating cash flow to decline from 2019, with the impact dependent on the pandemic and economic recovery. It cautioned that Q2 results may not indicate future-period performance and provided no specific revenue or earnings forecast.
- Management said available liquidity and operating cash flows should cover expenses for at least the next 12 months. Planned 2020 capital expenditures were approximately $7.5 million, including about $3.2 million for FCC-required television repacking that management expected to be reimbursed.
- Management cited ongoing risks from COVID-19 and possible renewed restrictions, advertising-market weakness, ratings and audience shifts, competition, migration from traditional to digital media, programmatic digital advertising’s margin pressure, foreign currency movements, and substantial indebtedness. The filing says programmatic demand may lead to a permanently higher-volume, lower-margin digital business.
- Disclosure controls were deemed ineffective because a previously identified material weakness in digital-segment controls remained unremediated. The weakness concerns digital revenue and Headway controls over receivables, payables, expenses, intercompany accounts and income taxes. Remediation steps were underway but had not operated long enough for effectiveness to be confirmed.
- Management said ordinary-course legal claims were not expected to materially affect financial position, results or cash flows. The Part II risk-factors item states “None,” while the filing’s forward-looking statements and MD&A describe significant business risks.
Important facts for investors to verify
- Whether advertising demand recovered after Q2, particularly in radio, and how much revenue weakness reflected temporary pandemic effects versus longer-term audience and competitive trends.
- Whether operating cash flow and liquidity remain adequate if revenue falls further, considering $216.7 million of debt principal and the reported 4.4-to-1 leverage ratio.
- The assumptions supporting the first-quarter impairment tests, and whether subsequent results or forecasts indicate further impairment risk.
- Progress and testing results for remediation of the digital-segment material weakness.
- Whether expected FCC reimbursement, planned capital spending and pending property sales were completed on the anticipated timing and terms.