Entravision Communications Corporation — Q2 2019 Form 10-Q
Business context and period. The unaudited filing covers the three and six months ended June 30, 2019, compared with the same 2018 periods. Entravision operates television, radio and digital media businesses, with a focus on U.S. Hispanic audiences. Amounts below are in millions unless stated otherwise.
Financial performance and position
| Metric | Q2 2019 | Q2 2018 | Six months 2019 | Six months 2018 |
|---|---|---|---|---|
| Revenue | $69.2 | $74.3 | $133.9 | $141.2 |
| Operating income (loss) | $(11.6) | $10.1 | $(6.6) | $9.8 |
| Net income (loss) | $(16.3) | $4.8 | $(14.9) | $3.0 |
| Basic and diluted EPS | $(0.19) | $0.05 | $(0.17) | $0.03 |
| Operating cash flow | Not stated separately | Not stated separately | $19.7 | $16.9 |
| Adjusted EBITDA (non-GAAP) | Not stated separately | Not stated separately | $20.6 | $21.8 |
- Revenue mix and segment trends: Q2 television revenue was $38.1 million, up 4%; radio was $14.4 million, down 17%; digital was $16.8 million, down 18%. Television’s increase mainly reflected spectrum-usage-rights revenue. Radio and digital declines reflected lower advertising, among other factors.
- Margins and costs: The filing does not provide a consolidated gross-margin figure. Digital cost of revenue was 53% of digital revenue in Q2, versus 55% a year earlier; management attributed the improvement to a shift toward lower-cost offerings. Adjusted EBITDA was 15% of revenue in both first-half periods. Q2 SG&A rose to $13.5 million from $12.7 million, including higher digital severance expense.
- Cash, liquidity and debt: At June 30, cash and equivalents were $52.6 million, marketable securities $113.3 million, and restricted cash $0.7 million. Current assets were $250.3 million and current liabilities $60.6 million. Debt was $244.7 million outstanding before $2.7 million of unamortized costs and discount; its carrying amount was $242.0 million. The term loan matures in November 2024, bears a floating rate, and carried a 5.09% rate at quarter-end. The company reported a 3.2x total leverage ratio at June 30, versus 4.9x a year earlier.
- Cash deployment: First-half investing cash flow was positive $6.2 million, including $21.7 million of marketable-security maturities; financing cash outflow was $20.0 million, including $8.5 million dividends, $9.0 million share repurchases and $1.5 million debt repayment. First-half capital expenditures were $14.8 million as reported in segment data.
- Other balance-sheet changes: Adoption of the lease standard added $46.2 million of operating lease right-of-use assets and $52.5 million of current and long-term lease liabilities at June 30. Goodwill fell from $74.3 million at year-end to $51.9 million, primarily due to impairment.
Changes versus the prior comparable period
- Q2 revenue declined 7%; first-half revenue declined 5%. Broadcast advertising fell to $37.2 million in Q2 from $41.5 million, while digital advertising fell to $16.8 million from $20.6 million.
- Q2 operating results moved from $10.1 million of income to an $11.6 million loss, substantially affected by a $22.4 million digital goodwill impairment. First-half net income of $3.0 million became a $14.9 million loss.
- First-half operating cash flow increased by $2.8 million, while adjusted EBITDA decreased by $1.2 million. These measures are not interchangeable; adjusted EBITDA is non-GAAP.
- Television revenue increased, but radio and digital revenue contracted. The company cited ratings and audience-preference changes, traditional-to-digital ad shifts, and the absence of 2018 FIFA World Cup revenue in radio comparisons.
Outlook, commentary, risks and unusual items
- Management expected 2019 revenue to benefit from spectrum usage rights and retransmission consent compared with 2018, while political revenue was expected to decline. It expected positive operating cash flow for full-year 2019 and approximately $20.8 million of capital expenditures, including about $6.3 million for FCC-required station repacking, expected to be reimbursed.
- Management expected direct operating expenses to decline, but SG&A and corporate expenses to increase, reflecting digital severance and bad-debt costs and higher audit fees.
- The $22.4 million goodwill impairment followed weaker-than-expected digital performance, personnel changes and revised forecasts. Digital advertising is changing rapidly as spending shifts to automated platforms; management noted pressure on intermediaries and margins, while its strategic shift improved digital gross-margin percentage but reduced revenue volume.
- Other unusual items included $3.6 million of first-half operating gains, primarily related to FCC broadcast repacking, and a $2.4 million first-half gain from changes in the fair value of Headway acquisition contingent consideration. The final 2018 contingent-consideration amount remained unresolved and could prompt future fair-value adjustments.
- The company stated that cash, operating cash flow and available credit were expected to cover anticipated requirements for at least 12 months. However, its secured variable-rate debt exposes it to interest-rate risk: a 100-basis-point increase in Eurodollar rates was estimated to raise annual interest expense and reduce operating cash flow by about $2.5 million.
- Disclosure controls were deemed ineffective because of continuing material weaknesses involving accounting resources, Headway controls, and broadcast and digital revenue controls. Management described remediation steps, including added staff, consultants, control redesign and training. The filing reported no material change in risk factors and said ordinary-course legal matters were not expected to materially affect the company.
- Lenders waived potential defaults related to late delivery of the 2018 audited financial statements and extended the delivery deadline; the company filed its 2018 Form 10-K on May 7, 2019, before the amended deadline. The amendment carried an approximately $0.2 million fee. The credit facility has no financial covenants, but includes other restrictions and events of default.
- Subsequent event: on July 31, 2019, Entravision agreed to acquire KMBH-TV in the McAllen, Texas area for $2.9 million, subject to customary conditions including FCC consent.
Key investor verification points
- Track digital revenue, margins, operating performance and assumptions underlying the $22.4 million goodwill impairment.
- Assess whether television spectrum and retransmission revenue can offset continued radio and advertising weakness, and verify the full-year outlook against reported results.
- Review the debt balance, floating-rate exposure, leverage calculation, repayment requirements and compliance with credit-agreement terms.
- Monitor progress in remediating the disclosed material weaknesses and whether controls become effective.
- Confirm final Headway contingent consideration, expected FCC reimbursement for repacking costs, and closing and purchase terms for KMBH-TV.