Entravision Communications Corporation — Q2 2017 Form 10-Q
Business and period: The filing covers the three and six months ended June 30, 2017. Entravision operates television, radio and digital media businesses focused on U.S. Hispanic audiences and markets in Latin America. It owned or operated 54 primary television stations and 49 radio stations. Unless otherwise noted, figures below are in millions of dollars.
Financial results and liquidity
| Metric | Q2 2017 | Q2 2016 | Six months 2017 | Six months 2016 |
|---|---|---|---|---|
| Revenue | $70.5 | $64.8 | $128.0 | $122.9 |
| Operating income | $9.3 | $13.3 | $17.3 | $21.0 |
| Net income | $3.5 | $5.7 | $6.1 | $8.0 |
| Diluted EPS | $0.04 | $0.06 | $0.07 | $0.09 |
| Operating margin | 13.1% | 20.6% | 13.5% | 17.1% |
| Net margin | 5.0% | 8.8% | 4.8% | 6.5% |
- Revenue mix and segment trends: Q2 television revenue was $37.8 million, down 4%; radio was $17.2 million, down 12%; digital was $15.6 million, up 157%. Digital’s growth chiefly reflected the April acquisition of Headway, which contributed $11.0 million of Q2 revenue and a $0.5 million net loss. Television and radio declines reflected weaker local and national advertising and less political advertising. Television retransmission consent revenue was $7.5 million in Q2, unchanged year over year.
- Cash flow: Operating cash flow was $23.3 million for the first half, versus $24.4 million. Investing used $17.2 million, including $7.5 million for Headway net of acquired cash, $7.3 million for property, equipment and intangibles, and $2.2 million for investments. Financing used $7.0 million, including $5.6 million of dividends and $1.9 million of debt principal repayments. Cash was $60.6 million at June 30, 2017, versus $61.5 million at year-end 2016.
- Debt and liquidity: Long-term debt, net of issuance costs and current maturities, was $285.2 million; current maturities were $3.8 million. The filing reports $290.9 million of variable-rate bank debt outstanding and a 3.5% effective interest rate at June 30. The company had a $30 million revolver, which expires in May 2018; the filing does not state a revolver balance. Leverage was 4.1x at June 30, 2017, versus 4.0x a year earlier; the company reported covenant compliance. A $186 million interest-rate swap hedged part of the variable-rate debt through December 2018.
- Other metrics: Six-month adjusted EBITDA, a non-GAAP measure, was $27.5 million versus $30.8 million, or 21% versus 25% of revenue. Dividends declared were $0.03 per share in Q2 and $0.06 per share for the first half, unchanged from the comparable 2016 periods.
Material changes and unusual items
- Headway was acquired on April 4 for $7.5 million cash, net of acquired cash, plus contingent consideration valued at $18.3 million at acquisition. The potential undiscounted contingent payments range from zero to $31.5 million over three years. Goodwill increased by $19.2 million from the acquisition; purchase-price valuations were provisional.
- Digital revenue gains were partly offset by higher digital media costs. Digital cost of revenue was 56% of segment revenue in Q2 versus 39% a year earlier; management attributed the increase to Headway and greater programmatic revenue, which generally carries lower margins.
- After quarter-end, the company received $263.6 million on July 21 from the FCC broadcast-spectrum auction. Funds were deposited with a qualified intermediary for a like-kind exchange. Entravision paid $16.3 million toward relocating WJAL-TV and expects an additional $16.3 million payment subject to FCC approval. The company said the spectrum changes were not expected to materially affect operations or results.
- Also after quarter-end, Entravision agreed to acquire KMIR-TV and KPSE-LD for $21 million, subject to closing conditions and FCC consent, with closing then expected in Q4 2017. The board approved a new $15 million share-repurchase authorization and terminated the former $20 million program.
Outlook, commentary and risks
- Management expected full-year 2017 revenue to benefit from digital media and retransmission consent, with political advertising below 2016. It expected positive operating cash flow for 2017 and approximately $13 million of capital expenditures; no numerical full-year revenue or earnings guidance was provided.
- Management expected Headway to increase 2017 direct operating and selling, general and administrative expenses. It expected corporate expenses to remain broadly constant versus 2016.
- Management cited advertising cancellations and rate pressure, competition, rapid changes in digital advertising, the relationship with Univision, retransmission-consent revenue, substantial debt and covenant restrictions, foreign-exchange exposure, and risks in international markets. A 100-basis-point increase in LIBOR was estimated to raise annual interest expense and reduce operating cash flow by approximately $1.1 million.
- The Univision retransmission-consent proxy agreement had been extended through August 31, 2017; the company intended to negotiate a further extension or new agreement, but gave no assurance of terms or completion. Univision affiliation agreements run through 2021.
- Management stated that ordinary-course litigation was not expected to have a material adverse effect. A shareholder letter alleging a compensation-committee issue under Section 162(m) was reviewed; the board accepted the committee’s conclusion that the company complied.
- Disclosure controls and procedures were assessed as effective, and the filing reported no material change in internal control over financial reporting during the quarter.
Important facts for investors to verify
- Whether the Univision proxy agreement was extended or replaced after August 31, 2017, and the financial terms of any agreement.
- How the FCC auction proceeds were ultimately applied, including tax treatment, WJAL-TV relocation costs and any remaining restrictions on the funds.
- Headway’s subsequent performance, final purchase-price allocation and potential contingent-consideration payments.
- Completion and final purchase price of the KMIR-TV and KPSE-LD acquisition, and the terms and use of the new repurchase authorization.
- Debt leverage, access to the revolver and covenant headroom, particularly given variable interest rates and the company’s declining operating income and adjusted EBITDA.