Entravision Communications Corporation — Q3 2017 Form 10-Q
Reporting period: Three and nine months ended September 30, 2017; balance sheet compared with December 31, 2016. Entravision operates television broadcasting, radio broadcasting and digital media businesses, serving U.S. Hispanic audiences and markets in Latin America.
Financial performance and liquidity
| Metric | Q3 2017 | Nine months 2017 | Comparable 2016 |
|---|---|---|---|
| Total net revenue | $334.6 million | $462.6 million | $65.3 million and $188.2 million, respectively |
| Advertising and retransmission revenue | $70.6 million, up 8% | $198.6 million, up 6% | $65.3 million and $188.2 million |
| Spectrum rights revenue | $263.9 million | $263.9 million | None |
| Operating income | $257.0 million | $274.3 million | $13.3 million and $34.2 million |
| Net income | $157.2 million; diluted EPS $1.71 | $163.3 million; diluted EPS $1.78 | $5.4 million / $0.06 and $13.4 million / $0.15 |
| Adjusted EBITDA | Not clearly provided for the quarter | $289.9 million | $48.6 million for nine months |
| Cash from operating activities | Not provided for the quarter | $293.5 million | $38.9 million for nine months |
The exceptionally high 2017 revenue and earnings primarily reflect the FCC spectrum auction, not recurring advertising growth. The company recorded $263.9 million upon relinquishing permanent spectrum rights associated with four stations and expensed $12.1 million for the carrying value of those rights. The auction proceeds were held as $231.1 million of restricted cash in a qualified intermediary for a contemplated like-kind exchange; this amount was not freely available cash.
Advertising and retransmission revenue rose, but performance varied by segment. Q3 television advertising and retransmission revenue fell 9% to $36.5 million, including retransmission revenue of $8.5 million versus $7.4 million. Radio revenue declined 12% to $16.9 million. Digital revenue increased 198% to $17.1 million, primarily following the Headway acquisition; segment operating results were a $0.9 million loss. Digital media cost of revenue rose to 58% of segment revenue in Q3, reflecting Headway and increased programmatic activity.
For the nine months, income tax expense was $100.2 million, or 38% of pretax income. Deferred income taxes were $99.5 million, while cash income taxes paid were $0.7 million. Thus reported net income and operating cash flow include significant noncash and transaction-related effects. Nine-month adjusted EBITDA was 63% of revenue versus 26% in 2016, but the comparison is substantially affected by the spectrum transaction.
At September 30, cash and cash equivalents were $56.0 million; restricted cash was $231.1 million. Total assets were $764.4 million and stockholders’ equity was $341.8 million. Debt was approximately $287.7 million net of issuance costs, including $3.8 million of current maturities; the company reported a 3.5% effective borrowing rate. Net leverage was 0.9x, versus 4.0x a year earlier. The credit agreement’s maximum total leverage ratio is 6.25x when the revolver is drawn, and the company reported compliance. The filing does not clearly state the amount of revolver availability or whether it was drawn.
Nine-month investing cash use was $53.2 million, including $32.6 million related to WJAL-TV relocation, $7.5 million for Headway net of acquired cash, $9.6 million of capital expenditures, and investments and acquisition deposits. Financing cash use was $14.8 million, including $10.2 million of dividends, $2.8 million of debt principal payments and $1.8 million of share repurchases. The company declared dividends of $0.05 per share in Q3 and $0.11 per share year to date.
Material changes and significant items
- Headway, a digital marketing business, was acquired on April 4, 2017. It contributed $12.7 million of Q3 revenue and a $0.2 million net loss; nine-month contributions were $23.8 million of revenue and a $0.7 million net loss. Contingent consideration had an acquisition-date fair value of $18.0 million, with total undiscounted payments potentially ranging from zero to $31.5 million.
- On July 13, the company authorized a new $15 million share-repurchase program, replacing a prior $20 million program. It repurchased and retired 0.3 million Class A shares for approximately $1.8 million in Q3.
- A credit agreement amendment effective August 1 permits certain restricted payments up to $40 million, with additional annual capacity subject to a 5.5x leverage condition.
- On October 2, after quarter-end, the company entered new Univision affiliation, proxy, and marketing and sales agreements. Most expire December 31, 2026; agreements for Orlando, Tampa and Washington, D.C. expire December 31, 2021.
- On November 1, after quarter-end, the company completed a $21 million acquisition of KMIR-TV and KPSE-LD, serving Palm Springs, California.
Outlook, risks and contingencies
Management expected full-year 2017 revenue to increase from spectrum usage rights, digital media and retransmission consent, while political advertising revenue would decline versus 2016. It expected positive operating cash flow for 2017, approximately $13 million of full-year capital expenditures, and stated that cash, operating cash flow and available borrowing capacity should meet anticipated requirements for at least twelve months. Management also expected Headway-related operating, selling and administrative expenses to increase during 2017. These are management expectations, not guarantees.
- Digital advertising is changing rapidly; shifts toward video and programmatic buying may pressure revenue or margins, and management said it may need to adapt offerings.
- Spectrum monetization depends on continuing demand and the company’s ability to adapt to technology and regulatory changes, including possible ATSC 3.0 developments.
- Substantially all television stations are Univision- or UniMás-affiliated. The new agreements extend key relationships, but the company’s reliance on Univision and retransmission-consent arrangements remains relevant.
- Debt is primarily variable-rate. Swaps hedge $186 million of debt through December 2018; management estimated a 100-basis-point LIBOR increase would raise annual interest expense by approximately $1.1 million.
- Credit-facility covenants restrict additional debt, investments and certain payments; covenant compliance and access to financing remain important risks.
- Ordinary-course claims and litigation were disclosed; management did not expect them to materially adversely affect financial position, results or cash flows. No material lawsuit was identified.
Important facts for investors to verify
- How the $231.1 million of restricted auction proceeds was ultimately used and whether the intended like-kind exchange was completed.
- Recurring operating performance excluding the $263.9 million spectrum transaction, particularly television and radio advertising trends and digital segment profitability.
- Headway’s subsequent results, integration progress, and contingent-consideration payments, which could reach $31.5 million undiscounted.
- The financial and operating terms of the new Univision agreements, and the status of retransmission-consent revenue and receivables.
- Debt principal, revolver availability and usage, covenant headroom, and the effect of interest-rate changes after the swaps expire in December 2018.
- Completion and funding of the Palm Springs station acquisition and the company’s actual full-year capital expenditures and cash generation.