Business context and reporting period
Entravision Communications Corporation’s Form 10-K covers the fiscal year ended December 31, 2016. The company targets Hispanic audiences in the United States and certain Mexican border markets through television, radio and digital advertising, reporting those as three segments. Television generated 62% of 2016 revenue, radio 29% and digital 9%. The year also benefited from presidential-election advertising.
Financial performance
| Metric | 2016 | 2015 |
|---|---|---|
| Net revenue | $258.5 million | $254.1 million |
| Operating income | $48.9 million | $55.2 million |
| Net income | $20.4 million | $25.6 million |
| Diluted earnings per share | $0.22 | $0.28 |
| Cash flow from operations | $57.3 million | $62.3 million |
| Capital expenditures | $9.3 million | $13.5 million |
| Adjusted EBITDA (non-GAAP) | $69.2 million | $76.3 million |
Revenue increased 2%, while operating income fell 12% and net income fell 20%. Operating margin was approximately 18.9% (21.7% in 2015); net margin was approximately 7.9% (10.1%). Adjusted EBITDA margin declined to approximately 27% from 30%.
Segment revenue: television $159.5 million, essentially flat; radio $75.8 million, down slightly; and digital $23.1 million, up 23%. Television segment operating profit was $65.3 million, down 2%; radio was $7.2 million, down 34%; digital was $1.0 million, versus a small loss in 2015. Digital cost of revenue rose to 41% of digital revenue from 38%, partly due to greater programmatic advertising activity.
Fourth-quarter revenue was $70.3 million versus $65.4 million in Q4 2015; net income was $7.0 million versus $5.8 million.
Liquidity, debt and capital allocation
Year-end cash and cash equivalents were $61.5 million, compared with $47.9 million a year earlier. Current assets were $131.5 million and current liabilities $34.6 million. Gross debt was approximately $292.8 million; the balance-sheet carrying amount of long-term debt, including current maturities and net of debt issuance costs, was $290.4 million. Total debt declined from approximately $316.6 million gross at year-end 2015. The debt is secured, principally matures in 2020, and is subject to restrictive covenants. The reported leverage ratio was 3.9x in both 2016 and 2015; the maximum is 6.50x when the revolver is drawn. The $30 million revolving facility was available subject to the credit agreement.
Cash used in financing included $23.8 million of debt payments and $11.2 million of dividends. The company paid $0.13 per share in dividends during 2016 and made no share repurchases during the year. A $186 million interest-rate swap effectively fixes the LIBOR component on that debt through December 2018, at a stated all-in fixed rate of 5.23%.
Material changes and unusual items
- Digital revenue increased $4.3 million, while television revenue included a $10.5 million decline because channel-modification revenue recorded in 2015 did not recur. Increased political, national advertising and retransmission revenue partly offset that comparison.
- Retransmission consent revenue rose to $29.6 million from $27.9 million. It represented approximately 19% of television revenue.
- Operating costs increased: direct operating expenses rose 3%, selling, general and administrative expenses 9%, and corporate expenses 9%. Higher compensation contributed; corporate expenses also included legal and financial due-diligence costs relating to a pending acquisition.
- The company recorded no impairment charge in 2016 or 2015. Goodwill and other intangible assets totaled $283.9 million at year-end 2016.
- Post-year-end, the company reported anticipated proceeds of approximately $264 million from the FCC spectrum auction, expected in the second half of 2017. Management did not expect the spectrum changes to materially alter operations or results.
- On March 2, 2017, the company agreed to acquire Headway, a digital marketing business, for an initial payment of approximately $12 million plus up to $34.5 million in contingent earn-outs; closing was expected early in Q2 2017.
Outlook, commentary and principal risks
Management expected 2017 revenue growth from digital media and retransmission consent, partly offset by lower political revenue than in 2016. It expected positive operating cash flow, approximately $13 million of capital expenditures, and higher direct and selling expenses primarily due to salary increases. Management stated that cash, operating cash flow and available credit were expected to meet anticipated requirements for at least twelve months, including the anticipated auction proceeds.
The Univision proxy agreement covering retransmission-consent negotiations had been extended through March 31, 2017; further extension or a replacement agreement was uncertain. Univision is also a key programming and sales partner, and the network affiliation agreements expire in 2021. Other material risks include substantial secured debt and credit-agreement restrictions, advertising cyclicality and lack of long-term advertiser commitments, competition and changing media technology, FCC license and spectrum-repacking risks, digital privacy and data-security regulation, and potential impairment of goodwill or broadcast licenses. Management said ordinary-course litigation was not expected to materially adversely affect the company. The filing reported effective disclosure controls and internal control over financial reporting; the auditor issued unqualified opinions on the financial statements and internal controls.
Most important facts for investors to verify
- Whether the anticipated $264 million FCC auction proceeds were received, and the final station modifications, repacking requirements, costs and operational effects.
- Whether the Univision proxy agreement was extended or replaced after March 31, 2017, and the resulting economics and terms for retransmission consent.
- Whether digital growth and retransmission revenue offset the expected decline in political revenue, while monitoring expense growth and digital margins.
- Debt repayment, covenant headroom, interest-rate exposure and compliance with restrictions on acquisitions, dividends and other capital actions.
- Headway acquisition closing, total consideration and performance against earn-out conditions.
- Goodwill and broadcast-license valuation assumptions, as well as realization and utilization of deferred tax assets and net operating loss carryforwards.