Entravision Communications Corporation — Q2 2014 Form 10-Q
Reporting period: Three and six months ended June 30, 2014; comparisons are with the corresponding 2013 periods. Entravision operates television and radio stations and digital media platforms serving Hispanic audiences. It reported 58 television and 49 radio stations.
Financial performance
| Metric | Q2 2014 | Q2 2013 | Six months 2014 | Six months 2013 |
|---|---|---|---|---|
| Revenue | $61.8 million | $57.0 million | $114.5 million | $106.0 million |
| Operating income | $18.1 million | $15.0 million | $28.9 million | $23.7 million |
| Net income | $8.7 million | $5.1 million | $13.1 million | $4.1 million |
| Diluted earnings per share | $0.10 | $0.06 | $0.14 | $0.05 |
| Interest expense | $3.5 million | $7.9 million | $6.9 million | $15.7 million |
- Q2 revenue grew 9%; television revenue rose 9% to $43.2 million and radio revenue rose 8% to $18.7 million. For the first half, television revenue increased 9% to $80.9 million and radio increased 7% to $33.6 million.
- Q2 operating margin was approximately 29.2%, versus 26.3% a year earlier; net margin was approximately 14.1%, versus 8.9%. First-half adjusted EBITDA, a non-GAAP measure, was $37.1 million, up 11%, or 32% of revenue versus 31%.
- Management attributed revenue growth primarily to World Cup advertising; television also benefited from higher retransmission-consent revenue. First-half retransmission revenue was $13.5 million, compared with $11.0 million.
- Q2 operating cash flow was not separately provided. First-half operating cash flow was $19.7 million, versus $12.8 million. Investing cash outflow was $19.1 million, including the Pulpo acquisition; financing cash outflow was $4.6 million. Cash declined to $39.8 million from $43.8 million at year-end 2013.
- At June 30, total debt was approximately $362.2 million, primarily variable-rate Term Loan B debt; long-term debt on the balance sheet was $358.4 million, plus $3.8 million current maturities. Cash was $39.8 million. The reported leverage ratio was 4.5x, compared with 4.0x at June 30, 2013; the company stated it was in covenant compliance.
- Current assets were $113.6 million and current liabilities $32.8 million. The company said available cash, operating cash flows, and credit-facility availability were expected to cover anticipated needs for at least 12 months.
Material changes and notable items
- Interest expense fell 56% year over year, reflecting the refinancing of 8.75% senior notes with the lower-rate 2013 credit facility. The effective rate on Term Loan B was 3.5% at June 30, 2014.
- On June 18, Entravision acquired digital advertising provider Pulpo Media for $15.0 million net of cash acquired, plus contingent consideration initially valued at $1.4 million. Additional payments could total up to $3.0 million over three years, subject to performance. The initial purchase-price allocation included $14.0 million of goodwill; valuations remained provisional.
- The company declared dividends of $0.03 per share in Q2 and $0.05 per share for the first half; it paid $4.5 million in dividends during the first six months.
- Three forward-starting swaps cover $186.0 million of debt from December 2015 through December 2018, at a 2.73% fixed benchmark rate and a stated 5.23% all-in rate. Their fair-value liability was $2.5 million at June 30; the first-half after-tax loss recorded in other comprehensive income was $1.8 million.
Outlook, risks, and contingencies
- Management expected 2014 revenue to continue increasing, citing World Cup and political advertising, retransmission-consent revenue, and Pulpo. It expected positive operating cash flow for 2014 and approximately $10 million in full-year capital expenditures.
- Management anticipated higher direct, selling and administrative, and corporate expenses during the remainder of 2014, including salary increases and Pulpo-related costs.
- The Univision proxy agreement for negotiating retransmission-consent terms was due to expire in December 2014. Entravision intended to seek an extension or replacement, but gave no assurance on terms or completion. Univision owed Entravision $10.6 million for carriage-related agreements at June 30. Univision also owns approximately 10% of Entravision on a fully converted basis; its Class U shares carry specified approval rights.
- Debt is variable-rate and secured, and the credit agreement restricts certain actions. A 100-basis-point increase in LIBOR was estimated to increase annual interest expense and reduce operating cash flow by approximately $0.6 million, based on debt outstanding at June 30. The swaps do not take effect until December 2015.
- Other disclosed risks include advertising cancellations or rate declines, competition, reliance on Univision programming and relationships, retransmission revenue, economic conditions, acquisition integration, and potential impairment. Management said ordinary-course litigation was not expected to have a material adverse effect; no material risk-factor change was reported. Disclosure controls were deemed effective.
- The company was evaluating the impact of the new revenue-recognition standard, effective for annual periods beginning after December 15, 2016.
Most important facts to verify
- Whether revenue growth and margins persist after World Cup and political advertising effects.
- Progress and final valuation of Pulpo, including performance-based payments and integration costs.
- Terms and outcome of the Univision retransmission proxy agreement after its December 2014 expiration, and collection of the $10.6 million receivable.
- Debt repayment capacity, leverage and covenant headroom, and exposure to higher interest rates before swaps begin.
- Whether forecast 2014 operating cash flow and approximately $10 million capital expenditures are achieved while maintaining dividends and liquidity.