Entravision Communications Corporation — Q3 2019 Form 10-Q
Reporting period: Quarter and nine months ended September 30, 2019; comparisons are with the corresponding 2018 periods. Amounts are in U.S. dollars. Entravision operates television, radio and digital media businesses, primarily serving U.S. Hispanic audiences. It owned or operated 55 television and 49 radio stations and had digital operations primarily in Spain and Latin America.
Financial performance and position
| Metric | Q3 2019 | Q3 2018 | Nine months 2019 | Nine months 2018 |
|---|---|---|---|---|
| Revenue | $68.8 million | $74.6 million | $202.7 million | $215.7 million |
| Operating income (loss) | $(3.8) million | $6.3 million | $(10.4) million | $16.1 million |
| Net income (loss) | $(12.2) million | $2.2 million | $(27.1) million | $5.2 million |
| Basic and diluted EPS | $(0.14) | $0.02 | $(0.32) | $0.06 |
| Operating cash flow | Not provided for quarter | Not provided for quarter | $23.5 million | $22.5 million |
| Capital expenditures | Not provided for quarter | Not provided for quarter | $22.4 million | $11.5 million |
- Revenue mix and trends: Q3 television revenue was $36.4 million, radio $14.8 million and digital $17.6 million. For the first nine months, television revenue rose 5% to $112.7 million, radio fell 13% to $41.1 million and digital fell 20% to $48.9 million.
- Margins and expenses: Digital cost of revenue declined to 56% of digital revenue in Q3 from 59% a year earlier and to 54% for nine months from 58%, reflecting a shift toward lower-cost offerings. Consolidated direct operating expenses were 45% of revenue in Q3 versus 42%, and 44% for nine months versus 43%.
- Adjusted EBITDA: Nine-month consolidated adjusted EBITDA, a non-GAAP measure defined in the credit agreement, was $29.8 million versus $33.1 million; it remained 15% of revenue. Management cautions that this measure is not a substitute for GAAP results or cash flows.
- Cash and liquidity at September 30: Cash and cash equivalents were $48.7 million, restricted cash $0.7 million and marketable securities $107.5 million. Current assets were $240.3 million and current liabilities $58.6 million.
- Debt: Variable-rate debt principal was approximately $244.0 million; the carrying amount, net of debt costs and discount, was $241.4 million. The term loan matures November 30, 2024; its rate was 5.09%. The reported total leverage ratio was 3.3x, versus 5.0x at September 30, 2018. A 100-basis-point rate increase would raise annual interest expense and reduce operating cash flow by an estimated $2.4 million.
- Cash uses: Nine-month financing cash outflow was $26.4 million, including $12.8 million of dividends, $10.4 million of share repurchases and $2.3 million of debt repayments. The company paid $0.05 per common share in Q3, unchanged from 2018.
Material changes and unusual items
- Q3 revenue declined 8%; nine-month revenue declined 6%. Management attributed the largest declines to digital, with radio also weaker. Digital declines reflected domestic and international revenue pressure as advertisers shifted toward programmatic buying; radio was affected by advertising weakness, audience/rating trends and the absence of 2018 FIFA World Cup revenue.
- Television revenue was flat in Q3 and up 5% for nine months. Higher spectrum-usage and retransmission-consent revenue partly offset weaker local advertising. Nine-month retransmission-consent revenue was $26.6 million.
- The company recorded $31.4 million of impairment charges in the first nine months: $27.7 million for digital goodwill, $3.5 million for a Mexican broadcast license and $0.2 million for property held for sale. The Q3 charge was $9.1 million, comprising $5.3 million of digital goodwill and $3.5 million of license impairment, plus the held-for-sale charge.
- Due to Mexican regulatory changes requiring a 20-year license-fee prepayment, Entravision chose not to prepay for XHRIO-TV. It expects to stop broadcasting that station when its current license expires on December 31, 2021.
- Other operating gains were $5.2 million for nine months, primarily related to required television channel relocations under the broadcast spectrum repack. The company expected approximately $6.5 million of related capital spending to be reimbursed by the FCC.
- Lease accounting adoption added right-of-use assets and lease liabilities to the balance sheet. At September 30, operating lease assets were $45.1 million and lease liabilities totaled $51.5 million; management said the adoption had no material effect on results or cash flows through the period.
Outlook, risks and contingencies
- Management expected full-year 2019 revenue from spectrum usage rights and retransmission consent to increase versus 2018, while political revenue was expected to decrease. It expected positive operating cash flow for full-year 2019 and said cash, operating cash flow and available credit were expected to cover anticipated needs for at least 12 months. No specific full-year revenue or earnings forecast was provided.
- Capital expenditures were expected to be approximately $24 million for 2019. Management anticipated lower direct operating expenses but higher SG&A and corporate expenses, including digital severance and audit costs.
- Key risks include substantial debt and restrictive credit-agreement covenants; variable interest rates; advertising demand and audience shifts away from traditional media; rapid digital-market changes and margin pressure; reliance on Univision relationships and retransmission consent; foreign currency and international operations; and broadcast regulation and spectrum monetization.
- Disclosure controls were determined to be ineffective because previously identified material weaknesses remained in accounting resources, controls over Headway, and broadcast and digital revenue controls. Management described remediation steps, but stated they were not yet fully implemented and tested.
- Management said ordinary-course legal claims were not expected to materially affect financial position, results or cash flows. The filing reported no material change in risk factors and no defaults under senior securities.
- After quarter-end, the company completed its acquisition of KMBH-TV serving McAllen, Texas, on November 7, 2019, for $2.9 million.
Important facts for investors to verify
- Whether digital revenue and performance stabilize after the strategic shift to programmatic and lower-cost offerings, and whether further impairment is required.
- Progress and testing of remediation for the three disclosed material weaknesses in internal controls.
- Debt-service capacity, the 3.3x leverage measure, credit-agreement obligations and exposure to floating interest rates.
- Expected financial and operating effects of ceasing XHRIO-TV broadcasts after December 31, 2021, and the terms of any license or station alternatives.
- Whether anticipated FCC reimbursement for repack capital expenditures is received and whether full-year capital spending and cash-flow expectations are met.
- The sustainability of dividends and repurchases alongside debt, capital expenditure and operating cash requirements.