Entravision Communications Corporation — Q2 2011 Form 10-Q
Reporting period: Three and six months ended June 30, 2011, compared with the corresponding 2010 periods. Entravision operates television and radio broadcasting businesses, primarily serving U.S. Hispanic audiences. Figures below are in millions of dollars unless otherwise noted.
Financial performance
| Metric | Q2 2011 | Q2 2010 | First half 2011 | First half 2010 |
|---|---|---|---|---|
| Net revenue | $50.3 | $53.4 | $94.3 | $96.5 |
| Operating income | $10.3 | $14.0 | $15.8 | $18.8 |
| Operating margin | 20.5% | 26.2% | 16.8% | 19.4% |
| Net income (loss) | $(0.4) | $7.0 | $(4.8) | $4.8 |
| Basic and diluted EPS | $0.00 | $0.08 | $(0.06) | $0.06 |
Operating margins are calculated from reported revenue and operating income. First-half adjusted EBITDA, a non-GAAP measure, was $26.0 million, down 9% from $28.5 million; it equaled 28% of revenue versus 30% a year earlier. First-half operating cash flow was positive at $9.1 million, compared with $9.2 million. Investing cash outflow was $5.3 million and financing cash outflow was $1.0 million. Cash and cash equivalents were $75.3 million at June 30.
At June 30, total assets were $488.1 million and stockholders’ equity was $6.5 million. Debt carrying value was $395.4 million, against $400 million principal of 8.75% secured notes due August 2017; estimated fair value was $413.0 million. The company had no revolver borrowings under its $50 million facility, with approximately $0.8 million of letters of credit outstanding. The reported total leverage ratio was 6.6x against a 7.0x maximum covenant. The filing reports $18.9 million of first-half interest expense and $18.2 million of cash interest paid.
Changes versus the prior comparable periods
- Q2 revenue declined 6%; first-half revenue declined 2%. Management attributed the shortfall mainly to World Cup advertising in 2010, with first-half comparisons also affected by 2010 census and political advertising.
- Q2 television revenue fell 5% to $33.1 million; radio revenue fell 8% to $17.1 million. First-half television revenue was down 1% to $63.8 million and radio revenue down 5% to $30.5 million.
- Q2 operating income fell 26%, while first-half operating income fell 16%. First-half adjusted EBITDA declined 9%.
- Radio segment operating profit fell 43% in Q2 and 44% in the first half, reflecting lower revenue and higher direct and selling expenses. Television segment operating profit declined 9% in Q2 and was essentially flat for the first half.
- Interest expense rose to $9.5 million in Q2 and $18.9 million in the first half. Management said the comparative-period difference primarily reflected the change in fair value of interest-rate swaps in 2010; those swaps were terminated in July 2010.
Outlook, commentary and risks
- Management expected retransmission-consent revenue to exceed 2010’s full-year level and to remain a growing revenue source. It reported $4.4 million in Q2 2011 and $8.6 million for the first half, versus $3.3 million and $6.5 million, respectively, in 2010.
- Management expected positive operating cash flow for full-year 2011, approximately $8 million of capital expenditures, and sufficient cash and available revolver capacity for anticipated needs for at least the next 12 months. These are expectations, not reported results.
- Management anticipated continued challenging advertising conditions in 2011, and expected some operating and corporate expenses to rise, citing partial salary restorations, LER-related expenses and professional fees. Direct operating expenses were 45% of Q2 revenue versus 41% a year earlier; first-half figures were 46% versus 44%.
- In January 2011, Entravision acquired the remaining 50% of Lotus/Entravision Reps LLC (LER) for approximately $1.1 million, subject to a working-capital adjustment. The remeasurement of its previously held interest generated a $0.7 million gain included in first-half other income. LER’s results were not significant to reported periods.
- Key risks include advertising demand and pricing, competition, economic uncertainty, dependence on Univision-affiliated programming and sales arrangements, and the ability to comply with debt covenants. The company noted that deferred tax assets were subject to a full valuation allowance. Management said ordinary-course litigation was not expected to materially adversely affect the company; risk factors were reported as having no material change.
- Univision-affiliated station agreements expire in 2021, subject to renewal provisions. Univision negotiates retransmission-consent terms under a six-year proxy agreement; $5.4 million was due from Univision at June 30 for station carriage agreements.
Important facts for investors to verify
- Whether advertising revenue stabilizes and retransmission-consent growth offsets the absence of periodic-event advertising.
- Progress against the 6.6x leverage ratio, the 7.0x covenant ceiling, and other credit-facility covenants as adjusted EBITDA and cash flows change.
- Cash generation, planned capital spending, and the company’s ability to service the 8.75% notes and refinance or repay debt at maturity.
- Actual LER integration results and final working-capital purchase-price adjustment.
- Whether the full valuation allowance, tax outcomes, and the $5.4 million Univision receivable change materially.