Entravision Communications Corporation — Q3 2014 Form 10-Q
Reporting period: Three and nine months ended September 30, 2014; filed November 7, 2014. Entravision operates television, radio and digital media businesses focused on Hispanic audiences. It reported 58 primary television stations and 49 radio stations. Unless stated otherwise, amounts below are in millions of dollars.
Financial performance
| Metric | Q3 2014 | Q3 2013 | Nine months 2014 | Nine months 2013 |
|---|---|---|---|---|
| Revenue | $62.3 | $57.8 | $176.8 | $163.8 |
| Operating income | $16.2 | $15.2 | $45.0 | $38.9 |
| Operating margin | 26.0% | 26.3% | 25.5% | 23.7% |
| Interest expense | $3.5 | $5.4 | $10.4 | $21.0 |
| Net income (loss) | $8.1 | $(21.4) | $21.2 | $(17.3) |
| Basic EPS | $0.09 | $(0.24) | $0.24 | $(0.20) |
- Q3 revenue rose 8%; television revenue was $41.3 million (+4%), radio $18.1 million (approximately flat), and digital $2.9 million. YTD revenue also rose 8%.
- Television growth reflected World Cup and political advertising and higher retransmission consent revenue. Radio benefited from World Cup and national advertising, partly offset by weaker local advertising. Digital revenue reflects the Pulpo acquisition.
- Q3 operating income increased 6%; YTD operating income increased 16%. Q3 operating margin was slightly lower, while YTD operating margin improved.
- Net income turned positive versus prior-year losses, substantially reflecting lower interest expense and the absence of the prior-year debt-extinguishment loss ($29.4 million in Q3 2013; $29.5 million YTD 2013). The 2014 periods had no such loss.
- YTD adjusted EBITDA, a non-GAAP measure, was $57.9 million versus $53.2 million, up 9%; margin was 33% versus 32%. The filing cautions that this measure is not a substitute for GAAP results or operating cash flow.
Cash flow, balance sheet and capital allocation
- YTD operating cash flow was $34.1 million, up from $18.0 million. Investing cash outflow was $21.4 million, including $15.0 million net cash consideration for Pulpo and $6.4 million of capital expenditures. Financing cash outflow was $10.2 million, including $6.7 million in dividends, $3.5 million of share repurchases and $1.9 million of debt payments.
- Cash was $46.3 million at September 30, 2014, versus $43.8 million at year-end 2013. Current assets were $123.5 million and current liabilities $34.4 million.
- Long-term debt, including current maturities, was approximately $362.2 million, versus $364.1 million at year-end 2013. The filing reports a 3.5% effective interest rate. The $30 million revolving facility was available for working capital and other permitted uses; the filing does not state a drawn balance.
- Net leverage ratio was 4.4x at September 30, 2014, versus 4.5x a year earlier; the company reported covenant compliance. The credit agreement’s maximum ratio is 6.5x when the revolver is drawn.
- The board authorized up to $10 million in Class A share repurchases. Through September 30, the company repurchased approximately 773,000 shares for $3.5 million, leaving $6.5 million authorized. Dividends declared were $0.03 per share in Q3 and $0.08 per share YTD.
Material changes, outlook and risks
- Entravision acquired digital advertising company Pulpo on June 18 for $15.0 million net of acquired cash, plus contingent consideration initially valued at $1.1 million. Additional payments of up to $3.0 million may be due over three years based on performance. Purchase-price allocations remained provisional; $13.8 million of goodwill was recorded.
- Management expected 2014 revenue to continue increasing, supported by political advertising, retransmission consent and Pulpo. It anticipated full-year retransmission consent revenue above 2013 and capital expenditures of approximately $10 million. Management expected positive operating cash flow for 2014 and said cash, operating cash flow and available revolver borrowings should meet anticipated needs for at least 12 months.
- Revenue is subject to advertising seasonality, cancellations and changes in local and national ad demand. Management noted even-year political advertising and World Cup activity can boost results; the World Cup-related revenue benefit is not expected to recur on the same basis after 2014.
- Debt is variable-rate and secured, with restrictive covenants. A 100-basis-point LIBOR increase was estimated to raise annual interest expense and reduce operating cash flow by approximately $0.8 million. Interest-rate swaps cover $186 million of debt beginning December 31, 2015; their September 30 fair value was a $1.7 million liability.
- Substantially all television stations are Univision- or UniMás-affiliated. The retransmission-consent proxy agreement with Univision was due to expire in December 2014; Entravision intended to negotiate an extension or replacement but gave no assurance one would be reached. Univision was owed $10.8 million for carriage-related agreements at September 30.
- Management said ordinary-course litigation was not expected to materially affect the company. The filing reported no material change in risk factors and no defaults upon senior securities. Disclosure controls were deemed effective.
Important facts for investors to verify
- Whether the Univision retransmission-consent proxy arrangement was extended or replaced, and the resulting terms and revenue economics.
- Subsequent advertising trends, especially the degree to which Q3 and YTD growth depended on political and World Cup advertising.
- Pulpo’s subsequent revenue, profitability, integration progress, final acquisition valuations and any contingent consideration payments.
- Debt balances, revolver usage, interest-rate exposure, covenant headroom and the effect of swaps when they become effective.
- Cash generation and capital allocation, including planned capital expenditures, dividends and remaining share-repurchase authorization.