Business context and reporting period
Entravision Communications Corporation’s Form 10-K covers the fiscal year ended December 31, 2013; it is an annual report, not a standalone fourth-quarter filing. The company operates television and radio broadcasting businesses focused on Hispanic audiences in the U.S. and border markets. It reported 58 primary television stations and 49 radio stations. Television generated about 70% of 2013 revenue and radio about 30%.
Financial performance and position
| Metric | FY 2013 | FY 2012 |
|---|---|---|
| Net revenue | $223.9 million | $223.3 million |
| Operating income | $54.0 million | $58.8 million |
| Net income | $133.8 million | $13.6 million |
| Operating cash flow | $32.8 million | $40.0 million |
| Adjusted EBITDA (non-GAAP) | $73.0 million | $76.9 million |
| Cash and cash equivalents at year-end | $43.8 million | $36.1 million |
| Total debt at year-end | $364.1 million | $340.8 million |
Revenue was nearly flat year over year. Operating margin was approximately 24.1%, down from 26.3%; adjusted EBITDA margin was approximately 32.6%, down from 34.4%. The reported net income surge principally reflects a $134.1 million income tax benefit, including reversal of about $144 million of deferred-tax valuation allowance; it does not indicate a comparable increase in operating earnings. The company reported a $29.7 million loss on extinguishment of debt.
Current assets were $111.1 million and current liabilities $35.1 million at year-end. The company reported a 4.7x total net leverage ratio, versus 4.2x in 2012, and said it was within the 7.0x maximum applicable if the revolving facility is drawn. Capital expenditures were $9.7 million. Stockholders’ equity rose to $136.0 million from $5.4 million, while accumulated deficit remained $791.6 million.
Material changes versus the prior comparable period
- Revenue increased by $0.7 million (about 0.3%): television revenue was $157.0 million, essentially unchanged, and radio revenue rose 1% to $66.9 million.
- Retransmission-consent revenue rose to $22.2 million from $20.2 million. Local advertising supported growth; political advertising was not material in 2013, unlike 2012.
- Direct operating expenses rose 12% to $103.7 million, while selling, general and administrative expenses fell 17% to $31.6 million. Management attributed much of the change to a new management structure that reclassified salary expense between these categories, as well as higher commissions and bonuses.
- Operating income fell 8%, and adjusted EBITDA declined 5%, despite lower interest expense. Interest expense decreased to $24.6 million from $35.4 million following refinancing and redemption of the prior notes.
- Operating cash flow declined to $32.8 million from $40.0 million. Year-end cash increased, and debt rose by about $23.2 million, reflecting the refinancing and related transactions.
Outlook, risks and unusual items
- Management anticipated 2014 revenue growth, citing World Cup and political advertising, as well as higher retransmission-consent revenue. It expected positive operating cash flow and approximately $10 million of capital expenditures in 2014; these are expectations, not guarantees.
- In 2013, Entravision replaced its prior financing with a senior secured credit facility, drew a $375 million Term Loan B, redeemed approximately $324 million of remaining 8.75% notes, and prepaid $10 million of the term loan at year-end. Term Loan B matures in 2020; the revolving facility matures in 2018. Year-end debt had a 3.5% effective variable interest rate. A 100-basis-point LIBOR increase was estimated to add about $0.9 million to annual interest expense.
- Interest-rate swaps covering $186 million of debt begin December 31, 2015 and effectively fix that portion at an all-in rate of 5.23% through December 2018. The credit agreement includes restrictive covenants, limits on acquisitions and other actions, and a leverage covenant if the revolver is drawn; covenant breach could trigger default or acceleration.
- Univision is a significant programming, national-sales and retransmission-consent partner. The retransmission-consent proxy agreement was due to expire in December 2014; renewal or replacement terms were uncertain. Univision’s network affiliation agreements run through 2021, subject to their terms.
- Key risks include reliance on advertising without long-term advertiser commitments, economic and competitive pressures, debt service and refinancing, reliance on Univision, broadcast-license renewal, spectrum auctions and repacking, and technology-driven changes in media consumption. Goodwill and broadcast licenses are significant assets and depend on management estimates; no impairment charge was recorded in 2013.
- The company paid $0.125 per share in 2013, including a $0.10 special dividend and a $0.025 quarterly dividend. Future dividends remain subject to board approval and credit-agreement restrictions. Management reported no litigation expected to have a material adverse effect; management and the auditor reported effective internal control over financial reporting.
Important facts for investors to verify
- Review the tax note and assess the sustainability of earnings excluding the large deferred-tax valuation-allowance reversal.
- Confirm current debt, interest-rate exposure, leverage, covenant headroom and scheduled principal payments under the credit agreement.
- Check whether the Univision retransmission-consent proxy arrangement was renewed or replaced after its December 2014 expiration, and the resulting economics.
- Compare subsequent advertising, retransmission-consent revenue, margins and cash flow with management’s 2014 outlook, including the effects of political and World Cup advertising.
- Monitor spectrum and FCC developments, license renewals, and impairment assumptions for goodwill and broadcast licenses.