Business context and reporting period
Entravision Communications Corporation’s Form 10-K covers the fiscal year ended December 31, 2019; it is an annual report, not a standalone fourth-quarter filing. Entravision operates television and radio businesses serving U.S. Hispanic audiences and a digital advertising business with operations primarily in Spain, Mexico, Argentina and other Latin American markets. Its three reportable segments are television, radio and digital.
At year-end, the company owned or operated 56 primary television stations and 49 radio stations. Univision supplies programming to substantially all of its television stations and is also a significant commercial partner.
Financial performance and liquidity
Amounts below are in millions of dollars except per-share data and ratios.
| Metric | 2019 | 2018 | Change |
|---|---|---|---|
| Net revenue | $273.6 | $297.8 | Down 8% |
| Operating income (loss) | $(1.7) | $33.6 | Declined $35.2 |
| Net income (loss) | $(19.7) | $12.2 | Declined $31.9 |
| Basic and diluted EPS | $(0.23) | $0.14 basic; $0.13 diluted | — |
| Cash from operating activities | $31.5 | $33.8 | Down $2.3 |
| Adjusted EBITDA, non-GAAP | $41.2 | $54.0 | Down 24% |
| Capital expenditures | $25.3 | $15.7 | Up $9.6 |
Fourth-quarter 2019 revenue was $70.8 million, compared with $82.1 million in fourth-quarter 2018. Fourth-quarter net income was $7.4 million, or $0.09 per share, versus $6.9 million, or $0.08 per diluted share, in the prior-year quarter.
Segment revenue was television $149.7 million, radio $55.0 million and digital $68.9 million. Segment operating profit was $55.2 million for television; radio recorded a $3.6 million loss and digital a $4.8 million loss. Digital cost of revenue declined to 53% of digital revenue from 56%, improving its gross-margin percentage despite lower sales.
Year-end cash and cash equivalents were $33.1 million, with $91.7 million of marketable securities. Total debt principal was $218.2 million, down from $246.2 million; the reported total leverage ratio was 3.5x, compared with 3.2x in 2018. The term loan’s year-end interest rate was 4.55%, and it matures in November 2024. The company reported $50.4 million of operating lease liabilities. The filing states that cash, operating cash flow and available credit were expected to cover anticipated requirements for at least the following 12 months.
Material changes versus the prior comparable period
- Revenue fell $24.2 million. Digital revenue declined $12.1 million, radio $8.9 million and television $3.2 million.
- Management attributed broadcast revenue declines mainly to ratings pressure, competition and changing audience preferences. Radio also lacked the FIFA World Cup-related revenue recorded in 2018. Advertising shifting from traditional media to digital continued to weigh on television and radio.
- Digital revenue declined amid a shift toward programmatic advertising and advertiser demands for greater efficiency and lower intermediary costs. Management said its strategic changes reduced revenue volume but improved digital gross-margin percentage.
- Operating results included a $32.1 million impairment charge, primarily a $27.7 million digital goodwill impairment, plus impairments of television licenses and assets. By contrast, 2019 included $6.5 million of income from the change in fair value of contingent consideration and $6.0 million of gains related to television channel relocation.
- Debt principal payments were $28.0 million in 2019, including a $25.0 million December prepayment. The company repurchased $12.6 million of shares and paid $17.0 million in dividends.
- Marketable securities decreased to $91.7 million from $132.4 million. Investing cash flow was positive $14.4 million in 2019, versus cash used of $159.5 million in 2018, when the company made substantial marketable-security purchases.
Outlook, risks and unusual items
- Management anticipated 2020 revenue growth versus 2019, citing political advertising and retransmission-consent revenue, and expected positive operating cash flow. It forecast approximately $9.0 million of 2020 capital expenditures, including about $1.4 million for broadcast repacking costs expected to be reimbursed by the FCC. These are filing-date expectations, not a guarantee.
- The filing identifies COVID-19 and broader economic uncertainty as potential threats to advertising demand, cash generation, financing and asset values. It does not quantify the potential effect.
- Variable-rate debt exposes the company to interest-rate changes: a 100-basis-point increase in LIBOR was estimated to raise annual interest expense and reduce operating cash flow by approximately $2.2 million.
- Univision relationship and programming concentration, retransmission-consent negotiations, audience declines, competition from digital platforms, and the ability to monetize spectrum are material business risks. Univision agreements generally run through 2026, but certain markets’ agreements expire in 2021.
- The company expects to stop broadcasting on XHRIO-TV when its current Mexican license term ends on December 31, 2021, after electing not to make a required 20-year license-fee prepayment. It recorded a $3.5 million impairment related to the license. The planned sale of KMCC-TV for $4.0 million was subject to FCC consent and customary closing conditions, with closing expected in the first half of 2020.
- Management and the auditor concluded that internal control over financial reporting was ineffective at year-end because a material weakness in digital-segment revenue and Headway financial controls remained unremediated. The auditor nevertheless issued an unqualified opinion on the 2019 financial statements and an adverse opinion on internal controls.
- The 2017 credit facility restricts acquisitions, asset sales, dividends and other actions. The company said it believed it was in compliance with its covenants at December 31, 2019; a prior late filing of 2018 audited statements had required a lender waiver and agreement amendment in 2019.
- Argentina’s high inflation, foreign-currency movements, data-privacy rules (including the California Consumer Privacy Act effective January 2020), and potential future impairment of goodwill or broadcast licenses add uncertainty. Management reported no litigation expected to have a material adverse effect.
Most important facts for investors to verify
- Whether revenue, audience ratings and segment profitability stabilized or improved after 2019, particularly in radio and digital.
- Whether 2020 political and retransmission-consent revenue expectations were achieved, and how COVID-19 affected advertising and cash flow.
- Current debt, cash and marketable-security balances; leverage; interest costs; and compliance with credit-agreement terms and required debt payments.
- Progress in remediating the digital-segment material weakness and whether subsequent filings or audits identify additional control issues.
- Further impairment risk, especially for digital goodwill and the television and radio licenses; also confirm the XHRIO-TV wind-down and KMCC-TV sale outcome.
- Whether Univision affiliation and proxy agreements are renewed on acceptable terms, particularly for markets with 2021 expirations.