Entravision Communications Corporation — 2017 Form 10-K
Reporting period: Fiscal year ended December 31, 2017. This is an annual report, not a quarterly filing; fourth-quarter results are noted below. Entravision operates television, radio and digital media businesses, primarily serving U.S. Hispanic audiences. Television represented 77% of 2017 revenue, radio 12% and digital 11%.
Financial performance and liquidity
| Metric | 2017 | 2016 |
|---|---|---|
| Net revenue | $536.0 million | $258.5 million |
| Operating income | $278.4 million | $48.9 million |
| Net income | $176.3 million | $20.4 million |
| Diluted earnings per share | $1.92 | $0.22 |
| Cash provided by operating activities | $301.5 million | $57.3 million |
| Capital expenditures | $12.7 million | $9.3 million |
| Consolidated adjusted EBITDA | $51.4 million | $69.2 million |
| Total debt at year-end | Approximately $299.3 million | Approximately $290.4 million |
Reported revenue included $263.9 million from the FCC spectrum auction, net of $12.3 million in carrying-value write-offs. Excluding this unusual auction revenue, advertising and retransmission consent revenue rose 5% to $272.1 million. The reported revenue increase therefore does not represent comparable recurring growth. Adjusted EBITDA, a non-GAAP measure, fell 26%; its margin was 10% of reported revenue versus 27% in 2016, with the comparison affected by auction revenue and related adjustments.
Year-end cash and cash equivalents were $39.6 million, plus $222.3 million of restricted cash, primarily auction proceeds held for a like-kind exchange. The filing says $221.5 million was released from restriction in January 2018. Current assets of $352.5 million include that restricted cash; current liabilities were $62.5 million. Management expected cash, operating cash flow and available credit-facility borrowings to cover anticipated needs for at least 12 months.
Operating cash flow rose sharply, but included significant non-cash adjustments, including $82.0 million of deferred income taxes. The filing reports $301.5 million of operating cash flow for 2017. Debt was variable-rate under a new $300 million senior secured term loan, bearing Eurodollar Rate plus 2.75% (or Base Rate plus 1.75%) and maturing November 2024. The reported total leverage ratio was 4.4:1 at year-end, up from 3.1:1 in 2016. A 100-basis-point LIBOR increase was estimated to add about $3.0 million to annual interest expense on the year-end balance.
Material changes and unusual items
- Television revenue rose substantially because of the FCC auction. The company relinquished permanent spectrum rights for four stations and recognized $263.9 million of auction revenue; management did not expect a similar transaction in the foreseeable future.
- Advertising and retransmission consent revenue increased 5% overall. Digital revenue grew to $57.1 million from $23.1 million, primarily after the April 2017 Headway acquisition. Radio revenue fell 12% to $66.9 million, and television advertising and retransmission revenue declined 7% to $148.1 million.
- Digital segment operating results turned to a $2.4 million loss from $1.0 million of operating profit. Management cited Headway-related costs, third-party media costs and lower-margin programmatic activity. Radio segment operating profit fell to $0.9 million from $7.2 million.
- The company acquired Headway for cash consideration of $12.0 million, net of cash acquired, plus contingent consideration valued at $15.9 million. Potential additional contingent payments range from $0 to $27.0 million over three years; employee payments of up to approximately $7.5 million are treated as compensation expense. It also acquired KMIR-TV and KPSE-LD for $21 million in November 2017.
- Entravision refinanced its prior facility in November 2017 with a $300 million term loan and recorded a $3.3 million debt-extinguishment loss. It terminated interest-rate swaps, reclassifying $2.5 million from accumulated other comprehensive income to interest expense.
- The Tax Cuts and Jobs Act produced a provisional $17.3 million tax benefit from remeasuring deferred taxes after the federal corporate rate reduction to 21%. The company said its accounting for certain tax-law provisions, including GILTI, remained under evaluation.
- Fourth-quarter 2017 revenue was $73.5 million and net income was $13.0 million, versus $70.3 million and $7.0 million, respectively, in fourth-quarter 2016.
Outlook, risks and contingencies
- For 2018, management expected higher digital, retransmission consent and political revenue, but lower spectrum-usage-rights revenue. It expected retransmission consent revenue to exceed 2017 and operating cash flow to remain positive. Expected 2018 capital expenditures were approximately $10 million, excluding amounts expected to be reimbursed by the FCC.
- Management expected direct operating and selling, general and administrative expenses to rise as Headway contributed for a full year; corporate expenses were expected to decline from 2017, partly because 2017 included auction and acquisition costs.
- A material weakness in internal control over financial reporting was identified, primarily related to insufficient accounting resources and controls following the Headway acquisition and the complexity of certain accounting matters. Management reported remediation efforts underway, including additional personnel and reporting software. The auditor issued an adverse opinion on internal control; it gave an unqualified opinion on the financial statements.
- Goodwill and other intangible assets totaled $348.5 million. The digital reporting unit’s estimated fair value exceeded carrying value by only 1%; management disclosed sensitivity to discount-rate and growth assumptions. No 2017 impairment charge was recorded.
- Key risks include substantial secured debt and restrictive covenants, advertising volatility and competition, declining radio performance, dependence on Univision for television programming and retransmission arrangements, spectrum repacking and monetization uncertainty, digital privacy regulation, foreign-exchange and international operating risks, and the identified control weakness.
- The company reported no litigation that management believed was likely to have a material adverse effect. Contractual obligations included $66.5 million of operating lease payments and $17.5 million for audience research and ratings services; $0.8 million of uncertain-tax-position liabilities was excluded from its contractual-obligations table because settlement timing could not be estimated reliably.
Most important facts for investors to verify
- How much of 2018 and subsequent revenue and cash generation is recurring after the one-time FCC auction proceeds, and how the released restricted proceeds were ultimately used.
- Whether the company’s leverage, interest costs and debt-covenant capacity remain manageable given adjusted EBITDA of $51.4 million and a reported 4.4:1 total leverage ratio.
- Whether radio revenue stabilizes and Headway delivers profitable growth, particularly as programmatic activity carries lower margins.
- Whether the digital reporting unit’s narrow impairment cushion persists and whether management completes remediation of the material weakness effectively.
- Whether the 2018 outlook for higher retransmission, digital and political revenue and lower spectrum revenue is achieved, and whether FCC repacking costs are reimbursed as expected.