UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q
(MARK ONE)
x |
QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 |
FOR THE QUARTERLY PERIOD ENDED March 31, 2016
OR
¨ |
TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 |
FOR THE TRANSITION PERIOD FROM TO
COMMISSION FILE NUMBER 1-15997
ENTRAVISION COMMUNICATIONS CORPORATION
(Exact name of registrant as specified in its charter)
Delaware |
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95-4783236 |
(State or other jurisdiction of incorporation or organization) |
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(I.R.S. Employer Identification No.) |
2425 Olympic Boulevard, Suite 6000 West
Santa Monica, California 90404
(Address of principal executive offices) (Zip Code)
(310) 447-3870
(Registrant’s telephone number, including area code)
N/A
(Former name, former address and former fiscal year, if changed since last report)
Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.
Yes x No ¨
Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files).
Yes x No ¨
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer or a non-accelerated filer. See the definitions of “large accelerated filer”, “accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Exchange Act. (Check one):
Large accelerated filer |
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¨ |
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Accelerated filer |
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x |
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Non-accelerated filer |
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¨ |
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Smaller reporting company |
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¨ |
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).
Yes ¨ No x
As of May 2, 2016, there were 64,743,187 shares, $0.0001 par value per share, of the registrant’s Class A common stock outstanding, 14,927,613 shares, $0.0001 par value per share, of the registrant’s Class B common stock outstanding and 9,352,729 shares, $0.0001 par value per share, of the registrant’s Class U common stock outstanding.
ENTRAVISION COMMUNICATIONS CORPORATION
FORM 10-Q FOR THE THREE-MONTH PERIOD ENDED MARCH 31, 2016
TABLE OF CONTENTS
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Page Number |
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ITEM 1. |
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3 |
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CONSOLIDATED BALANCE SHEETS (UNAUDITED) AS OF MARCH 31, 2016 AND DECEMBER 31, 2015 |
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3 |
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4 |
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5 |
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6 |
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7 |
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ITEM 2. |
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MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS |
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18 |
ITEM 3. |
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29 |
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ITEM 4. |
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29 |
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ITEM 1. |
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30 |
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ITEM 1A. |
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30 |
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ITEM 2. |
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30 |
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ITEM 3. |
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30 |
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ITEM 4. |
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30 |
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ITEM 5. |
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30 |
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ITEM 6. |
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31 |
1
This document contains “forward-looking statements” within the meaning of the Private Securities Litigation Reform Act of 1995, Section 27A of the Securities Act of 1933 and Section 21E of the Securities Exchange Act of 1934. All statements other than statements of historical fact are “forward-looking statements” for purposes of federal and state securities laws, including, but not limited to, any projections of earnings, revenue or other financial items; any statements of the plans, strategies and objectives of management for future operations; any statements concerning proposed new services or developments; any statements regarding future economic conditions or performance; any statements of belief; and any statements of assumptions underlying any of the foregoing.
Forward-looking statements may include the words “may,” “could,” “will,” “estimate,” “intend,” “continue,” “believe,” “expect” or “anticipate” or other similar words. These forward-looking statements present our estimates and assumptions only as of the date of this report. Except for our ongoing obligation to disclose material information as required by the federal securities laws, we do not intend, and undertake no obligation, to update any forward-looking statement.
Although we believe that the expectations reflected in any of our forward-looking statements are reasonable, actual results could differ materially from those projected or assumed in any of our forward-looking statements. Our future financial condition and results of operations, as well as any forward-looking statements, are subject to change and inherent risks and uncertainties. Some of the key factors impacting these risks and uncertainties include, but are not limited to:
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risks related to our substantial indebtedness or our ability to raise capital; |
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provisions of our debt instruments, including the agreement dated as of May 31, 2013, or the 2013 Credit Agreement, which governs our current credit facility, or the 2013 Credit Facility, the terms of which restrict certain aspects of the operation of our business; |
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our continued compliance with all of our obligations, including financial covenants and ratios, under the 2013 Credit Agreement; |
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cancellations or reductions of advertising due to the then current economic environment or otherwise; |
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advertising rates remaining constant or decreasing; |
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rapid changes in digital media advertising; |
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the impact of rigorous competition in Spanish-language media and in the advertising industry generally; |
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the impact on our business, if any, as a result of changes in the way market share is measured by third parties; |
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our relationship with Univision Communications Inc., or Univision; |
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the extent to which we continue to generate revenue under retransmission consent agreements; |
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subject to restrictions contained in the 2013 Credit Agreement, the overall success of our acquisition strategy and the integration of any acquired assets with our existing operations; |
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industry-wide market factors and regulatory and other developments affecting our operations; |
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economic uncertainty; |
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the impact of any potential future impairment of our assets; |
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risks related to changes in accounting interpretations; and |
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the impact, including additional costs, of mandates and other obligations that may be imposed upon us as a result of new federal healthcare laws, including the Affordable Care Act, the rules and regulations promulgated thereunder and any executive action with respect thereto. |
For a detailed description of these and other factors that could cause actual results to differ materially from those expressed in any forward-looking statement, please see the section entitled “Risk Factors,” beginning on page 28 of our Annual Report on Form 10-K for the year ended December 31, 2015.
2
ITEM 1. FINANCIAL STATEMENTS
ENTRAVISION COMMUNICATIONS CORPORATION
CONSOLIDATED BALANCE SHEETS (UNAUDITED)
(In thousands, except share and per share data)
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March 31, |
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December 31, |
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2016 |
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2015 |
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ASSETS |
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Current assets |
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Cash and cash equivalents |
$ |
22,991 |
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$ |
47,924 |
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Short-term investments |
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30,000 |
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— |
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Trade receivables, net of allowance for doubtful accounts of $2,989 and $3,040 (including related parties of $10,208 and $5,534) |
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60,709 |
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66,399 |
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Prepaid expenses and other current assets (including related parties of $274 and $274) |
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6,000 |
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5,705 |
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Total current assets |
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119,700 |
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120,028 |
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Property and equipment, net of accumulated depreciation of $201,240 and $198,282 |
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56,963 |
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57,874 |
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Intangible assets subject to amortization, net of accumulated amortization of $79,117 and $78,234 (including related parties of $13,338 and $13,918) |
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15,774 |
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16,656 |
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Intangible assets not subject to amortization |
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220,701 |
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220,701 |
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Goodwill |
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50,081 |
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50,081 |
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Deferred income taxes |
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57,060 |
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57,929 |
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Other assets |
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1,611 |
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1,693 |
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Total assets |
$ |
521,890 |
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$ |
524,962 |
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LIABILITIES AND STOCKHOLDERS' EQUITY |
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Current liabilities |
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Current maturities of long-term debt |
$ |
3,750 |
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$ |
3,750 |
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Accounts payable and accrued expenses (including related parties of $4,017 and $3,909) |
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26,271 |
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29,787 |
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Total current liabilities |
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30,021 |
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33,537 |
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Long-term debt, less current maturities, net of unamortized debt issuance costs of $3,054 and $3,226 |
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308,821 |
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309,587 |
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Other long-term liabilities |
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15,572 |
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14,565 |
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Total liabilities |
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354,414 |
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357,689 |
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Commitments and contingencies (note 4) |
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Stockholders' equity |
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Class A common stock, $0.0001 par value, 260,000,000 shares authorized; shares issued and outstanding 2016 64,755,921; 2015 64,477,171 |
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6 |
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6 |
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Class B common stock, $0.0001 par value, 40,000,000 shares authorized; shares issued and outstanding 2016 and 2015 14,927,613 |
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2 |
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2 |
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Class U common stock, $0.0001 par value, 40,000,000 shares authorized; shares issued and outstanding 2016 and 2015 9,352,729 |
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1 |
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1 |
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Additional paid-in capital |
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908,792 |
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910,228 |
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Accumulated deficit |
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(736,579 |
) |
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(738,849 |
) |
Accumulated other comprehensive income (loss) |
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(4,746 |
) |
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(4,115 |
) |
Total stockholders' equity |
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167,476 |
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167,273 |
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Total liabilities and stockholders' equity |
$ |
521,890 |
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$ |
524,962 |
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See Notes to Consolidated Financial Statements
3
ENTRAVISION COMMUNICATIONS CORPORATION
CONSOLIDATED STATEMENTS OF OPERATIONS (UNAUDITED)
(In thousands, except share and per share data)
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Three-Month Period |
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Ended March 31, |
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2016 |
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2015 |
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Net revenue |
$ |
58,113 |
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$ |
59,550 |
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Expenses: |
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Cost of revenue - digital media |
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1,839 |
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1,360 |
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Direct operating expenses (including related parties of $2,311 and $2,167) (including non-cash stock-based compensation of $321 and $358) |
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27,565 |
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26,685 |
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Selling, general and administrative expenses |
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11,435 |
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10,501 |
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Corporate expenses (including non-cash stock-based compensation of $625 and $509) |
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5,604 |
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4,993 |
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Depreciation and amortization (includes direct operating of $2,455 and $2,563; selling, general and administrative of $1,199 and $1,059 and corporate of $373 and $340) (including related parties of $580 and $581) |
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4,027 |
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3,962 |
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50,470 |
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47,501 |
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Operating income |
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7,643 |
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12,049 |
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Interest expense |
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(3,866 |
) |
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(3,227 |
) |
Interest income |
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7 |
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8 |
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Income before income taxes |
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3,784 |
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8,830 |
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Income tax (expense) benefit |
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(1,514 |
) |
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(3,546 |
) |
Net income |
$ |
2,270 |
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$ |
5,284 |
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Basic and diluted earnings per share: |
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Net income per share, basic |
$ |
0.03 |
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$ |
0.06 |
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Net income per share, diluted |
$ |
0.02 |
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$ |
0.06 |
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Cash dividends declared per common share |
$ |
0.03 |
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$ |
0.03 |
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Weighted average common shares outstanding, basic |
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88,897,456 |
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87,531,375 |
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Weighted average common shares outstanding, diluted |
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90,932,109 |
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90,085,961 |
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See Notes to Consolidated Financial Statements
4
ENTRAVISION COMMUNICATIONS CORPORATION
CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME (LOSS) (UNAUDITED)
(In thousands, except share and per share data)
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Three-Month Period |
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Ended March 31, |
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2016 |
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2015 |
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Net income |
$ |
2,270 |
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$ |
5,284 |
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Other comprehensive income (loss), net of tax: |
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Change in fair value of interest rate swap agreements |
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(632 |
) |
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(1,170 |
) |
Total other comprehensive income (loss) |
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(632 |
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(1,170 |
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Comprehensive income |
$ |
1,638 |
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$ |
4,114 |
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See Notes to Consolidated Financial Statements
5
ENTRAVISION COMMUNICATIONS CORPORATION
CONSOLIDATED STATEMENTS OF CASH FLOWS (UNAUDITED)
(In thousands)
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Three-Month Period |
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Ended March 31, |
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2016 |
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2015 |
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Cash flows from operating activities: |
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Net income |
$ |
2,270 |
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$ |
5,284 |
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Adjustments to reconcile net income to net cash provided by operating activities: |
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Depreciation and amortization |
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4,027 |
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3,962 |
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Deferred income taxes |
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1,264 |
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2,959 |
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Amortization of debt issue costs |
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191 |
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194 |
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Amortization of syndication contracts |
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89 |
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|
86 |
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Payments on syndication contracts |
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(94 |
) |
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(122 |
) |
Non-cash stock-based compensation |
|
946 |
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|
867 |
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Changes in assets and liabilities: |
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|
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(Increase) decrease in accounts receivable |
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5,800 |
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|
|
15,976 |
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(Increase) decrease in prepaid expenses and other assets |
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(378 |
) |
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|
(561 |
) |
Increase (decrease) in accounts payable, accrued expenses and other liabilities |
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(3,594 |
) |
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(3,840 |
) |
Net cash provided by operating activities |
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10,521 |
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24,805 |
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Cash flows from investing activities: |
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Purchases of short-term investments |
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(30,000 |
) |
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— |
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Purchases of property and equipment and intangibles |
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(2,135 |
) |
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(2,972 |
) |
Net cash used in investing activities |
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(32,135 |
) |
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|
(2,972 |
) |
Cash flows from financing activities: |
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|
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Proceeds from stock option exercises |
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400 |
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|
900 |
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Payments on long-term debt |
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(938 |
) |
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|
(938 |
) |
Dividends paid |
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(2,781 |
) |
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|
(2,191 |
) |
Payment of contingent consideration |
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— |
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(1,000 |
) |
Net cash used in financing activities |
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(3,319 |
) |
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|
(3,229 |
) |
Net increase (decrease) in cash and cash equivalents |
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(24,933 |
) |
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|
18,604 |
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Cash and cash equivalents: |
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|
|
|
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Beginning |
|
47,924 |
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|
|
31,260 |
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Ending |
$ |
22,991 |
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$ |
49,864 |
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Supplemental disclosures of cash flow information: |
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Cash payments for: |
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Interest |
$ |
3,675 |
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|
$ |
3,032 |
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Income taxes |
$ |
250 |
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|
$ |
587 |
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See Notes to Consolidated Financial Statements
6
ENTRAVISION COMMUNICATIONS CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
MARCH 31, 2016
1. BASIS OF PRESENTATION
Presentation
The consolidated financial statements included herein have been prepared by Entravision Communications Corporation (the “Company”), pursuant to the rules and regulations of the Securities and Exchange Commission (“SEC”). Certain information and footnote disclosures normally included in financial statements prepared in accordance with accounting principles generally accepted in the United States of America have been omitted pursuant to such rules and regulations. These consolidated financial statements and notes thereto should be read in conjunction with the Company’s audited consolidated financial statements for the year ended December 31, 2015 included in the Company’s Annual Report on Form 10-K for the year ended December 31, 2015. The unaudited information contained herein has been prepared on the same basis as the Company’s audited consolidated financial statements and, in the opinion of the Company’s management, includes all adjustments (consisting of only normal recurring adjustments) necessary for a fair presentation of the information for the periods presented. The interim results presented herein are not necessarily indicative of the results of operations that may be expected for the full fiscal year ending December 31, 2016 or any other future period.
Certain amounts in the Company’s prior period consolidated financial statements and notes to the financial statements have been reclassified to conform to current period presentation.
2. THE COMPANY AND SIGNIFICANT ACCOUNTING POLICIES
Nature of Business
The Company is a leading media company that reaches and engages Hispanics in the United States and certain border markets of Mexico across media channels and advertising platforms. The Company’s expansive portfolio encompasses integrated marketing and media solutions, comprised of television, radio and digital properties and data analytics services.
Revenue Recognition
Television and radio revenue related to the sale of advertising is recognized at the time of broadcast. Revenue for contracts with advertising agencies is recorded at an amount that is net of the commission retained by the agency. Revenue from contracts directly with the advertisers is recorded at gross revenue and the related commission or national representation fee is recorded in operating expense. Cash payments received prior to services rendered result in deferred revenue, which is then recognized as revenue when the advertising time or space is actually provided. Digital related revenue is recognized when display or other digital advertisements record impressions on the websites of the Company’s third-party publishers.
The Company generates revenue under arrangements that are sold on a standalone basis within a specific segment, and those that are sold on a combined basis across multiple segments. The Company has determined that in such revenue arrangements which contain multiple products and services, revenues are allocated based on the relative fair value of each delivered item and recognized in accordance with the applicable revenue recognition criteria for the specific unit of accounting.
In August 2008, the Company entered into a proxy agreement with Univision pursuant to which the Company granted Univision the right to negotiate retransmission consent agreements for its Univision- and UniMás-affiliated television station signals. Advertising related to carriage of the Company’s Univision- and UniMás-affiliated television station signals is recognized at the time of broadcast. See more details under the Related Party section below.
The Company also generates revenue from agreements associated with television stations in order to accommodate the operations of telecommunications operators. Revenue from such agreements is recognized when the Company has relinquished all rights to operate the station on the existing channel free from interference to the telecommunications operators.
Related Party
Substantially all of the Company’s stations are Univision- or UniMás-affiliated television stations. The Company’s network affiliation agreements, as amended, with Univision provide certain of its owned stations the exclusive right to broadcast Univision’s primary network and UniMás network programming in their respective markets. These long-term affiliation agreements each expire in 2021, and can be renewed for multiple, successive two-year terms at Univision’s option, subject to the Company’s consent. Under the Univision network affiliation agreement, the Company retains the right to sell approximately six minutes per hour of the available
7
advertising time on Univision’s primary network, subject to adjustment from time to time by Univision, but in no event less than four minutes. Under the UniMás network affiliation agreement, the Company retains the right to sell approximately four and a half minutes per hour of the available advertising time the UniMás network, subject to adjustment from time to time by Univision.
Under the network affiliation agreements, Univision acts as the Company’s exclusive sales representative for the sale of national advertising on the Company’s Univision- and UniMás-affiliate television stations, and the Company pays certain sales representation fees to Univision relating to sales of all advertising for broadcast on the Company’s Univision- and UniMás-affiliate television stations. During the three-month periods ended March 31, 2016 and 2015, the amount the Company paid Univision in this capacity was $2.3 million and $2.2 million, respectively.
The Company also generates revenue under two marketing and sales agreements with Univision, which give the Company the right through 2021 to manage the marketing and sales operations of Univision-owned UniMás and Univision affiliates in six markets – Albuquerque, Boston, Denver, Orlando, Tampa and Washington, D.C.
In August 2008, the Company entered into a proxy agreement with Univision pursuant to which the Company granted Univision the right to negotiate the terms of retransmission consent agreements for its Univision- and UniMás-affiliated television station signals for a term of six years, expiring in December 2014, which Univision and the Company have extended through May 31, 2016. Among other things, the proxy agreement provides terms relating to compensation to be paid to the Company by Univision with respect to retransmission consent agreements entered into with Multichannel Video Programming Distributors (“MVPDs”). As of March 31, 2016, the amount due to the Company from Univision was $10.2 million related to the agreements for the carriage of its Univision and UniMás-affiliated television station signals. The term of the proxy agreement extends with respect to any MVPD for the length of the term of any retransmission consent agreement in effect before the expiration of the proxy agreement.
Univision currently owns approximately 10% of the Company’s common stock on a fully-converted basis. The Class U common stock held by Univision has limited voting rights and does not include the right to elect directors. As the holder of all of the Company’s issued and outstanding Class U common stock, so long as Univision holds a certain number of shares, the Company will not, without the consent of Univision, merge, consolidate or enter into another business combination, dissolve or liquidate the Company or dispose of any interest in any Federal Communications Commission, or FCC, license for any of its Univision-affiliated television stations, among other things. Each share of Class U common stock is automatically convertible into one share of Class A common stock (subject to adjustment for stock splits, dividends or combinations) in connection with any transfer to a third party that is not an affiliate of Univision.
Stock-Based Compensation
The Company measures all stock-based awards using a fair value method and recognizes the related stock-based compensation expense in the consolidated financial statements over the requisite service period. As stock-based compensation expense recognized in the Company’s consolidated financial statements is based on awards ultimately expected to vest, it has been reduced for estimated forfeitures.
Stock-based compensation expense related to grants of stock options and restricted stock units was $0.9 million for each of the three-month periods ended March 31, 2016 and 2015.
Stock Options
Stock-based compensation expense related to stock options is based on the fair value on the date of grant using the Black-Scholes option pricing model and is amortized over the vesting period, generally between 1 to 4 years.
As of March 31, 2016, there was approximately $0.6 million of total unrecognized compensation expense related to grants of stock options that is expected to be recognized over a weighted-average period of 1.4 years.
Restricted Stock Units
Stock-based compensation expense related to restricted stock units is based on the fair value of the Company’s stock price on the date of grant and is amortized over the vesting period, generally between 1 to 4 years.
8
The following is a summary of non-vested restricted stock units granted (in thousands, except grant date fair value data):
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Three-Month Period |
|
|||||
|
Ended March 31, 2016 |
|
|||||
|
Number |
|
|
Weighted-Average |
|
||
Restricted stock units |
|
13 |
|
|
$ |
7.74 |
|
As of March 31, 2016, there was approximately $4.0 million of total unrecognized compensation expense related to grants of restricted stock units that is expected to be recognized over a weighted-average period of 1.7 years.
Certain of the Company’s management-level employees were granted performance stock units that are contingent upon achievement of specified pre-established performance goals over the performance period, which is fiscal year 2016, and vesting period of three years, subject to the recipient's continued service with the Company. The performance goals are based on achievement of net revenue and/or EBITDA goals. Depending on the outcome of the performance goals, the recipient may ultimately earn performance restricted stock units between 0% and 200% of the number of performance restricted stock units granted. For the three-month period ended March 31, 2016, there was no share-based compensation expense related to performance restricted stock units.
Income (Loss) Per Share
The following table illustrates the reconciliation of the basic and diluted income (loss) per share computations required by Accounting Standards Codification (ASC) 260-10, “Earnings per Share” (in thousands, except share and per share data):
|
Three-Month Period |
|
|||||
|
Ended March 31, |
|
|||||
|
2016 |
|
|
2015 |
|
||
Basic earnings per share: |
|
|
|
|
|
|
|
Numerator: |
|
|
|
|
|
|
|
Net income |
$ |
2,270 |
|
|
$ |
5,284 |
|
|
|
|
|
|
|
|
|
Denominator: |
|
|
|
|
|
|
|
Weighted average common shares outstanding |
|
88,897,456 |
|
|
|
87,531,375 |
|
|
|
|
|
|
|
|
|
Per share: |
|
|
|
|
|
|
|
Net income per share |
$ |
0.03 |
|
|
$ |
0.06 |
|
|
|
|
|
|
|
|
|
Diluted earnings per share: |
|
|
|
|
|
|
|
Numerator: |
|
|
|
|
|
|
|
Net income |
$ |
2,270 |
|
|
$ |
5,284 |
|
|
|
|
|
|
|
|
|
Denominator: |
|
|
|
|
|
|
|
Weighted average common shares outstanding |
|
88,897,456 |
|
|
|
87,531,375 |
|
Dilutive securities: |
|
|
|
|
|
|
|
Stock options and restricted stock units |
|
2,034,653 |
|
|
|
2,554,586 |
|
Diluted shares outstanding |
|
90,932,109 |
|
|
|
90,085,961 |
|
|
|
|
|
|
|
|
|
Per share: |
|
|
|
|
|
|
|
Net income per share |
$ |
0.02 |
|
|
$ |
0.06 |
|
Basic income (loss) per share is computed as net income (loss) divided by the weighted average number of shares outstanding for the period. Diluted income (loss) per share reflects the potential dilution, if any, that could occur from shares issuable through stock options and restricted stock awards.
For the three-month periods ended March 31, 2016 and 2015, a total of 13,489 and 107,500 shares of dilutive securities, respectively, were not included in the computation of diluted income per share because the exercise prices of the dilutive securities were greater than the average market price of the common shares.
9
Treasury Stock
On August 18, 2014, the Board of Directors approved a share repurchase program of up to $10.0 million of the Company’s outstanding common stock. On November 25, 2014, the Board of Directors approved an extension of the share repurchase program with a repurchase authorization of up to an additional $10.0 million of the Company’s outstanding common stock, for a total repurchase authorization of up to $20.0 million. Under the share repurchase program the Company is authorized to purchase shares from time to time through open market purchases or negotiated purchases, subject to market conditions and other factors. The share repurchase program may be suspended or discontinued at any time without prior notice.
Treasury stock is included as a deduction from equity in the Stockholders’ Equity section of the Consolidated Balance Sheets.
The Company did not repurchase shares during the three-month period ended March 31, 2016. As of March 31, 2016, the Company repurchased to date a total of approximately 2.5 million shares of Class A common stock at an average price of $5.08 since the beginning of this program, for an aggregate purchase price of approximately $12.5 million. All repurchased shares were retired as of December 31, 2014.
Short-Term Investment
During the three-month period ended March 31, 2016, the Company entered into an agreement with a financial institution to purchase a six-month certificate of deposit for $30.0 million, which was recorded in "Short-term investments" on the consolidated balance sheets.
2013 Credit Facility
On May 31, 2013, the Company entered into the 2013 Credit Facility pursuant to the 2013 Credit Agreement. The 2013 Credit Facility consists of a $20.0 million senior secured Term Loan A Facility (the “Term Loan A Facility”), a $375.0 million senior secured Term Loan B Facility (the “Term Loan B Facility”, and together with the Term Loan A Facility, the “Term Loan Facilities”) which was drawn on August 1, 2013 (the “Term Loan B Borrowing Date”), and a $30.0 million senior secured Revolving Credit Facility (the “Revolving Credit Facility”). In addition, the 2013 Credit Facility provides that the Company may increase the aggregate principal amount of the 2013 Credit Facility by up to an additional $100.0 million, subject to the Company satisfying certain conditions.
Borrowings under the Term Loan A Facility were used on the closing date of the 2013 Credit Facility (the “Closing Date”) (together with cash on hand) to (a) repay in full all of the outstanding obligations of the Company and its subsidiaries under the then outstanding credit facility, and (b) pay fees and expenses in connection with the 2013 Credit Facility. As discussed in more detail below, on August 1, 2013, the Company drew on the Company’s Term Loan B Facility to (a) repay in full all of the outstanding loans under the Term Loan A Facility and (b) redeem in full all of the Company’s then outstanding notes (the “Notes”). The Company intends to use any future borrowings under the Revolving Credit Facility to provide for working capital, capital expenditures and other general corporate purposes of the Company and from time to time fund a portion of certain acquisitions, in each case subject to the terms and conditions set forth in the 2013 Credit Agreement.
The 2013 Credit Facility is guaranteed on a senior secured basis by all of the Company’s existing and future wholly-owned domestic subsidiaries (the “Credit Parties”). The 2013 Credit Facility is secured on a first priority basis by the Company’s and the Credit Parties’ assets. Upon the redemption of the Notes, the security interests and guaranties of the Company and its Credit Parties under the indenture governing the Notes (the “Indenture”), and the Notes were terminated and released.
The Company’s borrowings under the 2013 Credit Facility bear interest on the outstanding principal amount thereof from the date when made at a rate per annum equal to either: (i) the Base Rate (as defined in the 2013 Credit Agreement) plus the Applicable Margin (as defined in the 2013 Credit Agreement); or (ii) LIBOR (as defined in the 2013 Credit Agreement) plus the Applicable Margin (as defined in the 2013 Credit Agreement). As of March 31, 2016, the Company’s effective interest rate was 3.5%. The Term Loan A Facility expired on the Term Loan B Borrowing Date, which was August 1, 2013. The Term Loan B Facility expires on May 31, 2020 (the “Term Loan B Maturity Date”) and the Revolving Credit Facility expires on May 31, 2018 (the “Revolving Loan Maturity Date”).
As defined in the 2013 Credit Facility, “Applicable Margin” means:
(a) with respect to the Term Loans (i) if a Base Rate Loan, one and one half percent (1.50%) per annum and (ii) if a LIBOR Rate Loan, two and one half percent (2.50%) per annum; and
10
(b) with respect to the Revolving Loans:
(i) for the period commencing on the Closing Date through the last day of the calendar month during which financial statements for the fiscal quarter ending September 30, 2013 are delivered: (A) if a Base Rate Loan, one and one half percent (1.50%) per annum and (B) if a LIBOR Rate Loan, two and one half percent (2.50%) per annum; and
(ii) thereafter, the Applicable Margin for the Revolving Loans shall equal the applicable LIBOR margin or Base Rate margin in effect from time to time determined as set forth below based upon the applicable First Lien Net Leverage Ratio then in effect pursuant to the appropriate column under the table below:
First Lien Net Leverage Ratio |
|
LIBOR Margin |
|
|
Base Rate Margin |
|
||
³ 4.50 to 1.00 |
|
|
2.50 |
% |
|
|
1.50 |
% |
< 4.50 to 1.00 |
|
|
2.25 |
% |
|
|
1.25 |
% |
In the event the Company engages in a transaction that has the effect of reducing the yield of any loans outstanding under the Term Loan B Facility within six months of the Term Loan B Borrowing Date, the Company will owe 1% of the amount of the loans so repriced or replaced to the Lenders thereof (such fee, the “Repricing Fee”). Other than the Repricing Fee, the amounts outstanding under the 2013 Credit Facility may be prepaid at the option of the Company without premium or penalty, provided that certain limitations are observed, and subject to customary breakage fees in connection with the prepayment of a LIBOR rate loan. The principal amount of the (i) Term Loan A Facility shall be paid in full on the Term Loan B Borrowing Date, (ii) Term Loan B Facility shall be paid in installments on the dates and in the respective amounts set forth in the 2013 Credit Agreement, with the final balance due on the Term Loan B Maturity Date and (iii) Revolving Credit Facility shall be due on the Revolving Loan Maturity Date.
Subject to certain exceptions, the 2013 Credit Agreement contains covenants that limit the ability of the Company and the Credit Parties to, among other things:
|
· |
incur additional indebtedness or change or amend the terms of any senior indebtedness, subject to certain conditions; |
|
· |
incur liens on the property or assets of the Company and the Credit Parties; |
|
· |
dispose of certain assets; |
|
· |
consummate any merger, consolidation or sale of substantially all assets; |
|
· |
make certain investments; |
|
· |
enter into transactions with affiliates; |
|
· |
use loan proceeds to purchase or carry margin stock or for any other prohibited purpose; |
|
· |
incur certain contingent obligations; |
|
· |
make certain restricted payments; and |
|
· |
enter new lines of business, change accounting methods or amend the organizational documents of the Company or any Credit Party in any materially adverse way to the agent or the lenders. |
The 2013 Credit Agreement also requires compliance with a financial covenant related to total net leverage ratio (calculated as set forth in the 2013 Credit Agreement) in the event that the revolving credit facility is drawn.
The 2013 Credit Agreement also provides for certain customary events of default, including the following:
|
· |
default for three (3) business days in the payment of interest on borrowings under the 2013 Credit Facility when due; |
|
· |
default in payment when due of the principal amount of borrowings under the 2013 Credit Facility; |
|
· |
failure by the Company or any Credit Party to comply with the negative covenants, financial covenants (provided, that, an event of default under the Term Loan Facilities will not have occurred due to a violation of the financial covenants until the revolving lenders have terminated their commitments and declared all obligations to be due and payable), and certain other covenants relating to maintenance of customary property insurance coverage, maintenance of books and accounting records and permitted uses of proceeds from borrowings under the 2013 Credit Facility, each as set forth in the 2013 Credit Agreement; |
11
|
· |
default in the payment of other indebtedness if the amount of such indebtedness aggregates to $15.0 million or more, or failure to comply with the terms of any agreements related to such indebtedness if the holder or holders of such indebtedness can cause such indebtedness to be declared due and payable; |
|
· |
failure of the Company or any Credit Party to pay, vacate or stay final judgments aggregating over $15.0 million for a period of thirty (30) days after the entry thereof; |
|
· |
certain events of bankruptcy or insolvency with respect to the Company or any Credit Party; |
|
· |
certain change of control events; |
|
· |
the revocation or invalidation of any agreement or instrument governing the Notes or any subordinated indebtedness, including the Intercreditor Agreement; and |
|
· |
any termination, suspension, revocation, forfeiture, expiration (without timely application for renewal) or material adverse amendment of any material media license. |
In connection with the Company entering into the 2013 Credit Agreement, the Company and the Credit Parties also entered into an Amended and Restated Security Agreement, pursuant to which the Company and the Credit Parties each granted a first priority security interest in the collateral securing the 2013 Credit Facility for the benefit of the lenders under the 2013 Credit Facility.
On August 1, 2013, the Company drew on borrowings under the Company’s Term Loan B Facility. The borrowings were used to (i) repay in full all of the outstanding loans under the Company’s Term Loan A Facility; (ii) redeem in full and terminate all of its outstanding obligations (the “Redemption”) on August 2, 2013 (the “Redemption Date”) under the Indenture, in an aggregate principal amount of approximately $324 million, and (iii) pay any fees and expenses in connection therewith. The redemption price for the redeemed Notes was 106.563% of the principal amount, plus accrued and unpaid interest thereon to the Redemption Date.
The Redemption constituted a complete redemption of the then outstanding Notes, such that no amount remained outstanding following the Redemption. Accordingly, the Indenture has been satisfied and discharged in accordance with its terms and the Notes have been cancelled, effective as of the Redemption Date. The Company recorded a loss on debt extinguishment of $29.7 million, primarily due to the premium associated with the redemption of the Notes, the unamortized bond discount and finance costs.
On December 31, 2015, the Company made a prepayment of $20.0 million to reduce the amount of loans outstanding under the Term Loan B Facility.
On December 30, 2014, the Company made a prepayment of $20.0 million to reduce the amount of loans outstanding under the Term Loan B Facility.
On December 31, 2013, the Company made prepayments of $10.0 million to reduce the amount of loans outstanding under the Term Loan B Facility.
The carrying amount of the Term Loan B Facility as of March 31, 2016 was $312.6 million, net of $3.1 million of unamortized debt issuance costs. The estimated fair value of the Term Loan B Facility as of March 31, 2016 was $315.6 million. The estimated fair value is calculated using an income approach which projects expected future cash flows and discounts them using a rate based on industry and market yields.
Derivative Instruments
The Company uses derivatives in the management of its interest rate risk with respect to its variable rate debt. The Company‘s strategy is to eliminate the cash flow risk on a portion of its variable rate debt caused by changes in the benchmark interest rate (LIBOR). Derivative instruments are not entered into for speculative purposes.
As required by the terms of the Company’s 2013 Credit Agreement, on December 16, 2013, the Company entered into three forward-starting interest rate swap agreements with an aggregate notional amount of $186.0 million at a fixed rate of 2.73%, resulting in an all-in fixed rate of 5.23%. The interest rate swap agreements took effect on December 31, 2015 with a maturity date on December 31, 2018. Under these interest rate swap agreements, the Company pays at a fixed rate and receives payments at a variable
12
rate based on three-month LIBOR. The interest rate swap agreements effectively fix the floating LIBOR-based interest of $186.0 million outstanding LIBOR-based debt. The interest rate swap agreements were designated and qualified as a cash flow hedge; therefore, the effective portion of the changes in fair value is recorded in accumulated other comprehensive income. Any ineffective portions of the changes in fair value of the interest rate swap agreements will be immediately recognized directly to interest expense in the consolidated statement of operations. The change in fair value of the interest rate swap agreements for the three-month periods ended March 31, 2016 and 2015 was a loss of $0.6 million and $1.2 million, net of tax, respectively, and was included in other comprehensive income (loss). The Company paid $0.8 million of interest related to the interest rate swap agreements for the three-month period ended March 31, 2016. As of March 31, 2016, the Company estimates that none of the unrealized gains or losses included in accumulated other comprehensive income or loss related to these interest rate swap agreements will be realized and reported in earnings within the next twelve months.
The carrying amount of the interest rate swap agreements is recorded at fair value, including non-performance risk, when material. The fair value of each interest rate swap agreement is determined by using multiple broker quotes, adjusted for non-performance risk, when material, which estimate the future discounted cash flows of any future payments that may be made under such agreements.
The fair value of the interest rate swap liability as of March 31, 2016 was $7.7 million and was recorded in "Other long-term liabilities" on the consolidated balance sheets.
Fair Value Measurements
ASC 820, “Fair Value Measurements and Disclosures”, defines and establishes a framework for measuring fair value and expands disclosures about fair value measurements. In accordance with ASC 820, the Company has categorized its financial assets and liabilities, based on the priority of the inputs to the valuation technique, into a three-level fair value hierarchy as set forth below.
Level 1 – Assets and liabilities whose values are based on unadjusted quoted prices for identical assets or liabilities in an active market that the company has the ability to access at the measurement date.
Level 2 – Assets and liabilities whose values are based on quoted prices for similar attributes in active markets; quoted prices in markets where trading occurs infrequently; and inputs other than quoted prices that are observable, either directly or indirectly, for substantially the full term of the asset or liability.
Level 3 – Assets and liabilities whose values are based on prices or valuation techniques that require inputs that are both unobservable and significant to the overall fair value measurement.
If the inputs used to measure the financial instruments fall within different levels of the hierarchy, the categorization is based on the lowest level input that is significant to the fair value measurement of the instrument.
The following table presents the Company’s financial assets and liabilities measured at fair value on a recurring basis in the consolidated balance sheets (in millions):
|
|
March 31, 2016 |
|
|||||||||||||
|
|
Total Fair Value and Carrying Value on Balance Sheet |
|
Fair Value Measurement Category |
|
|||||||||||
|
|
|
|
Level 1 |
|
Level 2 |
|
Level 3 |
|
|||||||
Assets: |
|
|
|
|
|
|
|
|
||||||||
Certificate of deposit |
|
$ |
30.0 |
|
|
$ |
— |
|
|
$ |
30.0 |
|
|
$ |
— |
|
Liabilities: |
|
|
|
|
|
|
|
|
|
|||||||
Interest rate swap |
|
$ |
7.7 |
|
|
$ |
— |
|
|
$ |
7.7 |
|
|
$ |
— |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
December 31, 2015 |
|
|||||||||||||
|
|
Total Fair Value and Carrying Value on Balance Sheet |
|
Fair Value Measurement Category |
|
|||||||||||
|
|
|
|
Level 1 |
|
Level 2 |
|
Level 3 |
|
|||||||
Liabilities: |
|
|
|
|
|
|
|
|
||||||||
Interest rate swap |
|
$ |
6.6 |
|
|
$ |
— |
|
|
$ |
6.6 |
|
|
$ |
— |
|
13
Accumulated Other Comprehensive Income (Loss)
Accumulated other comprehensive income (loss) includes the cumulative gains and losses of derivative instruments that qualify as cash flow hedges. The following table provides a rollforward of accumulated other comprehensive income (loss) for the three-month periods ended March 31, 2016 and 2015 (in millions):
|
2016 |
|
|
2015 |
|
||
Accumulated other comprehensive income (loss) as of January 1, |
$ |
(4.1 |
) |
|
$ |
(2.1 |
) |
Other comprehensive income (loss) |
|
(1.0 |
) |
|
|
(1.9 |
) |
Income tax benefit (expense) |
|
0.4 |
|
|
|
0.7 |
|
Other comprehensive income (loss), net of tax |
|
(0.6 |
) |
|
|
(1.2 |
) |
Accumulated other comprehensive income (loss) as of March 31, |
$ |
(4.7 |
) |
|
$ |
(3.3 |
) |
Cost of Revenue
Cost of revenue consists primarily of the costs of online media acquired from third-party publishers. Media cost is classified as cost of revenue in the period in which the corresponding revenue is recognized.
Recent Accounting Pronouncements
In February 2016, the Financial Accounting Standards Board (the “FASB”) issued Accounting Standards Update (“ASU”) 2016-02, Leases (Topic 842) which specifies the accounting for leases. For operating leases, ASU 2016-02 requires a lessee to recognize a right-of-use asset and a lease liability, initially measured at the present value of the lease payments, in its balance sheet. The standard also requires a lessee to recognize a single lease cost, calculated so that the cost of the lease is allocated over the lease term, on a generally straight-line basis. ASU 2016-02 is effective for public companies for annual reporting periods, and interim periods within those years beginning after December 15, 2018. Early adoption is permitted. The Company is currently in the process of evaluating the impact of adoption of the ASU on its consolidated financial statements.
In March 2016, the FASB issued ASU 2016-05, Derivatives and Hedging (Topic 815): Effect of Derivative Contract Novations on Existing Hedge Accounting Relationships which clarifies that a change in the counterparty to a derivative instrument that has been designated as a hedging instrument under Topic 815 does not, in and of itself, require dedesignation of that hedging relationship provided that all other hedge accounting criteria continue to be met. ASU 2016-05 is effective for public companies for annual reporting periods, and interim periods within those years beginning after December 15, 2016. Early adoption is permitted. The Company is currently in the process of evaluating the impact of adoption of the ASU on its consolidated financial statements.
In March 2016, the FASB issued ASU 2016-08, Revenue from Contracts with Customers (Topic 606), Principal versus Agent Considerations (Reporting Revenue Gross versus Net) which provides guidance on recording revenue on a gross basis versus a net basis based on the determination of whether an entity is a principal or an agent when another party is involved in providing goods or services to a customer. ASU 2016-08 is effective for public companies for annual reporting periods, and interim periods within those years beginning after December 15, 2017. Early adoption is not permitted. The Company is currently in the process of evaluating the impact of adoption of the ASU on its consolidated financial statements.
In March 2016, the FASB issued ASU 2016-09, Compensation – Stock Compensation (Topic 718): Improvements to Employee Share-Based Payment Accounting which is intended to simplify several aspects of the accounting for share-based payment transactions, including the income tax consequences, classification of awards as either equity or liabilities, and classification on the statement of cash flows. ASU 2016-09 is effective for public companies for annual reporting periods, and interim periods within those years beginning after December 15, 2016. Early adoption is permitted. The Company is currently in the process of evaluating the impact of adoption of the ASU on its consolidated financial statements.
Newly Adopted Accounting Standards
In April 2015, the FASB issued ASU 2015-03, Interest-Imputation of Interest (Subtopic 835-30), which requires that debt issuance costs related to a recognized debt liability be presented in the balance sheet as a direct deduction from the carrying amount of that debt liability, consistent with debt discounts. The Company has retrospectively adopted the provisions of ASU 2015-03 as of January 1, 2016, which was the original effective date for calendar year-end, public entities. As a result, unamortized debt expense of $3.1 million and $3.2 million at March 31, 2016 and December 31, 2015, respectively, have been reclassified from Other assets to a deduction of Long-term debt, less current maturities, on the consolidated balance sheets. Adoption of this guidance had no impact on the Company’s consolidated statements of operations or consolidated statements of cash flows.
14
3. SEGMENT INFORMATION
As of March 31, 2016, the Company operates in three reportable segments, based upon the type of advertising medium, which segments are television broadcasting, radio broadcasting and digital media. Through June 30, 2014, the Company operated in two reportable segments, television broadcasting and radio broadcasting. On June 18, 2014, the Company acquired Pulpo Media Inc. (“Pulpo”), a leading provider of digital advertising services and solutions focused on reaching Hispanic audiences in the U.S. and Latin America. Beginning with the third quarter of 2014, the Company created a new operating segment, digital media, which consists of the operations of Pulpo. The Company’s segments results reflect information presented on the same basis that is used for internal management reporting and it is also how the chief operating decision maker evaluates the business. The Company believes that this information regarding the digital media segment is useful to readers of the Company’s financial statements. The digital media segment was not significant to the Company’s operations prior to its acquisition of Pulpo.
Included in the television segment net revenue for the three-month period ended March 31, 2015, is approximately $5.0 million of revenue associated with television station channel modifications made by the Company in order to accommodate the operations of a telecommunications operator.
Television Broadcasting
The Company owns and/or operates 56 primary television stations located primarily in California, Colorado, Connecticut, Florida, Kansas, Massachusetts, Nevada, New Mexico, Texas and the Washington, D.C. area.
Radio Broadcasting
The Company owns and operates 49 radio stations (38 FM and 11 AM) located primarily in Arizona, California, Colorado, Florida, Nevada, New Mexico and Texas.
The Company owns and operates a national sales representation firm, Entravision Solutions, through which the Company sells advertisements and syndicate radio programming to approximately 350 stations across the United States.
Digital Media
The Company owns and operates an online advertising platform that delivers digital advertising in a variety of formats to reach Hispanics audiences on Internet-connected devices.
15
Separate financial data for each of the Company’s operating segments are provided below. Segment operating profit (loss) is defined as operating profit (loss) before corporate expenses. There were no significant sources of revenue generated outside the United States during the three-month periods ended March 31, 2016 and 2015. The Company evaluates the performance of its operating segments based on the following (in thousands):
|
Three-Month Period |
|
|
|
|
|
|||||
|
Ended March 31, |
|
|
% |
|
||||||
|
|
2016 |
|
|
|
2015 |
|
|
Change |
|
|
Net revenue |
|
|
|
|
|
|
|
|
|
|
|
Television |
$ |
36,565 |
|
|
$ |
39,502 |
|
|
|
(7 |
)% |
Radio |
|
16,884 |
|
|
|
16,345 |
|
|
|
3 |
% |
Digital |
|
4,664 |
|
|
|
3,703 |
|
|
|
26 |
% |
Consolidated |
|
58,113 |
|
|
|
59,550 |
|
|
|
(2 |
)% |
|
|
|
|
|
|
|
|
|
|
|
|
Cost of revenue - digital media |
|
1,839 |
|
|
|
1,360 |
|
|
|
35 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
Direct operating expenses |
|
|
|
|
|
|
|
|
|
|
|
Television |
|
15,034 |
|
|
|
14,679 |
|
|
|
2 |
% |
Radio |
|
10,941 |
|
|
|
10,186 |
|
|
|
7 |
% |
Digital |
|
1,590 |
|
|
|
1,820 |
|
|
|
(13 |
)% |
Consolidated |
|
27,565 |
|
|
|
26,685 |
|
|
|
3 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
Selling, general and administrative expenses |
|
|
|
|
|
|
|
|
|
|
|
Television |
|
5,446 |
|
|
|
5,055 |
|
|
|
8 |
% |
Radio |
|
4,888 |
|
|
|
4,526 |
|
|
|
8 |
% |
Digital |
|
1,101 |
|
|
|
920 |
|
|
|
20 |
% |
Consolidated |
|
11,435 |
|
|
|
10,501 |
|
|
|
9 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
Depreciation and amortization |
|
|
|
|
|
|
|
|
|
|
|
Television |
|
2,867 |
|
|
|
2,795 |
|
|
|
3 |
% |
Radio |
|
790 |
|
|
|
869 |
|
|
|
(9 |
)% |
Digital |
|
370 |
|
|
|
298 |
|
|
|
24 |
% |
Consolidated |
|
4,027 |
|
|
|
3,962 |
|
|
|
2 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
Segment operating profit (loss) |
|
|
|
|
|
|
|
|
|
|
|
Television |
|
13,218 |
|
|
|
16,973 |
|
|
|
(22 |
)% |
Radio |
|
265 |
|
|
|
764 |
|
|
|
(65 |
)% |
Digital |
|
(236 |
) |
|
|
(695 |
) |
|
|
(66 |
)% |
Consolidated |
|
13,247 |
|
|
|
17,042 |
|
|
|
(22 |
)% |
|
|
|
|
|
|
|
|
|
|
|
|
Corporate expenses |
|
5,604 |
|
|
|
4,993 |
|
|
|
12 |
% |
Operating income |
|
7,643 |
|
|
|
12,049 |
|
|
|
(37 |
)% |
|
|
|
|
|
|
|
|
|
|
|
|
Interest expense |
|
(3,866 |
) |
|
|
(3,227 |
) |
|
|
20 |
% |
Interest income |
|
7 |
|
|
|
8 |
|
|
|
(13 |
)% |
Income before income taxes |
$ |
3,784 |
|
|
$ |
8,830 |
|
|
|
(57 |
)% |
|
|
|
|
|
|
|
|
|
|
|
|
Capital expenditures |
|
|
|
|
|
|
|
|
|
|
|
Television |
$ |
1,419 |
|
|
$ |
2,071 |
|
|
|
|
|
Radio |
|
771 |
|
|
|
1,153 |
|
|
|
|
|
Digital |
|
49 |
|
|
|
18 |
|
|
|
|
|
Consolidated |
$ |
2,239 |
|
|
$ |
3,242 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
March 31, |
|
|
December 31, |
|
|
|
|
|
||
Total assets |
|
2016 |
|
|
|
2015 |
|
|
|
|
|
Television |
$ |
370,041 |
|
|
$ |
367,869 |
|
|
|
|
|
Radio |
|
128,599 |
|
|
|
132,395 |
|
|
|
|
|
Digital |
|
23,250 |
|
|
|
24,698 |
|
|
|
|
|
Consolidated |
$ |
521,890 |
|
|
$ |
524,962 |
|
|
|
|
|
16
4. LITIGATION
The Company is subject to various outstanding claims and other legal proceedings that may arise in the ordinary course of business. In the opinion of management, any liability of the Company that may arise out of or with respect to these matters will not materially adversely affect the financial position, results of operations or cash flows of the Company.
17
Overview
We are a leading media company that reaches and engages Hispanics in the United States and certain border markets of Mexico across media channels and advertising platforms. Our expansive portfolio encompasses integrated marketing and media solutions, comprised of television, radio and digital properties and data analytics services.
We operate in three reportable segments based upon the type of advertising medium: television broadcasting, radio broadcasting and digital media. Through June 30, 2014, we operated in two reportable segments, television broadcasting and radio broadcasting. On June 18, 2014, we acquired Pulpo, a leading provider of digital advertising services and solutions focused on reaching Hispanic audiences in the U.S. and Mexico. Beginning with the third quarter of 2014, we separated the results of Pulpo into a new reporting segment, digital media. We believe that this information regarding our digital media segment is useful to readers of our financial statements.
Our net revenue for the three-month period ended March 31, 2016, was $58.1 million. Of that amount, revenue attributed to our television segment accounted for approximately 63%, revenue attributed to our radio segment accounted for approximately 29%, and revenue attributed to our digital segment accounted for approximately 8%, of total revenue for the period.
As of the date of filing this report, we own and/or operate 56 primary television stations located primarily in California, Colorado, Connecticut, Florida, Kansas, Massachusetts, Nevada, New Mexico, Texas and Washington, D.C. We own and operate 49 radio stations (38 FM and 11 AM) located primarily in Arizona, California, Colorado, Florida, Nevada, New Mexico and Texas and a national sales representation firm. Through our digital media operations, we offer mobile, digital and other interactive media platforms and services on Internet-connected devices, including local websites and social media, that provide users with news, information and other content.
We generate revenue primarily from sales of national and local advertising time on television stations, radio stations and digital media platforms, and from retransmission consent agreements that are entered into with Multichannel Video Programming Distributors, or MVPDs. Advertising rates are, in large part, based on each medium’s ability to attract audiences in demographic groups targeted by advertisers. We recognize advertising revenue when commercials are broadcast and when display or other digital advertisements record impressions on the websites of our third party publishers. We do not obtain long-term commitments from our advertisers and, consequently, they may cancel, reduce or postpone orders without penalties. We pay commissions to agencies for local, regional and national advertising. For contracts directly with agencies, we record net revenue from these agencies. Seasonal revenue fluctuations are common in our industry and are due primarily to variations in advertising expenditures by both local and national advertisers. Our first fiscal quarter generally produces the lowest net revenue for the year. In addition, advertising revenue is generally higher during presidential election years (2016, 2020, etc.) resulting from significant political advertising and, to a lesser degree, Congressional off-year elections (2018, 2022, etc.), resulting from increased political advertising, compared to other years.
We refer to the revenue generated by agreements with MVPDs as retransmission consent revenue, which represents payments from MVPDs for access to our television station signals so that they may rebroadcast our signals and charge their subscribers for this programming. We recognize retransmission consent revenue when it is accrued pursuant to the agreements we have entered into with respect to such revenue.
We also generate revenue from agreements associated with television stations in order to accommodate the operations of telecommunications operators. Revenue from such agreements is recognized when we have relinquished all rights to operate the station on the existing channel free from interference to the telecommunications operators.
Our primary expenses are employee compensation, including commissions paid to our sales staff and amounts paid to our national representative firms, as well as expenses for marketing, promotion and selling, technical, local programming, engineering, and general and administrative functions. Our local programming costs for television consist primarily of costs related to producing a local newscast in most of our markets. In addition, cost of revenue related to our digital media segment consists primarily of the costs of online media acquired from third-party publishers.
Highlights
During the first quarter of 2016, we achieved revenue growth in our radio and digital segments. Net revenue decreased to $58.1 million, a decrease of $1.5 million, or 2%, over the first quarter of 2015. Our audience shares remained strong in the nation’s most densely populated Hispanic markets.
18
Net revenue in our television segment decreased to $36.6 million in the first quarter of 2016 from $39.5 million in the first quarter of 2015. This decrease of approximately $2.9 million, or 7%, in net revenue was primarily due to approximately $5.0 million of revenue associated with television station channel modifications made by the Company in order to accommodate the operations of a telecommunications operator included in the first quarter of 2015, and which revenue did not recur in the first quarter of 2016. This decrease was partially offset by an increase in national advertising revenue, an increase in political advertising revenue, which was not material in 2015, and an increase in retransmission consent revenue. We generated a total of $7.4 million of retransmission consent revenue in the first quarter of 2016. We anticipate that retransmission consent revenue for the full year 2016 will be greater than it was for the full year 2015 and will continue to be a growing source of net revenues in future periods.
Net revenue in our radio segment increased to $16.9 million in the first quarter of 2016 from $16.3 million in the first quarter of 2015. This increase of approximately $0.6 million, or 3%, in net revenue was primarily attributable to increases in local and national advertising, and an increase in political advertising revenue, which was not material in 2015.
Net revenue in our digital media segment increased to $4.7 million in the first quarter of 2016 from $3.7 million in the first quarter of 2015. This increase of approximately $1.0 million, or 26%, in net revenue was primarily attributable to an increase in national advertising.
Relationship with Univision
Substantially all of our television stations are Univision- or UniMás-affiliated television stations. Our network affiliation agreements with Univision provide certain of our owned stations the exclusive right to broadcast Univision’s primary network and UniMás network programming in their respective markets. These long-term affiliation agreements each expire in 2021, and can be renewed for multiple, successive two-year terms at Univision’s option, subject to our consent. Under our Univision network affiliation agreement, we retain the right to sell approximately six minutes per hour of the available advertising time on Univision’s primary network, subject to adjustment from time to time by Univision, but in no event less than four minutes. Under our UniMás network affiliation agreement, we retain the right to sell approximately four and a half minutes per hour of the available advertising time on the UniMás network, subject to adjustment from time to time by Univision.
Under the network affiliation agreements, Univision acts as our exclusive sales representative for the sale of national advertising on our Univision- and UniMás-affiliate television stations, and we pay certain sales representation fees to Univision relating to sales of all advertising for broadcast on our Univision- and UniMás-affiliate television stations. During the three-month periods ended March 31, 2016 and 2015, the amount we paid Univision in this capacity was $2.3 million and $2.2 million, respectively.
We also generate revenue under two marketing and sales agreements with Univision, which give us the right through 2021 to manage the marketing and sales operations of Univision-owned UniMás and Univision affiliates in six markets – Albuquerque, Boston, Denver, Orlando, Tampa and Washington, D.C.
In August 2008, we entered into a proxy agreement with Univision pursuant to which we granted to Univision the right to negotiate the terms of retransmission consent agreements for our Univision- and UniMás-affiliated television station signals for a term of six years, expiring in December 2014, which Univision and we have extended through May 31, 2016. Among other things, the proxy agreement provides terms relating to compensation to be paid to us by Univision with respect to retransmission consent agreements entered into with MVPDs. The term of the proxy agreement extends with respect to any MVPD for the length of the term of any retransmission consent agreement in effect before the expiration of the proxy agreement. It is also our current intention to negotiate with Univision an extension of the current proxy agreement or a new proxy agreement; however, no assurance can be given regarding the terms of any such extension or new agreement or that any such extension or new agreement will be entered into. As of March 31, 2016, the amount due to us from Univision was $10.2 million related to the agreements for the carriage of our Univision and UniMás-affiliated television station signals.
Univision currently owns approximately 10% of our common stock on a fully-converted basis. Our Class U common stock held by Univision has limited voting rights and does not include the right to elect directors. As the holder of all of our issued and outstanding Class U common stock, so long as Univision holds a certain number of shares, the Company will not, without the consent of Univision, merge, consolidate or enter into another business combination, dissolve or liquidate the Company or dispose of any interest in any Federal Communications Commission, or FCC, license for any of our Univision-affiliated television stations, among other things. Each share of Class U common stock is automatically convertible into one share of our Class A common stock (subject to adjustment for stock splits, dividends or combinations) in connection with any transfer to a third party that is not an affiliate of Univision.
19
For a description of our critical accounting policies, please refer to “Application of Critical Accounting Policies and Accounting Estimates” in Part II, Item 7, “Management’s Discussion and Analysis of Financial Condition and Results of Operations” of our Annual Report on Form 10-K for the fiscal year ended December 31, 2015, filed with the SEC on March 9, 2016.
Revenue Recognition
Television and radio revenue related to the sale of advertising is recognized at the time of broadcast. Revenue for contracts with advertising agencies is recorded at an amount that is net of the commission retained by the agency. Revenue from contracts directly with the advertisers is recorded at gross revenue and the related commission or national representation fee is recorded in operating expense. Cash payments received prior to services rendered result in deferred revenue, which is then recognized as revenue when the advertising time or space is actually provided. Digital related revenue is recognized when display or other digital advertisements record impressions on the websites of our third-party publishers.
We generate revenue under arrangements that are sold on a standalone basis within a specific segment, and those that are sold on a combined basis across multiple segments. We have determined that in such revenue arrangements which contain multiple products and services, revenues are allocated based on the relative fair value of each delivered item and recognized in accordance with the applicable revenue recognition criteria for the specific unit of accounting.
In August 2008, we entered into a proxy agreement with Univision pursuant to which we granted Univision the right to negotiate retransmission consent agreements for its Univision- and UniMás-affiliated television station signals. Advertising related to carriage of our Univision- and UniMás-affiliated television station signals is recognized at the time of broadcast. See more details under the Related Party section below.
We also generate revenue from agreements associated with television stations in order to accommodate the operations of telecommunications operators. Revenue from such agreements is recognized when we have relinquished all rights to operate the station on the existing channel free from interference to the telecommunications operators.
Recent Accounting Pronouncements
In February 2016, the Financial Accounting Standards Board (the “FASB”) issued Accounting Standards Update (“ASU”) 2016-02, Leases (Topic 842) which specifies the accounting for leases. For operating leases, ASU 2016-02 requires a lessee to recognize a right-of-use asset and a lease liability, initially measured at the present value of the lease payments, in its balance sheet. The standard also requires a lessee to recognize a single lease cost, calculated so that the cost of the lease is allocated over the lease term, on a generally straight-line basis. ASU 2016-02 is effective for public companies for annual reporting periods, and interim periods within those years beginning after December 15, 2018. Early adoption is permitted. We are currently in the process of evaluating the impact of adoption of the ASU on our consolidated financial statements.
In March 2016, the FASB issued ASU 2016-05, Derivatives and Hedging (Topic 815): Effect of Derivative Contract Novations on Existing Hedge Accounting Relationships which clarifies that a change in the counterparty to a derivative instrument that has been designated as a hedging instrument under Topic 815 does not, in and of itself, require dedesignation of that hedging relationship provided that all other hedge accounting criteria continue to be met. ASU 2016-05 is effective for public companies for annual reporting periods, and interim periods within those years beginning after December 15, 2016. Early adoption is permitted. We are currently in the process of evaluating the impact of adoption of the ASU on our consolidated financial statements.
In March 2016, the FASB issued ASU 2016-08, Revenue from Contracts with Customers (Topic 606), Principal versus Agent Considerations (Reporting Revenue Gross versus Net) which provides guidance on recording revenue on a gross basis versus a net basis based on the determination of whether an entity is a principal or an agent when another party is involved in providing goods or services to a customer. ASU 2016-08 is effective for public companies for annual reporting periods, and interim periods within those years beginning after December 15, 2017. Early adoption is not permitted. We are currently in the process of evaluating the impact of adoption of the ASU on our consolidated financial statements.
In March 2016, the FASB issued ASU 2016-09, Compensation – Stock Compensation (Topic 718): Improvements to Employee Share-Based Payment Accounting which is intended to simplify several aspects of the accounting for share-based payment transactions, including the income tax consequences, classification of awards as either equity or liabilities, and classification on the statement of cash flows. ASU 2016-09 is effective for public companies for annual reporting periods, and interim periods within those years beginning after December 15, 2016. Early adoption is permitted. We are currently in the process of evaluating the impact of adoption of the ASU on our consolidated financial statements.
20
Three-Month Periods Ended March 31, 2016 and 2015
The following table sets forth selected data from our operating results for the three-month periods ended March 31, 2016 and 2015 (in thousands):
|
Three-Month Period |
|
|
|
|
|
|||||
|
Ended March 31, |
|
|
% |
|
||||||
|
2016 |
|
|
2015 |
|
|
Change |
|
|||
Statements of Operations Data: |
|
|
|
|
|
|
|
|
|
|
|
Net revenue |
$ |
58,113 |
|
|
$ |
59,550 |
|
|
|
(2 |
)% |
Cost of revenue - digital media |
|
1,839 |
|
|
|
1,360 |
|
|
|
35 |
% |
Direct operating expenses |
|
27,565 |
|
|
|
26,685 |
|
|
|
3 |
% |
Selling, general and administrative expenses |
|
11,435 |
|
|
|
10,501 |
|
|
|
9 |
% |
Corporate expenses |
|
5,604 |
|
|
|
4,993 |
|
|
|
12 |
% |
Depreciation and amortization |
|
4,027 |
|
|
|
3,962 |
|
|
|
2 |
% |
|
|
50,470 |
|
|
|
47,501 |
|
|
|
6 |
% |
Operating income |
|
7,643 |
|
|
|
12,049 |
|
|
|
(37 |
)% |
Interest expense |
|
(3,866 |
) |
|
|
(3,227 |
) |
|
|
20 |
% |
Interest income |
|
7 |
|
|
|
8 |
|
|
|
(13 |
)% |
Income before income taxes |
|
3,784 |
|
|
|
8,830 |
|
|
|
(57 |
)% |
Income tax (expense) benefit |
|
(1,514 |
) |
|
|
(3,546 |
) |
|
|
(57 |
)% |
Net income |
$ |
2,270 |
|
|
$ |
5,284 |
|
|
|
(57 |
)% |
|
|
|
|
|
|
|
|
|
|
|
|
Other Data: |
|
|
|
|
|
|
|
|
|
|
|
Capital expenditures |
|
2,239 |
|
|
|
3,242 |
|
|
|
|
|
Consolidated adjusted EBITDA (adjusted for non-cash stock-based compensation) (1) |
|
12,611 |
|
|
|
16,842 |
|
|
|
|
|
Net cash provided by (used in) operating activities |
|
10,521 |
|
|
|
24,805 |
|
|
|
|
|
Net cash provided by (used in) investing activities |
|
(32,135 |
) |
|
|
(2,972 |
) |
|
|
|
|
Net cash provided by (used in) financing activities |
|
(3,319 |
) |
|
|
(3,229 |
) |
|
|
|
|
(1) |
Consolidated adjusted EBITDA means net income (loss) plus gain (loss) on sale of assets, depreciation and amortization, non-cash impairment charge, non-cash stock-based compensation included in operating and corporate expenses, net interest expense, other income (loss), gain (loss) on debt extinguishment, income tax (expense) benefit, equity in net income (loss) of nonconsolidated affiliate, non-cash losses and syndication programming amortization less syndication programming payments. We use the term consolidated adjusted EBITDA because that measure is defined in our 2013 Credit Facility and does not include gain (loss) on sale of assets, depreciation and amortization, non-cash impairment charge, non-cash stock-based compensation, net interest expense, other income (loss), gain (loss) on debt extinguishment, income tax (expense) benefit, equity in net income (loss) of nonconsolidated affiliate, non-cash losses and syndication programming amortization and does include syndication programming payments. |
Since our ability to borrow from our 2013 Credit Facility is based on a consolidated adjusted EBITDA financial covenant, we believe that it is important to disclose consolidated adjusted EBITDA to our investors. Our 2013 Credit Facility contains a total net leverage ratio financial covenant in the event that the revolving credit facility is drawn. The total net leverage ratio, or the ratio of consolidated total debt (net of up to $20 million of unrestricted cash) to trailing-twelve-month consolidated adjusted EBITDA, affects both our ability to borrow from our 2013 Credit Facility and our applicable margin for the interest rate calculation. Under our 2013 Credit Facility, our maximum total leverage ratio may not exceed 6.50 to 1 in the event that the revolving credit facility is drawn. The total leverage ratio was as follows (in each case as of March 31): 2016, 4.1 to 1; 2015, 3.9 to 1. Therefore, we were in compliance with this covenant at each of those dates.
While many in the financial community and we consider consolidated adjusted EBITDA to be important, it should be considered in addition to, but not as a substitute for or superior to, other measures of liquidity and financial performance prepared in accordance with accounting principles generally accepted in the United States of America, such as cash flows from operating activities, operating income and net income. As consolidated adjusted EBITDA excludes non-cash gain (loss) on sale of assets, non-cash depreciation and amortization, non-cash impairment charge, non-cash stock-based compensation expense, net interest expense, other income (loss), gain (loss) on debt extinguishment, income tax (expense) benefit, equity in net income (loss) of nonconsolidated affiliate, non-cash losses and syndication programming amortization and includes syndication programming payments, consolidated adjusted EBITDA has certain limitations because it excludes and includes several important non-cash financial line items. Therefore, we consider both non-GAAP and GAAP measures when evaluating our business. Consolidated adjusted EBITDA is also used to make executive compensation decisions.
21
Consolidated adjusted EBITDA is a non-GAAP measure. The most directly comparable GAAP financial measure to consolidated adjusted EBITDA is cash flows from operating activities. A reconciliation of this non-GAAP measure to cash flows from operating activities follows (in thousands):
|
Three-Month Period |
|
|||||
|
Ended March 31, |
|
|||||
|
|
2016 |
|
|
|
2015 |
|
Consolidated adjusted EBITDA (1) |
$ |
12,611 |
|
|
$ |
16,842 |
|
Interest expense |
|
(3,866 |
) |
|
|
(3,227 |
) |
Interest income |
|
7 |
|
|
|