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EVC > SEC Filings for EVC > Form 10-K on 10-Mar-2014All Recent SEC Filings

Show all filings for ENTRAVISION COMMUNICATIONS CORP

Form 10-K for ENTRAVISION COMMUNICATIONS CORP


10-Mar-2014

Annual Report


ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

The following discussion of our consolidated results of operations and cash flows for the years ended December 31, 2013, 2012 and 2011 and consolidated financial condition as of December 31, 2013 and 2012 should be read in conjunction with our consolidated financial statements and the related notes included elsewhere in this document.

OVERVIEW

We are a diversified Spanish-language media company utilizing a combination of television and radio operations, together with mobile, digital and other interactive media platforms, to reach Hispanic consumers across the United States, as well as the border markets of Mexico. We operate in two reportable segments: television broadcasting and radio broadcasting. Our net revenue for the year ended December 31, 2013 was $223.9 million. Of that amount, revenue generated by our television segment accounted for 70% and revenue generated by our radio segment accounted for 30%.

As of the date of filing this report, we own and/or operate 58 primary television stations located primarily in California, Colorado, Connecticut, Florida, 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. Our television and radio stations typically have local websites and other digital and interactive media platforms that provide users with news and information as well as a variety of other products and services.

We generate revenue primarily from sales of national and local advertising time on television and radio stations, and from retransmission consent agreements. 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. 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 the broadcasting industry and are due primarily to variations in advertising expenditures by both local and national advertisers. In addition, advertising revenue is generally higher during even-numbered years resulting from political advertising and in years when Univision has rights to broadcast the World Cup, which currently does not extend past 2014.

We also generate revenue from retransmission consent agreements that are entered into with MVPDs. We refer to such revenue 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.

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. Our local programming costs for television consist primarily of costs related to producing a local newscast in most of our markets.

Highlights

During 2013, we achieved revenue growth primarily driven by local advertising revenue and retransmission consent revenue, partially offset by political advertising revenue, which was not material in 2013. Net revenue increased to $223.9 million, an increase of $0.6 million, from $223.3 million in 2012. Our audience shares


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remain strong in the nation's most densely populated Hispanic markets, and we believe we are well positioned to benefit as the U.S. Hispanic market continues to expand and advertisers increasingly recognize the importance of reaching our target audience.

Net revenue for our television segment increased to $157.0 million in 2013, from $156.8 million in 2012. This increase was primarily due to increases in local advertising revenue and retransmission consent revenue, partially offset by political advertising revenue, which was not material in 2013. We generated a total of $22.2 million in retransmission consent revenue in 2013. We anticipate that retransmission consent revenue for the full year 2014 will be greater than it was for the full year 2013 and will continue to be a growing source of net revenues in future periods.

Net revenue for our radio segment increased to $66.9 million in 2013, from $66.4 million in 2012. This increase of $0.5 million, or 1%, was primarily due to an increase in local advertising revenue, partially offset by political advertising revenue, which was not material in 2013.

Acquisitions and Dispositions

On January 3, 2011, we completed the acquisition of Lotus/Entravision Reps LLC, or LER, a representation firm that sells national spots and digital advertising to advertising agencies on our behalf and other clients. We previously owned 50% of LER, which was accounted for under the equity method. We decided to acquire the 50% of LER that we did not own in order to integrate LER's sales force with our radio operations. We paid $1.1 million for the remaining 50% of LER. As a result of our obtaining control of LER, our previously-held 50% interest was remeasured to its fair value of $1.1 million. The resulting gain of $0.7 million is included in the line item 'Other income (loss)' on the consolidated statement of operations for the year ended December 31, 2011. LER is now known as Entravision Solutions.

We evaluated the transferred set of activities, assets, inputs and processes applied to these inputs in this acquisition and determined that the acquisition did constitute a business. Currently, we are subject to certain limitations on acquisitions under the terms of the 2013 Credit Agreement. Please see "Liquidity and Capital Resources" below.

In a strategic effort to focus our resources on strengthening existing clusters and expanding into new U.S. Hispanic markets, we periodically review our portfolio of media properties and, from time to time, consider divesting assets in markets where we do not see the opportunity to grow to scale and build out media clusters, subject to limitations contained in our amended Credit Agreement. Please see "Liquidity and Capital Resources" below.

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 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.


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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. 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. During the years ended December 31, 2013 and 2012, retransmission consent revenue accounted for approximately $22.2 million and $20.2 million, respectively. 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.

Univision currently owns approximately 10% of our common stock on a fully-converted basis. The Company's Class U common stock held by Univision has limited voting rights and does not include the right to elect directors. However, as the holder of all of the Company's issued and outstanding Class U common stock, Univision currently has the right to approve any merger, consolidation or other business combination involving the Company, any dissolution of the Company and any assignment of the Federal Communications Commission, or FCC, licenses for any of the Company's Univision-affiliated television stations. Each share of Class U common stock is automatically convertible into one share of the Company's 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.


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RESULTS OF OPERATIONS

Separate financial data for each of the Company's operating segments is provided below. Segment operating profit (loss) is defined as operating profit (loss) before corporate expenses, loss (gain) on sale of assets and impairment charge. The Company evaluates the performance of its operating segments based on the following (in thousands):

                                        Years Ended December 31,                   % Change                % Change
                                  2013            2012            2011           2013  to 2012           2012  to 2011
Net Revenue
Television                      $ 156,994       $ 156,839       $ 131,490                     0 %                    19 %
Radio                              66,922          66,414          62,906                     1 %                     6 %

Consolidated                      223,916         223,253         194,396                     0 %                    15 %

Direct operating expenses
Television                         63,623          56,664          53,789                    12 %                     5 %
Radio                              40,063          35,592          34,801                    13 %                     2 %

Consolidated                      103,686          92,256          88,590                    12 %                     4 %

Selling, general and
administrative expenses
Television                         15,797          20,571          19,606                   (23 )%                    5 %
Radio                              15,759          17,247          16,905                    (9 )%                    2 %

Consolidated                       31,556          37,818          36,511                   (17 )%                    4 %

Depreciation and
amortization
Television                         12,084          13,312          15,189                    (9 )%                  (12 )%
Radio                               2,869           3,114           3,464                    (8 )%                  (10 )%

Consolidated                       14,953          16,426          18,653                    (9 )%                  (12 )%

Segment operating profit
Television                         65,490          66,292          42,906                    (1 )%                   55 %
Radio                               8,231          10,461           7,736                   (21 )%                   35 %

Consolidated                       73,721          76,753          50,642                    (4 )%                   52 %
Corporate expenses                 19,771          17,976          15,669                    10 %                    15 %

Operating income (loss)         $  53,950       $  58,777       $  34,973                    (8 )%                   68 %

Consolidated adjusted
EBITDA (1)                      $  73,003       $  76,863       $  55,475                    (5 )%                   39 %

Capital expenditures
Television                      $   7,243       $   8,339       $   6,494
Radio                               2,505           1,561           1,724

Consolidated                    $   9,748       $   9,900       $   8,218

Total assets
Television                      $ 412,487       $ 313,904       $ 342,462
Radio                             125,750         124,147         124,859

Consolidated                    $ 538,237       $ 438,051       $ 467,321

* Percentage not meaningful.

(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


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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 7.00 to 1 in the event that the revolving credit facility is drawn. The total leverage ratio was as follows (in each case as of December 31): 2013, 4.7 to 1; 2012, 4.2 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.


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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):

                                                            Years Ended December 31,
                                                      2013            2012            2011
Consolidated adjusted EBITDA (1)                   $   73,003       $  76,863       $  55,475
Interest expense                                      (24,631 )       (35,407 )       (37,650 )
Interest income                                            44              86               3
Gain (loss) on debt extinguishment                    (29,675 )        (3,743 )          (423 )
Income tax (expense) benefit                          134,137          (6,112 )        (5,790 )
Amortization of syndication contracts                    (587 )          (707 )        (1,482 )
Payments on syndication contracts                       1,258           1,698           1,976
Non-cash stock-based compensation included in
direct operating expenses                              (1,070 )          (146 )          (229 )
Non-cash stock-based compensation included in
selling, general and administrative expenses               -             (767 )          (812 )
Non-cash stock-based compensation included in
corporate expenses                                     (3,701 )        (1,738 )        (1,302 )
Depreciation and amortization                         (14,953 )       (16,426 )       (18,653 )
Other income (loss)                                        -               -              687

Net income (loss)                                     133,825          13,601          (8,200 )
Depreciation and amortization                          14,953          16,426          18,653
Deferred income taxes                                (134,975 )         6,477           4,565
Amortization of debt issue costs                        1,647           2,284           2,207
Amortization of syndication contracts                     587             707           1,482
Payments on syndication contracts                      (1,258 )        (1,698 )        (1,976 )
Non-cash stock-based compensation                       4,771           2,651           2,343
Other (income) loss                                        -               -             (687 )
Loss (gain) on debt extinguishment                     29,675           3,743             423
Changes in assets and liabilities, net of
effect of acquisitions and dispositions:
(Increase) decrease in restricted cash                     -               -              809
(Increase) decrease in accounts receivable             (8,706 )        (3,740 )          (574 )
(Increase) decrease in prepaid expenses and
other assets                                             (509 )           321             336
Increase (decrease) in accounts payable,
accrued expenses and other liabilities                 (7,255 )          (740 )        (1,770 )

Cash flows from operating activities               $   32,755       $  40,032       $  17,611

(footnotes on preceding page)

Year Ended December 31, 2013 Compared to Year Ended December 31, 2012

Consolidated Operations

Net Revenue. Net revenue increased to $223.9 million for the year ended December 31, 2013 from $223.3 million for the year ended December 31, 2012, an increase of $0.6 million. Of the overall increase, $0.5 million was generated by our radio segment and was primarily attributable to an increase in local advertising revenue, partially offset by a decrease in political advertising revenue, which was not material in 2013. Additionally, the balance of the overall increase was generated by our television segment and was primarily attributable to increases in local advertising revenue and retransmission consent revenue, partially offset by a decrease in political advertising revenue, which was not material in 2013.

We currently anticipate that net revenue will increase for the full year 2014, primarily due to advertising revenue from World Cup and political activity, as well as retransmission consent revenue.


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Direct Operating Expenses. Direct operating expenses increased to $103.7 million for the year ended December 31, 2013 from $92.3 million for the year ended December 31, 2012, an increase of $11.4 million. Of the overall increase, $6.9 million was generated by our television segment and was primarily attributable to an increase in salary expense due to our new management structure, which shifted salaries to direct operating expense from selling, general and administrative expense, and an increase in performance based commissions and bonuses associated with the increase in local revenue. Additionally, $4.5 million of the overall increase was generated by our radio segment and was primarily attributable to an increase in salary expense due to our new management structure, which shifted salaries to direct operating expense from selling, general and administrative expense, and an increase in performance based commissions and bonuses associated with the increase in local revenue. As a percentage of net revenue, direct operating expenses increased to 46% for the year ended December 31, 2013 from 41% for the year ended December 31, 2012. Direct operating expenses as a percentage of net revenue increased because the increase in direct operating expenses outpaced the increase in net revenue. However, this increase as a percentage of revenue may not be directly comparable because of the new management structure and the shifting of certain expenses to direct operating expenses (which increased) from selling, general and administrative expense (which decreased).

We believe that direct operating expenses will continue to increase during 2014 primarily as a result of employee salary increases, and an increase in expenses associated with the anticipated increase in net revenue.

Selling, General and Administrative Expenses. Selling, general and administrative expenses decreased to $31.6 million for the year ended December 31, 2013 from $37.8 million for the year ended December 31, 2012, a decrease of $6.2 million. Of the overall decrease, $4.8 million was generated by our television segment and was primarily attributable to a decrease in salary expense due to the company's new management structure, which shifted salaries from selling, general and administrative expense to direct operating expense, and a decrease in bad debt expense. Additionally, $1.4 million of the overall decrease was generated by our radio segment and was primarily attributable to a decrease in salary expense due to our new management structure, which shifted salaries from selling, general and administrative expense to direct operating expense. As a percentage of net revenue, selling, general and administrative expenses decreased to 14% for the year ended December 31, 2013 from 17% for the year ended December 31, 2012. Selling, general and administrative expenses as a percentage of net revenue decreased because net revenue increased and selling, general and administrative expenses decreased. However, this decrease as a percentage of revenue may not be directly comparable because of the new management structure and the shifting of certain expenses from selling, general and administrative expense (which decreased) to direct operating expenses (which increased).

We believe that selling, general and administrative expenses will increase during 2014 primarily as a result of employee salary increases.

Corporate expenses increased to $19.8 million for the year ended December 31, 2013 from $18.0 million for the year ended December 31, 2012, an increase of $1.8 million. The increase was primarily attributable to an increase in non-cash stock-based compensation expense. As a percentage of net revenue, corporate expenses increased to 9% for year ended December 31, 2013 from 8% for the year ended December 31, 2012.

We believe that corporate expenses will continue to increase during 2014 primarily as a result of increased non-cash stock-based compensation expenses.

Depreciation and Amortization. Depreciation and amortization decreased to $15.0 million for the year ended December 31, 2013 from $16.4 million for the year ended December 31, 2012, a decrease of $1.4 million. The decrease was primarily due to a decrease in depreciation as certain assets are now fully depreciated.

Operating Income. As a result of the above factors, operating income was $54.0 million for the year ended December 31, 2013, compared to $58.8 million for the year ended December 31, 2012.


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Interest Expense. Interest expense decreased to $24.6 million for the year ended December 31, 2013 from $35.4 million for the year ended December 31, 2012, a decrease of $10.8 million. This decrease was primarily attributable to a lower average outstanding balance of our Notes, which were fully redeemed in August 2013, and due to our new Term Loan B under the 2013 Credit Facility, which bears interest at a lower rate than did our redeemed Notes.

Loss on Debt Extinguishment. We recorded a loss on debt extinguishment of $29.7 million, primarily related to the premium associated with the redemption of our Notes, the unamortized bond discount, and finance costs during the year ended December 31, 2013. We recorded a loss on debt extinguishment of $3.7 million related to the premium paid, unamortized finance costs and unamortized bond discount associated with the repurchase of Notes during the year ended December 31, 2012.

Income Tax Expense or Benefit. Income tax benefit for the year ended December 31, 2013 was $134.1 million. The effective income tax rate was significantly higher than our federal corporate income tax rate of 34%. The difference is due primarily to the release of the entire valuation allowance of our federal deferred tax assets and the release of the majority of the valuation allowance of our state deferred tax assets. Income tax expense for the year ended December 31, 2012 was $6.1 million. The effective income tax rate differed from our federal corporate income tax rate of 34% due to changes in the valuation allowance and deductions attributable to indefinite-lived intangible assets.

Our management periodically evaluates the realizability of the deferred tax . . .

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