ENTRAVISION COMMUNICATIONS CORPORATION The following discussion of our consolidated results of operations and cash
flows for the years ended
The discussion and analysis of our financial condition and results of operations for 2020 compared to 2019 appears below. As permitted bySEC rules, we have omitted the discussion and analysis of our financial condition and results of operations for 2019 compared to 2018. See Item 7, "Management's Discussions and Analysis of Financial Condition and Results of Operations", in our Annual Report on Form 10-K for the year endedDecember 31, 2019 , for this discussion. OVERVIEW We are a diversified global media, marketing and technology company that, through our television and radio segments, reaches and engagesU.S. Hispanics across acculturation levels and media channels. Additionally, our digital segment, whose operations are located primarily inSpain andLatin America , reaches a global market. Our operations encompass integrated marketing and media solutions, comprised of television, radio and digital properties and data analytics services. For financial reporting purposes, we report in three segments based upon the type of advertising medium: television, radio and digital. Our net revenue for the year endedDecember 31, 2020 was$344.0 million . Of that amount, revenue attributed to our television segment accounted for approximately 45%, revenue attributed to our digital segment accounted for approximately 42%, and revenue attributed to our radio segment accounted for approximately 13%. We own and/or operate 54 primary television stations located primarily inCalifornia ,Colorado ,Connecticut ,Florida ,Kansas ,Massachusetts ,Nevada ,New Mexico ,Texas andWashington, D.C. We own and operate 48 radio stations in 16U.S. markets. Our radio stations consist of 38 FM and10 AM stations located inArizona ,California ,Colorado ,Florida ,Nevada ,New Mexico andTexas . We also sell advertisements and syndicate radio programming to more than 100 markets acrossthe United States . We also provide digital advertising solutions that allow advertisers to reach primarily Hispanic online audiences worldwide. We operate proprietary technology and data platforms that deliver digital advertising in various advertising formats that allow advertisers to reach audiences across a wide range of Internet-connected devices on our owned and operated digital media sites, the digital media sites of our publisher partners, and on other digital media sites we access through third-party platforms and exchanges. We generate revenue primarily from sales of national and local advertising time on television stations, radio stations and digital media platforms, retransmission consent agreements that are entered into with MVPDs, and agreements associated with our television stations' spectrum usage rights. Advertising rates are, in large part, based on each medium's ability to attract audiences in demographic groups targeted by advertisers. In our television and radio segments, we recognize advertising revenue when commercials are broadcast. In our digital segment, we recognize advertising revenue when display or other digital advertisements record impressions on the websites of our third party publishers or as the advertiser's previously agreed-upon performance criteria are satisfied. 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 we have entered into 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 (2020, 2024, etc.) and, to a lesser degree, Congressional mid-term election years (2022, 2026, etc.), resulting from increased political advertising in those years 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 earned as the television signal is delivered to an MVPD. OurFCC licenses grant us spectrum usage rights within each of the television markets in which we operate. These spectrum usage rights give us the authority to broadcast our stations' over-the-air television signals to our viewers. We regard these rights as a valuable asset. With the proliferation of mobile devices and advances in technology that have freed up spectrum capacity, the monetization of our spectrum usage rights has become a significant source of revenue in recent years. We generate revenue from agreements associated with these television stations' spectrum usage rights from a variety of sources, including but not limited to agreements with third parties to utilize spectrum for the broadcast of their multicast networks; charging fees to accommodate the operations of third parties, including moving channel positions or accepting interference with our broadcasting operations; and modifying and/or relinquishing spectrum usage rights while continuing to broadcast through channel sharing or other arrangements. Revenue generated by such agreements is recognized over the period of the lease or when we have relinquished all or a portion of our spectrum usage rights for a station or have relinquished our rights to operate a station on the existing channel free from interference. In addition, subject to certain restrictions contained in our 2017 Credit Agreement, we will consider strategic 49 --------------------------------------------------------------------------------
acquisitions of television stations to further this strategy from time to time, as well as additional monetization opportunities expected to arise as the television broadcast industry implements the standards contained in ATSC 3.0.
Our primary expenses are employee compensation, including commissions paid to our sales staff and amounts paid to our national sales representative firms, as well as expenses for general and administrative functions, promotion and selling, engineering, marketing, and local programming. Our local programming costs for television consist primarily of costs related to producing a local newscast in most of our markets. Cost of revenue related to our television segment consists primarily of the carrying value of spectrum usage rights that were surrendered in theFCC auction for broadcast spectrum that concluded in 2017. In addition, cost of revenue related to our digital segment consists primarily of the costs of online media acquired from third-party publishers and third party server costs. Direct operating expenses include salaries and commissions of sales staff, amounts paid to national representation firms, production and programming expenses, fees for ratings services, and engineering costs. Corporate expenses consist primarily of salaries related to corporate officers and back office functions, third party legal and accounting services, and fees incurred as a result of being a publicly traded and reporting company.
Highlights
During 2020, our consolidated revenue increased to$344.0 million from$273.6 million in the prior year, primarily due to increase in advertising revenue attributed to the acquisition of a majority interest in a company engages in the sale and marketing of digital advertising that together with its subsidiaries, does business under the name Cisneros Interactive, during the fourth quarter of 2020, which did not contribute to net revenue in prior periods, and increases in political advertising revenue and retransmission consent revenue. The increase in advertising revenue was partially offset by decreases in local and national advertising revenue and revenue from spectrum usage rights. Our audience shares remained strong in the nation's most densely populated Hispanic markets. Net revenue for our television segment increased to$154.5 million in 2020, from$149.7 million in 2019. This increase of approximately$4.8 million was primarily due to increases in political advertising revenue and retransmission consent revenue, partially offset by decreases in local and national advertising revenue and revenue from spectrum usage rights. The decrease in local and national advertising revenue was primarily a result of the continuing economic crisis resulting from the COVID-19 pandemic, ratings declines, competitive factors with another Spanish-language broadcaster, and changing demographic preferences of audiences. We have previously noted a trend for advertising to move increasingly from traditional media, such as television, to new media, such as digital media, and we expect this trend to continue. We generated a total of$36.8 million in retransmission consent revenue for the year endedDecember 31, 2020 compared to$35.4 million for the year endedDecember 31, 2019 . We generated a total of$5.4 million in spectrum usage rights revenue for the year endedDecember 31, 2020 compared to$13.1 million for the year endedDecember 31, 2019 . Net revenue for our digital segment increased to$143.3 million in 2020, from$68.9 million in 2019. This increase of approximately$74.4 million was primarily a result of advertising revenue attributed to the acquisition of a majority interest in Cisneros Interactive during the fourth quarter of 2020, which did not contribute to net revenue in prior periods, partially offset by a decrease in advertising revenue as a result of declines in pre-acquisition digital revenue, and the continuing economic crisis resulting from the COVID-19 pandemic. We have previously noted a trend in our domestic digital operations whereby revenue is shifting more to programmatic revenue, and this trend is now growing in markets outsidethe United States . As a result, advertisers are demanding more efficiency and lower cost from intermediaries like us. In response to this trend, we are offering programmatic alternatives to advertisers, which is putting pressure on margins. We expect this trend will continue in future periods, likely resulting in a permanent higher volume, lower margin business in our digital segment. The digital advertising industry remains dynamic and is continuing to undergo rapid changes in technology and competition. We expect this trend to continue and possibly accelerate. We must continue to remain vigilant to meet these dynamic and rapid changes including the need to further adjust our business strategies accordingly. No assurances can be given that such strategies will be successful. Net revenue for our radio segment decreased to$46.3 million in 2020, from$55.0 million in 2019. This decrease of approximately$8.7 million was primarily due to decreases in local and national advertising revenue, partially offset by an increase in political advertising revenue. The decrease in local and national advertising revenue was primarily a result of the continuing economic crisis resulting from the COVID-19 pandemic, ratings declines and competitive factors with other Spanish-language broadcasters, and changing demographic preferences of audiences. We have previously noted a trend for advertising to move increasingly from traditional media, such as radio, to new media, such as digital media, and we expect this trend to continue. This trend has had a more significant impact on our radio revenue as compared to television revenue, and we expect that this trend will also continue. 50 --------------------------------------------------------------------------------
The Impact of the COVID-19 Pandemic on our Business
This section of this report should be read in conjunction with the rest of this item, "Forward-Looking Statements" and Notes to Consolidated Financial Statements appearing herein, for a more complete understanding of the impact of the COVID-19 pandemic on our business. OnMarch 11, 2020 , theWorld Health Organization (the "WHO") declared COVID-19 a pandemic. OnMarch 13, 2020 , a Presidential proclamation was issued declaring a national emergency inthe United States as a result of COVID-19. The COVID-19 pandemic has affected our business and, subject to the extent and duration of the pandemic and the continuing economic crisis that has resulted from the pandemic, is anticipated to continue to affect our business, from both an operational and financial perspective, in future periods.
Operational Impact
As result of lockdown, shelter-in-place, stay-at-home or similar orders imposed beginning inMarch 2020 , businesses in non-essential industries were closed or their operations were curtailed throughoutthe United States and around the world. By some estimates, up to 95% of theU.S. population has at one time or another been subject to such orders. While a number of such orders have been lifted or eased from time to time, they were reimposed on a wider scale later in 2020 during a resurgence of the pandemic. Unprecedented disruptions in daily life and business continue on a global scale. We are considered, or we believe that we are considered, an "essential business" in all jurisdictions inthe United States that have imposed lockdown, shelter-in-place, stay-at-home or similar orders. To date, we have experienced no significant interruption of our broadcasts in our television and radio segments in any of the markets in which we own and/or operate stations. Nonetheless, we are operating with reduced staff at all of our stations and we cannot give assurance at this time whether a more prolonged or extensive impact of the pandemic in any of our markets would not adversely affect our ability to continue staffing our stations at appropriate levels to continue broadcasts without interruption. Our digital segment has a significant number of employees inSpain ,Mexico andArgentina , which are among the worst affected countries in the world by the pandemic.Spain had begun to return to work in July following highly restrictive lockdowns that began inMarch 2020 , although the second wave of the pandemic that began in the latter months of 2020 has affectedSpain , along with the rest ofWestern Europe , with a significant increase in new cases reported and the reimposition of lockdowns in many parts ofSpain .Mexico began lifting lockdown restrictions in earlyJune 2020 but with a significant number of new cases and deaths during the second wave of the pandemic began reinstituting lockdowns in certain regions, including parts ofMexico City , in late 2020 and early 2021. In late June,Argentina extended and strengthened existing lockdown conditions inBuenos Aires that began nationwide inMarch 2020 as a significant number of new cases and deaths continued.Uruguay , where we also have a large number of employees in our digital segment, has not instituted lockdowns. Nonetheless, most of our employees in our digital segment work remotely and we have not seen a significant interruption in our digital business to date. We cannot give assurance at this time whether a more prolonged or extensive impact of the pandemic inSpain ,Latin America or any other location where our digital segment has employees or operates would not adversely affect our digital business. Our corporate office is located inSanta Monica, California , which, sinceMarch 19, 2020 , has been subject to a general statewide order, as modified from time to time, to stay at home except as needed to maintain continuity of operations of critical infrastructure sectors. We have been operating with reduced staff in our corporate office, with certain staff working remotely.. We have not experienced any significant interruption in any of our corporate or administrative departments, including without limitation our finance and accounting departments.
Financial Impact
In the quarter endedDecember 31, 2020 , the global,U.S. and local economies declined at a slower rate than during earlier periods in 2020. With the exception of political advertising during the height of the election cycle, we continued to experience significant cancellations of advertising and a significant decrease in new advertising placements in our television segment and especially our radio segment, continuing a trend that we had begun to experience since the last half ofMarch 2020 , although we experienced this decrease at a slower rate as the year progressed. The impact on our radio segment continues to be significantly greater than that on our television segment because radio audiences declined at a much greater rate, and maintained, as a result of fewer people commuting to work or driving in general as a result of a combination of lockdown, shelter-in-place, stay-at-home or similar orders that were still in effect in various parts ofthe United States throughout most of 2020, and changes in personal behavior regardless of whether such lockdown, shelter-in-place, stay-at-home or similar orders were in effect in certain parts ofthe United States from time to time during this period. 51 -------------------------------------------------------------------------------- We believe that these cancellations and reductions in the placement of new advertising are primarily attributable to decisions that our advertisers are making regarding the preservation of their own capital during the continuing business interruption that has resulted from a variety of lockdown, shelter-in-place, stay-at-home or similar orders; the closure of businesses acrossthe United States , including those in the automotive, services, non-emergency healthcare, retail, travel, restaurant and telecommunications industries, which has resulted in consumers not being able to frequent such businesses; reduced demand for products and services by our advertisers' customers, who are our audiences; the diversion of our advertisers' own personnel's attention from advertising activities during the pandemic as a result of health concerns, remote working and/or financial and other non-financial considerations; and the financial solvency of our advertisers in general during the continuing economic crisis that has resulted from the pandemic. To partially address this situation, we have continued to significantly reduce some of our advertising rates, primarily in our radio segment, although the rate of decrease in our advertising rates was at a slower pace during the quarter endedDecember 31, 2020 than it was during earlier periods in 2020 and has been somewhat moderated by political advertising in our inventory during the election cycle. We have also eased credit terms for certain of our advertising clients to help them manage their own cash flow and address other financial needs. Depending upon the extent and duration of the pandemic and the continuing economic crisis that has resulted from the pandemic, we expect that these cancellations and reductions in the placement of new advertising will continue in future periods. Therefore, our results of operations for the year endedDecember 31, 2020 may not be indicative of our results of operations for any future period. We cannot give assurance at this time whether a more prolonged or extensive impact of the pandemic and the continuing economic crisis that has resulted from the pandemic would not adversely affect our business, results of operations and financial condition in future periods during the course of the pandemic, or beyond. Based on publicly available information, while it currently appears that theU.S. and some local economies have continued to improve month-over-month during the quarter endedDecember 31, 2020 , such improvement is uneven geographically and by industry, and may be adversely impacted by the second wave of the pandemic. We believe that we have not yet felt the full impact of the continuing economic crisis, nor do we know how soon the global,U.S. and local economies will fully recover to pre-pandemic levels. Therefore, while we hope for a different outcome, we anticipate that we may continue to experience an adverse financial impact on our business and results of operations, albeit at a potentially slower rate, and possibly our financial condition, for an unknown period of time even after lockdown, shelter-in-place, stay-at-home and similar orders have been fully lifted and businesses fully reopen. Additionally, any resurgence of the pandemic, which began in many areas ofthe United States and certain parts of the world during the latter months of 2020, and/or the reimposition of lockdown, shelter-in-place, stay-at-home and similar orders, could intensify this adverse impact and add uncertainty to our business, results of operations and financial condition in future periods. Primarily during the quarter endedMarch 31, 2020 and early in the quarter endedJune 30, 2020 , we engaged in a small number of layoffs and significant number of furloughs of employees as a result of the pandemic. During the quarter endedDecember 31, 2020 we terminated these previously furloughed employees. Severance expense associated with these terminations was not material. We will continue to monitor this situation closely and may institute such further layoffs or furloughs at a future date if we think they are appropriate. We have elected to defer the employer portion of the social security payroll tax (6.2%) as provided in the Coronavirus Aid, Relief and Economic Security Act of 2020, commonly known as the CARES Act. The deferral was effective fromMarch 27, 2020 throughDecember 31, 2020 . The deferred amount will be paid in two installments and the amount will be considered timely paid if 50% of the deferred amount is paid byDecember 31, 2021 and the remainder is paid byDecember 31, 2022 . In order to preserve cash during this period, we have instituted certain cost reduction measures. OnMarch 26, 2020 , we suspended repurchases under our share repurchase program. EffectiveApril 16, 2020 , we instituted a 2.5%-22.5% reduction in salaries company-wide, depending on the amount of then-current compensation. During the quarter endedDecember 31, 2020 , these reductions were reversed and payments were restored retroactively, resulting in no financial impact on a fiscal year basis. EffectiveMay 16, 2020 , we suspended company matching of employee contributions to their 401(k) retirement plans. We also reduced our dividend by 50% beginning in the second quarter of 2020, and we may do so in future periods. Additionally, effectiveMay 28, 2020 , the Board of Directors decreased its annual non-employee director fees by 20% for the Board year ending at the 2021 shareholders meeting. During the quarter endedDecember 31, 2020 , these reductions were reversed and payments were restored retroactively, resulting in no financial impact on a fiscal year basis. We will continue to monitor all of these actions closely in light of current and changing conditions and may institute such additional actions as we may feel are appropriate at a future date. We believe that our liquidity and capital resources remain adequate and that we can meet current expenses for at least the next twelve months from a combination of cash on hand and cash flows from operations.
In addition to the great personal toll that the pandemic has exacted and is
expected to continue to exact, the challenges it is causing to the global,
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results of operations and financial condition. We are closely monitoring the
situation across all fronts and will need to remain flexible to respond to
developments as they occur. However, we cannot give any assurance if, or the
extent to which, we will be successful in these efforts.
Relationship with Univision
Substantially all of our television stations are Univision- or UniMás-affiliated television stations. Our network affiliation agreement with Univision provides certain of our owned stations the exclusive right to broadcast Univision's primary network and UniMás network programming in their respective markets. Under the network affiliation agreement, we retain the right to sell no less than four minutes per hour of the available advertising time on stations that broadcast Univision network programming, and the right to sell approximately four and a half minutes per hour of the available advertising time on stations that broadcast UniMás network programming, subject to adjustment from time to time by Univision. Under the network affiliation agreement, Univision acts as our exclusive third-party sales representative for the sale of certain 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. We also generate revenue under two marketing and sales agreements with Univision, which give us the right to manage the marketing and sales operations of Univision-owned Univision affiliates in six markets -Albuquerque ,Boston ,Denver ,Orlando ,Tampa andWashington, D.C. Under our proxy agreement with Univision, we grant Univision the right to negotiate the terms of retransmission consent agreements for our Univision- and UniMás-affiliated television station signals. 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 endedDecember 31, 2020 and 2019, retransmission consent revenue accounted for approximately$36.8 million and$35.4 million , respectively, of which$26.8 million and$27.3 million , respectively, relate to the Univision proxy agreement. 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. OnOctober 2, 2017 , we entered into the current affiliation agreement with Univision, which superseded and replaced our prior affiliation agreements with Univision. Additionally, on the same date, we entered into the current proxy agreement and current marketing and sales agreements with Univision, each of which superseded and replaced the prior comparable agreements with Univision. The term of each of these current agreements expires onDecember 31, 2026 for all of our Univision and UniMás network affiliate stations, except that each current agreement will expire onDecember 31, 2021 with respect to our Univision and UniMás network affiliate stations inOrlando ,Tampa andWashington, D.C. Univision currently owns approximately 11% of our common stock on a fully-converted basis. Our Class U common stock, all of which is held by Univision, has limited voting rights and does not include the right to elect directors. 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 of such shares of Class U common stock to a third party that is not an affiliate of Univision. In addition, as the holder of all of our issued and outstanding Class U common stock, so long as Univision holds a certain number of shares of Class U common stock, we may not, without the consent of Univision, merge, consolidate or enter into a business combination, dissolve or liquidate our company or dispose of any interest in anyFCC license with respect to television stations which are affiliates of Univision, among other things.
Acquisitions and Dispositions
Cisneros Interactive
OnOctober 13, 2020 , we acquired from certain individuals (collectively, the "Sellers"), 51% of the issued and outstanding shares of Cisneros Interactive. The transaction, funded from cash on hand, includes a purchase price of approximately$29.9 million in cash. We concluded that the remaining 49% of the issued and outstanding shares of Cisneros Interactive is considered to be a noncontrolling interest. In connection with the acquisition, we also entered into a Put and Call Option Agreement (the "Put and Call Agreement"). Subject to the terms of the Put and Call Agreement, if certain minimum EBITDA targets are met, the Sellers have the right (the "Put Option"), betweenMarch 15, 2024 andJune 13, 2024 , to cause us to purchase all (but not less than all) of the remaining 49% of the issued and outstanding shares of Cisneros Interactive at a purchase price to be based on a pre-determined multiple of six times 53 --------------------------------------------------------------------------------
Cisneros Interactive's 12-month EBITDA in the preceding calendar year. The
sellers may also exercise the Put Option upon the occurrence of certain events,
between
Additionally, subject to the terms of the Put and Call Agreement, we have the right (the "Call Option"), in calendar year 2024, to purchase all (but not less than all) of the remaining 49% of the issued and outstanding shares of Cisneros Interactive at a purchase price to be based on a pre-determined multiple of six times of Cisneros Interactive's 12-month EBITDA in calendar year 2023. Applicable accounting guidance requires an equity instrument that is redeemable for cash or other assets to be classified outside of permanent equity if it is redeemable (a) at a fixed or determinable price on a fixed or determinable date, (b) at the option of the holder, or (c) upon the occurrence of an event that is not solely within the control of the issuer. As a result of the put and call option redemption feature, and since the redemption is not solely within our control, the noncontrolling interest is considered redeemable, and is classified in temporary equity within our Consolidated Balance Sheets initially at its acquisition date fair value. The noncontrolling interest is adjusted each reporting period for income (or loss) attributable to the noncontrolling interest as well as any applicable distributions made. Since the noncontrolling interest is not currently redeemable and it is not probable that it will become redeemable, we are not currently required to adjust the amount presented in temporary equity to its redemption value.
We are in the process of completing the purchase price allocation for our acquisition of a majority interest in Cisneros Interactive. The measurement period remains open pending the finalization of the pre-acquisition tax-related items. The following is a summary of the purchase price allocation (in millions):
Cash$ 8.7 Accounts receivable 50.5 Other assets 6.2 Intangible assets subject to amortization 41.7 Goodwill 12.3 Current liabilities (48.1 ) Deferred tax (10.6 )
Redeemable noncontrolling interest (30.8 )
Intangibles assets subject to amortization acquired includes:
Estimated Weighted
Fair Value average
Intangible Asset (in millions) life (in years)
Publisher relationships $ 34.4 10.0
Advertiser relationships 5.2 4.0
Trade name 1.7 2.5
Non-Compete agreements 0.4 4.0
The fair value of the assets acquired includes trade receivables of
During the year ended
The goodwill, which is not expected to be deductible for tax purposes, is assigned to the digital segment and is attributable to Cisneros Interactive's workforce and expected synergies from combining Cisneros Interactive's operations with ours.
As noted above, the acquisition of a majority interest in Cisneros Interactive included a redeemable noncontrolling interest and the Put and Call Agreement. The fair value of the redeemable noncontrolling interest which includes the Put and Call Agreement recognized on the acquisition date was$30.8 million . The following unaudited pro forma information for the years endedDecember 31, 2020 and 2019 has been prepared to give effect to the acquisition of a majority interest in Cisneros Interactive as if the acquisition had occurred onJanuary 1, 2019 . This pro forma information was adjusted to exclude acquisition fees and costs of$0.9 million for the year endedDecember 31, 2020 , which were expensed in connection with the acquisition. This pro forma information does not purport to represent what our actual results of 54 --------------------------------------------------------------------------------
operations would have been had this acquisition occurred on such date, nor does it purport to predict the results of operations for any future periods.
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Years Ended
Ended December 31,
2020 2019
Pro Forma:
Total revenue $ 488,137 $ 432,966
Net income (loss) 5,257 (11,403 )
Net income (loss) attributable to redeemable
noncontrolling interest (5,343 ) (4,071 )
Net income (loss) attributable to common
stockholders $ (86 ) $ (15,474 )
Basic and diluted earnings per share: Net income (loss) per share, attributable to common stockholders, basic and diluted $ 0.00 $ (0.18 ) Weighted average common shares outstanding, basic and diluted 84,231,212 85,107,301 KMBH-TV OnNovember 7, 2019 , we completed the acquisition of television stationKMBH-TV , serving theMcAllen, Texas area, for an aggregate cash consideration of$2.9 million . The transaction was treated as an asset acquisition with$2.3 million of the purchase price recorded in "Intangible assets not subject to amortization", and the remainder recorded in "Property and equipment, net of accumulated depreciation" on our consolidated balance sheet.
Smadex
OnJune 11, 2018 , we completed the acquisition ofSmadex, S.L . ("Smadex"), a mobile programmatic solutions provider that delivers performance-based solutions and data insights for marketers. The transaction was treated as a business acquisition in accordance with the guidance of Accounting Standards Codification ("ASC") 805. We acquired Smadex to expand our technology platform, broaden our digital solutions offering and enhance our execution of performance campaigns. The transaction was funded from cash on hand for an aggregate cash consideration of$3.5 million , net of$1.2 million of cash acquired.
The following is a summary of the final purchase price allocation for our acquisition of Smadex (in millions):
Accounts receivable$ 0.9 Other current assets 0.4 Intangible assets subject to amortization 2.0Goodwill 3.6 Current liabilities (2.8 ) Long-term liabilities (0.2 ) Deferred tax (0.4 )
The fair value of assets acquired includes trade receivables of
During the year ended
The goodwill, which is not expected to be deductible for tax purposes, is assigned to the digital segment and is attributable to the Smadex workforce and expected synergies from combining its operations with ours.
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The following unaudited pro forma information for the years ended December 31,
2018 and 2017 has been prepared to give effect to the acquisition of Smadex as
if the acquisition had occurred on January 1, 2017 . This pro-forma information
does not purport to represent what the actual results of operations of the
Company would have been had this acquisition occurred on such date, nor does it
purport to predict the results of operations for future periods.
Years Ended
December 31,
2018
Pro Forma:
Total revenue $ 307,805
Net income (loss) $ 13,133
Basic and diluted earnings per share:
Net income per share, basic $ 0.15 Net income per share, diluted
Weighted average common shares
outstanding, basic 89,115,997
Weighted average common shares
outstanding, diluted 90,328,583
The unaudited pro forma information for the year ended
OnJanuary 16, 2018 , we completed the acquisition of television stationKMCC-TV , which serves theLas Vegas, Nevada area, for an aggregate cash consideration of$3.6 million . The transaction was treated as an asset acquisition with the majority of the purchase price recorded in "Intangible assets not subject to amortization" on our consolidated balance sheet. OnApril 2, 2020 , we soldKMCC-TV toION Media Stations, Inc. for$4.0 million . The transaction resulted in a gain of$0.6 million , which is included in other operating gain in the consolidated statements of operations. 57
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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, change in fair value of contingent consideration,
impairment charge, other operating (gain) loss, and foreign currency (gain)
loss. The Company evaluates the performance of its operating segments based on
the following (in thousands):
Years Ended December 31, % Change % Change
2020 2019 2018 2020 to 2019 2019 to 2018
Net Revenue
Television $ 154,456 $ 149,654 $ 152,911 3 % (2 )%
Digital 143,309 68,908 80,982 108 % (15 )%
Radio 46,261 55,013 63,922 (16 )% (14 )%
Consolidated 344,026 273,575 297,815 26 % (8 )%
Cost of revenue - digital 106,928 36,757 45,096 191 % (18 )%
Direct operating expenses
Television 61,145 61,778 62,434 (1 )% (1 )%
Digital 15,227 18,357 21,521 (17 )% (15 )%
Radio 28,537 39,277 41,287 (27 )% (5 )%
Consolidated 104,909 119,412 125,242 (12 )% (5 )%
Selling, general and administrative
expenses
Television 19,748 22,638 21,864 (13 )% 4 %
Digital 15,404 13,904 11,590 11 % 20 %
Radio 13,252 17,423 18,081 (24 )% (4 )%
Consolidated 48,404 53,965 51,535 (10 )% 5 %
Depreciation and amortization
Television 12,918 10,059 9,024 28 % 11 %
Digital 2,561 4,723 4,759 (46 )% (1 )%
Radio 1,803 1,866 2,490 (3 )% (25 )%
Consolidated 17,282 16,648 16,273 4 % 2 %
Segment operating profit (loss)
Television 60,645 55,179 59,589 10 % (7 )%
Digital 3,189 (4,833 ) (1,984 ) (166 )% 144 %
Radio 2,669 (3,553 ) 2,064 * (272 )%
Consolidated 66,503 46,793 59,669 42 % (22 )%
Corporate expenses 27,807 28,067 26,865 (1 )% 4 %
Change in fair value of contingent
consideration - (6,478 ) (1,202 ) (100 )% 439 %
Impairment charge 40,035 32,097 - 25 % *
Foreign currency (gain) loss (1,052 ) 754 1,616 * (53 )%
Other operating (gain) loss (6,895 ) (5,994 ) (1,187 ) 15 % 405 %
Operating income (loss) $ 6,608 $ (1,653 ) $ 33,577 * *
Consolidated adjusted EBITDA (1)
47 % (24 )%
Capital expenditures
Television $ 7,184 $ 24,174 $ 14,336
Digital 1,659 318 1,031
Radio 641 792 350
Consolidated $ 9,484 $ 25,284 $ 15,717
Total assets
Television $ 425,899 $ 465,758 $ 487,929
Digital 196,020 51,979 81,460
Radio 125,426 138,463 121,020
Consolidated $ 747,345 $ 656,200 $ 690,409
* 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 operating gain (loss), gain (loss) on
debt extinguishment, income tax (expense) benefit, equity in net income
(loss) of nonconsolidated affiliate, non-cash losses, syndication programming
amortization less syndication programming payments, revenue from the
spectrum incentive auction less related expenses, expenses associated with
investments, EBITDA attributable to redeemable noncontrolling interest,
acquisitions and dispositions and certain pro-forma cost savings. We use the
term consolidated adjusted EBITDA because that measure is defined in our 2017
Credit Agreement and does not include gain
58
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(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,
syndication programming amortization less syndication programming payments,
revenue from
associated with investments, EBITDA attributable to redeemable noncontrolling
interest, acquisitions and dispositions and certain pro-forma cost savings.
Since consolidated adjusted EBITDA is a measure governing several critical aspects of our 2017 Credit Facility, we believe that it is important to disclose consolidated adjusted EBITDA to our investors. We may increase the aggregate principal amount outstanding by an additional amount equal to$100.0 million plus the amount that would result in our total net leverage ratio, or the ratio of consolidated total senior debt (net of up to$75.0 million of unrestricted cash) to trailing-twelve-month consolidated adjusted EBITDA, not exceeding 4.0. In addition, beginningDecember 31, 2018 , at the end of every calendar year, in the event our total net leverage ratio is within certain ranges, we must make a debt prepayment equal to a certain percentage of our Excess Cash Flow, which is defined as consolidated adjusted EBITDA, less consolidated interest expense, less debt principal payments, less taxes paid, less other amounts set forth in the definition of Excess Cash Flow in the 2017 Credit Agreement. The total leverage ratio was as follows (in each case as ofDecember 31 ): 2020, 2.3 to 1; 2019, 3.5 to 1. 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 inthe United States of America , such as cash flows from operating activities, operating income (loss) and net income (loss). 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), non-recurring cash expenses, gain (loss) on debt extinguishment, income tax (expense) benefit, equity in net income (loss) of nonconsolidated affiliate, non-cash losses, syndication programming amortization less syndication programming payments, revenue fromFCC spectrum incentive auction less related expenses, expenses associated with investments, EBITDA attributable to redeemable noncontrolling interest, acquisitions and dispositions and certain pro-forma cost savings, consolidated adjusted EBITDA has certain limitations because it excludes and includes several important 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. 59 -------------------------------------------------------------------------------- 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, 2020 2019 2018 Consolidated adjusted EBITDA (1)$ 60,419 $ 41,209 $ 54,038 EBITDA attributable to redeemable noncontrolling interest 3,436 - - Interest expense (8,265 ) (13,683 ) (15,743 ) Interest income 1,748 3,353 3,973 Gain (loss) on debt extinguishment - (255 ) (550 ) Income tax (expense) benefit (1,506 ) (8,158 ) (7,877 ) Amortization of syndication contracts (504 ) (505 ) (651 ) Payments on syndication contracts 458 543
643
Non-cash stock-based compensation included in direct operating expenses (1,247 ) (732 ) (732 ) Non-cash stock-based compensation included in corporate expenses (3,878 ) (3,645 ) (5,055 ) Depreciation and amortization (17,282 ) (16,648 ) (16,273 ) Change in fair value of contingent consideration - 6,478 1,202 Other operating gain (loss) 6,895 5,994 1,187 Impairment charge (40,035 ) (32,097 ) - Impairment loss on investment - - (1,320 ) Non-recurring severance charge (1,654 ) (2,250 ) (782 ) Dividend income 28 918
1,475
Equity in net income (loss) of nonconsolidated affiliates - (234 ) (1,374 ) Net (income) loss attributable to redeemable noncontrolling interest (2,523 ) - - Net income (loss) attributable to common stockholders (3,910 ) (19,712 )
12,161
Depreciation and amortization 17,282 16,648
16,273
Deferred income taxes (6,225 ) 5,311
4,612
Amortization of debt issue costs 649 881
1,124
Amortization of syndication contracts 504 505
651
Payments on syndication contracts (458 ) (543 ) (643 ) Equity in net (income) loss of nonconsolidated affiliate - 234
1,374
Non-cash stock-based compensation 5,125 4,377
5,787
(Gain) loss on disposal of property and equipment (731 ) 158 - (Gain) loss on debt extinguishment - 255
550
Net income (loss) attributable to redeemable noncontrolling interest 2,523 - - Impairment charge 40,035 32,097 - Impairment loss on investment - -
1,320
Changes in assets and liabilities: (Increase) decrease in accounts receivable (20,100 ) 8,610
5,895
(Increase) decrease in prepaid expenses and other assets 11,526 2,102 (5,581 ) Increase (decrease) in accounts payable, accrued expenses and other liabilities 17,229 (19,384 ) (9,727 ) Cash flows from operating activities$ 63,449 $ 31,539 $ 33,796 (footnotes on preceding page)
Year Ended
Consolidated Operations
Net Revenue. Net revenue increased to$344.0 million for the year endedDecember 31, 2020 from$273.6 million for the year endedDecember 31, 2019 , an increase of approximately$70.4 million . Of the overall increase, approximately$4.8 million was attributable to our television segment and was primarily due increases in political advertising revenue and retransmission consent revenue, partially offset by decreases in local and national advertising revenue and revenue from spectrum usage rights. The decrease in local and national advertising revenue was primarily a result of the continuing economic crisis resulting from the COVID-19 pandemic, ratings declines, competitive factors with another Spanish-language broadcaster, and changing demographic preferences of audiences. We have previously noted a trend for advertising to move increasingly from traditional media, such as television, to new media, such as digital media, and we expect this trend to continue. Additionally, approximately$74.4 million of the overall increase was attributable to our digital segment and was primarily due to the acquisition of a majority interest in Cisneros Interactive during the fourth quarter of 2020, which did not contribute to net revenue in prior periods, partially offset by a decrease in advertising revenue as a result of declines in pre-acquisition digital revenue, and the continuing economic crisis resulting from the COVID-19 pandemic. We have previously noted a trend in our domestic digital operations whereby revenue is shifting more to programmatic revenue, and this 60
-------------------------------------------------------------------------------- trend is now growing in markets outsidethe United States . As a result, advertisers are demanding more efficiency and lower cost from intermediaries like us. In response to this trend, we are offering programmatic alternatives to advertisers, which is putting pressure on margins. We expect this trend will continue in future periods, likely resulting in a permanent higher volume, lower margin business in our digital segment. The digital advertising industry remains dynamic and is continuing to undergo rapid changes in technology and competition. We expect this trend to continue and possibly accelerate. We must continue to remain vigilant to meet these dynamic and rapid changes including the need to further adjust our business strategies accordingly. No assurances can be given that such strategies will be successful. The overall increase in net revenue was partially offset by a decrease of approximately$8.7 million attributable to our radio segment and was primarily due to decreases in local and national advertising revenue, partially offset by an increase in political advertising revenue. The decrease in local and national advertising revenue was primarily a result of the continuing economic crisis resulting from the COVID-19 pandemic, ratings declines and competitive factors with other Spanish-language broadcasters, and changing demographic preferences of audiences. We have previously noted a trend for advertising to move increasingly from traditional media, such as radio, to new media, such as digital media, and we expect this trend to continue. This trend has had a more significant impact on our radio revenue as compared to television revenue, and we expect that this trend will also continue. We believe that for the full year 2021, net revenue will increase primarily as a result of operating Cisneros Interactive for a full year in 2021 compared to less than three months in 2020, partially offset by a decrease in political advertising revenue compared to 2020. Cost of revenue-Digital. Cost of revenue in our digital segment increased to$106.9 million for the year endedDecember 31, 2020 from$36.8 million for the year endedDecember 31, 2019 , an increase of$70.1 million , primarily due to increased costs of revenue associated with Cisneros Interactive during the fourth quarter of 2020, following our acquisition during the fourth quarter of 2020, with respect to which we did not incur cost of revenue in prior periods. Direct Operating Expenses. Direct operating expenses decreased to$104.9 million for the year endedDecember 31, 2020 from$119.4 million for the year endedDecember 31, 2019 , a decrease of approximately$14.5 million . Of the overall decrease, approximately$0.6 million of the overall decrease was attributable to our television segment and was primarily due to decreases in salary expense associated with furloughs and layoffs, and expenses associated with the decrease in local and national advertising revenue. Additionally, approximately$3.2 million of the overall decrease was attributable to our digital segment primarily due to decreases in salary expense, and expenses associated with the decrease in advertising revenue as a result of declines in pre-acquisition digital revenue, and the continuing economic crisis resulting from the COVID-19 pandemic, partially offset by an increase associated with the acquisition of a majority interest in Cisneros Interactive during the fourth quarter of 2020, which did not incur direct operating expenses for us in prior periods. Additionally, approximately$10.8 million of the overall decrease was attributable to our radio segment and was primarily due to decreases in salary expense associated with furloughs and layoffs, and expenses associated with the decrease in advertising revenue. As a percentage of net revenue, direct operating expenses decreased to 30% for the year endedDecember 31, 2020 from 44% for the year endedDecember 31, 2019 , because direct operating expenses decreased while net revenue increased. We believe that direct operating expenses will increase during 2021, primarily as a result of operating Cisneros Interactive for a full year in 2021 compared to less than three months in 2020. Selling, General and Administrative Expenses. Selling, general and administrative expenses decreased to$48.4 million for the year endedDecember 31, 2020 from$54.0 million for the year endedDecember 31, 2019 , a decrease of approximately$5.6 million . Of the overall decrease, approximately$2.9 million was attributable to our television segment and was primarily due to decreases in salary expense associated with furloughs and layoffs, and payroll tax expense. Additionally, approximately$4.1 million of the overall decrease was attributable to our radio segment and was primarily due to decreases in salary expense associated with furloughs and layoffs, and payroll tax expense. The overall decrease was partially offset by an increase of approximately$1.5 million in our digital segment and was primarily due to the acquisition of a majority interest in Cisneros Interactive during the fourth quarter of 2020, which did not contribute to selling, general and administrative expenses in prior periods, partially offset by a decrease in in salary expense associated with furloughs and layoffs. As a percentage of net revenue, selling, general and administrative expenses decreased to 14% for the year endedDecember 31, 2020 from 20% for the year endedDecember 31, 2019 , because selling, general and administrative operating expenses decreased while net revenue increased.
We believe that selling, general and administrative expenses will increase during 2021, primarily as a result of operating Cisneros Interactive for a full year in 2021 compared to less than three months in 2020.
Corporate Expenses. Corporate expenses decreased to$27.8 million for the year endedDecember 31, 2020 from$28.1 million for the year endedDecember 31, 2019 , a decrease of$0.3 million . The decrease was primarily due to decreases in audit fees, travel and rent expense. These decreases were partially offset by expenses for legal and financial due diligence related to the acquisition of a majority interest in Cisneros Interactive. As a percentage of net revenue, corporate expenses decreased to 8% for the year endedDecember 31, 2020 from 10% for the year endedDecember 31, 2019 . 61
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We believe that corporate expenses will not change significantly during 2021 compared to 2020.
Depreciation and Amortization. Depreciation and amortization increased to$17.3 million for the year endedDecember 31, 2020 from$16.6 million for the year endedDecember 31, 2019 , an increase of$0.7 million . The increase was primarily attributable to amortization of the intangible assets from the acquisition of a majority interest in Cisneros Interactive, and fixed assets additions in our television segment as part of the broadcast television repack following theFCC auction for broadcast spectrum that concluded in 2017, partially offset by a decrease due to long-lived assets in our digital segment that were impaired in the first quarter of 2020. Change in fair value of contingent consideration. As a result of the change in fair value of the contingent consideration related to our 2017 acquisition of 100% of several entities collectively doing business as Headway ("Headway"), we recognized income of$6.5 million for the year endedDecember 31, 2019 . Foreign currency loss. Our historical revenues have primarily been denominated inU.S. dollars, and the majority of our current revenues continue to be, and are expected to remain, denominated inU.S. dollars. However, our operating expenses are generally denominated in the currencies of the countries in which our operations are located, and we have operations in countries other thanthe United States , primarily those operations related to our digital business. As a result, we have operating expense, attributable to foreign currency, that is primarily related to the operations related to our digital business. Foreign currency gain was$1.1 million for the year endedDecember 31, 2020 , compared to foreign currency loss of$0.8 million for the year endedDecember 31, 2019 , primarily due to currency fluctuations that affected our digital segment operations located outsidethe United States , primarily related to the digital business. Other operating gain. Other operating gain increased to$6.9 million for the year endedDecember 31, 2020 from$6.0 million for the year endedDecember 31, 2019 , an increase of$0.9 million , primarily due to gains in connection with the required relocation of certain television stations to a different channel as part of the broadcast television repack following theFCC auction for broadcast spectrum that concluded in 2017, and gains from the sale of certain assets. Impairment. Due to the continuing economic crisis resulting from the COVID-19 pandemic, we experienced a decline in performance across all our reporting units beginning late in the first quarter of 2020. Additionally, our digital reporting unit was already facing declining results prior to the onset of the pandemic, caused by continuing competitive pressures and rapid changes in the digital advertising industry, which then further accelerated late in that quarter as a result of the economic crisis brought about by the pandemic. The results of our television and radio reporting units prior to the onset of the pandemic were exceeding internal budgets, driven in large part by political advertising revenue, but declined sharply in the last few weeks of that quarter. As a result, we updated our internal forecasts of future performance and determined that triggering events had occurred during the first quarter of 2020 that required interim impairment assessments related to goodwill, indefinite lived intangible assets and long-lived assets. In addition, during the fourth quarter of 2020, as a result of our annual testing of goodwill and indefinite life intangible assets, we noted that the carrying values of two radioFCC license exceeded their fair values. As a result, we incurred an impairment charge related to indefinite life intangible assets in our radio reporting unit. As a result of these assessments, we recognized impairment charges totaling$40.0 million for the year endedDecember 31, 2020 . We incurred impairment charge related to goodwill in the amount of$27.7 million , impairment charge related to indefinite life intangible assets in the amount of$4.2 million , and impairment charge of$0.2 million to reflect the fair market value of our assets held for sale, for the year endedDecember 31, 2019 . These write-downs were made pursuant to ASC 350, "Intangibles -Goodwill and Other", which requires that goodwill and certain intangible assets be tested for impairment at least annually, or more frequently if events or changes in circumstances indicate the assets might be impaired. Operating Income (Loss). As a result of the above factors, operating income was$6.6 million for the year endedDecember 31, 2020 , compared to operating loss of$1.7 million for the year endedDecember 31, 2019 . Interest Expense, net. Interest expense, net decreased to$6.5 million for the year endedDecember 31, 2020 from$10.3 million for the year endedDecember 31, 2019 , a decrease of$3.8 million . This decrease was primarily due to lower principal balance as a result of repayment in the fourth quarter of 2019, and a lower interest rate.
Loss on Debt Extinguishment. We recorded a loss on debt extinguishment of
Income Tax Expense or Benefit. Income tax expense for the year endedDecember 31, 2020 was$1.5 million . The effective tax rate for the year endedDecember 31, 2020 was different from our statutory rate due to foreign and state taxes, a valuation allowance on deferred tax assets in our Spanish entity, adjustments to our state tax return filings as a result of gain that was previously deferred, and nondeductible expenses, primarily goodwill impairment charges. Income tax expense for the year endedDecember 31, 2019 was$8.2 million or negative 72% of our pre-tax loss. The effective tax rate for the year endedDecember 31, 2019 was different from our 62 -------------------------------------------------------------------------------- statutory rate primarily due to nondeductible expenses, including the significant goodwill impairment charges recorded inSpain and theU.S. during the year, the state tax impact on the previously deferred gain from theFCC auction for broadcast spectrum that concluded in 2017, as well as foreign and state taxes. Our management periodically evaluates the realizability of the deferred tax assets and, if it is determined that it is more likely than not that the deferred tax assets are realizable, adjusts the valuation allowance accordingly. Valuation allowances are established and maintained for deferred tax assets on a "more likely than not" threshold. The process of evaluating the need to maintain a valuation allowance for deferred tax assets and the amount maintained in any such allowance is highly subjective and is based on many factors, several of which are subject to significant judgment calls. Based on our analysis, we determined that it was more likely than not that our deferred tax assets would be realized for all jurisdictions with the exception of our digital operations located inSpain . As a result of recurring losses from our digital operations inSpain , management has determined that it is more likely than not that deferred tax assets of approximately$1.7 million atDecember 31, 2020 will not be realized and therefore we have established a valuation allowance on those assets.
Segment Operations
Television
Net Revenue. Net revenue in our television segment increased to$154.5 million in 2020, from$149.7 million in 2019. This increase of approximately$4.8 million was primarily due to increases in political advertising revenue and retransmission consent revenue, partially offset by decreases in local and national advertising revenue and revenue from spectrum usage rights. The decrease in local and national advertising revenue was primarily a result of the continuing economic crisis resulting from the COVID-19 pandemic, ratings declines, competitive factors with another Spanish-language broadcaster, and changing demographic preferences of audiences. We have previously noted a trend for advertising to move increasingly from traditional media, such as television, to new media, such as digital media, and we expect this trend to continue. We generated a total of$36.8 million in retransmission consent revenue for the year endedDecember 31, 2020 compared to$35.4 million for the year endedDecember 31, 2019 . We generated a total of$5.4 million in spectrum usage rights revenue for the year endedDecember 31, 2020 compared to$13.1 million for the year endedDecember 31, 2019 . Direct Operating Expenses. Direct operating expenses in our television segment decreased to$61.1 million for the year endedDecember 31, 2020 from$61.8 million for the year endedDecember 31, 2019 , a decrease of$0.7 million . The decrease was primarily due to decreases in salary expense associated with furloughs and layoffs, and expenses associated with the decrease in local and national advertising revenue. Selling, General and Administrative Expenses. Selling, general and administrative expenses in our television segment decreased to$19.7 million for the year endedDecember 31, 2020 from$22.6 million for the year endedDecember 31, 2019 , a decrease of$2.9 million . The decrease was primarily due to decreases in salary expense associated with furloughs and layoffs, and payroll tax expense. Digital Net Revenue. Net revenue in our digital segment increased to$143.3 million for the year endedDecember 31, 2020 from$68.9 million for the year endedDecember 31, 2019 , an increase of$74.4 million . The increase was a primarily a result of advertising revenue attributed to the acquisition of a majority interest in Cisneros Interactive during the fourth quarter of 2020, which did not contribute to net revenue in prior periods, partially offset by a decrease in advertising revenue as a result of declines in pre-acquisition digital revenue, and the continuing economic crisis resulting from the COVID-19 pandemic. We have previously noted a trend in our domestic digital operations whereby revenue is shifting more to programmatic revenue, and this trend is now growing in markets outsidethe United States . As a result, advertisers are demanding more efficiency and lower cost from intermediaries like us. In response to this trend, we are offering programmatic alternatives to advertisers, which is putting pressure on margins. We expect this trend will continue in future periods, likely resulting in a permanent higher volume, lower margin business in our digital segment. The digital advertising industry remains dynamic and is continuing to undergo rapid changes in technology and competition. We expect this trend to continue and possibly accelerate. We must continue to remain vigilant to meet these dynamic and rapid changes including the need to further adjust our business strategies accordingly. No assurances can be given that such strategies will be successful. Cost of revenue. Cost of revenue in our digital segment increased to$106.9 million for the year endedDecember 31, 2020 from$36.8 million for the year endedDecember 31, 2019 , an increase of$70.1 million , primarily due to increased costs of revenue associated with Cisneros Interactive during the fourth quarter of 2020, following our acquisition during the fourth quarter of 2020, which did not incur cost of revenue for us in prior periods. As a percentage of digital net revenue, cost of revenue increased to 75% for the year endedDecember 31, 2020 from 53% for the year endedDecember 31, 2019 , primarily due to the acquisition of a majority interest in Cisneros Interactive which operates with lower margins compared to our other digital operations.
Direct operating expenses. Direct operating expenses in our digital segment
decreased to
63
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due to primarily due to decreases in salary expense associated with furloughs
and layoffs, and expenses associated with the decrease in advertising revenue as
a result of declines in pre-acquisition digital revenue, and the continuing
economic crisis resulting from the COVID-19 pandemic, partially offset by an
increase associated with our acquisition of a majority interest in Cisneros
Interactive during the fourth quarter of 2020, which did not contribute to
direct operating expenses in prior periods.
Selling, general and administrative expenses. Selling, general and
administrative expenses in our digital segment increased to $15.4 million for
the year ended December 31, 2020 from $13.9 million for the year ended December
31, 2019 , an increase of $1.5 million . The increase was primarily due to our
acquisition of a majority interest in Cisneros Interactive during the fourth
quarter of 2020, which did not contribute to selling, general and administrative
expenses in prior periods, partially offset by a decrease in salary expense
associated with furloughs and layoffs.
Radio
Net Revenue. Net revenue in our radio segment decreased to$46.3 million in 2020, from$55.0 million in 2019. This decrease of approximately$8.7 million was primarily due to decreases in local and national advertising revenue, partially offset by an increase in political advertising revenue. The decrease in local and national advertising revenue was primarily a result of the continuing economic crisis resulting from the COVID-19 pandemic, ratings declines and competitive factors with other Spanish-language broadcasters, and changing demographic preferences of audiences. We have previously noted a trend for advertising to move increasingly from traditional media, such as radio, to new media, such as digital media, and we expect this trend to continue. This trend has had a more significant impact on our radio revenue as compared to television revenue, and we expect that this trend will also continue. Direct Operating Expenses. Direct operating expenses in our radio segment decreased to$28.5 million for the year endedDecember 31, 2020 from$39.3 million for the year endedDecember 31, 2019 , a decrease of$10.8 million . The decrease was primarily due to decreases in salary expense associated with furloughs and layoffs, and expenses associated with the decrease in advertising revenue. Selling, General and Administrative Expenses. Selling, general and administrative expenses in our radio segment decreased to$13.3 million for the year endedDecember 31, 2020 from$17.4 million for the year endedDecember 31, 2019 , a decrease of$4.1 million . The decrease was primarily due to decreases in salary expense associated with furloughs and layoffs, and payroll tax expense.
Liquidity and Capital Resources
While we have a history of operating losses in some periods and operating income in other periods, we also have a history of generating significant positive cash flows from our operations. We had net losses attributable to common stockholders of$3.9 million and$19.7 million for the years endedDecember 31, 2020 and 2019, respectively, and net income attributable to common stockholders of$12.2 million for the year endedDecember 31, 2018 . We had positive cash flow from operations of$63.4 million ,$31.5 million and$33.8 million for the years endedDecember 31, 2020 , 2019 and 2018, respectively. For at least the next twelve months, we expect to fund our working capital requirements, capital expenditures and payments of principal and interest on outstanding indebtedness, with cash on hand and cash flows from operations. We currently believe that our cash position is capable of meeting our operating and capital expenses and debt service requirements for at least the next twelve months. We believe that our position is strengthened by cash and cash equivalents on hand, in the amount of$119.2 million , and available for sale marketable securities in the additional amount of$28.0 million , as ofDecember 31, 2020 . Our liquidity is not materially impacted by the amounts held in accounts outsidethe United States .
2017 Credit Facility
OnNovember 30, 2017 (the "Closing Date"), we entered into our 2017 Credit Facility pursuant to the 2017 Credit Agreement. The 2017 Credit Facility consists of a$300.0 million senior secured Term Loan B Facility (the "Term Loan B Facility"), which was drawn in full on the Closing Date. In addition, the 2017 Credit Facility provides that we may increase the aggregate principal amount of the 2017 Credit Facility by up to an additional$100.0 million plus the amount that would result in our first lien net leverage ratio (as such term is used in the 2017 Credit Agreement) not exceeding 4.0 to 1.0, subject to us satisfying certain conditions. Borrowings under the Term Loan B Facility were used on the Closing Date (a) to repay in full all of our and our subsidiaries' then outstanding obligations under the previous 2013 credit agreement, or 2013 Credit Agreement, and to terminate the 2013 Credit Agreement, (b) to pay fees and expenses in connection with the 2017 Credit Facility, and (c) for general corporate purposes. The 2017 Credit Facility is guaranteed on a senior secured basis by certain of our existing and future wholly-owned domestic subsidiaries, and is secured on a first priority basis by our and those subsidiaries' assets. Our borrowings under the 2017 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 Eurodollar Rate (as defined in the 2017 Credit Agreement) plus 2.75%; or (ii) the 64
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Base Rate (as defined in the 2017 Credit Agreement) plus 1.75%. As of
Subject to certain exceptions, the 2017 Credit Facility contains covenants that limit the ability of us and our restricted subsidiaries to, among other things:
• incur liens on our property or assets; • make certain investments; • incur additional indebtedness;
• consummate any merger, dissolution, liquidation, consolidation or sale of
substantially all assets;
• dispose of certain assets;
• make certain restricted payments;
• make certain acquisitions;
• enter into substantially different lines of business;
• enter into certain transactions with affiliates;
• use loan proceeds to purchase or carry margin stock or for any other
prohibited purpose;
• change or amend the terms of our organizational documents or theorganization documents of certain restricted subsidiaries in a materially
adverse way to the lenders, or change or amend the terms of certain
indebtedness;
• enter into sale and leaseback transactions;
• make prepayments of any subordinated indebtedness, subject to certain
conditions; and
• change our fiscal year, or accounting policies or reporting practices.
The 2017 Credit Facility 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 2017 Credit Facility when due;
• default in payment when due of the principal amount of borrowings under the
2017 Credit Facility;
• failure by us or any subsidiary to comply with the negative covenants and
certain other covenants relating to maintaining the legal existence of the
Company and certain of its restricted subsidiaries and compliance with
anti-corruption laws;
• failure by us or any subsidiary to comply with any of the other agreements
in the 2017 Credit Agreement and related loan documents that continues for
thirty (30) days (or ten (10) days in the case of failure to comply with
covenants related to inspection rights of the administrative agent andlenders and permitted uses of proceeds from borrowings under the 2017 Credit
Facility) after our officers first become aware of such failure or first
receive written notice of such failure from any lender;
• default in the payment of other indebtedness if the amount of such
indebtedness aggregates to
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;
• certain events of bankruptcy or insolvency with respect to us or any
significant subsidiary;
• final judgment is entered against us or any restricted subsidiary in an
aggregate amount over
commenced by any creditor or there is a period of thirty (30) consecutive
days during which the judgment remains unpaid and no stay is in effect;
• any material provision of any agreement or instrument governing the 2017
Credit Facility ceases to be in full force and effect; and
• any revocation, termination, substantial and adverse modification, orrefusal by final order to renew, any media license, or the requirement (by
final non-appealable order) to sell a television or radio station, where any
such event or failure is reasonably expected to have a material adverse
effect.
In The Term Loan B Facility does not contain any financial covenants. In connection with our entering into the 2017 Credit Agreement, we and our restricted subsidiaries also entered into a Security Agreement, pursuant to which we and the Credit Parties each granted a first priority security interest in the collateral securing the 2017 Credit Facility for the benefit of the lenders under the 2017 Credit Facility.
65
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In December 2019 , we made a prepayment of $25.0 million to reduce the amount of
loans outstanding under our Term Loan B Facility. We did not make a prepayment
in 2020.
On April 30, 2019 , we entered into an amendment to the 2017 Credit Agreement,
which became effective on May 1, 2019 . Pursuant to that amendment, the lenders
under the 2017 Credit Facility waived any events of default that may have arisen
under the 2017 Credit Agreement in connection with our failure to timely deliver
our financial statements for the fiscal year ended December 31, 2018 , and
amended the 2017 Credit Agreement, giving us until May 31, 2019 to deliver the
2018 financial statements. Subsequent to this amendment and prior to the May 31,
2019 deadline, we delivered the 2018 financial statements in full, and therefore
were not in default under the 2017 Credit Agreement, as amended.
The carrying amount of the Term Loan B Facility as of December 31, 2020 was
$213.5 million , net of $1.8 million of unamortized debt issuance costs and
original issue discount. The estimated fair value of the Term Loan B Facility as
of December 31, 2020 was $210.5 million . The estimated fair value is based on
quoted prices in markets where trading occurs infrequently.
The 2017 Credit Agreement contains a covenant that the Company deliver its
financial statements and certain other information for each fiscal year within
90 days after the end of each fiscal year. As a result of our expanding business
operations, primarily related to the acquisition of a majority interest in
Cisneros Interactive, we did not deliver our financial statements and other
information within 90 days after the end of the fiscal year ended December 31,
2020 , and as a result we did not satisfy the requirement of this covenant in the
2017 Credit Agreement. The 2017 Credit Agreement provides an additional period
of 30 days for us to satisfy such covenant, and with the filing of this Annual
Report on Form 10-K we believe we have satisfied the requirements of the 2017
Credit Agreement with respect to the delivery of our financial statements and
other information for the fiscal year ended December 31, 2020 .
Share Repurchase Program
OnJuly 13, 2017 , our Board of Directors approved a share repurchase program of up to$15.0 million of our outstanding Class A common stock. OnApril 11, 2018 , our Board of Directors approved the repurchase of up to an additional$15.0 million of our outstanding Class A common stock, for a total repurchase authorization of up to$30.0 million . OnAugust 27, 2019 , the Board of Directors approved the repurchase of up to an additional$15.0 million of the Company's Class A common stock, for a total repurchase authorization of up to$45.0 million . Under the share repurchase program, we are 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. OnMarch 26, 2020 , we suspended share repurchases under the plan in order to preserve cash during the continuing economic crisis resulting from the COVID-19 pandemic. From inception of the share repurchase program throughDecember 31, 2020 , we have repurchased a total of approximately 8.6 million shares of Class A common stock at an average price per share of$3.76 , for an aggregate purchase price of approximately$32.2 million . All repurchased shares were retired as ofDecember 31, 2020 . Consolidated Adjusted EBITDA Consolidated adjusted EBITDA (as defined below) increased to$60.4 million for the year endedDecember 31, 2020 from$41.2 million for the year endedDecember 31, 2019 , an increase of$19.2 million , or 47%. As a percentage of net revenue, consolidated adjusted EBITDA increased to 18% for the year endedDecember 31, 2020 , from 15% for the year endedDecember 31, 2019 . 66 -------------------------------------------------------------------------------- Consolidated adjusted EBITDA, as defined in our 2017 Credit Agreement, 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), non-recurring cash expenses, gain (loss) on debt extinguishment, income tax (expense) benefit, equity in net income (loss) of nonconsolidated affiliate, non-cash losses, syndication programming amortization less syndication programming payments, revenue fromFCC spectrum incentive auction less related expenses, expenses associated with investments, EBITDA attributable to redeemable noncontrolling interest, acquisitions and dispositions and certain pro-forma cost savings. We use the term consolidated adjusted EBITDA because that measure is defined in our 2017 Credit Agreement 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), non-recurring cash expenses, gain (loss) on debt extinguishment, income tax (expense) benefit, equity in net income (loss) of nonconsolidated affiliate, non-cash losses, syndication programming amortization less syndication programming payments, revenue fromFCC spectrum incentive auction less related expenses, expenses associated with investments, EBITDA attributable to redeemable noncontrolling interest, acquisitions and dispositions and certain pro-forma cost savings. Since consolidated adjusted EBITDA is a measure governing several critical aspects of our 2017 Credit Facility, we believe that it is important to disclose consolidated adjusted EBITDA to our investors. We may increase the aggregate principal amount outstanding by an additional amount equal to$100.0 million plus the amount that would result in our total net leverage ratio, or the ratio of consolidated total senior debt (net of up to$75.0 million of unrestricted cash) to trailing-twelve-month consolidated adjusted EBITDA, not exceeding 4.0. In addition, beginningDecember 31, 2018 , at the end of every calendar year, in the event our total net leverage ratio is within certain ranges, we must make a debt prepayment equal to a certain percentage of our Excess Cash Flow, which is defined as consolidated adjusted EBITDA, less consolidated interest expense, less debt principal payments, less taxes paid, less other amounts set forth in the definition of Excess Cash Flow in the 2017 Credit Agreement. The total leverage ratio was as follows (in each case as ofDecember 31 ): 2020, 2.3 to 1; 2019, 3.5 to 1. 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 inthe United States of America , such as cash flows from operating activities, operating income (loss) and net income (loss). 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), non-recurring cash expenses, gain (loss) on debt extinguishment, income tax (expense) benefit, equity in net income (loss) of nonconsolidated affiliate, non-cash losses, syndication programming amortization less syndication programming payments, revenue fromFCC spectrum incentive auction less related expenses, expenses associated with investments, EBITDA attributable to redeemable noncontrolling interest, acquisitions and dispositions and certain pro-forma cost savings, consolidated adjusted EBITDA has certain limitations because it excludes and includes several important 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.
Consolidated adjusted EBITDA is a non-GAAP measure. For a reconciliation of consolidated adjusted EBITDA to cash flows from operating activities, its most directly comparable GAAP financial measure, please see page 60.
Cash Flow
Net cash flow provided by operating activities was$63.4 million for the year endedDecember 31, 2020 compared to net cash flow provided by operating activities of$31.5 million for the year endedDecember 31, 2019 . We had net loss of$1.4 million for the year endedDecember 31, 2020 , which included non-cash items such as deferred income taxes of$6.2 million , depreciation and amortization expense of$17.3 million , and impairment charge of$40.0 million . We had net loss of$19.7 million for the year endedDecember 31, 2019 , which included non-cash items such as deferred income taxes of$5.3 million , depreciation and amortization expense of$16.6 million , and impairment charge of$32.1 million . We expect to have positive cash flow from operating activities for the 2021 year. Net cash flow provided by investing activities was$38.1 million for the year endedDecember 31, 2020 , compared to net cash flow provided by investing activities of$14.4 million for the year endedDecember 31, 2019 . During the year endedDecember 31, 2020 , we had proceeds of$63.5 million from the maturity of marketable securities and proceeds of$5.1 million from the sale of property and equipment and intangibles, and we spent$21.3 million on the acquisition of a majority interest in Cisneros Interactive net of cash acquired,$9.1 million on net capital expenditures, and$0.2 million on the purchase of intangible assets. During the year endedDecember 31, 2019 , we had proceeds of$43.6 million from the maturity of marketable securities, and we spent$1.7 million on purchases of investments,$2.3 million on the purchase of intangible assets, and$25.3 million on net capital expenditures. We anticipate that our capital expenditures will be approximately$8.0 million during the full year 2021. Of this amount, we expect that approximately$0.2 million will be expended in connection with the required relocation of certain of our television stations to a different channel as part of the broadcast television repack following theFCC auction for broadcast spectrum that concluded in 2017, which amount we expect to be reimbursed to us by theFCC . The amount of our anticipated capital expenditures may change based on 67 --------------------------------------------------------------------------------
future changes in business plans and our financial condition and general economic conditions. We expect to fund capital expenditures with cash on hand and net cash flow from operations.
Net cash flow used in financing activities was$15.5 million for the year endedDecember 31, 2020 , compared to net cash flow used in financing activities of$59.4 million for the year endedDecember 31, 2019 . During the year endedDecember 31, 2020 , we made dividend payments of$10.5 million , debt payments of$3.0 million , paid$0.5 million for the repurchase of stock, and spent$1.4 million for taxes related to shares withheld for share-based compensation plans. During the year endedDecember 31, 2019 , we made debt payments of$28.0 million , dividend payments of$17.0 million , paid$12.6 million for the repurchase of stock, and spent$1.7 million for taxes related to shares withheld for share-based compensation plans.
Commitments and Contractual Obligations
Our material contractual obligations atDecember 31, 2020 are as follows (in thousands): Payments Due by Period Total amounts Less than More than Contractual Obligations committed 1 year 1-3 years 3-5 years 5 years Long Term Debt and related interest (1)$ 239,172 $ 9,235 $ 18,210 $ 211,727 $ - Media research and ratings providers (2) 10,454 7,483 2,529 442 - Operating leases (3) 50,673 9,421 14,791 10,832 15,629 Other material non-cancelable contractual obligations (4) 6,097 2,426 3,671 - -
Total contractual obligations (5)
(1) These amounts represent estimated future cash interest payments and mandatory
principal payments related to our 2017 Credit Facility. Future interest
payments could differ materially from amounts indicated in the table due to
future operational and financing needs, market factors and other currently
unanticipated events.
(2) We have agreements with certain media research and ratings providers,
expiring at various dates through
audience measurement services.
(3) We lease facilities and broadcast equipment under various operating lease
agreements with various terms and conditions, expiring at various dates
through
(4) These amounts consist primarily of obligations for software licenses utilized
by our sales team.
(5) Due to the uncertainty with respect to the timing of future cash flows
associated with our unrecognized tax benefits at
unable to make reasonably reliable estimates of the period of cash settlement
with the respective taxing authorities. Therefore,
liabilities related to uncertain tax positions have been excluded from the
table above.
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-------------------------------------------------------------------------------- We have also entered into employment agreements with certain of our key employees, includingWalter F. Ulloa ,Jeffery A. Liberman ,Christopher T. Young , andKarl Meyer . Our obligations under these agreements are not reflected in the table above. Other than lease commitments, legal contingencies incurred in the normal course of business and employment contracts for key employees, we do not have any off-balance sheet financing arrangements or liabilities. We do not have any majority-owned subsidiaries or any interests in or relationships with any variable-interest entities that are not included in our consolidated financial statements.
Application of Critical Accounting Policies and Accounting Estimates
Critical accounting policies are defined as those that are the most important to the accurate portrayal of our financial condition and results of operations. Critical accounting policies require management's subjective judgment and may produce materially different results under different assumptions and conditions. We have discussed the development and selection of these critical accounting policies with the Audit Committee of our Board of Directors, and the Audit Committee has reviewed and approved our related disclosure in this Management's Discussion and Analysis of Financial Condition and Results of Operations.
We believe that the accounting estimates related to the fair value of our reporting units and indefinite life intangible assets and our estimates of the useful lives of our long-lived assets are "critical accounting estimates" because: (1) goodwill and other intangible assets are our most significant assets, and (2) the impact that recognizing an impairment would have on the assets reported on our balance sheet, as well as on our results of operations, could be material. Accordingly, the assumptions about future cash flows on the assets under evaluation are criticalGoodwill represents the excess of the purchase price over the fair value of the net tangible and identifiable intangible assets acquired in each business combination. We test our goodwill and other indefinite-lived intangible assets for impairment annually on the first day of our fourth fiscal quarter, or more frequently if certain events or certain changes in circumstances indicate they may be impaired. In assessing the recoverability of goodwill and indefinite life intangible assets, we must make a series of assumptions about such things as the estimated future cash flows and other factors to determine the fair value of these assets. In testing the goodwill of our reporting units for impairment, we first determine, based on a qualitative assessment, whether it is more likely than not that the fair value of each of our reporting units is less than their respective carrying amounts. We have determined that each of our operating segments is a reporting unit. If it is deemed more likely than not that the fair value of a reporting unit is less than the carrying value based on this initial assessment, the next step is a quantitative comparison of the fair value of the reporting unit to its carrying amount. If a reporting unit's estimated fair value is equal to or greater than that reporting unit's carrying value, no impairment of goodwill exists and the testing is complete. If the reporting unit's carrying amount is greater than the estimated fair value, then an impairment loss is recorded for the amount of the difference. Due to the continuing economic crisis resulting from the COVID-19 pandemic, we experienced a decline in performance across all of our reporting units beginning late in the first quarter of 2020. Additionally, the digital reporting unit was already facing declining results prior to the onset of the pandemic, caused by continuing competitive pressures and rapid changes in the digital advertising industry, which then further accelerated late in the first quarter of 2020 as a result of the economic crisis brought about from the pandemic. The results of the television and radio reporting units prior to the onset of the pandemic and the resulting economic crisis were exceeding internal budgets, driven in large part by political advertising revenue, but declined sharply in the last few weeks of the first quarter of 2020. As a result, we updated our internal forecasts of future performance and determined that triggering events had occurred during the first quarter of 2020 that required interim impairment assessments. As a result of the interim impairment assessments, we concluded that the digital reporting unit carrying value exceeded its fair value, resulting in a goodwill impairment charge of$0.8 million in the first quarter of 2020. We determined that no triggering events had occurred during the second or third quarters of 2020 that required interim impairment assessments. As of our annual goodwill testing date,October 1, 2020 , we had$40.5 million of goodwill in our television reporting unit. We did not reach a definitive conclusion on the television reporting unit based on a qualitative assessment alone so we performed a quantitative test and compared the fair value of the television reporting unit to its carrying amount. The fair value of our television reporting unit exceeded its carrying value by 19%, resulting in no impairment charge. As discussed in Note 5 to Notes to Consolidated Financial Statements, the calculation of the fair value of the television reporting unit requires estimates of the discount rate and the long term projected growth rate. If that discount rate were to increase by 0.5%, the fair value of the television reporting unit would decrease by 5%. If the long term projected growth rate were to decrease by 0.5%, the fair value of the television reporting unit would decrease by 3%. 69
-------------------------------------------------------------------------------- As of our annual goodwill testing date,October 1, 2020 , we had$5.2 million of goodwill in our digital reporting unit. We did not reach a definitive conclusion on the digital reporting unit based on a qualitative assessment alone so we performed a quantitative test and compared the fair value of the digital reporting unit to its carrying amount. The fair value of our digital reporting unit exceeded its carrying value by 20%, resulting in no impairment charge in the fourth quarter of 2020. As discussed in Note 5 to Notes to Consolidated Financial Statements, the calculation of the fair value of the digital reporting unit requires estimates of the discount rate and the long term projected growth rate. If that discount rate were to increase by 1%, the fair value of the digital reporting unit would decrease by 5%. If the long term projected growth rate were to decrease by 0.5%, the fair value of the digital reporting unit would decrease by 1%.
As of our annual goodwill testing date,
When a quantitative analysis is performed, the estimated fair value of goodwill is determined by using a combination of a market approach and an income approach. The market approach estimates fair value by applying sales, earnings and cash flow multiples to each reporting unit's operating performance. The multiples are derived from comparable publicly-traded companies with similar operating and investment characteristics to our reporting units. The market approach requires us to make a series of assumptions, such as selecting comparable companies and comparable transactions and transaction premiums. The current economic conditions have led to a decrease in the number of comparable transactions, which makes the market approach of comparable transactions and transaction premiums more difficult to estimate than in previous years. The income approach estimates fair value based on our estimated future cash flows of each reporting unit, discounted by an estimated weighted-average cost of capital that reflects current market conditions, which reflect the overall level of inherent risk of that reporting unit. The income approach also requires us to make a series of assumptions, such as discount rates, revenue projections, profit margin projections and terminal value multiples. We estimated our discount rates on a blended rate of return considering both debt and equity for comparable publicly-traded companies in the television, radio and digital media industries. These comparable publicly-traded companies have similar size, operating characteristics and/or financial profiles to us. We also estimated the terminal value multiple based on comparable publicly-traded companies in the television, radio and digital media industries. We estimated our revenue projections and profit margin projections based on internal forecasts about future performance. Uncertain economic conditions, fiscal policy and other factors beyond our control potentially could have an adverse effect on the capital markets, which would affect the discount rate assumptions, terminal value estimates, transaction premiums and comparable transactions. Such uncertain economic conditions could also have an adverse effect on the fundamentals of our business and results of operations, which would affect our internal forecasts about future performance and terminal value estimates. Furthermore, such uncertain economic conditions could have a negative impact on the advertising industry in general or the industries of those customers who advertise on our stations, including, among others, the automotive, financial and other services, telecommunications, travel and restaurant industries, which in the aggregate provide a significant amount of our historical and projected advertising revenue. The activities of our competitors, such as other broadcast television stations and radio stations, could have an adverse effect on our internal forecasts about future performance and terminal value estimates. Changes in technology or our audience preferences, including increased competition from other forms of advertising-based mediums, such as Internet, social media and broadband content providers serving the same markets, could have an adverse effect on our internal forecasts about future performance, terminal value estimates and transaction premiums. Finally, the risk factors that we identify from time to time in ourSEC reports could have an adverse effect on our internal forecasts about future performance, terminal value estimates and transaction premiums. There can be no assurance that our estimates and assumptions made for the purpose of our goodwill impairment testing will prove to be accurate predictions of the future. If our assumptions regarding internal forecasts of future performance of our business as a whole or of our units are not achieved, if market conditions change and affect the discount rate, or if there are lower comparable transactions and transaction premiums, we may be required to record additional goodwill impairment charges in future periods. It is not possible at this time to determine if any such future change in our assumptions would have an adverse impact on our valuation models and result in impairment, or if it does, whether such impairment charge would be material.
Indefinite Life Intangible Assets
We believe that our broadcast licenses are indefinite life intangible assets. An
intangible asset is determined to have an indefinite useful life when there are
no legal, regulatory, contractual, competitive, economic or any other factors
that may limit the period over which the asset is expected to contribute
directly or indirectly to future cash flows. The evaluation of impairment for
indefinite life intangible assets is performed by a comparison of the asset's
carrying value to the asset's fair value. When the carrying value exceeds fair
value, an impairment charge is recorded for the amount of the difference. The
unit of accounting used to test broadcast licenses represents all licenses owned
and operated within an individual market cluster, because such licenses are used
together, are complimentary to each other and are representative of the best use
of those assets. Our individual market clusters consist of cities or nearby
cities. We test our broadcasting licenses for impairment based on certain
assumptions about these market clusters.
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The estimated fair value of indefinite life intangible assets is determined by
using an income approach. The income approach estimates fair value based on the
estimated future cash flows of each market cluster that a hypothetical buyer
would expect to generate, discounted by an estimated weighted-average cost of
capital that reflects current market conditions, which reflect the overall level
of inherent risk. The income approach requires us to make a series of
assumptions, such as discount rates, revenue projections, profit margin
projections and terminal value multiples. We estimate the discount rates on a
blended rate of return considering both debt and equity for comparable
publicly-traded companies in the television, radio and digital media industries.
These comparable publicly-traded companies have similar size, operating
characteristics and/or financial profiles to us. We also estimated the terminal
value multiple based on comparable publicly-traded companies in the television,
radio and digital media industries. We estimated the revenue projections and
profit margin projections based on various market clusters signal coverage of
the markets and industry information for an average station within a given
market. The information for each market cluster includes such things as
estimated market share, estimated capital start-up costs, population, household
income, retail sales and other expenditures that would influence advertising
expenditures. Alternatively, some stations under evaluation have had limited
relevant cash flow history due to planned or actual conversion of format or
upgrade of station signal. The assumptions we make about cash flows after
conversion are based on the performance of similar stations in similar markets
and potential proceeds from the sale of the assets.
During the first quarter of 2020, due to triggering events described above, we
conducted a review of certain of the indefinite life intangible assets in our
television and radio reporting units. Based on the assumptions and estimates
described above, the carrying values of certain FCC licenses exceeded their fair
values. As a result, we recorded impairment charges of FCC licenses in our
television and radio reporting units in the amount of $23.5 million and $8.8
million , respectively in the first quarter of 2020. Additionally, during our
annual testing date, October 1, 2020 , we noted that the carrying value of two
radio FCC license exceeded their fair value. As a result, we recorded an
impairment charge in the amount of $0.2 million . The fair values of our
television FCC licenses for each of the remaining market clusters exceeded the
carrying values in amounts ranging from 22% to over 1,000%. The fair values of
our radio FCC licenses for each of the remaining market clusters exceeded the
carrying values in amounts ranging from 0% to over 100%. Two markets with
aggregate carrying value of approximately $1.8 million have fair values that
exceed carrying values by less than 10%.
Uncertain economic conditions, fiscal policy and other factors beyond our
control potentially could have an adverse effect on the capital markets, which
would affect the discount rate assumptions, terminal value estimates,
transaction premiums and comparable transactions. Such uncertain economic
conditions could also have an adverse effect on the fundamentals of our business
and results of operations, which would affect our internal forecasts about
future performance and terminal value estimates. Furthermore, such uncertain
economic conditions could have a negative impact on the advertising industry in
general or the industries of those customers who advertise on our stations,
including, among others, the automotive, financial and other services,
telecommunications, travel and restaurant industries, which in the aggregate
provide a significant amount of our historical and projected advertising
revenue. The activities of our competitors, such as other broadcast television
stations and radio stations, could have an adverse effect on our internal
forecasts about future performance and terminal value estimates. Changes in
technology or our audience preferences, including increased competition from
other forms of advertising-based mediums, such as Internet, social media and
broadband content providers serving the same markets, could have an adverse
effect on our internal forecasts about future performance, terminal value
estimates and transaction premiums. Finally, the risk factors that we identify
from time to time in our SEC reports could have an adverse effect on our
internal forecasts about future performance, terminal value estimates and
transaction premiums.
There can be no assurance that our estimates and assumptions made for the
purposes of our impairment testing will prove to be accurate predictions of the
future. If our assumptions regarding internal forecasts of future performance of
our business as a whole or of our units are not achieved, if market conditions
change and affect the discount rate, or if there are lower comparable
transactions and transaction premiums, we may be required to record additional
impairment charges in future periods. It is not possible at this time to
determine if any such future change in our assumptions would have an adverse
impact on our valuation models and result in impairment, or if it does, whether
such impairment charge would be material.
Long-Lived Assets, Including Intangibles Subject to Amortization
Depreciation and amortization of our long-lived assets is provided using the
straight-line method over their estimated useful lives. Changes in
circumstances, such as the passage of new laws or changes in regulations,
technological advances, changes to our business model or changes in our capital
strategy could result in the actual useful lives differing from initial
estimates. In those cases where we determine that the useful life of a
long-lived asset should be revised, we will depreciate the net book value in
excess of the estimated residual value over its revised remaining useful life.
Factors such as changes in the planned use of equipment, customer attrition,
contractual amendments or mandated regulatory requirements could result in
shortened useful lives.
Long-lived assets and asset groups are evaluated for impairment whenever events
or changes in circumstances indicate that the carrying amount of such assets may
not be recoverable. The estimated future cash flows are based upon, among other
things, assumptions about expected future operating performance and may differ
from actual cash flows. Long-lived assets evaluated for impairment are grouped
with other assets to the lowest level for which identifiable cash flows are
largely independent of the cash
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flows of other groups of assets and liabilities. If the sum of the projected
undiscounted cash flows (excluding interest) is less than the carrying value of
the assets, the assets will be written down to the estimated fair value in the
period in which the determination is made.
During the first quarter of 2020 we conducted a review of certain long-lived
assets using a two-step approach. In the first step, the carrying value of the
asset group is compared to the projected undiscounted cash flows to determine
recoverability. If the asset carrying value is not recoverable, then the fair
value of the asset group is determined in the second step using an income
approach. The income approach requires us to make a series of assumptions, such
as discount rates, revenue projections, profit margin projections and useful
lives. Based on the assumptions and estimates described above, the carrying
values of long-lived assets in the digital reporting unit exceeded their fair
values. As a result, we recorded impairment charges related to Intangibles
subject to amortization of $5.3 million , and property and equipment of $1.5
million , in the first quarter of 2020. No impairment charges related to
Intangibles subject to amortization were recorded during the remainder of 2020.
Deferred Taxes
Deferred taxes are provided on a liability method whereby deferred tax assets are recognized for deductible temporary differences and deferred liabilities are recognized for taxable temporary differences. Temporary differences are the differences between the reported amounts of assets and liabilities and their tax bases. Deferred tax assets are reduced by a valuation allowance when it is determined to be more likely than not that some portion or all of the deferred tax assets will not be realized. Deferred tax assets and liabilities are adjusted for the effects of changes in tax laws and rates on the date of enactment. In evaluating our ability to realize net deferred tax assets, we consider all reasonably available evidence including our past operating results, tax strategies and forecasts of future taxable income. In considering these factors, we make certain assumptions and judgments that are based on the plans and estimates used to manage our business. We recognize the tax benefit from an uncertain tax position only if it is more likely than not the tax position will be sustained on examination by the taxing authorities, based on the technical merits of the position. The tax benefits recognized in the financial statements from such positions are then measured based on the largest benefit that has a greater than 50% likelihood of being realized upon settlement. We recognize interest and penalties related to uncertain tax positions in income tax expense.
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 as 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 or as the advertiser's previously agreed-upon
performance criteria are satisfied.
We generate revenue under arrangements in which services are sold on a
stand-alone 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 item and recognized in
accordance with the applicable revenue recognition criteria for the specific
unit of accounting.
We 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 earned as the
television signal is delivered to the MVPD.
We also generate revenue from agreements associated with our television
stations' spectrum usage rights from a variety of sources, including but not
limited to entering into agreements with third parties to utilize excess
spectrum for the broadcast of their multicast networks, charging fees to
accommodate the operations of third parties, including moving channel positions
or accepting interference with broadcasting operations, and modifying and/or
relinquishing spectrum usage rights while continuing to broadcast through
channel sharing or other arrangements. Revenue from such agreements is
recognized over the period of the lease or when we have relinquished all or a
portion of our spectrum usage rights for a station or have relinquished our
rights to operate a station on the existing channel free from interference.
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--------------------------------------------------------------------------------Allowance for Doubtful Accounts
Our accounts receivable consist of a homogeneous pool of relatively small dollar amounts from a large number of customers. We evaluate the collectability of our trade accounts receivable based on a number of factors. When we are aware of a specific customer's inability to meet its financial obligations to us, a specific reserve for bad debts is estimated and recorded which reduces the recognized receivable to the estimated amount we believe will ultimately be collected. In addition to specific customer identification of potential bad debts, bad debt charges are recorded based on our recent past loss history and an overall assessment of past due trade accounts receivable amounts outstanding.
Business Combinations
We apply the acquisition method of accounting for business combinations in accordance with GAAP and use estimates and judgments to allocate the purchase price paid for acquisitions to the fair value of the assets, including identifiable intangible assets and liabilities acquired. Such estimates may be based on significant unobservable inputs and assumptions such as, but not limited to, revenue projections, gross margin projections, customer attrition rates, royalty rates, discount rates and terminal growth rate assumptions. We use established valuation techniques and may engage reputable valuation specialists to assist with the valuations. Management's estimates of fair value are based upon assumptions believed to be reasonable, but which are inherently uncertain and unpredictable and, as a result, actual results may differ from estimates. Fair values are subject to refinement for up to one year after the closing date of an acquisition, as information relative to closing date fair values becomes available. Upon the conclusion of the measurement period, any subsequent adjustments are recorded to earnings.
Additional Information
For additional information on our significant accounting policies, please see Note 2 to Notes to Consolidated Financial Statements.
Recently Issued Accounting Pronouncements
For further information on recently issued accounting pronouncements, see Note 2 to Notes to Consolidated Financial Statements.
Sensitivity of Critical Accounting Estimates
We have critical accounting estimates that are sensitive to change. The most significant of those sensitive estimates relates to the impairment of intangible assets.Goodwill and indefinite life intangible assets are not amortized but instead are tested annually onOctober 1 for impairment, or more frequently if events or changes in circumstances indicate that the assets might be impaired. In assessing the recoverability of goodwill and indefinite life intangible assets, we must make assumptions about the estimated future cash flows and other factors to determine the fair value of these assets.
Television
In calculating the estimated fair value of our televisionFCC licenses, we used models that rely on various assumptions, such as future cash flows, discount rates and multiples. The estimates of future cash flows assume that the television segment revenues will increase significantly faster than the increase in the television expenses, and therefore the television assets will also increase in value. If any of the estimates of future cash flows, discount rates, multiples or assumptions were to change in any future valuation, it could affect our impairment analysis and cause us to record an additional expense for impairment. We conducted a review of our television indefinite life intangible assets by using an income approach. The income approach estimates fair value based on the estimated future cash flows of each market cluster that a hypothetical buyer would expect to generate, discounted by an estimated weighted-average cost of capital that reflects current market conditions, which reflect the overall level of inherent risk. The income approach requires us to make a series of assumptions, such as discount rates, revenue projections, profit margin projections and terminal value multiples. We estimate the discount rates on a blended rate of return considering both debt and equity for comparable publicly-traded companies in the television, radio and digital media industries. These comparable publicly-traded companies have similar size, operating characteristics and/or financial profiles to us. We also estimated the terminal value multiple based on comparable publicly-traded companies in the television, radio and digital media industries. We estimated the revenue projections and profit margin projections based on various market clusters signal coverage of the markets and industry information for an average station within a given market. The information for each market cluster includes such things as estimated market share, estimated capital start-up costs, population, household income, retail sales and other expenditures that would influence advertising expenditures. 73
-------------------------------------------------------------------------------- Due to the continuing economic crisis resulting from the COVID-19 pandemic, we experienced a decline in performance across all of our reporting units beginning late in the first quarter of 2020. The results of the television reporting unit prior to the onset of the pandemic and the resulting economic crisis were exceeding internal budgets, driven in large part by political advertising revenue, but declined sharply in the last few weeks of the first quarter of 2020. As a result, we updated our internal forecasts of future performance and determined that triggering events had occurred during the first quarter of 2020 that required interim impairment assessments. As a result of the interim impairment assessments, we concluded that the carrying values of certainFCC licenses exceeded their fair values. As a result, we recorded impairment charges ofFCC licenses in our television reporting unit in the amount of$23.5 million in the first quarter of 2020. We also conducted our annual review of our television reporting unit as part of our goodwill testing and determined that the carrying value of our television reporting unit exceeded the fair value. The fair value of the television reporting unit was primarily determined by using a combination of a market approach and an income approach. The revenue projections and profit margin projections in the models are based on the historical performance of the business and projected trends in the television industry and Hispanic market. Based on the assumptions and estimates described above, the television reporting unit's fair value exceeded its carrying value by 19%, resulting in no additional impairment charge for the year endedDecember 31, 2020 . As discussed in Note 5 to Notes to Consolidated Financial Statements, the calculation of the fair value of the television reporting unit requires estimates of the discount rate and the long term projected growth rate. If that discount rate were to increase by 0.5%, the fair value of the television reporting unit would decrease by 5%. If the long term projected growth rate were to decrease by 0.5%, the fair value of the television reporting unit would decrease by 3%.
Radio
In calculating the estimated fair value of our radioFCC licenses, we used models that rely on various assumptions, such as future cash flows, discount rates and multiples. The estimates of future cash flows assume that the radio segment revenues will increase significantly faster than the increase in the radio expenses, and therefore the radio assets will also increase in value. If any of the estimates of future cash flows, discount rates, multiples or assumptions were to change in any future valuation, it could affect our impairment analysis and cause us to record an additional expense for impairment. We conducted a review of our radio indefinite life intangible assets by using an income approach. The income approach estimates fair value based on the estimated future cash flows of each market cluster that a hypothetical buyer would expect to generate, discounted by an estimated weighted-average cost of capital that reflects current market conditions, which reflect the overall level of inherent risk. The income approach requires us to make a series of assumptions, such as discount rates, revenue projections, profit margin projections and terminal value multiples. We estimate the discount rates on a blended rate of return considering both debt and equity for comparable publicly-traded companies in the television, radio and digital media industries. These comparable publicly-traded companies have similar size, operating characteristics and/or financial profiles to us. We also estimated the terminal value multiple based on comparable publicly-traded companies in the television, radio and digital media industries. We estimated the revenue projections and profit margin projections based on various market clusters signal coverage of the markets and industry information for an average station within a given market. The information for each market cluster includes such things as estimated market share, estimated capital start-up costs, population, household income, retail sales and other expenditures that would influence advertising expenditures. Due to the continuing economic crisis resulting from the COVID-19 pandemic, we experienced a decline in performance across all of our reporting units beginning late in the first quarter of 2020. The results of the radio reporting unit prior to the onset of the pandemic and the resulting economic crisis were exceeding internal budgets, driven in large part by political advertising revenue, but declined sharply in the last few weeks of the first quarter of 2020. As a result, we updated our internal forecasts of future performance and determined that triggering events had occurred during the first quarter of 2020 that required interim impairment assessments. As a result of the interim impairment assessments, we concluded that the carrying values of certainFCC licenses exceeded their fair values. As a result, we recorded impairment charges ofFCC licenses in our radio reporting unit in the amount of$8.8 million in the first quarter of 2020. We also conducted our annual review of our radioFCC licenses and noted that the carrying value of two radioFCC licenses exceeded their fair values. As a result, we incurred an impairment charge in the amount of$0.2 million . The fair values of our radioFCC licenses for each of the remaining market clusters exceeded the carrying values in amounts ranging from 0% to over 100%.
We did not have any goodwill in our radio reporting unit at
Digital
Due to the continuing economic crisis resulting from the COVID-19 pandemic, we
experienced a decline in performance across all our reporting units beginning
late in the first quarter of 2020. Additionally, the digital reporting unit was
already facing declining results prior to the onset of the pandemic, caused by
continuing competitive pressures and rapid changes in the digital advertising
industry, which then further accelerated late in the first quarter of 2020 as a
result of the economic crisis brought about from the pandemic. As a result, we
updated our internal forecasts of future performance and determined that
triggering events had occurred
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during the first quarter of 2020 that required interim impairment assessments.
As a result of the interim impairment assessments, we concluded that the digital
reporting unit carrying value exceeded its fair value, resulting in a goodwill
impairment charge of $0.8 million in the first quarter of 2020. Additionally, we
conducted a review of certain long-lived assets using a two-step approach. In
the first step, the carrying value of the asset group is compared to the
projected undiscounted cash flows to determine recoverability. If the asset
carrying value is not recoverable, then the fair value of the asset group is
determined in the second step using an income approach. The income approach
requires us to make a series of assumptions, such as discount rates, revenue
projections, profit margin projections and useful lives. Based on the
assumptions and estimates described above, the carrying values of long-lived
assets in the digital reporting unit exceeded their fair values. As a result, we
recorded impairment charges related to intangibles subject to amortization of
$5.3 million , and property and equipment of $1.5 million , in the first quarter
of 2020. We determined that no triggering events had occurred during the second
or third quarters of 2020 that required interim impairment assessments.
As of our annual goodwill testing date, October 1, 2020 , the fair value of our
digital reporting unit exceeded its carrying value by 20%, resulting in no
additional impairment charge for the year ended December 31, 2020 . As discussed
in Note 5 to Notes to Consolidated Financial Statements, the calculation of the
fair value of the digital reporting unit requires estimates of the discount rate
and the long term projected growth rate. If that discount rate were to increase
by 1%, the fair value of the digital reporting unit would decrease by 5%. If the
long term projected growth rate were to decrease by 0.5%, the fair value of the
digital reporting unit would decrease by 1%.
Impact of Inflation
We believe that inflation has not had a material impact on our results of operations for each of our fiscal years in the three-year period endedDecember 31, 2020 . However, based on recent inflation trends, the economy inArgentina has been classified as highly inflationary. As a result, we applied the guidance in ASC 830, "Foreign Currency Matters", by remeasuring non-monetary assets and liabilities at historical exchange rates and monetary-assets and liabilities using current exchange rates. There can be no assurance that future inflation would not have an adverse impact on our operating results and financial condition.
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