Business Context and Reporting Period
iHeartMedia, Inc. provides audio and media services through broadcast radio, digital platforms, podcasting, networks, sponsorships and events, and Audio & Media Services businesses including Katz Media and RCS. This Form 10-Q covers the quarter ended September 30, 2019.
The company emerged from Chapter 11 on May 1, 2019, separated its outdoor advertising business into Clear Channel Outdoor Holdings, Inc., and adopted fresh start accounting. Accordingly, periods after May 1, 2019 are reported as the Successor and are not directly comparable with earlier Predecessor periods. Outdoor operations are presented as discontinued operations.
Financial Performance and Position
| Metric | Q3 2019 | Comparable period | Change |
|---|---|---|---|
| Revenue | $948.3 million | $920.5 million | +3.0% |
| Operating income | $140.8 million | $186.8 million | -24.6% |
| Net income | $12.4 million | $71.8 million | -82.8% |
| Net income attributable to the company | $12.4 million | $70.1 million | Declined |
| Adjusted EBITDA | $274.7 million | $273.8 million | +0.3% |
| Operating cash flow from continuing operations | $180.3 million | $155.5 million | +16.0% |
| Free cash flow from continuing operations | $151.5 million | $135.4 million | +11.9% |
Operating margin was approximately 14.9%, compared with approximately 20.3% in Q3 2018. Net margin was approximately 1.3%, compared with approximately 7.8%. Higher depreciation and amortization, corporate expenses, direct operating costs and interest expense reduced GAAP profitability despite relatively stable Adjusted EBITDA.
- Digital revenue increased $24.2 million, driven primarily by podcasting, including the Stuff Media acquisition, and other digital and on-demand services.
- Networks revenue increased $13.5 million, primarily from Total Traffic & Weather.
- Broadcast radio revenue declined $3.4 million, including a $5.8 million decrease in political revenue.
- Audio and Media Services revenue declined $10.0 million, also primarily due to lower political revenue.
- Excluding political revenue, management reported revenue growth of $43.8 million.
As of September 30, 2019, cash and cash equivalents were $277.1 million, or $288.3 million including restricted cash. Total debt before cash was approximately $5.8 billion, and net debt was approximately $5.5 billion. The company had no ABL borrowings, $49.2 million of outstanding letters of credit and approximately $400.8 million of excess ABL availability.
Debt consisted primarily of a $2.76 billion Term Loan Facility, $800.0 million of 6.375% Senior Secured Notes due 2026, $750.0 million of 5.25% Senior Secured Notes due 2027 and $1.45 billion of 8.375% Senior Unsecured Notes due 2027. Approximately 48% of aggregate principal debt carried floating interest rates.
Material Changes Versus Prior Comparable Period
- Revenue increased 3.0%, but operating income decreased 24.6% and net income decreased 82.8%.
- Depreciation and amortization increased $52.0 million, primarily because fresh start accounting increased the recorded values of tangible and intangible assets.
- Interest expense increased $98.9 million in Q3 2019 because the Successor began recognizing interest on post-emergence debt; the Predecessor had ceased accruing interest on debt subject to compromise after the bankruptcy filing.
- Corporate expenses increased $13.3 million, largely due to $17.1 million of share-based compensation under the post-emergence equity plan versus $0.5 million in the prior-year quarter.
- No Q3 2019 impairment charge was recorded, compared with $33.2 million in Q3 2018. The company also recorded a $91.4 million FCC license impairment in the Predecessor period from January 1 through May 1, 2019.
- In August 2019, the company issued $750.0 million of 5.25% Senior Secured Notes and used the proceeds and cash on hand to prepay $740.0 million of Term Loan borrowings. Management expects this to reduce required annual debt service by approximately $35 million and annual cash interest by approximately $4 million.
For the non-GAAP combined nine-month 2019 period, revenue was $2.66 billion versus $2.59 billion in 2018, Adjusted EBITDA was $694.6 million versus $668.6 million, and free cash flow from continuing operations was $173.5 million versus $468.3 million. These combined results are not GAAP results and combine Successor and Predecessor periods solely for management comparison.
Guidance, Outlook, Commentary, Risks and Unusual Items
- Management stated that cash on hand, operating cash flow and ABL availability should provide sufficient resources for operating needs, capital expenditures, interest payments and other obligations for at least the next 12 months and the foreseeable future.
- Expected cash interest payments were approximately $105 million in Q4 2019 and approximately $400 million in 2020.
- Management expects advertising revenue to remain sensitive to GDP, economic conditions, competition, technology changes and political cycles. The Audio segment is typically weakest in the first quarter.
- Fresh start accounting created substantial valuation and earnings effects, including $3.3 billion of goodwill, $4.6 billion of intangible assets at emergence and materially higher amortization expense.
- The nine-month 2019 results include $9.46 billion of net reorganization items, primarily the gain from settlement of liabilities subject to compromise and fresh start adjustments. This is a nonrecurring and highly unusual item.
- Final tax impacts of the bankruptcy emergence and cancellation-of-debt income remain subject to refinement based on the company’s December 31, 2019 financial position; management stated that the final tax attributes could change significantly.
- Key risks include high leverage, variable-rate debt exposure, advertising and macroeconomic cyclicality, competition from alternative media, technology and privacy risks, regulatory and FCC ownership restrictions, litigation, and the limited trading history and potential overhang of Successor securities.
- The company estimated that a 50% change in LIBOR would have changed interest expense for the May 2–September 30, 2019 period by approximately $14.5 million, assuming constant borrowings.
Important Facts for Investors to Verify
- Confirm the effects of fresh start accounting and avoid direct comparisons between Successor and Predecessor GAAP results without appropriate adjustments.
- Assess whether operating cash flow and Adjusted EBITDA can support approximately $400 million of expected 2020 cash interest, capital expenditures and required debt obligations.
- Review debt maturities, covenant restrictions, floating-rate exposure and the availability and borrowing-base requirements of the $450 million ABL Facility.
- Evaluate the sustainability of digital and podcasting growth relative to higher content, royalty, compensation and production costs.
- Review the final tax consequences of cancellation-of-debt income, NOL reductions and fresh start adjustments when the company reports year-end 2019 results.
- Consider dilution and governance implications from 81.3 million outstanding Special Warrants, post-emergence equity awards and the authorized equity incentive plan.
- Review contingencies, transition-services and tax matters agreements with Clear Channel Outdoor, as well as ordinary-course litigation and regulatory risks.