Business Context and Reporting Period
iHeartMedia, Inc. filed this Form 10-Q for the quarter ended June 30, 2019. The company operates audio businesses across broadcast radio, digital and podcasting, networks, sponsorships and events, and audio and media services. On May 1, 2019, it emerged from Chapter 11, separated the Clear Channel Outdoor business, reduced debt, issued new equity and adopted fresh start accounting.
Because the company became a new reporting entity after emergence, the Successor period begins May 2, 2019, while the Predecessor period ends May 1, 2019. Historical results are therefore not directly comparable. Management presents combined Predecessor and Successor results as a non-GAAP analytical comparison.
Key Financial Metrics
| Metric | Q2 2019 combined | Comparable Q2 2018 | Change |
|---|---|---|---|
| Revenue | $913.3 million | $891.8 million | Up 2.4% |
| Operating income | $181.6 million | $181.2 million | Up 0.2% |
| Adjusted EBITDA | $262.9 million | $254.8 million | Up 3.2% |
| Operating margin | 19.9% | 20.3% | Down approximately 40 basis points |
| Adjusted EBITDA margin | 28.8% | 28.6% | Up approximately 20 basis points |
Combined six-month 2019 revenue was $1.709 billion versus $1.665 billion in 2018. Combined operating income was $200.7 million versus $243.3 million, and Adjusted EBITDA was $419.9 million versus $394.8 million.
- Successor net income attributable to the company for May 2 through June 30 was $38.8 million, or $0.27 per diluted share.
- Combined Q2 net income attributable to the company was $11.337 billion, primarily reflecting a $9.498 billion reorganization gain and $1.855 billion of income from discontinued operations. This figure is not representative of recurring operating performance.
- Cash provided by operating activities for the combined six-month period was $43.0 million, down from $444.4 million in 2018. The decline reflected $196.3 million of cash paid for reorganization items, the Separation of CCOH and working-capital timing.
- Capital expenditures were $53.6 million for the combined six-month period, including $44.7 million for Audio.
- At June 30, 2019, cash and cash equivalents were $127.2 million and total debt was $5.811 billion, producing reported net debt of approximately $5.683 billion.
- The post-emergence debt structure included approximately $3.5 billion of term loans, $800 million of 6.375% senior secured notes, $1.45 billion of 8.375% senior unsecured notes and other subsidiary debt. The $450 million ABL facility was undrawn, with $59.2 million of letters of credit and $390.8 million of excess availability.
- Operating lease liabilities totaled approximately $882.9 million after adoption of ASC 842 and fresh start adjustments.
Material Changes Versus the Prior Comparable Period
- Revenue increased $21.6 million in Q2 and $44.6 million in the first six months. Digital revenue increased $22.5 million in Q2 and $39.1 million year to date, supported by podcasting, including the Stuff Media acquisition, live radio and on-demand services.
- Networks revenue increased $8.9 million in Q2 and $15.0 million year to date.
- Broadcast radio revenue declined $7.8 million in Q2 and $10.7 million year to date, primarily because 2018 benefited from midterm-election political advertising.
- Direct operating expenses increased $13.1 million in Q2 and $39.2 million year to date, driven by digital royalties, podcasting and content costs, events and production expenses.
- Depreciation and amortization increased because fresh start accounting substantially increased the recorded values of tangible and intangible assets.
- Interest expense was $69.3 million on a combined Q2 basis versus $10.6 million in 2018, although the company expects substantially lower ongoing interest costs than under its pre-bankruptcy capital structure.
- The company recorded a $91.4 million non-cash impairment charge on FCC licenses in the Predecessor period during the first six months of 2019.
Outlook, Commentary, Risks and Unusual Items
Management expects operating cash flow, cash on hand and ABL availability to fund operations, capital expenditures, interest payments and other obligations for at least the next 12 months. The company anticipated approximately $400 million of cash interest payments for 2019. Management expects long-term deleveraging from cash generation and voluntary debt repayment.
After quarter-end, on August 7, 2019, iHeartCommunications issued $750 million of 5.25% senior secured notes due 2027 and used the proceeds and cash on hand to repay $740 million of term loans. Management stated that the transaction eliminated scheduled term-loan principal payments for the remaining term, reduced required annual debt service by approximately $35 million and reduced expected annual cash interest by approximately $7 million.
- Advertising demand is sensitive to economic conditions, GDP, political cycles and competition from digital, satellite, streaming and other media platforms.
- Podcasting and digital growth may require additional royalties, content costs, technology investment and compensation expense.
- Approximately 61% of long-term debt carried floating interest rates at June 30, 2019; management estimated that a 50% change in LIBOR would have changed Successor-period interest expense by approximately $7.6 million.
- The company remains subject to substantial debt obligations, restrictive covenants, preferred-stock dividend and redemption provisions, and potential liquidity pressure if operating performance or borrowing availability weakens.
- Fresh start accounting, the Separation and the bankruptcy reorganization make historical results and asset values difficult to compare with future periods.
- Tax attributes, including federal and state net operating losses, may be reduced or eliminated because of cancellation-of-debt income and ownership-change limitations. The final tax effects remained subject to refinement through the 2019 tax return.
- FCC license renewals, foreign ownership restrictions, media-ownership rules, royalty rates, privacy and cybersecurity requirements and potential litigation could materially affect results.
- The filing states that the company had effective disclosure controls as of June 30, 2019 and that no material changes in internal control over financial reporting occurred during the quarter.
Investor Verification Items
- Verify recurring operating performance using the combined non-GAAP presentation, while separately evaluating the impact of the May 1 emergence and fresh start accounting.
- Reconcile Adjusted EBITDA to GAAP operating income and assess the effect of restructuring, reorganization, stock compensation and other adjustments.
- Monitor cash conversion, working-capital needs, capital expenditures and the company’s ability to maintain ABL availability.
- Review debt maturities, floating-rate exposure, covenant requirements, preferred-stock redemption rights and the post-quarter-end refinancing.
- Assess whether digital and podcasting growth offsets declines in broadcast and political advertising revenue.
- Follow the final tax treatment of cancellation-of-debt income and the company’s ability to use remaining tax attributes.
- Evaluate FCC license renewals, foreign ownership limitations, royalty developments, cybersecurity exposure and other regulatory contingencies.