Business Context and Reporting Period
CC Media Holdings, Inc. (the historical corporate entity associated with iHeartMedia) filed this unaudited Form 10-Q for the quarter ended March 31, 2013. Its reportable segments were Media and Entertainment (CCME), Americas outdoor advertising, International outdoor advertising, and Other. Results are seasonal, with the first quarter typically the weakest period for the operating segments.
Key Financial Metrics
| Metric | Q1 2013 | Q1 2012 | Change |
|---|---|---|---|
| Revenue | $1.343 billion | $1.361 billion | (1.3%) |
| Operating income | $81.3 million | $81.2 million | 0.1% |
| Operating margin | 6.1% | 6.0% | Improved slightly |
| Net loss | $209.1 million | $148.1 million | Loss increased $61.0 million |
| Net loss attributable to the Company | $203.0 million | $143.6 million | Loss increased $59.4 million |
| Loss per diluted share | $2.47 | $1.83 | Loss increased |
| Cash used in operating activities | $86.6 million | $7.6 million | Use increased $79.0 million |
| Capital expenditures | $61.6 million | $72.6 million | Decreased $11.0 million |
| Cash and cash equivalents | $721.6 million | $1.326 billion at March 31, 2012 | Down $503.4 million sequentially |
| Total debt | $20.426 billion | $20.747 billion at December 31, 2012 | Down $321.0 million |
| Net debt | $19.705 billion | $19.522 billion at December 31, 2012 | Up $182.4 million |
At March 31, 2013, current assets were $2.369 billion and current liabilities were $1.316 billion, implying a current ratio of approximately 1.8x. Shareholders’ deficit was $8.210 billion. Interest expense was $385.5 million, substantially exceeding operating income.
Material Changes Versus the Prior Comparable Period
- Consolidated revenue declined $17.7 million. Excluding foreign exchange and the prior-year divestiture of the international neon business, management reported an underlying decrease of $8.5 million.
- CCME revenue fell $14.9 million, primarily because of lost traffic-business contracts and lower sales during integration activities. Digital advertising benefited from increased iHeartRadio listening hours, which rose 31%.
- Americas outdoor revenue increased $6.3 million, driven by higher occupancy and capacity of digital and traditional displays. Operating income increased 13% to $45.6 million.
- International outdoor revenue decreased $7.4 million, but increased $1.7 million excluding foreign exchange and the divested neon business. The segment remained loss-making, although its operating loss improved to $22.5 million from $28.1 million.
- Direct operating expenses decreased 3.2% and SG&A decreased 4.3%, partly offset by an 18.2% increase in corporate expenses and a 3.9% increase in depreciation and amortization.
- Interest expense increased $11.5 million, primarily due to the $2.2 billion of 7.625% senior subordinated notes issued in March 2012.
- The income tax benefit decreased to $96.3 million from $157.4 million. The prior-year benefit included approximately $61.0 million related to tax examination settlements.
- Cash flow deteriorated materially: operating cash use increased to $86.6 million from $7.6 million, while financing activities used $354.3 million versus providing $172.2 million in the prior-year quarter.
Debt, Liquidity, Outlook, and Risks
- Clear Channel issued $575.0 million of 11.25% Priority Guarantee Notes due 2021. Proceeds, $269.5 million of receivables-based borrowings, and cash on hand funded repayment of the $846.9 million Term Loan A balance.
- Clear Channel also repaid $312.1 million of 5.75% senior notes at maturity. The refinancing and repayment activity generated a $3.9 million loss on extinguishment of debt.
- Debt maturities were reported at $66.6 million in 2013, $483.6 million in 2014, and $271.0 million in 2015. The receivables-based facility had a maximum commitment of $535 million, subject to borrowing-base and other limitations.
- Management stated that cash on hand, operating cash flow, and borrowing capacity were expected to meet working capital, capital expenditure, debt service, and other requirements for at least the next 12 months, while cautioning that future performance and financing availability were uncertain.
- The company was in compliance with its financing covenants at March 31, 2013. The secured-debt-to-EBITDA ratio was 6.0x versus a maximum permitted ratio of 9.5x, declining to 9.25x for the four quarters ended June 30, 2013.
- Key risks include substantial leverage, required debt service, potential covenant breaches or cross-defaults, advertising and macroeconomic weakness, foreign exchange exposure, interest-rate changes, regulatory requirements, litigation, and access to capital.
- In April 2013, a Los Angeles court invalidated 82 digital modernization permits held by Clear Channel Outdoor and ordered affected displays to be turned off. Management warned of a potentially significant operational impact if replacement permits or legislative relief could not be obtained.
- A proposed settlement of CCOH stockholder litigation remained subject to final documentation and Delaware Chancery Court approval. The financial statements did not reflect potential settlement effects.
- The company incurred $8.8 million of strategic revenue and cost-initiative expenses in the quarter, compared with $15.5 million in the prior-year quarter. These included consulting, severance, facility and workforce consolidation, and other streamlining costs.
Investor Verification Items
- Verify the sustainability of liquidity and debt-service capacity given negative first-quarter operating cash flow and approximately $20.4 billion of debt.
- Track refinancing needs, covenant thresholds, and the availability and borrowing base of the receivables-based credit facility.
- Assess whether CCME digital growth and Americas outdoor improvement can offset traffic-business weakness and European macroeconomic pressure.
- Monitor the financial and operating consequences of the Los Angeles digital-permit invalidations.
- Confirm the final terms and approval status of the CCOH stockholder litigation settlement and any related cash demands or dividends.
- Evaluate the recurring nature of cost savings versus strategic initiative charges and the effect of elevated interest expense on future earnings.
- Consider seasonality: management stated that first-quarter results are generally the weakest and are not necessarily indicative of full-year performance.