iHeartMedia, Inc. 2019 Form 10-K Summary
Business context and reporting period
iHeartMedia is a U.S. audio media company operating broadcast radio, digital streaming, podcasts, social media, live events, national syndication, Katz Media and RCS. The filing covers the fiscal year ended December 31, 2019.
On May 1, 2019, the Company emerged from Chapter 11, separated Clear Channel Outdoor Holdings, Inc., reduced iHeartCommunications’ debt from approximately $16.0 billion to approximately $5.8 billion, and adopted fresh start accounting. Accordingly, Successor-period results from May 2 through December 31, 2019 are not directly comparable with Predecessor-period results. Management presents combined 2019 results for trend analysis; these combined results are non-GAAP and are not pro forma results.
Financial performance and key metrics
| Metric | 2019 combined | 2018 | Change |
|---|---|---|---|
| Revenue | $3,683.5 million | $3,611.3 million | Up 2.0% |
| Operating income | $506.7 million | $690.1 million | Down 26.6% |
| Adjusted EBITDA | $1,000.7 million | $976.7 million | Up 2.5% |
| Operating cash flow from continuing operations | $461.4 million | $741.2 million | Down 37.8% |
| Free cash flow from continuing operations | $349.2 million | $656.0 million | Down 46.8% |
| Net income attributable to the Company | $11,296.7 million | $(201.9) million | Not meaningful |
Reported 2019 net income was dominated by a $9.46 billion net gain from the reorganization and a $1.69 billion gain associated with the Separation. It should not be viewed as representative of recurring operating profitability.
Revenue mix in 2019 included broadcast radio of $2,233.2 million, digital of $376.2 million, networks of $614.7 million, sponsorship and events of $209.5 million, Audio and Media Services of $236.7 million, and other revenue of $20.8 million, before eliminations. Digital revenue increased $91.6 million, primarily from podcasting, the Stuff Media acquisition and other digital services. Networks revenue increased $32.4 million.
Broadcast revenue declined $30.8 million, principally because 2018 benefited from higher political advertising. Audio and Media Services revenue declined $27.4 million, also reflecting lower political revenue. Political revenue fell to $28.8 million in 2019 from $103.0 million in 2018.
Operating income was pressured by a $90.5 million increase in depreciation and amortization from fresh start fair-value adjustments and $91.4 million of non-cash FCC license impairment charges recorded in the Predecessor period. Direct operating expenses increased $104.7 million, including higher compensation, digital royalties, music license fees and podcasting-related content costs. The 2019 combined operating margin was approximately 13.8%, compared with approximately 19.1% in 2018; comparisons are affected by fresh start accounting.
Cash flow, debt and liquidity
- Cash and cash equivalents were $400.3 million at December 31, 2019.
- Total debt was $5.77 billion, consisting of $4.32 billion of secured debt and $1.46 billion of unsecured debt. Net debt was $5.37 billion.
- The Company had a $450.0 million ABL Facility with no borrowings and $48.1 million of letters of credit outstanding, resulting in $401.9 million of availability.
- Capital expenditures were $112.2 million in 2019, compared with $85.2 million in 2018.
- Management expected approximately $356 million of cash interest payments in 2020 and stated that cash on hand, operating cash flow and ABL availability should fund operations, capital expenditures, debt service and other obligations for at least the next 12 months.
- Approximately 40% of aggregate principal debt bore floating interest rates at year-end. A 50% change in LIBOR was estimated to affect Successor-period interest expense by approximately $17.3 million.
In August 2019, the Company issued $750.0 million of 5.25% senior secured notes due 2027 and used proceeds and cash to repay $740.0 million of term loans. In November 2019, it issued $500.0 million of 4.75% senior secured notes due 2028 and used proceeds and cash to repay $500.0 million of term loans. On February 3, 2020, it made an additional $150.0 million term-loan prepayment and amended the term-loan pricing and certain covenants.
Material changes versus the prior comparable period
- The Company completed its Chapter 11 restructuring and Separation, creating a new capital structure and removing the Outdoor business from continuing operations.
- Revenue grew modestly despite the absence of the 2018 mid-term election cycle, with growth concentrated in digital, podcasting and networks.
- Adjusted EBITDA improved 2.5%, but GAAP operating income declined because of fresh-start depreciation and amortization and impairment charges.
- Continuing-operations operating cash flow and free cash flow declined substantially, primarily because post-emergence cash interest payments were higher and the Company made bankruptcy-related payments.
- Balance-sheet equity improved from a $11.56 billion Predecessor deficit at December 31, 2018 to $2.95 billion of Successor equity at December 31, 2019, primarily because of the reorganization and fresh start accounting.
- The Company adopted ASC 842 lease accounting in 2019, recording $881.8 million of operating lease right-of-use assets and $874.0 million of operating lease liabilities at year-end.
Guidance, outlook, commentary and risks
Management did not provide a formal revenue or EBITDA forecast in the filing. Its strategy emphasizes growing digital audio, podcasting, data-driven advertising, programmatic buying, analytics, live events and national advertising. Management announced modernization initiatives expected to require approximately $40 million to $50 million of incremental real-estate-related capital expenditures in 2020, weighted toward the second half of the year.
The business is seasonal, with the Audio segment typically performing weakest in the first quarter. Political advertising can materially affect year-over-year comparability, with generally higher revenue in congressional and presidential election years.
- High leverage, variable-rate debt, substantial interest obligations and restrictive debt covenants could limit financial flexibility.
- Advertising revenue is cyclical and sensitive to economic conditions, local markets and advertiser budgets.
- Competition from streaming audio, podcasts, satellite radio, digital platforms, social media and other entertainment may reduce audience share or advertising rates.
- The Company depends on key on-air talent, program hosts, management and the iHeartRadio brand.
- Music licensing, royalty negotiations and proceedings could increase expenses, including pending matters involving ASCAP, BMI, SESAC and the Copyright Royalty Board.
- FCC licensing, media ownership, foreign ownership, antitrust and license-renewal requirements could restrict operations or ownership. The FCC had not yet ruled on the Company’s request to permit foreign ownership and voting rights of up to 100%.
- Privacy, cybersecurity and data-protection laws, including the CCPA and GDPR, could create compliance costs, liabilities and limitations on targeted advertising.
- Outstanding Special Warrants and Class B shares could materially dilute Class A shareholders. The Company stated that it did not intend to pay dividends for the foreseeable future.
Important facts for investors to verify
- Reconcile the filing’s combined, non-GAAP 2019 results with the separate Predecessor and Successor GAAP periods before assessing trends.
- Review the post-emergence debt maturities, interest-rate exposure, mandatory and voluntary prepayment requirements, and covenant restrictions.
- Assess recurring cash generation excluding the non-recurring bankruptcy gain, Separation gain and other unusual items.
- Evaluate whether digital, podcasting and network growth can offset broadcast-radio pressure and political-revenue volatility.
- Review the status and potential financial effects of FCC foreign-ownership proceedings, music-royalty matters, tax matters and other litigation.
- Model potential dilution from approximately 80.2 million Special Warrants outstanding as of February 21, 2020, in addition to Class A and Class B shares.
- Verify the expected $40 million to $50 million of 2020 modernization capital expenditures and approximately $356 million of projected 2020 cash interest payments against subsequent filings.