Business Context and Reporting Period
iHeartMedia, Inc. filed this unaudited Form 10-Q for the quarter and nine months ended September 30, 2018. The company operates through iHeartMedia (broadcast, digital media, events and syndication), Americas outdoor advertising, International outdoor advertising and related media representation businesses. The domestic iHeartMedia entities were operating as debtors-in-possession under Chapter 11 following the March 14, 2018 voluntary bankruptcy filing; Clear Channel Outdoor Holdings and its subsidiaries were not debtors in the cases.
Key Financial Metrics
| Metric | Three Months Ended September 30, 2018 | Year-over-Year | Nine Months Ended September 30, 2018 | Year-over-Year |
|---|---|---|---|---|
| Revenue | $1.583 billion | Up 3.0% | $4.553 billion | Up 2.2% |
| Operating income | $247.3 million | Up 9.6% | $593.3 million | Down 8.1% |
| Operating margin | 15.6% | Improved from 14.7% | 13.0% | Declined from 14.5% |
| Net income attributable to the company | $70.1 million | Compared with a $250.5 million loss | $(416.8) million | Compared with an $816.8 million loss |
| Net margin attributable to the company | 4.4% | Improved from (16.3)% | (9.1)% | Improved from (18.3)% |
| Cash provided by operating activities | Not separately provided for the quarter | — | $663.3 million | Compared with $(557.7) million |
| Capital expenditures | Not separately provided for the quarter | — | $157.6 million | Down from $184.9 million |
Interest expense was $99.3 million in the third quarter and $625.3 million for the nine months. These amounts exclude contractual interest of $372.2 million and $812.4 million, respectively, because the company stopped accruing interest on debt classified as subject to compromise after the bankruptcy filing. Reorganization items were $52.5 million in the quarter and $313.3 million year to date.
Cash and cash equivalents were $311.2 million at September 30, 2018, compared with $267.1 million at December 31, 2017. Including restricted cash, cash, cash equivalents and restricted cash totaled $338.1 million. Total assets were $12.0 billion and stockholders’ deficit was $11.8 billion.
Total debt before cash was $20.4 billion, including $15.1 billion of debt classified as subject to compromise. The company had no borrowings under its $450.0 million debtor-in-possession facility at September 30, 2018, with reported excess availability of $347.2 million after letters of credit and the availability block. Clear Channel Outdoor’s separate $125.0 million asset-based facility had $26.6 million of excess availability.
Material Changes Versus the Prior Comparable Period
- Third-quarter revenue increased $46.0 million, with growth in all segments. Excluding foreign exchange, management reported a $55.4 million increase.
- Nine-month revenue increased $98.0 million, primarily from International outdoor and Americas outdoor growth, partly offset by lower iHeartMedia revenue.
- Third-quarter iHeartMedia revenue increased 1.6%, supported by digital subscriptions, political advertising, traffic and weather revenue, and trade and barter activity. Nine-month iHeartMedia revenue declined 1.2% because of lower local and national spot revenue.
- International outdoor revenue increased 10.8% for the nine months and operating income increased 54.8%, driven by growth in multiple countries and digital deployments.
- Americas outdoor operating income increased 9.9% for the nine months, despite the 2017 sale of the Canadian outdoor business.
- Operating income declined 8.1% for the nine months because of higher operating and corporate expenses, impairment charges and the absence of significant 2017 disposal gains.
- Impairment charges increased to $40.9 million from $7.6 million, including $33.1 million related to FCC licenses and $7.8 million related to an Americas outdoor permit.
- Operating cash flow improved substantially, largely because cash interest paid declined to $293.7 million from $1.426 billion and working-capital payments were deferred or reduced in connection with the restructuring.
Outlook, Bankruptcy, Risks and Unusual Items
The filing does not provide conventional operating guidance or formal revenue or earnings targets. Management stated that results are seasonal and interim results may not be indicative of full-year performance. Advertising demand is correlated with GDP, while international results are exposed to foreign currency movements and local economic conditions.
The company’s plan of reorganization contemplated creditors receiving new debt and approximately 99% of reorganized equity interests, while existing iHeartMedia equity holders would receive approximately 1%, subject to dilution. The plan also contemplated separating Clear Channel Outdoor from iHeartMedia. The disclosure statement was approved on September 20, 2018; voting was scheduled to conclude November 16, 2018, with a confirmation hearing scheduled for December 11, 2018. The plan remained subject to court approval, further revision and successful implementation.
The company missed a milestone under its Restructuring Support Agreement because disclosure-statement approval occurred after the required date. Certain consenting stakeholders therefore had termination rights, although the RSA had not been terminated as of the filing. The company expressly stated that substantial doubt existed about its ability to continue as a going concern.
- Liabilities subject to compromise totaled $16.5 billion, including $15.1 billion of debt and $542.7 million of accrued interest.
- Approximately 4,200 proofs of claim had been filed for approximately $808.3 billion as of November 5, 2018; the filing notes that this amount included duplicate claims and was subject to reconciliation and objections.
- The company identified a material weakness in internal control over financial reporting related to Clear Media Limited and concluded that disclosure controls and procedures were not effective at September 30, 2018.
- An investigation in China concerned alleged misappropriation of funds by Clear Media employees and could implicate Foreign Corrupt Practices Act provisions. Potential penalties could not be estimated.
- An Italian VAT investigation could require repayment of approximately $17 million, including estimated penalties and interest, but the ultimate amount remained uncertain.
- Adversary proceedings involved alleged lien-priority issues and potential equitable subordination of certain creditor and sponsor claims. The company was awaiting rulings in key matters.
- On October 10, 2018, after the reporting period, the company acquired Stuff Media LLC for $55.0 million.
- On October 18, 2018, after the reporting period, the Bankruptcy Court approved continued solicitation procedures for the amended plan.
Most Important Facts for Investors to Verify
- Current status, confirmation and effective date of the Chapter 11 plan, including the final treatment of existing debt, creditors, equity holders and Clear Channel Outdoor.
- Actual allowed claims after reconciliation of the approximately $808.3 billion of filed claims and the resulting amount of liabilities subject to compromise.
- Availability and borrowing conditions under the DIP facility and Clear Channel Outdoor facility, including letters of credit and borrowing-base requirements.
- Underlying operating cash generation excluding the benefit of suspended debt interest payments and deferred pre-petition obligations.
- Progress in remediating the Clear Media internal-control material weakness and any consequences from the China investigation.
- Final liability associated with the Italian VAT matter and the outcome of pending bankruptcy-related litigation.
- Whether the $40.9 million impairment charge signals additional risk to FCC license, permit or goodwill valuations.