Business Context and Reporting Period
This Form 10-Q was filed by CC Media Holdings, Inc., the predecessor corporate name associated with iHeartMedia, Inc., for the quarterly and six-month periods ended June 30, 2013. The company operated through Media and Entertainment (CCME), Americas outdoor advertising, International outdoor advertising, and Other segments. Results are unaudited and subject to seasonality.
Key Financial Metrics
| Metric | Three Months Ended June 30, 2013 | Six Months Ended June 30, 2013 |
|---|---|---|
| Revenue | $1.618 billion | $2.961 billion |
| Operating income | $320.2 million | $401.5 million |
| Operating margin | 19.8% | 13.6% |
| Net income attributable to the company | $7.2 million | $(195.8) million |
| Net margin attributable to the company | 0.4% | (6.6%) |
| Net cash provided by operating activities | Not separately presented | $(92.8) million |
| Capital expenditures | $71.1 million | $132.7 million |
| Cash and cash equivalents | Not separately presented | $704.2 million at June 30 |
| Total debt | Not separately presented | $20.4 billion gross; $19.7 billion net of cash |
Interest expense was $407.5 million in the second quarter and $793.0 million for the first six months. The company reported shareholders’ deficit of $8.3 billion at June 30, 2013. The weighted-average debt interest rate was 7.8%.
Material Changes Versus the Prior Comparable Period
- Second-quarter revenue increased 1.0% year over year, while six-month revenue decreased 0.1%. Excluding foreign exchange and the prior-year international neon divestiture, management reported underlying revenue growth of $23.0 million for the quarter and $14.5 million for the six-month period.
- Second-quarter operating income declined 7.5% to $320.2 million; six-month operating income declined 6.1% to $401.5 million. Higher CCME and corporate costs contributed to the deterioration.
- Second-quarter net income attributable to the company improved from a $39.0 million loss to $7.2 million of income, largely because of a $130.9 million gain on the sale of Sirius XM shares. Six-month loss attributable to the company widened to $195.8 million from $182.7 million.
- CCME revenue increased 2% in the quarter but declined slightly for the six months. iHeartRadio listening hours increased 36% in the quarter and 34% for the six months, supporting digital advertising growth, but traffic-business contract losses weighed on results.
- Americas outdoor revenue increased 4% in the quarter and 3% for the six months, with operating income up 7% and 8%, respectively, driven by digital-display capacity, occupancy, and rates.
- International outdoor revenue declined 2% for both periods as European macroeconomic weakness offset growth in China, the United Kingdom, Latin America, Australia, and other markets. Operating income nevertheless increased 17% in the quarter and 95% for the six months, aided by lower SG&A and prior-year legal costs.
- Operating cash flow changed from $118.8 million provided in the first six months of 2012 to $92.8 million used in 2013. Management attributed the decline primarily to approximately $90 million of additional cash interest payments.
- Cash declined by $520.8 million from December 31, 2012, primarily reflecting debt repayments and other financing uses. Financing activities used $449.5 million during the first six months.
Debt, Liquidity, Outlook, and Risks
- Clear Channel issued $575.0 million of 11.25% Priority Guarantee Notes due 2021 and used proceeds, receivables-based borrowings, and cash to prepay $846.9 million of Term Loan A. It also exchanged portions of notes due 2016 for approximately $1.2 billion of 14% Senior Notes due 2021, consisting of 12% cash interest and 2% payment-in-kind interest.
- A new $5.0 billion Term Loan D facility due January 30, 2019 extended a portion of debt previously due in 2016. The company’s debt maturities totaled $31.8 million in the remainder of 2013, $483.1 million in 2014, and $271.0 million in 2015.
- Management expected approximately $740.0 million of cash interest payments during the remainder of 2013. It stated that cash on hand, operating cash flow, and borrowing capacity were expected to fund requirements for at least the next 12 months, while cautioning that adverse operating results could require additional financing.
- The company was in compliance with its debt covenants at June 30, 2013. The secured-debt-to-EBITDA ratio was 6.2:1 versus a 9.25:1 maximum, but the maximum was scheduled to decline to 9.00:1 for the four quarters ending December 31, 2013 and 8.75:1 for the four quarters ending December 31, 2014.
- Advertising demand was described as correlated with GDP. Key risks included substantial leverage, high interest expense, refinancing and covenant compliance, economic weakness in Europe and other international markets, foreign-exchange exposure, regulatory and technology changes, litigation, taxes, and access to capital.
- In Los Angeles, 82 digital modernization permits were invalidated and the affected displays were required to be turned off. A motion seeking demolition of the related sign structures was scheduled for September 16, 2013.
- A proposed settlement of CCOH stockholder derivative litigation remained subject to Delaware Chancery Court approval. If approved, CCOH could demand repayment of $200 million under an intercompany note and declare a corresponding dividend, with approximately $22 million payable to public CCOH stockholders.
- The company incurred $14.1 million of strategic revenue and cost initiative expenses in the quarter and $22.9 million in the first six months. No specific earnings or revenue guidance was provided.
Most Important Facts to Verify
- Confirm the corporate-name relationship between this CC Media Holdings filing and the requested iHeartMedia, Inc. reference.
- Reconcile the deterioration in operating cash flow with the company’s liquidity assessment and projected $740.0 million of remaining 2013 cash interest.
- Review the detailed debt agreements, maturity schedule, interest-rate provisions, and covenant calculations, particularly the 2016 maturities and high-cost 2021 notes.
- Assess whether continued digital and iHeartRadio growth can offset traffic-revenue losses, higher streaming costs, and increased compensation and promotional spending.
- Monitor the Los Angeles digital-display litigation, the CCOH settlement approval, related cash demands, and any associated operating or demolition costs.
- Evaluate foreign-exchange movements and continued macroeconomic weakness in Europe, which materially affected international outdoor advertising results.