iHeartMedia, Inc. — Q2 2020 Form 10-Q Summary
Business context and reporting period
The filing covers the quarter and six months ended June 30, 2020. iHeartMedia operates primarily through its Audio segment, including broadcast radio, digital and podcasting, networks, sponsorships and events, and through Audio & Media Services, including Katz Media and RCS.
Results were significantly affected by the COVID-19 pandemic and reduced advertiser spending. Comparisons with 2019 require caution because the company emerged from Chapter 11 on May 1, 2019, adopted fresh start accounting, separated its outdoor advertising businesses, and reports 2019 as separate Successor and Predecessor periods. Management therefore also provides non-GAAP combined 2019 comparisons.
Key financial metrics
| Metric | Three months ended June 30, 2020 | Six months ended June 30, 2020 |
|---|---|---|
| Revenue | $487.6 million | $1.268 billion |
| Operating income (loss) | $(159.1) million | $(1.890) billion |
| Net income (loss) attributable to the company | $(197.3) million | $(1.886) billion |
| Diluted loss per share | $(1.35) | $(12.94) |
| Adjusted EBITDA | $(29.3) million | $111.1 million |
| Cash provided by operating activities | Not separately provided on a comparable GAAP basis in the filing summary | $102.9 million |
| Free cash flow from continuing operations | $(6.5) million | $63.4 million |
Second-quarter operating margin was approximately negative 32.6%, and Adjusted EBITDA margin was approximately negative 6.0%. The six-month operating loss was dominated by $1.733 billion of non-cash impairment charges.
At June 30, 2020, cash and cash equivalents were $517.7 million, total debt was $5.837 billion, net debt was approximately $5.319 billion, and total stockholders’ equity was $1.066 billion. The company also had $60.0 million of mandatorily redeemable preferred stock classified as a liability.
Revenue and operating performance
| Revenue stream | Q2 2020 | Change vs. combined Q2 2019 |
|---|---|---|
| Broadcast radio | $244.0 million | Down 56.5% |
| Digital | $93.2 million | Up 2.4% |
| Networks | $96.3 million | Down 38.4% |
| Sponsorship and events | $14.8 million | Down 65.1% |
| Audio and Media Services | $39.3 million | Down 32.9% |
| Total revenue | $487.6 million | Down 46.6% |
Compared with the combined second quarter of 2019, revenue declined $425.7 million. Broadcast revenue fell $317.1 million, including decreases of $188.7 million in local spot revenue and $103.7 million in national spot revenue. Networks and sponsorships/events also declined materially. Digital revenue increased primarily from podcasting, while political revenue provided a partial offset.
Cost reductions lowered direct operating expenses, SG&A, and corporate expenses, but these savings did not offset the revenue decline. Depreciation and amortization increased due to fresh start accounting, while second-quarter impairment charges included a $5.4 million non-cash charge related to an abandoned and subleased operating lease.
Material changes versus the prior comparable period
- Combined second-quarter revenue decreased 46.6% from $913.3 million in 2019.
- Adjusted EBITDA declined from $262.9 million to $(29.3) million.
- The company shifted from combined 2019 operating income of $181.6 million to a 2020 operating loss of $159.1 million.
- The 2019 comparison benefited from a $9.5 billion reorganization gain and approximately $1.9 billion of income from discontinued outdoor operations; these items did not recur in 2020.
- Six-month revenue decreased 25.8% to $1.268 billion from combined 2019 revenue of $1.709 billion.
- Six-month revenue declines were partly offset by 11.4% digital growth and higher political revenue.
- Six-month cash provided by operating activities increased to $102.9 million from combined 2019 cash provided of $43.0 million, aided by working-capital changes and the absence of significant 2019 reorganization cash payments.
Liquidity, debt, outlook, and risks
The company withdrew its 2020 financial guidance on March 26, 2020 because of COVID-19 uncertainty. Management expects full-year 2020 revenue to decline from 2019 and stated that the pandemic’s financial impact cannot be reasonably estimated.
Management projects approximately $200 million of 2020 operating cost savings from expense reductions, furloughs, compensation changes, lower capital expenditures, and other actions. Separately, modernization initiatives are expected to generate approximately $100 million of annualized run-rate savings by mid-2021, with approximately half expected in 2020. The company expects approximately $50 million of restructuring costs related to modernization initiatives in 2020.
In February 2020, the company prepaid $150.0 million of term loans and reduced the applicable term-loan interest-rate margin. In July 2020, it issued $450.0 million of incremental term loans, receiving net proceeds of $425.8 million. It used $235.0 million to repay the ABL Facility and retained approximately $190.6 million for general corporate purposes.
As of June 30, 2020, the ABL Facility had $235.0 million outstanding, $41.2 million of letters of credit, and only $13.2 million of stated availability, subject to borrowing-base and other restrictions. After the July refinancing, management estimated total available liquidity at approximately $868 million, including cash, adjusted cash, and available ABL capacity. The company expects approximately $84 million of cash interest payments in the third quarter of 2020 and approximately $170 million during the remainder of 2020.
Management believes liquidity is sufficient to fund operations and obligations for at least the next 12 months, but cautions that additional financing may be required if conditions deteriorate. Approximately 41% of aggregate debt carried floating interest rates at June 30, 2020. Other risks include further impairment charges, weaker advertising demand, customer collection risk, substantial indebtedness, competition from alternative media, event disruption, regulatory and FCC ownership restrictions, litigation, cybersecurity, and risks associated with the recent bankruptcy emergence.
The company recognized $502.7 million of FCC license impairment and $1.224 billion of goodwill impairment in the first quarter of 2020. Management recorded no additional interim impairment as of June 30, 2020, but stated that future impairment losses could be material if economic conditions or recovery assumptions worsen.
Team Telecom consented on June 29, 2020 to the FCC’s potential grant of the company’s petition seeking permission for expanded foreign ownership. The FCC had not issued a final ruling as of the filing, and the timing and permitted ownership level remained uncertain.
Important facts for investors to verify
- Whether advertising demand, especially broadcast radio and networks, recovered or continued to decline after June 30, 2020.
- Actual post-June liquidity after the July term-loan issuance, ABL repayment, interest payments, and operating cash flows.
- Compliance with ABL borrowing-base requirements and the company’s ability to maintain required liquidity.
- Future impairment testing results for goodwill, FCC licenses, and other intangible assets.
- Progress toward the stated $200 million of 2020 cost savings and $100 million of modernization-related annualized savings.
- The final FCC decision on the foreign-ownership petition and any effect on voting rights, special warrants, or equity ownership.
- Cash interest obligations, preferred-stock redemption and dividend requirements, and debt covenant amendments.
- The comparability of future results given fresh start accounting, the 2019 bankruptcy emergence, and discontinued outdoor operations.