iHeartMedia, Inc. — 2018 Q1 Form 10-Q Summary
Business context and reporting period
iHeartMedia, Inc. reported results for the three months ended March 31, 2018, with comparative results for the same period of 2017. The company operates iHeartMedia radio and digital media, Americas outdoor advertising, International outdoor advertising, and related media representation businesses. Latin American operations were reclassified from Americas outdoor to International outdoor beginning January 1, 2018, with prior periods recast.
On March 14, 2018, the company and certain domestic subsidiaries filed voluntary Chapter 11 bankruptcy petitions. Clear Channel Outdoor Holdings, Inc. and its subsidiaries did not file. The filing materially affected debt classification, interest expense, liquidity, financial reporting, and the company’s ability to continue as a going concern.
Financial performance and key metrics
| Metric | Q1 2018 | Q1 2017 | Change |
|---|---|---|---|
| Revenue | $1.370 billion | $1.329 billion | Up 3.1% |
| Operating income | $62.3 million | $114.1 million | Down 45.4% |
| Operating margin | 4.5% | 8.6% | Down 4.1 percentage points |
| Net loss | $431.6 million | $387.6 million | Loss increased $44.0 million |
| Net loss attributable to iHeartMedia | $415.7 million | $388.2 million | Loss increased $27.4 million |
| Basic and diluted loss per share | $4.88 | $4.58 | Loss per share increased |
| Cash provided by operating activities | $175.5 million | $(428.5) million | Improved $604.0 million |
| Capital expenditures | $38.7 million | $51.0 million | Down $12.3 million |
Revenue increased $40.6 million year over year, but management attributed $34.8 million of the increase to foreign exchange movements; revenue increased approximately $5.8 million excluding foreign exchange. International outdoor revenue grew 20.6% to $342.9 million, while iHeartMedia revenue declined 1.7% to $744.6 million and Americas outdoor revenue declined 1.7% to $255.8 million.
Direct operating expenses rose 5.3% to $601.3 million, selling, general and administrative expenses rose 5.0% to $473.0 million, and depreciation and amortization rose 3.6% to $151.4 million. Trade and barter expenses increased, particularly in iHeartMedia.
Interest expense declined to $418.4 million from $455.3 million, primarily because the company stopped accruing interest after the bankruptcy filing on debt classified as subject to compromise. Q1 2018 included $192.1 million of reorganization items, including $54.7 million of deferred financing fee write-offs, $131.1 million of original issue discount write-offs, and $6.3 million of professional fees.
Balance sheet, debt and liquidity
- Cash and cash equivalents were $297.4 million at March 31, 2018, compared with $267.1 million at December 31, 2017. Cash, cash equivalents and restricted cash totaled $360.5 million.
- Total assets were $12.193 billion, compared with $12.260 billion at year-end 2017.
- Total debt before reclassification was approximately $20.788 billion. Of this amount, $15.150 billion was classified as debt subject to compromise.
- Liabilities subject to compromise totaled $16.488 billion, including $15.150 billion of debt, $540.9 million of accrued interest, and $709.2 million of accounts payable, accrued liabilities and deferred taxes.
- Stockholders’ deficit increased to $11.753 billion from $11.327 billion at December 31, 2017.
- The company had $379.0 million outstanding under its receivables-based credit facility at March 31, 2018.
- Operating cash flow was positive primarily because of substantially lower cash interest payments, improved collections, extended accounts payable, and the nonpayment or stay of certain prepetition interest obligations. This cash-flow improvement may not represent normalized operating performance.
- Cash used in investing activities was $37.2 million, principally for capital expenditures. Cash used in financing activities was $92.4 million, principally for debt and credit-facility payments.
Material changes versus the prior comparable period
- The company entered Chapter 11, began operating as a debtor-in-possession, and adopted reorganization accounting under ASC 852.
- Operating income fell by $51.8 million despite higher revenue, primarily because expenses grew faster than revenue and Q1 2017 benefited from a $28.6 million gain on the sale of the Indianapolis outdoor market.
- iHeartMedia operating income declined 16.1% to $123.9 million, driven by lower spot advertising revenue and higher SG&A expenses.
- Americas outdoor operating income increased 2.8% to $37.5 million despite lower revenue, reflecting lower expenses following the Canadian business sale.
- International outdoor remained loss-making but improved its operating loss to $9.5 million from $11.4 million, supported by growth in China, Switzerland, Spain and Sweden.
- Operating cash flow changed from a $428.5 million use of cash to $175.5 million provided, largely due to a $448.8 million reduction in cash interest paid and working-capital actions taken in anticipation of bankruptcy.
- The company adopted ASC 606 using the full retrospective method; management stated that adoption did not materially affect prior-period financial statements.
Outlook, risks, contingencies and unusual items
The filing does not provide conventional earnings or revenue guidance. Management stated that first-quarter results are affected by seasonality and may not be indicative of full-year performance; the first quarter is typically the weakest period for the company’s operating segments.
The company entered into a Restructuring Support Agreement with certain creditors and equityholders. A plan of reorganization and disclosure statement were filed on April 28, 2018. Milestones included approval of the disclosure statement, confirmation of a plan, and an effective restructuring date by March 14, 2019. Failure to meet milestones could give consenting stakeholders termination rights.
The company stated that substantial doubt exists regarding its ability to continue as a going concern. Its ability to maintain liquidity depends on operating cash flow, cash on hand, use of cash collateral, potential debtor-in-possession financing, and successful completion of the Chapter 11 cases. A proposed $450 million DIP revolving facility, with a potential $100 million accordion, was submitted for court approval on May 17, 2018; approval and availability were not assured as of the filing.
The company was required to maintain minimum consolidated liquidity of $40.0 million through April 20, 2018 and $50.0 million thereafter under the cash collateral order. As of March 31, 2018, management reported compliance with the order and the minimum liquidity covenant.
Material risks include the outcome of the bankruptcy proceedings, claims reconciliation, potential changes to asset and liability values, access to financing, advertising-market weakness, competition from alternative media, foreign exchange exposure, variable interest rates, litigation, and the ongoing Clear Media investigation in China. The filing states that potential penalties or sanctions related to the investigation cannot reasonably be estimated.
Disclosure controls and procedures were not effective as of March 31, 2018. Management continued remediation of material weaknesses in internal control over financial reporting, including controls related to cash management and reporting at Clear Media Limited.
Most important facts for investors to verify
- Current status and final terms of the Chapter 11 plan, including creditor recoveries, equity treatment, and any separation of Clear Channel Outdoor.
- Approval, funding, borrowing base availability, and covenants of the proposed DIP facility and cash collateral arrangements.
- Actual unrestricted cash, liquidity availability, and operating cash burn during the restructuring process.
- Ultimate allowed amount and settlement treatment of the $16.488 billion of liabilities subject to compromise.
- Whether revenue trends in iHeartMedia and International outdoor advertising are sustainable after excluding foreign exchange effects and seasonal factors.
- Progress in remediating material weaknesses and the potential impact of the Clear Media investigation on internal controls, penalties, or sanctions.
- Pending bankruptcy-related lien litigation and other legal proceedings that could alter creditor priorities or materially affect recoveries.