Business Context and Reporting Period
iHeartMedia, Inc. filed this unaudited Form 10-Q for the quarter and six months ended June 30, 2018. The company operates iHeartMedia broadcast and digital media, Americas outdoor advertising, International outdoor advertising, and related media representation businesses. The company and certain domestic subsidiaries filed voluntary Chapter 11 petitions on March 14, 2018 and were operating as debtors-in-possession during the reporting period; Clear Channel Outdoor Holdings and its subsidiaries were not debtors.
Key Financial Metrics
| Metric | Three months ended June 30, 2018 | Three months ended June 30, 2017 | Six months ended June 30, 2018 | Six months ended June 30, 2017 |
|---|---|---|---|---|
| Revenue | $1.601 billion | $1.590 billion | $2.971 billion | $2.920 billion |
| Operating income | $285.2 million | $308.1 million | $346.0 million | $420.4 million |
| Operating margin | 17.8% | 19.4% | 11.6% | 14.4% |
| Net loss attributable to the company | $69.9 million | $176.4 million | $486.9 million | $566.1 million |
| Loss per diluted share | $0.82 | $2.08 | $5.71 | $6.68 |
| Net cash provided by operating activities | Not separately provided | Not separately provided | $444.4 million | $(453.2) million |
Interest expense was $107.6 million in the second quarter and $526.0 million for the first six months. The reported amounts were substantially lower than the prior year because the company stopped accruing interest on debt classified as liabilities subject to compromise after the bankruptcy filing. Reorganization items were $68.7 million for the quarter and $260.8 million for the six months.
Cash and cash equivalents were $261.8 million at June 30, 2018, compared with $267.1 million at December 31, 2017. Including restricted cash, cash at June 30, 2018 was $311.9 million. Total assets were $12.0 billion, while stockholders’ deficit was $11.9 billion.
Total debt before reclassification was $20.5 billion, including $15.1 billion classified as debt subject to compromise. Net debt, based on total debt less cash and cash equivalents, was approximately $20.3 billion. The company had $125.0 million outstanding under a new $450.0 million debtor-in-possession facility, with reported excess availability of $189.9 million after borrowing-base and other adjustments. Clear Channel Outdoor separately had $125.0 million of revolving commitments and $51.5 million of excess availability.
Material Changes Versus the Prior Comparable Period
- Second-quarter revenue increased 0.7%, but revenue excluding foreign-exchange effects declined by $12.0 million. Six-month revenue increased 1.8%, while revenue excluding foreign-exchange effects declined by $6.2 million.
- iHeartMedia segment revenue declined 3.5% in the quarter and 2.7% for the six months, primarily because of lower local and national spot advertising. Operating income declined 13.0% and 14.1%, respectively.
- International outdoor revenue increased 10.7% in the quarter and 15.0% for the six months, supported by growth in several countries, new deployments, and digital expansion. Operating income increased 27.3% and 47.8%, respectively.
- Americas outdoor revenue was essentially flat in the quarter and declined 0.9% for the six months, partly because of the 2017 sale of the Canadian business. Operating income nevertheless increased 5.1% and 4.3%, respectively, due to lower operating and selling expenses.
- Operating income declined 7.4% in the quarter and 17.7% for the six months. The decline reflected higher operating costs, lower iHeartMedia results, foreign-exchange effects, and the absence of significant 2017 asset-sale gains.
- Operating cash flow improved by approximately $897.6 million year over year for the six months, largely because cash interest payments fell from $876.0 million to $206.9 million and working-capital collections improved. This improvement was materially affected by the suspension of interest payments and limited payments on certain pre-petition obligations.
- Capital expenditures were $88.6 million for the six months, down from $136.6 million in the prior-year period. Financing activities used $360.8 million, primarily for debt repayments and refinancing activity.
- The company adopted ASC 606 using the full retrospective method and stated that the adoption did not materially affect reported financial statements. Latin American operations were reclassified to International outdoor for all periods presented.
Outlook, Bankruptcy, Risks, and Unusual Items
- The Chapter 11 plan contemplated issuing new equity and new debt, distributing 99% of reorganized iHeart equity interests to specified creditor classes and 1% to existing iHeartMedia equity holders, subject to dilution. The plan also contemplated separating Clear Channel Outdoor from iHeartMedia. The plan remained subject to Bankruptcy Court approval, regulatory approvals, further revision, and successful implementation.
- The company disclosed substantial doubt regarding its ability to continue as a going concern. The financial statements do not reflect adjustments that could result from the Chapter 11 cases, including potential changes in asset recoverability, liability classification, or ultimate claim settlements.
- The company received approximately 3,600 proofs of claim totaling approximately $765.7 billion as of July 26, 2018, including duplicate claims across debtor entities. Management stated that the claims-resolution process could materially change recorded liabilities.
- The DIP facility matures on the earlier of emergence from Chapter 11 or June 14, 2019, subject to specified extensions and conversion provisions. It bears interest at LIBOR plus 2.25% for Eurocurrency loans and includes financial, collateral, liquidity, and operational restrictions.
- The filing included $16.5 billion of liabilities subject to compromise at June 30, 2018. The ultimate amount and settlement terms remained uncertain.
- A creditors’ adversary proceeding challenged the priority and treatment of certain liens; trial was scheduled for October 24, 2018. A separate CCOH stockholder derivative action remained pending, with oral argument on a motion to dismiss scheduled for September 20, 2018.
- An Italy VAT investigation could require repayment of approximately $17 million, including estimated penalties and interest, although the final amount was unknown and could differ materially.
- An investigation involving employees of Clear Media Limited in China could result in regulatory penalties or other sanctions under applicable laws, including the Foreign Corrupt Practices Act; the amount, if any, could not be estimated.
- Management reported that disclosure controls were not effective as of June 30, 2018 because the company continued to remediate a material weakness in internal control over financial reporting, including controls related to cash management and reporting at Clear Media Limited.
- Advertising revenue is sensitive to economic conditions, GDP, competition from alternative media, technology changes, foreign-exchange movements, labor costs, regulatory matters, and customer demand. Results are seasonal, with International outdoor typically strongest in the second and fourth quarters.
Most Important Facts for Investors to Verify
- Bankruptcy Court approval, confirmation, and effective implementation of the proposed plan of reorganization.
- Ultimate allowed claims and settlement values compared with the $16.5 billion recorded liabilities subject to compromise and the substantially larger aggregate proofs of claim.
- Post-petition liquidity, operating cash flow, DIP facility availability, borrowing-base compliance, and the ability to obtain exit financing.
- Whether the proposed Clear Channel Outdoor separation occurs and how it affects creditor recoveries, intercompany balances, and future cash management.
- Underlying iHeartMedia advertising trends excluding foreign exchange, particularly local and national spot revenue and digital subscription growth.
- Resolution and financial impact of the lien litigation, CCOH stockholder litigation, Italy VAT matter, and China investigation.
- Progress in remediating the material weakness in internal controls and the effect of bankruptcy-related disruption on operations, employees, customers, and vendors.