iHeartMedia, Inc. 2015 Second-Quarter Form 10-Q Summary
Business Context and Reporting Period
iHeartMedia, Inc. operates through iHeartMedia (broadcast, digital media, events and syndication), Americas outdoor advertising, International outdoor advertising and related businesses. The filing covers the three and six months ended June 30, 2015, with comparisons to the same periods in 2014. Segment reporting was revised to include Latin America in Americas outdoor advertising.
Key Financial Metrics
| Metric | Three Months Ended June 30, 2015 | Six Months Ended June 30, 2015 |
|---|---|---|
| Revenue | $1.600 billion | $2.944 billion |
| Operating income | $412.2 million | $505.3 million |
| Operating margin | 25.8% | 17.2% |
| Consolidated net loss | $47.3 million | $433.9 million |
| Net loss attributable to iHeartMedia | $54.5 million | $439.4 million |
| Net margin attributable to iHeartMedia | (3.4%) | (14.9%) |
| Interest expense | $453.0 million | $894.7 million |
| Cash used in operating activities | Not provided for the quarter | $239.6 million |
| Capital expenditures | Not provided for the quarter | $124.9 million |
| Cash and cash equivalents at June 30 | $387.4 million | |
| Total debt at June 30 | $20.375 billion |
- Revenue declined 1.9% year over year in the second quarter and 1.0% for the first six months.
- Direct operating expenses decreased 4.6% in the quarter and 3.9% year to date, while SG&A increased 1.2% and 0.8%, respectively.
- The company reported a shareholders’ deficit of $10.241 billion at June 30, 2015, compared with $9.665 billion at December 31, 2014.
- Cash declined from $457.0 million at year-end 2014. Net debt increased to approximately $19.987 billion from $19.869 billion.
Material Changes Versus the Prior Comparable Period
- Second-quarter iHeartMedia revenue increased 4% to $840.7 million, and operating income increased 1% to $272.8 million. Six-month revenue increased 4% and operating income increased 5%.
- Americas outdoor revenue decreased 1% in the quarter but increased slightly for the six months; operating income increased 1% and 3%, respectively. Digital billboard and Spectacolor revenue growth partly offset foreign exchange effects.
- International outdoor revenue decreased 13% in the quarter and 10% year to date, primarily because of foreign currency translation. Excluding foreign exchange, management reported revenue growth of $8.7 million in the quarter and $33.2 million year to date.
- Operating income benefited materially from $100.8 million of other operating income in the quarter and $91.8 million year to date, primarily from gains on tower sale-leaseback transactions. The comparable 2014 periods had operating expense related to asset disposals.
- Interest expense increased $12.4 million in the quarter and $23.0 million year to date because of a higher weighted average cost of debt. The weighted average interest rate was 8.4% at June 30, 2015, compared with 8.1% at December 31, 2014.
- Net loss attributable to the company improved from $186.6 million to $54.5 million in the quarter and from $610.8 million to $439.4 million year to date, but the company remained substantially unprofitable.
Debt, Liquidity and Cash Flow
- Six-month operating cash flow was negative $239.6 million, compared with negative $46.2 million in 2014. Cash interest paid increased to $808.4 million from $756.3 million.
- Investing cash flow was positive $236.4 million, primarily from $369.0 million of tower-sale proceeds and $34.3 million from San Antonio office building sales, partly offset by capital expenditures.
- Financing cash flow was negative $62.0 million. The company issued $950.0 million of 10.625% notes due 2023 and used proceeds primarily to repay $931.3 million of term-loan debt.
- Debt maturities were stated as $1.4 million during the remaining six months of 2015, $195.5 million in 2016, $6.8 million in 2017 and $934.1 million in 2018.
- Management expected approximately $862.4 million of cash interest requirements for the remainder of 2015. At June 30, approximately 31% of aggregate principal debt carried floating interest rates.
- The company reported compliance with its debt covenants. The senior secured net debt-to-consolidated EBITDA ratio was 6.4:1 versus a maximum permitted ratio of 8.75:1; covenant-defined EBITDA for the preceding four quarters was $1.926 billion.
- Management stated that cash on hand, operating cash flow and borrowing capacity were expected to fund requirements for at least the next 12 months, but emphasized dependence on operating performance, refinancing and additional liquidity-generating transactions.
Guidance, Outlook, Risks and Unusual Items
- No formal revenue or earnings guidance is provided. Management expects continued investment in media and entertainment initiatives and digital billboards and believes long-term plans can support liquidity, subject to significant uncertainty.
- The company is highly leveraged and stated that it may need refinancing, asset sales or other liquidity transactions. Failure to refinance or generate sufficient cash could result in substantial liquidity problems, debt acceleration or loss of access to secured assets.
- The April 2015 sale of 367 broadcast tower sites generated proceeds of $369.2 million and a net gain of $207.2 million; $108.1 million of the gain was deferred over the related lease term. The company entered into long-term leases for continued use of sold towers, increasing future operating lease obligations.
- A second tower sale of nine additional sites for approximately $5.9 million closed on July 16, 2015, after the reporting date.
- The company faces ordinary-course litigation, the Los Angeles digital billboard dispute and an investigation by Danish and UK competition authorities involving international outdoor operations. The ultimate financial impact is not clear from the filing.
- Tax results were affected by valuation allowances against deferred tax assets. Effective tax rates were negative 87.5% for the quarter and negative 22.2% year to date.
- Foreign exchange materially reduced reported international revenue and produced an $80.3 million year-to-date loss in other comprehensive income, primarily from currency translation.
- Management fees and reimbursable expenses paid to sponsor affiliates were $3.9 million in the quarter and $7.8 million year to date. A related-party intercompany note payable by iHeartCommunications to Clear Channel Outdoor was $936.9 million and payable on demand, although eliminated in consolidation.
Most Important Facts for Investors to Verify
- Verify the company’s ability to generate positive operating cash flow and meet approximately $862.4 million of remaining 2015 cash interest requirements.
- Review upcoming 2016–2018 maturities, refinancing plans, borrowing capacity and the sensitivity of covenant compliance to weaker EBITDA or higher interest rates.
- Separate recurring operating performance from the $207.2 million tower-sale gain and assess the future lease costs and deferred-gain recognition.
- Monitor the Los Angeles billboard litigation and Danish, Swedish and UK competition investigation for potential penalties, operating restrictions or asset impairments.
- Assess the accessibility of the $387.4 million cash balance, including $148.3 million held outside the United States and amounts subject to restrictions or noncontrolling ownership.
- Confirm the filing’s indicated response that the company had not filed all reports required under Section 13 or 15(d) during the preceding 12 months, as well as the filing status of the referenced executive equity issuance.