AUDACY, INC. Overview
Management's discussion and analysis ("MD&A") of our financial condition and
results of operations should be read in conjunction with the consolidated
financial statements and related footnotes contained in Item 15 of this Annual
Report on Form 10-K, as well as the information set forth in Item 1A, Risk
Factors.
The MD&A, as well as various other sections of the Annual Report, contains and
refers to statements that constitute "forward-looking statements" within the
meaning of Section 27A of the Securities Act, and Section 21E of the Exchange
Act. For more information, refer to the "Note Regarding Forward-Looking
Statements".
Our Business
Audacy is a leading, multi-platform audio content and entertainment company. As a leading creator of live, original, local, premium audio content inthe United States and the nation's leader in local sports radio and news, we are home to the nation's most influential collection of podcasts, digital and broadcast content, and premium live events. Through our multi-channel platform, we engage our consumers each month with highly immersive content and experiences. Available in every U.S. market, we deliver compelling live and on-demand content and experiences from voices and influencers our communities trust. Our robust portfolio of assets and integrated solutions help advertisers take advantage of the burgeoning audio opportunity through targeted reach and conversion, brand amplification and local activation - all at a national scale. We are home to seven of the eight most listened to all-news stations in theU.S. , as well as more than 40 professional sports teams and dozens of top college athletic programs. As one of the country's two largest radio broadcasters, we offer local and national advertisers integrated marketing solutions across our broadcast, digital, podcast and event platform, delivering the power of local connection on a national scale. Our nationwide footprint of radio stations includes positions in all of the top 15 markets and 21 of the top 25 markets. We were organized in 1968 as aPennsylvania corporation. Our results are based upon our aggregate performance. The following are some of the factors that impact our performance at any given time: (i) audience ratings; (ii) program content; (iii) management talent and expertise; (iv) sales talent and expertise; (v) audience characteristics; (vi) signal strength; and (vii) the number and characteristics of other radio stations, digital competitors and other advertising media in the market area. As opportunities arise, we may, on a selective basis, change or modify a station's format or digital content due to changes in listeners' tastes or changes in a competitor's format or content. This could have an initial negative impact on ratings and/or revenues, and there are no guarantees that the modification or change will be beneficial at some future time. Our management is continually focused on these opportunities as well as the associated risks and uncertainties. We strive to develop compelling content and strong brand images to maximize audience ratings that are crucial to our stations' financial success. We derive our revenues primarily from the sale of broadcasting time to local, regional and national advertisers and national network advertiserswho purchase spot commercials in varying lengths. A growing source of revenue is from station-related digital product suites, which allow for enhanced audience interaction and participation, and integrated digital advertising solutions. Our local sales staff generates the majority of our local and regional advertising sales through direct solicitations of local advertising agencies and businesses. We retain a national representation firm to sell to advertisers outside of our local markets.
In the radio broadcasting industry, seasonal revenue fluctuations are common and are due primarily to variations in advertising expenditures by local and national advertisers. Typically, revenues are lowest in the first calendar quarter of the year.
In 2022, we generated the majority of our net revenues from local advertising,
which is sold primarily by each individual local radio station's sales staff.
The next largest amount of revenues is derived from national advertising, which
is sold by an independent national representation firm. This includes, but is
not limited to, the sale of advertising during audio streaming of our radio
stations over the Internet and the sale of advertising on our stations'
websites. The next largest amount of revenues was from our suite of digital
products. Digital revenues include: (i) providing targeted advertising through
the sale of streaming and display advertisements on our national platform,
audacy.com and our station websites; (ii) the sale of embedded advertisements in
our owned and operated podcasts and other on-demand content; and (iii)
production fees for the creation of podcasts.
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We generated the balance of our 2022 revenues principally from network
compensation, sponsorships and event revenues, and other revenues. Network
revenues include the sale of air-time on our Audacy Network. Sponsorships and
event revenues include the sale of advertising space at live and local events
across the country as well as naming rights to our programs and studios. Other
revenues include on-site promotions and endorsements from talent as well as
trade and barter revenues.
Our most significant operating expenses are employee compensation, programming
and promotional expenses, and audience measurement services. Other significant
expenses that impact our profitability are interest and depreciation and
amortization expense.
Results Of Operations
The year 2022 as compared to the year 2021
The following significant factors affected our results of operations for 2022 as compared to 2021:
Current Macroeconomic Conditions and the COVID-19 Pandemic InDecember 2019 , a novel strain of coronavirus ("COVID-19") surfaced which resulted in an outbreak of infections throughout the world, which has affected operations and global supply chains. OnMarch 11, 2020 , theWorld Health Organization declared COVID-19 a pandemic. The pandemic has had a material impact on the Company and current macroeconomic conditions have slowed our recovery. The current macroeconomic conditions continue to have a material impact on the Company and its recovery. While the full impact of these current macroeconomic conditions is not yet known, we have taken proactive actions in an effort to mitigate its effects and are continually assessing its effects on our business, including how it has and will continue to impact advertiser demand. Net revenues in each month fromJanuary 2022 toJune 2022 exceeded net revenues in each month fromJanuary 2021 toJune 2021 . While we experienced sequential growth in net revenues month-over-month throughJune 2022 , the pace of such growth began to slow down inJune 2022 . Due to the current macroeconomic conditions, the month-over-month improvement in net revenues did not continue into the third and fourth quarters of 2022. We are currently unable to predict the extent of the impact that the current macroeconomic conditions will have on our financial condition, results of operations and cash flows in future periods due to numerous uncertainties, but we believe the impact could be material if conditions persist.
The extent to which the current macroeconomic conditions impact our business, operations and financial results is inherently uncertain and will depend on numerous evolving factors that we may not be able to accurately predict.
WideOrbit Streaming Acquisition
OnOctober 20, 2021 , we completed an acquisition ofWideOrbit's digital audio streaming technology and the related assets and operations ofWideOrbit Streaming for approximately$40.0 million (the "WideOrbit Streaming Acquisition"). We operate WideOrbit Streaming under the name AmperWave ("AmperWave"). We funded this acquisition through a draw on our revolving credit facility (the "Revolver"). Our consolidated financial statements for the year endedDecember 31, 2022 reflect the results of AmperWave and based upon the timing of the WideOrbit Streaming Acquisition, the Company's consolidated financial statements for the year endedDecember 31, 2021 reflect the results of AmperWave for the portion of the period after the completion of the acquisition. The Company's consolidated financial statements for the year endedDecember 31, 2020 do not reflect the results of AmperWave.
Urban One Exchange
InApril 2021 , we completed a transaction with Urban One, Inc. ("Urban One") under which we exchanged our four station cluster inCharlotte, North Carolina for one station inSt. Louis, Missouri , one station inWashington, D.C. , and one station inPhiladelphia, Pennsylvania (the "Urban One Exchange"). We began programming the respective stations under local marketing agreements ("LMAs") onNovember 23, 2020 . Based upon the timing of the Urban One Exchange, our consolidated financial statements for the year endedDecember 31, 2022 : (a) reflect the results of the acquired stations for the entire period and (b) do not reflect the results of the divested stations. Our consolidated financial statements for the year endedDecember 31, 2021 ; (a) reflect the results of the acquired stations for the portion of the period in which the LMAs were in effect and after the completion of the Urban One Exchange; and (b) do not reflect the results of the divested stations. Our consolidated financial 26 --------------------------------------------------------------------------------
statements for the year ended
Podcorn Acquisition
InMarch 2021 , we completed an acquisition of podcast influencers marketplace,Podcorn Media, Inc. ("Podcorn") for$14.6 million in cash plus working capital and a performance-based earn out which is based upon the achievement of certain annual performance benchmarks over a two year period (the "Podcorn Acquisition"). Our consolidated financial statements for the year endedDecember 31, 2022 reflect the results of Podcorn and our consolidated financial statements for the year endedDecember 31, 2021 reflect the results of Podcorn for the portion of the period after the completion of the Podcorn Acquisition. Our consolidated financial statements for the years endedDecember 31, 2020 do not reflect the results of Podcorn. Note Issuance - The 2027 Notes During the second quarter of 2019, we issued$325.0 million in aggregate principal amount of senior secured second-lien notes due 2027 (the "Initial 2027 Notes"). Interest on the Initial 2027 Notes accrues at the rate of 6.500% per annum and is payable semi-annually in arrears onMay 1 andNovember 1 of each year. We used net proceeds of the offering, along with cash on hand of$89.0 million under our Revolver to repay$425.0 million of existing indebtedness under our term loan outstanding at that time (the "Term B-1 Loan"). Increases in our interest expense due to the issuance of the Initial 2027 Notes, which have a higher interest rate, were partially offset by reductions in our interest expense due to the partial repayment of our Term B-1 Loan. In connection with this note issuance: (i) we wrote off$1.6 million of unamortized debt issuance costs and$0.2 million of unamortized premium to loss on extinguishment of debt; (ii) we incurred third party costs and lender fees of approximately$5.8 million , of which approximately$3.9 million was capitalized and approximately$1.9 million was captured as other expenses related to financing. During the fourth quarter of 2019, we issued$100.0 million of additional 6.500% senior secured second-lien notes due 2027 (the "Additional Notes"). We used net proceeds of the offering to repay$97.6 million of existing indebtedness under our Term B-1 Loan. Contemporaneous with this partial pay-down of the Term B-1 Loan, we replaced the remaining amount outstanding under the Term B-1 Loan with a Term B-2 loan (the "Term B-2 Loan"). Increases in our interest expense due to the issuance of the Additional Notes, which have a higher interest rate, were partially offset by reductions in our interest expense due to the partial repayment of our Term B-1 Loan and the lower borrowing rate on the Term B-2 Loan. In connection with this note issuance: (i) we wrote off$0.3 million of unamortized debt issuance costs to loss on extinguishment of debt; and (ii) incurred third party costs and lender fees of approximately$6.3 million , of which approximately$3.8 million was capitalized and approximately$2.5 million was captured as refinancing expenses. During the fourth quarter of 2021, we issued$45.0 million of additional 6.500% senior secured second-lien notes due 2027 (the "Additional 2027 Notes"). The Additional 2027 Notes are treated as a single series with the Initial 2027 Notes and the Additional Notes. We used net proceeds of the Additional 2027 Notes offering to repay$44.6 million of existing indebtedness under the Term B-2 Loan. Increases in our interest expense occurred due to the issuance of the Additional 2027 Notes which have a higher interest rate than the Term B-2 Loan. In connection with this note issuance: (i) we incurred third party costs of approximately$1.1 million , of which approximately$0.8 million was capitalized and approximately$0.4 million was captured as refinancing expenses.
Note Issuance - The 2029 Notes
During the first quarter of 2021, we issued$540.0 million in aggregate principal amount of senior secured second-lien notes dueMarch 31, 2029 (the "2029 Notes"). Interest on the 2029 Notes accrues at the rate of 6.750% per annum and is payable semi-annually in arrears onMarch 31 andSeptember 30 of each year. We used net proceeds of the offering, along with cash on hand, to: (i) repay$77.0 million of existing indebtedness under our Term B-2 Loan; (ii) repay$40.0 million of drawings under our Revolver; and (iii) fully redeem all of our$400.0 million aggregate principal amount of 7.250% senior notes due 2024 (the "Senior Notes") and to pay fees and expenses in connection with the redemption. In connection with this activity, during the first quarter of 2021, we: (i) recorded$6.6 million of new debt issuance costs attributable to the 2029 Notes which will be amortized over the term of the 2029 Notes under the effective interest method; and (ii)$0.4 million of debt issuance costs attributable to the Revolver which will be amortized over the remaining term of the Revolver on a straight line basis. We also incurred$0.5 million of costs which were classified within refinancing expenses. 27 -------------------------------------------------------------------------------- In connection with the redemption of the Senior Notes during the first quarter of 2021, we wrote off the following amounts to gain/loss on extinguishment of debt: (i)$14.5 million in prepayment premiums for the early retirement of the Senior Notes; (ii)$8.7 million of unamortized premium attributable to the Senior Notes; (iii)$1.0 million of unamortized debt issuance costs attributable to the Senior Notes; and (iv)$1.3 million of unamortized debt issuance costs attributable to the Term B-2 Loan. Impairment Loss During the third quarter of 2022, the Company completed an interim impairment assessment for its goodwill at the podcast reporting unit and the QLGG reporting unit. As a result of this interim impairment assessment, the Company determined that the fair value of its podcast reporting unit was greater than the carrying value, and accordingly, no impairment was recorded. As a result of this interim impairment assessment, the Company determined that the fair value of its QLGG reporting unit was less than the amount reflected in the balance sheet and, accordingly, recorded an impairment loss of$18.1 million . As a result of this impairment assessment, the Company no longer has any goodwill attributable to the QLGG reporting unit and was not required to test the QLGG reporting unit as a part of the annual impairment assessment conducted during the fourth quarter of 2022. During the third quarter of 2022, the Company completed an interim impairment assessment for its broadcasting licenses at the market level using the Greenfield method. As a result of this interim impairment assessment, the Company determined that the fair value of its broadcasting licenses was less than the amount reflected in the balance sheet for certain of the Company's markets and, accordingly, recorded an impairment loss of$159.1 million ($116.7 million , net of tax). The annual impairment assessment conducted during the fourth quarter of 2022 indicated that the fair value of our broadcasting licenses and the fair value of our podcast reporting unit and the AmperWave reporting unit exceeded their respective carrying amounts. Accordingly, we were not required to record an impairment loss on broadcasting licenses or goodwill in the fourth quarter of 2022 . The annual impairment assessment conducted during the fourth quarter of 2021 indicated that the fair value of our broadcasting licenses and the fair value of our podcast reporting unit and QLGG reporting unit exceeded their respective carrying amounts. Accordingly, we were not required to record an impairment loss on broadcasting licenses or goodwill in the fourth quarter of 2021.
Restructuring Charges
In connection with the current macroeconomic conditions and COVID-19 pandemic, we incurred restructuring charges, including workforce reductions and other restructuring costs of$10.0 million , and 5.7 million during the years endedDecember 31, 2022 and 2021, respectively. Amounts were expensed as incurred and are included in restructuring charges.
Other Gain (Loss) Activity
During the year endedDecember 31, 2022 , we entered into an agreement with a third party Qualified Intermediary, under which we entered into an exchange of real property held for productive use or investment. This agreement relates to the sale of real property and identification and acquisition of replacement property. Total proceeds from the sale resulted in a gain of approximately$2.5 million . During the year endedDecember 31, 2022 , we finalized: (i) the sale of assets inSan Francisco, California , which had previously been classified within assets held for sale and recognized a loss of approximately$0.5 million ; and (ii) the sale of assets inHouston, Texas which has previously been classified within assets held for sale and recognized a gain of approximately$10.6 million . Additionally, we also recognized a gain of$0.6 million in connection with the bond repurchase activity discussed above. During the year endedDecember 31, 2022 , we entered into an agreement to dispose of land, equipment and anFCC license inLas Vegas, Nevada . Total proceeds from the sale of the land and equipment resulted in a gain of approximately$35.3 million . The license was disposed of in an exchange transaction which resulted in a loss of$2.0 million which was partially offset by a gain of$0.7 million in connection with the bond repurchase activity. During the year endedDecember 31, 2021 , we recognized: (i) a gain of approximately$4.6 million on the disposal of property and equipment inSacramento, California ; (ii) a gain of approximately$4.0 million in connection with the Urban One Exchange; and (iii) a gain of approximately$0.9 million on the disposal of an investment in a privately held company. These gains were partially offset by a$1.1 million loss of the disposal of property and equipment. 28 --------------------------------------------------------------------------------
YEARS ENDED DECEMBER 31,
2022 2021 % Change
(dollars in millions)
NET REVENUES $ 1,253.7 $ 1,219.4 3 %
OPERATING EXPENSE:
Station operating expenses 1,030.5 977.0 5 %
Depreciation and amortization expense 65.8 52.2 26 %
Corporate general and administrative expenses 96.4 93.4 3 %
Integration costs - -
Restructuring charges 10.0 5.7 76 %
Impairment loss 180.5 2.2 8107 %
Net gain on sale or disposal (47.7) (8.4) 468 %
Other expenses 0.7 1.0 (31) %
Change in fair value of contingent consideration (8.8) - 100 %
Refinancing expenses - 0.8 (100) %
Total operating expense 1,327.4 1,123.9 18 %
OPERATING INCOME (LOSS) (73.7) 95.5 (177) %
NET INTEREST EXPENSE 107.5 91.5 17 %
Net loss on extinguishment of debt - 8.2 100 %
Other income (0.2) (0.5) (52) %
OTHER (INCOME) EXPENSE (0.2) 7.7 (103) %
LOSS BEFORE INCOME TAX BENEFIT (181.0) (3.7) 4792 %
INCOME TAX BENEFIT (40.3) (0.2) 20038 %
NET LOSS $ (140.7) $ (3.5) 3,920 %
Net Revenues
Revenues increased compared to prior year primarily due to economic recovery and
improvements across all segments of our business from the depressed levels of
the prior year. Prior year revenues were negatively impacted from the economic
slowdown triggered by the COVID-19 pandemic. In the current year, we continued
to report sequential growth in net revenues month-over-month through June 2022
Due to current macroeconomic conditions, this trend did not continue and
revenues declined during the second half of 2022.
Net revenues were also positively impacted by: (i) growth in our spot revenues;
(ii) growth in our digital revenues; (iii) the operations of AmperWave for the
full period.
Net revenues increased the most for our stations located in the
Station Operating Expenses
Station operating expenses increased compared to prior year primarily due to: (i) an increase in payroll and related expenses in the current year; (ii) an increase in digital expenses related to user acquisition, content licenses and podcast host and talent fees; and (iii) an increase in 2022 revenues which resulted in a corresponding increase in variable sales-related expenses.
Station operating expenses included non-cash compensation expense of
Depreciation and Amortization Expense
Depreciation and amortization expense increased primarily due to an increase in
amortization of intangible assets in 2022 relative to 2021. The increase in
amortization is due to the addition of amortizable intangible assets in the
WideOrbit Streaming Acquisition and the Podcorn Acquisition. Additionally,
depreciation and amortization expense increased due to an increase in capital
expenditures in 2022 relative to 2021.
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--------------------------------------------------------------------------------Corporate General and Administrative Expenses
Corporate general and administrative expenses increased primarily as a result of an increase in payroll and related expenses in the current year. This increase was partially offset by a decrease in corporate rebranding costs in connection with our corporate name change in 2021, which is nonrecurring in nature. Corporate, general and administrative expenses included non-cash compensation expense of$5.0 million and$8.8 million for the years endedDecember 31, 2022 and 2021, respectively. Restructuring Charges
We incurred restructuring charges in 2022 and 2021 primarily in response to the
COVID-19 pandemic and the current macroeconomic conditions. These costs
increased
Impairment Loss
The impairment loss incurred during the year endedDecember 31, 2022 consists of: (i) a$159.1 million impairment charge as a result of an interim impairment assessment on ourFCC broadcasting licenses; (ii) an$18.1 million impairment charge as a result of an interim impairment assessment on ourGoodwill ; and (iii) a$3.2 million charge related to an early termination of certain leases. The impairment loss incurred during the year endedDecember 31, 2021 includes a$1.7 million write down of property and equipment and$0.5 million related to early termination of certain leases. We conducted interim impairment assessments on our broadcasting licenses during the second and third quarter of 2020. As a result of the interim impairment assessments, we determined that the fair value of our broadcasting licenses was less than their carrying value in certain markets and we recorded a cumulative non-cash impairment charge on our broadcasting licenses of$16.0 million ($11.7 million , net of tax). The annual impairment assessment conducted during the fourth quarter of 2020 indicated that the fair value of our broadcasting licenses was less than their carrying value in certain markets. As a result, we recorded a non-cash impairment charge on our broadcasting licenses of$246.0 million ($180.4 million , net of tax) in the fourth quarter of 2020. During the first quarter of 2020, we recorded a$1.1 million impairment charge related to ROU asset impairment. During the fourth quarter of 2020, we recorded a$1.4 million impairment charge related to computer software.
Refinancing Expenses
We incurred
Change in Fair Value of Contingent Consideration
In connection with the Podcorn Acquisition, we recorded a contingent consideration liability during the first quarter of 2021, which is subject to fair value remeasurements. Due to fluctuation in the market-based inputs used to develop the discount rate, the discount rate increased during the year endedDecember 31, 2022 . Additionally, a reduction in projected Adjusted EBITDA values resulted in a lower expected present value of the contingent consideration. As a result, the fair value of the contingent consideration decreased$8.8 million during the year endedDecember 31, 2022 .
Interest Expense
During the year ended
This increase in interest expense was primarily attributable to an increase in the outstanding fixed-rate indebtedness and variable-rate indebtedness upon which interest is computed coupled with an increase in variable interest rates.
The weighted average variable interest rate for our credit facilities as of
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--------------------------------------------------------------------------------Income Taxes (Benefit)
OnMarch 27, 2020 ,the United States enacted the Coronavirus Aid, Relief, and Economic Security Act (the "CARES Act"). The CARES Act is an emergency economic stimulus package that includes spending and tax breaks to strengthenthe United States economy and fund a nationwide effort to curtail the effects of the COVID-19 pandemic. The CARES Act includes significant business tax provisions that, among other things, includes the removal of certain limitations on utilization of net operating losses ("NOL") carryforwards, increases the loss carry back period for certain losses to five years, and increases the ability to deduct interest expense, as well as amending certain provisions of the previously enacted Tax Cuts and Jobs Act. We were able to carry back our 2020 federal income tax loss to prior tax years and filed 2 refund claims with the Internal Revenue Service ("IRS") for$20.4 million . We received a refund of$15.2 million in connection with the first claim during the first quarter of 2022. OnDecember 27, 2020 ,the United States enacted the Consolidated Appropriations Act, 2021 (the "Appropriations Act"), an additional stimulus package providing financial relief for individuals and small businesses. The Appropriations Act contains a variety of tax provisions, including full expensing of business meals in 2021 and 2022, and expansion of the employee retention tax credit. We do not expect the Appropriations Act to have a material tax impact.
We recognized an income tax benefit at an effective income tax rate of 22.26%
for the year ended
We recognized an income tax benefit at an effective income tax rate of 6.20% for 2021. The rate was lower than the federal statutory rate of 21% primarily due to the impact of nondeductible expenses and discrete income tax expense items related to the shortfall associated with share-based awards.
Estimated Income Tax Rate For 2023
We estimate that our 2023 annual tax rate before discrete items, which may fluctuate from quarter to quarter, will be between 28% and 30%. We anticipate that we will be able to utilize certain net operating loss carryforwards to reduce future payments of federal and state income taxes. We anticipate that our rate in 2023 could be affected primarily by: (i) changes in the level of income in any of our taxing jurisdictions; (ii) adding facilities through mergers or acquisition in states that on average have different income tax rates from states in which we currently operate and the resulting effect on previously reported temporary differences between the tax and financial reporting bases of our assets and liabilities; (iii) the effect of recording changes in our liabilities for uncertain tax positions; (iv) taxes in certain states that are dependent on factors other than taxable income; (v) the limitations on the deduction of cash and certain non-cash compensation expense for certain key employees; and (vi) any tax benefit shortfall associated with share-based awards. Our annual effective tax rate may also be materially impacted by: (a) tax expense associated with non-amortizable assets such as broadcasting licenses and goodwill; (b) regulatory changes in certain states in which we operate; (c) changes in the expected outcome of tax audits; (d) changes in the estimate of expenses that are not deductible for tax purposes; and (e) changes in the deferred tax valuation allowance. In the event we determine at a future time that it is more likely than not that we will not realize our net deferred tax assets, we will increase our deferred tax asset valuation allowance and increase income tax expense in the period when we make such a determination. Net Deferred Tax Liabilities As ofDecember 31, 2022 , and 2021, our total net deferred tax liabilities were$453.4 million and$487.7 million , respectively. The decrease in net deferred tax liabilities was primarily the result of a reduction in our deferred tax liability due to our impairment of indefinite-lived intangibles for book purposes. Our net deferred tax liabilities primarily relate to differences between book and tax bases of certain of our indefinite-lived intangibles (broadcasting licenses). The amortization of our indefinite-lived assets for tax purposes but not for book purposes creates deferred tax liabilities. A reversal of deferred tax liabilities may occur when indefinite-lived intangibles: (i) become impaired; or (ii) are sold, which would typically only occur in connection with the sale of the assets of a station or groups of stations or the entire company in a taxable transaction. Due to the amortization for tax purposes and not book purposes of our indefinite-lived intangible assets, we expect to continue to generate deferred tax liabilities in future periods.
Results Of Operations
The year 2021 as compared to the year 2020
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The discussion of our results of operations for the year ended December 31,
2021 , compared to the year ended December 31, 2020 , can be found in Part II,
Item 7, "Management's Discussion and Analysis of Financial Condition and Results
of Operations" in our Annual Report on Form 10-K filed with the SEC on March 1,
2022 .
Future Impairments
We may determine that it will be necessary to take impairment charges in future
periods if we determine the carrying value of our intangible assets is more than
the fair value.
During the third quarter of 2022, the Company completed an interim impairment
assessment for its broadcasting licenses at the market level. As a result of
this interim impairment assessment, the Company determined that the fair value
of its broadcasting licenses was less than the amount reflected in the balance
sheet for certain of the Company's markets and, accordingly, recorded an
impairment loss of $159.1 million ($116.7 million , net of tax).
During the third quarter of 2022, the Company completed an interim impairment
assessment for its goodwill at the podcast reporting unit and the QLGG reporting
unit. As a result of this interim impairment assessment, the Company determined
that the fair value of its QLGG reporting unit was less than the amount
reflected in the balance sheet and, accordingly, recorded an impairment loss of
$18.1 million . As a result of this impairment assessment, the Company no longer
has any goodwill attributable to the QLGG reporting unit.
The annual impairment assessment conducted during the fourth quarter of 2022 and
2021 indicated that the fair value of our broadcasting licenses and goodwill
exceeded their respective carrying amounts. Accordingly, we were not required to
record an impairment loss on broadcasting licenses or goodwill during the fourth
quarter of 2022 and 2021.
As discussed in the Broadcasting Licenses Valuation at Risk section below the
results indicated that there were 39 units of accounting where the fair value
exceeded their carrying value by 10% or less. In aggregate, these 39 units of
accounting had a carrying value of $1,980.7 million at December 31, 2022 . If
overall market conditions or the performance of the economy deteriorates,
advertising expenditures and radio industry results could be negatively
impacted, including expectations for future growth. This could result in future
impairment charges for these or other of our units of accounting, which could be
material. We may be required to retest prior to our next annual evaluation,
which could result in an impairment.
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--------------------------------------------------------------------------------Liquidity and Capital Resources
Liquidity
Although we have been, and expect to continue to be, negatively impacted by the current macroeconomic conditions, we anticipate that our business will continue to generate sufficient cash flow from operating activities and we believe that these cash flows, together with our existing cash and cash equivalents and our ability to draw on current credit facilities, will be sufficient for us to meet our current and long-term liquidity and capital requirements. However, our ability to maintain adequate liquidity is dependent upon a number of factors, including our revenue, macroeconomic conditions, the length and severity of business disruptions caused by the current macroeconomic conditions, our ability to contain costs and to collect accounts receivable, and various other factors, many of which are beyond our control Moreover, if the current macroeconomic conditions continue to create significant disruptions in the credit or financial markets, or impacts our credit ratings, it could adversely affect our ability to access capital on attractive terms, if at all. We also expect the timing of certain priorities to be impacted, such as the pace of our debt reduction efforts and the delay of certain capital projects. Our senior secured credit agreement (the "Credit Facility") as amended, is comprised of the$250.0 million Revolver and the Term B-2 Loan with$632.4 million outstanding atDecember 31, 2022 . During the year endedDecember 31, 2022 , and in connection with the issuance of the 2029 Notes, we: (i) repaid$40.0 million outstanding under our Revolver; and (ii) repaid$77.0 million outstanding under the Term B-2 Loan. We subsequently made additional borrowings and payments against our Revolver. In connection with the issuance of the Additional 2027 Notes, we repaid$44.6 million outstanding under the Term B-2 Loan. As ofDecember 31, 2022 , we had$632.4 million outstanding under the Term B-2 Loan and$180.0 million outstanding under the Revolver. In addition, we had$5.9 million in outstanding letters of credit. As ofDecember 31, 2022 , total liquidity was$144.8 million which was comprised of$41.5 million available under the Revolver and$103.3 million in cash and cash equivalents. During the year endedDecember 31, 2022 , we increased our outstanding debt by$75.5 million due to: (i) additional draw down and repayment activity under our Revolver; (ii) the repurchase of the 2027 Notes discussed below and (iii) amortization of costs related to debt refinancing activities. In connection with our outstanding indebtedness, we have restrictions on the ability of our subsidiaries to distribute cash to our Parent, as more fully described in the accompanying notes to our audited consolidated financial statements. We do not anticipate that these restrictions will limit our ability to meet our future obligations over the next 12 months. As ofDecember 31, 2022 , our Consolidated Net First Lien Leverage Ratio was 3.9 times as calculated in accordance with the terms of our Credit Facility, which place restrictions on the amount of cash, cash equivalents and restricted cash that can be subtracted in determining consolidated first lien net debt. Over the past several years, we have used a significant portion of our cash flow to service our indebtedness. Generally, our cash requirements are funded from one or a combination of internally generated cash flow, cash on hand and borrowings under our Revolver. As ofDecember 31, 2022 , the Company had capital expenditure commitments outstanding of$10.7 million . Subject to limitations in our credit agreements, we may also use our capital resources to repurchase shares of our Class A common stock, to pay dividends to our shareholders, and to make acquisitions. We may from time to time seek to repurchase and retire our outstanding indebtedness through open market purchases, privately negotiated transactions or otherwise.
Amendment and Repricing -
In connection with the Merger, we assumedCBS Radio's (nowAudacy Capital Corp.'s ) indebtedness outstanding under: (i) a credit agreement (the "Credit Facility") amongAudacy Capital Corp. , the guarantors named therein, the lenders named therein, andJPMorgan Chase Bank, N.A ., as administrative agent; and (ii) the Senior Notes (described below).
The 2027 Notes
During the second quarter of 2019, the Company and its finance subsidiary,Audacy Capital Corp. (formerly,Entercom Media Corp. ) ("Audacy Capital Corp. "), issued$325.0 million in aggregate principal amount of senior secured second-lien notes due 2027 (the "Initial 2027 Notes") under an Indenture dated as ofApril 30, 2019 (the "Base 2027 Indenture"). 33 -------------------------------------------------------------------------------- Interest on the Initial 2027 Notes accrues at the rate of 6.500% per annum and is payable semi-annually in arrears onMay 1 andNovember 1 of each year. UntilMay 1, 2022 , only a portion of the Initial 2027 Notes could be redeemed at a price of 106.500% of their principal amount plus accrued interest. On or afterMay 1, 2022 , the Initial 2027 Notes may be redeemed, in whole or in part, at a price of 104.875% of their principal amount plus accrued interest. The prepayment premium continues to decrease over time to 100% of their principal amount plus accrued interest. The Company used net proceeds of the offering, along with cash on hand and$89.0 million borrowed under its Revolver, to repay$425.0 million of existing indebtedness under the Company's term loan outstanding at that time (the "Term B-1 Loan"). In connection with this refinancing activity described above, during the second quarter of 2019, the Company: (i) wrote off$1.6 million of unamortized deferred financing costs associated with the Term B-1 Loan; (ii) wrote off$0.2 million of unamortized premium associated with the Term B-1 Loan; and (iii) recorded$3.9 million of new deferred financing costs which will be amortized over the term of the Initial 2027 Notes under the effective interest rate method. During the fourth quarter of 2019, the Company and its finance subsidiary,Audacy Capital Corp. , issued$100.0 million of additional 6.500% senior secured second-lien notes due 2027 (the "Additional Notes"). The Additional Notes were issued as additional notes under the Base 2027 Indenture, as supplemented by a first supplemental indenture, datedDecember 13, 2019 (the "First Supplemental 2027 Indenture"), and, together with the Base 2027 Indenture (the "2027 Indenture"). As ofDecember 31, 2021 , the Additional Notes were treated as a single series with the$325.0 million Initial 2027 Notes (together, with the Additional Notes, the "Notes") and have substantially the same terms as the Initial 2027 Notes. The Additional Notes were issued at a price of 105.0% of their principal amount, plus accrued interest fromNovember 1, 2019 . As ofDecember 31, 2021 , the unamortized premium on the Additional Notes was reflected on the balance sheet as an addition to the$425.0 million Initial Notes. The Company used net proceeds of the Additional Notes offering to repay$96.7 million of existing indebtedness under the Company's Term B-1 Loan. Contemporaneous with this partial pay-down of the Term B-1 Loan, the Company replaced the remaining amount outstanding under the Term B-1 Loan with a Term B-2 loan (the "Term B-2 Loan"). In connection with this refinancing activity described above, during the fourth quarter of 2019, the Company: (i) wrote off$0.3 million of unamortized deferred financing costs associated with the Term B-1 Loan; and (ii) recorded$3.8 million of new deferred financing costs. During the fourth quarter of 2021, the Company and its finance subsidiary,Audacy Capital Corp. , issued$45.0 million of additional 6.500% senior secured second-lien notes due 2027 (the "Additional 2027 Notes"). The Additional 2027 Notes were issued as additional notes under the 2027 Indenture. The Additional 2027 Notes are treated as a single series with the$325.0 million Initial 2027 Notes and the$100.0 million Additional Notes (collectively, the "2027 Notes") and have substantially the same terms as the Initial 2027 Notes. The Additional 2027 Notes were issued at a price of 100.750% of their principal amount. The premium on the Additional 2027 Notes will be amortized over the term under the effective interest rate method. As of any reporting period, the unamortized premium on the 2027 Notes is reflect on the balance sheet as an addition to the 470.0 million 2027 Notes.
The Company used net proceeds of the Additional 2027 Notes offering to repay
In connection with this refinancing activity described above, during the fourth quarter of 2021, the Company recorded$0.8 million of new deferred financing costs which will be amortized over the term of the 2027 Notes under the effective interest rate method. The Company also incurred$0.4 million of costs which were classified within refinancing expenses. The 2027 Notes are fully and unconditionally guaranteed on a senior secured second-lien basis by most of the direct and indirect subsidiaries ofAudacy Capital Corp. The 2027 Notes and the related guarantees are secured on a second-lien priority basis by liens on substantially all of the assets ofAudacy Capital Corp. and the guarantors of the 2027 Notes, including the stock or equity interests ofAudacy Capital Corp. and the subsidiary guarantors, subject to certain excluded assets Certain events of default under 2027 Indenture, or an acceleration of the 2027 Notes would cause a default under the Company's Credit Facility or the 2029 Notes. Any event of default, therefore, could have a material adverse effect on the Company's business and financial condition 34 -------------------------------------------------------------------------------- The 2027 Notes are not a registered security and there are no plans to register the 2027 Notes under the Securities Exchange Act in the future. As a result, Rule 3-10 and Rule 3-16 of Regulation S-X promulgated by theSEC is not applicable and no separate financial statements are required for the guarantor subsidiaries. During the second quarter of 2022, the Company repurchased$10.0 million of its 2027 Notes through open market purchases. This repurchase activity generated a gain on retirement of the 2027 Notes in the amount of$0.6 million . As of any reporting period, the unamortized premium on the 2027 Notes is reflected on the balance sheet as an addition to the$460.0 million 2027 Notes.
The Credit Facility
The Term B-2 Loan requires mandatory prepayments equal to a percentage of Excess Cash Flow, subject to incremental step-downs, depending on the Consolidated Net Secured Leverage Ratio. The Excess Cash Flow payment is based on the Excess Cash Flow and the Consolidated Net Secured Leverage Ratio for the prior year. We made our first Excess Cash Flow payment in the first quarter of 2020. As ofDecember 31, 2022 , we were in compliance with the financial covenant then applicable and all other terms of the Credit Facility in all material respects. Our ability to maintain compliance with our financial covenant under the Credit Facility is highly dependent on our results of operations. Currently, given the impact of COVID-19, the outlook is highly uncertain. Failure to comply with our financial covenant or other terms of our Credit Facility and any subsequent failure to negotiate and obtain any required relief from our lenders could result in a default under the Credit Facility. We will continue to monitor our liquidity position and covenant obligations and assess the impact of the COVID-19 pandemic on our ability to comply with the covenants under the Credit Facility. Any event of default could have a material adverse effect on our business and financial condition. We may seek from time to time to amend our Credit Facility or obtain other funding or additional funding, which may result in higher interest rates on our debt. However, we may not be able to do so on terms that are acceptable or to the extent necessary to avoid a default, depending upon conditions in the credit markets, the length and depth of the market reaction to the COVID-19 pandemic and our ability to compete in this environment.
The Credit Facility - Amendment No. 5
OnJuly 20, 2020 ,Audacy Capital Corp , entered into an amendment ("Amendment No. 5") to the Credit Agreement, datedOctober 17, 2016 (as previously amended, the "Existing Credit Agreement" and, as amended by Amendment No. 5, the "Credit Agreement"), with the guarantors party thereto, the lenders party thereto andJPMorgan Chase Bank, N.A ., as administrative agent and collateral agent. Amendment No. 5, among other things: (a) amended our financial covenants under the Credit Agreement by: (i) suspending the testing of the Consolidated Net First Lien Leverage Ratio (as defined in the Credit Agreement) through the Test Period (as defined in the Credit Agreement) endingDecember 31, 2020 ; (ii) adding a new minimum liquidity covenant of$75.0 million untilDecember 31, 2021 , or such earlier date as we may elect (the "Covenant Relief Period"); and (iii) imposing certain restrictions during the Covenant Relief Period, including among other things, certain limitations on incurring additional indebtedness and liens, making restricted payments or investments, redeeming notes and entering into certain sale and lease-back transactions; (b) increased the interest rate and/or fees under the Credit Agreement during the Covenant Relief Period applicable to: (i) 2024 Revolving Credit Loans (as defined in the Credit Agreement) to (x) in the case of Eurodollar Rate Loans (as defined in the Credit Agreement), a customary Eurodollar rate formula plus a margin of 2.50% per annum, and (y) in the case of Base Rate Loans (as defined in the Credit Agreement), a customary base rate formula plus a margin of 1.50% per annum, and (ii) Letter of Credit (as defined in the Credit Agreement) fees to 2.50% times the daily maximum amount available to be drawn under any such Letter of Credit; and (c) modified the definition of Consolidated EBITDA by setting fixed amounts for the fiscal quarters endingJune 30, 2020 ,September 30, 2020 , andDecember 31, 2020 , for purposes of testing compliance with the ConsolidatedNet First Lien Leverage Ratio financial covenant during the Covenant Relief Period, which fixed amounts correspond to the Borrower's Consolidated EBITDA as reported under the Existing Credit Agreement for the Test Period endedMarch 31, 2020 , for the fiscal quarters endingJune 30, 2019 ,September 30, 2019 , andDecember 31, 2019 , respectively. 35 --------------------------------------------------------------------------------
The Credit Facility - Amendment No. 6
OnMarch 5, 2021 ,Audacy Capital Corp. , entered into an amendment ("Amendment No. 6") to the Credit Agreement, datedOctober 17, 2016 (as previously amend, the "Existing Credit Agreement" and, as amendment by Amendment No. 6, the "Credit Agreement"), with the guarantors party thereto, the lenders party thereto andJPMorgan Chase Bank, N.A ., as administrative agent and collateral agent. Under the Existing Credit Agreement, during the Covenant Relief Period, we were subject to a$75.0 million limitation on investments in joint ventures, Affiliates, Unrestricted Subsidiaries and Non-Guarantor Subsidiaries (each as defined in the Existing Credit Agreement) (the "Covenant Relief Period Investment Limitation"). Amendment No. 6, among other things, excludes from the Covenant Relief Period Investment Limitation any investments made in connection with a permitted receivables financing facility. The covenant relief period provided by this amendment has expired.
Accounts Receivable Facility
On
The documentation for the Receivables Facility includes (i) a Receivables Purchase Agreement (the "Receivables Purchase Agreement") entered into by and amongAudacy Operations, Inc. , aDelaware corporation and our wholly-owned subsidiary ("Audacy Operations"),Audacy Receivables, LLC , aDelaware limited liability company and our wholly-owned subsidiary, as seller ("Audacy Receivables"), the investors party thereto (the "Investors"), andDZ BANK AG Deutsche Zentral-Genossenschaftsbank, Frankfurt AM Main , as agent ("DZ BANK"); (ii) a Sale and Contribution Agreement (the "Sale and Contribution Agreement"), by and among Audacy Operations,Audacy New York, LLC , aDelaware limited liability company and our wholly-owned subsidiary ("Audacy NY"), andAudacy Receivables; and (iii) a Purchase and Sale Agreement (the "Purchase and Sale Agreement," and together with the Receivables Purchase Agreement and the Sale and Contribution Agreement, the "Agreements") by and among certain of our wholly-owned subsidiaries (together with Audacy NY, the "Originators"),Audacy Operations and Audacy NY. Audacy Receivables is considered a special purpose vehicle ("SPV") as it is an entity that has a special, limited purpose and it was created to sell accounts receivable, together with customary related security and interests in the proceeds thereof, to the Investors in exchange for cash investments. Yield is payable to Investors under the Receivables Purchase Agreement at a variable rate based on either one-month SOFR or commercial paper rates plus a margin. Collections on the accounts receivable: (x) will be used to: (i) satisfy the obligations of Audacy Receivables under the Receivables Facility; or (ii) purchase additional accounts receivable from the Originators; or (y) may be distributed to Audacy NY, the sole member of Audacy Receivables.Audacy Operations acts as the servicer under the Agreements. The Agreements contain representations, warranties and covenants that are customary for bankruptcy-remote securitization transactions, including covenants requiring Audacy Receivables to be treated at all times as an entity separate from the Originators, Audacy Operations, the Company or any of its other affiliates and that transactions entered into between Audacy Receivables and any of its affiliates shall be on arm's-length terms. The Receivables Purchase Agreement also contains customary default and termination provisions which provide for acceleration of amounts owed under the Receivables Purchase Agreement upon the occurrence of certain specified events with respect toAudacy Receivables, Audacy Operations, the Originators, or the Company, including, but not limited to: (i) Audacy Receivables' failure to pay yield and other amounts due; (ii) certain insolvency events; (iii) certain judgments entered against the parties; (iv) certain liens filed with respect to assets; and (v) breach of certain financial covenants and ratios. Specifically, the Receivables Facility requires the Company to comply with a maximum ConsolidatedNet First-Lein Leverage Ratio that cannot exceed 4.0 times atDecember 31, 2022 . As ofDecember 31, 2022 , the Company's Consolidated Net First-Lein Leverage Ratio was 3.9 times. The Receivables Facility also requires the Company to maintain a minimum tangible net worth, as defined within the agreement, of at least$300.0 million . Additionally, the Receivables Facility requires the Company to maintain minimum liquidity of$25.0 million . This threshold was previously$75.0 million but was amended onJanuary 27, 2023 reducing the minimum liquidity to$25.0 million . We have agreed to guarantee the performance obligations of Audacy Operations and the Originators under the Receivables Facility documents. We have not agreed to guarantee any obligations of Audacy Receivables or the collection of any of the receivables and will not be responsible for any obligations to the extent the failure to perform such obligations byAudacy 36 --------------------------------------------------------------------------------
Operations or any Originator results from receivables being uncollectible on account of the insolvency, bankruptcy or lack of creditworthiness or other financial inability to pay of the related obligor.
In general, the proceeds from the sale of the accounts receivable are used by the SPV to pay the purchase price for accounts receivables it acquires from Audacy NY and may be used to fund capital expenditures, repay borrowings on the Credit Facility, satisfy maturing debt obligations, as well as fund working capital needs and other approved uses. Although the SPV is a wholly owned consolidated subsidiary of Audacy NY, the SPV is legally separate from Audacy NY. The assets of the SPV (including the accounts receivables) are not available to creditors of Audacy NY,Audacy Operations or the Company, and the accounts receivables are not legally assets of Audacy NY, Audacy Operations or the Company. The Receivables Facility is accounted for as a secured financing. The pledged receivables and the corresponding debt are included in Accounts receivable and Long-term debt, respectively, on the Consolidated Balance Sheets. The Receivables Facility will expire onJuly 15, 2024 , unless earlier terminated or subsequently extended pursuant to the terms of the Receivables Purchase Agreement. The pledged receivables and the corresponding debt are included in Accounts receivable, net and Long-term debt, net of current portion, respectively, on the Condensed Consolidated Balance Sheet. AtDecember 31, 2022 , we had outstanding borrowings of$75.0 million under the Receivables Facility.
The 2029 Notes
During the first quarter of 2021, we and our finance subsidiary,Audacy Capital Corp. , issued$540.0 million in aggregate principal amount of senior secured second-lien notes dueMarch 31, 2029 (the "2029 Notes"). Interest on the 2029 Notes accrues at the rate of 6.750% per annum and is payable semi-annually in arrears onMarch 31 andSeptember 30 of each year. We used net proceeds of the offering, along with cash on hand, to: (i) repay$77.0 million of existing indebtedness under the Term B-2 Loan; (ii) repay$40.0 million of drawings under the Revolver; and (iii) fully redeem all of its$400.0 million aggregate principal amount of 7.250% senior notes due 2024 (the "Senior Notes") and to pay fees and expenses in connection with the redemption. In connection with this activity, during the first quarter of 2021, we: (i) recorded$6.6 million of new debt issuance costs attributable to the 2029 Notes which will be amortized over the term of the 2029 Notes under the effective interest method; and (ii)$0.4 million of debt issuance costs attributable to the Revolver which will be amortized over the remaining term of the Revolver on a straight line basis. We also incurred$0.5 million of costs which were classified within refinancing expenses. The 2029 Notes are fully and unconditionally guaranteed on a senior secured second priority basis by each of the direct and indirect subsidiaries ofAudacy Capital Corp. A default under the 2029 Notes could cause a default under the Credit Facility or the 2027 Notes. Any event of default, therefore, could have a material adverse effect on the Company's business and financial condition. The 2029 Notes are not a registered security and there are no plans to register the 2029 Notes as a security in the future. As a result, Rule 3-10 of Regulation S-X promulgated by theSEC is not applicable and no separate financial statements are required for the guarantor subsidiaries.
The Senior Notes
Simultaneously with entering into the Merger and assuming the Credit Facility onNovember 17, 2017 , we also assumed the Senior Notes that mature onNovember 1, 2024 , in the amount of$400.0 million (the "Senior Notes"). The Senior Notes, which were originally issued byCBS Radio (nowAudacy Capital Corp. ) onOctober 17, 2016 , were valued at a premium as part of the fair value measurement on the date of the Merger. The premium on the Senior Notes will be amortized over the term under the effective interest rate method. As of any reporting period, the unamortized premium on the Senior Notes was reflected on the balance sheet as an addition to the$400.0 million liability. As discussed above, during the year endedDecember 31, 2021 , we issued a call notice to redeem our Senior Notes with an effective date ofApril 10, 2021 . We incurred interest on the Senior Notes until the redemption date. In connection with this redemption, we deposited the following funds to satisfy our obligations under the Senior Notes and discharge the Indenture governing the Senior Notes: (i)$400.0 million to redeem the Senior Notes in full; (ii)$14.5 million for a call premium for the early retirement of the Senior Notes; and (iii)$12.8 million for accrued and unpaid interest throughApril 10, 2021 . As a result of the refinancing, we recorded an$8.2 million loss on extinguishment of debt that included the call premium, the write off of unamortized debt issuance costs, and the write off of unamortized premium on the Senior Notes. 37 --------------------------------------------------------------------------------
Potential Liability Management Transactions
We are currently exploring, and expect to continue to explore, a variety of transactions to provide us with additional liquidity or to manage our liabilities, which could include extending maturities or otherwise reorganizing our debt to decrease overall leverage. These alternatives include refinancings, exchange offers, consent solicitations, the issuance of new indebtedness, amendments to the terms of our existing indebtedness and/or other transactions. In conjunction with any such transactions, we may seek consents to amend the documents governing our indebtedness to amend or eliminate certain covenants or collateral provisions. Because the terms of any such transactions will be subject to negotiations with the holders of our indebtedness, they may differ materially from those described above and are, to a large extent, outside of our control. We cannot assure you that we will enter into or consummate any such liability management transactions or that we will be successful in reducing our debt, and we cannot currently predict the impact that any such transactions, if consummated, would have on us.
Operating Activities
Net cash flows used by operating activities during 2022 and 2021 were
The cash flows used in operating activities decreased primarily due to: (i) an increase in net gain on disposals of assets of$39.4 million ; (ii) an increase in gain on remeasurement of contingent consideration of$9.9 million ; (iii) a decrease in net gains on deferred compensation of$8.5 million ; (iv) a decrease in loss on extinguishment of debt of$8.2 million ; and (v) an increase in net investment in working capital of$2.1 million . These decreases in cash flows used in operating activities were partially offset by a decrease in net loss, as adjusted for certain non-cash charges and income tax benefits of$15.5 million and an increase in depreciation and amortization of$13.5 million The increase in investment in working capital is primarily due to the timing of: (i) settlements of accounts payable and accrued liabilities; (ii) collections of accounts receivable; (iii) settlements of other long-term liabilities; (iv) settlements of accrued interest expense; and (v) settlements of prepaid expenses.
The decrease in net loss, as adjusted for certain non-cash charges and income
tax benefits is primarily attributable to an increase in net loss of
Investing Activities
Net cash flows used in investing activities were
During 2022, net cash flows used in investing activities decreased primarily due to: (i) an increase in proceeds from the sale of property, equipment, intangibles and other assets of$52.3 million ; and (ii) a decrease in purchases of business and audio assets of$49.8 million , partially offset by an increase in additions to property and equipment of$4.2 million .
Financing Activities
Net cash flows provided by financing activities were
During 2022, net cash flows provided by financing activities decreased primarily due to: (i) a decrease in cash outflows related to the redemption of fixed rate debt of$390.0 million ; (ii) a decrease in payments against the Revolver of$101.3 million ; (iii) a decrease of payments of long-term debt of$121.6 million ; (iv) a decrease in borrowing under the Revolver of$2.0 million ; (v) a decrease in payments of call premiums and other fees of$14.5 million ; and (vi) a decrease in payments for debt issuance costs of$10.5 million . These increases in cash flows provided by financing activities were partially offset by: (i) a decrease in proceeds from issuance of long term debt of$585.0 million ; and (ii) a reduction in proceeds from the borrowing under the Receivables Facility of$75.0 million . Income Taxes 38
-------------------------------------------------------------------------------- Under the CARES Act, we were able to carry back our 2020 federal income tax loss to prior tax years and filed 2 refund claims with theIRS for$20.4 million . During the year endedDecember 31, 2022 , we received a federal tax refund of approximately$15.2 million . We did not make any federal income tax payments in 2022 primarily as a result of the availability of NOLs to offset our federal taxable income. For federal income tax purposes, the acquisition ofCBS Radio was treated as a reverse acquisition which caused us to undergo an ownership change under Section 382 of the Internal Revenue Code (the "Code"). This ownership change will limit the utilization of our NOLs for post-acquisition tax years.
Dividends
Following the payment of the quarterly dividend for the first quarter of 2020, we suspended our quarterly dividend program. Any future dividends will be at the discretion of the Board based upon the relevant factors at the time of such consideration, including, without limitation, compliance with the restrictions set forth in our Credit Facility, the Notes and the Senior Notes. See Liquidity under Part II, Item 7, "Management's Discussion and Analysis of Financial Condition and Results of Operations," and Note 12, Long-Term Debt, in the accompanying notes to our audited consolidated financial statements.
Share Repurchase Programs
OnNovember 2, 2017 , our Board announced a share repurchase program (the "2017 Share Repurchase Program") to permit us to purchase up to$100.0 million of our issued and outstanding shares of Class A common stock through open market purchases. Shares repurchased by us under the 2017 Share Repurchase Program will be at our discretion based upon the relevant factors at the time of such consideration, including, without limitation, compliance with the restrictions set forth in our Credit Facility, the 2027 Notes and the 2029 Notes.
During the years ended
Capital Expenditures
Capital expenditures for 2022, 2021, and 2020 were
Credit Rating Agencies
On a continuing basis, Standard and Poor's,Moody's Investor Services and other rating agencies may evaluate our indebtedness in order to assign a credit rating. Any significant downgrade in our credit rating could adversely impact our future liquidity by limiting or eliminating our ability to obtain debt financing.
Contractual Obligations
The following table reflects a summary of our contractual obligations as ofDecember 31, 2022 : Payments Due By Period Less than 1 to 3 3 to 5 More Than Contractual Obligations: Total 1 Year Years Years 5 Years
Long-term debt obligations (1)
279,991 53,136 90,668 65,054 71,133
Purchase obligations (3) 556,780 240,335 230,662 62,669 23,114
Other long-term liabilities (4) 479,405 - 771 - 478,634
Total $ 3,561,351 $ 389,248 $ 1,293,236 $ 720,423 $ 1,158,444 (1) The total amount reflected in the above table includes principal and interest.
a.Our Credit Facility had outstanding indebtedness in the amount of
39
--------------------------------------------------------------------------------exclude any impact from required principal payments based upon our future operating performance. The above table includes projected interest expense under the remaining term of our Credit Facility.
b.Under our 2027 Notes, the maturity could be accelerated under an event of default or could be repaid in cash by us at our option prior to maturity. The above table includes projected interest expense under the remaining term of the agreement. c.Under our 2029 Notes, the maturity could be accelerated under an event of default or could be repaid in cash by us at our option prior to maturity. The above table includes projected interest expense under the remaining term of the agreement. (2) The operating lease obligations represent scheduled future minimum operating lease payments under non-cancellable operating leases, including rent obligations under escalation clauses. The minimum lease payments do not include common area maintenance, variable real estate taxes, insurance and other costs for which the Company may be obligated as most of these payments are primarily variable rather than fixed.
(3) We have purchase obligations that include contracts primarily for on-air personalities and other key personnel, ratings services, sports programming rights, software and equipment maintenance and certain other operating contracts.
(4) Included within total other long-term liabilities of$479.4 million are deferred income tax liabilities of$453.4 million . It is impractical to determine whether there will be a cash impact to an individual year. Therefore, deferred income tax liabilities, together with liabilities for deferred compensation and uncertain tax positions (other than the amount of unrecognized tax benefits that are subject to the expiration of various statutes of limitation over the next 12 months) are reflected in the above table in the column labeled as "More Than 5 Years." See Note 18, Income Taxes, in the accompanying notes to our audited consolidated financial statements for a discussion of deferred tax liabilities.
Off-Balance Sheet Arrangements
As ofDecember 31, 2022 , and as of the date this report was filed, we did not have any material off-balance sheet transactions, arrangements, or obligations, including contingent obligations. We do not have any other relationships with unconsolidated entities or financial partnerships, such as entities often referred to as structured finance or special purpose entities, which would have been established for the purpose of facilitating off-balance sheet financial arrangements or other contractually narrow or limited purposes as ofDecember 31, 2022 . Accordingly, we are not materially exposed to any financing, liquidity, market or credit risk that could arise if we had engaged in such relationships.
Market Capitalization
As ofDecember 31, 2022 , and 2021, our total equity market capitalization was$32.7 million and$363.6 million , respectively, which was$488.0 million lower and$289.8 lower, respectively, than our book equity value on those dates. As ofDecember 31, 2022 , and 2021, our stock price was$0.23 per share and$2.57 per share, respectively. Intangibles As ofDecember 31, 2022 , approximately 66% of our total assets consisted of radio broadcast licenses and goodwill, the value of which depends significantly upon the operational results of our business. We could not operate our radio stations without the relatedFCC license for each station.FCC licenses are subject to renewal every eight years. Consequently, we continually monitor the activities of our stations to ensure they comply with all regulatory requirements. See Part I, Item 1A, "Risk Factors", for a discussion of the risks associated with the renewal of licenses.
Inflation
Inflation has affected our performance by increasing our radio station operating expenses in terms of higher costs for wages and multi-year vendor contracts with assumed inflationary built-in escalator clauses. The exact effects of inflation, however, cannot be reasonably determined. There can be no assurance that a high rate of inflation in the future would not have an adverse effect on our profits, especially since our Credit Facility is variable rate.
Recent Accounting Pronouncements
40
--------------------------------------------------------------------------------For a discussion of recently issued accounting standards, see Note 2, Significant Accounting Policies, in the accompanying consolidated financial statements.
Critical Accounting Policies and Estimates
Our discussion and analysis of our financial condition and results of operations are based upon our consolidated financial statements, which have been prepared in accordance with accounting principles generally accepted inthe United States . The preparation of these financial statements requires us to make estimates and assumptions that affect the reported amounts of assets and liabilities, and disclosure of contingent assets and liabilities as of the date of the financial statements, and the reported amounts of revenues and expenses during the reporting period. We base our estimates on historical experience and various other assumptions that we believe to be reasonable under the circumstances, the results of which form the basis for making judgments about the carrying values of assets and liabilities that are not readily available from other sources. Actual results may differ from these estimates under different circumstances or by using different assumptions. We consider the following policies to be important in understanding the judgments involved in preparing our consolidated financial statements and the uncertainties that could affect our financial position, results of operations or cash flows: Revenue Recognition We generate revenue from the sale to advertisers of various services and products, including but not limited to: (i) spot revenues; (ii) digital advertising; (iii) network revenues; (iv) sponsorship and event revenues; and (v) other revenue. Services and products may be sold separately or in bundled packages. The typical length of a contract for service is less than 12 months. Revenue is derived primarily from the sale of commercial airtime to local and national advertisers. We recognize revenue when we satisfy a performance obligation by transferring control over a product or service to a customer, in an amount that reflects the consideration we expect to be entitled to in exchange for those products or services. Revenues presented in the consolidated financial statements are reflected on a net basis, after the deduction of advertising agency fees by the advertising agencies. We also evaluate when it is appropriate to recognize revenue based on the gross amount invoiced to the customer or the net amount retained by us if a third party is involved. Revenue is recognized when or as performance obligations under the terms of a contract with customers are satisfied. This typically occurs at the point in time that advertisements are broadcast, marketing services are provided, or as an event occurs. For spot revenues, digital advertising, and network revenues we recognize revenue at the point in time when the advertisement is broadcast. For event revenues, we recognize revenues at a point in time, as the event occurs. For sponsorship revenues, we recognize revenues over the length of the sponsorship agreement. For trade and barter transactions, revenue is recognized at the point in time when the promotional advertising is aired. For bundled packages, we account for each product or performance obligation separately if they are distinct. A product or service is distinct if it is separately identifiable from other items in the bundled package and if a customer can benefit from it on its own or with other resources that are readily available to the customer. The consideration is allocated between separate products and services in a bundle based on their stand-alone selling prices. The stand-alone selling prices are determined based on the prices at which we separately sell the commercial broadcast time, digital advertising, or digital product and marketing solutions.
Advertiser payments received in advance of when the products or services are delivered are recorded on our balance sheet as unearned revenue.
Allowance for Doubtful Accounts
Accounts receivable primarily consist of receivables from contracts with
customers for the sale of advertising time. Receivables are initially recorded
at the transaction amount. Each reporting period, we evaluate the collectability
of the receivables and record an allowance for doubtful accounts, which
represents our estimate of the expected losses that result from possible default
events over the expected life of a receivable. We establish our allowance for
doubtful accounts based upon our collection experience and the assessment of the
collectability of specific amounts. Changes to the allowance for doubtful
accounts are made by recording charges to bad debt expense and are reported in
the station operating expenses and corporate general and administrative expenses
line items.
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Radio Broadcasting Licenses and
We have made acquisitions in the past for which a significant amount of the purchase price was allocated to broadcasting licenses and goodwill assets. As ofDecember 31, 2022 , we have recorded approximately$2.2 billion in radio broadcasting licenses and goodwill, which represented approximately 66% of our total assets as of that date. We must conduct impairment testing at least annually, or more frequently if events or changes in circumstances indicate that the assets might be impaired, and charge to operations an impairment expense in the periods in which the recorded value of these assets is more than their fair value. Any such impairment could be material. After an impairment expense is recognized, the recorded value of these assets will be reduced by the amount of the impairment expense and that result will be the assets' new accounting basis. For goodwill, we use qualitative and quantitative approaches when testing goodwill for impairment. We perform a qualitative evaluation of events and circumstances impacting each reporting unit to determine the likelihood of goodwill impairment. Based on that qualitative evaluation, if we determine it is more likely than not that the fair value of a reporting unit exceeds its carrying amount, no further evaluation is necessary. Otherwise, we perform a quantitative goodwill impairment test. We perform quantitative goodwill impairment tests for reporting units at least once every three years. We believe our estimate of the value of our radio broadcasting licenses and reporting units is an important accounting estimate as the value is significant in relation to our total assets, and our estimate of the value uses assumptions that incorporate variables based on past experiences and judgments about future performance of our stations.
Broadcasting Licenses Impairment Test
In evaluating whether events or changes in circumstances indicate that an interim impairment assessment is required, we consider several factors in determining whether it is more likely than not that the carrying value of our broadcasting licenses or goodwill exceeds the fair value of our broadcasting licenses or goodwill, respectively. The analysis considers: (i) macroeconomic conditions such as deterioration in general economic conditions, limitations on accessing capital, or other developments in equity and credit markets; (ii) industry and market considerations such as deterioration in the environment in which we operate, an increased competitive environment, a change in the market for our products or services, or a regulatory or political development; (iii) cost factors such as increases in labor or other costs that have a negative effect on earnings and cash flows; (iv) overall financial performance such as negative or declining cash flows or a decline in actual or planned revenue or earnings compared with actual and projected results of relevant prior periods; (v) other relevant entity-specific events such as changes in management, key personnel, strategy, or customers, bankruptcy, or litigation; (vi) events affecting a reporting unit such as a change in the composition or carrying amount of our net assets; and (vii) a sustained decrease in our share price. We evaluate the significance of identified events and circumstances on the basis of the weight of evidence along with how they could affect the relationship between the carrying value of our broadcasting licenses and goodwill and their respective fair value amounts, including positive mitigating events and circumstances. Subsequent to the annual impairment test conducted during the fourth quarter of 2019, we continued to monitor these factors listed above. Due to the current economic and market conditions related to the COVID-19 pandemic, and a contraction in the expected future economic and market conditions utilized in the annual impairment test conducted in the fourth quarter of 2019, we determined that the changes in circumstances warranted an interim impairment assessment on our broadcasting licenses during the second quarter of 2020. Due to changes in facts and circumstances, we revised our estimates with respect to projected operating performance and discount rates used in the interim impairment assessment. During the second quarter of 2020, we completed an interim impairment test for our broadcasting licenses at the market level using the Greenfield method. As a result of this interim impairment assessment, we determined that the fair value of our broadcasting licenses was less than the amount reflected in the balance sheet for certain of our markets and, accordingly, recorded an impairment loss of$4.1 million , ($3.0 million , net of tax). Subsequent to the interim impairment assessment conducted during the second quarter of 2020, we continued to monitor these factors listed above. Due to the current economic and market conditions related to the COVID-19 pandemic, and a further contraction in the expected future economic and market conditions utilized in the interim impairment assessment conducted in the second quarter of 2020, primarily a decrease in market-specific revenue forecasts, we determined that changes in circumstances warranted an interim impairment assessment on certain of our broadcasting licenses during the third quarter of 2020. During the third quarter of 2020, we completed an interim impairment test for certain of our broadcasting licenses at the market level using the Greenfield method. As a result of this interim impairment assessment, we determined that the fair value of our broadcasting licenses was less than the amount reflected in the balance sheet for certain of our markets and, accordingly, recorded an impairment loss of$11.8 million , ($8.7 million , net of tax). 42 -------------------------------------------------------------------------------- In connection with our annual impairment assessment conducted during the fourth quarter of 2020, we continued to evaluate the appropriateness of the key assumptions used to develop the fair values of our broadcasting licenses. After further consideration of the impact that the COVID-19 pandemic continues to have on the broadcast industry, we concluded it was appropriate to revise the discount rate used. This change, which resulted in an increase to the discount rate used, was made to reflect current rates that a market participant could expect and further addressed forecast risk that exists as a result of the COVID-19 pandemic. During the fourth quarter of 2020, the Company completed its annual impairment test for broadcasting licenses at the market level using the Greenfield method. As a result of this annual impairment assessment, the Company determined that the fair value of its broadcasting licenses was less than the amount reflected in the balance sheet for certain of the Company's markets and, accordingly, recorded an impairment loss of$246.0 million , ($180.4 million , net of tax). As a result of this impairment charge, we wrote down the carrying value of our broadcasting licenses in 38 markets. The Company determined that an interim impairment assessment was not required in the year 2021. During the fourth quarter of 2021, the Company completed its annual impairment test for broadcasting licenses and determined that the fair value of its broadcasting licenses was greater than the amount reflected in the balance sheet for each of the Company's markets and, accordingly, no impairment was recorded. During the third quarter of 2022, the Company evaluated whether the facts and circumstances and available information result in the need for an impairment assessment for itsFCC broadcasting licenses, particularly the results of operations, increase in interest rates and related impact on the weighted average cost of capital and changes in stock price, and concluded an interim impairment assessment was warranted, and completed an interim impairment assessment for its broadcasting licenses at the market level. As a result of this interim impairment assessment, the Company determined that the fair value of its broadcasting licenses was less than the amount reflected in the balance sheet for certain of the Company's markets and, accordingly, recorded an impairment loss of$159.1 million ($116.7 million , net of tax). During the fourth quarter of 2022, the Company completed its annual impairment test for broadcasting licenses and determined that the fair value of its broadcasting licenses was greater than the amount reflected in the balance sheet for each of the Company's markets and, accordingly, no impairment was recorded.
We will continue to monitor these relevant factors to determine if any changes in key inputs in the valuation of our broadcasting licenses is warranted.
Methodology - Broadcasting Licenses
We perform our broadcasting license impairment test by using the Greenfield
method at the market level. Each market's broadcasting licenses are combined
into a single unit of accounting for purposes of testing impairment, as the
broadcasting licenses in each market are operated as a single asset. The
broadcasting licenses are assessed for recoverability at the market level.
Potential impairment is identified by comparing the fair value of a market's
broadcasting license to its carrying value. The Greenfield method is a
discounted cash flow approach (a 10-year income model) assuming a start-up
scenario in which the only assets held by an investor are broadcasting licenses.
Our fair value analysis contains assumptions based upon past experience,
reflects expectations of industry observers and includes judgments about future
performance using industry normalized information for an average station within
a certain market. The cash flow projections for the broadcasting licenses
include significant judgments and assumptions relating to the market share and
profit margin of an average station within a market based upon market size and
station type, the forecasted growth rate of each radio market (including
long-term growth rate) and the discount rate. Changes in our estimates of the
fair value of these assets could result in material future period write-downs of
the carrying value of our broadcasting licenses.
The methodology used by us in determining our key estimates and assumptions was
applied consistently to each market. We believe the assumptions identified below
are the most important and sensitive in the determination of fair value.
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--------------------------------------------------------------------------------Assumptions and Results - Broadcasting Licenses
The following table reflects the estimates and assumptions used in the interim and annual broadcasting licenses impairment assessments of each year:
Estimates And Assumptions
Fourth Quarter Second Quarter
Fourth Quarter 2022 Third Quarter 2022 2021 Fourth Quarter 2020 Third Quarter 2020 2020
Discount rate 9.50% 9.50% 8.50% 8.50% 7.50% 8.00%
Operating profit margin
ranges expected for
average stations in the
markets where the
Company operates 18% to 33% 20% to 33% 20% to 33% 20% to 36% 24% to 36% 22% to 36%
Forecasted growth rate
(including long-term
growth rate) range of
the Company's markets 0.0% to 0.6% 0.0% to 0.6% 0.0% to 0.6 0.0% to 0.6% 0.0% to 0.7% 0.0% to 0.8%
We believe we have made reasonable estimates and assumptions to calculate the
fair value of our broadcasting licenses. These estimates and assumptions could
be materially different from actual results.
If actual market conditions are less favorable than those projected by the
industry or by us, or if events occur or circumstances change that would reduce
the fair value of our broadcasting licenses below the amount reflected on the
balance sheet, we may be required to conduct an interim test and possibly
recognize impairment charges, which could be material, in future periods. The
COVID-19 pandemic increases the uncertainty with respect to such market and
economic conditions and, as such, increases the risk of future impairment.
The table below presents the percentage within a range by which the fair value
exceeded the carrying value of our radio broadcasting licenses as of December 1,
2022 , for 43 units of accounting (43 geographical markets) where the carrying
value of the licenses is considered material to our financial statements.
Markets with an immaterial carrying values were excluded.
Rather than presenting the percentage separately for each unit of accounting,
management's opinion is that this table in summary form is more meaningful to
the reader in assessing the recoverability of the broadcasting licenses. In
addition, the units of accounting are not disclosed with the specific market
name as such disclosure could be competitively harmful to us.
Units of Accounting
as of
Based Upon the
Valuation as of
Percentage Range by Which Fair
Value Exceeds the Carrying Value
Greater Greater Greater
0% To Than 5% Than 10% Than
5% To 10% To 15% 15%
Number of units of accounting 36 3 3 1
Carrying value (in thousands)
Broadcasting Licenses Valuation at Risk
After the interim impairment test conducted on our broadcasting licenses in the third quarter of 2022, the results indicated that there were 41 units of accounting where the fair value exceeded their carrying value by 10% or less. In aggregate, these 41 units of accounting had a carrying value of$2.0 billion atSeptember 30, 2022 . As discussed above, as a result of the interim impairment assessment conducted in the third quarter of 2022, we wrote down the carrying value of our broadcasting licenses in 38 markets. 44 -------------------------------------------------------------------------------- Units of
Accounting as of
Based Upon the
Valuation as of
Percentage Range by Which
Fair Value Exceeds the Carrying Value
Greater Greater Greater
0% To Than 5% Than 10% Than
5% To 10% To 15% 15%
Number of units of accounting 41 - 1 1
Carrying value (in thousands)
Sensitivity of Key Broadcasting Licenses Assumptions
If we were to assume changes in certain of our key assumptions used to determine the fair value of our broadcasting licenses, the following would be the incremental impact:
Sensitivity Analysis (1)
Percentage Decrease in Broadcasting Licenses Carrying Value
Increase the discount rate from 9.5% to 10.5% 10.2 %
Reduction in forecasted growth rate (including
long-term growth rate) to 0% for all markets 1.7 %
Reduction in operating profit margin by 10% 2.3 %
(1) Each assumption used in the sensitivity analysis is independent of the other assumptions.
To determine the radio broadcasting industry's future revenue growth rate for impairment purposes using the Greenfield model, management uses publicly available information on industry expectations rather than management's own estimates, which could differ. The publicly available market information is then allocated based on Company-specific market share. In addition, these long-term market growth rate estimates could vary in each of our markets. Using the publicly available information on industry expectations, each market's revenues were forecasted over a ten-year projection period to reflect the expected long-term growth rate for the radio broadcast industry, which was further adjusted for each of our markets. If the industry's growth is less than forecasted, then the fair value of our broadcasting licenses could be negatively impacted. Operating profit is defined as profit before interest, depreciation and amortization, income tax and corporate allocation charges. Operating profit is then divided by broadcast revenues, net of agency and national representative commissions, to compute the operating profit margin. For the broadcast license fair value analysis, the projections of operating profit margin that are used are based upon industry operating profit norms, which reflect market size and station type. These margin projections are not specific to the performance of our radio stations in a market, but are predicated on the expectation that a new entrant into the market could reasonably be expected to perform at a level similar to a typical competitor. If the outlook for the radio industry's growth declines, then operating profit margins in the broadcasting license fair value analysis would be negatively impacted, which would decrease the value of the broadcasting licenses. The discount rate to be used by a typical market participant reflects the risk inherent in future cash flows for the broadcast industry. The same discount rate was used for each of our markets. The discount rate is calculated by weighting the required returns on interest-bearing indebtedness and common equity capital in proportion to their estimated percentages in an expected capital structure. The capital structure was estimated based upon data available for publicly traded companies in the broadcast industry. See Note 8, Intangible Assets andGoodwill , in the accompanying notes to our audited consolidated financial statements, for a discussion of intangible assets and goodwill. Goodwill Impairment Test InNovember 2020 , we completed the QLGG Acquisition. QLGG represents a separate division one level beneath the single operating segment and its own reporting unit. For the goodwill acquired in the QLGG Acquisition, similar valuation techniques that were applied in the valuation of goodwill under purchase price accounting were also used in the annual impairment testing process. The valuation of the acquired goodwill approximated fair value. The podcast reporting unit goodwill, primarily consisting of acquired goodwill from the Cadence13 Acquisition and Pineapple Acquisition, was subject to a qualitative annual impairment test conducted in the fourth quarter of 2020. As a result 45 -------------------------------------------------------------------------------- of the qualitative impairment test, we determined it was more likely than not that the fair value of the podcast reporting unit, consisting of goodwill acquired in the Cadence13 Acquisition and the Pineapple Acquisition exceeded their respective carrying amounts. Accordingly, no quantitative impairment assessment was conducted and no impairment was recorded. After assessing the totality of events and circumstances listed above, we determined that it was more likely than not that the fair value of our reporting units was greater than their respective carrying amounts. Accordingly, we did not conduct an interim impairment test on our goodwill during 2021. InMarch 2021 , we completed the Podcorn Acquisition. Cadence13, Pineapple and Podcorn represent a single podcasting division one level beneath the single operating segment. Since the operations are economically similar, Cadence13, Pineapple and Podcorn were aggregated into a single podcasting reporting unit for the quantitative impairment assessment conducted in the fourth quarter of 2021. During the fourth quarter of 2021, we completed our annual impairment test for our podcasting reporting unit and determined that the fair value of our podcast reporting unit was greater than the carrying value and, accordingly, no impairment was recorded. During the fourth quarter of 2021, we completed our annual impairment test for the QLGG reporting unit and determined that the fair value of the QLGG reporting unit was greater than the carrying value and, accordingly, no impairment was recorded. InOctober 2021 , we completed the WideOrbit Streaming Acquisition. We operate WideOrbit Streaming under the name AmperWave ("AmperWave"). AmperWave represents a separate division one level beneath the single operating segment and its own reporting unit. For the goodwill acquired in the WideOrbit Streaming Acquisition, similar valuation techniques that were applied in the valuation of goodwill under purchase price accounting were also used in the annual impairment testing process. The valuation of the acquired reporting unit approximated fair value. During the third quarter of 2022, the Company evaluated whether the facts and circumstances and available information result in the need for an impairment assessment for any goodwill, particularly the results of operations, increase in interest rates and related impact on the weighted average cost of capital and changes in stock price, and concluded an interim impairment assessment was warranted, and completed an interim impairment assessment for its goodwill at the podcast reporting unit and the QLGG reporting unit. As a result of this interim impairment assessment, the Company determined that the fair value of its QLGG reporting unit was less than the amount reflected in the balance sheet and, accordingly, recorded an impairment loss of$18.1 million . As a result of this impairment assessment, the Company no longer has any goodwill attributable to the QLGG reporting unit. During the fourth quarter of 2022, the Company completed its annual impairment test for its podcasting and AmperWave reporting units and determined that the fair value of the podcast reporting unit and the AmperWave reporting unit was greater than the carrying value and, accordingly, no impairment was recorded. Methodology -Goodwill The Company used an income approach in computing the fair value of the Company's goodwill. This approach utilized a discounted cash flow method by projecting the Company's income over a specified time and capitalizing at an appropriate market rate to arrive at an indication of the most probable selling price. Potential impairment is identified by comparing the fair value of the Company's reporting unit to its carrying value, including goodwill. Cash flow projections for the reporting unit include significant judgments and assumptions relating to projected operating profit margin (including revenue and expense growth rates) and the discount rate. Management believes that this approach is commonly used and is an appropriate methodology for valuing the Company. Factors contributing to the determination of the Company's operating performance were historical performance and/or management's estimates of future performance. We elected to bypass the qualitative assessment for the interim impairment tests of our podcast reporting unit and QLGG reporting unit and proceeded directly to the quantitative goodwill impairment test by using a discounted cash flow approach (a 5-year income model). Potential impairment is identified by comparing the fair value of each reporting unit to its carrying value. Our fair value analysis contains assumptions based upon past experience, reflects expectations of industry observers and includes judgments about future performance using industry normalized information. The cash flow projections for the reporting units include significant judgments and assumptions relating to the revenue, operating expenses, projected operating 46 --------------------------------------------------------------------------------
profit margins, and the discount rate. Changes in our estimates of the fair value of these assets could result in material future period write-downs of the carrying value of our goodwill.
Assumptions and Results -
The following table reflects certain key estimates and assumptions used in the interim and annual goodwill impairment assessments of each year:
Estimates And Assumptions
Fourth Quarter 2022 Third Quarter 2022 Fourth Quarter 2021 Fourth Quarter 2020
Discount rate - podcast reporting
unit 11.00% 11.0 % 9.50% not applicable
Discount rate - QLGG reporting unit not applicable 13.0 % 12.00% not applicable
We believe we have made reasonable estimates and assumptions to calculate the
fair value of our goodwill. These estimates and assumptions could be materially
different from actual results.
If actual market conditions are less favorable than those projected by the
industry or by us, or if events occur or circumstances change that would reduce
the fair value of our goodwill below the amount reflected on the balance sheet,
we may be required to conduct an interim test and possibly recognize impairment
charges, which could be material, in future periods. The COVID-19 pandemic
increases the uncertainty with respect to such market and economic conditions
and, as such, increases the risk of future impairment.
Goodwill Valuation At Risk
Our remaining goodwill as of
Future impairment charges may be required on our goodwill, as the discounted cash flow model is subject to change based upon our performance, peer company performance, overall market conditions, and the state of the credit markets. We continue to monitor these relevant factors to determine if an interim impairment assessment is warranted. If there were to be a deterioration in our forecasted financial performance, an increase in discount rates, a reduction in long-term growth rates, a sustained decline in our stock price, or a failure to achieve analyst expectations, these could all be potential indicators of an impairment charge to our remaining goodwill, which could be material, in future periods.
Sensitivity of Key Goodwill Assumptions
If we were to assume changes in certain of our key assumptions used to determine the fair value of our podcasting reporting unit, the following would be the incremental impact:
Sensitivity Analysis (1)
Percentage Decrease in Reporting Unit Carrying Value
Increase the discount rate from 11.0% to 12.0% - %
Reduction in forecasted long-term growth rate to - %
0%
Reduction in operating profit margin by 10% - %
(1) Each assumption used in the sensitivity analysis is independent of the other assumptions.
As shown in the table above, if we were to assume certain changes in our key
assumptions used to determine the fair value of our reporting units, we would
not be required to record an impairment charge.
Using publicly available information on industry expectations, each reporting
unit's revenues were forecasted over a five-year projection period to reflect
the expected long-term growth rate for each respective reporting unit. If the
industry's growth is less than forecasted, then the fair value of our reporting
units could be negatively impacted.
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Operating profit is defined as profit before interest, depreciation and
amortization, income tax and corporate allocation charges. Operating profit is
then divided by revenues, net of costs of goods sold and commissions, to compute
the operating profit margin. If the outlook for the reporting units' growth
declines, then operating profit margins in the fair value analysis would be
negatively impacted, which would decrease the value of the reporting units.
The discount rate to be used by a typical market participant reflects the risk
inherent in future cash flows for the podcast reporting unit. The discount rate
is calculated by weighting the required returns on interest-bearing indebtedness
and common equity capital in proportion to their estimated percentages in an
expected capital structure. The capital structure was estimated based upon data
available for publicly traded companies in the podcasting space and the sports
betting industry.
See Note 8, Intangible Assets and Goodwill , in the accompanying notes to our
audited consolidated financial statements, for a discussion of intangible assets
and goodwill.
For a more comprehensive list of our accounting policies, see Note 2,
Significant Accounting Policies, accompanying the consolidated financial
statements included within this annual report. Note 2 to our audited
consolidated financial statements contains several other policies, including
policies governing the timing of revenue and expense recognition, that are
important to the preparation of our consolidated financial statements, but do
not meet the SEC's definition of critical accounting policies because they do
not involve subjective or complex judgments.
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