IHEARTMEDIA, INC.
Format of Presentation
Management's discussion and analysis of financial condition and results of
operations ("MD&A") should be read in conjunction with the consolidated
financial statements and related footnotes contained in Item 1 of this Quarterly
Report on Form 10-Q of iHeartMedia, Inc. (the "Company," "iHeartMedia," "we," or
"us").
Our primary business provides media and entertainment services via broadcast and
digital delivery, including our networks businesses, through our Audio segment.
We also operate businesses that provide audio and media services, through our
Audio and Media Services segment, including our full-service media
representation business, Katz Media Group ("Katz Media") and our provider of
scheduling and broadcast software and services, Radio Computing Services
("RCS").
Over the past ten years, we have transitioned our Audio business from a single
platform radio broadcast operator to a company with multiple platforms including
podcasting, networks and live events. We have also invested in numerous
technologies and businesses to increase the competitiveness of our inventory
with our advertisers and our audience. We believe that our ability to generate
cash flow from operations from our business initiatives and our current cash on
hand will provide sufficient resources to fund and operate our business, fund
capital expenditures and other obligations and make interest payments on our
long-term debt for at least the next 12 months.
Description of our Business
Our Audio strategy centers on delivering entertaining and informative content
where our listeners want to find us across multiple platforms, including
broadcast, digital and live mobile, as well as events. Our primary source of
revenue is derived from selling local and national advertising time on our radio
stations, with contracts typically less than one year in duration. The
programming formats of our radio stations are designed to reach audiences with
targeted demographic characteristics. We work closely with our advertising and
marketing partners to develop tools and leverage data to enable advertisers to
effectively reach their desired audiences. We continue to expand the choices for
listeners and we deliver our content and sell advertising across multiple
distribution channels, including digitally via our iHeartRadio mobile
application and other digital platforms which reach national, regional and local
audiences. We also generate revenue from network syndication, our nationally
recognized live events, our station websites and other miscellaneous
transactions.
Our advertising revenue is highly correlated to changes in gross domestic
product ("GDP") as advertising spending has historically trended in line with
GDP. A recession or downturn in the U.S. economy could have a significant
impact on the Company's ability to generate revenue. In light of the novel
coronavirus pandemic ("COVID-19") and the resulting recession impacting the U.S.
economy, our revenue for the three and nine months ended September 30, 2020 has
declined significantly compared to the comparable periods in 2019 and we expect
our full year 2020 revenue to decline compared to 2019, largely as a result of a
decline in consumer and business spending and the related impact to the demand
for advertising and pricing pressure resulting from greater competition for
available advertising dollars. Beginning in March 2020 and continuing in the
following months, we saw a sharp decline in each of our Broadcast radio,
Networks and Sponsorships revenue streams. Although revenue increased
substantially from the second quarter of 2020 to the third quarter of 2020, we
continued to see year-over-year declines in our Broadcast radio, Networks and
Sponsorships revenue streams. Revenue from our Audio and Media Services
increased, primarily as a result of higher political revenue, which resulted in
an increase of $16.2 million and $25.1 million in the three and nine months
ended September 30, 2020 , respectively.
When the business environment recovers, we expect that the traditional
promotional use of radio to be a strong benefit to us. As businesses reopen both
nationally and locally, we believe that we are advantaged by our unparalleled
reach and the live and local trusted voices that advertisers need to get their
messages out quickly.
In the first quarter of 2020, we announced our modernization initiatives, which
will take advantage of the significant investments we have made in new
technologies to build an operating infrastructure that provides better quality
and newer products and delivers new cost efficiencies. Our investments in
modernization are expected to deliver annualized run-rate cost savings of
approximately $100 million by mid-year 2021, and we expect to achieve
approximately 50% of our anticipated run-rate savings in 2020. In addition, in
response to the COVID-19 pandemic, we have taken steps to significantly reduce
our capital and operating expenditures for the remainder of 2020. These
initiatives are expected to generate approximately $200 million in operating
cost savings in 2020. For more information, please see the Liquidity and Capital
Resources - Anticipated Cash Requirements section below.
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On March 26, 2020 , we announced the withdrawal of our previously issued
financial guidance for the fiscal year ending December 31, 2020 due to
heightened uncertainty related to COVID-19. As a precautionary measure to
preserve financial flexibility in light of this uncertainty, we borrowed $350.0
million principal amount under our senior secured asset-based revolving credit
facility (the "ABL Facility"). During the second and third quarters of 2020, we
repaid the amounts outstanding under our ABL Facility using cash on hand and the
proceeds from the issuance of our Incremental Term Loan Facility (as defined
below), resulting in no balance outstanding under the facility as of
September 30, 2020 and borrowing capacity of $165 million , as a result of
restrictions in iHeartMedia's debt and preferred stock agreements.
In July 2020 , iHeartCommunications issued $450.0 million of incremental term
loans pursuant to an amendment (the "Incremental Term Loan Facility") to the
credit agreement (as amended, the "Credit Agreement") with iHeartMedia Capital
I, LLC ("Capital I"), as guarantor, certain subsidiaries of
iHeartCommunications , Inc. ("iHeartCommunications"), as guarantors, and Bank of
America, N.A ., as administrative agent, governing the Company's $2.5 billion
aggregate principal amount of senior secured term loans (the "Term Loan
Facility"), resulting in net proceeds of $425.8 million , after original issue
discount and debt issuance costs. A portion of the proceeds was used to repay
the balance outstanding on our ABL Facility of $235.0 million , with the
remaining $190.6 million of the proceeds available for general corporate
purposes. For more information please refer to the "Liquidity and Capital
Resources section" in this MD&A.
Impairment Charges
As a result of uncertainty related to COVID-19 and its negative impact on our
business and the public trading values of our debt and equity, we were required
to perform interim impairment tests on our long-lived assets, intangible assets
and indefinite-lived intangible assets as of March 31, 2020 . The interim
impairment tests resulted in a non-cash impairment of our Federal Communication
Commission ("FCC ") licenses of $502.7 million and a non-cash impairment charge
of $1.2 billion to reduce goodwill during the three months ended March 31, 2020 .
The Company performs its annual impairment test on goodwill and indefinite-lived
intangible assets, including FCC licenses, as of July 1 of each year. No
impairment was required as part of the 2020 annual impairment testing. For more
information, see Note 5, Property, Plant and Equipment, Intangible Assets and
Goodwill to the consolidated financial statements located in Item 1 of this
Quarterly Report on Form 10-Q for a further description of the impairment
charges and annual impairment tests.
While we believe we made reasonable estimates and utilized reasonable
assumptions to calculate the fair values of our long-lived assets,
indefinite-lived FCC licenses and reporting units, it is possible a material
change could occur to the estimated fair value of these assets as a result of
the uncertainty regarding the magnitude of the economic downturn caused by the
COVID-19 pandemic, as well as the timing of any recovery. If our actual results
are not consistent with our estimates, we could be exposed to future impairment
losses that could be material to our results of operations.
Emergence from Bankruptcy
On March 14, 2018 , iHeartMedia, iHeartCommunications , and certain of the
Company's direct and indirect domestic subsidiaries (collectively,
the "Debtors") filed voluntary petitions for relief (the "Chapter 11 Cases")
under Chapter 11 of the United States Bankruptcy Code (the "Bankruptcy Code"),
in the United States Bankruptcy Court for the Southern District of Texas ,
Houston Division (the "Bankruptcy Court "). On April 28, 2018 , the Debtors filed
a plan of reorganization and a related disclosure statement (as amended,
the "Disclosure Statement") with the Bankruptcy Court , which was subsequently
amended by filing the second, third, fourth and fifth amended Plan of
Reorganization and amended versions of the Disclosure Statement. On January 22,
2019 , the Modified Fifth Amended Joint Chapter 11 Plan of Reorganization of
iHeartMedia, Inc. and Its Debtor Affiliates (as further modified, the "Plan of
Reorganization") was confirmed by the Bankruptcy Court .
On May 1, 2019 (the "Effective Date"), the Debtors emerged from Chapter 11
through (a) a series of transactions (the "Separation") through which Clear
Channel Outdoor Holdings, Inc. ("CCOH"), its parent Clear Channel Holdings, Inc.
("CCH") and its subsidiaries (collectively with CCOH and CCH, the "Outdoor
Group ") were separated from, and ceased to be controlled by, the Company and its
subsidiaries (the "iHeart Group"), and (b) a series of transactions
(the "Reorganization") through which iHeartCommunications' debt was reduced from
approximately $16 billion to approximately $5.8 billion and a global compromise
and settlement among holders of claims ("Claimholders") in connection with the
Chapter 11 Cases was effected. The compromise and settlement involved, among
others, (i) the restructuring of iHeartCommunications' indebtedness by
(A) replacing its "debtor-in-possession" credit facility with a $450 million ABL
Facility and (B) issuing to certain Claimholders, on account of their claims,
the approximately $3.5 billion aggregate principal amount Term Loan Facility,
approximately $1.45 billion aggregate principal amount of new 8.375% Senior
Notes due 2027 (the "Senior Unsecured Notes") and approximately $800 million
aggregate principal amount of new 6.375% Senior Secured Notes due 2026 (the
"6.375% Senior Secured Notes"), (ii) the Company's issuance of new Class A
common stock, new Class B common stock and Special Warrants to Claimholders,
subject to ownership restrictions imposed by the Federal Communications'
Commission ("FCC "),
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(iii) the settlement of certain intercompany transactions, and (iv) the sale of
the preferred stock (the "iHeart Operations Preferred Stock") of the Company's
wholly-owned subsidiary iHeart Operations, Inc. ("iHeart Operations") in
connection with the Separation.
All of the existing equity of the Company was canceled on the Effective Date
pursuant to the Plan of Reorganization.
Beginning on the Effective Date, the Company applied fresh start accounting,
which resulted in a new basis of accounting and the Company becoming a new
entity for financial reporting purposes. As a result of the application of fresh
start accounting and the effects of the implementation of the Plan of
Reorganization, the consolidated financial statements after May 1, 2019 are not
comparable with the consolidated financial statements on or prior to that date.
Combined Results
Our financial results for the periods from January 1, 2019 through May 1, 2019
are referred to as those of the "Predecessor" period. Our financial results for
the period from May 2, 2019 through September 30, 2019 , the three months ended
September 30, 2020 and the nine months ended September 30, 2020 are referred to
as those of the "Successor" period. Our results of operations as reported in our
Consolidated Financial Statements for these periods are prepared in accordance
with GAAP. Although GAAP requires that we report on our results for the period
from January 1, 2019 through May 1, 2019 and the period from May 2, 2019 through
September 30, 2019 separately, management views the Company's operating results
for the three and nine months ended September 30, 2019 by combining the results
of the applicable Predecessor and Successor periods because such presentation
provides the most meaningful comparison to our results in the three and nine
months ended September 30, 2020 .
The Company cannot adequately benchmark the operating results of the period from
May 2, 2019 through September 30, 2019 against any of the current periods
reported in its Consolidated Financial Statements without combining it with the
period from January 1, 2019 through May 1, 2019 and does not believe that
reviewing the results of this period in isolation would be useful in identifying
trends in or reaching conclusions regarding the Company's overall operating
performance. Management believes that the key performance metrics such as
revenue, operating income and Adjusted EBITDA for the Successor period when
combined with the Predecessor period provides more meaningful comparisons to
other periods and are useful in identifying current business trends.
Accordingly, in addition to presenting our results of operations as reported in
our Consolidated Financial Statements in accordance with GAAP, the tables and
discussion below also present the combined results for the three and nine months
ended September 30, 2019 .
The combined results for the nine months ended September 30, 2019 , which we
refer to herein as the results for the "nine months ended September 30, 2019 "
represent the sum of the reported amounts for the Predecessor period from
January 1, 2019 through May 1, 2019 and the Successor period from May 2, 2019
through September 30, 2019 . These combined results are not considered to be
prepared in accordance with GAAP and have not been prepared as pro forma results
per applicable regulations. The combined operating results do not reflect the
actual results we would have achieved absent our emergence from bankruptcy and
may not be indicative of future results.
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Executive Summary
As 2020 began, we saw strong growth across our revenue streams in January and
February, particularly from digital and from political advertising. However,
while digital and political revenue continued to grow, the economic downturn as
a result of the COVID-19 pandemic had a significant and negative impact on our
other revenue streams beginning in March 2020 and continuing through the third
quarter of 2020, including broadcast radio which is our largest revenue stream.
Although revenue improved significantly from the second quarter of 2020, we
continued to experience a decline in advertising spend and the postponement or
cancellation of certain tent-pole events drove an overall decrease in revenue
for the three and nine months ended September 30, 2020 compared to the three and
nine months ended September 30, 2019 . The extent of the economic downturn and
the timing of recovery, as well as the future impact on our operations, are
subject to significant uncertainty. In an effort to further strengthen the
Company's financial flexibility and efficiently manage through the COVID-19
pandemic, we implemented measures to cut costs and preserve cash. For additional
information on these actions, see the Liquidity and Capital Resources -
Anticipated Cash Requirements section below.
The key developments that impacted our business during the quarter are
summarized below:
•Effects of the COVID-19 pandemic adversely impacted revenue for all revenue
streams, with the exception of political revenue.
•Revenue of $744.4 million decreased 21.5% during the quarter ended
September 30, 2020 compared to Revenue of $948.3 million in the prior year's
quarter and increased 52.7% compared to the quarter ended June 30, 2020 .
•Operating income of $39.4 million was down from $140.8 million in the prior
year's quarter.
•Net loss of $32.1 million as compared to Net income of $12.4 million in the
prior year's quarter.
•Adjusted EBITDA(1) of $162.1 million , was down from $274.7 million compared to
prior year's quarter and was up significantly compared to the quarter ended June
30, 2020 .
•Cash flows provided by operating activities from continuing operations of $33.3
million increased from Cash flows used for operating activities of $180.3
million in the prior year's quarter.
•Free cash flow(2) (used for) continuing operations of $14.3 million decreased
from $151.5 million in the prior year's quarter.
•Issued $450.0 million of incremental Term Loan commitments, resulting in net
proceeds of $425.8 million , after original issue discount and debt issuance
costs. A portion of the proceeds from the issuance was used to repay the balance
outstanding under the ABL Facility of $235.0 million , with the remaining $190.6
million of the proceeds available for general corporate purposes.
The table below presents a summary of our historical results of operations for
the periods presented:
(In thousands) Successor Company
Three Months Ended
September 30, %
2020 2019 Change
Revenue $ 744,406 $ 948,338 (21.5) %
Operating income $ 39,395 $ 140,822 (72.0) %
Net income (loss) $ (32,112) $ 12,374 NM
Cash provided by (used for) operating activities from
continuing operations $ 33,252 $ 180,341 (81.6) %
Adjusted EBITDA(1) $ 162,124 $ 274,656 (41.0) %
Free cash flow from (used for) continuing
operations(2) $ 14,275 $ 151,471 (90.6) %
(1) For a definition of Adjusted EBITDA and a reconciliation to Operating
income, the most closely comparable GAAP measure, and to Net income (loss),
please see "Reconciliation of Operating Income to Adjusted EBITDA" and
"Reconciliation of Net Income (Loss) to EBITDA and Adjusted EBITDA" in this
MD&A.
(2) For a definition of Free cash flow from continuing operations and a
reconciliation to Cash provided by operating activities from continuing
operations, the most closely comparable GAAP measure, please see "Reconciliation
of Cash provided by operating activities from continuing operations to Free cash
flow from continuing operations" in this MD&A.
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Results of Operations
The tables below present the comparison of our historical results of operations
for the periods presented:
(In thousands) Successor Company
Three Months Ended
September 30,
2020 2019
Revenue $ 744,406 $ 948,338 Operating expenses: Direct operating expenses (excludes depreciation and amortization)
276,719 316,740
Selling, general and administrative expenses (excludes depreciation and amortization)
292,581 327,115
Corporate expenses (excludes depreciation and amortization) 34,657 58,513
Depreciation and amortization 99,379 95,268
Other operating expense, net 1,675 9,880
Operating income 39,395 140,822
Interest expense, net 85,562 100,967
Gain on investments, net 62 1,735
Equity in loss of nonconsolidated affiliates (58) (1)
Other expense, net (1,177) (12,457)
Income (loss) from continuing operations before income taxes (47,340) 29,132
Income tax benefit (expense) 15,228 (16,758)
Net income (loss) (32,112) 12,374
Less amount attributable to noncontrolling interest - -
Net income (loss) attributable to the Company $ (32,112) $ 12,374
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(In thousands) Successor Predecessor
Successor Company Company Company Non-GAAP Combined
Period from
Nine Months January 1,
Ended Period from May 2, 2019
September 2019 through through May Nine Months Ended
30, September 30, 1, September 30,
2020 2019 2019 2019
Revenue $ 2,012,688 $ 1,583,984 $ 1,073,471 $ 2,657,455
Operating expenses:
Direct operating expenses (excludes
depreciation and amortization) 828,217 515,512 381,184 896,696
Selling, general and administrative
expenses (excludes depreciation and
amortization) 897,941 547,346 427,230 974,576
Corporate expenses (excludes
depreciation and amortization) 101,025 85,331 53,647 138,978
Depreciation and amortization 299,494 154,651 52,834 207,485
Impairment charges 1,733,235 - 91,382 91,382
Other operating expense, net 3,247 6,634 154 6,788
Operating income (loss) (1,850,471) 274,510 67,040 341,550
Interest expense (income), net 257,614 170,678 (499) 170,179
Gain (loss) on investments, net (8,613) 1,735 (10,237) (8,502)
Equity in loss of nonconsolidated
affiliates (653) (25) (66) (91)
Other income (expense), net (10,295) (21,614) 23 (21,591)
Reorganization items, net - - 9,461,826 9,461,826
Income (loss) from continuing operations before income taxes (2,127,646) 83,928 9,519,085 9,603,013 Income tax benefit (expense) 209,481 (32,761) (39,095) (71,856) Income (loss) from continuing operations (1,918,165) 51,167 9,479,990 9,531,157 Income from discontinued operations, net of tax - - 1,685,123 1,685,123 Net income (loss) (1,918,165) 51,167 11,165,113 11,216,280 Less amount attributable to noncontrolling interest - - (19,028)
(19,028)
Net income (loss) attributable to the Company$ (1,918,165) $ 51,167 $ 11,184,141 $ 11,235,308 40
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The tables below present the comparison of our revenue streams for the periods
presented:
(In thousands) Successor Company
Three Months Ended
September 30, %
2020 2019 Change
Broadcast Radio $ 404,460 $ 573,048 (29.4) %
Digital 112,589 96,656 16.5 %
Networks 118,982 160,133 (25.7) %
Sponsorship and Events 28,898 55,541 (48.0) %
Audio and Media Services 75,039 59,873 25.3 %
Other 6,368 4,986 27.7 %
Eliminations (1,930) (1,899)
Revenue, total $ 744,406 $ 948,338 (21.5) %
(In thousands) Successor Predecessor Non-GAAP
Successor Company Company Company Combined
Period from
Nine Months January 1,
Ended Period from May 2, 2019
September 2019 through through May Nine Months Ended
30, September 30, 1, September 30, %
2020 2019 2019 2019 Change
Broadcast Radio $ 1,110,155$ 963,588 $ 657,864 $ 1,621,452 (31.5) % Digital 298,592 160,894 102,789 263,683 13.2 % Networks 349,889 265,559 189,088 454,647 (23.0) % Sponsorship and Events 73,055 87,331 50,330 137,661 (46.9) % Audio and Media Services 174,517 100,410 69,362 169,772 2.8 % Other 12,335 9,222 6,606 15,828 (22.1) % Eliminations (5,855) (3,020) (2,568) (5,588) Revenue, total$ 2,012,688 $ 1,583,984 $ 1,073,471 $ 2,657,455 (24.3) % Consolidated results for the three months endedSeptember 30, 2020 compared to the consolidated results for the three months endedSeptember 30, 2019 and consolidated results for the nine months endedSeptember 30, 2020 compared to the combined results for the nine months endedSeptember 30, 2019 were as follows:
Revenue
Revenue decreased$203.9 million during the three months endedSeptember 30, 2020 compared to the same period of 2019. The decrease in Revenue is attributable to the macroeconomic effects of COVID-19, which began to unfold into a global pandemic in early March of 2020, resulting in a significant economic downturn due to the shut-down of non-essential businesses and shelter-in-place orders. The impact continued through the third quarter of 2020, resulting in significant revenue declines impacting most of our revenue streams primarily as a result of a decrease in broadcast radio advertising spend. Broadcast revenue decreased$168.6 million , driven by a$107.7 million decrease in Local spot revenue and a$56.1 million decrease in National spot revenue. Revenue from our Network businesses, including both Premiere and Total Traffic & Weather, was also impacted by the downturn, resulting in a decrease of$41.2 million . Revenue from Sponsorship and Events decreased by$26.6 million , primarily as a result of the postponement or cancellations of events in response to the COVID-19 pandemic. Digital revenue increased$15.9 million , driven primarily by continued growth in podcasting. Audio and Media Services revenue increased$15.2 million primarily due to a$16.2 million increase in political revenue as a result of 2020 being a presidential election year, partially offset by the effects of COVID-19 on advertising spend. 41 -------------------------------------------------------------------------------- Revenue decreased$644.8 million during the nine months endedSeptember 30, 2020 compared to the same period of 2019. The decrease in Revenue is primarily attributable to the macroeconomic effects of COVID-19, which began to unfold into a global pandemic in early March of 2020, resulting in a significant economic downturn due to the shut-down of non-essential businesses and shelter-in-place orders. Strong Revenue growth in January and February was followed by a sharp decline in revenue in March, which continued through the second and third quarters of 2020, resulting in significant revenue declines impacting most of our revenue streams, primarily as a result of a decrease in broadcast radio advertising spend. Broadcast revenue decreased$511.3 million , driven by a$322.4 million decrease in Local spot revenue and a$177.9 million decrease in National spot revenue. The decrease in Broadcast revenue was offset by a$30.2 million increase in political revenue as a result of 2020 being a presidential election year. Revenue from our Network businesses, including both Premiere and Total Traffic & Weather, was also impacted by the downturn, resulting in a decrease of$104.8 million . Revenue from Sponsorship and Events decreased by$64.6 million , primarily as a result of the postponement or cancellation of events in response to the COVID-19 pandemic. Digital revenue increased$34.9 million , driven primarily by continued growth in podcasting. Audio and Media Services revenue increased$4.7 million due to a$25.1 million increase in political revenue as a result of 2020 being a presidential election year, offset by the effects of COVID-19 on advertising spend. Direct Operating Expenses Direct operating expenses decreased$40.0 million during the three months endedSeptember 30, 2020 compared to the same period of 2019. The decrease in Direct operating expenses was driven primarily by lower employee compensation expenses resulting from our modernization initiatives and cost reduction initiatives taken in response to the COVID-19 pandemic. In addition, variable operating expenses, including music license and performance royalty fees, decreased in relation to lower revenue recognized during the period. Variable expenses related to events also decreased as a result of the postponement or cancellation of events in response to the COVID-19 pandemic. Direct operating expenses decreased$68.5 million during the nine months endedSeptember 30, 2020 compared to the same period of 2019. The decrease in Direct operating expenses was driven primarily by lower employee compensation expenses resulting from cost reduction initiatives taken in response to the COVID-19 pandemic. In addition, variable operating expenses, including music license and performance royalty fees, decreased in relation to lower revenue recognized during the period. Variable expenses related to events also decreased as a result of the postponement or cancellation of events in response to the COVID-19 pandemic. The decrease in Direct operating expenses was partially offset by severance payments and other costs specific to our modernization initiatives, which were incurred mainly in January and February, as well as higher content costs from higher podcasting and digital subscription revenue. Selling, General and Administrative ("SG&A") Expenses SG&A expenses decreased$34.5 million during the three months endedSeptember 30, 2020 compared to the same period of 2019. The decrease in SG&A expenses was driven primarily by lower employee compensation expenses resulting from cost reduction initiatives taken in response to the COVID-19 pandemic, along with lower sales commissions, which were impacted by the decrease in revenue. Travel and entertainment expenses also decreased primarily as a result of operating-expense-saving initiatives put into place in response to the COVID-19 pandemic. SG&A expenses decreased$76.6 million during the nine months endedSeptember 30, 2020 compared to the same period of 2019. The decrease in SG&A expenses was driven primarily by lower employee compensation expenses resulting from cost reduction initiatives taken in response to the COVID-19 pandemic, along with lower sales commissions, which were impacted by the decrease in revenue. Travel and entertainment expenses also decreased primarily as a result of operating-expense-saving initiatives put into place in response to the COVID-19 pandemic, as well as trade and barter expenses primarily driven by lower Local trade expenses, which declined in line with lower trade revenue. The decrease in SG&A expenses was partially offset by costs incurred in relation to our modernization initiatives announced in the first quarter of 2020 and higher bad debt expense. Corporate Expenses Corporate expenses decreased$23.9 million during the three months endedSeptember 30, 2020 compared to the same period of 2019, as a result of lower employee compensation, including variable incentive expenses and employee benefits, resulting from cost reduction initiatives taken in response to the COVID-19 pandemic. In addition, share-based compensation expense decreased$11.2 million as a result of incremental share-based compensation expenses recognized in the three months endedSeptember 30, 2019 in relation to a portion of the equity awards that vested upon our listing on Nasdaq inJuly 2019 . 42 -------------------------------------------------------------------------------- Corporate expenses decreased$38.0 million during the nine months endedSeptember 30, 2020 compared to the same period of 2019, as a result of lower employee compensation, including variable incentive expenses and employee benefits, resulting from cost reduction initiatives taken in response to the COVID-19 pandemic. The decrease in Corporate expenses was partially offset by costs incurred to support our modernization initiatives in January and February. Depreciation and Amortization Depreciation and amortization increased$4.1 million during the three months endedSeptember 30, 2020 compared to the same period of 2019, primarily as a result of higher depreciation resulting from our investments in IT infrastructure. Depreciation and amortization increased$92.0 million during the nine months endedSeptember 30, 2020 , compared to the same period of 2019, respectively, primarily as a result of the application of fresh start accounting, which resulted in significantly higher values of our tangible and intangible long-lived assets. Impairment Charges We perform our annual impairment test on our goodwill andFCC licenses as ofJuly 1 of each year. In addition, we test for impairment of intangible assets whenever events and circumstances indicate that such assets might be impaired. As discussed above, as a result of the assumed potential adverse effects caused by the COVID-19 pandemic on estimated future cash flows, we recognized non-cash impairment charges to our indefinite-lived intangible assets and goodwill of$1.7 billion in the first quarter of 2020. No impairment charges were recorded in the third quarter of 2020 in connection with our annual impairment test. We recognized non-cash impairment charges of$91.4 million in the nine months endedSeptember 30, 2019 on our indefinite-livedFCC licenses as a result of an increase in our weighted average cost of capital. See Note 5, Property, Plant and Equipment, Intangible Assets andGoodwill , to the consolidated financial statements located in Item 1 of this Quarterly Report on Form 10-Q for a further description of the impairment charges. Other Operating Expense, Net Other operating expense, net of$1.7 million and$9.9 million for the three months endedSeptember 30, 2020 and 2019, respectively, and Other operating expense, net of$3.2 million and$6.8 million for the nine months endedSeptember 30, 2020 and 2019, respectively, relate to net losses recognized on asset disposals. Interest Expense Interest expense decreased$15.4 million during the three months endedSeptember 30, 2020 compared to the same period of 2019, primarily as a result of the impact of lower LIBOR rates, as well as the impact of the amendment to the Term Loan Facility in the first quarter of 2020, resulting in a 1.00% reduction in the Term Loan Facility interest rate. Interest expense increased$87.4 million during the nine months endedSeptember 30, 2020 compared to the same period of 2019 as a result of the interest recognized on the new debt issued in connection with our emergence from the Chapter 11 Cases. During the period fromMarch 14, 2018 toMay 1, 2019 , while the Company was a debtor-in-possession, no interest expense was recognized on pre-petition debt. The increase was offset by a decrease in interest expense driven by the impact of lower LIBOR rates, as well as the impact of the amendment to the Term Loan Facility in the first quarter of 2020, resulting in a 1.00% reduction in the Term Loan Facility interest rate. In the Predecessor period, we ceased to accrue interest expense on long-term debt, which was reclassified as Liabilities subject to compromise as ofMarch 14, 2018 (the "Petition Date"), resulting in$533.4 million in contractual interest not being accrued on pre-petition indebtedness for the period fromJanuary 1, 2019 toMay 1, 2019 . Gain (Loss) on Investments,Net During the three and nine months endedSeptember 30, 2020 , we recognized a gain on investments, net of$0.1 million and a loss on investments of$8.6 million , respectively. The loss on investments, net recognized during the nine months endedSeptember 30, 2020 was primarily in connection with estimated credit losses and declines in the value of our investments. During the three and nine months endedSeptember 30, 2019 , we recognized a gain of$1.7 million and a loss of$8.5 million , respectively. The loss on investments, net recognized during the nine months endedSeptember 30, 2019 was primarily in connection with declines in the value of our investments. 43 -------------------------------------------------------------------------------- Other Income (Expense), Net Other expense, net was$1.2 million and$10.3 million for the three and nine months endedSeptember 30, 2020 , respectively. Other expense, net for the nine months endedSeptember 30, 2020 related primarily to costs incurred to amend our Term Loan Facility and professional fees incurred in connection with the Chapter 11 Cases in the Successor period. Other expense, net was$12.5 million and$21.6 million for the three and nine months endedSeptember 30, 2019 , respectively. Other expense, net for the three and nine months endedSeptember 30, 2019 related primarily to professional fees incurred directly in connection with the Chapter 11 Cases in the Successor period. Such expenses were included within Reorganization items, net in the post-petition period while the Company was a debtor-in-possession.
Reorganization Items, Net
During the nine months endedSeptember 30, 2019 , we recognized Reorganization items, net of$9,461.8 million related to our emergence from the Chapter 11 Cases, which consisted primarily of the net gain from the consummation of the Plan of Reorganization and the related settlement of liabilities. In addition, Reorganization items, net included professional fees recognized between theMarch 14, 2018 Petition Date and theMay 1, 2019 Effective Date in connection with the Chapter 11 Cases.
Income Tax Benefit (Expense)
The effective tax rate for theSuccessor Company for the three and nine months endedSeptember 30, 2020 was 32.2% and 9.8%, respectively. The effective tax rate for the nine months endedSeptember 30, 2020 was primarily impacted by the impairment charges discussed above. The deferred tax benefit primarily consists of$125.5 million related to theFCC license impairment charges recorded during the period. The effective tax rate for theSuccessor Company for the period fromMay 2, 2019 throughSeptember 30, 2019 was 39.0%. The effective tax rate for continuing operations of thePredecessor Company for the period fromJanuary 1, 2019 throughMay 1, 2019 (Predecessor) was 0.4%. The income tax expense for the period fromJanuary 1, 2019 throughMay 1, 2019 (Predecessor) primarily consists of the income tax impacts from reorganization and fresh start adjustments, including adjustments to our valuation allowance. The Company recorded income tax benefits of$102.9 million for reorganization adjustments in the Predecessor period, primarily consisting of: (1) tax expense for the reduction in federal and state net operating loss carryforwards from the cancellation of debt income realized upon emergence; (2) tax benefit for the reduction in deferred tax liabilities attributed primarily to long-term debt that was discharged upon emergence; (3) tax benefit for the effective settlement of liabilities for unrecognized tax benefits that were discharged upon emergence; and (4) tax benefit for the reduction in valuation allowance resulting from the adjustments described above. The Company recorded income tax expense of$185.4 million for fresh start adjustments in the Predecessor period, consisting of$529.1 million tax expense for the increase in deferred tax liabilities resulting from fresh start accounting adjustments, which was partially offset by$343.7 million tax benefit for the reduction in the valuation allowance on our deferred tax assets. 44 --------------------------------------------------------------------------------
Income from Discontinued Operations, Net
During the nine months endedSeptember 30, 2019 , we recognized Income from discontinued operations, net of tax of$1,685.1 million related to the separation of our domestic and international outdoor advertising businesses, which were previously reported as theAmericas outdoor and International outdoor segments prior to the Separation.
Net Income (Loss) Attributable to the Company
Net loss attributable to the Company decreased$44.5 million to$32.1 million during the three months endedSeptember 30, 2020 compared to Net income attributable to the Company of$12.4 million during the three months endedSeptember 30, 2019 , primarily as a result of the decrease in Revenue, partially offset by lower operating expenses, in addition to the other factors discussed above. Net loss attributable to the Company decreased$13,153.5 million to$1,918.2 million during the nine months endedSeptember 30, 2020 compared to Net income attributable to the Company of$11,235.3 million during the nine months endedSeptember 30, 2019 , primarily as a result of the$9.5 billion gain from Reorganization items net related to the Chapter 11 Cases in the 2019 period, the$1.7 billion gain on disposal of our Outdoor business in the 2019 period and due to the other factors discussed above. Reconciliation of Operating Income (Loss) to Adjusted EBITDA (In thousands) Successor Company Three Months Ended September 30, 2020 2019 Operating income$ 39,395 $ 140,822 Depreciation and amortization 99,379 95,268 Other operating expense, net 1,675 9,880 Share-based compensation expense 5,885 17,112 Restructuring and reorganization expenses 15,790 11,574 Adjusted EBITDA(1)$ 162,124 $ 274,656 (In thousands) Non-GAAP Successor Company Successor Company Predecessor Company Combined Period from May Period from January Nine Months Nine Months Ended 2, 2019 through 1, 2019 through May Ended September September 30, September 30, 1, 30, 2020 2019 2019 2019 Operating income (loss)$ (1,850,471) $ 274,510 $ 67,040$ 341,550 Depreciation and amortization 299,494 154,651 52,834 207,485 Impairment charges 1,733,235 - 91,382 91,382 Other operating expense, net 3,247 6,634 154 6,788 Share-based compensation expense 14,728 20,151 498 20,649 Restructuring and reorganization expenses 72,947 13,463 13,241 26,704 Adjusted EBITDA(1)$ 273,180 $ 469,409 $ 225,149$ 694,558 45
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Reconciliation of Net Income (Loss) to EBITDA and Adjusted EBITDA
(In thousands) Successor Company
Three Months Ended September 30,
2020 2019
Net income (loss) $ (32,112) $ 12,374
Income tax (benefit) expense (15,228) 16,758
Interest expense, net 85,562 100,967
Depreciation and amortization 99,379 95,268
EBITDA $ 137,601 $ 225,367
Gain on investments, net (62) (1,735)
Other expense, net 1,177 12,457
Equity in loss of nonconsolidated affiliates 58 1
Other operating expense, net 1,675 9,880
Share-based compensation expense 5,885 17,112
Restructuring and reorganization expenses 15,790 11,574
Adjusted EBITDA(1) $ 162,124 $ 274,656
(In thousands) Successor Predecessor
Successor Company Company Company Non-GAAP Combined
Period from
Nine Months January 1,
Ended Period from May 2, 2019
September 2019 through through May Nine Months Ended
30, September 30, 1, September 30,
2020 2019 2019 2019
Net income (loss) $ (1,918,165) $ 51,167 $ 11,165,113 $ 11,216,280
Income from discontinued
operations, net of tax - - (1,685,123) (1,685,123)
Income tax (benefit) expense (209,481) 32,761 39,095
71,856
Interest expense (income), net 257,614 170,678 (499)
170,179
Depreciation and amortization 299,494 154,651 52,834 207,485 EBITDA$ (1,570,538) $ 409,257 $ 9,571,420 $ 9,980,677 Reorganization items, net - - (9,461,826) (9,461,826) (Gain) Loss on investments, net 8,613 (1,735) 10,237 8,502 Other (income) expense, net 10,295 21,614 (23) 21,591 Equity in loss of nonconsolidated affiliates 653 25 66 91 Impairment charges 1,733,235 - 91,382 91,382 Other operating expense, net 3,247 6,634 154 6,788 Share-based compensation expense 14,728 20,151 498
20,649
Restructuring and reorganization expenses 72,947 13,463 13,241 26,704 Adjusted EBITDA(1)$ 273,180 $ 469,409 $ 225,149 $ 694,558 (1)We define Adjusted EBITDA as consolidated Operating income (loss) adjusted to exclude restructuring and reorganization expenses included within Direct operating expenses, SG&A expenses and Corporate expenses, and share-based compensation expenses included within Corporate expenses, as well as the following line items presented in our Statements of Operations: Depreciation and amortization, Impairment charges and Other operating expense (income), net. Alternatively, Adjusted EBITDA is calculated as Net income (loss), adjusted to exclude (Income) loss from discontinued operations, net of tax, Income tax (benefit) expense, Interest expense (income), net, Depreciation and amortization, Reorganization items, net, (Gain) Loss on investments, net, Other (income) expense, net, Equity in loss of nonconsolidated affiliates, net, Impairment charges, Other operating expense (income), net, Share-based 46 -------------------------------------------------------------------------------- compensation expense, and restructuring and reorganization expenses. Restructuring expenses primarily include severance expenses incurred in connection with cost saving initiatives, as well as certain expenses, which, in the view of management, are outside the ordinary course of business or otherwise not representative of the Company's operations during a normal business cycle. Reorganization expenses primarily include the amortization of retention bonus amounts paid or payable to certain members of management directly as a result of the Reorganization. We use Adjusted EBITDA, among other measures, to evaluate the Company's operating performance. This measure is among the primary measures used by management for the planning and forecasting of future periods, as well as for measuring performance for compensation of executives and other members of management. We believe this measure is an important indicator of our operational strength and performance of our business because it provides a link between operational performance and operating income. It is also a primary measure used by management in evaluating companies as potential acquisition targets. We believe the presentation of this measure is relevant and useful for investors because it allows investors to view performance in a manner similar to the method used by management. We believe it helps improve investors' ability to understand our operating performance and makes it easier to compare our results with other companies that have different capital structures or tax rates. In addition, we believe this measure is also among the primary measures used externally by our investors, analysts and peers in our industry for purposes of valuation and comparing our operating performance to other companies in our industry. Since Adjusted EBITDA is not a measure calculated in accordance with GAAP, it should not be considered in isolation of, or as a substitute for, operating income or net income (loss) as an indicator of operating performance and may not be comparable to similarly titled measures employed by other companies. Adjusted EBITDA is not necessarily a measure of our ability to fund our cash needs. Because it excludes certain financial information compared with operating income and compared with consolidated net income (loss), the most directly comparable GAAP financial measures, users of this financial information should consider the types of events and transactions which are excluded. Reconciliation of Cash Provided by Operating Activities from Continuing Operations to Free Cash Flow from Continuing Operations (In thousands) Successor Company Three Months Ended September 30, 2020 2019
Cash provided by operating activities from continuing operations
$ 33,252 $ 180,341 Purchases of property, plant and equipment by continuing operations
(18,977) (28,870)
Free cash flow from continuing operations(1) $ 14,275 $ 151,471
(In thousands) Successor Successor Predecessor Non-GAAP
Company Company Company Combined
Period from
Nine Months January 1,
Ended Period from May 2019
September 2, 2019 through through May Nine Months Ended
30, September 30, 1, September 30,
2020 2019 2019 2019
Cash provided by (used for)
operating activities from continuing
operations $ 136,161 $ 263,542 $ (7,505) $ 256,037
Purchases of property, plant and
equipment by continuing operations (58,523) (46,305) (36,197) (82,502)
Free cash flow from (used for)
continuing operations(1) $ 77,638 $ 217,237 $ (43,702) $ 173,535
(1)We define Free cash flow from (used for) continuing operations ("Free Cash
Flow") as Cash provided by (used for) operating activities from continuing
operations less capital expenditures, which is disclosed as Purchases of
property, plant and equipment by continuing operations in the Company's
Consolidated Statements of Cash Flows. We use Free Cash Flow, among other
measures, to evaluate the Company's liquidity and its ability to generate cash
flow. We believe that Free Cash Flow is meaningful to investors because we
review cash flows generated from operations after taking into consideration
capital expenditures due to the fact that these expenditures are considered to
be a necessary component of ongoing operations. In addition, we believe that
Free Cash Flow helps improve investors' ability to compare our liquidity with
other companies. Since Free Cash Flow is not a measure calculated in accordance
with GAAP, it should not be considered in isolation of, or as a substitute for,
Cash provided by operating activities and may not be comparable to similarly
titled measures employed by other companies. Free Cash Flow is not necessarily a
measure of our ability to fund our cash needs.
47
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Share-Based Compensation Expense
Historically, we had granted restricted shares of the Company's Class A common
stock to certain key individuals. In connection with the effectiveness of our
Plan of Reorganization, all unvested restricted shares were canceled.
Pursuant to the new equity incentive plan (the "Post-Emergence Equity Plan") we
adopted in connection with the effectiveness of our Plan of Reorganization, we
have granted restricted stock units and options to purchase shares of the
Company's Class A common stock to certain key individuals.
Share-based compensation expenses are recorded in corporate expenses and were
$5.9 million and $17.1 million for the three months ended September 30, 2020 and
2019, respectively, and $14.7 million and $20.6 million for the nine months
ended September 30, 2020 and 2019, respectively.
In August 2020 , we issued performance-based restricted stock units ("Performance
RSUs") to certain key employees. Such Performance RSUs vest upon the achievement
of critical operational (cost savings) improvements and specific environmental,
social and governance initiatives, which are being measured over an
approximately 18-month period from the date of issuance. In the three months
ended September 30, 2020 , we recognized $1.1 million in relation to these
performance-based RSUs.
As of September 30, 2020 , there was $58.5 million of unrecognized compensation
cost related to unvested share-based compensation arrangements with vesting
based on service conditions. This cost is expected to be recognized over a
weighted average period of approximately 3 years. In addition, as of
September 30, 2020 , there was $3.9 million of unrecognized compensation cost
related to unvested share-based compensation arrangements that will vest based
on performance conditions.
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LIQUIDITY AND CAPITAL RESOURCES
Cash Flows
The following discussion highlights cash flow activities during the periods
presented:
Successor Predecessor Non-GAAP
(In thousands) Company Successor Company Company Combined
Nine Months Period from May Period from Nine Months
Ended September 2, 2019 through January 1, 2019 Ended September
30, September 30, through May 1, 30,
2020 2019 2019 2019
Cash provided by (used for):
Operating activities $ 136,161 $ 263,542 $ (40,186) $ 223,356
Investing activities $ (71,172) $ (43,815) $ (261,144) $ (304,959)
Financing activities $ 248,637 $ (5,095) $ (55,557) $ (60,652)
Free Cash Flow(1) $ 77,638 $ 217,237 $ (43,702) $ 173,535
(1) For a definition of Free cash flow from continuing operations and a
reconciliation to Cash provided by operating activities from continuing
operations, the most closely comparable GAAP measure, please see "Reconciliation
of Cash provided by operating activities from continuing operations to Free cash
flow from continuing operations" in this MD&A.
Operating Activities
Cash provided by operating activities for the nine months ended September 30,
2020 was $136.2 million compared to $223.4 million of cash provided by operating
activities in the nine months ended September 30, 2019 .
Cash provided by operating activities from continuing operations decreased from
$256.0 million in the nine months ended September 30, 2019 to $136.2 million in
the nine months ended September 30, 2020 primarily as a result of a decrease in
Revenue driven by the decline in advertising spend resulting from the economic
slow-down impacted by the COVID-19 pandemic. In addition, cash interest payments
made by continuing operations increased $187.9 million as a result of interest
payments on our debt issued upon our emergence. The Company ceased paying
interest on long-term debt after the March 14, 2018 petition date until the
Company emerged from bankruptcy on May 1, 2019 . The decrease was offset by
changes in working capital balances, particularly accounts receivable, which was
impacted by improved collections. In addition, we paid $201.6 million during the
nine months ended September 30, 2019 in relation to Reorganization items, net.
Investing Activities
Cash used for investing activities of$71.2 million during the nine months endedSeptember 30, 2020 primarily reflects$58.5 million in cash used for capital expenditures and$12.7 million used for acquisitions. We spent$50.4 million for capital expenditures in our Audio segment primarily related to IT infrastructure,$2.4 million in our Audio & Media Services segment, primarily related to acquired software and$5.7 million in Corporate primarily related to equipment and software purchases. Cash used for investing activities of$305.0 million during the nine months endedSeptember 30, 2019 primarily reflects$222.4 million in cash used for investing activities from discontinued operations. In addition, we used$82.5 million for capital expenditures. We spent$68.4 million for capital expenditures in our Audio segment primarily related to IT infrastructure,$4.1 million in our Audio & Media Services segment, primarily related to acquired software and$10.0 million in Corporate primarily related to equipment and software purchases. 49 -------------------------------------------------------------------------------- Financing Activities Cash provided by financing activities of$248.6 million during the nine months endedSeptember 30, 2020 primarily resulted from the net proceeds of$425.8 million from the issuance of incremental term loan commitments, offset by the$150.0 million prepayment on our Term Loan Facility in the first quarter 2020, along with required quarterly principal payments made on the Term Loan Facility. Cash used for financing activities was$60.7 million during the nine months endedSeptember 30, 2019 primarily resulted from the payment byiHeartCommunications to CCOH as CCOH's recovery of its claims under the Due from iHeartCommunications Note and settlement of the post-petition intercompany note, partially offset by$60.0 million in proceeds received from the issuance of the iHeart Operations Preferred Stock. Anticipated Cash Requirements Our primary sources of liquidity are cash on hand, which consisted of$713.7 million as ofSeptember 30, 2020 , cash flow from operations and borrowing capacity under our$450.0 million ABL Facility. As ofSeptember 30, 2020 ,iHeartCommunications had no amounts outstanding under the ABL Facility, a borrowing base of$365.6 million and$41.2 million in outstanding letters of credit, resulting in$324.4 million of borrowing base availability. As a result of certain restrictions in the Company's debt and preferred stock agreements, as ofSeptember 30, 2020 , approximately$165 million was available to be drawn upon under the ABL Facility. InJuly 2020 , the Company issued$450.0 million of incremental term loans, resulting in net proceeds of$425.8 million , after original issue discount and debt issuance costs. A portion of the proceeds from the issuance was used to repay all outstanding balances under the ABL Facility of$235.0 million , with the remaining$190.6 million of the proceeds available for general corporate purposes. Our cash balance was$713.7 million as ofSeptember 30, 2020 . Together with our borrowing capacity under the ABL Facility, our total available liquidity1 was approximately$879 million . We continue to evaluate the full extent of COVID-19's impact on our business. While the challenges that COVID-19 has created for advertisers and consumers have had a significant impact on our revenue for the three and nine months endedSeptember 30, 2020 and has created a business outlook that is less clear in the near term, we believe that we have sufficient liquidity to continue to fund our operations. We expect that our primary anticipated uses of liquidity will be to fund our working capital, make interest payments, fund capital expenditures, pursue certain strategic opportunities and maintain operations in light of the COVID-19 pandemic and other obligations. We anticipate that we will have approximately$86 million of cash interest payments in the fourth quarter of 2020. We expect to have approximately$338 million of cash interest payments in 2021. As a result of certain favorable tax provisions in the Coronavirus Aid, Relief and Economic Security ("CARES") Act, we expect our 2020 cash income tax payments to be insignificant. As a result of the provisions regarding interest deductions and the deferral of certain employment taxes into future periods, cash tax payments in 2020 are expected to be approximately$100 million lower than they would been absent these favorable provisions. Over the past ten years, we have transitioned our Audio business from a single platform radio broadcast operator to a company with multiple platforms, including digital, podcasting, networks and live events. Early in the first quarter of 2020, we implemented our modernization initiatives to take advantage of the significant investments we have made in new technologies to build an operating infrastructure that provides better quality and newer products and delivers new cost efficiencies. We have also invested in numerous technologies and businesses to increase the competitiveness of our inventory with our advertisers and our audience. In response to the COVID-19 pandemic, in an effort to further strengthen the Company's financial flexibility and efficiently manage through the period of economic slowdown and uncertainty, the Company is continuing to take the following measures, which are expected to generate approximately$200 million in operating cost savings in 2020: •Substantial reduction in certain operating expenses, such as new employee hiring, travel and entertainment expenses, 401(k) matching expenses, consulting fees and other discretionary expenses. •Reduction in planned capital expenditures to a level that we believe will still enable the Company to make key investments to continue our strategic initiatives related to Smart Audio and Digital, including podcasting. 1 Total available liquidity defined as cash and cash equivalents plus available borrowings under the ABL Facility. We use total available liquidity to evaluate our capacity to access cash to meet obligations and fund operations. 50 -------------------------------------------------------------------------------- •Reduction in compensation for senior management and other employees of the Company, including a 100% reduction of the Company's Chief Executive Officer's annual base salary and bonus. In addition, as a result of the decrease in revenue as a result of the COVID-19 pandemic, certain variable expenses including event production costs and sales commissions, as well as other variable compensation, showed a corresponding decrease. We believe that our cash balance, our cash flow from operations and availability under our ABL Facility provide us with sufficient liquidity to fund our core operations, maintain key personnel and meet our other material obligations. In addition, none of our long-term debt includes maintenance covenants that could trigger early repayment. We fully appreciate the unprecedented challenges posed by the COVID-19 pandemic, however, we remain confident in our business, our employees and our strategy. We believe that our ability to generate cash flow from operations from our business initiatives, our current cash on hand and availability under the ABL Facility will provide sufficient resources to continue to fund and operate our business, fund capital expenditures and other obligations and make interest payments on our long-term debt. If these sources of liquidity need to be augmented, additional cash requirements would likely be financed through the issuance of debt or equity securities; however, there can be no assurances that we will be able to obtain additional debt or equity financing on acceptable terms or at all in the future. We frequently evaluate strategic opportunities, and we expect from time to time to pursue acquisitions or dispose of certain businesses, which may or may not be material. For example, onOctober 22, 2020 , we used a portion of our cash on hand to complete the strategic acquisition ofVoxnest, Inc. , a provider of podcast analytics and programmatic ad serving tools, which we believe will be a transaction accretive to shareholder value. Specifically, as we continue to focus on operational efficiencies that drive greater margin and cash flow, we will continue to review and consider opportunities to unlock shareholder value and increase free cash flow. OnFebruary 3, 2020 ,iHeartCommunications made a$150.0 million prepayment using cash on hand and entered into an agreement to amend the Term Loan Facility to reduce the interest rate to LIBOR plus a margin of 3.00%, or the Base Rate (as defined in the Credit Agreement plus a margin of 2.00% and to modify certain covenants contained in the Credit Agreement. OnJuly 16, 2020 ,iHeartCommunications entered into an additional amendment to the Credit Facility ("Amendment No. 2") to provide for$450.0 million , resulting in net proceeds of$425.8 million , after original issue discount and debt issuance costs. A portion of the proceeds from the issuance was used to repay the remaining balance outstanding under the ABL Facility of$235.0 million , with the remaining$190.6 million of the proceeds available for general corporate purposes. The incremental term loans issued pursuant to Amendment No. 2 have an interest rate of 4.00% for Eurocurrency Rate Loans and 3.00% for Base Rate Loans (subject to a LIBOR floor of 0.75% and Base Rate floor of 1.75%). Amendment No. 2 also modifies certain other provisions of the Credit Agreement. In connection with the Separation and Reorganization, we entered into the following transactions which may require ongoing capital commitments: Transition Services Agreement Pursuant to the Transition Services Agreement between us, iHeartMediaManagement Services, Inc. ("iHM Management Services"),iHeartCommunications and CCOH, for one year from the Effective Date, we agreed to provide CCOH with certain administrative and support services and other assistance which CCOH utilized in the conduct of its business as such business was conducted prior to the Separation. The Transition Services Agreement was terminated onAugust 31, 2020 . For additional information, see Note 2, Discontinued Operations to the consolidated financial statements located in Item 1 of this Quarterly Report on Form 10-Q for a further description. New Tax Matters Agreement In connection with the Separation, we entered into the New Tax Matters Agreement by and among iHeartMedia,iHeartCommunications , iHeartOperations, Inc. , CCH,CCOH andClear Channel Outdoor, Inc. , to allocate the responsibility of iHeartMedia and its subsidiaries, on the one hand, and CCOH and its subsidiaries, on the other, for the payment of taxes arising prior and subsequent to, and in connection with, the Separation. 51 -------------------------------------------------------------------------------- The New Tax Matters Agreement requires that iHeartMedia andiHeartCommunications indemnify CCOH and its subsidiaries, and their respective directors, officers and employees, and hold them harmless, on an after-tax basis, from and against certain tax claims related to the Separation. In addition, the New Tax Matters Agreement requires that CCOH indemnify iHeartMedia for certain income taxes paid by iHeartMedia on behalf of CCOH and its subsidiaries. Sources of Capital As ofSeptember 30, 2020 andDecember 31, 2019 , we had the following debt outstanding, net of cash and cash equivalents: (In millions)
September 30, 2020 December 31, 2019
Term Loan Facility due 2026(1) $ 2,085.5 $ 2,251.3
Incremental Term Loan Facility due 2026(2) 448.9 -
Asset-based Revolving Credit Facility due 2023(3) - -
6.375% Senior Secured Notes due 2026 800.0 800.0
5.25% Senior Secured Notes due 2027 750.0 750.0
4.75% Senior Secured Notes due 2028 500.0 500.0
Other Secured Subsidiary Debt 23.0 21.0
Total Secured Debt 4,607.4 4,322.3
8.375% Senior Unsecured Notes due 2027 1,450.0 1,450.0
Other Subsidiary Debt 6.5 12.5
Purchase accounting adjustments and original issue
discount (19.6) -
Long-term debt fees (22.5) (19.4)
Total Debt 6,021.8 5,765.4
Less: Cash and cash equivalents 713.7 400.3
$ 5,308.1 $ 5,365.1
(1)On February 3, 2020 , iHeartCommunications made a $150.0 million prepayment
using cash on hand and entered into an agreement to amend the Term Loan Facility
to reduce the interest rate to LIBOR plus a margin of 3.00%, or the Base Rate
(as defined in the Credit Agreement) plus a margin of 2.00% and to modify
certain covenants contained in the Credit Agreement.
(2)On July 16, 2020 , iHeartCommunications issued $450.0 million of incremental
term loans under the Amendment No. 2, resulting in net proceeds of $425.8
million , after original issue discount and debt issuance costs. A portion of the
proceeds from the issuance was used to repay the remaining balance outstanding
on the Company's ABL Facility of $235.0 million , with the remaining $190.6
million of the proceeds available for general corporate purposes.
(3)On March 13, 2020 , iHeartCommunications borrowed $350.0 million under the ABL
Facility, the proceeds of which were invested as cash on the Balance Sheet.
During the three months ended June 30, 2020 and the three months ended September
30, 2020 , iHeartCommunications voluntarily repaid the principal amount drawn
under the ABL Facility. As of September 30, 2020 , the ABL Facility had a
borrowing base of $365.6 million , no outstanding borrowings and $41.2 million of
outstanding letters of credit, resulting in $324.4 million of borrowing base
availability. As a result of certain restrictions in the Company's debt and
preferred stock agreements, as of September 30, 2020 , approximately $165 million
was available to be drawn upon under the ABL Facility.
For additional information regarding our debt refer to Note 6, Long-Term Debt.
Exchange of Special Warrants
On July 25, 2019 , the Company filed a Petition for Declaratory Ruling ("PDR")
with the FCC to permit up to 100% of the Company's voting stock to be owned by
non-U.S. individuals and entities. On November 5, 2020 , the FCC issued a
Declaratory Ruling granting the relief requested by the PDR, subject to certain
conditions set forth in the Declaratory Ruling. On November 9, 2020 , the Company
notified the holders of warrants to purchase the Company's Class A common stock
or Class B common stock (the "Special Warrants") of the commencement of an
exchange process (the "Exchange"). In the Exchange, the Company will exchange
all or a portion of the outstanding Special Warrants into Class A common stock
or Class B common stock, subject to compliance with the Declaratory Ruling, the
Communications Act, and FCC rules. The Company
52
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has agreed to waive the exercise price for exchanging the Special Warrants in
the exchange following the Declaratory Ruling and consequently will not receive
any proceeds from that exchange. As of November 5, 2020 , Special Warrants to
purchase 75,753,316 shares of the Company's Class A common stock or Class B
common stock remained outstanding.
Supplemental Financial Information under Debt Agreements and Certificate of
Designation Governing the iHeart Operations Preferred Stock
Pursuant to iHeartCommunications' material debt agreements, Capital I, the
parent guarantor and a subsidiary of iHeartMedia, is permitted to satisfy its
reporting obligations under such agreements by furnishing iHeartMedia's
consolidated financial information and an explanation of the material
differences between iHeartMedia's consolidated financial information, on the one
hand, and the financial information of Capital I and its consolidated restricted
subsidiaries, on the other hand. Because neither iHeartMedia nor iHeartMedia
Capital II, LLC , a wholly-owned direct subsidiary of iHeartMedia and the parent
of Capital I, have any operations or material assets or liabilities, there are
no material differences between iHeartMedia's consolidated financial information
for the three and nine months ended September 30, 2020 , and Capital I's and its
consolidated restricted subsidiaries' financial information for the same
periods.
According to the certificate of designation governing the iHeart Operations
Preferred Stock, iHeart Operations is required to provide certain supplemental
financial information of iHeart Operations in comparison to the Company and its
consolidated subsidiaries. iHeart Operations and its subsidiaries comprised
84.6% of the Company's consolidated assets as of September 30, 2020 . For the
three and nine months ended September 30, 2020 , iHeart Operations and its
subsidiaries comprised 84.7% and 84.9% of the Company's consolidated revenue,
respectively.
Commitments, Contingencies and Guarantees
We are currently involved in certain legal proceedings arising in the ordinary
course of business and, as required, have accrued our estimate of the probable
costs for resolution of those claims for which the occurrence of loss is
probable and the amount can be reasonably estimated. These estimates have been
developed in consultation with counsel and are based upon an analysis of
potential results, assuming a combination of litigation and settlement
strategies. It is possible, however, that future results of operations for any
particular period could be materially affected by changes in our assumptions or
the effectiveness of our strategies related to these proceedings. Please refer
to "Legal Proceedings" in Part II, Item 1 of this Quarterly Report on Form 10-Q.
SEASONALITY
Typically, the Audio segment experiences its lowest financial performance in the
first quarter of the calendar year. We expect this trend to continue in the
future. Due to this seasonality and certain other factors, the results for the
interim periods may not be indicative of results for the full year. In addition,
our Audio segment and our Audio and media services segment are impacted by
political cycles and generally experience higher revenues in congressional
election years, and particularly in presidential election years. This
cyclicality may affect comparability of results between years.
MARKET RISK
We are exposed to market risks arising from changes in market rates and prices,
including movements in interest rates and inflation.
Interest Rate Risk
A significant amount of our long-term debt bears interest at variable rates.
Accordingly, our earnings will be affected by changes in interest rates. As of
September 30, 2020 , approximately 43% of our aggregate principal amount of
long-term debt bore interest at floating rates. Assuming the current level of
borrowings and assuming a 50% change in LIBOR, it is estimated that our interest
expense for the nine months ended September 30, 2020 would have changed by $7.7
million .
In the event of an adverse change in interest rates, management may take actions
to mitigate our exposure. However, due to the uncertainty of the actions that
would be taken and their possible effects, the preceding interest rate
sensitivity analysis assumes no such actions. Further, the analysis does not
consider the effects of the change in the level of overall economic activity
that could exist in such an environment.
Inflation
Inflation is a factor in the economies in which we do business and we continue
to seek ways to mitigate its effect. Inflation has affected our performance in
terms of higher costs for wages, salaries and equipment. Although the exact
impact of inflation is indeterminable, we believe we have offset these higher
costs by increasing the effective advertising rates of most of our broadcasting
stations in our Audio operations.
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Critical Accounting Estimates
The preparation of our financial statements in conformity with U.S. GAAP
requires management to make estimates, judgments and assumptions that affect the
reported amounts of assets and liabilities and disclosure of contingent assets
and liabilities at the date of the financial statements and the reported amount
of expenses during the reporting period. On an ongoing basis, we evaluate our
estimates that are based on historical experience and on various other
assumptions that are believed to be reasonable under the circumstances. The
result of these evaluations forms the basis for making judgments about the
carrying values of assets and liabilities and the reported amount of expenses
that are not readily apparent from other sources. Because future events and
their effects cannot be determined with certainty, actual results could differ
from our assumptions and estimates, and such difference could be material. There
have been no significant changes to our critical accounting policies and
estimates disclosed in "Critical Accounting Estimates" of Item 7, Management's
Discussion and Analysis of our Annual Report on Form 10-K for the year ended
December 31, 2019 except as disclosed in Note 1, Basis of Presentation to our
consolidated financial statements.
CRITICAL ACCOUNTING ESTIMATES
The preparation of our financial statements in conformity with U.S. GAAP
requires management to make estimates, judgments and assumptions that affect the
reported amounts of assets and liabilities and disclosure of contingent assets
and liabilities at the date of the financial statements and the reported amount
of expenses during the reporting period. On an ongoing basis, we evaluate our
estimates that are based on historical experience and on various other
assumptions that are believed to be reasonable under the circumstances. The
result of these evaluations forms the basis for making judgments about the
carrying values of assets and liabilities and the reported amount of expenses
that are not readily apparent from other sources. Because future events and
their effects cannot be determined with certainty, actual results could differ
from our assumptions and estimates, and such difference could be material. Our
significant accounting policies are discussed in the notes to our consolidated
financial statements included in Note 1 of this Quarterly Report on Form 10-Q.
Management believes that the following accounting estimates are the most
critical to aid in fully understanding and evaluating our reported financial
results, and they require management's most difficult, subjective or complex
judgments, resulting from the need to make estimates about the effect of matters
that are inherently uncertain. The following narrative describes these critical
accounting estimates, the judgments and assumptions and the effect if actual
results differ from these assumptions.
The Company performs its annual impairment test on goodwill and indefinite-lived
intangible assets as of
Indefinite-lived Intangible Assets In connection with our Plan of Reorganization, we applied fresh start accounting as required by ASC 852 and recorded all of our assets and liabilities at estimated fair values, including ourFCC licenses, which are included within our Audio reporting unit. Indefinite-lived intangible assets, such as ourFCC licenses, are reviewed annually for possible impairment using the direct valuation method as prescribed in ASC 805-20-S99. Under the direct valuation method, the estimated fair value of the indefinite-lived intangible assets was calculated at the market level as prescribed by ASC 350-30-35. Under the direct valuation method, it is assumed that rather than acquiring indefinite-lived intangible assets as a part of a going concern business, the buyer hypothetically obtains indefinite-lived intangible assets and builds a new operation with similar attributes from scratch. Thus, the buyer incurs start-up costs during the build-up phase which are normally associated with going concern value. Initial capital costs are deducted from the discounted cash flows model, which results in value that is directly attributable to the indefinite-lived intangible assets. Our key assumptions using the direct valuation method are market revenue growth rates, market share, profit margin, duration and profile of the build-up period, estimated start-up capital costs, the risk-adjusted discount rate and terminal values. This data is populated using industry normalized information representing an average asset within a market.
On
•Revenue forecasts published by
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•Operating margins of 8.0% in the first year gradually climb to the industry
average margin in year 3 of up to 21.0%, depending on market size; and
•Assumed discount rates of 8.5% for the 15 largest markets and 9.0% for all
other markets.
While we believe we have made reasonable estimates and utilized appropriate
assumptions to calculate the fair value of our indefinite-lived intangible
assets, it is possible a material change could occur. If future results are not
consistent with our assumptions and estimates, we may be exposed to impairment
charges in the future. The following table shows the change in the fair value of
our indefinite-lived intangible assets that would result from a 100 basis point
decline in our discrete and terminal period revenue growth rate and profit
margin assumptions and a 100 basis point increase in our discount rate
assumption:
(In thousands)
Revenue Profit Discount
Description Growth Rate Margin Rate
FCC license $ 343,517 $ 184,986 $ 542,741 The estimated fair value of our
Upon application of fresh start accounting in accordance with ASC 852 in connection with our emergence from bankruptcy, we recorded goodwill of$3.3 billion , which represented the excess of estimated enterprise fair value over the estimated fair value of our assets and liabilities.Goodwill was further allocated to our reporting units based on the relative fair values of our reporting units as ofMay 1, 2019 . We test goodwill at interim dates if events or changes in circumstances indicate that goodwill might be impaired. The fair value of our reporting units is used to apply value to the net assets of each reporting unit. To the extent that the carrying amount of net assets would exceed the fair value, an impairment charge may be required to be recorded. The discounted cash flow approach we use for valuing goodwill involves estimating future cash flows expected to be generated from the related assets, discounted to their present value using a risk-adjusted discount rate. Terminal values are also estimated and discounted to their present value. OnJuly 1, 2020 , we performed our annual impairment test in accordance with ASC 350-30-35, resulting in no impairment of goodwill. In determining the fair value of our reporting units, we used the following assumptions: •Expected cash flows underlying our business plans for the periods 2020 through 2024. Our cash flow assumptions are based on detailed, multi-year forecasts performed by each of our operating reporting units, and reflect the current advertising outlook across our businesses. •Cash flows beyond 2024 are projected to grow at a perpetual growth rate, which we estimated at 2.0% for our Audio and digital reporting units and 2.0% for ourKatz Media reporting unit (beyond 2028). •In order to risk adjust the cash flow projections in determining fair value, we utilized a discount rate of approximately 14.0% for each of our reporting units.
Based on our annual assessment using the assumptions described above, a hypothetical 5% reduction in the estimated fair value in each of our reporting units would not result in a material impairment condition.
While we believe we have made reasonable estimates and utilized appropriate
assumptions to calculate the estimated fair value of our reporting units, it is
possible a material change could occur. If future results are not consistent
with our assumptions and estimates, we may be exposed to impairment charges in
the future. The following table shows the decline in the fair value of each of
our reporting units that would result from a 100 basis point decline in our
discrete and terminal period revenue growth rate and profit margin assumptions
and a 100 basis point increase in our discount rate assumption:
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(In thousands)
Revenue Profit Discount
Description Growth Rate Margin Rate
Audio $ 590,000 $ 233,000 $ 671,000
Katz Media $ 28,000 $ 13,000 $ 31,000
Other $ 16,000 $ 6,000 $ 16,000
CAUTIONARY STATEMENT CONCERNING FORWARD-LOOKING STATEMENTS
The Private Securities Litigation Reform Act of 1995 provides a safe harbor for
forward-looking statements made by us or on our behalf. This report contains
various forward-looking statements which represent our expectations or beliefs
concerning future events, including, without limitation, our future operating
and financial performance, the anticipated impacts of the COVID-19 pandemic on
our business, financial position and results of operations, our Rights Plan, our
expected costs, savings and timing of our modernization initiatives and other
capital and operating expense reduction initiatives, our business plans,
strategies and initiatives, our expectations about certain markets, our
expectations regarding our FCC petition for declaratory ruling, expected cash
interest payments and our anticipated financial performance and liquidity.
Statements expressing expectations and projections with respect to future
matters are forward-looking statements within the meaning of the Private
Securities Litigation Reform Act of 1995. We caution that these forward-looking
statements involve a number of risks and uncertainties and are subject to many
variables which could impact our future performance. These statements are made
on the basis of management's views and assumptions, as of the time the
statements are made, regarding future events and performance. There can be no
assurance, however, that management's expectations will necessarily come to
pass. Actual future events and performance may differ materially from the
expectations reflected in our forward-looking statements. We do not intend, nor
do we undertake any duty, to update any forward-looking statements.
A wide range of factors could materially affect future developments and
performance, including but not limited to:
•risks associated with weak or uncertain global economic conditions and their
impact on the level of expenditures for advertising;
•the impact of the COVID-19 pandemic on our business, financial position and
results of operations;
•intense competition including increased competition from alternative media
platforms and technologies;
•dependence upon the performance of on-air talent, program hosts and management
as well as maintaining or enhancing our master brand;
•fluctuations in operating costs;
•technological changes and innovations;
•shifts in population and other demographics;
•the impact of our substantial indebtedness;
•the impact of future acquisitions, dispositions and other strategic
transactions;
•legislative or regulatory requirements;
•the impact of legislation or ongoing litigation on music licensing and
royalties;
•regulations and consumer concerns regarding privacy and data protection, and
breaches of information security measures;
•risks associated with our emergence from the Chapter 11 Cases;
•risks related to our Class A common stock, including our significant number of
outstanding warrants;
•regulations impacting our business and the ownership of our securities; and
•certain other factors set forth in our other filings with the SEC .
This list of factors that may affect future performance and the accuracy of forward-looking statements is illustrative and is not intended to be exhaustive. Accordingly, all forward-looking statements should be evaluated with the understanding of their inherent uncertainty.
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