iHeartMedia(IHRT) - 2020 Q4 - Annual Report

PART I Business iHeartMedia is the leading U.S. audio media company, leveraging broadcast radio, digital, podcasting, social media, and events to capture advertising spend, with its operations heavily regulated by the FCC - iHeartMedia positions itself as the 1 audio media company in the U.S. by consumer reach, operating in the 'companionship' sector of the audio industry, distinct from the 'music collection' sector[15][16][19] - The company operates across five main platforms: Broadcast radio (largest reach), Digital (iHeartRadio), Podcasts (1 publisher by audience), Social media (228 million followers), and Events (over 20,000 annually, adapted to virtual formats)[18][20] Business Segment Revenue (2018-2020) | Segment | 2020 Revenue ($M) | 2019 Revenue ($M) | 2018 Revenue ($M) | | :--- | :--- | :--- | :--- | | Audio | 2,681.2 | 3,454.5 | 3,353.8 | | Audio & Media Services | 274.7 | 236.7 | 264.1 | - As of December 31, 2020, the company owned and operated 858 live broadcast radio stations (244 AM, 614 FM) across approximately 160 U.S. markets[24][30] Digital Revenue Growth (2018-2020) | Year | Digital Revenue ($M) | | :--- | :--- | | 2020 | 474.4 | | 2019 | 376.2 | | 2018 | 284.6 | - Podcasting is a key growth area, with revenue reaching $101 million in 2020, a 90.6% increase from the prior year, and the company is the 1 podcast publisher as measured by Podtrac[34] - The company's growth strategy includes capturing more advertising spend from other mediums (like digital and TV) by using data-rich tools like SmartAudio, increasing its share of the national advertising market, and expanding its high-profile events platform[39][40][49] - The business is heavily regulated by the FCC, which governs broadcast licenses, ownership rules (including alien ownership), and programming content, and the company received a Declaratory Ruling in November 2020 authorizing up to 100% foreign ownership, subject to certain conditions[66][76] Risk Factors The company faces significant risks from the COVID-19 pandemic's impact on advertising revenue, intense competition, substantial indebtedness, regulatory changes, and challenges related to its recent Chapter 11 bankruptcy emergence - The COVID-19 pandemic has significantly impacted the business by reducing ad budgets, causing order cancellations, and disrupting operations, with a negative impact expected to continue into 2021[90][91] - The company faces intense competition for audiences and advertising revenue from other radio operators, streaming services, satellite radio, podcasts, and other media platforms[95][97] - Substantial indebtedness may adversely affect financial health by increasing vulnerability to economic downturns, dedicating a large portion of cash flow to debt service, and limiting operational flexibility due to restrictive covenants[107] - Extensive government regulation, primarily by the FCC, could limit operations or lead to large fines, and potential legislation could also require new royalty payments for over-the-air broadcasts, increasing expenses[110][112] - Risks related to the recent emergence from Chapter 11 include non-comparability of historical financial data due to fresh-start accounting and a new capital structure, as well as potential unfavorable tax consequences[120][121] - FCC regulations limit foreign ownership of capital stock, and while a November 2020 ruling authorized up to 100% foreign ownership, it is subject to conditions and requires specific approval for foreign holders exceeding certain thresholds (e.g., 5%)[135][137] Properties The company's corporate headquarters are leased in San Antonio, Texas, with additional executive operations in New York, and its Audio segment properties, including offices, studios, and transmitter sites, are considered suitable for operations - Corporate headquarters are leased in San Antonio, TX, with other key operations in New York, NY[146] - Audio segment properties include offices, studios, and transmitter/antenna sites, which the company owns or leases, with most towers and antennas being leased[147][148] Legal Proceedings The company is involved in various ordinary course legal proceedings, with a key regulatory matter being the FCC's Foreign Ownership Rule, which led to a November 2020 ruling permitting up to 100% foreign ownership and a subsequent warrant exchange in January 2021 - The company is involved in ordinary course litigation, including commercial disputes, defamation, employment claims, and intellectual property matters[149] - A significant legal matter relates to FCC foreign ownership restrictions, where the company received a declaratory ruling on November 5, 2020, permitting up to 100% foreign ownership, subject to certain conditions[151][152] - Following the FCC ruling, the company conducted an exchange of a portion of its outstanding Special Warrants into Class A and Class B common stock on January 8, 2021[153] PART II Market for Registrant's Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities The company's Class A common stock trades on Nasdaq under 'IHRT', with no public market for Class B, and while a partial warrant exchange occurred, the company has no current dividend intention, and its stock underperformed Nasdaq but outperformed a peer Radio Index from July 2019 to December 2020 - Class A common stock is traded on the Nasdaq Global Select Market under the symbol 'IHRT', with no established public trading market for the Class B common stock[157][158] - The company has no current intention to pay dividends on its Class A common stock[161] Stock Performance Comparison (Indexed to $1,000 on 7/18/19) | Date | iHeartMedia, Inc. | Radio Index | Nasdaq Stock Market Index | | :--- | :--- | :--- | :--- | | 7/18/19 | $1,000 | $1,000 | $1,000 | | 12/31/19 | $1,024 | $860 | $1,093 | | 12/31/20 | $787 | $489 | $1,570 | Selected Financial Data This section presents selected historical financial data, which is not directly comparable across periods due to the company's May 2019 emergence from Chapter 11 bankruptcy and adoption of fresh-start accounting, highlighting a significant 2020 revenue decline to $2.95 billion and a net loss of $1.91 billion driven by a $1.74 billion impairment charge - Financial data is split into 'Successor' (after May 1, 2019) and 'Predecessor' (on or before May 1, 2019) periods due to emergence from bankruptcy and adoption of fresh-start accounting, making periods not directly comparable[170][171] Selected Historical Financial Data (in thousands) | Metric | Successor 2020 | Successor (May 2 - Dec 31, 2019) | Predecessor (Jan 1 - May 1, 2019) | Predecessor 2018 | | :--- | :--- | :--- | :--- | :--- | | Revenue | $2,948,218 | $2,610,056 | $1,073,471 | $3,611,323 | | Operating Income (Loss) | $(1,737,624) | $439,636 | $67,040 | $690,144 | | Net Income (Loss) | $(1,915,222) | $113,299 | $11,165,113 | $(202,639) | | Impairment Charges | $1,738,752 | $0 | $91,382 | $33,150 | | Total Assets | $9,202,961 | $11,021,099 | N/A | $12,269,515 | | Long-term Debt | $5,982,155 | $5,756,504 | N/A | $0 (reclassified) | Management's Discussion and Analysis of Financial Condition and Results of Operations Management discusses the significant negative impact of the COVID-19 pandemic on 2020 revenue, which fell 20% to $2.95 billion, partially offset by strong digital growth and political advertising, alongside $250 million in cost savings and a $1.7 billion impairment charge, while affirming sufficient liquidity for the next 12 months Results of Operations For the year ended December 31, 2020, revenue decreased 20.0% to $2.95 billion due to the COVID-19 pandemic, partially offset by 26.1% digital growth and political advertising, resulting in an operating loss of $1.74 billion (driven by an impairment charge) and a net loss of $1.9 billion, contrasting sharply with 2019's bankruptcy-inflated net income Consolidated Results of Operations (2020 vs. 2019 Combined) | (In thousands) | Year Ended 2020 | Year Ended 2019 (Combined) | % Change | | :--- | :--- | :--- | :--- | | Revenue | $2,948,218 | $3,683,527 | (20.0)% | | Operating Income (Loss) | $(1,737,624) | $506,676 | NM | | Net Income (Loss) | $(1,915,222) | $11,278,412 | NM | | Adjusted EBITDA | $538,673 | $1,000,698 | (46.2)% | Revenue by Stream (2020 vs. 2019 Combined) | (In thousands) | Year Ended 2020 | Year Ended 2019 (Combined) | % Change | | :--- | :--- | :--- | :--- | | Broadcast Radio | $1,604,880 | $2,233,246 | (28.1)% | | Digital | $474,371 | $376,178 | 26.1% | | Networks | $484,950 | $614,719 | (21.1)% | | Sponsorship and Events | $107,654 | $209,517 | (48.6)% | | Audio and Media Services | $274,749 | $236,654 | 16.1% | - The 2020 operating loss was driven by a $1.7 billion non-cash impairment charge on indefinite-lived intangible assets and goodwill in Q1 2020, triggered by the adverse effects of the COVID-19 pandemic[206] - Operating expenses (Direct, SG&A, Corporate) decreased significantly in 2020 due to cost reduction initiatives in response to COVID-19 and lower variable costs (e.g., sales commissions) tied to reduced revenue[201][203][204] Non-GAAP Financial Measures This section provides reconciliations for non-GAAP measures, showing Adjusted EBITDA for 2020 decreased 46.2% to $538.7 million and Free Cash Flow from continuing operations decreased 62.6% to $130.7 million, reflecting lower operating performance and higher cash interest payments Adjusted EBITDA Reconciliation Summary (in thousands) | | Year Ended 2020 | Year Ended 2019 (Combined) | | :--- | :--- | :--- | | Operating Income (Loss) | $(1,737,624) | $506,676 | | Depreciation and amortization | $402,929 | $302,457 | | Impairment charges | $1,738,752 | $91,382 | | Share-based compensation | $22,862 | $26,909 | | Restructuring & reorganization | $100,410 | $65,120 | | Adjusted EBITDA | $538,673 | $1,000,698 | Free Cash Flow Reconciliation Summary (in thousands) | | Year Ended 2020 | Year Ended 2019 (Combined) | | :--- | :--- | :--- | | Cash from operating activities (continuing) | $215,945 | $461,400 | | Purchases of property, plant and equipment | $(85,205) | $(112,190) | | Free cash flow (continuing) | $130,740 | $349,210 | Liquidity and Capital Resources As of December 31, 2020, the company had total available liquidity of approximately $893 million, including $720.7 million in cash, deemed sufficient for the next 12 months, supported by $200 million in cost savings and $450 million in incremental term loans, with net debt at $5.3 billion and $335 million in anticipated 2021 interest payments - As of December 31, 2020, the company had $720.7 million in cash and cash equivalents and total available liquidity of approximately $893 million[260][261] - In response to COVID-19, the company generated approximately $200 million in operating cost savings in 2020 through reductions in operating expenses, capital expenditures, and compensation, with the majority of these savings expected to be permanent[266] Net Debt Summary (in millions) | | Dec 31, 2020 | Dec 31, 2019 | | :--- | :--- | :--- | | Total Debt | $6,016.9 | $5,765.4 | | Less: Cash and cash equivalents | $720.7 | $400.3 | | Net Debt | $5,296.2 | $5,365.1 | - Anticipated cash requirements for 2021 include approximately $335 million for interest payments, and the company also deferred $29.3 million in 2020 employment taxes under the CARES Act, with payments due in 2021 and 2022[262][263] Critical Accounting Estimates Management identifies critical accounting estimates including the valuation of indefinite-lived intangible assets (FCC licenses) and goodwill, which were significantly impacted by impairment charges in 2020, alongside estimates for doubtful accounts, leases, asset useful lives, tax provisions (including deferred tax asset valuation allowances), and litigation accruals - Valuation of indefinite-lived intangible assets (FCC licenses) and goodwill are critical estimates, with an interim impairment test in Q1 2020 leading to significant write-downs due to COVID-19's impact, though the annual test on July 1, 2020, resulted in no further impairment[312][316][314] - The estimated fair value of FCC licenses was $2.0 billion at July 1, 2020, compared to a carrying value of $1.8 billion, indicating some cushion against future impairment[315] - The fair value of the Audio and RCS reporting units exceeded their carrying values by approximately 10% or less during the annual goodwill impairment test, indicating sensitivity to changes in assumptions[321] - Estimating tax provisions, particularly the valuation allowance against deferred tax assets, requires significant judgment as the company must assess the likelihood of realizing these assets in the future[324][325] Financial Statements and Supplementary Data This section contains the company's audited consolidated financial statements for the fiscal year ended December 31, 2020, and the independent auditor's report from Ernst & Young LLP, which highlights the valuation of goodwill and indefinite-lived intangibles as a critical audit matter due to significant estimation and judgment, especially after Q1 2020 impairment charges - The report from independent auditor Ernst & Young LLP provides an unqualified opinion on the financial statements and the effectiveness of internal control over financial reporting[336][337] - The auditor identified the 'Valuation of Goodwill and Indefinite-Lived Intangibles' as a Critical Audit Matter due to the complex and highly judgmental nature of impairment tests, particularly the significant estimations required for projected cash flows and discount rates following the impact of COVID-19[342][343] Controls and Procedures Management, including the CEO and CFO, concluded that the company's disclosure controls and procedures and internal control over financial reporting were effective as of December 31, 2020, with the independent auditor also issuing an unqualified opinion on internal control effectiveness - Management concluded that the company's disclosure controls and procedures were effective as of December 31, 2020[659] - Management's assessment concluded that the company's internal control over financial reporting was effective as of December 31, 2020, based on the COSO 2013 framework[662] - No material changes to internal control over financial reporting occurred during the fourth quarter of 2020[663] Other Information On February 23, 2021, the Board of Directors amended the company's bylaws to designate the federal district courts of the United States as the exclusive forum for resolving any complaints arising under the Securities Act of 1933 - On February 23, 2021, the company's bylaws were amended to establish federal district courts as the exclusive forum for actions arising under the Securities Act of 1933[674] PART III Directors, Executive Officers and Corporate Governance Information regarding directors, executive officers, and corporate governance is incorporated by reference from the company's Definitive Proxy Statement for the 2021 Annual Meeting of Stockholders, with the Code of Business Conduct and Ethics available on its website - Most information required by this item, including details on directors and corporate governance, is incorporated by reference from the forthcoming 2021 Definitive Proxy Statement[680] Executive Compensation Information regarding executive and director compensation is incorporated by reference from the company's Definitive Proxy Statement for the 2021 Annual Meeting of Stockholders - All information required by this item is incorporated by reference from the forthcoming 2021 Definitive Proxy Statement[681] Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters This section details equity compensation plans, showing 10.8 million securities to be issued upon exercise of outstanding options and rights at a weighted-average exercise price of $16.02, with an additional 2.4 million securities available for future issuance, and further information on security ownership incorporated by reference from the Definitive Proxy Statement Equity Compensation Plan Information | Plan Category | Securities to be issued upon exercise (A) | Weighted-Average Exercise Price (B) | Securities remaining for future issuance (C) | | :--- | :--- | :--- | :--- | | Plans not approved by security holders | 10,829,057 | $16.02 | 2,413,013 | Certain Relationships and Related Transactions, and Director Independence Information regarding related party transactions and director independence is incorporated by reference from the company's Definitive Proxy Statement for the 2021 Annual Meeting of Stockholders - All information required by this item is incorporated by reference from the forthcoming 2021 Definitive Proxy Statement[684] Principal Accountant Fees and Services Information regarding principal accountant fees and services is incorporated by reference from the company's Definitive Proxy Statement for the 2021 Annual Meeting of Stockholders - All information required by this item is incorporated by reference from the forthcoming 2021 Definitive Proxy Statement[685] PART IV Exhibits and Financial Statement Schedules This section lists all financial statements, schedules, and exhibits filed as part of the 10-K report, including consolidated financial statements, Schedule II for Valuation and Qualifying Accounts, and key corporate documents such as the plan of reorganization, certificates of incorporation, bylaws, and various debt and employment agreements - This section lists all financial statements, schedules, and exhibits filed with the report[687] Schedule II: Allowance for Doubtful Accounts (in thousands) | Period | Beginning Balance | Charges to Costs | Write-offs | Ending Balance | | :--- | :--- | :--- | :--- | :--- | | 2020 (Successor) | $12,629 | $38,273 | $12,738 | $38,777 | | 2019 (Combined) | $26,584 | $17,356 | $8,622 | $12,629 |