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").
Beginning on January 1, 2021 , we began reporting based on three reportable
segments:
?the iHeartMedia Multiplatform Group , which includes our Broadcast radio,
Networks and Sponsorships and Events businesses;
?the iHeartMedia Digital Audio Group , which includes our Digital businesses,
including Podcasting; and
?the Audio & Media Services Group , which includes Katz Media Group ("Katz
Media"), our full-service media representation business, and RCS Sound Software
("RCS"), a provider of scheduling and broadcast software and services.
These reporting segments reflect how senior management operates the Company and
align with certain leadership and organizational changes implemented in the
first quarter of 2021. This structure provides improved visibility into the
underlying performances, results, and margin profiles of our distinct businesses
and enables senior management to better monitor trends at the operational level
and address opportunities or issues as they arise via regular review of
segment-level results and forecasts with operational leaders.
Additionally, beginning on January 1, 2021 , Segment Adjusted EBITDA became the
segment profitability metric reported to the Company's Chief Operating Decision
Maker for purposes of making decisions about allocation of resources to, and
assessing performance of, each reportable segment. Segment Adjusted EBITDA is
calculated as Revenue less operating expenses, excluding Restructuring expenses
(as defined below) and share-based compensation expenses.
Over the past ten years, we have transitioned our business from a single
platform radio broadcast operator to a company with multiple platforms including
digital, podcasting, networks and events, as well as ad technology capabilities.
We have also invested in numerous technologies and businesses to increase the
competitiveness of our inventory with our advertisers and our audience. We
believe the presentation of our results by segment provides additional insight
into our broadcast radio business and our fast-growing digital business. 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 twelve
months.
Description of our Business
Our strategy centers on delivering entertaining and informative content where
our listeners want to find us across our Multiplatform Group , including
broadcast and events, and our Digital Audio Group , including podcasting and
streaming services. The primary source of revenue for our Multiplatform Group is
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. Our Multiplatform Group also generates revenue from network
syndication, nationally recognized events and other miscellaneous transactions.
Through our Digital Audio Group , we continue to expand the choices for listeners
and we derive revenue by delivering our content and selling advertising across
multiple digital distribution channels, including via our iHeartRadio mobile
application, our station websites and other digital platforms which reach
national, regional and local audiences. Audio & Media Services Group revenue is
generated by services provided to broadcast industry participants through our
Katz Media and RCS businesses. As a media representation firm, Katz Media
generates revenue via commissions on media sold on behalf of the radio and
television stations that it represents, while RCS generates revenue by providing
broadcast and webcast software and technology and services to radio stations,
television music channels, cable companies, satellite music networks and
Internet stations worldwide.
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. As a result of the impact
of the coronavirus pandemic ("COVID-19") and the resulting impact on the U.S.
economy, our revenue for the nine months ended September 30, 2021 was negatively
impacted. Beginning
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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
our results for the third quarter of 2021 continued to be impacted by the
effects of the COVID-19 pandemic, our revenue for both the three months ended
June 30, 2021 and September 30, 2021 increased significantly compared to the
three months ended June 30, 2020 and September 30, 2020 . Although revenues
significantly increased in the nine months ended September 30, 2021 compared to
the prior year for our Broadcast radio, Networks and Sponsorships revenue
streams of our Multiplatform Group , revenue from these revenue streams has not
fully recovered from the impact of COVID-19. Our Digital Audio Group revenues,
including podcasting, have continued to grow each quarter year-over-year during
the COVID-19 pandemic.
As the business environment continues to build positive momentum, we expect that
the traditional promotional use of radio to be a strong benefit to us. As
businesses continue to recover, 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 January 2020 , we announced key modernization initiatives designed to take
advantage of the significant investments that the Company has made in new
technologies to build an improved operating infrastructure to upgrade products
and deliver incremental cost efficiencies. This modernization is a multi-pronged
set of strategic initiatives that we believe positions the Company for
sustainable long-term growth, margin expansion, and value creation for
stockholders.
Our investments in modernization delivered approximately $50 million of in-year
savings in 2020 and remain on track to achieve the target of $100 million of
cost savings in 2021.
In April 2020 , we announced approximately $200 million of incremental in-year
operating-expense-saving initiatives in response to the weaker economic
environment caused by the COVID-19 pandemic. As previously announced, the
Company has implemented plans to make the majority of the savings permanent. For
more information, please see the Liquidity and Capital Resources - Anticipated
Cash Requirements section below.
Impairment Charges
As part of our operating-expense-savings initiatives, we have taken proactive
steps to streamline our real estate footprint and reduce related structural
lease expenses incurred by the Company. These strategic actions typically result
in impairment charges due to the write-down of the affected right-of-use assets
and related fixed assets, including leasehold improvements. For the nine months
ended September 30, 2021 , we recognized non-cash impairment charges of $49.4
million as a result of these cost-savings initiatives.
We perform our 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 2021 annual impairment testing. As a
result of the COVID-19 pandemic and the economic downturn starting in March
2020 , the Company performed interim impairment tests as of March 31, 2020 on its
indefinite-lived FCC licenses and goodwill, resulting in non-cash impairment
charges of $502.7 million and $1.2 billion on its FCC licenses and goodwill,
respectively. For more information, see Note 4, 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. 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.
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Executive Summary
Although our results for the third quarter of 2021 continued to be impacted by
the effects of the COVID-19 pandemic, our revenues increased significantly,
including revenue from our Multiplatform segment, which includes our broadcast
radio, networks and sponsorship and events businesses. Digital revenue,
including podcasting, continued to grow year-over-year.
The key developments that impacted our business during the quarter are
summarized below:
•Consolidated Revenue of $928.1 million increased $183.6 million , or 24.7%
during the quarter ended September 30, 2021 compared to Revenue of $744.4
million in the prior year's third quarter.
•Revenue and Segment Adjusted EBITDA from our Multiplatform Group increased
$103.9 million and $69.5 million compared to the prior year's third quarter,
respectively.
•Revenue and Segment Adjusted EBITDA from our Digital Audio Group increased
$89.6 million and $32.0 million compared to the prior year's third quarter,
respectively.
•Revenue and Segment Adjusted EBITDA from our Audio & Media Services Group
decreased $9.0 million and $6.4 million compared to the prior year's third
quarter, respectively.
•Operating income of $80.1 million was up from $39.4 million in the prior year's
third quarter.
•Net income of $3.7 million compared to a Net loss of $32.1 million in the prior
year's third quarter.
•Adjusted EBITDA(1) of $230.2 million , was up $68.1 million from $162.1 million
in prior year's third quarter.
•Cash flows provided by operating activities of $95.7 million increased from
Cash flows provided by operating activities of $33.3 million in the prior year's
third quarter.
•Free cash flow(2) of $45.5 million improved from $14.3 million in the prior
year's third quarter.
The table below presents a summary of our historical results of operations for
the periods presented:
(In thousands) Three Months Ended
September 30, %
2021 2020 Change
Revenue $ 928,051 $ 744,406 24.7 %
Operating income $ 80,111 $ 39,395 103.4 %
Net income (loss) $ 3,673 $ (32,112) NM
Cash provided by operating activities $ 95,736 $ 33,252 187.9 %
Adjusted EBITDA(1) $ 230,213 $ 162,124 42.0 %
Free cash flow(2) $ 45,462 $ 14,275 218.5 %
(1) For a definition of Adjusted EBITDA and a reconciliation to Operating income
(loss), the most closely comparable GAAP measure, and to Net income (loss),
please see "Reconciliation of Operating Income (Loss) 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 and a reconciliation to Cash provided by
operating activities, the most closely comparable GAAP measure, please see
"Reconciliation of Cash provided by operating activities to Free cash flow" in
this MD&A.
29
-------------------------------------------------------------------------------- Results of Operations The tables below present the comparison of our historical results of operations for the three and nine months endedSeptember 30, 2021 to the three and nine months endedSeptember 30, 2020 : (In thousands) Three Months Ended Nine Months Ended September 30, September 30, 2021 2020 2021 2020 Revenue$ 928,051 $ 744,406 $ 2,496,321 $ 2,012,688 Operating expenses: Direct operating expenses (excludes depreciation and amortization) 325,766 270,862 939,094 808,925 Selling, general and administrative expenses (excludes depreciation and amortization) 390,086 333,095 1,105,056 1,018,258 Depreciation and amortization 108,100 99,379 343,408 299,494 Impairment charges 11,647 - 49,391 1,733,235 Other operating expense, net 12,341 1,675 27,491 3,247 Operating income (loss) 80,111 39,395 31,881 (1,850,471) Interest expense, net 82,481 85,562 252,489 257,614 Gain (loss) on investments, net (10,367) 62 39,468 (8,613) Equity in loss of nonconsolidated affiliates (1,056) (58) (1,115) (653) Other expense, net (9,681) (1,177) (10,851) (10,295) Loss before income taxes (23,474) (47,340) (193,106) (2,127,646) Income tax benefit (expense) 27,147 15,228 (77,237) 209,481 Net income (loss) 3,673 (32,112) (270,343) (1,918,165) Less amount attributable to noncontrolling interest 493 - 486 -
Net income (loss) attributable to the Company
The tables below present the comparison of our revenue streams for the three and nine months endedSeptember 30, 2021 to the three and nine months endedSeptember 30, 2020 : (In thousands) Three Months Ended Nine Months Ended September 30, % September 30, % 2021 2020 Change 2021 2020 Change Broadcast Radio$ 483,456 $ 404,460 19.5 %$ 1,293,134 $ 1,110,155 16.5 % Networks 127,920 118,982 7.5 % 366,592 349,889 4.8 % Sponsorship and Events 42,663 28,898 47.6 % 93,641 73,055 28.2 % Other 4,940 2,757 79.2 % 9,359 8,724 7.3 % Multiplatform Group 658,979 555,097 18.7 % 1,762,726 1,541,823 14.3 % Digital, excluding Podcast 141,573 93,574 51.3 % 405,276 242,479 67.1 % Podcast 64,196 22,626 183.7 % 155,976 59,724 161.2 % Digital Audio Group 205,769 116,200 77.1 % 561,252 302,203 85.7 % Audio & Media Services Group 66,078 75,039 (11.9) % 182,390 174,517 4.5 % Eliminations (2,775) (1,930) (10,047) (5,855) Revenue, total$ 928,051 $ 744,406 24.7 %$ 2,496,321 $ 2,012,688 24.0 % 30
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Consolidated results for the three and nine months ended
compared to the consolidated results for the three and nine months ended
Returned
Consolidated revenue increased$183.6 million during the three months endedSeptember 30, 2021 compared to the same period of 2020. The increase in Consolidated revenue is attributable to the continued recovery from the macroeconomic effects of COVID-19 and the continuing growth of our operating businesses. Multiplatform revenue increased$103.9 million , or 18.7%, primarily resulting from strengthening demand for broadcast advertising compared to the third quarter of 2020, partially offset by lower political advertising revenue compared to the same period of 2020, which was a presidential election year. Digital Audio revenue increased$89.6 million , or 77.1%, driven primarily by continuing increases in demand for digital advertising and the continued growth of podcasting. Audio & Media Services revenue decreased$9.0 million due to lower political advertising revenue, partially offset by the continued recovery from the impact of COVID-19. Consolidated revenue increased$483.6 million during the nine months endedSeptember 30, 2021 compared to the same period of 2020. The increase in Consolidated revenue is attributable to the continued recovery from the macroeconomic effects of COVID-19 and the continuing growth of our operating businesses. Multiplatform revenue increased$220.9 million , primarily resulting from strengthening demand for broadcast advertising. Digital Audio revenue increased$259.0 million , driven primarily by continuing increases in demand for digital advertising, including continued growth in podcasting. Audio & Media Services revenue increased$7.9 million primarily due to the continued recovery from the impact of COVID-19, partially offset by decreases in political advertising revenue. Direct Operating Expenses Consolidated direct operating expenses increased$54.9 million during the three months endedSeptember 30, 2021 compared to the same period of 2020, primarily as a result of the expenses directly associated with the significant increase in revenue. The increase in direct operating expenses was driven primarily by higher content and talent and profit sharing expenses, third-party digital costs, and costs related to the return of local and national live events. The increase in Consolidated direct operating expenses was partially offset by lower employee compensation and other expenses resulting from our modernization and cost-reduction initiatives executed in 2020 and 2021. Consolidated direct operating expenses increased$130.2 million during the nine months endedSeptember 30, 2021 compared to the same period of 2020. The increase in Direct operating expenses was driven primarily by higher variable expenses, along with higher third-party digital costs and talent and profit sharing expenses due to higher revenue. In addition, variable operating expenses, including music license and performance royalty fees, also increased as a result of higher revenue. Variable expenses related to events also increased as a result of the return of live events. The increase in Consolidated direct operating expenses was partially offset by lower employee compensation and other expenses resulting from our modernization and cost-reduction initiatives executed in 2020 and early 2021. Selling, General and Administrative ("SG&A") Expenses Consolidated SG&A expenses increased$57.0 million during the three months endedSeptember 30, 2021 compared to the same period of 2020. The increase in Consolidated SG&A expenses was driven primarily by increased employee compensation expenses resulting primarily from higher variable bonus expense based on financial performance and higher sales commission expenses as a result of higher revenue. In the prior year the Company did not pay bonuses to the vast majority of employees. In addition, increased headcount resulting from investments in our digital businesses contributed to the increase in Consolidated SG&A expenses. These increases were partially offset by lower trade expense due to the timing of expenses incurred in connection with the iHeartRadioMusic Festival , as well as decreases in employee compensation and other expenses resulting from modernization and cost-reduction initiatives taken in response to the COVID-19 pandemic. 31 -------------------------------------------------------------------------------- Consolidated SG&A expenses increased$86.8 million during the nine months endedSeptember 30, 2021 compared to the same period of 2020. The increase in SG&A expenses was driven primarily by higher employee compensation expenses resulting from higher variable bonus accruals based on financial performance as well as an increase in headcount resulting from investments in our digital businesses. Sales commission expenses also increased as a result of higher revenue. These increases were partially offset by lower bad debt expense, lower trade expense due to the timing of expenses incurred in connection with the iHeartRadioMusic Festival , as well as decreases in employee compensation and other expenses resulting from modernization and cost-reduction initiatives taken in response to the COVID-19 pandemic. Depreciation and Amortization Depreciation and amortization increased$8.7 million and$43.9 million during the three and nine months endedSeptember 30, 2021 compared to the same periods of 2020, primarily as a result of increased capital expenditures and the impact of acquired businesses, and accelerated amortization of certain intangible 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 part of our operating expense-savings initiatives, we have taken strategic actions to streamline our real estate footprint and related expenses, resulting in impairment charges due to the write-down of right-of-use assets and related fixed assets, including leasehold improvements. During the three and nine months endedSeptember 30, 2021 , we recognized non-cash impairment charges of$11.6 million and$49.4 million related to certain of our right-of-use assets and leasehold improvements as a result of these cost-savings initiatives. No impairment charges were recorded in the third quarter of 2021 or 2020 in connection with our annual impairment testing of goodwill andFCC licenses. In the nine months endedSeptember 30, 2020 , we recognized non-cash impairment charges to our goodwill andFCC licenses of$1.7 billion as a result of the adverse effects caused by the COVID-19 pandemic on estimated future cash flows in the first quarter of 2020. Other Operating Expense, Net Other operating expense, net of$12.3 million and$1.7 million for the three months endedSeptember 30, 2021 and 2020, respectively, and Other operating expense, net of$27.5 million and$3.2 million for the nine months endedSeptember 30, 2021 and 2020, respectively, relate primarily to net losses recognized on asset disposals in connection with our real estate optimization initiatives. Interest Expense Interest expense decreased$3.1 million during the three months endedSeptember 30, 2021 compared to the same period of 2020, primarily as a result of the interest rate reduction of our amended incremental term loan facility and the$250.0 million voluntary repayment made inJuly 2021 on our term loan credit facilities in connection with the repricing transaction. Interest expense decreased$5.1 million during the nine months endedSeptember 30, 2021 compared to the same period of 2020, primarily as a result of the impact of lower LIBOR rates and the$250.0 million voluntary repayment of our term loan facilities and amended incremental term loan facility inJuly 2021 , partially offset by the issuance of incremental term loans in the third quarter of 2020. Gain (Loss) on Investments,Net During the three months endedSeptember 30, 2021 , we recognized a loss on investments, net of$10.4 million in connection with estimated credit losses and declines in the value of our investments. During the nine months endedSeptember 30, 2021 , we recognized a gain of$39.5 million , primarily related to the sale of our investment in theSan Antonio Spurs . In the three months endedSeptember 30, 2020 we recognized a gain of$0.1 million . In the nine months endedSeptember 30, 2020 we recognized a loss of$8.6 million primarily in connection with estimated credit losses and declines in the value of our investments. Other Expense, Net Other expense, net was$9.7 million and$1.2 million for the three months endedSeptember 30, 2021 and 2020, respectively, and$10.9 million and$10.3 million for the nine months endedSeptember 30, 2021 and 2020, respectively. Other expense, net for the three and nine months endedSeptember 30, 2021 related primarily to the write-off of unamortized debt issuance costs upon our voluntary partial prepayment of our Term Loan Facilities inJuly 2021 , and finance lease termination payments. Other expense, net for the nine months endedSeptember 30, 2020 related primarily to costs incurred to amend our Term Loan Facility and professional fees. 32 --------------------------------------------------------------------------------
Tax benefit (expense)
The effective tax rate for the Company for the three and nine months endedSeptember 30, 2021 was 115.6% and (40.0)%, respectively. The effective tax rates were primarily impacted by the forecasted increase in valuation allowance against certain deferred tax assets, related primarily to disallowed interest expense carryforwards, due to uncertainty regarding the Company's ability to utilize those assets in future periods. The effective tax rate 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 consisted of$125.5 million related to theFCC license impairment charges recorded during the period.
Net income (loss) attributable to the company
Net income attributable to the Company increased$35.3 million to Net income attributable to the Company of$3.2 million during the three months endedSeptember 30, 2021 compared to a Net loss attributable to the Company of$32.1 million during the three months endedSeptember 30, 2020 , primarily as a result of the increase in revenue from the continuing recovery from the macroeconomic effects of the COVID-19 pandemic and the continuing growth of our operating businesses. Net loss attributable to the Company decreased$1,647.3 million to$270.8 million during the nine months endedSeptember 30, 2021 compared to Net loss attributable to the Company of$1,918.2 million during the nine months endedSeptember 30, 2020 , primarily as a result of the impairment charge recognized during the first quarter of 2020 and the increase in revenue from the continuing recovery from the macroeconomic effects of the COVID-19 pandemic and the continuing growth of our operating businesses.
Multiplatform group results
Three Months Ended Nine Months Ended
(In thousands) September 30, % September 30, %
2021 2020 Change 2021 2020 Change
Revenue $ 658,979 $ 555,097 18.7 % $ 1,762,726 $ 1,541,823 14.3 %
Operating expenses(1) 450,549 416,131 8.3 % 1,268,107 1,265,094 0.2 %
Segment Adjusted EBITDA $ 208,430 $ 138,966 50.0 % $ 494,619 $ 276,729 78.7 %
Segment Adjusted EBITDA
margin 31.6 % 25.0 % 28.1 % 17.9 %
(1) Operating expenses include direct operating expenses and commercial, general and administrative expenses, excluding restructuring expenses.
Three months
Revenue from ourMultiplatform Group increased$103.9 million compared to the prior year, primarily as a result of the continued recovery from the negative impact of the COVID-19 pandemic in 2020. Broadcast revenue grew$79.0 million , or 19.5%, year-over-year, while Networks grew$8.9 million , or 7.5%, year-over-year. Revenue from Sponsorship and Events increased by$13.8 million , or 47.6%, year-over-year, primarily as a result of the return of live events. These increases were partially offset by a$15.1 million decrease in political revenue compared to the same period in 2020, which was a presidential election year. Operating expenses increased$34.4 million , driven primarily by higher variable employee compensation expenses, including commission and bonus expense, as well as higher talent and profit-sharing fees, both as a result of higher revenue, and higher expenses related to the return of live events, which were partially offset by lower trade expenses resulting from the timing of expenses incurred in connection with the iHeartRadioMusic Festival . These increases were partially offset by lower employee compensation and other expenses resulting from our modernization and cost-reduction initiatives executed in 2020 and early 2021. 33
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Nine months
Revenue from ourMultiplatform Group increased$220.9 million compared to the comparative period in the prior year, primarily as a result of the continued recovery from the negative impact of the COVID-19 pandemic on our traditional radio business. Broadcast revenue increased$183.0 million , or 16.5%, year-over-year, while Networks grew$16.7 million , or 4.8%, year-over-year. Revenue from Sponsorship and Events increased by$20.6 million , or 28.2%, year-over-year, primarily as a result of the return of live events. Operating expenses increased$3.0 million , driven primarily by higher variable employee compensation expense including commission and bonus expense, as well as higher talent and profit share fees, both driven by higher revenue, and higher expenses related to the return of live events. The increase was partially offset by lower bad debt expense as well as lower employee compensation and other expenses resulting from our modernization and cost-reduction initiatives.
Digital Audio Group Results
Three Months Ended Nine Months Ended
(In thousands) September 30, % September 30, %
2021 2020 Change 2021 2020 Change
Revenue $ 205,769 $ 116,200 77.1 % $ 561,252 $ 302,203 85.7 %
Operating expenses(1) 138,646 81,042 71.1 % 399,828 231,589 72.6 %
Segment Adjusted EBITDA $ 67,123 $ 35,158 90.9 % $ 161,424 $ 70,614 128.6 %
Segment Adjusted EBITDA
margin 32.6 % 30.3 % 28.8 % 23.4 %
(1) Operating expenses include direct operating expenses and commercial, general and administrative expenses, excluding restructuring expenses.
Three months
Revenue from ourDigital Audio Group increased$89.6 million compared to the prior year, including growth from Digital, excluding Podcast revenue, which grew$48.0 million , or 51.3%, year-over-year, driven by increased demand for digital advertising, and Podcast revenue which increased by$41.6 million , or 183.7%, year-over-year, driven by higher revenues from the development of new podcasts as well as growth from existing podcasts.Digital Audio Group revenue increased as a result of general increased demand for digital advertising, the growing popularity of podcasting, the continued addition of premium content to our industry-leading podcast business and our improving ability to monetize our digital audiences and inventory utilizing our sales force and advertising technology platforms, partially driven by leveraging our prior strategic investments in the digital space. Operating expenses increased$57.6 million in connection with ourDigital Audio Group's significant revenue growth, including the impact of higher variable employee compensation expense, variable content and third-party digital costs due to higher revenue and the development of new podcasts. In addition, operating expenses increased due to increased headcount resulting from our investments in key infrastructure to support our growing digital operations, as well as higher variable compensation expenses including sales commissions and bonus arrangements. Nine Months Revenue from ourDigital Audio Group increased$259.0 million compared to the prior year, led by Digital, excluding Podcast revenue, which grew$162.8 million , or 67.1%, year-over-year, driven by increased demand for digital advertising. Podcast revenue also increased by$96.3 million , or 161.2%, year-over-year, driven by higher revenues from the development of new podcasts and growth from existing podcasts.Digital Audio Group revenues increased as a result of general increased demand for digital advertising, the growing popularity of podcasting, the continued addition of premium content to our industry-leading podcast business and our improving ability to monetize our digital audiences and inventory utilizing our sales force and advertising technology platforms, partially driven by investments in the digital space. 34 -------------------------------------------------------------------------------- Operating expenses increased$168.2 million in connection with ourDigital Audio Group's significant revenue growth, including the impact of variable employee compensation expense, variable content and talent costs and third-party digital costs due to higher revenue, as well as increased content and production costs primarily resulting from the development of new podcasts. In addition, operating expenses increased due to additional headcount resulting from investments in the digital space, as well as higher variable compensation expenses including sales commissions and bonus arrangements.
Audio and Media Services group results
Three Months Ended Nine Months Ended
(In thousands) September 30, % September 30, %
2021 2020 Change 2021 2020 Change
Revenue $ 66,078 $ 75,039 (11.9) % $ 182,390 $ 174,517 4.5 %
Operating expenses(1) 43,656 46,247 (5.6) % 124,148 127,774 (2.8) %
Segment Adjusted EBITDA $ 22,422 $ 28,792 (22.1) % $ 58,242 $ 46,743 24.6 %
Segment Adjusted EBITDA
margin 33.9 % 38.4 % 31.9 % 26.8 %
(1) Operating expenses include direct operating expenses and commercial, general and administrative expenses, excluding restructuring expenses.
Three months
Our income
Operating expenses decreased
Nine months
Revenue from ourAudio & Media Services Group increased$7.9 million compared to the comparative period in the prior year as a result of the continued recovery from the negative impact of the COVID-19 pandemic, partially offset by lower political advertising revenue.
Operating expenses decreased
Reconciliation of Operating Income (Loss) to Adjusted EBITDA
(In thousands) Three Months Ended Nine Months Ended
September 30, September 30,
2021 2020 2021 2020
Operating income (loss) $ 80,111 $ 39,395 $ 31,881 $ (1,850,471)
Depreciation and amortization 108,100 99,379 343,408 299,494
Impairment charges 11,647 - 49,391 1,733,235
Other operating expense, net 12,341 1,675 27,491 3,247
Share-based compensation expense 5,993 5,885 17,581
14,728 Restructuring expenses 12,021 15,790 47,216 72,947 Adjusted EBITDA(1)$ 230,213 $ 162,124 $ 516,968 $ 273,180 35
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Reconciliation of net income (loss) to EBITDA and adjusted EBITDA (in thousands)
Three Months Ended Nine Months Ended
September 30, September 30,
2021 2020 2021 2020
Net income (loss) $ 3,673 $ (32,112) $ (270,343) $ (1,918,165)
Income tax (benefit) expense (27,147) (15,228) 77,237 (209,481)
Interest expense, net 82,481 85,562 252,489 257,614
Depreciation and amortization 108,100 99,379 343,408 299,494
EBITDA $ 167,107 $ 137,601 $ 402,791 $ (1,570,538)
Loss (gain) on investments, net 10,367 (62) (39,468) 8,613
Other expense, net 9,681 1,177 10,851 10,295
Equity in loss of nonconsolidated
affiliates 1,056 58 1,115 653
Impairment charges 11,647 - 49,391 1,733,235
Other operating expense, net 12,341 1,675 27,491 3,247
Share-based compensation expense 5,993 5,885 17,581 14,728
Restructuring expenses 12,021 15,790 47,216 72,947
Adjusted EBITDA(1) $ 230,213 $ 162,124 $ 516,968 $ 273,180
(1)We define Adjusted EBITDA as consolidated Operating income (loss) adjusted to
exclude restructuring expenses included within Direct operating expenses and
SG&A expenses, and share-based compensation expenses included within SG&A
expenses, as well as the following line items presented in our Statements of
Operations: Depreciation and amortization, Impairment charges and Other
operating expense, net. Alternatively, Adjusted EBITDA is calculated as Net
income (loss), adjusted to exclude Income tax (benefit) expense, Interest
expense, net, Depreciation and amortization, Loss (gain) on investments, net,
Other expense, net, Equity in loss of nonconsolidated affiliates, net,
Impairment charges, Other operating expense, net, Share-based compensation
expense, and restructuring expenses. Restructuring expenses primarily include
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. 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.
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Reconciliation of Cash Provided by Operating Activities to Free Cash Flow
(In thousands) Three Months Ended Nine Months Ended
September 30, September 30,
2021 2020 2021 2020
Cash provided by operating activities $ 95,736 $ 33,252 $ 196,593 $ 136,161
Purchases of property, plant and
equipment (50,274) (18,977) (101,335) (58,523)
Free cash flow(1) $ 45,462 $ 14,275 $ 95,258 $ 77,638
(1)We define Free cash flow ("Free Cash Flow") as Cash provided by operating
activities less capital expenditures, which is disclosed as Purchases of
property, plant and equipment 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.
Share-Based Compensation Expense
Historically, we had granted restricted shares of the Company's Class A common
stock to certain key individuals.
Pursuant to our 2019 Equity Incentive Plan (the "2019 Plan"), we historically
granted restricted stock units and options to purchase shares of the Company's
Class A common stock to certain key individuals. On April 21, 2021 , our 2021
Long-Term Incentive Award Plan (the "2021 Plan") was approved by stockholders
and replaced the 2019 Plan. Pursuant to our 2021 Plan, we will continue to grant
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 SG&A expenses and were $6.0
million and $5.9 million for the three months ended September 30, 2021 and 2020,
respectively, and $17.6 million and $14.7 million for the nine months ended
September 30, 2021 and 2020, respectively.
As of September 30, 2021 , there was $45.0 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 2.3 years. In addition, as of
September 30, 2021 , there was $0.3 million of unrecognized compensation costs
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:
Nine Months Ended
(In thousands) September 30,
2021 2020
Cash provided by (used for):
Operating activities $ 196,593 $ 136,161
Investing activities $ (259,898) $ (71,172)
Financing activities $ (288,118) $ 248,637
Free Cash Flow(1) $ 95,258 $ 77,638
(1) For a definition of Free cash flow from operations and a reconciliation to
Cash provided by operating activities from operations, the most closely
comparable GAAP measure, please see "Reconciliation of Cash provided by
operating activities from operations to Free cash flow from operations" in this
MD&A.
Operating Activities
Cash provided by operating activities increased from $136.2 million in the nine
months ended September 30, 2020 to $196.6 million in the nine months ended
September 30, 2021 primarily as a result of an increase in cash flows generated
from higher revenues and operating profitability as the Company's businesses
continue to recover from the impact of the COVID-19 pandemic. The increase in
cash provided by operating activities was partially offset by changes in working
capital balances, particularly accounts receivable, which was impacted by the
timing of collections.
Investing Activities
Cash used for investing activities of $259.9 million during the nine months
ended September 30, 2021 primarily reflects the net cash payment made to acquire
Triton Digital for $228.5 million . In addition, $101.3 million in cash was used
for capital expenditures. We spent $66.5 million for capital expenditures in our
Multiplatform Group segment primarily related to our real estate optimization
initiatives, and $17.9 million in our Digital Audio Group segment primarily
related to IT infrastructure, $6.2 million in our Audio & Media Services Group
segment, primarily related to software and $10.7 million in Corporate primarily
related to equipment and software purchases. Cash used for investing activities
was partially offset by cash provided by investing activities primarily related
to proceeds of $50.8 million received from the sale of our investment in the San
Antonio Spurs .
Cash used for investing activities of $71.2 million during the nine months ended
September 30, 2020 primarily reflects $58.5 million in cash used for capital
expenditures. We spent $34.8 million for capital expenditures in our
Multiplatform Group segment primarily related to IT infrastructure, $10.7
million in our Digital Audio Group segment primarily related to investments in
our digital platform, $2.5 million in our Audio & Media Services Group segment,
primarily related to acquired software and $10.5 million in Corporate primarily
related to equipment and software purchases.
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Financing Activities
Cash used for financing activities of $288.1 million during the nine months
ended September 30, 2021 primarily resulted from the $250.0 million voluntary
repayment of our term loan credit facilities in connection with the repricing
transaction, and required quarterly principal payments made on our Term Loan
Facility and repayment of a subsidiary note payable. As a result of our
voluntary prepayment, our Term Loan Facility no longer requires quarterly
principal payments.
Cash provided by financing activities of $248.6 million during the nine months
ended September 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 of
2020, along with required quarterly principal payments made on the Term Loan
Facility.
Anticipated Cash Requirements
Our primary sources of liquidity are cash on hand, which consisted of cash and
cash equivalents of $369.1 million as of September 30, 2021 , cash flow from
operations and borrowing capacity under our $450.0 million ABL Facility. As of
September 30, 2021 , iHeartCommunications had no amounts outstanding under the
ABL Facility, a facility size of $450.0 million and $28.5 million in outstanding
letters of credit, resulting in $421.5 million of borrowing base availability.
Together with our cash balance of $369.1 million as of September 30, 2021 and
our borrowing capacity under the ABL Facility, our total available liquidity1
was approximately $791 million .
On July 16, 2021 , we amended the Term Loan credit facilities and voluntarily
prepaid $250.0 million of borrowings outstanding under these facilities using
cash on hand. On October 27, 2021 , iHeart Operations repurchased all of the
iHeart Operations Preferred Stock with cash on hand for an aggregate price of
$64.4 million ("Redemption Price"), including accrued dividends, upon obtaining
consent from the third party investor. The Redemption Price included a
negotiated make-whole premium as the redemption occurred prior to the optional
redemption date set forth in the Certificate of Designation governing the iHeart
Operations Preferred Stock. Subsequent to the transaction, the preferred shares
were retired and cancelled and are no longer outstanding.
We continue to evaluate the ongoing impact of COVID-19 on our business. The
challenges that COVID-19 has created for advertisers and consumers have had a
significant impact on our revenue for the nine months ended September 30, 2021
and have created a business outlook that is less clear in the near term.
Although our results continued to be impacted by the effects of the COVID-19
pandemic, our revenue for both the three months ended June 30, 2021 and
September 30, 2021 increased significantly compared to the three months ended
June 30, 2020 and September 30, 2020 . We believe that we have sufficient
liquidity to continue to fund our operations for at least the next twelve
months.
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 and other obligations.
We anticipate that we will have approximately $81 million of cash interest
payments in the remainder of 2021 and $312 million of cash interest payments in
2022.
Over the past several years, we have transitioned our business from a
single-platform radio broadcast operator to a company with multiple platforms,
including digital, podcasting, networks and live and virtual events. In January
2020 , we announced key modernization initiatives designed to take advantage of
the significant investments that we have made in new technologies to build an
improved operating infrastructure to upgrade products and deliver incremental
cost efficiencies. This modernization is a multi-pronged set of strategic
initiatives that we believe positions the Company for sustainable long-term
growth, margin expansion, and value creation for stockholders.
Our investments in modernization delivered approximately $50 million of in-year
savings in 2020 and remain on track to achieve the target of $100 million of
cost savings.
In April 2020 , we announced approximately $200 million of incremental in-year
operating-expense-saving initiatives in response to the weaker economic
environment caused by the COVID-19 pandemic. As previously announced, we have
implemented plans to make the majority of these savings permanent.
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 for
at least the next twelve months. In addition, none of our long-term debt
includes maintenance covenants that could trigger early
1 Total available liquidity is 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.
39
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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, on March 31, 2021 , we used a portion of our cash on hand
to acquire Triton Digital, a global leader in digital audio and podcast
technology and measurement services, from The E.W. Scripps Company for $228.5
million in cash, excluding transaction costs.
Tax Matters Agreement
In connection with the separation (the "Separation") of Clear Channel Outdoor
Holdings, Inc. ("CCOH") as part of the Company's plan of reorganization (the
"Plan of Reorganization") for emergence from Chapter 11 bankruptcy, we entered
into the Tax Matters Agreement by and among iHeartMedia, iHeartCommunications ,
iHeart Operations, Inc. , Clear Channel Holdings, Inc. , CCOH and Clear 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.
The Tax Matters Agreement requires that iHeartMedia and iHeartCommunications
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 Tax Matters
Agreement requires that CCOH indemnify iHeartMedia for certain income taxes paid
by iHeartMedia on behalf of CCOH and its subsidiaries.
Summary Debt Capital Structure
As of September 30, 2021 and December 31, 2020 , we had the following debt
outstanding, net of cash and cash equivalents:
(In thousands) September 30, 2021 December 31, 2020
Term Loan Facility due 20261 $ 1,864,032 $ 2,080,259
Incremental Term Loan Facility due 20261 401,220 447,750
Asset-based Revolving Credit Facility due 2023 - -
6.375% Senior Secured Notes due 2026 800,000 800,000
5.25% Senior Secured Notes due 2027 750,000 750,000
4.75% Senior Secured Notes due 2028 500,000 500,000
Other Secured Subsidiary Debt 5,369 22,753
Total Secured Debt $ 4,320,621
8.375% Senior Unsecured Notes due 2027 1,450,000 1,450,000 Other Subsidiary Debt - 6,782 Purchase accounting adjustments and original issue discount (14,156) (18,817) Long-term debt fees (19,090) (21,797) Total Debt $ 5,737,375$ 6,016,930 Less: Cash and cash equivalents 369,094 720,662 $ 5,368,281$ 5,296,268 1 OnJuly 16, 2021 ,iHeartCommunications , Inc. ("iHeartCommunications") entered into an amendment to the credit agreement governing its Term Loan credit facilities. The amendment reduces the interest rate of its Incremental Term Loan Facility due 2026 to a Eurocurrency Rate of LIBOR plus a margin of 3.25% and floor of 0.50% (from LIBOR plus a margin of 4.00% and floor of 0.75%). The Base Rate interest amount was reduced to Base Rate plus a margin of 2.25% and floor of 1.50%. In connection with the amendment,iHeartCommunications voluntarily prepaid$250.0 million of borrowings outstanding under the Term Loan credit facilities with cash on hand, resulting in a reduction of$44.3 million of the existing Incremental Term Loan Facility due 2026 and$205.7 million of the Term Loan Facility due 2026. We expect to save$12.7 million in annual interest payments as a result of the repricing and repayment. 40 --------------------------------------------------------------------------------
For more information on our debt, see Note 5, Long-term debt.
Exchange of Special Warrants OnJuly 25, 2019 , the Company filed a petition for declaratory ruling ("PDR") with theFederal Communications Commission (the "FCC ") to permit up to 100% of the Company's voting stock to be owned by non-U.S. individuals and entities. OnNovember 5, 2020 , theFCC issued a declaratory ruling granting the relief requested by the PDR (the "Declaratory Ruling"), subject to certain conditions set forth in the Declaratory Ruling. OnJanuary 8, 2021 , the Company exchanged a portion of the outstanding Special Warrants into 45,133,811 shares of iHeartMedia Class A common stock, the Company's publicly traded equity, and 22,337,312 Class B common stock in compliance with the Declaratory Ruling, the Communications Act andFCC rules. Following the Exchange, the Company's remaining Special Warrants continue to be exercisable for shares of Class A common stock or Class B common stock. There were 120,189,029 shares of Class A common stock, 21,622,510 shares of Class B common stock and 5,304,430 Special Warrants outstanding onNovember 1, 2021 . Supplemental Financial Information under Debt Agreements Pursuant toiHeartCommunications' 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 iHeartMediaCapital 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 endedSeptember 30, 2021 , and Capital I's and its consolidated restricted subsidiaries' financial information for the same periods. 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, our businesses experience their 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, ourMultiplatform Group and ourAudio & Media Services Group 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 ofSeptember 30, 2021 , approximately 40% 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 endedSeptember 30, 2021 would have changed by$0.8 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. 41 --------------------------------------------------------------------------------
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 Multiplatform operations. CRITICAL ACCOUNTING ESTIMATES The preparation of our financial statements in conformity withU.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 Item 8, Financial Statements and Supplementary Data of our Annual Report on Form 10-K for the year endedDecember 31, 2020 . 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 intangible assets with indefinite useful lives from the
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 ourMultiplatform Group 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.
At
•Revenue forecasts published byBIA Financial Network, Inc. ("BIA"), varying by market, and revenue growth projections made by industry analysts were used for the initial four-year period; •2.0% revenue growth was assumed beyond the initial four-year period; •Revenue was grown proportionally over a build-up period, reaching market revenue forecast by year 3; •Operating margins of 8.0% in the first year gradually climb to the industry average margin in year 3 of up to 20.2%, depending on market size; and •Assumed discount rates of 8.0% for the 15 largest markets and 8.5% 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 decrease in 42 -------------------------------------------------------------------------------- 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 RateFCC licenses$ 405,630 $ 213,548 $ 459,449 The estimated fair value of ourFCC licenses atJuly 1, 2021 was$2.2 billion , while the carrying value was$1.8 billion . Given the difference between the carrying values of ourFCC licenses and their estimated fair values, an increase in discount rates or a decrease in revenue growth rates or profit margins could result in an impairment to ourFCC licenses.
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 . As a result of the changes in the Company's management structure and its reportable segments, we performed interim impairment tests on goodwill as ofJanuary 1, 2021 . No impairment charges were recorded in the first quarter of 2021 in connection with the interim impairment test. 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, 2021 , 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 2021 through 2025. 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 2025 are projected to grow at a perpetual growth rate, which we estimated at 2.0% for our Multiplatform and RCS Reporting units, 3% for our Digital Audio Reporting unit, and 2.0% for ourKatz Media reporting unit (beyond 2029). •In order to risk adjust the cash flow projections in determining fair value, we utilized discounts rates between 11% and 14% for each of our reporting units.
Based on our annual valuation using the assumptions described above, a hypothetical 5% reduction in estimated fair value in each of our reporting units would not result in a material impairment condition.
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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:
(In thousands)
Revenue Profit Discount
Description Growth Rate Margin Rate
Multiplatform $ 670,000 $ 240,000 $ 650,000
Digital $ 330,000 $ 100,000 $ 270,000
Katz Media $ 60,000 $ 20,000 $ 50,000
Other $ 30,000 $ 10,000 $ 20,000
An increase in discount rates or a decrease in revenue growth rates or profit
margins could result in impairment charges being required to be recorded for one
or more of our reporting units.
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 and recovery from the
COVID-19 pandemic on our business, financial position and results of operations,
our expected costs, savings and timing of our modernization initiatives and
other capital and operating expense reduction initiatives, expected interest
rate savings from our amendment to and $250 million voluntary prepayment on our
Term Loan credit facilities, our business plans, strategies and initiatives,
benefits of acquisitions, our expectations about certain markets, 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
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•certain other factors set forth in Part I, Item 1A, "Risk Factors" in our
Annual Report on Form 10-K for the year ended December 31, 2020 , as updated by
"Part II, Item 1A, "Risk Factors" in this Quarterly Report on Form 10-Q, and
other filings with the Securities and Exchange Commission ("SEC").
This list of factors that may affect future performance and the accuracy of forward-looking statements is illustrative and does not purport to be exhaustive. Therefore, all forward-looking statements should be evaluated taking into account their inherent uncertainty.
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