Item 2. Management’s Discussion and Analysis
ITEM 2. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
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," "our," or "us").
Our reportable segments are:
▪ the Multiplatform Group, which includes our Broadcast radio, Networks and Sponsorships and Events businesses;
▪ the 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. This structure provides visibility into the underlying performance, results, and margin profiles of our distinct businesses and enables senior management to 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, Segment Adjusted EBITDA is 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.
We operate as a company with multiple platforms including radio, 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 various platforms.
Multiplatform Group
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.
Management looks at our Multiplatform Group's operations’ overall revenue as well as the revenue from each type of advertising, including local advertising, which is sold predominately in a station’s local market, and national advertising, which is sold across multiple markets. Local advertising is sold by each radio station’s sales staff while national advertising is sold by our national sales team. We periodically review and refine our selling structures in all regions and markets in an effort to maximize the value of our offering to advertisers and, therefore, our revenue.
Management also looks at Multiplatform Group's revenue by region and market size. Typically, larger markets can reach larger audiences with wider demographics than smaller markets. Additionally, management reviews our share of audio advertising revenues in markets where such information is available, as well as our share of target demographics listening in an average quarter hour. This metric gauges how well our formats are attracting and retaining listeners.
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Management also monitors revenue generated through our programmatic ad-buying platform, and our data analytics advertising product, SmartAudio, to measure the success of our enhanced marketing optimization tools. We have made significant investments so we can provide the same ad-buying experience that once was only available from digital-only companies and enable our clients to better understand how our assets can successfully reach their target audiences.
Management monitors average advertising rates and cost per mille, the cost of every 1,000 advertisement impressions (“CPM”), which are principally based on the length of the spot and how many people in a targeted audience listen to our stations, as measured by an independent ratings service. In addition, our advertising rates are influenced by the time of day the advertisement airs, with morning and evening drive-time hours typically priced the highest. Our price and yield information systems enable our station managers and sales teams to adjust commercial inventory and pricing based on local market demand, as well as to manage and monitor different commercial durations in order to provide more effective advertising for our customers at what we believe are optimal prices given market conditions. Yield is measured by management in a variety of ways, including revenue earned divided by minutes of advertising sold.
A portion of our Multiplatform Group segment’s expenses vary in connection with changes in revenue. These variable expenses primarily relate to costs in our programming and sales departments, including profit sharing fees and commissions, and bad debt. Our content costs, including music license fees for music delivered via broadcast, vary with the volume and mix of songs played on our stations.
Digital Audio Group
The primary source of revenue in the Digital Audio Group segment is the sale of advertising on the Company’s iHeartRadio mobile application and website, station websites, and podcast network. Revenues for advertising spots are recognized over time based on impressions delivered or time elapsed, depending upon the terms of the contract. Digital Audio Group’s contracts with advertisers are typically a year or less in duration and are generally billed monthly upon satisfaction of the performance obligations.
Through our Digital Audio Group, we continue to expand the choices for listeners. We derive revenue in this segment by developing and delivering our content and selling advertising across multiple digital distribution channels, including via our iHeartRadio mobile application, our station websites and other digital platforms that reach national, regional and local audiences.
Our strategy has enabled us to extend our leadership in the rapidly growing podcasting sector, and iHeartMedia is the number one podcast publisher in America. Our reach now extends across more than 250 platforms and 2,000 different connected devices, and our digital business is comprised of streaming, subscription, display advertisements, and other content that is disseminated over digital platforms.
A portion of our Digital Audio Group segment’s expenses vary in connection with changes in revenue. These variable expenses primarily relate to our content costs including profit sharing fees and third-party content costs, as well as sales commissions and bad debt. Certain of our content costs, including digital music performance royalties, vary with the volume of listening hours on our digital platforms.
Audio & Media Services Group
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 software and media streaming, along with research services for radio stations, broadcast television stations, cable channels, record labels, ad agencies and Internet stations worldwide.
Economic Conditions
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.
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COVID-19
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 as a result of the impact of the coronavirus pandemic ("COVID-19") and the resulting impact on the U.S. economy. Our Multiplatform Group revenues significantly increased during 2021, and continued to increase in the first half of 2022 compared to the first half of 2021 as a result of continued recovery from the impact of COVID-19. Our Digital Audio Group revenues, including podcasting, have continued to grow each quarter during COVID-19 and throughout the recovery. Our Audio & Media Services Group revenues have increased for the first half of 2022 compared to the first half of 2021 mainly due to the continued recovery from the impact of COVID-19. Refer to Note 1, Basis of Presentation, for more information regarding COVID-19 and its impact on our financial statements.
Cost Savings Initiatives
We have implemented key modernization initiatives and operating-expense-saving initiatives to take advantage of the significant investments we have made in new technologies to deliver incremental cost efficiencies, including initiatives to streamline our real estate footprint, and we continue to explore opportunities for further efficiencies.
Impairment Charges
As part of our operating-expense-savings initiatives, we have taken proactive steps to streamline our real estate footprint and reduce related lease and operating 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 six months ended June 30, 2022 and 2021, we recognized non-cash impairment charges of $1.6 million and $37.7 million, respectively, as a result of these cost-savings initiatives.
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Executive Summary
Our revenues for the second quarter of 2022 increased across our Multiplatform Group, Digital Audio Group and Audio & Media Services Group segments as a result of the continued recovery from the impacts of the COVID-19 pandemic and the continued increased demand for digital advertising, including podcasting.
The key developments that impacted our business during the quarter are summarized below:
• Consolidated Revenue of $954.0 million increased $92.4 million, or 10.7% during the quarter ended June 30, 2022 compared to Consolidated Revenue of $861.6 million in the prior year's second quarter.
• Revenue and Segment Adjusted EBITDA from our Multiplatform Group increased $27.5 million and $13.1 million compared to the prior year's second quarter, respectively.
• Revenue and Segment Adjusted EBITDA from our Digital Audio Group increased $54.6 million and $24.6 million compared to the prior year's second quarter, respectively.
• Revenue and Segment Adjusted EBITDA from our Audio & Media Services Group increased $9.9 million and $1.6 million compared to the prior year's second quarter, respectively.
• Operating income of $82.9 million increased $54.8 million from $28.1 million in the prior year’s second quarter.
• Net income of $15.2 million increased $47.2 million from a Net loss of $32.0 million in the prior year's second quarter.
• Cash flows provided by operating activities of $155.8 million increased from $29.1 million in the prior year's second quarter.
• Adjusted EBITDA (1) of $237.2 million, was up $52.7 million from $184.5 million in prior year's second quarter.
• Free cash flow (2) of $106.1 million increased from $(3.0) million in the prior year's second quarter.
The table below presents a summary of our historical results of operations for the periods presented:
(In thousands) Three Months Ended
June 30,
2022 2021
Revenue $ 954,005 $ 861,605
Operating income 82,869 28,126
Net income (loss) 15,182 (31,960)
Cash provided by operating activities 155,801 29,129
Adjusted EBITDA (1)
$ 237,185 $ 184,508
Free cash flow (2)
106,148 (2,982)
(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 (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.
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Results of Operations
The tables below present the comparison of our historical results of operations for the three and six months ended June 30, 2022 to the three and six months ended June 30, 2021:
(In thousands) Three Months Ended
June 30, Six Months Ended
June 30,
2022 2021 2022 2021
Revenue $ 954,005 $ 861,605 $ 1,797,463 $ 1,568,270
Operating expenses:
Direct operating expenses (excludes depreciation and amortization)
365,382 320,515 695,906 613,328
Selling, general and administrative expenses (excludes depreciation and amortization)
379,057 372,640 763,401 714,970
Depreciation and amortization 110,788 127,945 224,839 235,308
Impairment charges 245 — 1,579 37,744
Other operating expense, net 15,664 12,379 16,534 15,150
Operating income (loss) 82,869 28,126 95,204 (48,230)
Interest expense, net 81,494 84,887 160,713 170,008
Gain on investments, net 9,590 49,644 7,825 49,835
Equity in loss of nonconsolidated affiliates (29) (31) (58) (59)
Gain on extinguishment of debt 8,203 — 8,203 —
Other expense, net (2,175) (363) (2,445) (1,170)
Income (loss) before income taxes 16,964 (7,511) (51,984) (169,632)
Income tax benefit (expense) (1,782) (24,449) 18,427 (104,384)
Net income (loss) 15,182 (31,960) (33,557) (274,016)
Less amount attributable to noncontrolling interest
781 326 624 (7)
Net income (loss) attributable to the Company $ 14,401 $ (32,286) $ (34,181) $ (274,009)
The tables below present the comparison of our revenue streams for the three and six months ended June 30, 2022 to the three and six months ended June 30, 2021:
(In thousands) Three Months Ended
June 30, % Six Months Ended
June 30, %
2022 2021 Change 2022 2021 Change
Broadcast Radio $ 463,304 $ 451,142 2.7 % $ 879,785 $ 809,678 8.7 %
Networks 127,532 123,586 3.2 % 245,090 238,672 2.7 %
Sponsorship and Events 38,064 28,585 33.2 % 71,665 50,978 40.6 %
Other 4,400 2,537 73.4 % 7,920 4,419 79.2 %
Multiplatform Group 633,300 605,850 4.5 % 1,204,460 1,103,747 9.1 %
Digital, excluding Podcast 166,880 144,502 15.5 % 312,555 263,703 18.5 %
Podcast 85,681 53,428 60.4 % 154,225 91,780 68.0 %
Digital Audio Group 252,561 197,930 27.6 % 466,780 355,483 31.3 %
Audio & Media Services Group 71,065 61,175 16.2 % 131,922 116,312 13.4 %
Eliminations (2,921) (3,350) (5,699) (7,272)
Revenue, total $ 954,005 $ 861,605 10.7 % $ 1,797,463 $ 1,568,270 14.6 %
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Consolidated results for the three and six months ended June 30, 2022 compared to the consolidated results for the three and six months ended June 30, 2021 were as follows:
Revenue
Consolidated revenue increased $92.4 million during the three months ended June 30, 2022 compared to the same period of 2021. 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 Group revenue increased $27.5 million, or 4.5%, primarily resulting from strengthening demand for broadcast advertising, the return of live events and an increase in political advertising revenue as 2022 is a midterm election year. Digital Audio Group revenue increased $54.6 million, or 27.6%, driven primarily by continuing increases in demand for digital advertising and the continued growth of podcasting. Audio & Media Services revenue increased $9.9 million primarily due to the increase in political advertising revenue as 2022 is a midterm election year and the continued recovery from the impact of COVID-19.
Consolidated revenue increased $229.2 million during the six months ended June 30, 2022 compared to the same period of 2021. 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 Group revenue increased $100.7 million, primarily resulting from strengthening demand for broadcast advertising, the return of live events during the six months ended June 30, 2022 compared to the same period of 2021, and an increase in political advertising revenue as 2022 is a midterm election year. Digital Audio Group revenue increased $111.3 million, driven primarily by continuing increases in demand for digital advertising, including continued growth in podcasting. Audio & Media Services revenue increased $15.6 million primarily due to the continued recovery from the impact of COVID-19 and an increase in political advertising revenue as 2022 is a midterm election year.
Direct Operating Expenses
Consolidated direct operating expenses increased $44.9 million during the three months ended June 30, 2022 compared to the same period of 2021. The increase in direct operating expenses was primarily driven by higher variable content costs resulting from our significant increase in revenue, including profit sharing expenses, third-party digital costs, and production costs related to the return of local and national live events.
Consolidated direct operating expenses increased $82.6 million during the six months ended June 30, 2022 compared to the same period of 2021. The increase in direct operating expenses was primarily driven by higher variable content costs resulting from our significant increase in revenue, including profit sharing expenses, third-party digital costs, and production costs related to the return of local and national live events.
Selling, General and Administrative (“SG&A”) Expenses
Consolidated SG&A expenses increased $6.4 million during the three months ended June 30, 2022 compared to the same period of 2021. The increase in Consolidated SG&A expenses was driven primarily by increased employee compensation costs related to increased workforce due to the investments in key infrastructure to support our growing digital operations, increased sales commission expenses as a result of higher revenue, and increased bad debt expense. These increases were partially offset by lower variable bonus accruals and a decrease in national trade and barter expenses primarily related to the timing of the iHeartRadio Music Awards show.
Consolidated SG&A expenses increased $48.4 million during the six months ended June 30, 2022 compared to the same period of 2021. The increase in SG&A expenses was driven primarily by higher employee compensation costs related to increased workforce due to the investments in key infrastructure to support our growing digital operations, increased sales commission expenses as a result of higher revenue, increased bad debt and higher trade and barter expense. These increases were partially offset by lower variable bonus accruals.
Depreciation and Amortization
Depreciation and amortization decreased $17.2 million and $10.5 million during the three and six months ended June 30, 2022 compared to the same periods of 2021, primarily as a result of certain intangible assets being fully amortized, partially offset by increased capital expenditures related to IT and real estate optimization initiatives.
Impairment Charges
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
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assets, including leasehold improvements. During the six months ended June 30, 2022 and 2021, we recognized non-cash impairment charges of $1.6 million and $37.7 million, respectively, as a result of these cost-savings initiatives.
Other Operating Expense, Net
Other operating expense, net of $15.7 million and $12.4 million for the three months ended June 30, 2022 and 2021, respectively, and Other operating expense, net of $16.5 million and $15.2 million for the six months ended June 30, 2022 and 2021, respectively, relate primarily to non-cash net book losses recognized on asset disposals in connection with our real estate optimization initiatives.
Interest Expense
Interest expense decreased $3.4 million and $9.3 million, respectively, during the three and six months ended June 30, 2022 compared to the same periods of 2021, primarily as a result of the interest rate reduction of our incremental term loan facility as amended in July 2021 and the $250.0 million voluntary repayment made in July 2021 on our term loan credit facilities in connection with the repricing transaction.
Gain on Investments, Net
During the three and six months ended June 30, 2022, we recognized a gain on investments, net of $9.6 million and $7.8 million, respectively, in connection with increases in the value of our investments. During the three and six months ended June 30, 2021, we recognized a gain of $49.6 million and $49.8 million, respectively, primarily related to the sale of our investment in the San Antonio Spurs.
Gain on Extinguishment of Debt
During the three and six months ended June 30, 2022, we recognized a gain on extinguishment of debt of $8.2 million in connection with the open market repurchases of $113.5 million aggregate principal amount of iHeartCommunications, Inc.'s 8.375% Senior Unsecured Notes due 2027 for $105.3 million in cash.
Income Tax Benefit (Expense)
The effective tax rate for the Company for the three and six months ended June 30, 2022 was 10.5% and 35.4%, respectively. The effective tax rate was primarily impacted by the forecasted increase in valuation allowance against certain deferred tax assets, related primarily to disallowed interest expense carryforwards and net operating loss carryforwards, due to uncertainty regarding the Company’s ability to utilize those assets in future periods.
Net Income (Loss) Attributable to the Company
Net income attributable to the Company of $14.4 million during the three months ended June 30, 2022 increased $46.7 million compared to a Net loss attributable to the Company of $32.3 million during the three months ended June 30, 2021, 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 $239.8 million to $34.2 million during the six months ended June 30, 2022 compared to Net loss attributable to the Company of $274.0 million during the six months ended June 30, 2021, 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.
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Multiplatform Group Results
(In thousands) Three Months Ended
June 30, % Six Months Ended
June 30, %
2022 2021 Change 2022 2021 Change
Revenue $ 633,300 $ 605,850 4.5 % $ 1,204,460 $ 1,103,747 9.1 %
Operating expenses (1)
438,804 424,452 3.4 % 876,057 817,558 7.2 %
Segment Adjusted EBITDA $ 194,496 $ 181,398 7.2 % $ 328,403 $ 286,189 14.8 %
Segment Adjusted EBITDA margin 30.7 % 29.9 % 27.3 % 25.9 %
(1) Operating expenses consist of Direct operating expenses and Selling, general and administrative expenses, excluding Restructuring expenses.
Three Months
Revenue from our Multiplatform Group increased $27.5 million compared to the prior year, primarily as a result of the continued recovery from the impact of COVID-19. Broadcast revenue grew $12.2 million, or 2.7%, year-over-year, driven by higher spot revenue and political advertising revenue as 2022 is a midterm election year, partially offset by lower trade and barter revenue due to the impact of the timing of the iHeartRadio Music Awards show, while Networks grew $3.9 million, or 3.2%, year-over-year. Revenue from Sponsorship and Events increased by $9.5 million, or 33.2%, year-over-year, primarily as a result of the return of live events.
Operating expenses increased $14.4 million, driven primarily by event costs related to the return of live events including the iHeart Country Festival, higher sales commissions in connection with the increase in revenue, and an increase in bad debt expense due to a credit in Q2 2021 related to the recovery of COVID-19 reserves recorded in 2020. These increases were partially offset by a decrease in trade and barter expense due to the impact of the timing of the iHeartRadio Music Awards show and lower variable bonus accruals based on financial performance.
Six Month s
Revenue from our Multiplatform Group increased $100.7 million compared to the prior year, primarily as a result of the continued recovery from the impact of COVID-19. Broadcast revenue increased $70.1 million, or 8.7%, year-over-year, while Networks grew $6.4 million, or 2.7%, year-over-year. Revenue from Sponsorship and Events increased by $20.7 million, or 40.6%, year-over-year, primarily as a result of the return of live events.
Operating expenses increased $58.5 million, driven primarily by higher event costs in connection with the return of live events including the iHeart Country Festival, as well as higher sales commission, talent and profit share costs, all driven by higher revenue, and an increase in bad debt expense due to a credit in 2021 related to the recovery of COVID-19 reserves recorded in 2020. These increases were partially offset by lower rent and utilities in connection with our real estate optimization initiatives as well as lower variable bonus accruals based on financial performance.
Digital Audio Group Results
(In thousands) Three Months Ended
June 30, % Six Months Ended
June 30, %
2022 2021 Change 2022 2021 Change
Revenue $ 252,561 $ 197,930 27.6 % $ 466,780 $ 355,483 31.3 %
Operating expenses (1)
173,678 143,640 20.9 % 335,389 261,182 28.4 %
Segment Adjusted EBITDA $ 78,883 $ 54,290 45.3 % $ 131,391 $ 94,301 39.3 %
Segment Adjusted EBITDA margin 31.2 % 27.4 % 28.1 % 26.5 %
(1) Operating expenses consist of Direct operating expenses and Selling, general and administrative expenses, excluding Restructuring expenses.
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Three Months
Revenue from our Digital Audio Group increased $54.6 million compared to the prior year, including growth from Digital, excluding Podcast revenue, which grew $22.4 million, or 15.5%, year-over-year, driven by increased demand for digital advertising as well as Podcast revenue which increased by $32.3 million, or 60.4%, 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 and the growing popularity of podcasting.
Operating expenses increased $30.0 million due to higher employee compensation costs related to increased workforce due to the investments in key infrastructure to support our growing digital operations and higher variable content costs, third-party digital costs and profit share expenses due to higher revenue and the development of new podcasts.
Six Month s
Revenue from our Digital Audio Group increased $111.3 million compared to the prior year, including growth from Digital, excluding Podcast revenue, which grew $48.9 million, or 18.5%, year-over-year, driven by increased demand for digital advertising. Podcast revenue also increased by $62.4 million, or 68.0%, 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.
Operating expenses increased $74.2 million in connection with our Digital Audio Group’s significant revenue growth, including the impact of variable employee compensation expense, 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 investments in key infrastructure to support our growing digital operations.
Audio & Media Services Group Results
(In thousands) Three Months Ended
June 30, % Six Months Ended
June 30, %
2022 2021 Change 2022 2021 Change
Revenue $ 71,065 $ 61,175 16.2 % $ 131,922 $ 116,312 13.4 %
Operating expenses (1)
48,995 40,704 20.4 % 93,465 80,492 16.1 %
Segment Adjusted EBITDA $ 22,070 $ 20,471 7.8 % $ 38,457 $ 35,820 7.4 %
Segment Adjusted EBITDA margin 31.1 % 33.5 % 29.2 % 30.8 %
(1) Operating expenses consist of Direct operating expenses and Selling, general and administrative expenses, excluding Restructuring expenses.
Three Months
Revenue from our Audio & Media Services Group increased $9.9 million compared to the comparative period in the prior year due to an increase in political advertising revenue as 2022 is a midterm election year and the continued recovery from the impact of COVID-19.
Operating expenses increased $8.3 million primarily as a result of higher employee compensation related to seasonal (political) staffing, higher merchandising costs and a new purchase agreement with third-parties for specific inventory spots.
Six Month s
Revenue from our Audio & Media Services Group increased $15.6 million compared to the comparative period in the prior year due to an increase in political advertising revenue as 2022 is a midterm election year and the continued recovery from the impact of COVID-19.
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Operating expenses increased $13.0 million primarily as a result of higher employee compensation related to seasonal (political) staffing, higher merchandising costs and a new purchase agreement with third-parties for specific inventory spots.
Reconciliation of Operating Income (Loss) to Adjusted EBITDA
(In thousands) Three Months Ended
June 30, Six Months Ended
June 30,
2022 2021 2022 2021
Operating income (loss) $ 82,869 $ 28,126 $ 95,204 $ (48,230)
Depreciation and amortization 110,788 127,945 224,839 235,308
Impairment charges 245 — 1,579 37,744
Other operating expense, net 15,664 12,379 16,534 15,150
Share-based compensation expense 8,610 5,903 14,145 11,588
Restructuring expenses 19,009 10,155 30,102 35,195
Adjusted EBITDA (1)
$ 237,185 $ 184,508 $ 382,403 $ 286,755
Reconciliation of Net Income (Loss) to EBITDA and Adjusted EBITDA
(In thousands) Three Months Ended
June 30, Six Months Ended
June 30,
2022 2021 2022 2021
Net income (loss) $ 15,182 $ (31,960) $ (33,557) $ (274,016)
Income tax (benefit) expense 1,782 24,449 (18,427) 104,384
Interest expense, net 81,494 84,887 160,713 170,008
Depreciation and amortization 110,788 127,945 224,839 235,308
EBITDA $ 209,246 $ 205,321 $ 333,568 $ 235,684
Gain on investments, net (9,590) (49,644) (7,825) (49,835)
Gain on extinguishment of debt (8,203) — (8,203) —
Other expense, net 2,175 363 2,445 1,170
Equity in loss of nonconsolidated affiliates 29 31 58 59
Impairment charges 245 — 1,579 37,744
Other operating expense, net 15,664 12,379 16,534 15,150
Share-based compensation expense 8,610 5,903 14,145 11,588
Restructuring expenses 19,009 10,155 30,102 35,195
Adjusted EBITDA (1)
$ 237,185 $ 184,508 $ 382,403 $ 286,755
(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, Gain on extinguishment of debt, 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
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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 (loss) 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 (loss) 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 to Free Cash Flow
(In thousands) Three Months Ended
June 30, Six Months Ended
June 30,
2022 2021 2022 2021
Cash provided by operating activities $ 155,801 $ 29,129 $ 103,589 $ 100,857
Purchases of property, plant and equipment (49,653) (32,111) (72,210) (51,061)
Free cash flow (1)
$ 106,148 $ (2,982) $ 31,379 $ 49,796
(1) We define Free cash flow ("Free Cash Flow") as Cash provided by (used for) 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 (used for) 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
On April 21, 2021, our 2021 Long-Term Incentive Award Plan (the "2021 Plan") was approved by stockholders and replaced the prior plan. Pursuant to our 2021 Plan, we will 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 $8.6 million and $5.9 million for the three months ended June 30, 2022 and 2021, respectively, and $14.1 million and $11.6 million for the six months ended June 30, 2022 and 2021, respectively.
On March 28, 2022, we issued performance-based restricted stock units ("Q1 2022 Performance RSUs") to certain key employees. The Q1 2022 Performance RSUs vest upon the achievement of certain total stockholder return goals and continued service, which are being measured over an approximately 50-month period from the date of issuance.
On May 9, 2022, we issued performance-based restricted stock units ("Q2 2022 Performance RSUs") and restricted stock units ("2022 RSUs") to certain key employees. The Q2 2022 Performance RSUs vest upon the achievement of certain total stockholder return goals, Adjusted EBITDA goals, Diversity, Equity and Inclusion goals, and continued service. The Q2 2022 Performance RSUs are measured over a 3-year period from the date of issuance. The 2022 RSUs vest upon continued service. The 2022 RSUs are being recognized ratably over a 3-year period from the date of issuance.
As of June 30, 2022, there was $62.0 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 3.8 years. In addition, as of June 30, 2022, there were unrecognized compensation costs of $11.7 million of Q1 2022 Performance RSUs and $14.7 million of Q2 2022 Performance RSUs related to unvested share-based compensation arrangements that will vest based on performance and service conditions. These costs will be recognized over a 50-month period from the date of issuance for the Q1 2022 Performance RSUs and over a 3-year period from the date of issuance for the Q2 2022 Performance RSUs.
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LIQUIDITY AND CAPITAL RESOURCES
Cash Flows
The following discussion highlights cash flow activities during the periods presented:
(In thousands) Six Months Ended
June 30,
2022 2021
Cash provided by (used for):
Operating activities $ 103,589 $ 100,857
Investing activities (49,657) (218,263)
Financing activities (110,711) (19,882)
Free Cash Flow (1)
31,379 49,796
(1) For a definition of Free cash flow from operations and a reconciliation to Cash provided by (used for) operating activities, the most closely comparable GAAP measure, please see “Reconciliation of Cash provided by (used for) operating activities to Free cash flow from operations” in this MD&A.
Operating Activities
Cash provided by operating activities of $103.6 million during the six months ended June 30, 2022 increased from $100.9 million during the six months ended June 30, 2021 primarily due to an increase in cash flows from operations as the Company's businesses continue to recover from the impact of COVID-19, mostly offset by an increase in the payment of bonuses and commissions in the first quarter of 2022. The Company did not pay bonuses to the vast majority of employees in the first quarter of 2021.
Investing Activities
Cash used for investing activities of $49.7 million during the six months ended June 30, 2022 primarily reflects $72.2 million in cash used for capital expenditures. We spent $48.7 million for capital expenditures in our Multiplatform Group segment primarily related to our real estate optimization initiatives, $11.1 million in our Digital Audio Group segment primarily related to IT infrastructure, $4.1 million in our Audio & Media Services Group segment, primarily related to software, and $8.3 million in Corporate primarily related to equipment and software purchases. Cash used for investing activities was partially offset by proceeds from the sale of certain properties related to our real estate optimization initiatives.
Cash used for investing activities of $218.3 million during the six months ended June 30, 2021 primarily reflects the net cash payment made to acquire Triton Digital for $228.5 million. In addition, $51.1 million in cash was used for capital expenditures. We spent $31.5 million for capital expenditures in our Multiplatform Group segment and $11.7 million for capital expenditures in our Digital Audio Group segment primarily related to IT infrastructure, $2.2 million in our Audio & Media Services Group segment, primarily related to software and $5.7 million in Corporate primarily related to equipment and software purchases. Cash used for investing activities was partially offset by cash provided by investing activities related to proceeds received of $50.8 million from the sale of our investment in the San Antonio Spurs.
Financing Activities
Cash used for financing activities totaled $110.7 million during the six months ended June 30, 2022 primarily due to the open market repurchases of $113.5 million aggregate principal amount of our 8.375% Senior Unsecured Notes due 2027 for $105.3 million in cash, reflecting a discounted purchase price from the face value of the notes.
Cash used for financing activities of $19.9 million during the six months ended June 30, 2021 primarily resulted from required quarterly principal payments made on the Term Loan Facility and repayment of a subsidiary note payable.
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Sources of Liquidity and Anticipated Cash Requirements
Our primary sources of liquidity are cash on hand, which consisted of cash and cash equivalents of $294.8 million as of June 30, 2022, cash flow from operations and borrowing capacity under our $450.0 million senior secured asset-based revolving credit facility entered into on May 17, 2022 (the "New ABL Facility") which refinanced and replaced in its entirety the existing ABL Facility (the "Existing ABL Facility"). As of June 30, 2022, iHeartCommunications had no amounts outstanding under the ABL Facility, a facility size of $450.0 million and $29.4 million in outstanding letters of credit, resulting in $420.6 million of borrowing base availability. Together with our cash balance of $294.8 million as of June 30, 2022 and our borrowing capacity under the New ABL Facility, our total available liquidity 1 was approximately $715 million.
We regularly evaluate economic conditions including the ongoing impact of COVID-19 on our business. For the six months ended June 30, 2022, our revenues increased compared to the six months ended June 30, 2021 due to recovery from the macroeconomic effects of COVID-19, among other factors discussed in the Results of Operations section of the MD&A. Although we cannot predict future economic conditions or the impact of any potential contraction of economic growth on our business, we believe that we have sufficient liquidity to continue to fund our operations for at least the next twelve months.
We are a party to many contractual obligations involving commitments to make payments to third parties. These obligations impact our short-term and long-term liquidity and capital resource needs. Certain contractual obligations are reflected on the Consolidated Balance Sheet as of June 30, 2022, while others are considered future commitments. Our contractual obligations primarily consist of long-term debt and related interest payments, commitments under non-cancelable operating lease agreements, and employment and talent contracts. In addition to our contractual obligations, we expect that our primary anticipated uses of liquidity in 2022 will be to fund our working capital, make interest and tax payments, fund capital expenditures, pursue certain strategic opportunities and maintain operations.
Assuming the current level of borrowings and interest rates in effect at June 30, 2022, we anticipate that we will have approximately $168 million of cash interest payments in the remainder of 2022.
We believe that our cash balance, our cash flow from operations and availability under our New 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. We acknowledge the challenges posed by the COVID-19 pandemic and any potential slow down in economic activity, rising inflation and interest rates, and other macroeconomic trends, however, we remain confident in our business, our employees and our strategy. Further, we believe our available liquidity will allow us to fund capital expenditures and other obligations and make interest payments on our long-term debt for at least the next twelve months. 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. During the three months ended June 30, 2022, we conducted open market repurchases of $113.5 million aggregate principal amount of iHeartCommunications, Inc.'s 8.375% Senior Unsecured Notes due 2027 for $105.3 million in cash, reflecting a discounted purchase price from the face value of the notes. We expect from time to time to pursue other strategic opportunities such as acquisitions or disposals of certain businesses, which may or may not be material.
1 Total available liquidity is defined as cash and cash equivalents plus available borrowings under the New ABL Facility. We use total available liquidity to evaluate our capacity to access cash to meet obligations and fund operations.
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Summary Debt Capital Structure
As of June 30, 2022 and December 31, 2021, we had the following debt outstanding, net of cash and cash equivalents:
(In thousands) June 30, 2022 December 31, 2021
Term Loan Facility due 2026 $ 1,864,032 $ 1,864,032
Incremental Term Loan Facility due 2026 401,220 401,220
Asset-based Revolving Credit Facility due 2023 1
— —
Asset-based Revolving Credit Facility due 2027 1
— —
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 4,577 5,350
Total Secured Debt $ 4,319,829 $ 4,320,602
8.375% Senior Unsecured Notes due 2027 2
1,336,450 1,450,000
Other Subsidiary Debt 69 90
Original issue discount (12,027) (13,454)
Long-term debt fees (16,902) (18,370)
Total Debt $ 5,627,419 $ 5,738,868
Less: Cash and cash equivalents 294,831 352,129
$ 5,332,588 $ 5,386,739
1 On May 17, 2022, we entered into a $450.0 million New ABL Facility, maturing in 2027, which refinanced and replaced in its entirety the Existing ABL Facility. For more information about the New ABL Facility, refer to Note 5, Long-Term Debt .
2 During the three months ended June 30, 2022, we repurchased $113.5 million aggregate principal amount of iHeartCommunications, Inc.’s 8.375% Senior Unsecured Notes due 2027 for $105.3 million in cash, excluding accrued interest, via open market transactions. The repurchased notes were subsequently cancelled and retired, resulting in a gain on extinguishment of debt of $8.2 million.
Our New ABL Facility contains a springing fixed charge coverage ratio that is effective if certain triggering events related to borrowing capacity under the New ABL Facility occur. As of June 30, 2022, no triggering event had occurred and, as a result, we were not required to comply with any fixed charge coverage ratio as of or for the periods ended June 30, 2022. Other than our New ABL Facility, none of our long-term debt includes maintenance covenants that could trigger early repayment. As of June 30, 2022, we were in compliance with all covenants related to our debt agreements in all material respects. For additional information regarding our debt, refer to Note 5, Long-Term Debt .
Our subsidiaries have from time to time repurchased certain debt obligations of iHeartCommunications, and may in the future, as part of various financing and investment strategies, purchase additional outstanding indebtedness of iHeartCommunications or its subsidiaries or our outstanding equity securities, in tender offers, open market purchases, privately negotiated transactions or otherwise. We or our subsidiaries may also sell certain assets, securities, or properties. These purchases or sales, if any, could have a material positive or negative impact on our liquidity available to repay outstanding debt obligations or on our consolidated results of operations. These transactions could also require or result in amendments to the agreements governing outstanding debt obligations or changes in our leverage or other financial ratios, which could have a material positive or negative impact on our ability to comply with the covenants contained in iHeartCommunications’ debt agreements. These transactions, if any, will depend on prevailing market conditions, our liquidity requirements, contractual restrictions and other factors. The amounts involved may be material.
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Supplemental Financial Information under Debt Agreements
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 six months ended June 30, 2022, and Capital I’s and its consolidated restricted subsidiaries’ financial information for the same period. Further, as of June 30, 2022, we were in compliance with all covenants related to our debt agreements in all material respects.
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.
We have future cash obligations under various types of contracts. We lease office space, certain broadcast facilities and equipment. Some of our lease agreements contain renewal options and annual rental escalation clauses (generally tied to the consumer price index), as well as provisions for our payment of utilities and maintenance. We also have non-cancellable contracts in our radio broadcasting operations related to program rights and music license fees. In the normal course of business, our broadcasting operations have minimum future payments associated with employee and talent contracts. These contracts typically contain cancellation provisions that allow us to cancel the contract with good cause.
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, we are impacted by political cycles and generally experience higher revenues in congressional election years, and particularly in presidential election years. This may affect the 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. Additionally, certain assumptions used within management's estimates are impacted by changes in interest rates. Accordingly, our earnings will be affected by changes in interest rates. As of June 30, 2022, 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 six months ended June 30, 2022 would have changed by $2.5 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 our business and we continue to seek ways to mitigate its effect. Inflation has affected our performance in terms of higher costs for employee compensation, equipment and third party services. We believe the effects of inflation, if any, on our historical results of operations and financial condition have been immaterial. Although we are unable to determine the exact impact of inflation, we believe the impact will continue to be immaterial considering the actions we may take in response to these higher costs that may arise as a result of inflation.
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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, 2021.
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, economic trends including inflation and potential recessionary indicators, our expected costs, savings and timing of our modernization initiatives and other capital and operating expense reduction initiatives, debt repurchases, our business plans, strategies and initiatives, benefits of acquisitions, our expectations about certain markets and businesses, 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 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 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 Part I, Item 1A, “Risk Factors” in our Annual Report on Form 10-K for the year ended December 31, 2021, as updated by 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 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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ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
Required information is presented under “Market Risk” within Item 2 of this Part I.