ITEM 2. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
Management’s discussion and analysis of our financial condition and results of operations (“MD&A”) should be read in conjunction with the consolidated financial statements and related notes contained in Item 1 of this Quarterly Report on Form 10-Q.10-Q and the Company's 2019 Annual Report on Form 10-K. All references in this Quarterly Report on Form 10-Q to the “Company,” “we,” “us” and “our” refer to Clear Channel Outdoor Holdings, Inc. and its consolidated subsidiaries. Certain prior period amounts included herein have been reclassified
International revenue decreased $41.2 million during the three months ended June 30, 2019 compared to the same period of 2018. Excluding the $21.6 million impact from movements in foreign exchange rates, International revenue decreased $19.6 million during the three months ended June 30, 2019 compared to the same period of 2018, primarily due to lower revenues in China.
RESULTS OF OPERATIONS
Our Results The discussion of Operations discussionour results of operations is presented on both a consolidated and segment basis. We manageBeginning in 2020, our operating segments by focusing primarily on theirsegment profit measure is Segment Adjusted EBITDA, which is calculated as revenue less direct operating income, while corporateexpenses and selling, general and administrative expenses, excluding restructuring and other costs, which are defined as costs associated with cost-saving initiatives such as severance, consulting and termination costs and other special costs. Corporate expenses, depreciation and amortization, other operating income and expense, all non-operating income and expenses, and income taxes are managed on a total company basis and are, therefore, included only in our discussion of consolidated results.
Revenue and expenses “excluding the impact from movementof movements in foreign exchange rates” in this MD&A are presented because management believes that viewing certain financial results without the impact of fluctuations in foreign currency rates facilitates period to periodperiod-to-period comparisons of business performance and provides useful information to investors. Revenue and expenses “excluding the impact from movementof movements in foreign exchange rates” are calculated by converting the current period’s revenue and expenses in local currency to U.S. dollars using average foreign exchange rates for the priorcomparable period.
Due to seasonality, uncertainty surrounding COVID-19, and the sale of our Clear Media business, as previously described in the "Overview" discussion, the results for the interim period are not indicative of expected results for the full year.
Consolidated Results of Operations
The comparison of our historical results of operations for the three and six months ended June 30, 20192020 to the three and six months ended June 30, 20182019 is as follows:
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| | | | | | | | | | | | | | | | | | | |
(In thousands) | Three Months Ended June 30, | | % | | Six Months Ended June 30, | | % |
| 2019 | | 2018 | | Change | | 2019 | | 2018 | | Change |
Revenue | $ | 698,015 |
| | $ | 711,980 |
| | (2.0)% | | $ | 1,285,131 |
| | $ | 1,310,378 |
| | (1.9)% |
Operating expenses: | | | | | | | | | | | |
Direct operating expenses (excludes depreciation and amortization) | 363,029 |
| | 372,936 |
| | (2.7)% | | 710,856 |
| | 734,225 |
| | (3.2)% |
Selling, general and administrative expenses (excludes depreciation and amortization) | 134,721 |
| | 125,289 |
| | 7.5% | | 257,687 |
| | 252,697 |
| | 2.0% |
Corporate expenses (excludes depreciation and amortization) | 38,907 |
| | 37,928 |
| | 2.6% | | 67,521 |
| | 73,363 |
| | (8.0)% |
Depreciation and amortization | 80,174 |
| | 82,767 |
| | (3.1)% | | 155,250 |
| | 166,827 |
| | (6.9)% |
Other operating income (expense), net | 1,270 |
| | 929 |
| | | | (2,252 | ) | | 875 |
| | |
Operating income | 82,454 |
| | 93,989 |
| | (12.3)% | | 91,565 |
| | 84,141 |
| | 8.8% |
Interest expense, net | 107,971 |
| | 96,777 |
| | | | 222,834 |
| | 194,041 |
| | |
Loss on extinguishment of debt | — |
| | — |
| | | | (5,474 | ) | | — |
| | |
Loss on Due from iHeartCommunications | (5,778 | ) | | — |
| | | | (5,778 | ) | | — |
| | |
Other expense, net | (9,203 | ) | | (35,402 | ) | | | | (9,768 | ) | | (15,761 | ) | | |
Loss before income taxes | (40,498 | ) | | (38,190 | ) | | | | (152,289 | ) | | (125,661 | ) | | |
Income tax benefit (expense) | 29,093 |
| | (4,753 | ) | | | | (28,670 | ) | | (50,120 | ) | | |
Consolidated net loss | (11,405 | ) | | (42,943 | ) | | | | (180,959 | ) | | (175,781 | ) | | |
Less amount attributable to noncontrolling interest | (466 | ) | | 7,440 |
| | | | (5,853 | ) | | 3,024 |
| | |
Net loss attributable to the Company | $ | (10,939 | ) | | $ | (50,383 | ) | | | | $ | (175,106 | ) | | $ | (178,805 | ) | | |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
(In thousands) | Three Months Ended June 30, | | | | % | | Six Months Ended June 30, | | | | % |
| 2020 | | 2019 | | Change | | 2020 | | 2019 | | Change |
Revenue | $ | 314,906 | | | $ | 698,015 | | | (54.9)% | | $ | 865,715 | | | $ | 1,285,131 | | | (32.6)% |
Operating expenses: | | | | | | | | | | | |
Direct operating expenses (excludes depreciation and amortization) | 254,553 | | | 363,029 | | | (29.9)% | | 604,822 | | | 710,856 | | | (14.9)% |
Selling, general and administrative expenses (excludes depreciation and amortization) | 99,688 | | | 134,721 | | | (26.0)% | | 223,392 | | | 257,687 | | | (13.3)% |
Corporate expenses (excludes depreciation and amortization) | 32,665 | | | 38,907 | | | (16.0)% | | 69,003 | | | 67,521 | | | 2.2% |
Depreciation and amortization | 66,192 | | | 80,174 | | | (17.4)% | | 141,945 | | | 155,250 | | | (8.6)% |
Impairment charges | — | | | — | | | | | 123,137 | | | — | | | |
| | | | | | | | | | | |
| | | | | | | | | | | |
Other operating income (expense), net | 69,600 | | | 1,270 | | | | | 63,579 | | | (2,252) | | | |
Operating income (loss) | (68,592) | | | 82,454 | | | | | (233,005) | | | 91,565 | | | |
Interest expense, net | 88,742 | | | 107,971 | | | | | 178,884 | | | 222,834 | | | |
Loss on Due from iHeartCommunications | — | | | (5,778) | | | | | — | | | (5,778) | | | |
Loss on extinguishment of debt | — | | | — | | | | | — | | | (5,474) | | | |
Other expense, net | (4,490) | | | (9,203) | | | | | (23,379) | | | (9,768) | | | |
Loss before income taxes | (161,824) | | | (40,498) | | | | | (435,268) | | | (152,289) | | | |
Income tax benefit (expense) | 19,221 | | | 29,093 | | | | | 3,442 | | | (28,670) | | | |
Consolidated net loss | (142,603) | | | (11,405) | | | | | (431,826) | | | (180,959) | | | |
Less amount attributable to noncontrolling interest | (5,405) | | | (466) | | | | | (17,137) | | | (5,853) | | | |
Net loss attributable to the Company | $ | (137,198) | | | $ | (10,939) | | | | | $ | (414,689) | | | $ | (175,106) | | | |
Consolidated Revenue
Consolidated revenue decreased $14.0$383.1 million, or 54.9%, during the three months ended June 30, 20192020 compared to the same period of 2018.2019. Excluding the $21.6$3.2 million impact fromof movements in foreign exchange rates, consolidated revenue increased $7.6decreased $379.9 million, during the three months ended June 30, 2019 compared to the same period of 2018. This is due to revenue growth in our Americas business, partially offset by a decrease in revenue in our International business driven primarily by lower revenues in China.or 54.4%.
Consolidated revenue decreased $25.2$419.4 million, or 32.6%, during the six months ended June 30, 20192020 compared to the same period of 2018.2019. Excluding the $46.4$12.1 million impact fromof movements in foreign exchange rates, consolidated revenue increased $21.2decreased $407.4 million, duringor 31.7%.
The decrease in consolidated revenue for both the three and six months ended June 30, 2019 comparedmonth periods is primarily due to the same periodsignificant adverse impacts of 2018. This is dueCOVID-19 on our business. Also contributing to revenue growth in our Americas business, partially offset by athe decrease in consolidated revenue inis the sale of our InternationalClear Media business driven primarily by lower revenues in China and Italy.on April 28, 2020.
Consolidated Direct Operating Expenses
Consolidated direct operating expenses decreased $9.9$108.5 million, or 29.9%, during the three months ended June 30, 20192020 compared to the same period of 2018.2019. Excluding the $13.6$5.0 million impact fromof movements in foreign exchange rates, consolidated direct operating expenses increased $3.7decreased $103.5 million, during the three months ended June 30, 2019 compared to the same period of 2018. An increase in variable site lease expense in our Americas business, driven by increased revenue, was partially offset by a decrease in direct operating expenses in our International business, also primarily related to variable site lease expense. or 28.5%.
Consolidated direct operating expenses decreased $23.4$106.0 million, or 14.9%, during the six months ended June 30, 20192020 compared to the same period of 2018.2019. Excluding the $30.8$12.1 million impact fromof movements in foreign exchange rates, consolidated direct operating expenses increased $7.4decreased $93.9 million, or 13.2%.
The decrease in consolidated direct operating expenses for both the three and six month periods is largely due to lower site lease and other direct operating expenses throughout our business, mainly driven by lower revenue and renegotiated contracts with landlords and municipalities to better align fixed site lease expenses with reductions in revenue. We recognized reductions of rent expense on lease and non-lease contracts due to negotiated rent abatements of $29.4 million during the second quarter of 2020. Also contributing to the decrease in consolidated direct operating expenses is the sale of our Clear Media business. These decreases were partially offset by higher direct operating expenses in France related to a new contract.
Restructuring and other costs included within consolidated direct operating expenses were $0.8 million and $0.3 million during the three months ended June 30, 2020 and 2019, respectively, and $1.0 million and $0.4 million during the six months ended June 30, 2020 and 2019, compared to the same period of 2018. An increase in variable site lease expense in our Americas business, driven by increased revenue, was partially offset by a decrease in direct operating expenses in our International business, also primarily related to variable site lease expense.respectively.
Consolidated Selling, General and Administrative (“SG&A”) Expenses
Consolidated SG&A expenses increased $9.4decreased $35.0 million, or 26.0%, during the three months ended June 30, 2020 compared to the same period of 2019. Excluding the $2.1 million impact of movements in foreign exchange rates, consolidated SG&A expenses decreased $32.9 million, or 24.4%.
Consolidated SG&A expenses decreased $34.3 million, or 13.3%, during the six months ended June 30, 2020 compared to the same period of 2019. Excluding the $4.7 million impact of movements in foreign exchange rates, consolidated SG&A expenses decreased $29.7 million, or 11.5%.
The decrease in consolidated SG&A expenses for both the three and six month periods is largely due to lower employee compensation expense driven by operating cost savings initiatives in response to COVID-19, including reductions in salaries, bonuses and employee hours, as well as hiring freezes and furloughs; European governmental support and wage subsidies; and lower revenue. Also contributing to the decrease in consolidated SG&A expenses is the sale of our Clear Media business.
Restructuring and other costs included within consolidated SG&A expenses were $1.5 million and $2.9 million during the three months ended June 30, 2020 and 2019, compared to the same period of 2018. Excluding the $4.7respectively, and $3.1 million impact from movements in foreign exchange rates, consolidated SG&A expenses increased $14.1 million during the three months ended June 30, 2019 compared to the same period of 2018. SG&A expenses increased primarily due to higher employee compensation expense in our Americas business, including variable incentive compensation, and higher expenses in our international business for professional fees in connection with the ongoing investigation in China.
Consolidated SG&A expenses increased $5.0$5.2 million during the six months ended June 30, 2020 and 2019, compared to the same period of 2018. Excluding the $10.3 million impact from movements in foreign exchange rates, consolidated SG&A expenses increased $15.3 million during the six months ended June 30, 2019 compared to the same period of 2018. SG&A expenses increased primarily due to higher employee compensation expense in our Americas business, including variable incentive compensation, as well as higher expenses in our International business, including bad debt expense and professional fees in connection with the ongoing investigation in China.respectively.
Corporate Expenses
Corporate expenses increased $1.0decreased $6.2 million, or 16.0%, during the three months ended June 30, 20192020 compared to the same period of 2018.2019. Excluding the $0.8$0.3 million impact fromof movements in foreign exchange rates, corporate expenses increased $1.8decreased $6.0 million, or 15.4%. This increasedecrease was primarilylargely driven by higher compensation-related expenses includinglower employee compensation expense from operating cost savings initiatives in response to COVID-19 and a decrease in operating performance, as well as lower share-based compensation, partially offset by incremental stand-alone costs associated with the build-out of new corporate functions and expenses related toafter the investigations in China and Italy. The increase in expenses was partially offset by the elimination of costs associated with the termination of the agreements comprising trademark and IP licenses and sponsorship management fees that were in place prior to the Separation.
Corporate expenses decreased $5.8increased $1.5 million, or 2.2%, during the six months ended June 30, 20192020 compared to the same period of 2018.2019. Excluding the $1.5$0.6 million impact from movements in foreign exchange rates, corporate expenses decreased $4.3increased $2.1 million, during the six months ended June 30, 2019 compared to the same period of 2018.or 3.1%. This decreaseincrease was primarilylargely driven by the elimination of costs associated with the termination of the agreements comprising trademark and IP licenses and sponsorship management fees that were in place prior to the Separation. The decrease in expenses was partially offset by higher compensation-related expenses including share-based compensation, incremental stand-alone costs associated with the build-out of new corporate functions after the Separation, partially offset by lower employee compensation expense from operating cost savings initiatives and a decrease in operating performance, as well as lower share-based compensation.
Restructuring and other costs included within corporate expenses related to the investigations in Chinawere $3.1 million and Italy.
Depreciation and Amortization
Depreciation and amortization decreased $2.6$7.0 million during the three months ended June 30, 2020 and 2019, compared to the same period in 2018primarily due to assets becoming fully depreciated or fully amortizedrespectively, and the impact from movements in foreign exchange rates, partially offset by capital expenditures.
Depreciation$8.3 million and amortization decreased $11.6$10.4 million during the six months ended June 30, 2020 and 2019, respectively.
Depreciation and Amortization
Depreciation and amortization decreased $14.0 million, or 17.4%, during the three months ended June 30, 2020 compared to the same period in 2018primarily due to assets becoming fully depreciated or fully amortized andof 2019. Excluding the $0.9 million impact fromof movements in foreign exchange rates, depreciation and amortization decreased $13.1 million, or 16.3%.
Depreciation and amortization decreased $13.3 million, or 8.6%, during the six months ended June 30, 2020 compared to the same period of 2019. Excluding the $2.0 million impact of movements in foreign exchange rates, depreciation and amortizationdecreased $11.3 million, or 7.3%.
The decrease in depreciation and amortization for both the three and six month periods is largely driven by the sale of our Clear Media business, with the remaining decrease due to lower capital expenditures.
Impairment Charges
During the three months ended March 31, 2020, we recognized impairment charges of $123.1 million on indefinite-lived permits in multiple markets of our Americas segment, driven by reductions in projected cash flows related to the expected negative financial statement impacts from COVID-19, as well as an increased discount rate. Refer to Note 8 to our Consolidated Financial Statements included in Item 1 of Part I of this Quarterly Report on Form 10-Q for a further description of the impairment charge. As expectations and projections of the financial statement impacts from COVID-19 are revised, our estimates and assumptions may change, and additional impairments may be recognized in future periods.
Other Operating Income (Expense), Net
Other operating income, net, of $69.6 million and $63.6 million for the three and six months ended June 30, 2020, respectively, was primarily driven by a gain on the sale of our Clear Media business of $75.2 million, partially offset by capital expenditures.legal costs and consulting fees incurred related to the sale.
For the three and six months ended June 30, 2019, we recognized other operating income, net, of $1.3 million and other operating expense, net, of $2.3 million, respectively.
Interest Expense, Net
Interest expense, net, increased $11.2decreased $19.2 million and $28.8$44.0 million during the three and six months ended June 30, 2019,2020, respectively, compared to the same periods of 2018, primarily due to higher2019. These decreases were driven by the lower rates of interest incurred in conjunction withon the refinancing ofnew debt from the $2,200 million of 7.625% Series A Senior Subordinated Notes due 2020 issued by CCWH (the “Series A CCWH Subordinated Notes) and 7.625% Series B Senior Subordinated Notes due 2020 issued by CCWH (the “Series B CCWH Subordinated Notes” and, together with the Series A CCWH Subordinated Notes, the “CCWH Subordinated Notes”) with $2,235.0 million of 9.25% Senior Subordinated Notes due 2024 issued by CCWH (the “New CCWH Subordinated Notes”). In addition to an increase in interest expense due to higher ratesAugust 2019 refinancing and the higher principal amount on the New CCWH Subordinated Notes, there was incremental interest expense as both theredemption of a portion of our CCWH Senior Subordinated Notes and the New CCWH Senior Subordinated Notes were outstanding for the period from February 4, 2019 to March 6,in July 2019.
Loss on Extinguishment of Debt
Loss on extinguishment of debt was $5.5 million for the six months ended June 30, 2019, which resulted from a loss recognized during the three months ended March 31, 2019 in relation to the refinancing of the 7.625% CCWH Senior Subordinated Notes.
Loss on Due from iHeartCommunications
Pursuant to the Separation Agreement, the note payable by iHeartCommunications to the Company was canceled upon separation of the companies,Separation, and we received a recovery amount of approximately $149.0 million in cash. This resulted in a $5.8 million loss recognized during the three and six months ended June 30, 2019. Refer
Loss on Extinguishment of Debt
During the three months ended March 31, 2019, we recognized a loss on extinguishment of debt of $5.5 million related to the "Liquidityrefinancing of the 7.625% Series A and Capital Resources" section of this MD&A below for more information.
Other Expense, Net
Other expense, net, of $9.2 million and $9.8 million recognized inSeries B Senior Subordinated Notes Due 2020. We did not extinguish any debt during the three and six months ended June 30, 2020.
Other Expense, Net
Other expense, net, decreased $4.7 million during the three months ended June 30, 2020 compared to the same period of 2019 primarily related to costs incurred in connection with the Separation from iHeartMedia andduring the three months ended June 30, 2019.
Other expense, net, increased $13.6 million during the six months ended June 30, 2020 compared to the same period of 2019 primarily due to increases in net foreign exchange losses recognized in connection with intercompany notes denominated in foreign currencies.
Other expense, net, of $35.4 million and $15.8 million recognized This was partially offset by costs incurred in connection with the three andSeparation from iHeartMedia during the six months ended June 30, 2018 related primarily to net foreign exchange gains recognized in connection with intercompany notes denominated in foreign currencies.2019.
Income Tax Benefit (Expense)
For periods prior to the Separation, our operations were included in a consolidated income tax return filed by iHeartMedia. However, forFor our financial statements, however, our provision for income taxes was computed as if we were to filefiled separate consolidated federal income tax returns with our subsidiaries for all periods.
The effective tax rates for the three and six months ended June 30, 2020 were 11.9% and 0.8%, respectively. The effective rate in 2020 was primarily impacted by the valuation allowance recorded against current period deferred tax assets resulting from losses and interest expense carryforwards in the U.S. and certain foreign jurisdictions due to uncertainty regarding the Company’s ability to realize those assets in future periods. Additionally, the Company recorded $57.8 million of tax expense as a result of selling its 50.91% stake in Clear Media.
The effective tax rates for the three and six months ended June 30, 2019 were 71.8% and (18.8)%, respectively. The effective rate in 2019 was primarily impacted by the valuation allowance recorded against deferred tax assets resulting from losses in the U.S. and certain foreign jurisdictions due to uncertainty regarding the Company's ability to realize those assets in future periods. The income tax benefit recorded for the three months ended June 30, 2019 is attributed to changes in the Company's estimated annual effective tax rate, driven primarily by changes in forecasted earnings at certain international locations.
The effective tax rates for the three and six months ended June 30, 2018 were (12.4)% and (39.9)%, respectively. The effective rate was primarily impacted by the valuation allowance recorded against deferred tax assets resulting from losses in the U.S. and certain foreign jurisdictions due to uncertainty regarding the Company's ability to realize those assets in future periods.
As a result ofOn March 27, 2020, the Separation from iHeartMedia, certain deferred tax attributes of the Company were reduced as a result of cancellation of indebtedness income realized in connection with the iHeart Plan of Reorganization. As discussed in Note 7, the CompanyCARES Act was not reimbursed for the reduction of its tax attributes under the terms of the New Tax Matters Agreement. The reorganization adjustments resulted in a reduction to deferred tax assets for all U.S. federal net operating loss carryforwards and certain state net operating loss carryforwards. These adjustments were partially offset by the reduction of valuation allowances recorded by the Company as of the Separation date. The net tax impact of the reorganization adjustments, which was approximately $65.9 million, was reflectedsigned into law in the equity section of the balance sheet as a dividend. Additionally, the Company recognized a capital loss for tax purposesU.S. to provide certain relief as a result of the seriesCOVID-19 pandemic. The CARES Act, among other things, relaxes the limitation for business interest deductions for 2019 and 2020 by allowing taxpayers to deduct interest up to the sum of transactions to effect the Separation. To the extent the capital50% of adjusted taxable income and permits net operating loss is not subject to reduction as a result of cancellation of indebtedness income, it may be carried forwardcarryovers to offset capital gains recognized by100% of taxable income for taxable years beginning before 2021. As of June 30, 2020, the Company in the next five years, subject to annual limitations under Section 382 of the Internal Revenue Code. The deferredCARES Act did not have significant impact on our effective tax asset associated with the capital loss carryforward is offset by a valuation allowance due to significant uncertainty regarding the Company's ability to utilize the carryforward prior to its expiration.
rate.
Americas Outdoor Advertising Results of Operations
Our Americas outdoor operating results were as follows: | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
(In thousands) | Three Months Ended June 30, | | | | % | | Six Months Ended June 30, | | | | % |
| 2020 | | 2019 | | Change | | 2020 | | 2019 | | Change |
Revenue | $ | 199,700 | | | $ | 327,142 | | | (39.0)% | | $ | 495,487 | | | $ | 599,864 | | | (17.4)% |
Direct operating expenses1 | 108,301 | | | 135,974 | | | (20.4)% | | 243,524 | | | 266,493 | | | (8.6)% |
SG&A expenses1 | 45,428 | | | 55,482 | | | (18.1)% | | 98,757 | | | 107,118 | | | (7.8)% |
Segment Adjusted EBITDA | 47,019 | | | 136,747 | | | (65.6)% | | 154,977 | | | 227,876 | | | (32.0)% |
| | | | | | | | | | | |
| | | | | | | | | | | |
|
| | | | | | | | | | | | | | | | | | | |
(In thousands) | Three Months Ended June 30, | | % | | Six Months Ended June 30, | | % |
| 2019 | | 2018 | | Change | | 2019 | | 2018 | | Change |
Revenue | $ | 327,142 |
| | $ | 299,922 |
| | 9.1% | | $ | 599,864 |
| | $ | 555,769 |
| | 7.9% |
Direct operating expenses | 135,974 |
| | 130,313 |
| | 4.3% | | 266,493 |
| | 255,186 |
| | 4.4% |
SG&A expenses | 55,482 |
| | 47,824 |
| | 16.0% | | 107,118 |
| | 96,774 |
| | 10.7% |
Depreciation and amortization | 44,558 |
| | 43,123 |
| | 3.3% | | 84,054 |
| | 87,627 |
| | (4.1)% |
Operating income | $ | 91,128 |
| | $ | 78,662 |
| | 15.8% | | $ | 142,199 |
| | $ | 116,182 |
| | 22.4% |
1Includes restructuring and other costs that are excluded from Segment Adjusted EBITDA.
Three Months
Americas revenue increased $27.2Revenue decreased $127.4 million, or 39.0%, during the three months ended June 30, 20192020 compared to the same period of 2018. The largest driver2019. Revenue in our Americas segment was an increaseadversely affected by COVID-19 as cities and states throughout the U.S. were locked down to limit the spread of the virus, resulting in reduced customer demand and the loss of advertising campaigns. This resulted in decreases in revenue across our products, including a decrease in digital revenue from billboards and street furniture primarily due to higher ratesof $44.9 million, or 55.6%, and the deployment of new digital displays. Increasesdecreases in revenue from print billboards, airport displays, print billboardsother transit displays and wallscapes also contributedof $41.8 million, $22.0 million, $8.3 million and $5.6 million, respectively. Compared to the overall growth in revenue.same period of 2019, Americas total digital revenue was $105.9decreased $56.9 million, and $88.5or 53.7%, to $49.0 million for the three months ended June 30, 2019 and 2018, respectively. Digital revenue2020, including $35.9 million from billboards and street furniture was $80.9 million and $69.1 million for the three months ended June 30, 2019 and 2018, respectively.furniture. Revenue generated from national sales comprised 41%37.3% and 39%41.1% of total revenue for the three months ended June 30, 2020 and 2019, and 2018, respectively.respectively, while the remainder of revenue was generated from local sales.
Americas directDirect operating expenses increased $5.7decreased $27.7 million, or 20.4%, during the three months ended June 30, 20192020 compared to the same period of 2018,2019 primarily due to higher variablelower site lease expenses related to higher revenue. Americas lower revenue and renegotiated contracts with landlords and municipalities.
SG&A expenses increased $7.7decreased $10.1 million, or 18.1%, during the three months ended June 30, 20192020 compared to the same period of 2018, primarily due to higher2019. Lower employee compensation expense, including variable incentive compensation.costs, driven by operating cost savings initiatives implemented by the Company in response to COVID-19 and lower revenue, were partially offset by higher bad debt expense.
Six Months
Americas revenue increased $44.1Revenue decreased $104.4 million, or 17.4%, during the six months ended June 30, 20192020 compared to the same period of 2018. The largest driver2019. As previously described, revenue in our Americas segment was an increaseadversely affected by COVID-19 during the second quarter of 2020, resulting in digitaldecreases in revenue across our products. Digital revenue from billboards and street furniture primarily duedecreased $34.2 million, or 24.4%, with the decline related to higher rates andCOVID-19 partially offset by the deployment of new digital displays. Increases indisplays, and revenue from print billboards, airport displays, and print billboards were also significant driversother transit displays decreased $34.0 million, $18.4 million and $9.4 million, respectively. Compared to the same period of the overall growth in revenue.2019, Americas total digital revenue was $188.1decreased $40.3 million, and $161.7or 21.4%, to $147.8 million for the six months ended June 30, 2019 and 2018, respectively. Digital revenue2020, including $105.8 million from billboards and street furniture was $140.0 million and $124.5 million for the six months ended June 30, 2019 and 2018, respectively.furniture. Revenue generated from national sales comprised 39%37.5% and 38%39.4% of total revenue for the six months ended June 30, 2020 and 2019, and 2018, respectively.respectively, while the remainder of revenue was generated from local sales.
Direct operating expenses increased $11.3decreased $23.0 million, or 8.6%, during the six months ended June 30, 20192020 compared to the same period of 2018,2019 primarily due to higher variablelower site lease expenses related to higher revenue. Americas lower revenue and renegotiated contracts with landlords and municipalities.
SG&A expenses increased $10.3decreased $8.4 million, or 7.8%, during the six months ended June 30, 20192020 compared to the same period of 2018, primarily due to higher2019. Lower employee compensation expense, including variable incentive compensation.costs, driven by operating cost savings initiatives implemented by the Company in response to COVID-19 and lower revenue, were partially offset by higher bad debt expense.
International Outdoor AdvertisingEurope Results of Operations
Our International outdoor operating results were as follows: | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
(In thousands) | Three Months Ended June 30, | | | | % | | Six Months Ended June 30, | | | | % |
| 2020 | | 2019 | | Change | | 2020 | | 2019 | | Change |
Revenue | $ | 107,346 | | | $ | 290,437 | | | (63.0)% | | $ | 319,036 | | | $ | 534,332 | | | (40.3)% |
Direct operating expenses1 | 130,896 | | | 184,847 | | | (29.2)% | | 304,492 | | | 358,754 | | | (15.1)% |
SG&A expenses1 | 46,426 | | | 60,751 | | | (23.6)% | | 99,557 | | | 115,955 | | | (14.1)% |
Segment Adjusted EBITDA | (68,819) | | | 46,536 | | | (247.9)% | | (82,930) | | | 63,017 | | | (231.6)% |
|
| | | | | | | | | | | | | | | | | | | |
(In thousands) | Three Months Ended June 30, | | % | | Six Months Ended June 30, | | % |
| 2019 | | 2018 | | Change | | 2019 | | 2018 | | Change |
Revenue | $ | 370,873 |
| | $ | 412,058 |
| | (10.0)% | | $ | 685,267 |
| | $ | 754,609 |
| | (9.2)% |
Direct operating expenses | 227,055 |
| | 242,623 |
| | (6.4)% | | 444,363 |
| | 479,039 |
| | (7.2)% |
SG&A expenses | 79,239 |
| | 77,465 |
| | 2.3% | | 150,569 |
| | 155,923 |
| | (3.4)% |
Depreciation and amortization | 33,812 |
| | 38,683 |
| | (12.6)% | | 68,393 |
| | 77,248 |
| | (11.5)% |
Operating income | $ | 30,767 |
| | $ | 53,287 |
| | (42.3)% | | $ | 21,942 |
| | $ | 42,399 |
| | (48.2)% |
1Includes restructuring and other costs that are excluded from Segment Adjusted EBITDA.
Three Months
International revenueRevenue decreased $41.2$183.1 million, or 63.0%, during the three months ended June 30, 20192020 compared to the same period of 2018.2019. Excluding the $21.6$2.2 million impact fromof movements in foreign exchange rates, International revenue decreased $19.6$180.9 million, duringor 62.3%. Revenue in our Europe segment was adversely affected by COVID-19 as governments locked down countries experiencing concentrated outbreaks of the three months ended June 30,virus, resulting in reduced customer demand and the loss of advertising campaigns. During the second quarter of 2019, compared toCOVID-19 had a negative impact on our revenues in each country in which we have operations, with the same period of 2018, primarily due to an $18.1 million decreaselargest decreases occurring in China revenues due to weakening economic conditions. Clear Media Limited, our Chinese subsidiary, remains cautious about the operating environment in 2019 as uncertainty continues in China's overall economy. The non-renewal of contracts in certain countries, including Italy and Spain, also contributed to the decrease in revenue. These decreases were partially offset by increases in revenue from digital display expansion inFrance, the United Kingdom ("U.K."), Spain, Switzerland, Sweden and new contracts in Finland. International digitalItaly. Digital revenue was $90.1decreased $51.1 million, and $86.4or 64.7%, to $27.8 million for the three months ended June 30, 2019 and 2018, respectively.2020. Excluding the $5.0$0.9 million impact fromof movements in foreign exchange rates, total digital revenue increased $8.7decreased $50.2 million, or 63.6%.
Direct operating expenses decreased $54.0 million, or 29.2%, during the three months ended June 30, 20192020 compared to the same period of 2018.
International2019. Excluding the $3.3 million impact of movements in foreign exchange rates, direct operating expenses decreased $15.6$50.7 million, or 27.4%.Direct operating expenses decreased in each country in which we have operations, with the largest decreases occurring in Spain, the U.K, Switzerland and France. The largest drivers of these decreases were lower site lease expense driven by lower revenue and renegotiated contracts with landlords and municipalities and lower production, subcontractor, cleaning and maintenance costs driven by lower revenue.
SG&A expenses decreased $14.3 million, or 23.6% during the three months ended June 30, 20192020 compared to the same period of 2018.2019. Excluding the $13.6$1.1 million impact fromof movements in foreign exchange rates, International direct operatingSG&A expenses decreased $2.0$13.3 million, during the three months ended June 30, 2019 compared to the same period of 2018.Theor 21.8%. This decrease was primarilyis largely due to lower site lease expenses in Italy and Spain due to the non-renewal of contracts, partially offset by higher site lease expenses in countries experiencing revenue growth. International SG&A expenses increased $1.8 million during the three months ended June 30, 2019 compared to the same period of 2018. Excluding the $4.7 million impact from movements in foreign exchange rates, International SG&A expenses increased $6.5 million during the three months ended June 30, 2019 compared to the same period of 2018. The increase was primarily due to increased professional feesemployee compensation expense related to lower revenue, operating cost savings initiatives implemented by the investigationCompany and governmental support and wage subsidies received in China.response to COVID-19, with the largest SG&A decreases occurring in France and the U.K.
Six Months
International revenueRevenue decreased $69.3$215.3 million, or 40.3% during the six months ended June 30, 20192020 compared to the same period of 2018.2019. Excluding the $46.4$8.5 million impact fromof movements in foreign exchange rates, International revenue decreased $22.9$206.8 million, or 38.7%. As previously described, revenue in our Europe segment was adversely affected by COVID-19 during the six months ended June 30, 2019 compared to the same period of 2018, primarily due to an $18.1 million2020, resulting in a decrease in China revenues due to weakening economic conditions.revenue in each country in which we have operations, with the largest decreases occurring in France, the U.K, Spain, Switzerland, Sweden and Italy. The non-renewal of certain contracts in certain countries, including ItalySwitzerland and Spain also contributed to the overall decrease in revenue. These decreases wererevenue, which was partially offset by increases in revenue from digital display expansion in the United Kingdom and new contracts in Finland. International digitalFrance and Switzerland. Digital revenue was $162.5decreased $50.9 million, and $158.0or 35.6%, to $92.0 million for the six months ended June 30, 2019 and 2018, respectively.2020. Excluding the $10.7$2.9 million impact fromof movements in foreign exchange rates, total digital revenue increased $15.2decreased $48.0 million, or 33.6%.
Direct operating expenses decreased $54.3 million, or 15.1%, during the six months ended June 30, 20192020 compared to the same period of 2018.
International2019. Excluding the $8.2 million impact of movements in foreign exchange rates, direct operating expenses decreased $34.7$46.0 million, or 12.8%. Direct operating expenses decreased in most countries in which we have operations, with the largest decreases occurring in Spain, Switzerland, the U.K, Norway and Sweden. The primary drivers of these decreases were lower site lease expense driven by lower revenue and renegotiated contracts with landlords and municipalities; lower production, subcontractor, cleaning and maintenance costs driven by lower revenue; lower direct operating expenses related to the non-renewal of certain contracts in Switzerland and Spain; and lower employee compensation expense related to operating cost savings initiatives implemented by the Company and governmental support and wage subsidies received in response to COVID-19. This was partially offset by higher fixed site lease expense related to the new contract in France.
SG&A expenses decreased $16.4 million, or 14.1%, during the six months ended June 30, 20192020 compared to the same period of 2018.2019. Excluding the $30.8$2.7 million impact fromof movements in foreign exchange rates, InternationalSG&A expenses decreased $13.7 million, or 11.8%. This decrease is largely due to lower employee compensation expense related to lower revenue, operating cost savings initiatives implemented by the Company and governmental support and wage subsidies received in response to COVID-19, with the largest SG&A decreases occurring in France and the U.K.
Other Results of Operations
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
(In thousands) | Three Months Ended June 30, | | | | % | | Six Months Ended June 30, | | | | % |
| 2020 | | 2019 | | Change | | 2020 | | 2019 | | Change |
Revenue | $ | 7,860 | | | $ | 80,436 | | | (90.2)% | | $ | 51,192 | | | $ | 150,935 | | | (66.1)% |
Direct operating expenses1 | 15,356 | | | 42,208 | | | (63.6)% | | 56,806 | | | 85,609 | | | (33.6)% |
SG&A expenses1 | 7,834 | | | 18,488 | | | (57.6)% | | 25,078 | | | 34,614 | | | (27.5)% |
Segment Adjusted EBITDA2 | (15,255) | | | 20,141 | | | (175.7)% | | (30,442) | | | 31,361 | | | (197.1)% |
1Includes restructuring and other costs that are excluded from Segment Adjusted EBITDA.
2Our Latin America business represented ($5.7) million and $5.5 million of Other Segment Adjusted EBITDA for the three months ended June 30, 2020 and 2019, respectively, and ($3.8) million and $8.3 million of Other Segment Adjusted EBITDA for the six months ended June 30, 2020 and 2019, respectively.
Three Months
Revenue decreased $72.6 million, or 90.2%, during the three months ended June 30, 2020 compared to the same period of 2019. Excluding the $1.1 million impact of movements in foreign exchange rates, revenue decreased $71.5 million, or 88.9%, largely due to the sale of our Clear Media business. Revenue from our Latin America business was $3.4 million and $23.0 million for the three months ended June 30, 2020 and 2019, respectively. The decrease in Latin America revenue is due to the adverse impact of COVID-19 on our operations.
Direct operating expenses decreased $26.9 million, or 63.6%, during the three months ended June 30, 2020 compared to the same period of 2019. Excluding the $1.7 million impact of movements in foreign exchange rates, direct operating expenses decreased $3.9$25.2 million, or 59.6%, primarily due to the sale of our Clear Media business. Direct operating expenses from our Latin America business were $5.5 million and $11.1 million for the three months ended June 30, 2020 and 2019, respectively.
SG&A expenses decreased $10.7 million, or 57.6%, during the three months ended June 30, 2020 compared to the same period of 2019. Excluding the $1.1 million impact of movements in foreign exchange rates, SG&A expenses decreased $9.6 million, or 51.9%, primarily due to the sale of our Clear Media business. SG&A expenses from our Latin America business were $3.8 million and $6.4 million for the three months ended June 30, 2020 and 2019, respectively.
Six Months
Revenue decreased $99.7 million, or 66.1%, during the six months ended June 30, 20192020 compared to the same period of 2018.2019. Excluding the $3.6 million impact of movements in foreign exchange rates, revenue decreased $96.2 million, or 63.7%, largely due to the sale of our Clear Media business. Revenue from our Latin America business was $21.9 million and $41.6 million for the six months ended June 30, 2020 and 2019, respectively. The decrease wasin Latin America revenue is primarily due to lower site lease expenses in Italy and Spain due to the non-renewaladverse impact of contracts, partially offset by higher site lease expenses in countries experiencing revenue growth. International SG&ACOVID-19 on our operations.
Direct operating expenses decreased $5.4$28.8 million, or 33.6%, during the six months ended June 30, 20192020 compared to the same period of 2018.2019. Excluding the $10.3$3.9 million impact fromof movements in foreign exchange rates, International direct operating expenses decreased $24.9 million, or 29.1%, primarily due to the sale of our Clear Media business. Direct operating expenses from our Latin America business were $16.4 million and $21.6 million for the six months ended June 30, 2020 and 2019, respectively.
SG&A expenses increased $4.9decreased $9.5 million, or 27.5%, during the six months ended June 30, 20192020 compared to the same period of 2018. The increase was2019. Excluding the $2.0 million impact of movements in foreign exchange rates, SG&A expenses decreased $7.6 million, or 21.9%, primarily due to an increase in bad debt expense in Chinathe sale of our Clear Media business. SG&A expenses from our Latin America business were $9.5 million and higher costs related to$11.8 million for the investigation in China.six months ended June 30, 2020 and 2019, respectively.
Reconciliation of Segment Operating Income to Consolidated Operating Income
|
| | | | | | | | | | | | | | | |
(In thousands) | Three Months Ended June 30, | | Six Months Ended June 30, |
| 2019 | | 2018 | | 2019 | | 2018 |
Operating income: | | | | | | | |
Americas | $ | 91,128 |
| | $ | 78,662 |
| | $ | 142,199 |
| | $ | 116,182 |
|
International | 30,767 |
| | 53,287 |
| | 21,942 |
| | 42,399 |
|
Other operating income (expense), net | 1,270 |
| | 929 |
| | (2,252 | ) | | 875 |
|
Corporate and other (1) | (40,711 | ) | | (38,889 | ) | | (70,324 | ) | | (75,315 | ) |
Consolidated operating income | $ | 82,454 |
| | $ | 93,989 |
| | $ | 91,565 |
| | $ | 84,141 |
|
| |
(1) | Corporate and other includes expenses related to Americas and International as well as overall executive, administrative and support functions. |
LIQUIDITY AND CAPITAL RESOURCES
Cash Flows
The following discussion highlights cash flow activities during the six months ended June 30, 20192020 and 2018:2019:
| | | | | | | | | | | |
(In thousands) | Six Months Ended June 30, | | |
| 2020 | | 2019 |
Net cash provided by (used for): | | | |
Operating activities | $ | (24,422) | | | $ | 55,135 | |
Investing activities | $ | 149,576 | | | $ | (76,687) | |
Financing activities | $ | 138,392 | | | $ | 208,328 | |
|
| | | | | | | |
(In thousands) | Six Months Ended June 30, |
| 2019 | | 2018 |
Net cash provided by (used for): | | | |
Operating activities | $ | 55,135 |
| | $ | 65,868 |
|
Investing activities | $ | (76,687 | ) | | $ | (58,263 | ) |
Financing activities | $ | 208,328 |
| | $ | 27,600 |
|
Operating Activities
Net cash provided byused for operating activities was $55.1$24.4 million during the six months ended June 30, 20192020 compared to $65.9$55.1 million of net cash provided by operating activities during the six months ended June 30, 2018. The decrease2019.
•During the six months ended June 30, 2020, net loss as adjusted for non-cash and non-operating items, most notably depreciation and amortization, impairment charges and gain on disposal of operating and other assets, resulted in $215.2 million of net cash providedoutflows from operating activities. This was partially offset by operating activities waschanges in working capital balances, which resulted in $190.7 million of net cash inflows, primarily driven by a decrease in accounts receivable as collections exceeded sales due to the adverse impact of COVID-19.
•During the six months ended June 30, 2019, net incomeloss as adjusted for non-cash and non-operating items, primarilymost notably depreciation and amortization, and deferred taxes, partiallyresulted in $6.6 million of net cash outflows from operating activities. This was more than offset by an increase in net cash provided by operating activities related to changes in working capital balances, most notably accrued interest.which resulted in $61.8 million of net cash inflows, driven primarily by a change in interest payment terms from weekly to semi-annually as a result of the Separation.
Cash paid for interest decreased $6.0 million, to $155.2 million during the six months ended June 30, 2019 decreased $26.12020 compared to $161.2 million compared toduring the same period of 2018 due to a change in interest payment terms as a result of the Separation, partially offset by the refinancing of the 7.625% CCWH Senior Subordinated Notes due 2020. Prior to the Separation, interest on the CCWH Senior Notes and CCWH Subordinated Notes was payable to the Trustee weekly in arrears. Following the Separation, interest is payable to the Trustee semi-annually, on February 15 and August 15 of each year, beginning on August 15, 2019.
Investing Activities
Net cash used forprovided by (used for) investing activities primarily reflects the April 2020 sale of $76.7Clear Media, resulting in $216.0 million during the six months ended June 30, 2019 primarily reflectedof net proceeds, which is net of cash retained by Clear Media, and our capital expenditures of $79.3 million. We spent $27.3 million in our Americas segment primarily related to the construction of newas follows:
| | | | | | | | | | | | | | | |
(In thousands) | | | | | Six Months Ended June 30, | | |
| | | | | 2020 | | 2019 |
Americas(1) | | | | | $ | 31,896 | | | $ | 27,338 | |
Europe(2) | | | | | 19,422 | | | 34,425 | |
Other(3) | | | | | 8,385 | | | 9,059 | |
Corporate(4) | | | | | 7,260 | | | 8,459 | |
Total | | | | | $ | 66,963 | | | $ | 79,281 | |
(1)Construction and sustaining activities for billboards and other out-of-home advertising structures,displays, including digital boards $43.5 million in
(2)Construction and sustaining activities for our International segment primarily related to street furniture and other out-of-home advertising displays, including digital displays,boards
(3)Transit advertising structure additions and $8.5 millionpurchase of concession rights in Corporate primarily relatedChina (prior to the build-outsale of the new San Antonio office andClear Media on April 28, 2020)
(4)Build-out of IT infrastructure due the Separation.
Net cash used for investing activities of $58.3 million during the six months ended June 30, 2018 primarily reflected our capital expenditures of $61.3 million. We spent $24.4 million in our Americas segment primarily related to the construction of new advertising structures, including digital boards, $35.5 million in our International segment primarily related to street furniture and transit advertising structures, including digital displays, and $1.4 million in Corporate primarily related toSeparation, as well as equipment and software purchases.
purchases
Financing Activities
Net cash provided by financing activities during the six months ended June 30, 2020 primarily reflected the cautionary draw of $208.3$150.0 million that we made under our Revolving Credit Facility to enhance liquidity and preserve financial flexibility during the economic downturn resulting from COVID-19, partially offset by principal payments of $10.0 million on our Term Loan Facility in accordance with the terms of the Senior Secured Credit Agreement.
Net cash provided by financing activities during the six months ended June 30, 2019 reflected primarily reflected net transfers of $159.2 million in cash from iHeartCommunications, including settlement of the Due from iHeartCommunications Note upon consummation of the Separation, as well as $43.8 million of proceeds from the issuance of mandatorily redeemablemandatorily-redeemable preferred stock, net of fees and expenses. Additionally, net cash provided by financing activities increased by $35.0 million due to the refinancing of the CCWH Senior Subordinated Notes, partially offset by $26.8 million of debt issuance costs.
Net cash used for financing activities of $27.6 million during the six months ended June 30, 2018 primarily reflected net transfers of $60.8 million in cash from iHeartCommunications, which represents the activity in the “Due from iHeartCommunications” account, partially offset by cash dividends paid of $30.6 million.
iHeart Chapter 11 Cases and the Separation
On March 14, 2018, iHeartMedia, which, prior to the Separation was the parent company of the Company and certain of its subsidiaries (collectively, the “Debtors”), filed voluntary petitions for reorganization (the “iHeart Chapter 11 Cases”) under Chapter 11 of the United States Bankruptcy Code (the “Bankruptcy Code”) in the United States Bankruptcy Court for the Southern District of Texas, Houston Division (the “Bankruptcy Court”). The Company and its direct and indirect subsidiaries did not file voluntary petitions for reorganization under the Bankruptcy Code and are not Debtors in the iHeart Chapter 11 Cases.
On May 1, 2019 (the “Effective Date”), the conditions to the effectiveness of the Plan of Reorganization were satisfied and iHeartMedia emerged from Chapter 11 through a series of transactions (the “Separation”) through which the Company and its subsidiaries (collectively, the “Outdoor Group”) were separated from, and ceased to be controlled by, iHeartMedia and its subsidiaries (the “iHeart Group”).
Merger Agreement
On March 27, 2019, as contemplated by the Settlement Agreement and iHeartMedia’s modified fifth amended Plan of Reorganization (the “iHeart Plan of Reorganization”), which was confirmed by the United States Bankruptcy Court for the Southern District of Texas (the "Bankruptcy Court") on January 22, 2019, the Company (then known as Clear Channel Holdings, Inc.) and its subsidiary, Clear Channel Outdoor Holdings, Inc., entered into an Agreement and Plan of Merger (the “Merger Agreement”). On May 1, 2019, Clear Channel Outdoor Holdings, Inc. merged with and into the Company, with the Company surviving the Merger and changing its name to Clear Channel Outdoor Holdings, Inc.
In connection with the Merger, each share of the Clear Channel Outdoor Holdings, Inc.’s Class A common stock (the “Old CCOH Class A Common Stock”) issued and outstanding immediately prior to the effective time of the Merger (other than shares of Old CCOH Class A Common Stock held by the Company or any direct or indirect wholly-owned subsidiary of the Company) converted into one share of common stock of the Company (“Common Stock”). The shares of the Old CCOH Class A Common Stock held by the Company and its subsidiaries were canceled and retired, and no shares of Common Stock were exchanged for such shares. All of the outstanding shares of the Company’s common stock outstanding, all held by iHeartCommunications, immediately before the Merger were converted into 325,726,917 shares of Common Stock. As a result, immediately after the Merger, the Company had a single class of common stock, and the pre-Merger Old CCOH Class A common stockholders (other than the Company and its subsidiaries) owned the same percentage of the Company that they owned of Clear Channel Outdoor Holdings, Inc. immediately before the Merger.
Separation Agreement
On March 27, 2019, the Company, Clear Channel Outdoor Holdings, Inc., iHeartMedia and iHeartCommunications entered into a Settlement and Separation Agreement (the “Separation Agreement”) governing the terms of the separation of the Company as the surviving corporation under the Merger and each subsidiary of the Company after giving effect to the Transactions (the Company together with its subsidiaries, the “Outdoor Group”) from iHeartMedia and each of its subsidiaries immediately after giving effect to the Transactions (iHeartMedia together with its subsidiaries, the “iHeart Group”).
Pursuant to the Separation Agreement, on May 1, 2019, (i) iHeartMedia and iHeartCommunications caused each relevant member of the iHeart Group to assign, transfer, convey and deliver to iHeartCommunications, and iHeartCommunications will transfer to the Company or the relevant member of the Outdoor Group, any and all direct or indirect title and interest in the assets that are primarily related to or used primarily in connection with the Outdoor Business (after giving effect to the Transactions) (such assets, the “Outdoor Assets”), excluding certain excluded assets, and (ii) the Company and Clear Channel Outdoor Holdings, Inc. caused each relevant member of the Outdoor Group to transfer to the relevant member of the iHeart Group any and all direct or indirect title and interest in the assets of the business conducted by the iHeart Group after giving effect to the Transactions, including the radio business (the “iHeart Business” and such assets, the “iHeart Assets”).
At the same time as the transfer of the Outdoor Assets from the iHeart Group to the Outdoor Group, the members of the Outdoor Group assumed the liabilities associated with the Outdoor Business, subject to certain exceptions as set forth in the Separation Agreement. At the same time as the transfer of the iHeart Assets from the Outdoor Group to the iHeart Group, the members of the iHeart Group assumed the liabilities associated with the iHeart Business, subject to certain exceptions as set forth in the Separation Agreement.
The Separation Agreement provided for cancellation of the note payable by iHeartCommunications to the Company (the “Due from iHeartCommunications Note”) and that any agreements or licenses requiring royalty payments to the iHeart Group by the Outdoor Group for trademarks or other intellectual property terminated effective as of December 31, 2018. It also provided for (i) the repayment of the post-petition intercompany balance outstanding in favor of the Debtors as of December 31, 2018, which was equal to $21.6 million as of that date and (ii) the waiver of the set-off value of any royalties and IP license fees owed to iHeartCommunications equal to approximately $31.8 million from March 14, 2018 through December 31, 2018, such that the resulting intercompany balance on such date was $10.2 million in favor of the Company. Pursuant to an amendment to the Separation Agreement, the Company offset the $149.0 million amount owed to us by the iHeart Group on May 1, 2019 by $52.1 million (which is the additional intercompany liability incurred from January 1, 2019 through March 31, 2019), resulting in a total net payment to the Company of approximately $107.0 million on May 1, 2019 (including the $10.2 million payment discussed above). iHeartCommunications paid the Company the intercompany liability incurred from April 1, 2019 through May 1, 2019 of $8.8 million after the Separation. In addition, pursuant to the Separation Agreement the Company received (i) the trademarks listed on the schedules to the Separation Agreement and (ii) reimbursement of the reasonable expenses of legal counsel and financial advisors incurred on or prior to May 1, 2019 of the Company’s board of directors or the special committee of the Company’s board of directors, in each case, to the extent incurred in connection with the Separation.
Anticipated Cash Requirements
FollowingTrends and Uncertainties
COVID-19's extensive impact on the Separation,global advertising market had a significant negative impact on our primary sourcesresults of operations in both our Americas and Europe segments during the second quarter of 2020.
Throughout the second quarter, we took measures to increase our liquidity areand preserve and strengthen our financial flexibility, including the following:
•Renegotiated contracts with landlords and municipalities to better align fixed site lease expenses with reductions in revenue;
•Cut compensation costs through reductions in salaries, bonuses and employee hours, as well as hiring freezes and furloughs;
•Obtained European governmental support and wage subsidies;
•Eliminated and reduced discretionary expenses;
•Deferred capital expenditures; and
•Deferred site lease and other payments to optimize working capital levels.
We believe that our cash on hand cash flow from operations and additional availability under our receivables-based credit facility. As of June 30, 2019, we had $372.5 million of cash on our balance sheet, including $146.1 million of cash held outside the U.S. by our subsidiaries, a portion of which is held by non-wholly owned subsidiaries or is otherwise subject to certain restrictions and not readily accessible to us. Excess cash from our foreign operations may be transferred to our operations in the United States if needed to fund operations in the United States, subject to the foreseeable cash needs of our foreign operations. If any excess cash held by our foreign subsidiaries were needed to fund operations in the U.S., we could presently repatriate available funds without a requirement to accrue or pay U.S. taxes. As a result of significant deficits, as calculated for tax law purposes, in our foreign earnings and profits, we have flexibility to make future cash distributions as non-taxable returns of capital. Additionally, as a result of U.S. tax reform, future dividend distributions from our international subsidiaries are exempt from U.S. federal income tax beginning January 1, 2018.
Our primary uses of liquidity are for our working capital, capital expenditures, debt service, other funding requirements and dividend payments to be due to the investor in the Preferred Stock. On February 12, 2019, our subsidiary CCWH refinanced its CCWH Subordinated Notes, which matured in March 2020,facilities, combined with an aggregate principal amount of $2,235.0 million of New CCWH Subordinated Notes, which are scheduled to mature in February 2024. On July 30, 2019, we issued 100 million shares of common stock in a public offering, and we will use the net proceeds from the offering to redeem approximately $333.5 million aggregate principal amount of New CCWH Subordinated Notes on August 22, 2019. As of June 30, 2019, we had debt maturities totaling $0.1 million, $375.3 million and $0.3 million in 2019, 2020 and 2021.
A substantial amount of our cash requirements are for debt service obligations. During the six months ended June 30, 2019, we spent $161.2 million of cash on interest on our debt. We anticipate having approximately $161.0 million of cash interest payment obligations in the second half of 2019. Our significant interest payment obligations reduce our financial flexibility, make us more vulnerable to changes in operating performance and economic downturns generally, reduce our liquidity over time and could negatively affect our ability to obtain additional financing in the future.
Based on our current and anticipated levels of operations and conditions in our markets, we believe that cash on hand, cash flows from operations and borrowing capacity under our receivables-based credit facilitycontinued savings initiatives and additional sources of liquidity, as discussed below within "Sources of Capital and Liquidity," will enable us to meet our working capital, capital expenditure, debt service and other funding requirements including the debt service on the CCWH Senior Notes, the New CCWH Subordinated Notes and the CCIBV Senior Notes, for at least the next 12 months. We believe our long-term plans, which include promoting outdoor media spending, capitalizing on our diverse geographic and product opportunities and the continued deployment of digital displays and addressing our capital structure and reducing leverage, will enable us to continue generating cash flows from operations sufficient to meet our liquidity and funding requirements in the long term. However, our anticipated results are subject to significant uncertainty.uncertainty and may be affected by events beyond our control, including prevailing economic, financial and industry conditions. Our ability to fundmeet our working capital, capital expenditures, debt service and other obligationsfunding requirements depends on the impacts from these uncertainties, including the impacts related to COVID-19, our future operating performance, our cash flow from operations, and our ability to manage our liquidity and obtain supplemental liquidity, if necessary, and managenecessary. Additional factors may emerge that could cause our liquidity.
Historically, our cash management arrangement with iHeartCommunications had been our only committed external source of liquidity. Now that our business is separated from iHeartCommunications, we are more dependent upon our abilityexpectations to generate cash or obtain additional financing to meet our liquidity needs. We may need to obtain additional financing, from banks or other lenders, or through public offerings or private placements of debt or equity, strategic relationships or other arrangements, or from a combination of these sources, in the future. There can be no assurance that financing alternatives will be available in sufficient amounts or on terms acceptable to us in the future due to market conditions, our financial condition, our liquidity constraints, our lack of history operating as a company independent from iHeartCommunications or other factors, many of which are beyond our control. Even if financing alternatives are available to us, we may not find them suitable or at comparable interest rates to the indebtedness being refinanced, and our annual cash interest payment obligations could increase further. In addition, the terms of our existing or future debt agreements may restrict us from securing financing on terms that are available to us at that time. In addition to the need to refinance our various indebtedness at or before maturity, ifchange. If we are unable to generate sufficient cash through our operations or obtain sources of supplemental liquidity, we could face substantial liquidity problems, which could have a material adverse effect on our financial condition and on our ability to meet our obligations.
We weremay take further cost-cutting measures beyond those discussed above to generate short-term liquidity in compliancethe event of an unanticipated need for cash. In addition, we regularly consider, and enter into discussions with the covenants contained in our materiallenders related to, potential financing agreements asalternatives, which may include supplemental liquidity through issuances of June 30, 2019.secured or unsecured debt or other capital-raising transactions.
We frequently evaluate strategic opportunities both within and outside our existing lines of business. Webusiness, and we expect from time to time to dispose of certain businesses and may pursue acquisitions. These dispositions or acquisitions could be material. Specifically, as we continue to focus on operational efficiencies that drive greater margin and cash flow, we will continue to review and consider opportunities to unlock shareholder value, which may include, among other things, potential asset or operational divestitures intended to deleverage and increase free cash flow.
Sources of Capital and Liquidity
Our primary sources of liquidity are cash on hand, cash flow from operations, our Senior Secured Credit Facilities and our Receivables-Based Credit Facility. In March 2020, we borrowed $150.0 million under our Revolving Credit Facility to enhance liquidity and preserve financial flexibility, and in May 2020 we received $216.0 million of net cash proceeds from the sale of our Clear Media business, contributing to an increase in our cash and cash equivalents balance. As of June 30, 2019 and December 31, 2018,2020, we had $662.1 million of cash on our balance sheet, including $316.7 million of cash held outside the following debt outstanding, cashU.S. by our subsidiaries. Additionally, we had excess availability of $15.7 million under our Receivables-Based Credit Facility and cash equivalents, and amounts due (to)/from iHeartCommunications:$4.8 million under our Revolving Credit Facility, subject to limitations in the CCWH Senior Notes Indenture.
|
| | | | | | | |
(In millions) | June 30, 2019 | | December 31, 2018 |
Clear Channel Worldwide Holdings Senior Notes due 2022 | $ | 2,725.0 |
| | $ | 2,725.0 |
|
Clear Channel Worldwide Holdings Senior Subordinated Notes due 2020(1) | — |
| | 2,200.0 |
|
Clear Channel Worldwide Holdings Senior Subordinated Notes due 2024(1) | 2,235.0 |
| | — |
|
Receivables-based Credit Facility due 2023(2) | — |
| | — |
|
Revolving Loan with iHeartCommunications due 2022(3) | — |
| | — |
|
Clear Channel International B.V. Senior Notes due 2020 | 375.0 |
| | 375.0 |
|
Other debt | 4.0 |
| | 3.9 |
|
Original issue discount | (1.0 | ) | | (0.7 | ) |
Long-term debt fees | (41.6 | ) | | (25.9 | ) |
Total debt | 5,296.4 |
| | 5,277.3 |
|
Less: Cash and cash equivalents | 372.5 |
| | 182.5 |
|
Less: Due from iHeartCommunications | — |
| | 154.8 |
|
Less: Due to iHeartCommunications, post iHeart Chapter 11 Cases | — |
| | (21.6 | ) |
| $ | 4,923.9 |
| | $ | 4,961.6 |
|
| |
(1) | On February 4, 2019, CCWH, delivered a conditional notice of redemption calling all of its outstanding $2,200.0 million CCWH Subordinated Notes for redemption on March 6, 2019. The redemption was conditioned on the closing of the offering of $2,235.0 million of New CCWH Subordinated Notes. At the closing of such offering on February 12, 2019, CCWH deposited with the trustee for the CCWH Subordinated Notes a portion of the proceeds from the new notes in an amount sufficient to pay and discharge the principal amount outstanding, plus accrued and unpaid interest on the CCWH Subordinated Notes to, but not including, the redemption date. CCWH irrevocably instructed the trustee to apply such funds to the full payment of the CCWH Subordinated Notes on the redemption date. Concurrently therewith, CCWH elected to satisfy and discharge the indentures governing the CCWH Subordinated Notes in accordance with their terms and the trustee acknowledged such discharge and satisfaction. As a result of the satisfaction and discharge of the indentures, CCWH and the guarantors of the CCWH Subordinated Notes have been released from their remaining obligations under the indentures and the CCWH Subordinated Notes. On July 23, 2019, CCWH issued a conditional notice of redemption to redeem a portion of the New CCWH Subordinated Notes, using the proceeds of a public offering of common stock. On July 30, 2019, the conditions to the redemption were satisfied, and the notice of redemption became irrevocable. Pursuant to the notice of redemption, as amended at the closing of the offering, approximately $333.5 million aggregate principal amount of New CCWH Subordinated Notes will be redeemed on August 22, 2019. |
| |
(2) | As of June 30, 2019, the receivables-based credit facility had $80.7 million of letters of credit outstanding and a borrowing limit of $125.0 million, resulting in $44.3 million of excess availability. Certain additional restrictions, including a springing financial covenant, take effect at decreased levels of excess availability. |
| |
(3) | On May 1, 2019, in accordance with the Separation agreement, Clear Channel Outdoor ("CCO") entered into a three-year $200.0 million revolving loan agreement with iHeartCommunications. As of June 30, 2019, no amounts were drawn under the iHeartCommunications Line of Credit. On July 30, 2019, in connection with the consummation of a public offering of common stock, we terminated the iHeartCommunications Line of Credit. |
We may from timeAdditionally, we have recently taken several incremental measures to time repay our outstanding debt or seek to purchase our outstanding equity securities. Such transactions, if any, will depend on prevailing market conditions,increase our liquidity requirements, contractualand preserve and strengthen our financial flexibility:
•In May 2020, we issued the CCIBV Note through our indirect wholly-owned subsidiary and then transferred this note to the holder of our mandatorily-redeemable preferred stock (the "Preferred Stock") in exchange for the Preferred Stock, which remains outstanding and is held by one of our affiliates and eliminated upon consolidation. This transfer of the Preferred Stock to an affiliate effectively eliminated certain restrictions and other factors.on our flexibility to potentially pursue liquidity-enhancing capital structure transactions.
Clear Channel Worldwide Holdings Senior Notes
As of•In June 2020, we amended our senior secured credit agreement, thereby suspending the springing financial covenant through June 30, 2019,2021 and delaying the CCWH senior notes represented $2.7 billion aggregate principal amountscheduled financial covenant step-down until March 31, 2022. In addition, for all reporting periods through September 30, 2021, we are required to maintain minimum cash on hand and availability under our receivables-based credit facility and Revolving Credit Facility of indebtedness outstanding, which consisted$150 million. We expect this amendment to support our efforts to manage through the uncertainties caused by the unprecedented COVID-19 situation while maintaining compliance with the terms of $735.75our Revolving Credit Facility.
•In August 2020, we issued $375.0 million aggregate principal amount of 6.5% Series ACCIBV Senior Secured Notes, due 2022 (the “Series2025, through our indirect wholly-owned subsidiary. A CCWH Senior Notes”)portion of these proceeds was used to pay the CCIBV Note in full, to include paid-in-kind interest, and $1,989.25 million aggregate principalthe remainder of the proceeds will be used for general corporate purposes, including to fund the operating expenses and capital expenditures of our Europe segment.
Uses of Capital and Liquidity
Our primary uses of liquidity are for our working capital used to fund the operations of the business, capital expenditures and debt service.
The primary driver of our capital expenditure requirements is the construction of new advertising structures, including the deployment of digital displays in accordance with our long-term strategy to digitize our network as an alternative to traditional methods of displaying our clients' advertisements. As previously described, in light of the rapidly-evolving impact of COVID-19 and the uncertainty around the related economic downturn, we deferred capital expenditures during the second quarter of 2020, resulting in a decrease in our capital expenditures for the second quarter of 2020 as compared to the same period of 2019.
A substantial amount of 6.5% Series Bour cash requirements is for debt service obligations. In April 2020, we elected to change the payment terms for interest on our Senior Secured Credit Facilities from monthly to every three months, and during the six months ended June 30, 2020, we spent $155.2 million of cash to pay interest on our debt. After giving effect to the issuance of the CCIBV Senior Secured Notes, we anticipate having approximately $166.4 million of cash interest payment obligations during the remainder 2020 and $360.3 million of cash interest payment obligations in 2021. Additionally, during the six months ended June 30, 2020 we made $10.0 million in principal payments on the Term Loan Facility, and we anticipate making $10.0 million of additional principal payments on the Term Loan Facility during the remainder of the year. Our next material debt maturity is in 2024 when $1.9 billion of CCWH Senior Notes due 2022 (the “Series B CCWH Senior Notes” and together with$150.0 million outstanding under the Series A CCWH Senior Notes, the “CCWH Senior Notes”). The CCWH Senior NotesRevolving Credit Facility are guaranteed by us, Clear Channel Outdoor, Inc.,due. Refer to Note 4 to our Consolidated Financial Statements included in Item 1 of Part I of this Quarterly Report on Form 10-Q for a subsidiary of ours (“CCOI”), and certaindetail of our directdebt outstanding as of June 30, 2020.
We also have future cash obligations under various types of contracts, including non-cancelable operating leases and indirect subsidiaries.
The Series A CCWH Senior Notes indentureother non-cancelable contracts. As previously described, we have successfully renegotiated contracts with landlords and municipalities in both the Series B CCWH Senior Notes indenture restrict our ability to incur additional indebtedness but permit us to incur additional indebtedness based on an incurrence test. Under this test,U.S. and Europe in order to incur additional indebtedness, our debtbetter align fixed site lease expenses with reductions in revenue as we continue to adjusted EBITDA ratios (as definedbe impacted by the indentures) must be lower than 7.0:1COVID-19, and 5.0:1 for total debtwe have also deferred site lease and senior debt, respectively, and in order to incur additional indebtedness that is subordinatedother payments when possible.
Debt Covenants
The Senior Secured Credit Agreement contains a springing financial covenant, applicable solely to the CCWHRevolving Credit Facility if the balance of the Revolving Credit Facility is greater than $0 and undrawn letters of credit exceed $10 million, that generally requires compliance with a first lien net leverage ratio of 7.60 to 1.00, with a step-down to 7.10 to 1.00 originally scheduled to commence with the last day of the fiscal quarter ending June 30, 2021. In June 2020, we amended the Senior Notes, our debtSecured Credit Agreement to adjusted EBITDA ratios (as defined bysuspend the indentures) must be lower than 7.0:1. The indentures contain certain other exceptions that allow us to incur additional indebtedness. The Series B CCWH Senior Notes indenture also restricts our ability to pay dividends, but permits us to pay dividendsspringing financial covenant of the Revolving Credit Facility from the proceedsthird quarter of indebtedness or2020 through the proceeds from asset sales if our debt to adjusted EBITDA ratios (as defined bysecond quarter of 2021. This amendment also delays the indenture) are lower than 7.0:1 and 5.0:1 for total debt and senior debt, respectively. The Series B CCWH Senior Notes indenture also contains certain other exceptions that allow us to pay dividends, including (i) $525.0 million of dividends made pursuant to general restricted payment baskets and (ii) dividends made using proceeds received upon a demand by us of amounts outstanding under the Due from iHeartCommunications Note. We have used substantially alltiming of the $525.0 million general restricted payment baskets infinancial covenant step-down of the Series B CCWH Senior Notes indenture. The Series A CCWH Senior Notes indenture does not limit our ability to pay dividends.
Our consolidatedfirst lien net leverage ratio defined as totaluntil the first quarter of 2022. During the suspension period, we are required to maintain minimum liquidity of $150 million, including cash on hand and availability under our receivables-based credit facility and Revolving Credit Facility, and we agreed not to make voluntary restricted payments with certain exceptions. Our first lien leverage ratio, which is calculated by dividing first lien debt divided by EBITDA (as defined by the CCWH Senior Notes indentures)Secured Credit Agreement) for the preceding four quarters, was 8.8:16.55 to 1.00 as of June 30, 2019,2020.
First lien debt and senior leverage ratio, defined as senior debt divided by EBITDA (as defined byin the CCWH Senior Notes indentures)Secured Credit Agreement) are presented herein because they are material components of the first lien net leverage ratio contained in the Senior Secured Credit Agreement. The following table presents a calculation of our first lien debt for the preceding four quarters was 4.5:1 as ofended June 30, 2019. 2020:
| | | | | |
| Four Quarters Ended |
(In millions) | June 30, 2020 |
Term Loan Facility | $ | 1,985.0 | |
Revolving Credit Facility | 150.0 | |
Clear Channel Outdoor Holdings 5.125% Senior Notes Due 2027 | 1,250.0 | |
Other debt | 5.4 | |
Less: Cash and cash equivalents | (662.1) | |
First lien debt(1) | $ | 2,728.3 | |
(1)Due to rounding, the total may not equal the sum of the line items in the table above.
As required by the definition of EBITDA in the CCWH Senior Notes indentures,Secured Credit Agreement, our EBITDA (as defined in the Senior Secured Credit Agreement) for the preceding four quarters of $607.4$416.3 million is calculated as operating income (loss) before depreciation and amortization, impairment charges and gains and losses on acquisitions and divestitures plus share-based compensation, and is further adjusted for the following: (i) costs incurredinterest income; (ii) charges, expenses or reserves in connection withrespect of any restructuring, relocation, redundancy or severance the closure and/expense or consolidation of facilities, retention charges, consulting feesone-time compensation charges; (iii) certain adjustments for pro forma "run rate" cost savings, operating expense reductions and other permitted activities; (ii) extraordinary, non-recurringsynergies related to acquisitions, dispositions and other specified transactions or unusual gainsrelated to restructuring initiatives, cost savings initiatives, entry into new contracts or losses or expenses; (iii) non-cash charges;other initiatives; and (iv) various other items. Because our consolidated leverage ratio exceeded the limit in the incurrence tests described above, we are not currently permitted to incur additional indebtedness using the incurrence test in the Series A CCWH Senior Notes indenture and the Series B CCWH Senior Notes indenture, and we are not currently permitted to pay dividends from the proceeds of indebtedness or the excess proceeds from asset sales under the Series B CCWH Senior Notes indenture. There are other exceptions in these indentures that allow us to incur additional indebtedness and pay dividends.
The following table reflects a reconciliation of EBITDA (as defined by the CCWH Senior Notes indentures)Secured Credit Agreement) to operating income and net cash provided by operating activities for the four quarters ended June 30, 2019:2020:
| | | | | |
| Four Quarters Ended |
(In millions) | June 30, 2020 |
EBITDA (as defined by the Senior Secured Credit Agreement) | $ | 416.3 | |
Less adjustments to EBITDA (as defined by the Senior Secured Credit Agreement): | |
Charges, expenses or reserves in respect of any restructuring, relocation, redundancy or severance expense or one-time compensation charges | (17.0) | |
Cost savings initiatives | (99.4) | |
Gain on disposal of operating and other assets, net, and other items | 70.8 | |
Less: Depreciation and amortization, Impairment charges, Share-based compensation and Interest income | (442.4) | |
Operating loss(1) | (71.7) | |
Plus: Depreciation and amortization, Impairment charges, Loss (gain) on disposal of operating and other assets, net and Share-based compensation | 361.7 | |
Less: Interest expense, net | (375.6) | |
Less: Current income tax expense | (22.2) | |
Less: Other expense, net | (29.7) | |
Adjustments to reconcile consolidated net loss to net cash provided by (used for) operating activities (including Credit losses, Amortization of deferred financing charges and note discounts, net, Foreign exchange transaction loss and Other reconciling items, net) | 40.8 | |
Change in operating assets and liabilities, net | 231.6 | |
Net cash provided by operating activities(1) | $ | 135.0 | |
|
| | | |
| Four Quarters Ended |
(In millions) | June 30, 2019 |
EBITDA (as defined by the CCWH Senior Notes indentures) | $ | 607.4 |
|
Less adjustments to EBITDA (as defined by the CCWH Senior Notes indentures): | |
Costs incurred in connection with severance, the closure and/or consolidation of facilities, retention charges, consulting fees and other permitted activities | (16.9 | ) |
Extraordinary, non-recurring or unusual gains or losses or expenses (as referenced in the definition of EBITDA in the CCWH Senior Notes indentures) | (4.4 | ) |
Non-cash charges | (5.6 | ) |
Other items | 9.3 |
|
Less: Depreciation and amortization, Impairment charges, Gains and losses on acquisitions and divestitures and Share-based compensation expense | (330.6 | ) |
Operating income | 259.2 |
|
Plus: Depreciation and amortization, Impairment charges, Gain (loss) on disposal of operating and fixed assets and Share-based compensation expense | 330.3 |
|
Less: Interest expense | (416.7 | ) |
Plus: Interest income on Due from iHeartCommunications | 0.2 |
|
Less: Current income tax expense | (58.3 | ) |
Plus: Other income, net | (28.7 | ) |
Adjustments to reconcile consolidated net loss to net cash provided by operating activities (including Provision for doubtful accounts, Amortization of deferred financing charges and note discounts, net and Other reconciling items, net) | 38.0 |
|
Change in assets and liabilities, net of assets acquired and liabilities assumed | 52.5 |
|
Net cash provided by operating activities | $ | 176.5 |
|
Clear Channel Worldwide Holdings Senior Subordinated Notes
As of June 30, 2019,(1)Due to rounding, the New CCWH Senior Subordinated Notes represented $2,235.0 million aggregate principal amount of indebtedness outstanding. On February 4, 2019, CCWH delivered a conditional notice of redemption calling all of its outstanding CCWH Subordinated Notes for redemption on March 6, 2019. The redemption was conditioned ontotal may not equal the closingsum of the offering of $2,235.0 million of New CCWH Subordinated Notes. At the closing of such offering on February 12, 2019, CCWH deposited with the trustee for the CCWH Subordinated Notes a portion of the proceeds from the new notes in an amount sufficient to pay and discharge the principal amount outstanding, plus accrued and unpaid interest on the CCWH Subordinated Notes to, but not including, the redemption date. CCWH irrevocably instructed the trustee to apply such funds to the full payment of the CCWH Subordinated Notes on the redemption date. Concurrently therewith, CCWH elected to satisfy and discharge the indentures governing the CCWH Subordinated Notes in accordance with their terms and the trustee acknowledged such discharge and satisfaction. As a result of the satisfaction and discharge of the indentures, CCWH and the guarantors of the CCWH Subordinated Notes have been released from their remaining obligations under the indentures and the CCWH Subordinated Notes.
The New CCWH Subordinated Notes were issued pursuant to an indenture, dated as of February 12, 2019 (the “New CCWH Notes Indenture”), among Clear Channel Worldwide, the Company, CCOI and the other guarantors party thereto (collectively with the Company and CCOI, the “Guarantors”), and U.S. Bank National Association, as trustee, paying agent, registrar and transfer agent (the “Trustee”). The New CCWH Subordinated Notes mature on February 15, 2024 and bear interest at a rate of 9.25% per annum. Prior to the Separation, interest will be payable to the Trustee weekly in arrears. Following the Separation, interest will be payable to the Trustee semi-annually. In each case, interest will be payable to the holders of the New CCWH Notes Subordinated Notes semi-annually on February 15 and August 15 of each year, beginning on August 15, 2019.
The New CCWH Subordinated Notes and the guarantees of the New CCWH Subordinated Notes are unsecured senior subordinated obligations that rank pari passu in right of payment to all senior subordinated indebtedness of Clear Channel Worldwide and the Guarantors, junior to all senior indebtedness of CCWH and the Guarantors, including the CCWH Senior Notes, and senior to all future subordinated indebtedness of CCWH and the Guarantors that expressly provides that it is subordinated to the New CCWH Subordinated Notes. Following the satisfaction of certain conditions, including that the CCWH Senior Notes are no longer outstanding and at least a portion of such notes has been refinanced with senior secured indebtedness, the New CCWH Subordinated Notes and the guarantees of the New CCWH Subordinated Notes will cease to be subordinated obligations and thereafter will rank pari passu in right of payment with all senior indebtedness of CCWH and the Guarantors (the “step-up”). There can be no assurance that the step-up will ever occur and that the New CCWH Subordinated Notes and the guarantees will ever cease to be subordinated indebtedness of CCWH and the Guarantors.
Clear Channel Worldwide may redeem the New CCWH Subordinated Notes at its option, in whole or part, at any time prior to February 15, 2021, at a price equal to 100% of the principal amount of the New CCWH Subordinated Notes redeemed, plus a make-whole premium, plus accrued and unpaid interest to the redemption date. CCWH may redeem the New CCWH Subordinated Notes, in whole or in part, on or after February 15, 2021, at the redemption prices set forthline items in the New CCWH Notes Indenture plus accrued and unpaid interest to the redemption date. At any time prior to February 15, 2021, CCWH may elect to redeem up to 40%table above.
In addition, CCWH may redeem up to 20%each of the aggregate principal amount of the New CCWH Subordinated Notes at any time prior to February 15, 2021, using the net proceeds from certain other equity offerings at 103% of the principal amount of the New CCWH Subordinated Notes. CCWH will be permitted to use these two redemption options concurrently but will not be permitted to redeem, in the aggregate, more than 40% of the principal amount of the New CCWH Subordinated Notes pursuant to these options.
The New CCWH Notes Indenture containsour debt agreements includes negative covenants that, subject to significant exceptions, limit the Company’sour ability and the ability of itsour restricted subsidiaries to, among other things: (i)things, incur or guarantee additional debtindebtedness or issue certain preferred stock; (ii) redeem, purchase or retire subordinated debt; (iii) makeincur certain investments; (iv) create restrictions on the payment of dividends or other amounts from the Company’s restricted subsidiaries that are not Guarantors; (v) enter into certain transactions with affiliates; (vi) merge or consolidate with another person, or sell or otherwise dispose of all or substantially all of the Company’s assets; (vii)liens; engage in mergers, consolidations, liquidations and dissolutions; sell certain assets, including capital stock of the Company’sour subsidiaries; (viii) designate the Company’s subsidiaries as unrestricted subsidiaries, (ix) pay dividends redeemand distributions or repurchase capital stockstock; make certain investments, loans, or make other restricted payments; and (x) in the event that the step-up occurs and New CCWH Subordinated Notes cease to beadvances; redeem, purchase or retire subordinated incur certain liens.
Receivables Based Credit Facility Due 2023
During the second quarter of 2018, CCOI, a subsidiary of ours, entered into a receivables-based credit facility with an aggregate principal amount of $125.0 million. The receivables-based credit facility may be used for working capital needs, to issue letters of credit and for other general corporate purposes.
As of June 30, 2019, the facility had $80.7 million of letters of credit outstanding and a borrowing limit of $125.0 million, resulting in $44.3 million of excess availability.
Borrowings under the receivables-based credit facility will mature, and lending commitments thereunder will terminate, on the earlier of (a) June 1, 2023 and (b) 90 days prior to the maturity date of any indebtedness of the Company or any of its direct or indirect subsidiaries in an aggregate principal amount outstanding in excess of $250 million (other than the CCIBV Senior Notes).
CCIBV Senior Notes
During the fourth quarter of 2015, CCIBV, an international subsidiary of ours, issued $225.0 million aggregate principal amount outstanding of the CCIBV Senior Notes). During the third quarter of 2017, CCIBV issued $150.0 million in additional aggregate principal amount of CCIBV Senior Notes, bringing the total amount outstanding under the CCIBV Senior Notes as of June 30, 2019 to $375.0 million.
The indenture governing the CCIBV Senior Notes contains covenants that limit CCIBV’s ability and the ability of its restricted subsidiaries to, among other things: (i) pay dividends, redeem stock or make other distributions or investments; (ii) incur additional debt or issue certain preferred stock; (iii) transfer or sell assets; (iv) create liens on assets; (v)debt; engage in certain transactions with affiliates; (vi) createenter into agreements which limit our ability and the ability of our restricted subsidiaries to incur restrictions on dividendsthe ability to make distributions; and amend or other payments by the restricted subsidiaries; and (vii) merge, consolidate or sell substantially all of CCIBV’s assets.waive organizational documents.
Other Debt
Other debt consists primarily of capital leases and loans with international banks. As of June 30, 2019, approximately $4.0 million was outstanding as other debt.2020, we were in compliance with the covenants contained in our financing agreements.
Mandatorily Redeemable Preferred Stock
Guarantor Subsidiaries
The Company and certain of the Company’s direct and indirect wholly-owned domestic subsidiaries (the “Obligor Group") fully and unconditionally guarantee, on a joint and several basis, the CCWH Senior Notes. On May 1, 2019,February 28, 2020, the Company issued 45,000 sharesand the guarantors under the CCWH Senior Notes Indenture filed a registration statement with the SEC to register the offer to exchange the CCWH Senior Notes and the guarantees thereof for a like principal amount of Series A Perpetual Preferred Stock, par value $0.01 per share,CCWH Senior Notes and guarantees thereof that have been registered under the Securities Act, in accordance with the deadlines set forth in the Registration Rights Agreement. The registration statement, as amended on April 6, 2020, became effective on April 7, 2020.
In our Annual Report on Form 10-K for the year ended December 31, 2019, we included certain consolidating information with respect to the Company, Clear Channel Worldwide Holdings, Inc. (“CCWH”) and our wholly-owned subsidiaries that guarantee the CCWH Senior Notes in the notes to our audited consolidated financial statements pursuant to Rule 3-10 of Regulation S-X. In March 2020, the SEC adopted amendments to Rule 3-10 of Regulation S-X to simplify the financial disclosure requirements for guarantors and issuers of guaranteed registered securities. The amendments will be effective January 4, 2021, but voluntary compliance with the amendments in advance of January 4, 2021 is permitted. As a result of these amendments, starting with this Quarterly Report on Form 10-Q, we will no longer include consolidating financial information in the notes to our consolidated financial statements, and we will instead include certain summary financial information in accordance with Rule 13-01 of Regulation S-X.
The following summary financial information of the Company having an aggregate initial liquidation preferenceObligor Group, which includes the parent guarantor, the issuer and the subsidiary guarantors, is provided in conformity with the SEC’s Regulation S-X Rule 13-01:
| | | | | | | | | | | |
(In thousands) | Six Months Ended June 30, 2020 | | Year Ended December 31, 2019 |
Results of Operations Data: | | | |
Revenue | $ | 493,274 | | | $ | 1,263,657 | |
Operating income (loss) | (102,575) | | | 239,307 | |
Net loss attributable to the Obligor Group | (273,783) | | | (292,916) | |
| | | | | | | | | | | |
| As of | | As of |
(In thousands) | June 30, 2020 | | December 31, 2019 |
Select Asset and Liability Data: | | | |
Cash and cash equivalents | $ | 344,167 | | | $ | 287,773 | |
Other current assets | 217,956 | | | 265,368 | |
Property, plant and equipment, net | 621,698 | | | 669,402 | |
Notes receivable from related-party non-guarantors | 305,581 | | | 306,679 | |
Other assets(1) | 2,679,259 | | | 2,794,351 | |
Current liabilities (excluding current portion of long-term debt) | 369,684 | | | 397,107 | |
Long-term debt (including current portion of long-term debt) | 5,227,737 | | | 5,083,988 | |
Mandatorily-redeemable preferred stock | — | | | 44,912 | |
Notes payable to related-party non-guarantors | 80,299 | | | 80,146 | |
Other non-current liabilities | 1,410,211 | | | 1,422,997 | |
(1) Investments in non-guarantor subsidiaries have been excluded from the presentation of $45 million (the “Preferred Stock”) for a cash purchase priceOther assets.
As of June 30, 2019,2020, CCWH had $1,901.5 million of CCWH Senior Notes outstanding. The CCWH Senior Notes are guaranteed, jointly and severally, irrevocably and unconditionally, on an unsecured senior basis, by the liquidation preferenceCompany and certain of the Preferred Stock was approximately $46.1 million.
The termsCompany’s existing and conditionsfuture subsidiaries (the “Guarantors”). Not all of the Preferred Stock andCompany’s subsidiaries guarantee the rights of its holders are set forth inCCWH Senior Notes. The Company’s subsidiaries that do not guarantee the Certificate of Designation of Series A Perpetual Preferred StockCCWH Senior Notes (the “Certificate of Designation”“Non-Guarantor Subsidiaries”) include all foreign subsidiaries of the Company, filed with the officeall non-wholly-owned subsidiaries of the Secretary of StateCompany, certain domestic subsidiaries and all immaterial subsidiaries. The CCWH Senior Notes are structurally subordinated to all existing and future obligations of the State of Delaware on May 1, 2019,Non-Guarantor Subsidiaries, and the Series A Investors Rights Agreement, datedclaims of creditors of the Non-Guarantor Subsidiaries, including trade creditors, will have priority as to the assets of these subsidiaries. In the event of a bankruptcy, liquidation or reorganization of any of the Non-Guarantor Subsidiaries, holders of their indebtedness and their trade and other creditors will generally be entitled to payment of their claims from the assets of those subsidiaries before any assets are made available for distribution to CCWH and, in turn, to its creditors.
In addition, as of May 1, 2019, byJune 30, 2020, CCWH guaranteed $1,250.0 million principal amount of CCOH Senior Secured Notes, $1,985.0 million of borrowings under the Term Loan Facility, $150.0 million of borrowings and among$20.2 million of letters of credit under the Company,Revolving Credit Facility, and $63.3 million of letters of credit under the Receivables-Based Credit Facility. All of the subsidiaries of CCOH that guarantee the CCWH Senior Notes are guarantors of this secured indebtedness. The CCWH Senior Notes are effectively subordinated to, and the purchaser listed therein (the “Investors Rights Agreement”).
Sharesguarantee of each Guarantor of the Preferred Stock rank senior and in priority of payment to our common equity interests and preferred stock juniorCCWH Senior Notes is effectively subordinated to, the Preferred StockCCOH Senior Secured Notes, the Term Loan Facility, the Revolving Credit Facility and other equity interests and preferred stock that does not expressly provide that such equity interest ranks senior to or pari passu with the Preferred Stock in any liquidation or winding up of the Company.
Dividends on the Preferred Stock will accrue on a daily basis at the applicable dividend rate on the then-current liquidation preference of the Preferred Stock, as and when declared by the board of directors. Dividends will either (a) be payable in cash, if andReceivables-Based Credit Facility, to the extent declaredof the value of the assets securing such indebtedness.
The obligations of each Guarantor under its guarantee are limited as necessary to prevent such guarantee from constituting a fraudulent conveyance under applicable law. If a guarantee were to be rendered voidable, it could be subordinated by a court to all other indebtedness (including guarantees and other contingent liabilities) of the boardGuarantor, and, depending on the amount of directors,such indebtedness, a Guarantor’s liability on its guarantee could be reduced to zero. Each guarantee by a Guarantor provides by its terms that it shall be automatically and unconditionally released and discharged upon: (1) any sale, exchange or (b)transfer (by merger or otherwise) of the Guarantor in a manner in compliance with the applicable provisions of the CCWH Senior Notes Indenture; (2) the designation of any restricted subsidiary that is a Guarantor as an unrestricted subsidiary; (3) CCWH’s exercising legal defeasance or covenant defeasance in accordance with the relevant provisions of the CCWH Senior Notes Indenture, or (4) a Guarantor ceasing to be addeda restricted subsidiary as a result of a transaction or designation permitted under the CCWH Senior Notes Indenture.
CCWH is a holding company with no significant operations or material assets other than the direct and indirect equity interests in its subsidiaries. CCWH derives all of its operating income from its subsidiaries. As a result, its cash flow and the ability to service its indebtedness, including the liquidation preference. CCWH Senior Notes, depends on the performance of its subsidiaries and the ability of those entities to distribute funds to it.
CRITICAL ACCOUNTING ESTIMATES
The dividend rate will be equalpreparation of our financial statements in conformity with GAAP requires management to (i)make estimates, judgments and assumptions that affect the greaterreported amounts of (a) a published LIBOR rate or (b) two (2%) percent plus (ii) either a cash dividend margin orassets and liabilities, and disclosure of contingent assets and liabilities, at the date of the financial statements and the reported amount of revenue and expenses during the reporting period. On an accruing dividend margin, in each caseongoing basis, we evaluate our estimates that are based on historical experience and on various other assumptions that are believed to be reasonable under the Company’s consolidated leverage ratio, subjectcircumstances. The results of these evaluations form the basis for making judgments about the carrying values of assets and liabilities and the reported amount of revenue and 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. Management believes that certain 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. These critical accounting estimates, management's judgments and assumptions, and the effect if actual results differ from these assumptions are described under Part II, Item 7 "Management's Discussion and Analysis of Financial Condition and Results of Operations" in our 2019 Annual Report on Form 10-K.
Due to COVID-19, we have updated certain adjustments. At any leverage ratio,of our estimates and assumptions that affect the accruing dividend margin will exceedreported amounts of assets and liabilities from that of which was reported in our 2019 Annual Report on Form 10-K, as described below. There continues to be a high level of uncertainty in estimating our expected economic and operational impacts relative to COVID-19 as it is an evolving situation. As expected impacts from COVID-19 are revised, our estimates and assumptions may change, and we may experience further potential impacts to our financial statements in future periods.
Impairment Tests
Indefinite-lived Intangible Assets
Indefinite-lived intangible assets, such as our billboard permits, are reviewed at least annually for possible impairment and whenever events or changes in circumstances indicate that the cash dividend margin by 1.5%. Dividends, if declared, will be payable on March 31, June 30, September 30 and December 31 of each year (or on the next business day if such date is not a business day). No dividend may be declared unless paid immediately in cash (it being understood that no dividends may be declared and paid in securities or otherwise “in kind”).
The Company may redeem anycarrying amount of the Preferred Stock, at its option, at any time on or afterasset may not be recoverable using the third anniversarydirect valuation method as prescribed in ASC 805-20-S99. Under the direct valuation method, the estimated fair value of the Issue Date, in each case, in cashindefinite-lived intangible assets is calculated at a redemption price equal to the Liquidation Preference per share. Upon consummation of certain equity offerings, the Company may, at its option, redeem all ormarket level as prescribed by ASC 350-30-35, and it is assumed that rather than acquiring indefinite-lived intangible assets as a part of a going concern business, the Preferred Stockbuyer hypothetically develops 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 that are normally associated with going concern value. Initial capital costs are deducted from the discounted cash flow model to calculate the 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 and losses incurred during the build-up period, the risk-adjusted discount rate and terminal values. This data is populated using industry-normalized information representing an average asset within a market.
Due to COVID-19 we tested our intangible assets for impairment and recognized an impairment charge of $123.1 million in the first quarter of 2020, related to permits in multiple markets in our Americas segment, primarily driven by reductions in projected cash flows and an increased discount rate. In determining the fair value of our billboard permits, the following key assumptions were used:
•Industry revenue growth forecasts used for the Liquidation Preference plusinitial four-year period, which varied by market, included an average growth of 2.4% over the next two years, factoring in the impacts related to COVID-19, and between 2.9% and 3.0% during the remaining two years;
•Revenue growth beyond the initial four-year period was assumed to be 3.0%;
•Revenue was grown over a make-whole premium. In addition, uponbuild-up period, reaching maturity by the occurrencesecond year;
•Operating margins gradually climb to the industry average margin (as high as 53.3%, depending on market size) by the third year; and
•Discount rate was assumed to be 10.0%.
While we believe we have made reasonable estimates and utilized appropriate assumptions to calculate the fair value of among other things (i) anyour indefinite-lived intangible assets, it is possible that 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 the fair value of control, (ii) a liquidation, dissolution, or winding up or (iii) certain insolvency events, each holder may requireour indefinite-lived intangible assets that would result from decreases of 100 basis points in our discrete and terminal period revenue growth rate and profit margin assumptions and an increase of 100 basis points in our discount rate assumption:
| | | | | | | | | | | | | | | | | | | | |
(In thousands) | | Revenue growth rate | | Profit margin | | Discount rate |
Decrease in fair value of: | | (100 basis point decrease) | | (100 basis point decrease) | | (100 basis point increase) |
Billboard permits | | $ | (523,700) | | | $ | (119,100) | | | $ | (504,000) | |
The estimated fair value of our billboard permits at March 31, 2020 was $1.9 billion. As of June 30, 2020, the Company to redeem for cash allcarrying value of our billboard permits was $0.8 billion which reflects the impairment charge recognized in the first quarter of 2020 discussed above.
Goodwill
Goodwill represents the excess of the then outstanding sharespurchase price over the fair value of Preferred Stock. In addition,identifiable net assets acquired in business combinations. 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 holdersnet assets of Preferred Shares may require a designated subsidiaryeach reporting unit. To the extent that the carrying amount of net assets would exceed the fair value, an impairment charge is recorded. The discounted cash flow approach that we use for valuing goodwill as part of the Companyimpairment testing approach involves estimating future cash flows expected to purchasebe generated from the sharesrelated assets, discounted to their present value using a risk-adjusted discount rate. Terminal values are also estimated and discounted to their present value.
As previously described, we changed our presentation of segment information as of January 1, 2020 to reflect changes in the way the business is managed and resources are allocated by the CODM. This resulted in a change to our operating segments and certain reporting units. Corresponding with the change in our reporting units, we tested goodwill for impairment immediately before and after the fifth anniversarychange utilizing a discount rate of issuance.approximately 8.5% to 10.0% for each of our reporting units and an estimated perpetual growth rate of 3.0%. This testing did not identify impairment. Additionally, due to the expected impacts from COVID-19, we tested our goodwill for impairment as of March 31, 2020 in accordance with ASC 350-20-35; however, this did not result in any impairment of goodwill during the three months ended March 31, 2020. In determining the fair value of our reporting units, we used the following assumptions:
On•Expected cash flows underlying our business plans for the tenth anniversaryperiods 2020 through 2024, which are based on detailed, multi-year forecasts performed by each of our operating segments and reflect the advertising outlook across our businesses;
•Cash flows beyond 2024 are projected to grow at a perpetual growth rate, which we estimated at 3.0%; and
•In order to risk-adjust the cash flow projections in determining fair value, we utilized a discount rate of approximately 9.5% to 11.0% for each of our reporting units.
Based on our assessment using the assumptions described above, a hypothetical 10% reduction in the estimated fair value in each of our reporting units would not result in a material impairment condition.
While we believe we have made reasonable estimates and utilized appropriate assumptions to calculate the estimated fair value of our reporting units, it is possible a material change could occur. If future results are not consistent with our assumptions and estimates, we may be exposed to impairment charges in the future. The following table shows the decrease in the fair value of each of our reporting units with goodwill that would result from decreases of 100 basis points in our discrete and terminal period revenue growth rate and profit margin assumptions and an increase of 100 basis points in our discount rate assumption:
| | | | | | | | | | | | | | | | | | | | |
(In thousands) | | Revenue growth rate | | Profit margin | | Discount rate |
Decrease in fair value of reporting unit: | | (100 basis point decrease) | | (100 basis point decrease) | | (100 basis point increase) |
Americas | | $ | (410,000) | | | $ | (120,000) | | | $ | (400,000) | |
Europe | | $ | (116,000) | | | $ | (135,000) | | | $ | (105,000) | |
Latin America | | $ | (14,000) | | | $ | (5,000) | | | $ | (15,000) | |
NEW ACCOUNTING PRONOUNCEMENTS
For a description of the issue dateexpected impact of the Preferred Stock, the shares of Preferred Stock will be subject to mandatory redemption for an amount equal to the liquidation preference.
The certificate of designations for the Preferred Stock will limit its ability to incur additional debt or any other security ranking pari passu with or senior to the Preferred Stock, other than in (a) an amountnewly issued but not to exceed $300 millionyet adopted accounting pronouncements on a cumulative basis or (b) subject to an incurrence-based leverage test, subject to other customary carve-outs.
Commitments, Contingenciesour financial position 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”Note 1 to our Consolidated Financial Statements located in Part II, Item 1 of Part I of this Quarterly Report on Form 10-Q.
SEASONALITYCautionary Statement Concerning Forward-Looking Statements
Typically, both This report contains various forward-looking statements which represent our Americasexpectations or beliefs concerning future events, including, without limitation, our future operating and International segments experience their lowest financial performance, our ability to comply with the covenants in the first quarteragreements governing our indebtedness and the availability of capital and the terms thereof. Statements expressing expectations and projections with respect to future matters are forward-looking statements within the meaning of the calendar year,Private Securities Litigation Reform Act of 1995, which provides a safe harbor for forward-looking statements made by us or on our behalf. We caution that these forward-looking statements involve a number of risks and uncertainties and are subject to many variables that 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:
•the magnitude of the impact of the COVID-19 pandemic on our operations and on general economic conditions;
•risks associated with International historically experiencing a loss fromweak or uncertain global economic conditions and their impact on the level of expenditures on advertising;
•our ability to service our debt obligations and to fund our operations and capital expenditures;
•industry conditions, including competition;
•our ability to obtain key municipal concessions for our street furniture and transit products;
•fluctuations in that period. Our International segment typically experiences its strongest performanceoperating costs;
•technological changes and innovations;
•shifts in population and other demographics;
•other general economic and political conditions in the secondU.S. and fourth quartersin other countries in which we currently do business, including those resulting from recessions, political events and acts or threats of terrorism or military conflicts;
•changes in labor conditions and management;
•the impact of future dispositions, acquisitions and other strategic transactions;
•legislative or regulatory requirements;
•regulations and consumer concerns regarding privacy and data protection;
•a breach of our information security measures;
•restrictions on outdoor advertising of certain products;
•fluctuations in exchange rates and currency values;
•risks of doing business in foreign countries;
•third-party claims of intellectual property infringement, misappropriation or other violation against us;
•the risk that the Separation could result in significant tax liability or other unfavorable tax consequences to us and impair our ability to utilize our federal income tax net operating loss carryforwards in future years;
•the risk that we may be more susceptible to adverse events following the Separation;
•the risk that we may be unable to replace the services iHeartCommunications provided us in a timely manner or on comparable terms;
•our dependence on our management team and other key individuals;
•the risk that indemnities from iHeartMedia will not be sufficient to insure us against the full amount of certain liabilities;
•volatility of our stock price;
•the impact of our substantial indebtedness, including the effect of our leverage on our financial position and earnings;
•the ability of our subsidiaries to dividend or distribute funds to us in order for us to repay our debts;
•the restrictions contained in the agreements governing our indebtedness limiting our flexibility in operating our business;
•the effect of analyst or credit ratings downgrades;
•our ability to regain compliance with the continued listing criteria of the calendar year. We expect this trendNew York Stock Exchange and continue to continue incomply with other applicable listing standards within the future. Due to this seasonalityavailable cure period; and
•certain other factors set forth in our other filings with the results forSEC.
This list of factors that may affect future performance and the interim periods mayaccuracy of forward-looking statements is illustrative and is not intended to be indicativeexhaustive. Accordingly, all forward-looking statements should be evaluated with the understanding of results for the full year.their inherent uncertainty.
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
We are exposed to market risks arising from changes in market rates and prices, including movements in equity security prices, and foreign currency exchange rates.
On June 23, 2016, the United Kingdom (the "U.K.") held a referendum in which voters approved an exit of the U.K. from the European Union (the "E.U."), commonly referred to as "Brexit,"rates and on March 29, 2017, the U.K. delivered formal notification of its intention to withdraw from the E.U. To date, no formal withdrawal agreement has been reached between the U.K. and the E.U., despite the passage of the date on which it was expected that the U.K.’s membership in the E.U. would terminate, creating significant uncertainty about the terms (and timing) under which the U.K. will leave the E.U. and the consequent impact on the economies of the U.K., the E.U. and other countries. Our International segment is currently headquartered in the U.K. and transacts business in many key European markets including the U.K. The announcement of Brexit caused the British pound currency rate to weaken against the U.S. dollar. Further, Brexit may cause our U.K. customers to closely monitor their costs and reduce the amount they spend on advertising. Any of these or similar effects of Brexit could adversely impact our business, operating results, cash flows and financial condition.inflation.
Foreign Currency Exchange Rate Risk
We have operations in countries throughout the world. Foreignworld, and foreign operations are measured in their local currencies. As a result, our financial results could be affected by factors such as changes in foreign currency exchange rates or weak economic conditions in the foreign markets in which we have operations. We believeChanges in economic or political conditions in any of the foreign countries in which we mitigate a small portionoperate, including Brexit, could result in exchange rate movement, new currency or exchange controls or other currency restrictions being imposed.
Our foreign operations reported a net lossesloss of $4.7$51.0 million and $42.2$165.4 million for the three and six months ended June 30, 2019.2020. We estimate that a 10% increase in the value of the U.S. dollar relative to foreign currencies would have decreased our net lossesloss for the three and six months ended June 30, 20192020 by $0.5$5.1 million and $4.2$16.5 million, respectively. Arespectively, and a 10% decrease in the value of the U.S. dollar relative to foreign currencies duringwould have increased our net loss for the three and six months ended June 30, 2019 would have increased our net losses for the same periods2020 by a corresponding amount.
This analysis does not consider the implications that such currency fluctuations could have on the overall economic activity that could exist in such an environment in the U.S. or the foreign countries or on the results of operations of these foreign entities.
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 outdoor display faces.
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. Except for the historical information, 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, our ability to comply with the covenants in the agreements governing our indebtedness and the availability of capital and the terms thereof. 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 on advertising, including the effects of Brexit and economic uncertainty in China;
our ability to service our debt obligations and to fund our operations and capital expenditures;
industry conditions, including competition;
our dependence on our management team and other key individuals;
our ability to obtain key municipal concessions for our street furniture and transit products;
fluctuations in operating costs;
technological changes and innovations;
shifts in population and other demographics;
other general economic and political conditions in the United States and in other countries in which we currently do business, including those resulting from recessions, political events and acts or threats of terrorism or military conflicts;
changes in labor conditions and management;
the impact of future dispositions, acquisitions and other strategic transactions;
legislative or regulatory requirements;
regulations and consumer concerns regarding privacy and data protection, and breaches of information security measures;
increases in tax rates or changes in tax laws or regulations;
a breach of our security measures;
restrictions on outdoor advertising of certain products;
capital expenditure requirements;
fluctuations in exchange rates and currency values;
risks of doing business in foreign countries;
new or increased tariffs or unfavorable changes in trade policy;
the risk that we may be more susceptible to adverse events following the Separation;
the risk that we may be unable to replace the services iHeartCommunications provided us in a timely manner or on comparable terms;
the risk that the Separation may result in unfavorable tax consequences for us and impair our ability to utilize our federal income tax net operating loss carryforwards in future years;
the impact of our substantial indebtedness, including the effect of our leverage on our financial position and earnings;
the ability of our subsidiaries to dividend or distribute funds to us in order for us to repay our debts;
the restrictions contained in the agreements governing our indebtedness and our Series A Preferred Stock limiting our flexibility in operating our business;
the effect of analyst or credit ratings downgrades; and
certain other factors set forth in our other filings with the SEC.
This list of factors that may affect future performance and the accuracy of forward-looking statements is illustrative and is not intended to be exhaustive. Accordingly, all forward-looking statements should be evaluated with the understanding of their inherent uncertainty.
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
Required information is presented under “Market Risk” within Item 2 of this Part I.
ITEM 4. CONTROLS AND PROCEDURES
As required by Rule 13a-15(b) of the Securities Exchange Act of 1934, as amended (the “Exchange Act”), under the supervision and with the participation of management, including our Chief Executive Officer and our Chief Financial Officer, we have carried out an evaluation of the effectiveness of the design and operation of our disclosure controls and procedures (as defined in Rule 13a-15(e) under the Exchange Act) as of the end of the period covered by this report. Our disclosure controls and procedures are designed to provide reasonable assurance that information we are required to disclose in reports that are filed or submitted under the Exchange Act is accumulated and communicated to our management, including our Chief Executive Officer and our Chief Financial Officer, as appropriate to allow timely decisions regarding required disclosure and is recorded, processed, summarized and reported within the time periods specified by the SEC. Based on that evaluation, our Chief Executive Officer and our Chief Financial Officer concluded that our disclosure controls and procedures were effective as of June 30, 20192020 at the reasonable assurance level.
There were no changes in our internal control over financial reporting that occurred during the quarter ended June 30, 20192020 that have materially affected, or are reasonably likely to materially affect, our internal control over financial reporting.
PART II --– OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS
We currently are involved in certain legal proceedings arising in the ordinary course of business, and, as required, have accrued an estimate of the probable costs for the 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 its strategies related to these proceedings. Additionally, due to the inherent uncertainty of litigation, there can be no assurance that the resolution of any particular claim or proceeding would not have a material adverse effect on our financial condition or results of operations.
Although we are involved in a variety of legal proceedings in the ordinary course of business, a large portion of our litigation arisesarising in the following contexts: commercial disputes; misappropriation of likeness and right of publicity claims;disputes, employment and benefits related claims;claims, land use and zoning, governmental fines;fines, intellectual property claims;claims, and tax disputes.
Stockholder Litigation
On May 9, 2016, a stockholder We are not aware of the Company filed a derivative lawsuit in the Court of Chancery of the State of Delaware (the “Delaware Chancery Court”), captioned GAMCO Asset Management Inc. v. iHeartMedia Inc. et al., C.A. No. 12312-VCS. The complaint named as defendants iHeartCommunications, Inc. (“iHeartCommunications”), the Company’s indirect parent company, iHeartMedia, Inc. (“iHeartMedia”), the parent company of iHeartCommunications, Bain Capital Partners, LLC and Thomas H. Lee Partners, L.P. (together, the “Former Sponsor Defendants”), iHeartMedia’s pre-bankruptcy private equity sponsors and pre-bankruptcy majority owners, and the members of the Company’s board of directors. The Company also was named as a nominal defendant. The complaint alleged that the Company had been harmed by the intercompany agreements with iHeartCommunications, the Company’s lack of autonomy over its own cash and the actions of the defendants in serving the interests of iHeartMedia, iHeartCommunications and the Former Sponsor Defendants to the detriment of the Company and its minority stockholders. The plaintiff sought, amongany other things, a ruling that the defendants breached their fiduciary duties to the Company and that iHeartMedia, iHeartCommunications and the Former Sponsor Defendants aided and abetted the board of directors’ breaches of fiduciary duty, rescission of payments to iHeartCommunications and its affiliates pursuant to dividends declared in connection with the CCIBV Note Offering and Outdoor Asset Sales, and an order requiring iHeartMedia, iHeartCommunications and the Former Sponsor Defendants to disgorge all profits they have received as a result of the alleged fiduciary misconduct.
On July 20, 2016, the defendants filed a motion to dismiss plaintiff's verified stockholder derivative complaint for failure to state a claim upon which relief can be granted. On November 23, 2016, the Delaware Chancery Court granted defendants’ motion to dismiss all claims brought by the plaintiff. On December 19, 2016, the plaintiff filed a notice of appeal of the ruling. The oral hearing on the appeal was held on October 11, 2017. On October 12, 2017, the Supreme Court of Delaware affirmed the lower court's ruling, dismissing the case.
On December 29, 2017, another stockholder of the Company filed a derivative lawsuit (the "Norfolk Lawsuit") in the Delaware Chancery Court captioned Norfolk County Retirement System, v. iHeartMedia, Inc., et al., C.A. No. 2017-0930-JRS. The complaint names as defendants iHeartMedia, iHeartCommunications, the Former Sponsor Defendants, and the members of the Company's board of directors. The Company is named as a nominal defendant. The complaint alleges that the Company has been harmed by the Company Board’s November 2017 decision to extend the maturity date of the intercompany revolving note (the “Third Amendment”) at what the complaint describes as far-below-market interest rates. The plaintiff sought, among other things, a ruling that the defendants breached their fiduciary duties to the Company, a modification of the Third Amendment to bear a commercially reasonable rate of interest, and an order requiring disgorgement of all profits, benefits and other compensation obtained by defendants as a result of the alleged breaches of fiduciary duties.
On March 7, 2018, the defendants filed a motion to dismiss plaintiff's verified derivative complaint for failure to state a claim upon which relief can be granted. On March 16, 2018, iHeartMedia filed a Notice of Suggestion of Pendency of Bankruptcy and Automatic Stay of Proceedings. On May 4, 2018, plaintiff filed its response to the motion to dismiss. On June 26, 2018, the defendants filed a reply brief in further support of their motion to dismiss. Oral argument on the motion to dismiss was held on September 20, 2018.
On August 27, 2018, the same stockholder of the Company that had filed a derivative lawsuit against iHeartMedia and others in 2016 (GAMCO Asset Management Inc.) filed a putative class action lawsuit (the "GAMCO II Lawsuit") in the Delaware Chancery Court, captioned GAMCO Asset Management, Inc. v. Hendrix, et al., C.A. No. 2018-0633-JRS. The complaint names as defendants the Former Sponsor Defendants and the members of the Company’s board of directors. The complaint alleges that minority shareholders in the Company during the period November 8, 2017 to March 14, 2018 were harmed by decisions of the Company's board of directors and the intercompany note committee of the board of directors relating to the intercompany note. The plaintiff sought, among other things, a ruling that the Company's board of directors, the intercompany note committee, and the Sponsor Defendants breached their fiduciary duties and that the Sponsor Defendants aided and abetted the Board’s breach of fiduciary duty; and an award of damages, together with pre- and post-judgment interests, to the putative class of minority shareholders.
On December 16, 2018, the Debtors, the Company, GAMCO Asset Management, Inc., and Norfolk County Retirement System entered into a settlement agreement (the "Settlement Agreement"), which resolves all claims, objections, and other causes of action that have been or could be assertedmaterial pending legal proceedings by or on behalf of the Company, GAMCO Asset Management, Inc., and/or Norfolk County Retirement System by and among the Debtors, the Company, GAMCO Asset Management, Inc., certain individual defendants in the GAMCO Asset Management, Inc. action and/or the Norfolk County Retirement System action, and the private equity sponsor defendants in such actions. The Settlement Agreement provides for the consensual separation of the Debtors and the Company, including approximately $149.0 million of recovery to CCOH on account of its claim against iHeartCommunications in the Chapter 11 cases, an unsecured revolving line of credit in an aggregate amount not to exceed $200 million from iHeartCommunications (the “iHeart Line of Credit”), the transfer of certain of the Debtors’ intellectual property to the Company, the waiver by the Debtors of the setoff for the value of the transferred intellectual property, mutual releases, the termination of the cash sweep under the existing Corporate Services Agreement, the termination of any agreements or licenses requiring royalty payments from the Company to the Debtors for trademarks or other intellectual property, the waiver of any post-petition amounts owed by the Company relating to such trademarks or other intellectual property, and the execution of a new transition services agreement and other separation documents. The Settlement Agreement was approved by the Bankruptcy Court and the United States District Court for the Southern District of Texas in connection with the confirmation of the iHeartMedia Chapter 11 Cases on January 22, 2019. On May 1, 2019, the Debtors' plan of reorganization went effective, and the Norfolk Lawsuit and GAMCO II Lawsuit were each subsequently dismissed with prejudice.us.
China Investigation
Two former employees of Clear Media Limited, an indirect, non-wholly-owned subsidiary of the Company whose ordinary shares are listed on the Hong Kong Stock Exchange, have been convicted in China of certain crimes, including the crime of misappropriation of funds, and sentenced to imprisonment. One of those former employees has appealed his conviction. The Company isWe are not aware of any litigation, claim or assessment pending against the Companyus in relation to this investigation. Based on information known to date, the Company believes any contingent liabilities arising from potential misconduct that has been or may be identified by the investigation in China are not material to the Company’s consolidated financial statements. The effect of the misappropriation of funds is reflected in these financial statements in the appropriate periods.
The CompanyWe advised both the United States Securities and Exchange CommissionSEC and the United States DepartmentDOJ of Justice of thethis investigation at Clear Media Limited and isare cooperating to provide documents, interviews and information to the agencies. Subsequent to the announcement that we were considering a strategic review of our stake in response to inquiriesClear Media, in March 2020, we received a subpoena from the agencies. The Clear Media Limited investigation could implicate the books and records, internal controls and anti-bribery provisionsstaff of the U.S. Foreign Corrupt Practices Act, which statuteSEC and regulations providea Grand Jury subpoena from the United States Attorney's Office for potential monetary penalties as well as criminal and civil sanctions. It is possible that monetary penalties and other sanctions could be assessed on the CompanyEastern District of New York, both in connection with this matter. The nature and amount of any monetary penalty or other sanctions cannot reasonably be estimated at this time and could be qualitatively or quantitatively materialthe previously disclosed investigation. For additional information related to the Company.China investigation, refer to Note 5 to our Consolidated Financial Statements located in Item 1 of Part I of this Quarterly Report on Form 10-Q.
Italy Investigation
During the three months ended June 30, 2018, the Company identified misstatements associated with VAT obligations in its business in Italy, which resulted in an understatement of its VAT obligation. These misstatements resulted in an understatement of other long-term liabilities of $16.9 million as of December 31, 2017. The effect of these misstatements is reflected in the historical financial statements in the appropriate periods. Upon identification of these misstatements, the Company undertook certain procedures, including a forensic investigation. In addition, the Company voluntarily disclosed the matter and findings to the Italian tax authorities in order to commence a discussion on the appropriate calculation of the VAT position. The current expectation is that the Company may have to repay to the Italian tax authority a substantial portion of the VAT previously applied as a credit in relation to the transactions under investigation, amounting to approximately $17 million, including estimated possible penalties and interest. The Company made a payment of approximately $6.9 million, net of VAT recoverable, during the fourth quarter of 2018 and expects to pay the remainder during the last half of 2019 or the first quarter of 2020. The ultimate amount to be paid may differ from the estimates, and such differences may be material.
ITEM 1A. RISK FACTORS
Risks Related to Our Business
There have not been anyno material changes to the risk factors disclosed under the caption “Risks Related to Our Business” in Part I, Item 1A of"Risk Factors" in our Annual Report on Form 10-K for the year ended December 31, 2018 (the “Annual Report”),2019, except that we are updating the risk factors entitled “Our results have beenfactor set forth under “The coronavirus outbreak could impact our operations” in the past,Form 10-K is updated and could be in the future, adversely affected by economic uncertainty or deteriorations in economic conditions,” “We face intense competition in the outdoor advertising business,” “Our financial performance may be adversely affected by many factors beyond our control,” “Future dispositions, acquisitions and other strategic transactions could pose risks,” “Government regulation of outdoor advertising may restrict our outdoor advertising operations,” “We are exposed to foreign currency exchange risks because a majority of our revenue is received in foreign currencies and translated to U.S. dollars for reporting purposes” and “Doing business in foreign countries exposes us to certain risks not expected to occur when doing business in the United States,” as set forth below, and we are supplementing these risk factorsreplaced with the risk factor entitledset forth below under “Third-party claims of intellectual property infringement, misappropriation or other violation against us could harmThe COVID-19 pandemic has negatively affected and will likely continue to negatively affect our business, operating results, and financial condition and prospects,” asand the risk factor set forth below:below under “If we cannot meet the continued listing requirements of the New York Stock Exchange (“NYSE”), the NYSE may delist our common stock, which would have an adverse impact on the trading, liquidity and market price of our common stock” is added.
The COVID-19 pandemic has negatively affected and will likely continue to negatively affect our business, operating results, financial condition and prospects.
On March 11, 2020, the COVID-19 outbreak was characterized as a pandemic by the World Health Organization. In response to the pandemic, governments around the world have implemented numerous measures to try to contain the virus, such as travel bans and restrictions, quarantines, work-from-home orders and shutdowns. These measures have impacted and may further impact all or portions of our workforce and operations, the behavior of our advertising customers and of consumers, and the operations of our suppliers. Our business, along with the global economy, has been adversely affected by these measures, which have resulted in significant reductions in time spent out of home by consumers, reductions in advertising spending, reductions in consumer spending, volatile economic conditions and business disruptions across markets globally.
Our results have beenof operations were negatively impacted by the COVID-19 pandemic in the past,first half of the year. Due to the continued global spread of COVID-19, including throughout the U.S., we anticipate continued significant adverse effects on our results of operations throughout our business during the second half of the year as customers continue to defer buying decisions and reduce marketing spend. The COVID-19 pandemic has caused a significant reduction in time spent out-of-home as a result of work-from-home orders, a reduction in time spent in airports as a result of travel restrictions and a general decrease in consumer spending. The COVID-19 pandemic has caused an economic slowdown, and it is possible that it could be in the future, adversely affected by economic uncertainty or deteriorations in economic conditions.
We derive revenues from the sale of advertising.cause a prolonged global recession. Expenditures by advertisers tend to be cyclical, reflecting economic conditions and budgeting and buying patterns. Periods ofEconomic slowdown, a slowing economy orprolonged recession or periods ofcontinued economic uncertainty may be accompanied by a decrease in advertising. For example, the global economic downturn that began in 2008 resulted in a decline in advertising and marketing by our customers, which resulted in a decline in advertising revenues across our businesses. This reduction in advertising revenues had an adverse effect on our revenue, profit margins, cash flow and liquidity. Global economic conditions remain uncertain. For example, while the economy in China has grown significantly over the past decades, growth has been uneven, both geographically and among various sectors of the economy, and the rate of growth has been slowing. Moreover, there is considerable uncertainty in China’s economic condition as a result of among other things, the political climate and trade policy of the United States. Any prolonged slowdown in the Chinese economy may adversely affect the results of our Chinese subsidiary, which could materially and adverselyCOVID-19 outbreak is likely to negatively affect our business, financial conditionadvertising customers. The extent to which COVID-19 will ultimately impact our results will depend on future developments, which are highly uncertain, but we have experienced and results of operations. If economic conditions do notare continuing to experience reduced advertising spending, which has and could continue to improve, economic uncertainty increases or economic conditions deteriorate again, global economic conditions may once againmaterially adversely impact our revenue, profit margins, cash flowbusiness, results of operations and liquidity. Furthermore, because a significant portion of our revenue is derived from local advertisers, our abilityoverall financial performance in future periods.
During the second quarter, the COVID-19 pandemic also significantly increased economic and demand uncertainty and led to generate revenues in specific markets is directly affected by localdisruption and regional conditions, and unfavorable local and regional economic conditions also may adversely impact our results. In addition, evenvolatility in the absence of a downturn in general economic conditions, an individual business sector or marketglobal capital markets, which may experience a downturn, causing it to reduce its advertising expenditures, which also may adversely impact our results.
We face intense competitioncontinue in the outdoor advertising business.third quarter potentially resulting in increased cost of capital and an adverse impact on access to capital.
WeIn recent weeks, new daily cases in certain of the markets in which we operate have continued to fall and shelter-in-place orders have been lifted in part. However, a highly competitive industry,resurgence in COVID-19 cases could result in restrictions being reinstated, and we may not be able to maintain or increase our current advertising revenues. We compete for advertising revenue withit is unclear when an economic recovery could start and what a recovery will look like as countries emerge from this unprecedented shutdown of the global economy.
These and other outdoor advertising businesses, as well as with other media, such as radio, newspapers, magazines, television, direct mail, mobile devices, satellite radio and Internet-based services, within their respective markets. Market shares are subject to change for various reasons including through consolidationimpacts of our competitors through processes such as mergers and acquisitions, whichthe COVID-19 pandemic could have the effect of reducingheightening many of the other risks described in the “Risk Factors” section in our revenue in a specific market. Our competitors may develop technology, services or advertising media thatAnnual Report on Form 10-K for the Year Ended December 31, 2019. The extent to which the coronavirus impacts our results will depend on future developments, which are equal or superior to those we provide or that achieve greater market acceptancehighly uncertain and brand recognition than we achieve. It also is possible thatcannot be predicted, including new competitorsinformation which may emerge concerning the severity of the coronavirus, the duration of the outbreak, travel restrictions, business closures or business disruption, a reduction in time spent out of home and the actions taken throughout the world, including in our markets, to contain the coronavirus or treat its impact. The severity, magnitude and duration of the COVID-19 pandemic is uncertain, rapidly acquire significant market share in any ofchanging and hard to predict and depends on events beyond our business segments. The advertiser/agency ecosystem is diverse and dynamic, with advertiser/agency relationships subject to change. This could have an adverse effect on us if an advertiser client shifts its relationship to an agency with whom we doknowledge or control. We might not have as good a relationship. An increased level of competition for advertising dollars may lead to lower advertising rates as we attempt to retain customers or may cause us to lose customers to our competitors who offer lower rates that we are unable or unwilling to match.
Further, as digital advertising and programmatic technologies continue to develop and become increasingly important to our business model, our competitors may be able to offer products that are,predict or that are seenrespond to be, substantially similarall impacts on a timely basis to prevent near- or better than ours. This may force us to compete in different ways and incur additional costs, become subject to additional governmental regulations, and/or expend resources in order to remain competitive. If our competitors are more successful than we are in developing digital advertising and programmatic products and services, our business, financial condition and results of operations could be adversely affected.
Our financial performance may be adversely affected by many factors beyond our control.
Certain factors that could adversely affect our financial performance by, among other things, decreasing overall revenues, the numbers of advertising customers, advertising fees or profit margins include:
unfavorable fluctuations in operating costs, which we may be unwilling or unable to pass throughlong-term adverse impacts to our customers;
global economic conditions, such as the economic uncertainty in China;
our inability to successfully adopt or our being late in adopting technological changes and innovations that offer more attractive advertising alternatives than what we offer, which could result in a loss of advertising customers or lower advertising rates, which could have a material adverse effect on our operating results and financial performance;
unfavorable shifts in population and other demographics, which may cause us to lose advertising customers as people migrate to markets where we have a smaller presence or which may cause advertisers to be willing to pay less in advertising fees if the general population shifts into a less desirable age or geographical demographic from an advertising perspective;
adverse political effects and acts or threats of terrorism or military conflicts; and
unfavorable changes in labor conditions, which may impair our ability to operate or require us to spend more to retain and attract key employees.
In addition, on June 23, 2016, the U.K. held a referendum in which voters approved an exit of the U.K. from the European Union (the “E.U.”), commonly referred to as “Brexit.” International outdoor is currently headquartered in the U.K. and transacts business in many key European markets. To date, no formal withdrawal agreement has been reached between the U.K. and the E.U., despite the passage of the date on which it was expected that the U.K.’s membership in the E.U. would terminate. creating significant uncertainty about the terms (and timing) under which the U.K. will leave the E.U. and the consequent impact on the economies of the U.K., the E.U. and other countries. This uncertainty may cause our customers to closely monitor their costs and reduce the amount they spend on advertising. Any of these or similar effects of Brexit could adversely impact our business, operating results, cash flows and financial condition.
Future dispositions, acquisitions and other strategic transactions could pose risks.
We frequently evaluate strategic opportunities both within and outside our existing lines of business. We expect from time to time to pursue strategic dispositions of certain businesses, as well as acquisitions, and we may pursue other strategic transactions, including recapitalizations or other corporate restructurings, including a REIT conversion. These dispositions, acquisitions or other transactions could be material. Such transactions involve numerous risks, including:
our dispositions may negatively impact revenues from our national, regional and other sales networks;
our dispositions may make it difficult to generate cash flows from operations sufficient to meet our anticipated cash requirements, including our debt service requirements;
our acquisitions may prove unprofitable and fail to generate anticipated cash flows;
to successfully manage our large portfolio of outdoor advertising and other businesses, we may need to:
recruit additional senior management as we cannot be assured that senior management of acquired businesses will continue to work for us and we cannot be certain that our recruiting efforts will succeed, and
expand corporate infrastructure to facilitate the integration of our operations with those of acquired businesses, because failure to do so may cause us to lose the benefits of any expansion that we decide to undertake by leading to disruptions in our ongoing businesses or by distracting our management;
we may enter into markets and geographic areas where we have limited or no experience;
we may encounter difficulties in the integration of acquired operations and systems; and
our management’s attention may be diverted from other business concerns.
Dispositions and acquisitions of outdoor advertising businesses may require antitrust review by U.S. federal antitrust agencies and may require review by foreign antitrust agencies under the antitrust laws of foreign jurisdictions. We can give no assurances that the Department of Justice, the Federal Trade Commission or foreign antitrust agencies will not seek to bar us from disposing of or acquiring outdoor advertising businesses or impose stringent undertakings on our business as a condition to the completion of an acquisition in any market where we already have a significant position.
Government regulation of outdoor advertising may restrict our outdoor advertising operations.
U.S. federal, state and local regulations have a significant impact on the outdoor advertising industry and our business. One of the seminal laws is the Highway Beautification Act (“HBA”), which regulates outdoor advertising on controlled roads in the United States. The HBA regulates the size and location of billboards, mandates a state compliance program, requires the development of state standards, promotes the expeditious removal of illegal signs and requires just compensation for takings. Construction, repair, maintenance, lighting, upgrading, height, size, spacing, the location and permitting of billboards and the use of new technologies for changing displays, such as digital displays, are regulated by federal, state and local governments. From time to time, states and municipalities have prohibited or significantly limited the construction of new outdoor advertising structures. Changes in laws and regulations affecting outdoor advertising, or changes in the interpretation of those laws and regulations, at any level of government, including the foreign jurisdictions in which we operate, could have a significant financial impact on us by requiring us to make significant expenditures or otherwise limiting or restricting some of our operations. Due to such regulations, it has become increasingly difficult to develop new outdoor advertising locations.
We have also introduced and intend to expand the deployment of digital billboards that display digital advertising copy from various advertisers that change several times an hour. We have encountered regulations that restrict or prohibit these types of digital displays. Since digital billboards have been developed and introduced relatively recently into the market on a large scale, existing regulations that currently do not apply to them by their terms could be revised or new regulations could be enacted to impose greater restrictions. These regulations may impose greater restrictions on digital billboards due to alleged concerns over aesthetics or driver safety. Any new restrictions on digital billboards could have a material adverse effect on both our existing inventory of digital billboards and our plans to expand our digital deployment.
From time to time, certain state and local governments and third parties have attempted to force the removal of our displays under various state and local laws, including zoning ordinances, permit enforcement and condemnation. Similar risks also arise in certain of our international jurisdictions. Certain zoning ordinances provide for amortization which is the required removal of legal non-conforming billboards (billboards which conformed with applicable laws and regulations when built, but which do not conform to current laws and regulations) or the commercial advertising placed on such billboards after a period of years. Pursuant to this concept, the governmental body asserts that just compensation is earned by continued operation of the billboard over that period of time. Although amortization is prohibited along all controlled roads, amortization has been upheld along non-controlled roads in limited instances where permitted by state and local law. Other regulations limit our ability to rebuild, replace, repair, maintain and upgrade non-conforming displays. In addition, from time to time third parties or local governments assert that we own or operate displays that either are not properly permitted or otherwise are not in strict compliance with applicable law. If we are increasingly unable to resolve such allegations or obtain acceptable arrangements in circumstances in which our displays are subject to removal, modification or amortization, or if there occurs an increase in such regulations or their enforcement, our operating results could suffer.
A number of state and local governments have implemented or initiated taxes, fees and registration requirements in an effort to decrease or restrict the number of outdoor signs and/or to raise revenue. From time to time, legislation also has been introduced in international jurisdictions attempting to impose taxes on revenue from outdoor advertising or for the right to use outdoor advertising assets. In addition, a number of jurisdictions have implemented legislation or interpreted existing legislation to restrict or prohibit the installation of digital billboards, and we expect these efforts to continue. The increased imposition of these measures, and our inability to overcome any such measures, could reduce our operating income if those outcomes require removal or restrictions on the use of preexisting displays or limit growth of digital displays. In addition, if we are unable to pass on the cost of these items to our clients, our operating income could be adversely affected.
International regulation of the outdoor advertising industry can vary by municipality, region and country, but generally limits the size, placement, nature and density of out-of-home displays. Other regulations limit the subject matter, animation and language of out-of-home displays. Our failure to comply with these or any future international regulations could have an adverse impact on the effectiveness of our displays or their attractiveness to clients as an advertising medium and may require us to make significant expenditures to ensure compliance and avoid certain penalties or contractual breaches.results. As a result, we may experience a significantcannot at this time predict the impact on our operations, revenue, international client base and overall financial condition.
We are exposed to foreign currency exchange risks because a majority of our revenue is received in foreign currencies and translated to U.S. dollars for reporting purposes.
We generate a majority of our revenues in currencies other than U.S. dollars. Changes in economic or political conditions, including Brexit, in any of the foreign countries in which we operate could result in exchange rate movement, new currency or exchange controls or other currency restrictions being imposed. Because we receive a majority of our revenues in currencies from the countries in which we operate, exchange rate fluctuations in any such currency could have an adverse effect on our profitability. A majority of our cash flows are generated in foreign currencies and translated to U.S. dollars for reporting purposes, and certain of the indebtedness held by our international subsidiaries is denominated in U.S. dollars, and, therefore, significant changes in the value of such foreign currencies relative to the U.S. dollar could have a material adverse effect on our financial condition and our ability to meet interest and principal payments on our indebtedness.
Given the volatility of exchange rates, we cannot assure you that we will be able to effectively manage our currency transaction and/or translation risks. It is possible that volatility in currency exchange rates will have a material adverse effect on our financial condition or results of operations. We expect to experience economic losses and gains and negative and positive impacts on our operating income as a result of foreign currency exchange rate fluctuations.
Doing business in foreign countries exposes us to certain risks not expected to occur when doing business in the United States.
Doing business in foreign countries carries withCOVID-19 pandemic, but it certain risks that are not found when doing business in the United States. These risks could result in losses against which we are not insured. Examples of these risks include:
potential adverse changes in the diplomatic relations of foreign countries with the United States;
new or increased tariffs or unfavorable changes in trade policy;
hostility from local populations;
the adverse effect of foreign exchange controls;
government policies against businesses owned by foreigners;
investment restrictions or requirements;
expropriations of property without adequate compensation;
the potential instability of foreign governments;
the risk of insurrections;
risks of renegotiation or modification of existing agreements with governmental authorities;
difficulties collecting receivables and otherwise enforcing contracts with governmental agencies and others in some foreign legal systems;
withholding and other taxes on remittances and other payments by subsidiaries;
changes in tax structure and level; and
changes in laws or regulations or the interpretation or application of laws or regulations.
Our International operations involve contracts with, and regulation by, foreign governments. We operate in many parts of the world that experience corruption to some degree. Although we have policies and procedures in place that are designed to promote legal and regulatory compliance (including with respect to the U.S. Foreign Corrupt Practices Act and the U.K. Bribery Act), our employees, subcontractors and agents could take actions that violate applicable anti-corruption laws or regulations. Two former employees of Clear Media Limited, an indirect, non-wholly-owned subsidiary of the Company whose ordinary shares are listed on the Hong Kong Stock Exchange, have been convicted in China of certain crimes, including the crime of misappropriation of funds, and sentenced to imprisonment. One of those former employees has appealed his conviction. For a description of this matter, see “Part II, Item 1. Legal Proceedings-China Investigation.” Violations of these laws, or allegations of such violations, could have a material adverse effect on our business, financial position and results of operations.operations, financial condition and cash flows.
If we cannot meet the continued listing requirements of the New York Stock Exchange (“NYSE”), the NYSE may delist our common stock, which would have an adverse impact on the trading, liquidity and market price of our common stock.
Third-party claims of intellectual property infringement, misappropriation or other violation against us could harm our business, operating results, and financial condition.
Third parties have asserted, and may inOn August 4, 2020, we received written notification from the future assert,New York Stock Exchange (the “NYSE”) that we have infringed, misappropriated or otherwise violated their intellectual property rights. As we face increasing competition, the possibility of intellectual property rights claims against us will grow. Any lawsuits regarding intellectual property rights, regardless of their success, could be expensive to resolve and would divert the time and attention of our management and technical personnel. In the event that any third party claims that we infringe their patents or that we are otherwise employing their proprietary technology without authorization and initiates litigation against us, even if we believe such claims are without merit, there is no assurance that a court would findwere not in our favor on questions of infringement, validity, enforceability or priority. An adverse outcome of a dispute may damage our reputation, force us to adjust our business practices, require us to pay significant damages, and/or take other actions that could have a material adverse effect on our business. As a result of intellectual property infringement claims, or to avoid potential claims, we may choose or be required to seek licenses from third parties. These licenses may not be available on commercially reasonable terms, or at all. Even if we are able to obtain a license, the license would likely obligate us to pay license fees or royalties or both, and the rights granted to us might be nonexclusive,compliance with the potential for our competitors to gain access to the same intellectual property. In addition, the rights that we secure under intellectual property licenses may not include rights to allan NYSE continued listing standard in Rule 802.01C of the intellectual property owned or controlled byNYSE Listed Company Manual ("Section 802.01C") because the licensor, and the scope of the licenses granted to us may not include rights covering all of the products, services and technologies provided by us. The occurrence of any of the foregoing could harm our business, operating results and financial condition.
Risks Related to Our Separation from iHeartCommunications
The following risk factors disclosed under the caption “Risks Related to Our Separation from iHeartCommunications” below amend, restate and replace all of the risk factors under the caption “Risks Related to the Separation, the iHeart Chapter 11 Cases and Our Relationship with iHeartCommunications” in Item 1A of our Annual Report:
The Separation could result in significant tax liability or other unfavorable tax consequences to us.
The transactions related to the Separation were intended to be taxable transactions. The gain or loss recognized with respect to these transactions will depend on, among other things: (a) the value and tax basis of the assets transferred in the Radio Distribution and the value and tax basisaverage closing price of our common stock fell below $1.00 over a period of 30 consecutive trading days.
Pursuant to Section 802.01C, we have a period of six months following the receipt of the notice to regain compliance with the minimum share price requirement, or until our next annual meeting of stockholders if stockholder approval is required to cure the share price non-compliance, as would be the case to effectuate a reverse stock split. We intend to timely respond to the NYSE with respect to our intent to cure the deficiency and return to compliance with the NYSE continued listing requirements. We intend to regain compliance with the requirements of Section 802.01C by implementing a reverse stock split, subject to approval by our board of directors and the stockholders at the next annual meeting of stockholders, if we do not achieve an accelerated cure prior to the cure deadline. The number of shares available on the effective datepublic market following a reverse stock split would be reduced significantly, which may affect the volume and liquidity of the Separation (the “Effective Date”) (such values will be determined by referenceour common stock.
Pursuant to among other things, the trading value of the iHeartMedia equity andNYSE rules, our common stock followingcontinues to be listed and traded on NYSE during the Effective Date); (b) complex modeling considerations under certain U.S. Treasury regulations; (c) the amount of cancellation of indebtedness income realized in connection with the iHeartMedia’s Chapter 11 proceedings; and (d) the extent to which any “excess loss accounts” (as defined under applicable U.S. Treasury regulations) are taken into account. The extent to which any related taxable gain or loss will result in any cash tax liabilities will depend on whether the tax attributes of iHeartMedia and its subsidiaries, including the net operating losses (“NOLs”) of iHeartMedia and its subsidiaries (including CCOH and its subsidiaries), are sufficient to offset any net taxable gain and income attributable to the transactions related to the Separation.
In addition, the merger of Clear Channel Outdoor Holdings, Inc. into Clear Channel Holdings, Inc. (the “Merger”) was intended to qualify as a “reorganization” within the meaning of Section 368(a) of the Internal Revenue Code of 1986, as amended (the “Code”), and the obligation of each of the parties thereto to effect the Merger was conditioned upon the receipt of U.S. federal income tax opinions to that effect from their respective tax counsels. These tax opinions represent the legal judgment of counsel who rendered the opinions and are not binding on the Internal Revenue Service (the “IRS”) or the courts. If the IRS makes a subsequent determination that the Merger does not qualify as a “reorganization,” then additional tax liability could arise.
Based on our analysis to date of the various factors that will influence whether the Separation resulted in material cash tax liabilities, we do not expect any material cash tax liability resulting from the Separation. However, the analysis of the Separation will continue until the tax return for the 2019 tax year is filed. In addition, there may be some uncertainty with respect to the factors that determine whether the Separation gave rise to cash tax liability, even after appropriate tax returns are filed. Accordingly, we cannot say with certainty that no material cash tax liability will be owed as a result of the Separation and the transactions related thereto. To the extent the Separation and the transactions related thereto do give rise to any cash tax liability, CCOH, iHeartCommunications, iHeartMedia and various other entities would be jointly and severally liable under applicable law for any such amounts. The allocation of such liabilities among the various members of the iHeartMedia Group and CCOH are addressed by a new tax matters agreement that was entered into in connection with the Separation.
In addition, we expect that, as a result of the cancellation of indebtedness income realized by the debtors in connection with iHeartMedia’s Chapter 11 proceeds, certain of our tax attributes will becure period, subject to significant reduction or elimination. The tax matters agreement that was entered into in connectionour compliance with the Separation provides that we will not be compensated as a result of such reduction.other continued listing requirements.
Transfers of our equity in connection with iHeartMedia’s Chapter 11 proceedings and cancellation of indebtedness income realized by the debtors in the iHeartMedia Chapter 11 proceedings may impair our ability to utilize our U.S. federal income tax NOL carryforwards in future years.
Under U.S. federal income tax law, a corporation is generally permitted to deduct from taxable income NOLs carried forward from prior years. Under applicable law, we were attributed a portion of the U.S. federal NOL carryforward and certain other tax attributes of the iHeartMedia consolidated group prior to the Separation (in general, the portion of the federal NOL carryforward attributable to our operations and expenses). To the extent any such tax attributes survive the reduction in tax attributes described above, our ability to utilize these tax attributes to offset future taxable income and to reduce U.S. federal income tax liability is subject to certain requirements and restrictions. Specifically, we experienced an “ownership change,” as defined in Section 382 of the Code, as a result of the Separation. Accordingly, our ability to use any surviving tax attributes may be substantially limited, which could have a negative impact on our financial position and results of operations. Under Section 382 of the Code, absent an applicable exception, if a corporation undergoes an “ownership change,” the amount of U.S. federal income tax attributes existing prior to the change that it can utilize to offset its taxable income in future taxable years generally is subject to an annual limitation in an amount equal to the value of its stock immediately prior to the ownership change multiplied by the long-term tax-exempt rate, subject to adjustments to reflect the differences between the fair market value of the corporation’s assets and the tax basis in such assets and various other complex rules and adjustments.
Additionally, as noted above, we expect that certain of our tax attributes will be subject to significant reduction or elimination as a result of the cancellation of indebtedness income realized by the debtors in connection with iHeartMedia’s Chapter 11 proceedings.
Accordingly, thereNo assurance can be no assurancegiven that we will be able to utilize our U.S. federal income tax NOL carryforwardsregain compliance with the minimum share price requirement or certain of ourmaintain compliance with the other tax attributes to offset future taxable income.
We may be more susceptible to adverse events as a resultcontinued listing requirements of the Separation.
We may beNYSE. If we are unable to achieve some or all of the benefits that we expect to achieve as an independent company in the time we expect, if at all. As a result of the Separation, we may be more susceptible to market fluctuations and have less leverage with suppliers, and we may experience other adverse events.
We may be unable to make, on a timely or cost-effective basis, the changes necessary to operate as an independent publicly-traded company, and we may experience increased costs as a result of the Separation.
Prior to the Separation, iHeartMedia provided Clear Channel Outdoor Holdings, Inc. with various corporate services. Under a transition services agreement (the “Transition Services Agreement”), iHeartMedia and/or its affiliates are providing certain administrative and support services and other assistance to us, which we are using and will continue to use in the conduct of our businesses as such business was conducted prior to the Separation generally for one year (subject to certain rights of ours to extend for up to an additional year). Following the Separation and the expiration of the Transition Services Agreement, we will need to provide internally or obtain from unaffiliated third parties the services we previously received from iHeartMedia and its affiliates. We negotiated our arrangements with iHeartCommunications in the context of a parent-subsidiary relationship prior to our initial public offering and we negotiated the terms of the Transition Services Agreement in the context of iHeartMedia’s Chapter 11 proceedings. We may be unable to replace these services in a timely manner or on terms and conditions as favorable as those we received from iHeartMedia prior to the Separation. We may be unable to successfully establish the infrastructure or implement the changes necessary to operate independently or may incur additional costs. If we fail to obtain the services necessary to operate effectively or if we incur greater costs in obtaining these services, our business, financial condition and results of operations may be adversely affected.
The Separation resulted in changes in our senior management team and may result in the loss of other key employees.
Our business is dependent upon the performance of our senior management team and other key individuals. The Separation resulted in changes to our senior management team, including our chief executive officer and chief financial officer. We are continuing to identify replacements for additional key positions following the Separation. Competition for these individuals is intense. In addition, many of our key employees are at-will employees who are under no obligation to remain with us, and may decide to leave as a result of the uncertainty surrounding the business following the Separation or for a variety of personal or other reasons beyond our control. If members of our senior management or key individuals decide to leave in the future, if we decide to make further changes to the composition of, or the roles and responsibilities of, these individuals, or if we are not successful in attracting, motivating and retaining other key employees, our business could be adversely affected.
The Separation resulted in changes to the composition of our board of directors.
In connectionregain compliance with the Separation, members of our board of directors were replaced with new directors who were selected by a committee consisting of certain holders of interestsNYSE’s continued listing requirements and creditors in iHeartMedia’s Chapter 11 proceedings. Our new board of directors does not have the same level of experience with our historical operations as our previous board. Our new board of directors may pursue business plans and growth strategies that differ from our previous business plans and growth strategies. Any new business plans or growth strategies implemented by the new board of directors, including plans to address our capital structure and reduce our leverage, if unsuccessful, may lead to material unanticipated problems, expenses, liabilities, competitive responses, loss of customer and other business relationships, and an adverse impact on operations and financial results.
Our historical financial information is not necessarily representative of the results we would have achieved as an independent public company and may not be a reliable indicator of our future results.
The historical financial information included in this Quarterly Report on Form 10-Q does not necessarily reflect the results of operations and financial position we would have achieved as an independent public company not controlled by iHeartMedia during the periods presented, or those that we will achieve in the future. Prior to the Separation, we operated as part of iHeartMedia’s broader corporate organization, and subsidiaries of iHeartMedia performed various corporate functions for us. Our historical financial information reflects allocations of corporate expenses from iHeartMedia for these and similar functions. These allocations may not reflect the costs we will incur for similar services in the future as an independent publicly-traded company.
Our historical financial information does not reflect expected changes in our organizational structure as part of the Separation, including changes in our capital structure, tax structure and new personnel needs. As part of iHeartMedia, we enjoyed certain benefits from iHeartMedia’s operating diversity, size and purchasing power and we lost these benefits after the Separation. As an independent entity, we may be unable to purchase goods or services and technologies, such as insurance and health care benefits and computer software licenses, on terms as favorable to us as those we obtained as part of iHeartMedia prior to the Separation.
Following the Separation, we are also now responsible for the additional costs associated with being an independent publicly-traded company, including costs related to corporate governance, investor and public relations and public reporting. In addition, certain costs incurred by subsidiaries of iHeartMedia, including executive oversight, accounting, treasury, tax, legal, human resources, occupancy, procurement, information technology and other shared services, have historically been allocated to us by iHeartMedia, but these allocations may not reflect the level of these costs to us as we provide these services ourselves. Therefore, our historical financial statements may not be indicative of our future performance as an independent publicly-traded company. We cannot assure you that our operating results will continue at a similar level.
In connection with the Separation, iHeartMedia agreed to indemnify us and we agreed to indemnify iHeartMedia for certain liabilities. There can be no assurance that the indemnities from iHeartMedia will be sufficient to insure us against the full amount of such liabilities.
Pursuant to agreements that we entered into with iHeartMedia in connection with the Separation, iHeartMedia agreed to indemnify us for certain liabilities, and we agreed to indemnify iHeartMedia and its subsidiaries for certain liabilities. For example, we will indemnify iHeartMedia and its subsidiaries for liabilities arising from or accruing prior to the closing date of the Separation to the extent such liabilities related our business, assets and liabilities as well as liabilities relating to a breach of the Settlement and Separation Agreement governing the terms of the Separation. However, third parties might seek to hold us responsible for liabilities that iHeartMedia agreed to retain, and there can be no assurance that iHeartMedia will be able to fully satisfy its indemnification obligations under these agreements. In addition, indemnities that we may be required to provide to iHeartMedia and its subsidiaries could be significant and could adversely affect our business.
Risks Related to Ownership of our Common Stock
The following risk factors disclosed under the caption “Risks Related to Ownership of our Common Stock” below amend, restate and replace all of the risk factors under the caption “Risks Related to Our Class A Common Stock” in Part I, Item 1A of our Annual Report:
Our stock price may be volatile or may decline regardless of our operating performance.
The market price for our common stock may be volatile. You may not be ableis suspended from trading and delisted, it could have adverse consequences including, among others, reducing the number of investors willing to resell your shares athold or aboveacquire our common stock, reducing the price you paid for them, due to fluctuations in theliquidity and market price of our common stock, which may be caused byadverse publicity and a number of factors, many of which we cannot control, including those described under the heading “-Risks Related to our Business”reduced interest in us from investors, analysts and the following:
our limited history operating as an independent public company;
our quarterly or annual earnings or those of other companies in our industry;
changes in accounting standards, policies, guidance, interpretations or principles;
changes in financial estimates by any securities analysts who follow our common stock, our failure to meet these estimates or failure of those analysts to initiate or maintain coverage of our common stock;
downgrades by any securities analysts who follow our common stock;
future sales of our common stock by our officers, directors and significant stockholders, including stockholders that were former creditors of iHeartMedia that received their common stock at the time of the Separation in connection with iHeartMedia’s Chapter 11 proceedings;
market conditions or trends in our industry or the economy as a whole and, in particular, in the advertising industry;
investors’ perceptions of our prospects;
announcements by us of significant contracts, acquisitions, joint ventures or capital commitments; and
changes in key personnel.
participants. In addition, the stock markets have experienced extreme price and volume fluctuations that have affected and continue to affect the market prices of equity securities of many companies. In the past, stockholders have instituted securities class action litigation following periods of market volatility. If we were involved in securities litigation, we could incur substantial costs, and our resources and the attention of management could be diverted from our business.
If securitiesa suspension or industry analysts do not publish research or publish inaccurate or unfavorable research about our business, our stock price and trading volume could decline.
The trading market for our common stock depends in part on the research and reports that securities or industry analysts publish about us or our business. If one or more of the analysts who covers us downgrades our common stock or publishes inaccurate or unfavorable research about our business, our stock price would likely decline. If one or more of these analysts ceases coverage of us or fails to publish reports on us regularly, demand for our common stock could decrease, which could cause our stock price and trading volume to decline.
Future sales of our common stock in the public market, or the perception that such sales may occur, could lower our stock price, and any additional capital raised by us through the sale of our common stock, or the issuance of equity awards by us, may dilute your ownership in us.
Sales of substantial amounts of our common stock in the public market by our stockholders, or the perception that these sales could occur, could adversely affect the price of our common stock anddelisting could impair our ability to raise additional capital through the sale of additional shares. At the time of the Separation, nearly 90% of our outstanding common stock was distributed to the former creditors of iHeartMedia in connection with iHeartMedia’s Chapter 11 proceedings,public markets and these former creditors may not be long-term holders of our common stock. None of the shares of common stock issued to these stockholders in connection with iHeartMedia’s Chapter 11 proceedings are “restricted securities” and, except in the case of “affiliates” of the Company, may be sold freely without restriction into the market.
Any additional capital raised by us through the sale of our common stock may also dilute your ownership in us. In the future, we may also issue our common stock in connection with acquisitions or investments. We cannot predict the size of any such future issuances, but the amount of shares of our common stock issued in connection with an acquisition or investment could constitute a material portion of the then-outstanding shares of our common stock.
We currently do not pay regularly-scheduled dividends on our common stock.
In the past, we have paid certain special dividends but we do not pay regularly-scheduled dividends and are subject to restrictions on our ability to pay dividends should we seek to do so in the future. We are a holding company with no independent operationsattract and no significant assets other than the stockretain employees by means of our subsidiaries. In addition, the Certificate of Designation for our Series A Preferred Stock contains, the indentures governing our senior notes and our senior subordinated notes contain, restrictions on our ability to pay dividends. We, therefore, are dependent upon the receipt of dividends or other distributions from our subsidiaries to pay dividends. In addition, our senior notes and our senior subordinated notes contain restrictions on our ability to pay dividends. If we elect not to pay dividends in the future or are prevented from doing so, the price of our common stock must appreciate in order for you to realize a gain on your investment. This appreciation may not occur.equity compensation.
The holders of our preferred stock have rights that are senior to the rights of a holder of our common stock and the documents governing our preferred stock include certain restrictive covenants.
As part of the Separation, we issued $45.0 million of Series A Preferred Stock to third party investors. The Series A Preferred Stock provides that, among other things, in the event of our bankruptcy, dissolution or liquidation, the holders of our Series A Preferred Stock must be satisfied before any distributions can be made to the holders of our common stock. As a result of our Series A Preferred Stock’s superior rights relative to our common stock, the right of holders of our common stock to receive distributions from us may be diluted and may be limited by these rights. Should we default or fail to pay dividends, in cash, on the Series A Preferred Stock for twelve consecutive quarters, the holders of the Series A Preferred Stock will have the right to appoint one director to our board. Additionally, the Certificate of Designation for our Series A Preferred Stock limits our ability to incur additional debt or to make certain restricted payments that could also affect the holders of our common stock.
Delaware law and certain provisions in our certificate of incorporation may prevent efforts by our stockholders to change the direction or management of our company.
Our certificate of incorporation and our by-laws contain provisions that may make the acquisition of our company more difficult without the approval of our board of directors, including, but not limited to, the following:
for the first three years following the Separation, our board of directors will be divided into three equal classes, with members of each class elected in different years for different terms, making it impossible for stockholders to change the composition of our entire board of directors in any given year;
action by stockholders may only be taken at an annual or special meeting duly called by or at the direction of a majority of our board of directors;
advance notice for all stockholder proposals is required;
except as otherwise provided by a certificate of designations, any director or the entire board of directors may be removed from office as provided by Section 141(k) of the Delaware General Corporation Law (the “DGCL”); and
except as required by law, for the first three years following the Separation, any amendment, alteration, rescission or repeal of our certificate of incorporation requires the affirmative vote of at least 66 2/3% of the total voting power of all outstanding shares of capital stock entitled to vote thereon, voting together as a single class.
These and other provisions in our certificate of incorporation, bylaws and Delaware law could make it more difficult for stockholders or potential acquirers to obtain control of our board of directors or initiate actions that are opposed by our board of directors, including actions to delay or impede a merger, tender offer or proxy contest involving our company. The existence of these provisions could negatively affect the price of our common stock and limit opportunities for you to realize value in a corporate transaction.
Our certificate of incorporation designates the Court of Chancery of the State of Delaware, subject to certain exceptions, as the sole and exclusive forum for certain types of actions and proceedings that may be initiated by our stockholders, which could limit our stockholders’ ability to obtain a favorable judicial forum for disputes with us or our directors, officers or employees.
Our certificate of incorporation provides that the Court of Chancery of the State of Delaware, subject to certain exceptions, is the sole and exclusive forum for (i) any derivative action or proceeding brought on our behalf, (ii) any action asserting a claim of breach of a fiduciary duty owed by any of our directors, officers or other employees to us or our stockholders, (iii) any action asserting a claim against us arising pursuant to any provision of the DGCL, our certificate of incorporation or our bylaws or (iv) any other action asserting a claim against us that is governed by the internal affairs doctrine. Any person or entity purchasing or otherwise acquiring any interest in shares of our capital stock shall be deemed to have notice of and to have consented to the provisions of our certificate of incorporation described above. This choice of forum provision may limit a stockholder’s ability to bring a claim in a judicial forum that it finds favorable for disputes with us or our directors, officers or other employees, which may discourage such lawsuits against us and our directors, officers and employees. Alternatively, if a court were to find these provisions of our certificate of incorporation inapplicable to, or unenforceable in respect of, one or more of the specified types of actions or proceedings, we may incur additional costs associated with resolving such matters in other jurisdictions, which could adversely affect our business and financial condition.
Other than the items set forth above, there have been no material changes to the risk factors disclosed under Part I, Item 1A “Risk Factors” in our Annual Report on Form 10-K for the year ended December 31, 2018.
ITEM 2. UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS
The following table sets forth our purchases of shares of our Class A common stock made during the quarter ended June 30, 2019:2020:
| | | | | | | | | | | | | | | | | | | | | | | |
Period | Total Number of Shares Purchased(1) | | Average Price Paid per Share(1) | | Total Number of Shares Purchased as Part of Publicly Announced Plans or Programs | | Maximum Number (or Approximate Dollar Value) of Shares that May Yet Be Purchased Under the Plans or Programs |
April 1 through April 30 | 458,382 | | | $ | 0.60 | | | — | | | $ | — | |
May 1 through May 31 | 3,974 | | | $ | 0.79 | | | — | | | — | |
June 1 through June 30 | 114,029 | | | $ | 0.98 | | | — | | | — | |
Total | 576,385 | | | $ | 0.68 | | | — | | | $ | — | |
|
| | | | | | | | | | | | | |
Period | Total Number of Shares Purchased(1) | | Average Price Paid per Share(1) | | Total Number of Shares Purchased as Part of Publicly Announced Plans or Programs | | Maximum Number (or Approximate Dollar Value) of Shares that May Yet Be Purchased Under the Plans or Programs |
April 1 through April 30 | — |
| |
|
| | — |
| | $ | — |
|
May 1 through May 31 | 55,835 |
| | 5.18 |
| | — |
| | — |
|
June 1 through June 30 | 440,087 |
| | 4.85 |
| | — |
| | — |
|
Total | 495,922 |
| | $ | 4.89 |
| | — |
| | $ | — |
|
(1)The shares indicated consist of shares of our common stock tendered by employees to us during the three months ended June 30, 2020 to satisfy the employees’ tax withholding obligation in connection with the vesting and release of restricted shares, which are repurchased by us based on their fair market value on the date the relevant transaction occurs. | |
(1) | The shares indicated consist of shares of our common stock tendered by employees to us during the three months ended June 30, 2019 to satisfy the employees’ tax withholding obligation in connection with the vesting and release of restricted shares, which are repurchased by us based on their fair market value on the date the relevant transaction occurs. |
ITEM 3. DEFAULTS UPON SENIOR SECURITIES
None.
ITEM 4. MINE SAFETY DISCLOSURES
Not applicable.
ITEM 5. OTHER INFORMATION
None.
ITEM 6. EXHIBITS
|
| | | | | | | |
Exhibit Number
| | Description |
3.1 | | |
3.24.1 | | |
4.110.1 | | |
4.2 | | Supplemental Indenture, dated as of May 1, 2019, by and among Clear Channel Worldwide Holdings, Inc., Clear Channel Outdoor Holdings, Inc., the other guarantors party thereto and U.S. Bank National Association, as trustee (Series A Senior Notes) (incorporated by reference to Exhibit 4.2 to Clear Channel Outdoor Holdings, Inc. Current Report on Form 8-K filed on May 2, 2019). |
4.3 | | Supplemental Indenture, dated as of May 1, 2019, by and among Clear Channel Worldwide Holdings, Inc., Clear Channel Outdoor Holdings, Inc., the other guarantors party thereto and U.S. Bank National Association, as trustee (Series B Senior Notes) (incorporated by reference to Exhibit 4.3 to Clear Channel Outdoor Holdings, Inc. Current Report on Form 8-K filed on May 2, 2019). |
10.1 | | Transition ServicesCredit Agreement, dated as of May 1, 2019, byJune 12, 2020, among the Company, the other loan parties thereto and among iHeartMedia, Inc., iHeartMedia Management Services, Inc., iHeartCommunications, Inc. and Clear Channel Outdoor Holdings, Inc. (incorporatedDeutsche Bank AG New York Branch, as administrative agent (incorporated by reference to Exhibit 10.1 to Clear Channel Outdoor Holdings, Inc.the Company's Current Report on Form 8-K filed on May 2, 2019).F |
10.2 | | Tax Matters Agreement, dated as of May 1, 2019, by and among iHeartMedia, Inc., iHeartCommunications, Inc., iHeart Operations, Inc., Clear Channel Holdings, Inc., Clear Channel Outdoor Holdings, Inc., and Clear Channel Outdoor, LLC (incorporated by reference to Exhibit 10.2 to Clear Channel Outdoor Holdings, Inc. Current Report on Form 8-K filed on May 2, 2019). |
10.3 | | |
10.4 | | |
10.5 | | |
10.6 | | |
10.7 | | |
10.8 | | |
10.9 | | |
10.10 | | |
10.1122.1* | | |
31.1* | | |
31.2* | | |
|
32.1** | | |
Exhibit
Number
| | Description |
32.1** | | |
32.2** | | |
101*101.INS* | | XBRL Instance Document. |
101.SCH* | | XBRL Taxonomy Extension Schema Document. |
101.CAL* | | XBRL Taxonomy Extension Calculation Linkbase Document. |
101.DEF* | | XBRL Taxonomy Extension Definition Linkbase Document. |
101.LAB* | | XBRL Taxonomy Extension Label Linkbase Document. |
101.PRE* | | XBRL Taxonomy Extension Presentation Linkbase Document. |
104 | | Cover Page Interactive Data Files.File (formatted as inline XBRL). |
__________________
* Filed herewith.
** Furnished herewith.
Signatures
Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.
| | | | | | | | |
| | CLEAR CHANNEL OUTDOOR HOLDINGS, INC. |
| | |
August 7, 2020 | | CLEAR CHANNEL OUTDOOR HOLDINGS, INC. |
| | |
August 1, 2019 | | /s/ JASON A. DILGER |
| | Jason A. Dilger |
| | Chief Accounting Officer |