10-K: Annual report pursuant to Section 13 and 15(d)
Published on May 3, 2018
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-K
[X] |
Annual report pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934
For the fiscal year ended December 31, 2017, or
|
[ ] |
Transition report pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934
For the transition period from ________ to _________.
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Commission File Number 001-32663
CLEAR CHANNEL OUTDOOR HOLDINGS, INC.
(Exact name of registrant as specified in its charter)
Delaware |
86-0812139 |
(State or other jurisdiction of incorporation or organization) |
(I.R.S. Employer Identification No.) |
20880 Stone Oak Parkway
San Antonio, Texas
|
78258 |
(Address of principal executive offices) |
(Zip Code) |
(210) 832-3700
(Registrant’s telephone number, including area code)
Securities registered pursuant to Section 12(b) of the Act:
Title of Each Class |
Name of Exchange on Which Registered |
Class A Common Stock, $.01 par value per share |
New York Stock Exchange |
Securities registered pursuant to Section 12(g) of the Act: None
Indicate by check mark if the registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities Act. YES [ ] NO [X]
Indicate by check mark if the registrant is not required to file reports pursuant to Section 13 or Section 15(d) of the Exchange Act. YES [ ] NO [X]
Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes [ ] No [X]
Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files). Yes [X] No [ ]
Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K is not contained herein, and will not be contained, to the best of registrant’s knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K. [X]
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, a smaller reporting company, or an emerging growth company. See the definitions of “large accelerated filer,” “accelerated filer,” “smaller reporting company” and "emerging growth company" in Rule 12b-2 of the Exchange Act. Large accelerated filer [ ] Accelerated filer [X] Non-accelerated filer [ ] Smaller reporting company [ ] Emerging growth company [ ]
If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or reviews financial accounting standards provided pursuant to Section 13(a) of the Exchange Act. [ ]
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes [ ] No [X]
As of June 30, 2017, the aggregate market value of the common stock beneficially held by non-affiliates of the registrant was approximately $223.2 million based on the closing sales price of the Class A common stock as reported on the New York Stock Exchange.
On April 24, 2018, there were 49,053,983 outstanding shares of Class A common stock (excluding 1,018,080 shares held in treasury) and 315,000,000 outstanding shares of Class B common stock.
DOCUMENTS INCORPORATED BY REFERENCE
Items 10, 11, 12, 13 and 14 of Part III will be incorporated by reference from a Form 10-K/A or Proxy Statement for our 2018 Annual Meeting of Stockholders to be filed with the Securities and Exchange Commission.
CLEAR CHANNEL OUTDOOR HOLDINGS, INC.
INDEX TO FORM 10-K
Page
Number
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PART I |
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Item 1. |
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Item 1A. |
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Item 1B. |
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Item 2. |
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Item 3. |
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Item 4. |
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PART II |
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Item 5. |
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Item 6. |
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Item 7. |
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Item 7A. |
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Item 8. |
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Item 9. |
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Item 9A. |
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Item 9B. |
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PART III |
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Item 10. |
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Item 11. |
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Item 12. |
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Item 13. |
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Item 14. |
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PART IV |
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Item 15. |
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Item 16. |
PART I
ITEM 1. BUSINESS
The Company
Clear Channel Outdoor Holdings, Inc. (the “Company”), a Delaware corporation, provides clients with advertising opportunities through billboards, street furniture displays, transit displays and other out-of-home advertising displays, such as wallscapes and spectaculars, which we own or operate in key markets worldwide. Our business consists of two reportable operating segments: Americas and International. As of December 31, 2017, we owned or operated over 570,000 advertising displays worldwide. For the year ended December 31, 2017, we generated consolidated revenue of approximately $2.6 billion, with $1.26 billion and $1.33 billion from our Americas and International segments, respectively.
Our History
We were incorporated in August 1995 under the name “Eller Media Company.” In 1997, Clear Channel Communications, Inc., now iHeartCommunications, Inc. (“iHeartCommunications”), our parent company, entered the outdoor advertising industry with its acquisition of Eller Media Company. We changed our name to Clear Channel Outdoor Holdings, Inc. in August 2005.
On November 11, 2005, we became a publicly traded company through an initial public offering, or IPO, in which we sold 10%, or 35.0 million shares, of our Class A common stock. Prior to our IPO, we were an indirect wholly-owned subsidiary of iHeartCommunications. As of December 31, 2017, iHeartCommunications, through its subsidiaries, owned all of our outstanding shares of Class B common stock and 10,726,917 shares of our Class A common stock, collectively representing approximately 89.5% of the outstanding shares of our common stock and approximately 99% of the total voting power of our common stock.
Prior to or at the time of our IPO, we entered into agreements with iHeartCommunications that govern the relationship between iHeartCommunications and us and provide for, among other things, the provision of services by iHeartCommunications to us and the allocation of employee benefit, tax and other liabilities and obligations attributable to our operations. These agreements include the Master Agreement, Corporate Services Agreement, Employee Matters Agreement, Tax Matters Agreement and Trademark License Agreement (collectively, the "Intercompany Agreements"). All of the agreements relating to our ongoing relationship with iHeartCommunications were made in the context of a parent-subsidiary relationship and the terms of these agreements may be more or less favorable to us than if they had been negotiated with unaffiliated third parties.
iHeartCommunications has the right to terminate these agreements in various circumstances. As of the date of the filing of this report, no notice of termination of any of these agreements has been received from iHeartCommunications.
As long as iHeartCommunications continues to own shares of our common stock representing more than 50% of the total voting power of our common stock, it will have the ability to direct the election of all members of our Board of Directors and, therefore, to exercise a controlling influence over our business and affairs, including any determinations with respect to mergers or other business combinations, our acquisition or disposition of assets, our incurrence of indebtedness, our issuance of any additional common stock or other equity securities, our repurchase or redemption of common stock or any preferred stock, if applicable, and our payment of dividends in certain situations. Similarly, iHeartCommunications will have the power to determine the outcome of matters submitted to a vote of our stockholders, including the power to prevent an acquisition or any other change in control, and to take other actions that might be favorable to iHeartCommunications.
On July 30, 2008, iHeartCommunications completed its merger with a subsidiary of CC Media Holdings, Inc., now iHeartMedia, Inc. (“iHeartMedia”), a company formed by a group of private equity funds sponsored by Bain Capital Partners, LLC and Thomas H. Lee Partners, L.P. iHeartCommunications is now owned indirectly by iHeartMedia.
On March 14, 2018, iHeartMedia, the indirect parent of the Company which owns approximately 89.5% of the Company's outstanding common stock, 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.
The iHeartMedia Chapter 11 Cases are being administered under the caption In re: iHeartMedia, Inc., Case No. 18-31274 (MI). The Bankruptcy Court has approved the Debtors’ request to jointly administer all of the Chapter 11 Cases under the caption In re: iHeartMedia, Inc., et al. The Debtors will continue to operate their businesses as “debtors-in-possession” under the jurisdiction of the Bankruptcy Court and in accordance with the applicable provisions of the Bankruptcy Code and orders of the Bankruptcy Court.
1
Our board of directors has established a special committee consisting of our independent directors (the “Special Committee”) to consider, review and negotiate certain transactions between iHeartCommunications and us in connection with the iHeart Chapter 11 Cases. We have consented to, and the Bankruptcy Court has entered a final order approving, iHeartCommunications' continuing to provide services pursuant to the Corporate Services Agreement during the iHeart Chapter 11 Cases. We expect iHeartCommunications to continue to provide services to us pursuant to the Corporate Services Agreement in the ordinary course of business, until it emerges from Chapter 11 or such arrangements are otherwise addressed through the iHeart Chapter 11 Cases.
Our corporate headquarters are in San Antonio, Texas and we have executive offices in New York, New York. Our headquarters are located at 20880 Stone Oak Parkway, San Antonio, Texas 78258 (telephone: 210-822-2828).
Our Business Segments
We have two reportable business segments, Americas outdoor advertising (“Americas”) and International outdoor advertising (“International”), which represented 48% and 52% of our 2017 revenue, respectively. As of December 31, 2017, our Americas segment consisted of operations primarily in the United States and Latin America and our International segment consisted of operations primarily in Europe and Asia. Beginning January 1, 2018, our Latin American operations will be included in our International segment.
We are a leading global outdoor advertising company providing clients with advertising opportunities through billboards, street furniture displays, transit displays and other out-of-home advertising displays. Through our extensive display inventory, we have the ability to deliver innovative, effective marketing campaigns for advertisers and marketing, creative and strategic partners in communities across the Americas and internationally.
We focus on building the leadership position of our diverse global assets and maximizing our financial performance while serving our local communities. We intend to continue to execute upon our long-standing outdoor advertising strategies, while closely managing expenses and focusing on achieving operating efficiencies throughout our businesses. Part of our long-term strategy is to pursue the technology of digital displays, including flat screens, LCDs and LEDs, as additions to traditional methods of displaying our clients’ advertisements. We are currently installing these technologies in certain markets, both domestically and internationally.
For more information about our revenue, gross profit and assets by segment and our revenue and long-lived assets by geographic area, see Note 11 to our Consolidated Financial Statements located in Item 8 of Part II of this Annual Report on Form 10-K.
Americas Outdoor Advertising
We are one of the largest outdoor advertising companies in the United States. Approximately 91%, 90% and 90% of our revenue in our Americas segment was derived from the United States in the years ended December 31, 2017, 2016 and 2015, respectively. As of December 31, 2017, we owned or operated approximately 85,000 display structures in the United States with operations in 43 of the 50 largest markets, including all of the 20 largest markets. The majority of our non-US revenues are from Latin America where we operate approximately 9,000 display structures in countries including Brazil, Mexico, Peru and Chile. During the first quarter of 2018, the Company reevaluated its segment reporting and determined that its Latin America operations should be managed by its International outdoor leadership team. As such, beginning January 1, 2018, our Latin American operations will be included in our International outdoor segment.
Our Americas assets consist of printed and digital billboards, transit displays, including airports, street furniture and wallscapes and other spectaculars. Our Americas business is focused on metropolitan areas with dense populations.
Strategy
We seek to capitalize on our Americas network and diversified product mix to maximize revenue. Our strategy focuses on pursuing the technology of digital displays, as well as leveraging our diversified product mix and long-standing presence in many of our existing markets, which provides us with the ability to launch new products and test new initiatives in a reliable and cost-effective manner.
Promote Outdoor Media Spending. Given the attractive industry fundamentals of outdoor media and our depth and breadth of relationships with both local and national advertisers, we believe we can drive outdoor advertising's share of total media spending by using our dedicated sales team to highlight the value of outdoor advertising relative to other media. We have made and continue to make significant investments in research tools like Radar. Radar is the industry's first suite of campaign planning and attribution solutions that utilize anonymous mobile location intelligence to help brands reach certain audiences and understand what happens after someone is exposed to an advertisement on our printed and digital displays.
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Differentiate through Innovation, Sales and Services. Over the last several years, we have developed and hired talent who are helping to re-make how outdoor media is bought and sold. We are working closely with clients, advertising agencies and other diversified media companies to develop more sophisticated approaches to delivering the right audience in the right location at the right time. One example is our programmatic effort to sell digital billboard advertisements using automated advertisement sales technology to introduce ease and efficiency to the out-of-home ad sales process and enable better targeting of digital billboard advertising. Another is our RFP team, which provides proposal preparation and marketing support for our key multi-market sales efforts. A third area is our proof of performance delivery platform that is leading the industry in providing transparency when the ad is delivered, accessible via API to allow partners to pull proof of performance information into whatever system they choose.
Continue to Deploy Digital Displays. Our long-term strategy for our outdoor advertising businesses includes pursuing the technology of digital displays, including flat screens, LCDs and LEDs, as additions to traditional methods of displaying our clients’ advertisements. Digital advertising provides significant advantages over traditional outdoor media. Our electronic displays are linked through centralized computer systems to instantaneously and simultaneously and rapidly change advertising copy on a large number of displays, allowing us to sell more advertising opportunities to advertisers. The ability to change copy by time of day and quickly change messaging based on advertisers’ needs creates additional flexibility for our customers. Although digital displays require more capital to construct compared to printed bulletins, the advantages of digital allow us to penetrate new accounts and categories of advertisers, as well as serve a broader set of needs for existing advertisers. Digital displays allow for high-frequency, 24-hour advertising changes in high-traffic locations and allow us to offer our clients optimal flexibility, distribution, circulation and visibility. We expect this trend to continue as we increase our quantity of digital inventory. As of December 31, 2017, we had deployed more than 1,100 digital billboards in 28 markets in the United States.
Sources of Revenue
Americas generated 48%, 48% and 48% of our revenue in 2017, 2016 and 2015, respectively. Americas revenue is derived from the sale of advertising copy placed on our printed and digital displays. Our display inventory consists primarily of billboards, transit displays and street furniture. The margins on our billboard contracts, including those related to digital billboards, tend to be higher than those on contracts for other displays, due to their greater size, impact and location along major roadways that are highly trafficked. Billboards comprise approximately two-thirds of our display revenues. The following table shows the approximate percentage of revenue derived from each category for our Americas inventory:
Year Ended December 31, |
||||||||
2017 |
2016 |
2015 |
||||||
Billboards: |
||||||||
Bulletins |
59 |
% |
59 |
% |
58 |
% |
||
Posters |
10 |
% |
10 |
% |
12 |
% |
||
Transit displays |
16 |
% |
16 |
% |
15 |
% |
||
Street furniture displays |
7 |
% |
7 |
% |
6 |
% |
||
Spectaculars/wallscapes |
4 |
% |
4 |
% |
5 |
% |
||
Other |
4 |
% |
4 |
% |
4 |
% |
||
Total |
100 |
% |
100 |
% |
100 |
% |
Our Americas segment generates revenues from local and national sales. Our advertising rates are based on a number of different factors including location, competition, size of display, illumination, market and gross ratings points. Gross ratings points are the total number of impressions delivered, expressed as a percentage of a market population, of a display or group of displays. The number of impressions delivered by a display is measured by the number of people passing the site during a defined period of time. For all of our billboards in the United States, we use independent, third-party auditing companies to verify the number of impressions delivered by a display.
While location, price and availability of displays are important competitive factors, we believe that providing quality customer service and establishing strong client relationships are also critical components of sales. In addition, we have long-standing relationships with a diversified group of advertising brands and agencies that allow us to diversify client accounts and establish continuing revenue streams.
Billboards
Our billboard inventory primarily includes bulletins and posters.
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Bulletins. Bulletins vary in size, with the most common size being 14 feet high by 48 feet wide. Digital bulletins display static messages that resemble standard printed bulletins when viewed, but also allow advertisers to change messages throughout the course of a day, and may display advertisements for multiple customers. Our electronic displays are linked through centralized computer systems to instantaneously and simultaneously change advertising copy as needed. Because of their greater size, impact, high-frequency and 24-hour advertising changes, we typically receive our highest rates for digital bulletins. Almost all of the advertising copy displayed on printed bulletins is computer printed on vinyl and transported to the bulletin where it is secured to the display surface. Bulletins generally are located along major expressways, primary commuting routes and main intersections that are highly visible and heavily trafficked. Our clients may contract for individual bulletins or a network of bulletins, meaning the clients’ advertisements are rotated among bulletins to increase the reach of the campaign. Our client contracts for bulletins, either printed or digital, generally have terms ranging from four weeks to one year.
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• |
Posters. Printed posters are approximately 11 feet high by 23 feet wide, and the printed junior posters are approximately 5 feet high by 11 feet wide. Digital posters are available in addition to the traditional poster-size and junior poster-size. Similar to digital bulletins, digital posters display static messages that resemble standard printed posters when viewed, and are linked through centralized computer systems to instantaneously and simultaneously change messages throughout the course of a day. Advertising copy for printed posters is digitally printed on a single piece of polyethylene material that is then transported and secured to the poster surfaces. Advertising copy for printed junior posters is printed using silk screen, lithographic or digital process to transfer the designs onto paper that is then transported and secured to the poster surfaces. Posters generally are located in commercial areas on primary and secondary routes near point-of-purchase locations, facilitating advertising campaigns with greater demographic targeting than those displayed on bulletins. Our poster rates typically are less than our bulletin rates, and our client contracts for posters generally have terms ranging from four weeks to one year. Premiere displays, which consist of premiere panels and squares, are innovative hybrids between bulletins and posters that we developed to provide our clients with an alternative for their targeted marketing campaigns. The premiere displays use one or more poster panels, but with vinyl advertising stretched over the panels similar to bulletins. Our intent is to combine the creative impact of bulletins with the additional reach and frequency of posters.
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Transit Displays
Our transit displays are advertising surfaces on various types of vehicles or within transit systems, including on the interior and exterior sides of buses, trains, trams, and within the common areas of rail stations and airports, and are available in both printed and digital formats. Similar to street furniture, contracts for the right to place our displays on such vehicles or within such transit systems and to sell advertising space on them generally are awarded by public transit authorities in competitive bidding processes or are negotiated with private transit operators. Generally, these contracts have terms ranging from five to ten years. Our client contracts for transit displays generally have terms ranging from four weeks to one year.
Street Furniture Displays
Our street furniture displays include advertising surfaces on bus shelters, information kiosks, freestanding units and other public structures, are available in both printed and digital formats, and are primarily located in major metropolitan areas and along major commuting routes. Generally, we are responsible for the construction and maintenance of street furniture structures. Contracts for the right to place our street furniture displays in the public domain and sell advertising space on them are awarded by municipal and transit authorities in competitive bidding processes governed by local law. Generally, these contracts have terms ranging from 10 to 20 years. As compensation for the right to sell advertising space on our street furniture structures, we pay the municipality or transit authority a fee or revenue share that is either a fixed amount or a percentage of the revenue derived from the street furniture displays. Typically, these revenue sharing arrangements include payments by us of minimum guaranteed amounts. Client contracts for street furniture displays typically have terms ranging from four weeks to one year, and are typically for network packages of multiple street furniture displays.
Other Displays
The balance of our display inventory consists of spectaculars and wallscapes. Spectaculars are customized display structures that often incorporate video, multidimensional lettering and figures, mechanical devices and moving parts and other embellishments to create special effects. The majority of our spectaculars are located in Los Angeles, San Francisco and Times Square in New York City. Client contracts for spectaculars typically have terms of one year or longer. A wallscape is a display that drapes over or is suspended from the sides of buildings or other structures. Generally, wallscapes are located in high-profile areas where other types of outdoor advertising displays are limited or unavailable. Clients typically contract for individual wallscapes for extended terms.
Advertising Inventory and Markets
4
As of December 31, 2017, we owned or operated approximately 94,000 display structures in our Americas segment with operations in 43 of the 50 largest markets in the United States, including all of the 20 largest markets. Therefore, no one property is material to our overall operations. We believe that our properties are in good condition and suitable for our operations.
Our displays are located on land we own, lease or for which we have acquired permanent easements or executed long-term management agreements. The majority of the advertising structures on which our displays are mounted require permits. Permits are granted for the right to operate an advertising structure as long as the structure is used in compliance with the laws and regulations of the applicable jurisdiction.
In January 2017, Americas sold its Indianapolis, Indiana market in exchange for certain assets in Atlanta, Georgia with a fair value of $39.4 million, plus $43.1 million in cash, net of closing costs. The assets acquired as part of the transaction consisted of $9.9 million in fixed assets and $29.5 million in intangible assets (including $2.3 million in goodwill). The Company recognized a net gain of $28.9 million related to the sale, which is included within Other operating income (expense), net.
During the third quarter of 2017, Americas sold its ownership interest in a joint venture in Canada. As a result, the Company recognized a net loss on sale of $12.1 million, including a $6.3 million cumulative translation adjustment, which is included within Other operating income (expense), net.
Production
In a majority of our markets, our local production staff performs the full range of activities required to create and install advertising copy. Production work includes creating the advertising copy design and layout, coordinating its printing and installing the copy on displays. We provide creative services to smaller advertisers and to advertisers not represented by advertising agencies. National advertisers often use preprinted designs that require only installation. Our creative and production personnel typically develop new designs or adopt copy from other media for use on our inventory. Our creative staff also can assist in the development of marketing presentations, demonstrations and strategies to attract new clients.
Construction and Operation
We typically own the physical structures on which our clients’ advertising copy is displayed. We manage the construction of our structures centrally and erect them on sites we either lease or own or for which we have acquired permanent easements. The site lease terms generally range from one to 20 years. In addition to the site lease, we must obtain a permit to build new signs or convert existing signs to digital format. Permits are typically granted in perpetuity by the state and/or local government and typically are transferable or renewable for a minimal, or no, fee. Printed bulletin and poster advertising copy is primarily printed with computer generated graphics on a single sheet of vinyl supplied by the advertiser. These advertisements are then transported to the site and wrapped around the face of the site or affixed to a hardware anchoring system on the display site. The operational process also includes conducting visual inspections of the inventory for display defects and taking the necessary corrective action within a reasonable period of time.
Client Categories
In 2017, the top five client categories in our Americas segment were business services, retail, healthcare and medical, media and restaurants.
Competition
The outdoor advertising industry in the Americas is fragmented, consisting of several large companies involved in outdoor advertising, such as OUTFRONT Media Inc. and Lamar Advertising Company, as well as numerous smaller and local companies operating a limited number of displays in a single market or a few local markets. We also compete with other advertising media in our respective markets, including broadcast and cable television, radio, print media, direct mail, mobile, social media, online and other forms of advertisement. Outdoor advertising companies compete primarily based on ability to reach consumers, which is driven by location of the display.
International Outdoor Advertising
Our International segment includes our operations in Europe and Asia, with approximately 34%, 32% and 34% of our revenue in this segment derived from France and the United Kingdom for the years ended December 31, 2017, 2016 and 2015. As of December 31, 2017, we owned or operated more than 480,000 displays across 18 countries.
Our International assets consist of street furniture, billboards, transit displays, retail displays, SmartBike programs and other spectaculars, which we own or operate under lease or license agreements. Our International business is focused on densely populated metropolitan areas.
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Strategy
Similar to our Americas business, we believe our International business has attractive industry fundamentals, including the ability to reach a broad audience and drive foot traffic to the point-of-sale, making outdoor a cost-effective medium for advertisers as measured by cost per thousand persons reached compared to other traditional media. Our International business focuses on the following strategies:
Promote Overall Outdoor Media Spending. Our strategy is to promote growth in outdoor advertising’s share of total media spending by demonstrating the strength of our medium. We believe that outdoor advertising is strongly positioned to compete with other media, whose audiences are fragmenting to online equivalents of traditional media content. As part of our effort to promote growth in outdoor advertising’s share of total media, we are focusing on developing and implementing improved outdoor audience delivery measurement systems (such as our C.A.S.T. system in France) to provide advertisers with tools to plan their campaigns and determine how effectively their message is reaching the desired audience.
Differentiate on Sales and Marketing. For over five years, we have spent time and resources building commercial capabilities through a company wide sales force effectiveness program and an upgrade in our sales and marketing talent. These capabilities allow us to build and nurture relationships with our clients and their agencies as well as to offer packages and products that meet our clients’ advertising needs. Going forward, particular areas of focus include pricing, packaging and programmatic selling. Our new proprietary programmatic platform enables marketers to buy our out of home inventory in audience-based packages, giving them the ability to manage their campaigns on a self-service basis.
Capitalize on Product and Geographic Opportunities. We are also focused on growing our relevance to our advertising customers by continuously optimizing our display portfolio and targeting investments in promising market segments. We have continued to innovate and introduce new products in our markets based on local demand. Our street furniture business generates the largest portion of our revenue and that is where we plan to focus much of our investment. We plan to continue to evaluate municipal contracts that may come up for bid and will make prudent investments where we believe we can generate attractive returns.
Continue to Deploy Digital Display Networks. Our digital displays are a dynamic medium, which enables our customers to engage in real-time, tactical, topical and flexible advertising. We will continue our focused and dedicated digital strategy and remain committed to the development of digital out-of-home communication solutions. Through our digital brand, Clear Channel Play, we are able to offer networks of digital displays in multiple formats and multiple environments including bus shelters, billboards, airports, transit, malls and flagship locations. Part of our long-term strategy is to pursue the diversification of our product offering by introducing technologies, such as beacons, small cells, wayfinding stations and provision of wifi in our street furniture network, as additions to traditional methods of displaying our clients’ advertisements. We are currently installing these technologies in a number of our markets. Digital displays enable revenue growth by enhancing the core proposition of outdoor advertising to our clients by improving the quality of display; enabling greater utilization of our best advertising locations through sequential displays; allowing advertisers to plan campaigns around specific days or times of day; and enhancing creativity and contextual relevance of advertisements, tailoring messages according to specific locations, times or other inputs, such as the current weather or latest betting odds. We seek to achieve greater consumer engagement and flexibility by delivering powerful, flexible and interactive campaigns that open up new possibilities for advertisers to engage with their target audiences. We had more than 13,500 digital displays in 16 countries across Europe and Asia as of December 31, 2017.
Sources of Revenue
Our International segment generated 52%, 52% and 52% of our revenue in 2017, 2016 and 2015, respectively. Our International display inventory consists primarily of street furniture displays, billboards, transit displays and other out-of-home advertising displays. The following table shows the approximate percentage of revenue derived from each inventory category of our International segment:
Year Ended December 31, |
|||||
2017 |
2016 |
2015 |
|||
Street furniture displays |
51% |
52% |
52% |
||
Billboards |
17% |
17% |
19% |
||
Transit displays |
11% |
10% |
9% |
||
Other (1)
|
21% |
21% |
20% |
||
Total |
100% |
100% |
100% |
6
(1) |
Includes advertising revenue from retail displays, other small displays, and non-advertising revenue from sales of street furniture equipment, cleaning and maintenance services, operation of SmartBike programs and production revenue. |
Our International segment generates the majority of its revenue from the sale of advertising space on street furniture displays, billboards, retail displays and transit displays. Similar to our Americas business, advertising rates generally are based on the gross ratings points of a display or group of displays. In some of the countries where we have operations, the number of impressions delivered by a display is weighted to account for such factors as illumination, proximity to other displays and the speed and viewing angle of approaching traffic.
While location, price and availability of displays are important competitive factors, we believe that providing quality customer service and establishing strong client relationships are also critical components of sales. Our entrepreneurial culture allows local management to operate their markets as separate profit centers, encouraging customer cultivation and service.
Street Furniture Displays
Our International street furniture displays, available in printed and digital formats, are substantially similar to their Americas street furniture counterparts, and include bus shelters, freestanding units, various types of kiosks, telephone boxes and other public structures. Internationally, contracts with municipal and transit authorities for the right to place our street furniture in the public domain and sell advertising on such street furniture typically provide for terms ranging up to 15 years. The major difference between our International and Americas street furniture businesses is in the nature of the municipal contracts. In our International outdoor business, these contracts typically require us to provide the municipality with a broader range of metropolitan amenities such as bus shelters with or without advertising panels, information kiosks and public wastebaskets, as well as space for the municipality to display maps or other public information. In exchange for providing such metropolitan amenities and display space, we are authorized to sell advertising space on certain sections of the structures we erect in the public domain. Our International print street furniture is typically sold to clients as network packages of multiple street furniture displays, with contract terms ranging from one to two weeks. Due to its dynamic and real time delivery capabilities, digital street furniture can be sold flexibly, allowing advertisers to buy solutions on a ‘play and impact’ audience-based model to reach and engage their audiences with dynamic, contextually relevant and targeted messages
Billboards
The sizes of our International billboards are not standardized. The billboards vary in both format and size across our networks, with the majority of our International billboards being similar in size to our posters used in our Americas business.
Our billboard inventory is primarily comprised of premium billboards and classic billboards and is available in printed and digital formats.
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Premium. Digital premium billboards allow advertisers to dynamically change messages throughout the course of a day to more effectively target and engage audiences in key locations, and may display advertisements for multiple customers. Our electronic displays are linked through centralized computer systems to instantaneously and simultaneously change messages throughout the course of a day. Because of their greater size, impact, high frequency and 24-hour advertising changes, digital premium billboards typically deliver our highest rates. Almost all of the advertising copy displayed on printed premium billboards is digitally-printed and transported to the billboard where it is secured to the display surface. Premium billboards generally are located along major expressways, primary commuting routes and main intersections that are highly visible and heavily trafficked. Our clients may contract for individual billboards or a network of billboards.
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Classic. Digital and printed classic billboards are available in a variety of formats across our markets. Similar to digital premium billboards, classic digital billboards are linked through centralized computer systems to instantaneously and simultaneously change messages throughout the course of a day. Advertising copy for printed classic billboards is digitally printed then transported and secured to the poster surfaces. Classic billboards generally are located in commercial areas on primary and secondary routes near point-of-purchase locations, facilitating advertising campaigns with greater demographic targeting than those displayed on premium billboards. Classic billboards typically deliver lower rates than our premium billboards. Our intent is to combine the creative impact of premium billboards with the additional reach and frequency of classic billboards.
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Our billboards are primarily sold to clients as network packages with contract terms typically ranging from one to two weeks. Long-term client contracts are also available and typically have terms of up to one year. We lease the majority of our billboard sites from private landowners, usually for one to ten years.
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Transit Displays
Our International transit display contracts are substantially similar to their Americas transit display counterparts. They are advertising surfaces on various types of vehicles or within transit systems, including on the interior and exterior sides of buses, trains, trams and within the common areas of rail stations and airports, and are available in both printed and digital formats. Similar to street furniture, contracts for the right to place our displays on such vehicles or within such transit systems and to sell advertising space on them generally are awarded by public transit authorities in competitive bidding processes or are negotiated with private transit operators. Contracts with public transit authorities or private transit operators typically have terms ranging from two to five years. Our client contracts for transit displays, either printed or digital, generally have terms ranging from one week to one year, or longer. Due to its dynamic and real time delivery capabilities, digital transit can be sold flexibly, allowing advertisers to buy solutions on a ‘play and impact’ audience-based model to reach and engage their audiences with dynamic, contextually relevant and targeted messages.
Retail Displays
Our retail displays are mainly standalone advertising structures in or in close proximity to retail outlets such as malls and supermarkets. The right to place our displays in these locations and to sell advertising space on them generally is awarded by retail outlet operators such as large retailers or mall operators either through private tenders or bilateral negotiations. Upfront investment and ongoing maintenance costs vary across contracts. Contracts with mall operators and retailers have terms ranging from three to ten years. Our client contracts for retail displays, either printed or digital, generally have terms ranging from one week to two weeks. Due to its dynamic and real time delivery capabilities, digital retail displays can be sold flexibly, allowing advertisers to buy solutions on a ‘play and impact’ audience-based model to reach and engage their audiences with dynamic, contextually relevant and targeted messages.
Other International Displays and Services
The balance of our revenue from our International segment consists primarily of advertising revenue from other small displays and non-advertising revenue from sales of street furniture equipment, cleaning and maintenance services, and production and creative services revenue. Our International inventory includes other small displays that are counted as separate displays since they form a substantial part of our network and International outdoor advertising revenue. We also have a SmartBike bicycle rental program which provides bicycles for rent to the general public in several municipalities. In exchange for operating these bike rental programs, we generally derive revenue from advertising rights to the bikes, bike stations, additional street furniture displays and/or a share of rental income from the local municipalities. In several of our International markets, we sell equipment or provide cleaning and maintenance services as part of street furniture contracts with municipalities.
Advertising Inventory and Markets
As of December 31, 2017, we owned or operated more than 480,000 displays in our International segment, with operations across 18 countries. Our International display count includes display faces, which may include multiple faces on a single structure, as well as small, individual displays. As a result, our International display count is not comparable to our Americas display count, which includes only unique displays. No one property is significant to our overall operations. We believe that our properties are in good condition and suitable for our operations.
Production
The majority of our International clients are advertisers targeting national or regional audiences whose business generally is placed with us through media or advertising agencies. These agencies often provide to our International clients creative services to design and produce the advertising copy, which is delivered to us either in digital format or in the traditional format of physical printed advertisements. For digital advertising campaigns, the digital advertisement is received by our content management system and is then distributed to our digital displays. For traditional advertising campaigns, the printed advertisement - whether in paper or vinyl - is shipped to centralized warehouses operated by us. The copy is then sorted and delivered to sites where it is installed on our displays.
Construction and Operation
The International manufacturing process largely consists of two elements: the manufacture and installation of advertising structures and the weekly preparation of advertising posters for distribution throughout our networks. We outsource the manufacturing of advertising structures to third parties and regularly seek competitive bids. We use a wide range of suppliers located in many of our markets, although much of our inventory is manufactured in China and the United Kingdom. The design of street furniture structures (such as bus shelters, bicycle racks and kiosks) is typically done in conjunction with a third party design or architectural firm and followed by a competitive bidding process to select a manufacturer. Our street furniture sites are posted by our own employees or subcontractors who also clean and maintain the sites. The decision to use our own employees or
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subcontractors is made on a market-by-market basis taking into consideration the mix of products in the market and local labor costs.
Client Categories
In 2017, the top five client categories in our International segment, based on International revenue derived from these categories, were retail, entertainment, telecommunications, internet and e-commerce and food and food products.
Competition
The international outdoor advertising industry is competitive, consisting of several large companies involved in outdoor advertising, such as JCDecaux SA and ExterionMedia (UK) Limited, as well as numerous smaller and local companies operating a limited number of displays in a single market or a few local markets. We also compete with other advertising media in our respective markets, including broadcast and cable television, radio, print media, direct mail, online, mobile and other forms of advertisement. Outdoor companies compete primarily based on ability to reach consumers, which is driven by location of the display.
Our business requires us to obtain and renew contracts with municipalities and other governmental entities, which frequently require us to participate in competitive bidding processes at each renewal. Many of these contracts typically have terms ranging up to 15 years and have revenue share, capital expenditure requirements and/or fixed payment components. Competitive bidding processes are complex and sometimes lengthy. Substantial costs may be incurred in connection with preparing bids for such processes. Our competitors, individually or through relationships with third parties, may be able to provide municipalities with different or greater capabilities or prices or benefits than we can provide. In the past we have not, and most likely in the future will not, be awarded all of the contracts on which we bid. There can be no assurance that we will win any particular bid, or that we will be able to replace any revenues lost upon expiration or completion of a contract. Our inability to renew existing contracts can also result in significant expenses from the removal of our displays. Furthermore, if and when we do obtain a contract, we are generally required to incur significant start-up expenses. The costs of bidding on contracts and the start-up costs associated with new contracts we may obtain may significantly reduce our cash flow and liquidity. The success of our business also depends generally on our ability to obtain and renew contracts with private landlords.
Employees
As of December 31, 2017, we had approximately 1,400 domestic employees and approximately 4,300 international employees, of which approximately 5,000 were in direct operations and 700 were in administrative or corporate related activities. Approximately 100 of our employees are subject to collective bargaining agreements in their respective countries. We are a party to numerous collective bargaining agreements, none of which represent a significant number of employees. We believe that our relationship with our employees is good.
Seasonality
Required information is located within Item 7 of Part II of this Annual Report on Form 10-K.
Regulation of our Business
The outdoor advertising industry in the United States is subject to governmental regulation at the federal, state and local levels. These regulations may include, among others, restrictions on the construction, repair, maintenance, lighting, upgrading, height, size, spacing and location and permitting of and, in some instances, content of advertising copy being displayed on outdoor advertising structures. In addition, international regulations have a significant impact on the outdoor advertising industry. 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 may limit the subject matter and language of out-of-home displays.
From time to time, legislation has been introduced in both the United States and foreign jurisdictions attempting to impose taxes on revenue from outdoor advertising or for the right to use outdoor advertising assets. Several jurisdictions have imposed such taxes as a percentage of our outdoor advertising revenue generated in that jurisdiction. In addition, some jurisdictions have taxed our personal property and leasehold interests in advertising locations using various valuation methodologies. We expect U.S. and foreign jurisdictions to continue to try to impose such taxes as a way of increasing revenue. In recent years, outdoor advertising also has become the subject of targeted taxes and fees. These laws may affect prevailing competitive conditions in our markets in a variety of ways. Such laws may reduce our expansion opportunities or may increase or reduce competitive pressure from other members of the outdoor advertising industry. No assurance can be given that existing or future laws or regulations, and the enforcement thereof, will not materially and adversely affect the outdoor advertising industry. However, we
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contest laws and regulations that we believe unlawfully restrict our constitutional or other legal rights and may adversely impact the growth of our outdoor advertising business.
In the United States, federal law, principally the Highway Beautification Act (“HBA”), regulates outdoor advertising on Federal-Aid Primary, Interstate and National Highway Systems roads within the United States (“controlled roads”). The HBA regulates the size and placement of billboards, requires the development of state standards, mandates a state’s compliance program, promotes the expeditious removal of illegal signs and requires just compensation for takings.
To satisfy the HBA’s requirements, all states have passed billboard control statutes and regulations that regulate, among other things, construction, repair, maintenance, lighting, height, size, spacing and the placement and permitting of outdoor advertising structures. We are not aware of any state that has passed control statutes and regulations less restrictive than the prevailing federal requirements on the federal highway system, including the requirement that an owner remove any non-grandfathered, non-compliant signs along the controlled roads, at the owner’s expense and without compensation. Local governments generally also include billboard control as part of their zoning laws and building codes regulating those items described above and include similar provisions regarding the removal of non-grandfathered structures that do not comply with certain of the local requirements. Some local governments have initiated code enforcement and permit reviews of billboards within their jurisdiction. In some instances we have had to remove billboards as a result of such reviews.
As part of their billboard control laws, state and local governments regulate the construction of new signs. Some jurisdictions prohibit new construction, some jurisdictions allow new construction only to replace or relocate existing structures and some jurisdictions allow new construction subject to the various restrictions discussed above. In certain jurisdictions, restrictive regulations also limit our ability to relocate, rebuild, repair, maintain, upgrade, modify or replace existing legal non-conforming billboards.
U.S. federal law neither requires nor prohibits the removal of existing lawful billboards, but it does mandate the payment of compensation if a state or political subdivision compels the removal of a lawful billboard along the controlled roads. In the past, state governments have purchased and removed existing lawful billboards for beautification purposes using federal funding for transportation enhancement programs, and these jurisdictions may continue to do so in the future. From time to time, state and local government authorities use the power of eminent domain and amortization to remove billboards. Amortization 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. Thus far, we have been able to obtain satisfactory compensation for, or relocation of, our billboards purchased or removed as a result of these types of governmental action, although there is no assurance that this will continue to be the case in the future.
We have introduced and intend to expand the deployment of digital billboards that display static digital advertising copy from various advertisers that change up to several times per minute. We have encountered some existing regulations in the U.S. and across some international jurisdictions that restrict or prohibit these types of digital displays. However, since digital technology for changing static copy has only recently been developed and introduced into the market on a large scale, and is in the process of being introduced more broadly in our international markets, existing regulations that currently do not apply to digital technology by their terms could be revised to impose greater restrictions. These regulations, or actions by third parties, may impose greater restrictions on digital billboards due to alleged concerns over aesthetics or driver safety.
Privacy and Data Protection
We collect certain types of information from users of our technology platforms, including, without limitation, our websites, web pages, interactive features, applications, social media pages, and mobile application (“Platforms”), in accordance with the privacy policies and terms of use posted on the applicable Platform. We use the information we collect about and from Platform users for a variety of business purposes. In addition, we collect personally identifiable information from our employees, from users of our Smartbike services, from our business partners and from consumers who interact with our digital panels, including the use of behavioral analysis software.
We are subject to a number of federal, state, local and foreign laws and regulations relating to consumer protection, information security, data protection and privacy. Many of these laws and regulations are still evolving and could be interpreted in ways that could harm our business. In the area of information security and data protection, the laws in several states in the United States and most other countries require companies to implement specific information security controls and legal protections to protect certain types of personally identifiable information. Likewise, the most states in the United States and most other countries have laws in place requiring companies to notify users if there is a security breach that compromises certain categories
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of their personally identifiable information. Any failure on our part to comply with these laws may subject us to significant liabilities.
We have implemented commercially reasonable organizational and technical security measures that are designed to protect against the loss, misuse, and alteration of our employees’, clients’ and consumers’ personally identifiable information and to protect our proprietary business information. In Europe, we have appointed a Chief Data Protection Officer and are preparing a comprehensive legal and information security-led approach to compliance with the new Europe-wide General Data Protection Regulation (the “GDPR”) in line with our obligations and our risk profile. Despite our best efforts, no security measures are perfect or impenetrable. Any failure or perceived failure by us to protect our information or information about our employees, clients and consumers or to comply with our policies or applicable regulatory requirements could result in damage to our business and loss of confidence in us, damage to our brands, the loss of users of our services, consumers, business partners and advertisers, as well as proceedings against us by governmental authorities or others, which could harm our business.
Available Information
You can find more information about us at our Internet website located at www.clearchanneloutdoor.com. Our Annual Report on Form 10-K, our Quarterly Reports on Form 10-Q, our Current Reports on Form 8-K and any amendments to those reports are available free of charge through our website as soon as reasonably practicable after we electronically file such material with, or furnish such material to, the Securities and Exchange Commission (“SEC”). The contents of our website are not deemed to be part of this Annual Report on Form 10-K or any of our other filings with the SEC.
The SEC maintains a website that contains these reports at www.sec.gov. Any materials we file with the SEC may also be read or copied at the SEC’s Public Reference Room at 100 F Street, NE, Washington, DC 20549. Information concerning the operation of the Public Reference Room may be obtained by calling the SEC at (800) 732-0330.
ITEM 1A. RISK FACTORS
Risks Related to Our Business
Our results have been in the past, and could be in the future, adversely affected by economic uncertainty or deteriorations in economic conditions
We derive revenues from the sale of advertising. Expenditures by advertisers tend to be cyclical, reflecting economic conditions and budgeting and buying patterns. Periods of a slowing economy or recession, or periods of 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 have been slow to recover and remain uncertain. If economic conditions do not continue to improve, economic uncertainty increases or economic conditions deteriorate again, global economic conditions may once again adversely impact our revenue, profit margins, cash flow and liquidity. Furthermore, because a significant portion of our revenue is derived from local advertisers, our ability to generate revenues in specific markets is directly affected by local and regional conditions, and unfavorable regional economic conditions also may adversely impact our results. In addition, even in the absence of a downturn in general economic conditions, an individual business sector or market may experience a downturn, causing it to reduce its advertising expenditures, which also may adversely impact our results.
To service our debt obligations and to fund our operations and our capital expenditures, we require a significant amount of cash to meet our needs, which depends on many factors beyond our control
Our ability to service our debt obligations and to fund our operations and our capital expenditures for display construction, renovation or maintenance requires a significant amount of cash. Our primary sources of liquidity are cash on hand, cash flow from operations, the intercompany arrangements provided for in the cash management order approved in the iHeart Chapter 11 Cases and our senior revolving credit facility. Based on our current and anticipated levels of operations and conditions in our markets, we believe that cash on hand, cash flow from operations, cash provided under the intercompany arrangements and borrowing capacity under our senior revolving credit facility will enable us to meet our working capital, capital expenditure, debt service and other funding requirements for at least the next twelve months. However, our ability to fund our working capital, capital expenditures, debt service and other obligations depends on our future operating performance and cash from operations, which are in turn subject to prevailing economic conditions and other factors, many of which are beyond our control. If our future operating performance does not meet our expectations or our plans materially change in an adverse manner or prove to be materially inaccurate, we may need additional financing. In addition, the purchase price of possible acquisitions, capital expenditures for deployment of digital billboards and/or other strategic initiatives could require additional indebtedness or equity financing on our part. Adverse securities and credit market conditions could significantly affect the availability of equity or debt financing.
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Consequently, there can be no assurance that such financing, if permitted under the terms of our financing agreements, will be available on terms acceptable to us or at all. The inability to obtain additional financing in such circumstances could have a material adverse effect on our financial condition and on our ability to meet our obligations or pursue strategic initiatives. Additional indebtedness could increase our leverage and make us more vulnerable to economic downturns and may limit our ability to withstand competitive pressures.
We face intense competition in the outdoor advertising business
We operate in a highly competitive industry, and we may not be able to maintain or increase our current advertising revenues. We compete for advertising revenue with 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 consolidation of our competitors through processes such as mergers and acquisitions, which could have the effect of reducing our revenue in a specific market. Our competitors may develop technology, services or advertising media that are equal or superior to those we provide or that achieve greater market acceptance and brand recognition than we achieve. It also is possible that new competitors may emerge and rapidly acquire significant market share in any of our business segments. 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.
Our business is dependent on our management team and other key individuals
Our business is dependent upon the performance of our management team and other key individuals. Although we have entered into agreements with some members of our management team and certain other key individuals, we can give no assurance that all or any of our management team and other key individuals will remain with us, or that we won’t continue to make changes to the composition of, and the roles and responsibilities of, our management team. Competition for these individuals is intense and many of our key employees are at-will employees who are under no obligation to remain with us, and may decide to leave for a variety of personal or other reasons beyond our control. If members of our management or key individuals decide to leave us 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. Five of our executive officers serve as executive officers of iHeartMedia and iHeartCommunications, including our CEO who also serves as the CEO of iHeartMedia and iHeartCommunications. These executive officers provide services to us pursuant to the Corporate Services Agreement. If the Corporate Services Agreement is rejected or otherwise terminated during or upon completion of the iHeart Chapter 11 Cases, and these officers cease to provide services to us, we will need to identify replacements or transition their responsibilities to others. In addition, the iHeart RSA contemplates a separation of the Company from iHeartCommunications. Accordingly, alternative arrangements for executive management will likely need to be implemented as a result of the separation.
The success of our street furniture and transit products businesses is dependent on our obtaining key municipal concessions, which we may not be able to obtain on favorable terms
Our street furniture and transit products businesses require us to obtain and renew contracts with municipalities and transit authorities. Many of these contracts, which require us to participate in competitive bidding processes at each renewal, typically have terms ranging up to 15 years and have revenue share, capital expenditure requirements and/or fixed payment components. Competitive bidding processes are complex and sometimes lengthy and substantial costs may be incurred in connection with preparing bids.
Our competitors, individually or through relationships with third parties, may be able to provide different or greater capabilities or prices or benefits than we can provide. In the past we have not been, and most likely in the future will not be, awarded all of the contracts on which we bid. The success of our business also depends generally on our ability to obtain and renew contracts with private landlords. There can be no assurance that we will win any particular bid, be able to renew existing contracts or be able to replace any revenue lost upon expiration or completion of a contract. Our inability to renew existing contracts may also result in significant expenses from the removal of our displays. Furthermore, if and when we do obtain a contract, we are generally required to incur significant start-up expenses. The costs of bidding on contracts and the start-up costs associated with new contracts we may obtain may significantly reduce our cash flow and liquidity.
This competitive bidding process presents a number of risks, including the following:
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we expend substantial cost and managerial time and effort to prepare bids and proposals for contracts that we may not win; |
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we may be unable to estimate accurately the revenue derived from and the resources and cost structure that will be required to service any contract we win; and |
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we may encounter expenses and delays if our competitors challenge awards of contracts to us in competitive bidding, and any such challenge could result in the resubmission of bids on modified specifications, or in the termination, reduction or modification of the awarded contract. |
Our inability to successfully negotiate, renew or complete these contracts due to third-party or governmental demands and delay and the highly competitive bidding processes for these contracts could affect our ability to offer these products to our clients, or to offer them to our clients at rates that are competitive to other forms of advertising, without adversely affecting our financial results.
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:
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unfavorable fluctuations in operating costs, which we may be unwilling or unable to pass through to our customers; |
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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; |
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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; |
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adverse political effects and acts or threats of terrorism or military conflicts; and |
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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 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". International outdoor is currently headquartered in the U.K. and transacts business in many key European markets. As a result of the referendum, the British government has begun negotiating the terms of the U.K.'s withdrawal from the E.U. It is unclear how these negotiations, or the U.K.’s ultimate exit from the E.U., will impact 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. These dispositions or acquisitions could be material. Dispositions and acquisitions involve numerous risks, including:
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our dispositions may negatively impact revenues from our national, regional and other sales networks; |
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our dispositions may make it difficult to generate cash flows from operations sufficient to meet our anticipated cash requirements, including our debt service requirements; |
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our acquisitions may prove unprofitable and fail to generate anticipated cash flows; |
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to successfully manage our large portfolio of outdoor advertising and other businesses, we may need to: |
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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 |
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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; |
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we may enter into markets and geographic areas where we have limited or no experience; |
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we may encounter difficulties in the integration of operations and systems; and |
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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 DOJ, the FTC or foreign antitrust agencies will not seek to bar us from disposing of or acquiring outdoor advertising businesses or impose stringent undertaking 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
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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 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.
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. As a result, we may experience a significant impact on our operations, revenue, international client base and overall financial condition.
Regulations and consumer concerns regarding privacy and data protection, or any failure to comply with these regulations, could hinder our operations
We collect and utilize demographic and other information, including personally identifiable information, from and about our consumers, business partners and advertisers. We are subject to numerous federal, state and foreign laws and regulations relating to consumer protection, information security, data protection and privacy, among other things. Many of these laws are still evolving, new laws may be enacted and any of these laws could be amended or interpreted in ways that could harm our business. In addition, changes in consumer expectations and demands regarding privacy and data protection could restrict our ability to collect, use, disclose and derive economic value from demographic and other information related to our consumers, business partners and advertisers, or to transfer employee data within the corporate group. Such restrictions could limit our ability to offer targeted advertising opportunities to our business partners and advertisers. Although we have implemented and are implementing policies and procedures designed to comply with these laws and regulations, any failure or perceived failure by us to comply with our policies or applicable regulatory requirements related to consumer protection, information security, data protection and privacy could result in a loss of confidence in us, damage to our brands, the loss of consumers, business partners and advertisers, as well as proceedings against us by governmental authorities or others, which could hinder our operations and adversely affect our business.
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If our security measures are breached, we could lose valuable information, suffer disruptions to our business, and incur expenses and liabilities including damages to our relationships with business partners and advertisers
Although we have implemented physical and electronic security measures that are designed to protect against the loss, misuse and alteration of our websites, digital assets and proprietary business information as well as, consumer, business partner and advertiser personally identifiable information, no security measures are perfect and impenetrable and we may be unable to anticipate or prevent unauthorized access. A security breach could occur due to the actions of outside parties, employee error, malfeasance or a combination of these or other actions. If an actual or perceived breach of our security occurs, we could lose competitively sensitive business information or suffer disruptions to our business operations, information processes or internal controls. In addition, the public perception of the effectiveness of our security measures or services could be harmed; we could lose consumers, business partners and advertisers. In the event of a security breach, we could suffer financial exposure in connection with penalties, remediation efforts, investigations and legal proceedings and changes in our security and system protection measures. Currently, not all of our systems are fully compliant with PCI-DSS and GDPR standards and, as a result, we may face additional liability in the event of a security breach involving payment card information.
Restrictions on outdoor advertising of certain products may restrict the categories of clients that can advertise using our products
Out-of-court settlements between the major U.S. tobacco companies and all 50 states, the District of Columbia, the Commonwealth of Puerto Rico and other U.S. territories include a ban on the outdoor advertising of tobacco products. Other products and services may be targeted in the U.S. in the future, including alcohol products. Most European Union countries, among other nations, also have banned outdoor advertisements for tobacco products and regulate alcohol advertising. Regulations vary across the countries in which we conduct business. Any significant reduction in advertising of products due to content-related restrictions could cause a reduction in our direct revenues from such advertisements and an increase in the available space on the existing inventory of billboards in the outdoor advertising industry.
Environmental, health, safety and land use laws and regulations may limit or restrict some of our operations
As the owner or operator of various real properties and facilities, we must comply with various foreign, federal, state and local environmental, health, safety and land use laws and regulations. We and our properties are subject to such laws and regulations relating to the use, storage, disposal, emission and release of hazardous and non-hazardous substances and employee health and safety as well as zoning restrictions. Historically, we have not incurred significant expenditures to comply with these laws. However, additional laws which may be passed in the future, or a finding of a violation of or liability under existing laws, could require us to make significant expenditures and otherwise limit or restrict some of our operations.
We are exposed to foreign currency exchange risks because a portion of our revenue is received in foreign currencies and translated to U.S. dollars for reporting purposes
We generate a portion 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 portion 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 portion 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 with 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:
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potential adverse changes in the diplomatic relations of foreign countries with the United States; |
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hostility from local populations; |
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the adverse effect of foreign exchange controls |
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government policies against businesses owned by foreigners; |
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investment restrictions or requirements; |
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expropriations of property without adequate compensation; |
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the potential instability of foreign governments; |
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the risk of insurrections; |
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risks of renegotiation or modification of existing agreements with governmental authorities; |
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difficulties collecting receivables and otherwise enforcing contracts with governmental agencies and others in some foreign legal systems; |
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withholding and other taxes on remittances and other payments by subsidiaries; |
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changes in tax structure and level; and |
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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. Violations of these laws, or allegations of such violations, could have a material adverse effect on our business, financial position and results of operations.
We identified a material weakness in our internal control over financial reporting as of December 31, 2017, and the occurrence of this or any other material weakness could have a material adverse effect on our ability to report accurate financial information in a timely manner.
Our management recently concluded that, as described under the heading “Item 9A. Controls and Procedures,” we had a material weakness as of December 31, 2017 and therefore did not maintain effective internal control over financial reporting or effective disclosure controls and procedures, both of which are requirements of the Securities Exchange Act of 1934, as of that date. The material weakness related to our failure to detect the misappropriation of funds by an employee of Clear Media Limited, an indirect, non-wholly-owned subsidiary of the Company whose ordinary shares are listed on the Hong Kong Stock Exchange. The Company understands that several employees of Clear Media Limited are subject to an ongoing police investigation for misappropriation of funds. Although we concluded that the amount misappropriated was not material to our financial statements, it is possible that the internal controls in place on that date would not have detected a larger misappropriation that would have been material to our financial statements.
The misappropriation and the special investigation that we conducted as a result of the misappropriation kept us from filing this Annual Report on Form 10-K on or before its due date. We have implemented additional controls, and are taking additional steps, to remediate the material weakness. However, the remedial measures we have taken may not be adequate to prevent future misappropriation or avoid other control deficiencies or material weaknesses. There can be no assurance that any system of internal control over financial reporting will be successful in preventing all errors or fraud or in making all material information known in a timely manner to the appropriate levels of management. As a result, it is possible that our financial statements will not comply with generally accepted accounting principles, will contain a material misstatement or will not be available on a timely basis, any of which could cause investors to lose confidence in us and lead to, among other things, unanticipated legal, accounting and other expenses, delays in filing required financial disclosures, enforcement actions by government authorities, fines, penalties, the delisting of our common stock and liabilities arising from stockholder litigation.
Risks Related to Our Relationship with iHeartCommunications
Because iHeartCommunications controls substantially all of the total voting power of our common stock, investors will not be able to affect the outcome of any stockholder vote
As of December 31, 2017, iHeartCommunications indirectly owned (1) all of our outstanding shares of Class B common stock and (2) 10,726,917 shares of our Class A common stock, collectively representing approximately 89.5% of the outstanding shares of our common stock. Each share of our Class B common stock entitles its holder to 20 votes and each share of our Class A common stock entitles its holder to one vote on all matters on which stockholders are entitled to vote. As a result, as of December 31, 2017, iHeartCommunications controlled approximately 99% of the total voting power of our common stock.
As long as iHeartCommunications continues to own shares of our common stock representing more than 50% of the total voting power of our common stock, it will have the ability to direct the election of all members of our board of directors and, therefore, to exercise a controlling influence over our business and affairs, including any determinations with respect to mergers or other business combinations, our acquisition or disposition of assets, our incurrence of indebtedness, our issuance of any additional common stock or other equity securities, our repurchase or redemption of common stock or preferred stock, if applicable, and our payment of dividends in certain situations. Similarly, iHeartCommunications will have the power to determine the outcome of matters submitted to a vote of our stockholders, including the power to prevent an acquisition or any other change in control. Because iHeartCommunications’ interests as our controlling stockholder may differ from other stockholders’ interests, actions taken by iHeartCommunications with respect to us may not be favorable to all stockholders.
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iHeartCommunications has filed a voluntary petition for relief under Chapter 11 of the United States Bankruptcy Code, which could cause significant uncertainties and risks for our operations and our liquidity
Pursuant to the Corporate Services Agreement, we are obligated to use various corporate services provided by iHeartCommunications and its affiliates, including treasury, payroll and other financial services, certain executive officer services, human resources and employee benefit services, legal services, information systems and network services and procurement and sourcing support. The iHeart Chapter 11 Cases could cause significant uncertainties and disrupt our operations and/or adversely affect our rights under the Corporate Services Agreement and the other intercompany agreements.
Also pursuant to the Corporate Services Agreement, substantially all of the cash generated from our domestic Americas operations is transferred daily into accounts of iHeartCommunications (after satisfying our controlled disbursement accounts and the funding requirements of the trustee accounts under the senior notes and the senior subordinated notes issued by Clear Channel Worldwide Holdings, Inc., an indirect, wholly-owned subsidiary of ours), where funds of ours and of iHeartCommunications are commingled, and recorded as "Due from iHeartCommunications" on the consolidated balance sheet. Prior to March 14, 2018, net amounts owed between us and iHeartCommunications were evidenced by revolving promissory notes. Pursuant to a final order entered by the Bankruptcy Court (the “cash management order”), following March 14, 2018, intercompany allocations that would have been reflected in adjustments to the balance of the Due from iHeartCommunications Note are instead reflected in an intercompany balance that accrues interest at a rate equal to the interest under the Due from iHeart Communications Note. We do not have any material committed external sources of capital independent from iHeartCommunications, and iHeartCommunications is not required to provide us with funds to finance our working capital or other cash requirements. In addition, we have no access to the cash transferred from us to iHeartCommunications other than pursuant to the cash management arrangements under the Corporate Services agreement and the cash management order of the Bankruptcy Court with respect to cash management.
We are an unsecured creditor of iHeartCommunications with respect to amounts owed under the Due from iHeartCommunications Note. On March 16, 2018, iHeartMedia and the other Debtors entered into a Restructuring Support Agreement (the “iHeart RSA”) with certain creditors and equityholders. The iHeart RSA contemplates that our business will be separated from iHeartCommunications at the conclusion of the iHeartMedia Chapter 11 Cases and that the Due from iHeartCommunications Note will receive treatment in a form and substance acceptable to the Debtors, to the Company and to certain consenting senior creditors of iHeartCommunications, which treatment will be set forth in a plan of reorganization and approved by the Bankruptcy Court. It is still early in the iHeart Chapter 11 Cases, and we cannot predict at this time the outcome of iHeartCommunications' efforts to restructure its indebtedness. As an unsecured creditor of iHeartCommunications, we do not expect that we will be able to recover all of the amounts owed to us under the Due from iHeartCommunications Note upon the implementation of any plan of reorganization that is ultimately accepted by the requisite creditors and approved by the Bankruptcy Court. If we do not recognize the expected recovery under the Due from iHeartCommunications Note, or if we cannot generate sufficient liquidity from our operations or other sources on a timely basis, we could experience a liquidity shortfall. In addition, any repayments that we received on the Due from iHeartCommunications Notes during the one-year preference period prior to the filing of the iHeart Chapter 11 Cases may potentially be avoidable as a preference and subject to recovery by the iHeartCommunications bankruptcy estate, which could further exacerbate any liquidity shortfall. At December 31, 2017, the principal amount outstanding under the Due from iHeartCommunications Note was $1,067.6 million, and, as a result of the loss we recognized during the fourth quarter of 2017, the asset recorded in "Due from iHeartCommunications" on the consolidated balance sheet was $212.0 million, which reflects management's best estimate of the cash settlement amount of the note.
Our agreements with iHeartCommunications impose obligations on, and iHeartCommunications' financing agreements effectively impose restrictions on, our ability to finance operations and capital needs, make acquisitions and engage in other business activities
We have entered into a Master Agreement, a Corporate Services Agreement, an Employee Matters Agreement, a Tax Matters Agreement, a Trademark License Agreement and a number of other agreements with iHeartCommunications setting forth various matters governing our relationship with iHeartCommunications while it remains a significant stockholder in us (the "Intercompany Agreements"). These agreements allow iHeartCommunications to retain control over many aspects of our operations, in addition to iHeartCommunications' ability to control us through its controlling ownership of our common stock. We are not able to terminate these agreements or amend them in a manner we deem more favorable so long as iHeartCommunications continues to own shares of our common stock representing more than 50% of the total voting power of our common stock. iHeartCommunications' financing agreements also impose a number of restrictions on us.
In addition, the Master Agreement and, in some cases, iHeartCommunications' financing agreements, include restrictive covenants that, among other things, restrict our ability to:
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issue any shares of capital stock or securities convertible into capital stock; |
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incur additional indebtedness; |
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make certain acquisitions and investments; |
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repurchase our stock; |
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dispose of certain assets; and |
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merge or consolidate. |
The rights of iHeartCommunications under these agreements, in addition to iHeartCommunications' ability to control us through its controlling ownership of our common stock, may allow iHeartCommunications to delay or prevent an acquisition of us that our other stockholders may consider favorable. In addition, the restrictions contained in these agreements limit our ability to finance operations and capital needs, make acquisitions or engage in other business activities, including our ability to grow and increase our revenue or respond to competitive changes.
Although we expect iHeartCommunications will continue to provide services to us under the Corporate Services Agreement during the iHeart Chapter 11 Cases, we currently expect that if our business is separated from iHeartCommunications at the ultimate conclusion of the iHeart Chapter 11 Cases as contemplated by the iHeart RSA (as defined above), the Corporate Services Agreement may terminate, be modified or be replaced with an agreement that gives effect to such separation, which could cause significant uncertainty for us. See "iHeartCommunications has filed a voluntary petition for relief under Chapter 11 of the United States Bankruptcy Code, which could cause significant uncertainties and risks for our operations and our liquidity."
We may be unable to replace the services iHeartCommunications provides us in a timely manner or on comparable terms
We negotiated our arrangements with iHeartCommunications in the context of a parent-subsidiary relationship prior to the initial public offering of our Class A common stock. We cannot assure you that iHeartCommunications will continue to provide us with services during the iHeart Chapter 11 Cases, or that we will be able to replace these services in a timely manner or on comparable terms. In addition, we currently expect that our business is separated from iHeartCommunications at the conclusion of the iHeart Chapter 11 Cases as contemplated by the iHeart RSA (as defined above), the Corporate Services Agreement may terminate, be modified or be replaced with an agreement that gives effect to such separation. We cannot provide assurance that the amount we pay iHeartCommunications for the services will be as favorable to us as that which may be available for comparable services provided by unrelated third parties. Other Intercompany Agreements with iHeartCommunications also govern our relationship with iHeartCommunications and provide for the allocation of employee benefit, tax and other liabilities and obligations attributable to our operations. The agreements also contain terms and provisions that may be more favorable than terms and provisions we might have obtained in arm’s length negotiations with unaffiliated third parties. While we cannot predict at this time the outcome of iHeartCommunications’ efforts to restructure its indebtedness, we currently expect that a plan of reorganization will provide for the termination, modification or replacement of some or all of these Intercompany Agreements. If iHeartCommunications ceases to provide services to us pursuant to those Intercompany Agreements, our costs of procuring those services from third parties may increase.
The iHeart Chapter 11 Cases may give rise to unfavorable tax consequences for us.
Although the Company and its direct and indirect subsidiaries did not file Chapter 11 cases as part of the iHeart Chapter 11 Cases, the consummation of the iHeart Chapter 11 Cases may have an adverse impact on the Company and its subsidiaries. The iHeart RSA contemplates the separation of our business from iHeartCommunications, with certain senior creditors of iHeartCommunications receiving the approximately 89.5% of our outstanding shares of common stock that are currently owned indirectly by iHeartCommunications. It has not yet been determined whether such separation will be structured as a taxable transaction or as a tax-free reorganization. In either case, there is a risk that such separation will give rise to a U.S. federal income tax liability. If such liability were to arise, we would be jointly liable for such tax liability under federal law and, while we would not anticipate that any such tax liability would be asserted against us in the first instance, we may ultimately be liable for such liability if iHeartCommunications and its subsidiaries other than us fail to satisfy such liability. Similar principles may apply for foreign, state and local income tax purposes where we file combined, consolidated or unitary returns with iHeartCommunications or its subsidiaries for federal, foreign, state and local income tax purposes. In addition, we may be required to reduce certain of our tax attributes, including net operating loss carryforwards, as a result of any cancellation of indebtedness income realized by the Debtors in connection with the iHeart Chapter 11 Cases.
Transfers of our equity, issuances of equity in connection with the iHeart Chapter 11 Cases, and cancellation of indebtedness income realized by the Debtors in the iHeart Chapter 11 Cases may impair our ability to utilize our federal income tax net operating loss carryforwards in future years.
Under federal income tax law, a corporation is generally permitted to deduct from taxable income net operating losses carried forward from prior years. We are attributed a portion of the U.S. federal net operating loss carryforward of the iHeartMedia consolidated group. Our ability to utilize these net operating loss carryforwards to offset future taxable income and to reduce federal income tax liability is subject to certain requirements and restrictions. If we experience an “ownership change,” as defined
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in section 382 of the U.S. Internal Revenue Code, then our ability to use our net operating loss carryforwards may be substantially limited, which could have a negative impact on our financial position and results of operations. Generally, there is an “ownership change” if one or more shareholders owning 5% or more of a corporation’s common stock have aggregate increases in their ownership of such stock of more than 50 percentage points over the prior three-year period. Following the implementation of a plan of reorganization in the iHeart Chapter 11 Cases, it is expected that we will experience an “ownership change.” Under section 382 of the U.S. Internal Revenue Code, absent an application exception, if a corporation undergoes an “ownership change,” the amount of its net operating losses that may be utilized to offset future taxable income generally is subject to an annual limitation on the amount of federal income tax net operating loss carry-forwards existing prior to the change that it could utilize to offset its taxable income in any future taxable year to an amount generally 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. Because the value of our stock can fluctuate materially, it is possible an ownership change would materially limit our ability to utilize our substantial federal income tax net operating loss carry-forwards in the future. In addition, our net operating losses may be subject to reduction as a result of any cancellation of indebtedness income realized by the Debtors in connection with the iHeart Chapter 11 Cases. Accordingly, there can be no assurance that we will be able to utilize our federal income tax net operating loss carry-forwards to offset future taxable income.
Conflicts of interest may arise between iHeartCommunications and us in the Chapter 11 Cases that could be resolved in a manner unfavorable to us
Questions relating to conflicts of interest may arise between iHeartCommunications and us in a number of areas relating to our past and ongoing relationships, including in connection with the Chapter 11 Cases. iHeartCommunications is owned indirectly by iHeartMedia. Two of our directors serve as directors of iHeartMedia. Three of our other directors are affiliated with iHeartMedia and its stockholders. In addition, five of our executive officers serve as executive officers of iHeartMedia, including our CEO who also serves as the CEO of iHeartCommunications.
Areas in which conflicts of interest between iHeartCommunications and us could arise include, but are not limited to, the following:
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Cross officerships, directorships and stock ownership. The ownership interests of our directors or executive officers in the common stock of iHeartMedia or service as a director or officer of both iHeartMedia and us could create, or appear to create, conflicts of interest when directors and executive officers are faced with decisions that could have different implications for the two companies. For example, these decisions could relate to: (1) the nature, quality and cost of services rendered to us by iHeartCommunications; (2) disagreement over the desirability of a potential acquisition opportunity; (3) employee retention or recruiting; or (4) our capital structure, including our level of indebtedness and our dividend policy.
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Intercompany transactions. From time to time, iHeartCommunications or its affiliates may enter into transactions with us or our subsidiaries or other affiliates. Although the terms of any such transactions will be established based upon negotiations between employees of iHeartCommunications and us and, when appropriate, subject to the approval of the independent directors on our board or a committee of disinterested directors, there can be no assurance the terms of any such transactions will be as favorable to us or our subsidiaries or affiliates as may otherwise be obtained in arm’s length negotiations.
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Intercompany agreements. We have entered into certain agreements with iHeartCommunications pursuant to which it provides us certain management, administrative, accounting, tax, legal and other services, for which we reimburse iHeartCommunications on a cost basis. In addition, we entered into a number of intercompany agreements covering matters such as tax sharing and our responsibility for certain liabilities previously undertaken by iHeartCommunications for certain of our businesses. Pursuant to the Corporate Services Agreement between iHeartCommunications and us, we are contractually obligated to utilize the services of certain executive officers of iHeartCommunications as our executive officers until iHeartCommunications owns shares of our common stock representing less than 50% of the total voting power of our common stock, or we provide iHeartCommunications with six months prior written notice of termination. The terms of these agreements were established while we were a wholly owned subsidiary of iHeartCommunications and were not the result of arm’s length negotiations. In addition, conflicts could arise in the interpretation or any extension or renegotiation of these existing agreements.
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Intercompany financing. iHeartCommunications may request and may exert pressure on us to engage in transactions or to agree to arrangements in connection with the iHeart Chapter 11 Cases for the purpose of supporting its liquidity needs, which may negatively affect our business operations, cash flows or capital structure.
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If iHeartCommunications engages in the same type of business we conduct or takes advantage of business opportunities that might be attractive to us, our ability to successfully operate and expand our business may be hampered
Our amended and restated certificate of incorporation provides that, subject to any contractual provision to the contrary, iHeartCommunications will have no obligation to refrain from:
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engaging in the same or similar business activities or lines of business as us; or |
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doing business with any of our clients, customers or vendors. |
In addition, the corporate opportunity policy set forth in our amended and restated certificate of incorporation addresses potential conflicts of interest between our company, on the one hand, and iHeartCommunications or iHeartMedia and its officers and directors who are officers or directors of our company, on the other hand. The policy provides that if iHeartCommunications or iHeartMedia acquires knowledge of a potential transaction or matter which may be a corporate opportunity for both iHeartCommunications and us, we will have renounced our interest in the corporate opportunity. It also provides that if one of our directors or officers who is also a director or officer of iHeartCommunications or iHeartMedia learns of a potential transaction or matter that may be a corporate opportunity for both iHeartCommunications and us, (1) we will have renounced our interest in the corporate opportunity, unless that opportunity is expressly offered to that person in writing solely in his or her capacity as our director or officer, and (2) the director or officer will have no duty to communicate or present that corporate opportunity to us and will not be liable to us or our stockholders for breach of fiduciary duty by reason of iHeartCommunications’ actions with respect to that corporate opportunity.
This policy could result in iHeartCommunications having rights to corporate opportunities in which both we and iHeartCommunications have an interest.
We are a “controlled company” within the meaning of the New York Stock Exchange (“NYSE”) rules and, as a result, qualify for, and intend to rely on, exemptions from certain corporate governance requirements that may not provide as many protections as those afforded to stockholders of other companies
iHeartCommunications owns shares of our common stock representing more than 50% of the total voting power of our common stock and, as a result, we have elected to be treated as a “controlled company” under the NYSE corporate governance standards. As a controlled company, we are exempt from the provisions of the NYSE’s corporate governance standards requiring that: (1) a majority of our board consists of independent directors; (2) we have a nominating and governance committee composed entirely of independent directors and governed by a written charter addressing the nominating and governance committee’s purpose and responsibilities; and (3) we have a compensation committee composed entirely of independent directors with a written charter addressing the compensation committee’s purpose and responsibilities. Although we currently have a compensation committee composed entirely of independent directors with a written charter addressing the compensation committee’s purpose and responsibilities, we currently do not have a nominating and governance committee and a majority of our board of directors currently does not consist of independent directors. We intend to continue using certain of these exemptions and, as a result: (1) we may not create or maintain a nominating and governance committee; (2) the nominating and governance committee (if one is created) and the compensation committee may not consist entirely of independent directors; and (3) our board of directors may not consist of a majority of independent directors. Accordingly, you may not have the same protections afforded to stockholders of companies that are subject to all of the NYSE corporate governance requirements.
We do not have control over our tax decisions and could be liable for income taxes owed by iHeartCommunications
As long as iHeartCommunications continues to own shares of our common stock representing at least 80% of the total voting power and value of our common stock, we and certain of our subsidiaries will be included in iHeartCommunications’ consolidated group for U.S. federal income tax purposes for all pre-merger periods and iHeartMedia’s consolidated group for post-merger periods. In addition, we or one or more of our subsidiaries may be included in the combined, consolidated or unitary tax returns of iHeartCommunications for pre-merger periods and iHeartMedia for post-merger periods or one or more of its subsidiaries for foreign, state and local income tax purposes. Under the Tax Matters Agreement, we pay to iHeartCommunications the amount of federal, foreign, state and local income taxes that we would be required to pay to the relevant taxing authorities if we and our subsidiaries filed combined, consolidated or unitary tax returns and were not included in the combined, consolidated or unitary tax returns of iHeartCommunications or its subsidiaries. In addition, by virtue of its controlling ownership and the Tax Matters Agreement, iHeartCommunications effectively controls all of our tax decisions. The Tax Matters Agreement provides that iHeartCommunications has the sole authority to respond to and conduct all tax proceedings (including tax audits) relating to us, to file all income tax returns on our behalf and to determine the amount of our liability to (or entitlement to payment from) iHeartCommunications under the Tax Matters Agreement. This arrangement may result in conflicts of interest between iHeartCommunications and us. For example, under the Tax Matters Agreement, iHeartCommunications is able to choose to contest, compromise, or settle any adjustment or deficiency proposed by the relevant taxing authority in a manner that may be beneficial to iHeartCommunications and detrimental to us.
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Moreover, notwithstanding the Tax Matters Agreement, federal law provides that each member of a consolidated group is liable for the group’s entire tax obligation. Thus, to the extent iHeartCommunications or other members of the group fail to make any United States federal income tax payments required by law, we would be liable for the shortfall. Similar principles may apply for foreign, state and local income tax purposes where we file combined, consolidated or unitary returns with iHeartCommunications or its subsidiaries for federal, foreign, state and local income tax purposes.
If iHeartCommunications spins off our Class B common stock to the iHeartMedia stockholders, we have agreed in the Tax Matters Agreement to indemnify iHeartCommunications for its tax-related liabilities in certain circumstances
If iHeartCommunications spins off our Class B common stock to the iHeartMedia’s stockholders in a distribution intended to be tax-free under Section 355 of the Internal Revenue Code of 1986, as amended, which we refer to herein as the Code, we have agreed in the Tax Matters Agreement to indemnify iHeartCommunications and its affiliates against any and all tax-related liabilities if such a spin-off fails to qualify as a tax-free distribution (including as a result of Section 355(e) of the Code) due to actions, events or transactions relating to our stock, assets or business, or a breach of the relevant representations or covenants made by us in the Tax Matters Agreement. If neither we nor iHeartCommunications is responsible under the Tax Matters Agreement for any such spin-off not being tax-free under Section 355 of the Code, we and iHeartCommunications have agreed to each be responsible for 50% of the tax-related liabilities arising from the failure of such a spin-off to so qualify.
Uncertainties in the interpretation and application of the Tax Cuts and Jobs Act of 2017 could materially affect our tax obligations and effective tax rate.
On December 22, 2017, the U.S. enacted comprehensive tax legislation, commonly referred to as the Tax Cuts and Jobs Act (the Tax Act). The Tax Act requires complex computations not previously required by U.S. tax law. As such, the application of accounting guidance for such items is currently uncertain. Further, compliance with the Tax Act and the accounting for such provisions require preparation and analysis of information not previously required or regularly produced. In addition, the U.S. Department of Treasury has broad authority to issue regulations and interpretative guidance that may significantly impact how we will apply the Tax Act and impact our results of operations in future periods. Accordingly, while we have provided a provisional estimate on the effect of the Tax Act in our accompanying audited financial statements, further regulatory or GAAP accounting guidance for the law, our further analysis on the application of the law, and refinement of our initial estimates and calculations could materially change our current provisional estimates, which could, in turn, materially affect our tax obligations and effective tax rate. There may also be significant future effects that these tax reforms will have on our financial results and our business strategies. In addition, there is a risk that states or foreign jurisdictions may amend their tax laws in response to these tax reforms, which could have a material impact on our future results.
Risks Related to Our Class A Common Stock
Our stock ownership by iHeartCommunications, provisions in our agreements with iHeartCommunications and our corporate governance documents, Delaware law and the Chapter 11 Cases may delay or prevent an acquisition of us that our other stockholders may consider favorable, which could decrease the value of your shares of Class A common stock
As long as iHeartCommunications continues to own shares of our common stock representing more than 50% of the total voting power of our common stock, it will have the ability to control decisions regarding an acquisition of us by a third party. As a controlled company, we are exempt from some of the corporate governance requirements of the NYSE, including the requirement that our board of directors consist of a majority of independent directors. In addition, our amended and restated certificate of incorporation, bylaws and Delaware law contain provisions that could make it more difficult for a third party to acquire us without the consent of our board of directors. These provisions include restrictions on the ability of our stockholders to remove directors, supermajority voting requirements for stockholders to amend our organizational documents, restrictions on a classified board of directors and limitations on action by our stockholders by written consent. Some of these provisions, such as the limitation on stockholder action by written consent, only become effective once iHeartCommunications no longer controls us. In addition, our board of directors has the right to issue preferred stock without stockholder approval, which could be used to dilute the stock ownership of a potential hostile acquirer. Delaware law also imposes certain restrictions on mergers and other business combinations between us and any holder of 15% or more of our outstanding voting stock. These restrictions under Delaware law do not apply to iHeartCommunications while it retains at least 15% or more of our Class B common stock. Although we believe these provisions protect our stockholders from coercive or otherwise unfair takeover tactics and thereby provide for an opportunity to receive a higher bid by requiring potential acquirers to negotiate with our board of directors, these provisions apply even if the offer may be considered beneficial by some stockholders. As a result of the filing of the iHeart Chapter 11 Cases, iHeartCommunications is operating as a “debtor-in-possession” under the jurisdiction of the Bankruptcy Court, and any acquisition of us by a third party would also require the approval of the Bankruptcy Court.
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The concentration of our stock ownership by iHeartCommunications could depress the market price for shares of our Class A common stock
As a result of the significant concentration of our stock ownership, we have a relatively small public float compared to the number of our shares outstanding, which may adversely affect the trading price for our Class A common stock because investors may perceive disadvantages in owning stock in companies with controlling stockholders. As of December 31, 2017, iHeartCommunications, through its subsidiaries, held approximately 89.5% of our outstanding shares of common stock. In addition, the uncertainties caused by the iHeart Chapter 11 Cases may cause investors to perceive disadvantages in owning our Class A common stock.
Future sales or distributions of our shares could depress the market price for shares of our Class A common stock
iHeartCommunications is not subject to any contractual obligation that would prohibit it from selling, spinning off, splitting off or otherwise disposing of any shares of our common stock. iHeartCommunications may sell all or part of the shares of our common stock it owns or distribute those shares in connection with the iHeart Chapter 11 Cases. The iHeart RSA contemplates that our business will be separated from iHeartCommunications and the shares of our common stock held by iHeartCommunications will be distributed to certain of iHeartCommunications' creditors at the conclusion of the iHeartMedia Chapter 11 Cases. Accordingly, we do not expect iHeartCommunications to maintain its ownership of our common stock. Sales or distributions by iHeartCommunications or by subsequent holders of our common stock of substantial amounts of our common stock in the public market could adversely affect prevailing market prices for our Class A common stock.
We currently do not pay regularly-scheduled dividends on our Class A common stock
We paid a special dividend on March 15, 2012, a special dividend on November 8, 2013 in connection with the settlement of litigation, a special dividend on August 11, 2014, a special dividend on January 7, 2016, a special dividend on February 4, 2016, a special dividend on February 23, 2017, a special dividend on October 5, 2017, a special dividend on October 31, 2017 and a special dividend on January 24, 2018. 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 operations and no significant assets other than the stock of our subsidiaries. We, therefore, are dependent upon the receipt of dividends or other distributions from our subsidiaries to pay dividends. In addition, Clear Channel Worldwide Holdings, Inc.’s (“CCWH”) senior notes and CCWH’s 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 Class A common stock must appreciate in order to realize a gain on your investment. This appreciation may not occur.
Risks Related to Our Indebtedness
We may not be able to generate sufficient cash to service all of our indebtedness and may be forced to take other actions to satisfy our obligations under our indebtedness, which may not be successful
We have a substantial amount of indebtedness. At December 31, 2017, we had $5.3 billion of total indebtedness outstanding, including: (1) $2.7 billion aggregate principal amount of CCWH’s senior notes, net of unamortized discounts of $4.2 million, which mature in November 2022; (2) $2.2 billion aggregate principal amount of CCWH’s senior subordinated notes, which mature in March 2020; (3) $379.0 million aggregate principal amount outstanding of international subsidiary senior notes, net of unamortized premiums of $4.0 million, which mature in December 2020; and (4) $2.4 million of other debt. This large amount of indebtedness could have negative consequences for us, including, without limitation:
▪ |
requiring us to dedicate a substantial portion of our cash flow to the payment of principal and interest on indebtedness, thereby reducing cash available for other purposes, including to fund operations and capital expenditures, invest in new technology and pursue other business opportunities; |
▪ |
limiting our liquidity and operational flexibility and limiting our ability to obtain additional financing for working capital, capital expenditures, debt service requirements, acquisitions and general corporate or other purposes; |
▪ |
limiting our ability to adjust to changing economic, business and competitive conditions; |
▪ |
requiring us to defer planned capital expenditures, reduce discretionary spending, sell assets, restructure existing indebtedness or defer acquisitions or other strategic opportunities; |
▪ |
limiting our ability to refinance any of the indebtedness or increasing the cost of any such financing; |
▪ |
making us more vulnerable to an increase in interest rates, a downturn in our operating performance, a decline in general economic or industry conditions or a disruption in the credit markets; and |
▪ |
making us more susceptible to negative changes in credit ratings, which could impact our ability to obtain financing in the future and increase the cost of such financing. |
If compliance with the debt obligations materially hinders our ability to operate our business and adapt to changing industry conditions, we may lose market share, our revenue may decline and our operating results may suffer.
22
Our ability to make scheduled payments on our debt obligations depends on our financial condition and operating performance, which is subject to prevailing economic and competitive conditions and to certain financial, business and other factors beyond our control. We may not be able to maintain a level of cash flows from operating activities sufficient to permit us to pay the principal, premium, if any, and interest on our indebtedness.
If our cash flows and capital resources are insufficient to fund our debt service obligations, we may be forced to reduce or delay capital expenditures, sell assets or operations, seek additional capital or refinance our indebtedness. We may not be able to take any of these actions, and these actions may not be successful or permit us to meet our scheduled debt service obligations. Furthermore, these actions may not be permitted under the terms of our existing or future debt agreements.
Our ability to refinance our debt will depend on the condition of the capital markets and our financial condition at such time. Any refinancing of our debt could be at higher interest rates and increase our debt service obligations and may require us to comply with more onerous covenants, which could further restrict our business operations. The terms of existing or future debt instruments may restrict us from adopting some of these alternatives. These alternative measures may not be successful and may not permit us to meet our scheduled debt service obligations. Our operations and our ability to successfully refinance or extend our debt may also be negatively affected by the iHeart Chapter 11 Cases. If we cannot make scheduled payments on our indebtedness we will be in default under one or more of our debt agreements and, as a result we could be forced into bankruptcy or liquidation.
Because we derive all of our operating income from our subsidiaries, our ability to repay our debt depends upon the performance of our subsidiaries and their ability to dividend or distribute funds to us
We derive all of our operating income from our subsidiaries. As a result, our cash flow and the ability to service our indebtedness depend on the performance of our subsidiaries and the ability of those entities to distribute funds to us. We cannot assure you that our subsidiaries will be able to, or be permitted to, pay to us the amounts necessary to service our debt.
The documents governing our indebtedness contain restrictions that limit our flexibility in operating our business
Our material financing agreements contain various covenants restricting, among other things, our ability to:
▪ |
make acquisitions or investments; |
▪ |
make loans or otherwise extend credit to others; |
▪ |
incur indebtedness or issue shares or guarantees; |
▪ |
redeem, repurchase or retire our subordinated debt; |
▪ |
create liens; |
▪ |
enter into transactions with affiliates; |
▪ |
sell, lease, transfer or dispose of assets; |
▪ |
merge or consolidate with other companies; and |
▪ |
make a substantial change to the general nature of our business. |
These restrictions could affect our ability to operate our business and may limit our ability to react to market conditions or take advantage of potential business opportunities as they arise. For example, such restrictions could adversely affect our ability to finance our operations, make strategic acquisitions, investments or alliances, restructure our organization or finance our capital needs. Additionally, our ability to comply with these covenants and restrictions may be affected by events beyond our control. These include prevailing economic, financial and industry conditions. If we breach any of these covenants or restrictions, we could be in default under the agreements governing our indebtedness and, as a result, we would be forced into bankruptcy or liquidation.
Downgrades in our credit ratings may adversely affect our borrowing costs, limit our financing options, reduce our flexibility under future financings and adversely affect our liquidity, and also may adversely impact our business operations
Our corporate credit ratings are speculative-grade. Our corporate credit ratings and ratings outlook are subject to review by rating agencies from time to time and, on various occasions, have been downgraded. In the future, our corporate credit rating and rating outlook could be further downgraded. Any further reductions in our credit ratings could increase our borrowing costs, reduce the availability of financing to us or increase the cost of doing business or otherwise negatively impact our business operations.
Cautionary Statement Concerning Forward-Looking Statements
The Private Securities Litigation Reform Act of 1995 provides a safe harbor for forward-looking statements made by us or on our behalf. This report contains various forward-looking statements which represent our expectations or beliefs concerning future events, including, without limitation, our future operating and financial performance, our ability to comply with the covenants in the agreements governing our indebtedness and the availability of capital and the terms thereof. Statements expressing
23
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; |
▪ |
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; |
▪ |
restrictions on outdoor advertising of certain products; |
▪ |
capital expenditure requirements; |
▪ |
fluctuations in exchange rates and currency values; |
▪ |
risks of doing business in foreign countries; |
▪ |
the identification of a material weakness in our internal control over financial reporting; |
▪ |
our relationship with iHeartCommunications, including its ability to elect all of the members of our board of directors and its ability as our controlling stockholder to determine the outcome of matters submitted to our stockholders and certain additional matters governed by intercompany agreements between us; |
▪ |
the risks and uncertainties associated with the iHeart Chapter 11 Cases on us and iHeartCommunications, our primary direct or indirect external source of capital, which is operating as a “debtor-in-possession” under the jurisdiction of the Bankruptcy Court; |
▪ |
the obligations and restrictions imposed on us by our agreements with iHeartCommunucations; |
▪ |
the risk that we may be unable to replace the services iHeartCommunications provides us in a timely manner or on comparable terms; |
▪ |
the risk that the iHeart Chapter 11 Cases 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 limiting our flexibility in operating our business; |
▪ |
the effect of 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 1B. UNRESOLVED STAFF COMMENTS
None.
24
ITEM 2. PROPERTIES
Our corporate headquarters are located in San Antonio, Texas, where we lease space for executive offices and a data and administrative service center. In addition, certain of our executive and other operations are located in New York, New York and London, England.
The types of properties required to support each of our outdoor advertising branches include offices, production facilities and structure sites. An outdoor branch and production facility is generally located in an industrial or warehouse district.
With respect to each of the Americas and International segments, we primarily lease our outdoor display sites and own or have acquired permanent easements for relatively few parcels of real property that serve as the sites for our outdoor displays. Our leases generally range from month-to-month to year-to-year and can be for terms of 10 years or longer, and many provide for renewal options.
There is no significant concentration of displays under any one lease or subject to negotiation with any one landlord. We believe that an important part of our management activity is to negotiate suitable lease renewals and extensions. For additional information regarding our properties, see “Item 1. Business.”
ITEM 3. 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 our 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 arises in the following contexts: commercial disputes; misappropriation of likeness and right of publicity claims; employment and benefits related claims; governmental fines; intellectual property claims; and tax disputes.
Stockholder Litigation
On May 9, 2016, a stockholder of the Company filed a derivative lawsuit in the Court of Chancery of the State of Delaware, captioned GAMCO Asset Management Inc. v. iHeartMedia Inc. et al., C.A. No. 12312-VCS. The complaint names 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 “Sponsor Defendants”), iHeartMedia’s private equity sponsors and majority owners, and the members of the Company’s board of directors. The Company also is named as a nominal defendant. The complaint alleges that the Company has 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 Sponsor Defendants to the detriment of the Company and its minority stockholders. Specifically, the complaint alleges that the defendants have breached their fiduciary duties by causing the Company to: (i) continue to loan cash to iHeartCommunications under the intercompany note at below-market rates; (ii) abandon its growth and acquisition strategies in favor of transactions that would provide cash to iHeartMedia and iHeartCommunications; (iii) issue new debt in the CCIBV note offering (the “CCIBV Note Offering”) to provide cash to iHeartMedia and iHeartCommunications through a dividend; and (iv) effect the sales of certain outdoor markets in the U.S. (the “Outdoor Asset Sales”) allegedly to provide cash to iHeartMedia and iHeartCommunications through a dividend. The complaint also alleges that iHeartMedia, iHeartCommunications and the Sponsor Defendants aided and abetted the directors’ breaches of their fiduciary duties. The complaint further alleges that iHeartMedia, iHeartCommunications and the Sponsor Defendants were unjustly enriched as a result of these transactions and that these transactions constituted a waste of corporate assets for which the defendants are liable to the Company. The plaintiff is seeking, among other things, a ruling that the defendants breached their fiduciary duties to the Company and that iHeartMedia, iHeartCommunications and the 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 Sponsor Defendants to disgorge all profits they have received as a result of the alleged fiduciary misconduct.
25
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 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 in the Court of Chancery of the State of Delaware, captioned Norfolk County Retirement System, v. iHeartMedia, Inc., et al., C.A. No. 2017-0930-JRS. The complaint names as defendants iHeartMedia, iHeartCommunications, the 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. Specifically, the complaint alleges that (i) iHeartMedia and Sponsor defendants breached their fiduciary duties by exploiting their position of control to require the Company to enter the Third Amendment on terms unfair to the Company; (ii) the Company Board breached their duty of loyalty by approving the Third Amendment and elevating the interests of iHeartMedia, iHeartCommunications and the Sponsor Defendants over the interests of the Company and its minority unaffiliated stockholders; and (iii) the terms of the Third Amendment could not have been agreed to in good faith and represent a waste of corporate assets by the Company Board. The complaint further alleges that iHeartMedia, iHeartCommunications and the Sponsor defendants were unjustly enriched as a result of the unfairly favorable terms of the Third Amendment. The plaintiff is seeking, 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, iHM filed a Notice of Suggestion of Pendency of Bankruptcy and Automatic Stay of Proceedings.
China Investigation
Several employees of Clear Media Limited, an indirect, non-wholly-owned subsidiary of ours whose ordinary shares are listed on, but currently suspended from trading on, the Hong Kong Stock Exchange, are subject to an ongoing police investigation in China for misappropriation of funds. Clear Media Limited has conducted additional procedures and processes, including a special investigation by forensic accountants and an external law firm appointed by Clear Media Limited’s board of directors and approved by the Company’s Audit Committee, into the misappropriation of funds. During the course of the special investigation, it was discovered that three bank accounts were opened in the name of Clear Media Limited entities, which were not authorized, and certain transactions were recorded therein. The opening of the unauthorized bank accounts has also been referred to the police in China for investigation. The misappropriation of funds resulted in discrepancies between actual cash balances and cash amounts included in the Company’s accounting records as of December 31, 2016 and 2015. Included in Selling, general and administrative expenses and Interest expense is $9.6 million and $1.4 million, respectively, recorded in the fourth quarter of 2017 to correct for the accounting errors resulting from the discrepancies. Such accounting errors are not considered to be material to the current year or prior year financial statements.
We advised both the United States Securities and Exchange Commission and the United States Department of Justice of the investigation at Clear Media Limited, and we intend to cooperate with both agencies in connection with any investigation that may be conducted in this matter.
The police investigation is on-going, and the Company is not aware of any litigation, claim or assessment pending against the Company related to the matters described above. Based on information known to date, we believe any contingent liabilities arising from potential misconduct that has been or may be identified by the investigations are not material to our consolidated financial statements. In 2017, Clear Media Limited accounted for 9.8% of our net revenue and 9.9% of our consolidated total assets.
The investigation could implicate the books and records, internal controls and anti-bribery provisions of the U.S. Foreign Corrupt Practices Act, which statute and regulations provide 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 Company in connection with this matter. The nature and amount of any monetary penalty or other sanctions cannot reasonably be estimated at this time.
ITEM 4. MINE SAFETY DISCLOSURES
Not Applicable.
26
EXECUTIVE OFFICERS OF THE REGISTRANT
The following information with respect to our executive officers is presented as of May 3, 2018:
Name |
Age |
Position |
||
Robert W. Pittman |
64 |
Chairman and Chief Executive Officer |
||
Richard J. Bressler |
60 |
Chief Financial Officer |
||
Scott R. Wells |
49 |
Chief Executive Officer – Clear Channel Outdoor Americas |
||
C. William Eccleshare |
62 |
Chairman and Chief Executive Officer – Clear Channel Outdoor International |
||
Steven J. Macri |
49 |
Senior Vice President – Corporate Finance |
||
Scott D. Hamilton |
48 |
Senior Vice President, Chief Accounting Officer and Assistant Secretary |
||
Robert H. Walls, Jr. |
57 |
Executive Vice President, General Counsel and Secretary |
The officers named above serve until their respective successors are chosen and qualified, in each case unless the officer sooner dies, resigns, is removed or becomes disqualified.
Robert W. Pittman is the Chairman and Chief Executive Officer of iHeartMedia, iHeartCommunications and iHeartMedia Capital I, LLC and the Chairman and Chief Executive Officer of the Company. Mr. Pittman was appointed as the Executive Chairman and a director of iHeartMedia and iHeartCommunications on October 2, 2011. He was appointed as Chairman of iHeartMedia and iHeartCommunications on May 17, 2013. He also was appointed as Chairman and Chief Executive Officer and a member of the board of managers of iHeartMedia Capital I, LLC on April 26, 2013. Prior to October 2, 2011, Mr. Pittman served as the Chairman of Media and Entertainment Platforms for iHeartMedia and iHeartCommunications since November 2010. He has been a member of, and an investor in, Pilot Group, a private equity investment company, since April 2003. Mr. Pittman was formerly Chief Operating Officer of AOL Time Warner, Inc. from May 2002 to July 2002. He also served as Co-Chief Operating Officer of AOL Time Warner, Inc. from January 2001 to May 2002, and earlier, as President and Chief Operating Officer of America Online, Inc. from February 1998 to January 2001. Mr. Pittman serves on the boards of numerous charitable organizations, including the Lupus Research Alliance, the Rock and Roll Hall of Fame Foundation and the Robin Hood Foundation, where he has served as past Chairman. Mr. Pittman was selected to serve as a member of our Board because of his service as our Chief Executive Officer, as well as his extensive media experience gained through the course of his career.
Richard J. Bressler is the President, Chief Operating Officer, Chief Financial Officer and Director of iHeartMedia, iHeartMedia Capital I, LLC and iHeartCommunications and the Chief Financial Officer of the Company. Mr. Bressler was appointed as the Chief Financial Officer and President of iHeartMedia, iHeartMedia Capital I, LLC, iHeartCommunications and the Company on July 29, 2013 and as Chief Operating Officer of iHeartMedia, iHeartMedia Capital I, LLC and iHeartCommunications on February 18, 2015. Prior thereto, Mr. Bressler was a Managing Director at THL. Prior to joining THL, Mr. Bressler was the Senior Executive Vice President and Chief Financial Officer of Viacom, Inc. from 2001 through 2005. He also served as Chairman and Chief Executive Officer of Time Warner Digital Media and, from 1995 to 1999, was Executive Vice President and Chief Financial Officer of Time Warner Inc. Prior to joining Time Inc. in 1988, Mr. Bressler was previously a partner with the accounting firm of Ernst & Young LLP. Mr. Bressler also currently is a director of iHeartMedia, iHeartCommunications and Gartner, Inc., a member of the board of managers of iHeartMedia Capital I, LLC and Mr. Bressler previously served as a member of the board of directors of American Media Operations, Inc., Nielsen Holdings B.V. and Warner Music Group Corp. and as a member of the J.P. Morgan Chase National Advisory Board. Mr. Bressler holds a B.B.A. in Accounting from Adelphi University.
Scott R. Wells is the Chief Executive Officer of Clear Channel Outdoor Americas at each of the iHeartMedia, iHeartMedia Capital I, LLC, iHeartCommunications and the Company and was appointed to this position on March 3, 2015. Previously, Mr. Wells served as an Operating Partner at Bain Capital since January 2011 and prior to that served as an Executive Vice President at Bain Capital since 2007. Mr. Wells also was one of the leaders of the firm’s operationally focused Portfolio Group. Prior to joining Bain Capital, he held several executive roles at Dell, Inc. (“Dell”) from 2004 to 2007, most recently as Vice President of Public Marketing and On-Line in the Americas. Prior to joining Dell, Mr. Wells was a Partner at Bain & Company, where he focused primarily on technology and consumer-oriented companies. Mr. Wells was a member of our Board from August 2008 until March 2015. He currently serves as a director of Ad Council, the Achievement Network (ANet) and the Outdoor Advertising Association of America (OAAA). He has an M.B.A., with distinction, from the Wharton School of the University of Pennsylvania and a B.S. from Virginia Tech.
27
C. William Eccleshare is the Chairman and Chief Executive Officer- Clear Channel International at each of iHeartMedia, iHeartMedia Capital I, LLC, iHeartCommunications and the Company and was appointed to this position on March 2, 2015. Prior to such time, he served as Chief Executive Officer – Outdoor of iHeartMedia, iHeartCommunications and the Company since January 24, 2012 and as Chief Executive Officer—Outdoor of iHeartMedia Capital I, LLC on April 26, 2013. Prior to January 24, 2012, he served as Chief Executive Officer—Clear Channel Outdoor—International of iHeartMedia and iHeartCommunications since February 17, 2011 and as Chief Executive Officer—International of the Company since September 1, 2009. Previously, he was Chairman and CEO of BBDO EMEA from 2005 to 2009. Prior thereto, he was Chairman and CEO of Young & Rubicam EMEA since 2002.
Steven J. Macri is the Senior Vice President-Corporate Finance of iHeartMedia, iHeartMedia Capital I, LLC, iHeartCommunications and the Company and the Chief Financial Officer of iHeartMedia's iHM segment. Mr. Macri was appointed Senior Vice President - Corporate Finance of iHeartMedia, iHeartMedia Capital I, LLC, iHeartCommunications and the Company on September 9, 2014 and as the Chief Financial Officer of iHeartMedia division on October 7, 2013. Prior to joining the company, Mr. Macri served as Chief Financial Officer for LogicSource Inc., from March 2012 to September 2013. Prior to joining LogicSource, Mr. Macri was Executive Vice President and Chief Financial Officer at Warner Music Group Corp. from September 2008 to December 2011 and prior thereto served as Controller and Senior Vice President-Finance from February 2005 to August 2008. He has an MBA from New York University Stern School of Business and a B.S. in Accounting from Syracuse University.
Scott D. Hamilton is the Senior Vice President, Chief Accounting Officer and Assistant Secretary of iHeartMedia, iHeartMedia Capital I, LLC, iHeartCommunications and the Company. Mr. Hamilton was appointed Senior Vice President, Chief Accounting Officer and Assistant Secretary of iHeartMedia, iHeartCommunications and the Company on April 26, 2010 and was appointed as Senior Vice President, Chief Accounting Officer and Assistant Secretary of iHeartMedia Capital I, LLC on April 26, 2013. Prior to April 26, 2010, Mr. Hamilton served as Controller and Chief Accounting Officer of Avaya Inc. (“Avaya”), a multinational telecommunications company, from October 2008 to April 2010. Prior thereto, Mr. Hamilton served in various accounting and finance positions at Avaya, beginning in October 2004. Prior thereto, Mr. Hamilton was employed by PricewaterhouseCoopers from September 1992 until September 2004 in various roles including audit, transaction services and technical accounting consulting.
Robert H. Walls, Jr. is the Executive Vice President, General Counsel and Secretary of iHeartMedia, iHeartMedia Capital I, LLC, iHeartCommunications and the Company. Mr. Walls was appointed the Executive Vice President, General Counsel and Secretary of iHeartMedia, iHeartCommunications and the Company on January 1, 2010 and was appointed as Executive Vice President, General Counsel and Secretary of iHeartMedia Capital I, LLC on April 26, 2013. On March 31, 2011, Mr. Walls was appointed to serve in the newly-created Office of the Chief Executive Officer for iHeartMedia Capital I, LLC, iHeartCommunications and the Company, in addition to his existing offices. Mr. Walls served in the Office of the Chief Executive Officer for iHeartMedia Capital I, LLC and iHeartCommunications until October 2, 2011, and served in the Office of the Chief Executive Officer for the Company until January 24, 2012. Mr. Walls was a founding partner of Post Oak Energy Capital, LP and served as Managing Director through December 31, 2009 and as an advisor to Post Oak Energy Capital, LP through December 31, 2013.
28
PART II
ITEM 5. MARKET FOR REGISTRANT’S COMMON EQUITY, RELATED STOCKHOLDER MATTERS AND ISSUER PURCHASES OF EQUITY SECURITIES
Market Information
Shares of our Class A common stock trade on the New York Stock Exchange (“NYSE”) under the symbol “CCO.” There were 147 stockholders of record as of April 24, 2018. This figure does not include an estimate of the indeterminate number of beneficial holders whose shares may be held of record by brokerage firms and clearing agencies. The following table sets forth, for the calendar quarters indicated, the reported high and low sales prices of our Class A common stock as reported on the NYSE:
Class A
Common Stock
Market Price
|
Class A
Common Stock
Market Price
|
||||||||||||
High |
Low |
High |
Low |
||||||||||
2017 |
2016 |
||||||||||||
First Quarter................ |
$ |
6.20 |
$ |
4.60 |
First Quarter................ |
$ |
4.71 |
$ |
3.32 |
||||
Second Quarter........... |
6.00 |
3.55 |
Second Quarter........... |
6.65 |
4.10 |
||||||||
Third Quarter.............. |
5.20 |
3.85 |
Third Quarter.............. |
7.25 |
5.84 |
||||||||
Fourth Quarter............ |
4.80 |
3.80 |
Fourth Quarter............ |
6.25 |
4.90 |
There is no established public trading market for our Class B common stock. There were 315,000,000 shares of our Class B common stock outstanding on April 24, 2018. iHeartCommunications indirectly holds all of the shares of Class B common stock outstanding and 10,726,917 shares of Class A common stock, representing 89.5% of the shares outstanding and approximately 99% of the voting power. The holders of our Class A common stock and Class B common stock have identical rights, except holders of our Class A common stock are entitled to one vote per share while holders of Class B common stock are entitled to 20 votes per share. The shares of Class B common stock are convertible, at the option of the holder at any time or upon any transfer, into shares of Class A common stock on a one-for-one basis, subject to certain limited exceptions.
Dividend Policy
We do not pay regularly scheduled dividends, and our ability to pay dividends on our common stock is subject to restrictions should we seek to do so in the future. On March 15, 2012, we paid a special dividend in an amount equal to $6.0832 per share to the holders of record of our Class A and Class B common stock at the close of business on March 12, 2012 and, on November 8, 2013, in connection with the settlement of the derivative litigation related to the Due from iHeartCommunications note, we paid a special dividend in an amount equal to $0.5578 per share to the holders of record of our Class A and Class B common stock at the close of business on November 5, 2013. On August 11, 2014, we paid a special dividend in an amount equal to $0.4865 per share to the holders of record of our Class A and Class B common stock at the close of business on August 4, 2014. On January 7, 2016, we paid a special dividend in an amount equal to $0.6026 per share to the holders of record of our Class A and Class B common stock at the close of business on January 4, 2016. On February 4, 2016, we paid a special dividend in an amount equal to $1.4937 per share to the holders of record of our Class A and Class B common stock at the close of business on February 1, 2016. On February 23, 2017 we paid a special dividend in an amount equal to $0.7797 per share to the holders of our Class A and Class B common stock at the close of business on February 20, 2017. On October 5, 2017 we paid a special dividend in an amount equal to $0.0687 per share to the holders of our Class A and Class B common stock at the close of business on October 2, 2017. On October 31, 2017 we paid a special dividend in an amount equal to $0.0687 per share to the holders of our Class A and Class B common stock at the close of business on October 26, 2017. On January 24, 2018 we paid a special dividend in an amount equal to $0.0824 per share to the holders of our Class A and Class B common stock at the close of business on January 19, 2018.
We are a holding company with no independent operations and no significant assets other than the stock of our subsidiaries and the Due from iHeartCommunications note. We, therefore, are dependent on the receipt of dividends or other distributions from our subsidiaries or repayment by iHeartCommunications of amounts outstanding under the Due from iHeartCommunications note to pay dividends. On October 19, 2013, in accordance with the terms of the derivative litigation settlement, we established a committee of our board of directors for the specific purpose of monitoring the Due from iHeartCommunications note. The committee has the non-exclusive authority pursuant to a committee charter to demand repayment under the Due from iHeartCommunications note under certain circumstances related to iHeartCommunications’ liquidity or the amount outstanding under the Due from iHeartCommunications note as long as our board of directors declares a simultaneous dividend equal to the amount so demanded. Any payment pursuant to such demand would be subject to the approval of the Bankruptcy Court.
29
In addition, the agreements governing our indebtedness contain restrictions on our ability to pay dividends. If we were to declare and pay cash dividends in the future, holders of our Class A common stock and Class B common stock would share equally, on a per share basis, in any such cash dividend. See “Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations—Liquidity and Capital Resources—Sources of Capital” and Note 6 to the Consolidated Financial Statements in Item 8 of this Annual Report on Form 10-K.
Sales of Unregistered Securities
We did not sell any equity securities during 2017 that were not registered under the Securities Act of 1933.
Purchases of Equity Securities
The following table sets forth the purchases made during the quarter ended December 31, 2017 by or on behalf of us or an affiliated purchaser of shares of our Class A common stock registered pursuant to Section 12 of the Exchange Act:
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
|
||||||||||
October 1 through October 31 |
1,458 |
$ |
4.30 |
— |
$ |
— |
||||||||
November 1 through November 30 |
— |
— |
— |
— |
||||||||||
December 1 through December 31 |
9,145 |
3.98 |
— |
— |
||||||||||
Total |
10,603 |
$ |
4.03 |
— |
$ |
— |
(1) |
The shares indicated consist of shares of our Class A common stock tendered by employees to us during the three months ended December 31, 2017 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.
|
30
ITEM 6. SELECTED FINANCIAL DATA
The following tables set forth our selected historical consolidated financial and other data as of the dates and for the periods indicated. The selected historical financial data are derived from our audited consolidated financial statements. Certain prior period amounts have been reclassified to conform to the 2017 presentation. Historical results are not necessarily indicative of the results to be expected for future periods. Acquisitions and dispositions impact the comparability of the historical consolidated financial data reflected in this schedule of Selected Financial Data.
The selected historical consolidated financial and other data should be read in conjunction with “Management’s Discussion and Analysis of Financial Condition and Results of Operations” and our consolidated financial statements and the related notes thereto located within Item 8 of Part II of this Annual Report on Form 10-K.
(In thousands, except per share data) |
For the Years Ended December 31, |
||||||||||||||||||
2017 |
2016 |
2015 |
2014 |
2013 |
|||||||||||||||
Results of Operations Data: |
|||||||||||||||||||
Revenue |
$ |
2,591,265 |
$ |
2,688,884 |
$ |
2,806,204 |
$ |
2,961,259 |
$ |
2,946,190 |
|||||||||
Operating expenses: |
|||||||||||||||||||
Direct operating expenses (excludes depreciation and amortization) |
1,402,765 |
1,422,058 |
1,494,902 |
1,596,888 |
1,594,728 |
||||||||||||||
Selling, general and administrative expenses (excludes depreciation and amortization) |
508,637 |
515,202 |
531,504 |
548,519 |
543,572 |
||||||||||||||
Corporate expenses (excludes depreciation and amortization) |
143,678 |
117,436 |
116,523 |
131,008 |
124,483 |
||||||||||||||
Depreciation and amortization |
325,991 |
344,124 |
375,962 |
406,243 |
403,170 |
||||||||||||||
Impairment charges (1)
|
4,159 |
7,274 |
21,631 |
3,530 |
13,150 |
||||||||||||||
Other operating income (expense), net |
26,391 |
354,688 |
(4,824 |
) |
7,259 |
22,979 |
|||||||||||||
Operating income |
232,426 |
637,478 |
260,858 |
282,330 |
290,066 |
||||||||||||||
Interest expense, net |
381,149 |
374,892 |
355,669 |
353,265 |
352,783 |
||||||||||||||
Interest income on Due from iHeartCommunications |
68,871 |
50,309 |
61,439 |
60,179 |
54,210 |
||||||||||||||
Loss on Due from iHeartCommunications |
(855,648 |
) |
— |
— |
— |
— |
|||||||||||||
Gain (loss) on investments, net |
(1,045 |
) |
531 |
— |
— |
(18 |
) |
||||||||||||
Equity in earnings (loss) of nonconsolidated affiliates |
(990 |
) |
(1,689 |
) |
(289 |
) |
3,789 |
(2,092 |
) |
||||||||||
Other income (expense), net |
29,800 |
(70,682 |
) |
12,387 |
15,185 |
1,016 |
|||||||||||||
Income (loss) before income taxes |
(907,735 |
) |
241,055 |
(21,274 |
) |
8,218 |
(9,601 |
) |
|||||||||||
Income tax benefit (expense) |
280,218 |
(76,656 |
) |
(49,943 |
) |
8,967 |
(14,543 |
) |
|||||||||||
Consolidated net income (loss) |
(627,517 |
) |
164,399 |
(71,217 |
) |
17,185 |
(24,144 |
) |
|||||||||||
Less amount attributable to noncontrolling interest |
12,199 |
23,002 |
24,764 |
26,709 |
24,134 |
||||||||||||||
Net income (loss) attributable to the Company |
$ |
(639,716 |
) |
$ |
141,397 |
$ |
(95,981 |
) |
$ |
(9,524 |
) |
$ |
(48,278 |
) |
(1) |
We recorded non-cash impairment charges of $4.2 million, $7.3 million, $21.6 million, $3.5 million and $13.2 million during 2017, 2016, 2015, 2014 and 2013, respectively. Our impairment charges are discussed more fully in Item 8 of Part II of this Annual Report on Form 10-K.
|
Net income (loss) attributable to the Company per common share: |
|||||||||||||||||||
Basic |
$ |
(1.77 |
) |
$ |
0.39 |
$ |
(0.27 |
) |
$ |
(0.03 |
) |
$ |
(0.13 |
) |
|||||
Weighted average common shares |
361,141 |
360,294 |
359,508 |
358,565 |
357,662 |
||||||||||||||
Diluted |
$ |
(1.77 |
) |
$ |
0.39 |
$ |
(0.27 |
) |
$ |
(0.03 |
) |
$ |
(0.13 |
) |
|||||
Weighted average common shares |
361,141 |
361,612 |
359,508 |
358,565 |
357,662 |
31
(In thousands) |
As of December 31, |
||||||||||||||||||
2017 |
2016 |
2015 |
2014 |
2013 |
|||||||||||||||
Balance Sheet Data: |
|||||||||||||||||||
Current assets |
$ |
974,172 |
$ |
1,341,435 |
$ |
1,567,697 |
$ |
1,056,030 |
$ |
1,214,143 |
|||||||||
Property, plant and equipment, net |
1,395,029 |
1,412,833 |
1,627,986 |
1,905,651 |
2,081,098 |
||||||||||||||
Total assets |
4,670,782 |
5,718,828 |
6,306,788 |
6,296,630 |
6,685,069 |
||||||||||||||
Current liabilities |
657,512 |
641,718 |
920,613 |
717,829 |
773,590 |
||||||||||||||
Long-term debt, net of current maturities |
5,266,153 |
5,110,020 |
5,106,513 |
4,880,526 |
4,861,357 |
||||||||||||||
Stockholders’ equity (deficit) |
(1,841,405 |
) |
(930,926 |
) |
(567,824 |
) |
(139,332 |
) |
161,537 |
32
ITEM 7. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
OVERVIEW
Format of Presentation
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 footnotes contained in Item 8 of this Annual Report on Form 10-K. Our discussion is presented on both a consolidated and segment basis. Our reportable operating segments are Americas outdoor advertising (“Americas”) and International outdoor advertising (“International”). Our Americas and International segments provide outdoor advertising services in their respective geographic regions using various digital and traditional display types.
We manage our operating segments primarily focusing on their operating income, while Corporate expenses, Other operating income (expense), net, Interest expense, Interest income on Due from iHeartCommunications, Equity in earnings (loss) of nonconsolidated affiliates, Other income, net and Income tax benefit (expense) are managed on a total company basis and are, therefore, included only in our discussion of consolidated results.
During the first quarter of 2018, we reevaluated our segment reporting and determined that our Latin America operations should be managed by our International outdoor leadership team. As such, beginning January 1, 2018, our Latin American operations will be included in our International outdoor segment. Certain prior period amounts have been reclassified to conform to the 2017 presentation.
Description of Our Business
Our revenue is derived from selling advertising space on the displays we own or operate in key markets worldwide, consisting primarily of billboards, street furniture and transit displays. Part of our long-term strategy is to pursue the technology of digital displays, including flat screens, LCDs and LEDs, as additions to traditional methods of displaying our clients’ advertisements. We are currently installing these technologies in certain markets, both domestically and internationally.
Management typically monitors our business by reviewing the average rates, average revenue per display, occupancy, and inventory levels of each of our display types by market.
We own the majority of our advertising displays, which typically are located on sites that we either lease or own or for which we have acquired permanent easements. Our advertising contracts with clients typically outline the number of displays reserved, the duration of the advertising campaign and the unit price per display.
The significant expenses associated with our operations include direct production, maintenance and installation expenses as well as site lease expenses for land under our displays including revenue-sharing or minimum guaranteed amounts payable under our billboard, street furniture and transit display contracts. Our direct production, maintenance and installation expenses include costs for printing, transporting and changing the advertising copy on our displays, the related labor costs, the vinyl costs, electricity costs and the costs for cleaning and maintaining our displays. Vinyl costs vary according to the complexity of the advertising copy and the quantity of displays. Our site lease expenses include lease payments for use of the land under our displays, as well as any revenue-sharing arrangements or minimum guaranteed amounts payable that we may have with the landlords. The terms of our site leases and revenue-sharing or minimum guaranteed contracts generally range from one to 20 years.
Americas
Our advertising rates are based on a number of different factors including location, competition, type and size of display, illumination, market and gross ratings points. Gross ratings points are the total number of impressions delivered by a display or group of displays, expressed as a percentage of a market population. The number of impressions delivered by a display is measured by the number of people passing the site during a defined period of time. For all of our billboards in the United States, we use independent, third-party auditing companies to verify the number of impressions delivered by a display.
Client contract terms typically range from four weeks to one year for the majority of our display inventory in the United States. Generally, we own the street furniture structures and are responsible for their construction and maintenance. Contracts for the right to place our street furniture and transit displays and sell advertising space on them are awarded by municipal and transit authorities in competitive bidding processes governed by local law or are negotiated with private transit operators. Generally, these contracts have terms ranging from 10 to 20 years.
33
International
Similar to our Americas business, advertising rates generally are based on the gross ratings points of a display or group of displays. The number of impressions delivered by a display, in some countries, is weighted to account for such factors as illumination, proximity to other displays and the speed and viewing angle of approaching traffic. In addition, because our International advertising operations are conducted in foreign markets, including Europe and Asia, management reviews the operating results from our foreign operations on a constant dollar basis. A constant dollar basis allows for comparison of operations independent of foreign exchange movements.
Our International display inventory is typically sold to clients through network packages, with client contract terms typically ranging from one to two weeks with terms of up to one year available as well. Internationally, contracts with municipal and transit authorities for the right to place our street furniture and transit displays typically provide for terms ranging up to 15 years. The major difference between our International and Americas street furniture businesses is in the nature of the municipal contracts. In our International business, these contracts typically require us to provide the municipality with a broader range of metropolitan amenities in exchange for which we are authorized to sell advertising space on certain sections of the structures we erect in the public domain. A different regulatory environment for billboards and competitive bidding for street furniture and transit display contracts, which constitute a larger portion of our business internationally, may result in higher site lease costs in our International business.
Macroeconomic Indicators
Our advertising revenue for our Americas and International segments is highly correlated to changes in gross domestic product (“GDP”) as advertising spending has historically trended in line with GDP, both domestically and internationally. According to the U.S. Department of Commerce, estimated U.S. GDP growth for 2017 was 2.3%. Internationally, our results are impacted by fluctuations in foreign currency exchange rates as well as the economic conditions in the foreign markets in which we have operations.
Relationship with iHeartCommunications
There are several agreements which govern our relationship with iHeartCommunications including the Master Agreement, Corporate Services Agreement, Employee Matters Agreement, Tax Matters Agreement and Trademark and License Agreement (collectively, the "Intercompany Agreements"). iHeartCommunications has the right to terminate these agreements in various circumstances. As of the date of the filing of this Annual Report on Form 10-K, no notice of termination of any of these agreements has been received from iHeartCommunications. Our agreements with iHeartCommunications continued under the same terms and conditions subsequent to iHeartCommunications’ merger.
On March 14, 2018, iHeartMedia, the indirect parent of the Company which owns approximately 89.5% of the Company's outstanding common stock, 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.
Our board of directors has established a Special Committee to consider and review certain transactions between iHeartCommunications and us in connection with the iHeart Chapter 11 Cases. We have consented to, and the Bankruptcy Court has entered a final order approving, iHeartCommunications' continuing to provide services pursuant to the Corporate Services Agreement during the iHeart Chapter 11 Cases. We expect iHeartCommunications to continue to provide services to us pursuant to the Corporate Services Agreement in the ordinary course of business, until it emerges from Chapter 11 or such arrangements are otherwise addressed through the iHeart Chapter 11 Cases.
On March 16, 2018, iHeartMedia and the other Debtors entered into a Restructuring Support Agreement (the “iHeart RSA”) with certain creditors and equityholders. The iHeart RSA contemplates that our business will be separated from iHeartCommunications at the conclusion of the iHeartMedia Chapter 11 Cases. The terms and conditions of the separation will be set forth in a plan of reorganization and approved by the Bankruptcy Court. While we cannot predict at this time the outcome of iHeartCommunications’ efforts to restructure its indebtedness, we currently expect that the plan of reorganization will provide for the termination, modification or replacement of the Intercompany Agreements.
In accordance with the Master Agreement, our branch managers follow a corporate policy allowing iHeartCommunications to use, without charge, Americas’ displays they believe would otherwise be unsold. iHeartCommunications bears the cost of producing the advertising and we bear the costs of installing and removing this advertising.
34
Under the Corporate Services Agreement, iHeartCommunications provides management services to us. These services are charged to us based on actual direct costs incurred or allocated by iHeartCommunications based on headcount, revenue or other factors on a pro rata basis. For the years ended December 31, 2017, 2016 and 2015, we recorded approximately $68.7 million, $36.0 million and $30.1 million, respectively, as a component of corporate expenses for these services.
The Trademark and License Agreement entitles us to use (1) on a nonexclusive basis, the "Clear Channel" trademark and the Clear Channel "outdoor" trademark logo with respect to day-to-day operations of our business worldwide and on the Internet, and (2) certain other Clear Channel marks in connection with our business. On February 9, 2017, we entered into a binding option and letter of intent with iHeartMedia granting us a binding option to purchase at fair value the registered trademarks and domain names owned by iHeartMedia and its subsidiaries that incorporate one or more of the words "Clear" and/or "Channel," and any translations or derivations of any of the foregoing, together with any goodwill associated therewith. This option is exercisable in our sole and absolute discretion at any time between February 23, 2018 and February 23, 2019. For the year ended December 31, 2017, management service expenses included $36.8 million pursuant to the Trademark License Agreement.
As of December 31, 2017, iHeartCommunications' and its subsidiaries held 10,726,917 shares of the Company's Class A common stock and all of the Company's class B common stock, which represented 89.5% of the outstanding shares of the Company's common stock on a fully-diluted basis.
Executive Summary
The key developments in our business for the year ended December 31, 2017 are summarized below:
• |
Consolidated revenue decreased $97.6 million during 2017 compared to 2016. Excluding a $8.6 million impact from movements in foreign exchange rates, consolidated revenue decreased $106.2 million during 2017 compared to 2016.
|
• |
During the third quarter of 2017, Americas sold its ownership interest in a joint venture in Canada. As a result, the Company recognized a net loss on sale of $12.1 million.
|
• |
On August 14, 2017, Clear Channel International B.V. ("CCIBV"), our indirect subsidiary, issued $150.0 million in aggregate principal amount of 8.75% Senior Notes due 2020 (the "New CCIBV Notes") , as additional notes under the indenture governing CCIBV's existing 8.75% Senior Notes due 2020. |
• |
On November 29, 2017, the “Due from iHeartCommunications” note was amended to extend its maturity from December 15, 2017 to May 15, 2019. The note's interest rate was also amended and increased from 6.5% to 9.3%. |
• |
In October 2017, we made demands for repayment of $50.0 million outstanding under the Due from iHeartCommunications Note and simultaneously paid special cash dividends of $50.0 million. |
Revenues and expenses “excluding the impact of foreign exchange movements” in this Management’s Discussion & Analysis of Financial Condition and Results of Operations is presented because management believes that viewing certain financial results without the impact of fluctuations in foreign currency rates facilitates period to period comparisons of business performance and provides useful information to investors. Revenues and expenses “excluding the impact of foreign exchange movements” are calculated by converting the current period’s revenues and expenses in local currency to U.S. dollars using average foreign exchange rates for the prior period.
35
RESULTS OF OPERATIONS
Consolidated Results of Operations
The comparison of our historical results of operations for the year ended December 31, 2017 to the year ended December 31, 2016 is as follows:
(In thousands) |
Years Ended December 31, |
% |
|||||||
2017 |
2016 |
Change |
|||||||
Revenue |
$ |
2,591,265 |
$ |
2,688,884 |
(3.6)% |
||||
Operating expenses: |
|||||||||
Direct operating expenses (excludes depreciation and amortization) |
1,402,765 |
1,422,058 |
(1.4)% |
||||||
Selling, general and administrative expenses (excludes depreciation and amortization) |
508,637 |
515,202 |
(1.3)% |
||||||
Corporate expenses (excludes depreciation and amortization) |
143,678 |
117,436 |
22.3% |
||||||
Depreciation and amortization |
325,991 |
344,124 |
(5.3)% |
||||||
Impairment charges |
4,159 |
7,274 |
(42.8)% |
||||||
Other operating income, net |
26,391 |
354,688 |
(92.6)% |
||||||
Operating income |
232,426 |
637,478 |
(63.5)% |
||||||
Interest expense |
381,149 |
374,892 |
|||||||
Interest income on Due from iHeartCommunications |
68,871 |
50,309 |
|||||||
Loss on Due from iHeartCommunications
|
(855,648 |
) |
— |
||||||
Gain (loss) on investments, net |
(1,045 |
) |
531 |
||||||
Equity in loss of nonconsolidated affiliates |
(990 |
) |
(1,689 |
) |
|||||
Other income (expense), net |
29,800 |
(70,682 |
) |
||||||
Income (loss) before income taxes |
(907,735 |
) |
241,055 |
||||||
Income tax benefit (expense) |
280,218 |
(76,656 |
) |
||||||
Consolidated net income (loss) |
(627,517 |
) |
164,399 |
||||||
Less amount attributable to noncontrolling interest |
12,199 |
23,002 |
|||||||
Net income (loss) attributable to the Company |
$ |
(639,716 |
) |
$ |
141,397 |
Consolidated Revenue
Consolidated revenue decreased $97.6 million during 2017 compared to 2016. Excluding an $8.6 million impact from movements in foreign exchange rates, consolidated revenue decreased $106.2 million during 2017 compared to 2016. The decrease in consolidated revenue is primarily due to the sales of our businesses in Australia and Turkey in 2016 and Canada in 2017, which generated revenue of $13.7 million and $149.4 million in the years ended December 31, 2017 and 2016, respectively. This decrease was partially offset by revenue growth in our International business as a result of new contracts and digital expansion.
Consolidated Direct Operating Expenses
Consolidated direct operating expenses decreased $19.3 million during 2017 compared to 2016. Excluding the $4.0 million impact from movements in foreign exchange rates, consolidated direct operating expenses decreased $23.3 million during 2017 compared to 2016 due to the sales of our businesses in Australia and Turkey in 2016 and Canada in 2017. This decrease was partially offset by higher site lease expense related to new contracts.
Consolidated Selling, General and Administrative (“SG&A”) Expenses
Consolidated SG&A expenses decreased $6.6 million during 2017 compared to 2016. Excluding the $2.8 million impact from movements in foreign exchange rates, consolidated SG&A expenses decreased $9.4 million during 2017 compared to 2016. SG&A expenses were lower primarily due to the sales of our businesses in Australia and Turkey in 2016 and Canada in 2017.
Corporate Expenses
Corporate expenses increased $26.2 million during 2017 compared to 2016. Excluding the $1.4 million impact from movements in foreign exchange rates, corporate expenses increased $27.6 million during 2017 compared to 2016 primarily due to the $36.7 million trademark license fee paid to iHeartMedia, Inc. (see Note 6 to our Consolidated Financial Statements located
36
in Part II of this Annual Report on Form 10-K). The increase in Corporate expenses is partially offset by a decrease in executive and share-based compensation expense.
Revenue and Efficiency Initiatives
Included in the amounts for direct operating expenses, SG&A and corporate expenses discussed above are expenses of $11.2 million and $13.0 million incurred in 2017 and 2016, respectively, in connection with our strategic revenue and efficiency initiatives. The costs were incurred to improve revenue growth, enhance yield, reduce costs, and organize each business to maximize performance and profitability. These costs consist primarily of severance related to workforce initiatives, consolidation of locations and positions, consulting expenses and other costs incurred in connection with streamlining our businesses. These costs are expected to provide benefits in future periods as the initiative results are realized. Of these costs for 2017, $1.8 million are reported within direct operating expenses, $8.5 million are reported within SG&A and $0.9 million are reported within corporate expense. In 2016, such costs totaled $2.7 million, $7.7 million, and $2.6 million, respectively.
Depreciation and Amortization
Depreciation and amortization decreased $18.1 million during 2017 compared to 2016 primarily due to the sale of the Australia and Turkey businesses and assets becoming fully depreciated or fully amortized.
Impairment Charges
We perform our annual impairment test on our goodwill, billboard permits, and other intangible assets as of July 1 of each year. In addition, we test for impairment of property, plant and equipment whenever events and circumstances indicate that depreciable assets might be impaired. As a result of these impairment tests, during 2017, we recorded an impairment charge of $1.6 million during 2017 related to goodwill in one International business. In addition, the Company recognized an impairment of $2.6 million during 2017 in relation to advertising assets that were no longer usable in one country in our International segment. During 2016, we recognized a $7.3 million impairment related to goodwill in one International business. Please see Note 2 to the consolidated financial statements included in Item 8 of Part II of this Annual Report on Form 10-K for a further description of the impairment charges.
Other Operating Income, Net
Other operating income, net of $26.4 million in 2017 primarily related to the sale in the first quarter of 2017 of the Americas' Indianapolis market in exchange for cash and certain assets in Atlanta, Georgia, resulting in a net gain of $28.9 million, and the $6.8 million gain recognized on the sale of our ownership interest in a joint venture in Belgium during the second quarter of 2017. These gains were partially offset by the $12.1 million loss on the sale in the third quarter 2017 of our Canada business.
Other operating income, net of $354.7 million in 2016 primarily related to the net gain of $278.3 million on sale of nine non-strategic U.S. markets in the first quarter of 2016 and the net gain of $127.6 million on sale of our business in Australia in the fourth quarter of 2016, partially offset by the $56.6 million loss, which includes $32.2 million in cumulative translation adjustments, on the sale of our business in Turkey in the second quarter of 2016.
Interest Expense
Interest expense increased $6.3 million in 2017 compared to 2016, due primarily to new debt issuances.
Interest Income on Due From iHeartCommunications
The terms of the Due from iHeartCommunications Note provide that any balance above $1.0 billion continues to accrue interest at a rate of 20.0%, while the balance up to $1.0 billion accrues interest at a rate of 9.3% (prior to the amendment to the terms of the Due from iHeartCommunications note on November 29, 2017, the Note accrued interest at 6.5%). Interest income increased $18.6 million during 2017 compared to 2016, primarily due to a higher average outstanding balance on the Due from iHeartCommunications Note, including the impact of the amounts over $1.0 billion accruing interest at 20.0%.
Loss on Due from iHeartCommunications
Loss on Due from iHeartCommunications included the $855.6 million impairment of the Due from iHeartCommunications Note, which was recorded as a result of the Chapter 11 bankruptcy protection filed by iHeartCommunications.
Gain (loss) on Investments, net
Loss on investments, net was $1.0 million for 2017. Gain on investments, net was $0.5 million for 2016.
Equity in Loss of Nonconsolidated Affiliates
37
Equity in loss of nonconsolidated affiliates of $1.0 million and $1.7 million for 2017 and 2016, respectively, included the loss from our equity investments in our Americas and International segments.
Other Income (Expense), Net
Other income was $29.8 million for 2017. Other expense was $70.7 million for 2016. These amounts relate primarily to net foreign exchange gains and losses recognized in connection with intercompany notes denominated in foreign currencies.
Income Tax Expense
Our operations are included in a consolidated income tax return filed by iHeartMedia. However, for our financial statements, our provision for income taxes was computed as if we file separate consolidated federal income tax returns with our subsidiaries.
On December 22, 2017, the U.S. government enacted comprehensive income tax legislation, referred to as The Tax Cuts and Jobs Act (the Tax Act). The Tax Act reduces the U.S. federal corporate tax rate from 35% percent to 21% effective January 1, 2018, requires companies to pay a one-time transition tax on earnings of certain foreign subsidiaries that were previously tax deferred, and creates new U.S. taxes on certain foreign earnings. To account for the reduction in the U.S. federal corporate income tax rate, we remeasured our deferred tax assets and liabilities based on the rates at which they are expected to reverse in the future, generally 21% percent. To determine the impact from the one-time transition tax on accumulated foreign earnings, we analyzed our cumulative foreign earnings and profits in accordance with the rules provided in the Tax Act. Based upon our preliminary analysis which is not yet complete, we have not recorded income tax expense in the current period for the one-time transition tax due to the net accumulated deficit in our foreign earnings and profits.
The effective tax rate for 2017 was 30.9% and was primarily impacted by the $228.0 million provisional deferred tax benefit recorded in connection with the reduction of the U.S. federal corporate income tax rate to 21% upon enactment of the Tax Act mentioned above.
The effective tax rate for 2016 was 31.8% and was primarily impacted by the deferred tax benefits recorded in the current period for the release of valuation allowances in the U.S. and France. The release of the valuation allowance of $32.9 million in the U.S. was primarily due to the taxable income generated from the sale of nine non-strategic U.S. outdoor markets during the first quarter of 2016 and the release of valuation allowance in France of $43.3 million was due to positive evidence that existed related to the Company’s ability to utilize certain net operating loss carryforwards in the future. The deferred tax benefits described above were partially offset by $54.7 million in tax expense attributable to the sale of our business in Australia during the period.`
Americas Results of Operations
Our Americas operating results were as follows:
(In thousands) |
Years Ended December 31, |
% |
|||||||
2017 |
2016 |
Change |
|||||||
Revenue |
$ |
1,256,326 |
$ |
1,278,413 |
(1.7)% |
||||
Direct operating expenses |
574,113 |
570,310 |
0.7% |
||||||
SG&A expenses |
219,467 |
225,415 |
(2.6)% |
||||||
Depreciation and amortization |
189,707 |
185,654 |
2.2% |
||||||
Operating income |
$ |
273,039 |
$ |
297,034 |
(8.1)% |
Americas revenue decreased $22.1 million during 2017 compared to 2016. Excluding the $3.8 million impact from movements in foreign exchange rates, Americas revenue decreased $25.9 million during 2017 compared to 2016. The decrease in revenue was primarily due to the $17.9 million impact resulting from the sales of non-strategic outdoor markets during the first quarter of 2016 and our Canadian business in the third quarter of 2017. The impact of exchanging our Indianapolis market for cash and assets in Atlanta in the first quarter of 2017 also contributed to the decrease in revenue. These decreases were partially offset by higher revenue from new and existing airport contracts.
Americas direct operating expenses increased $3.8 million during 2017 compared to 2016. Excluding the $1.9 million impact from movements in foreign exchange rates, Americas direct operating expenses increased $1.9 million during 2017 compared to 2016. The increase in direct operating expenses was driven primarily by higher site lease expenses related to new and existing airport contracts and print displays, partially offset by the $13.2 million decrease in expense due to the impact of the sales of non-strategic outdoor markets during the first quarter of 2016 and our Canadian business in the third quarter of 2017. Americas SG&A expenses decreased $5.9 million during 2017 compared to 2016. Excluding the $1.0 million impact from
38
movements in foreign exchange rates, Americas SG&A expenses decreased $6.9 million during 2017 compared to 2016. The decrease in SG&A expenses was primarily due to lower bad debt expense and the $2.5 million impact resulting from the sales of non-strategic outdoor markets in the first quarter of 2016 and the sale of our Canadian business in the third quarter of 2017, and the exchange of outdoor markets in the first quarter of 2017.
International Results of Operations
Our International operating results were as follows:
(In thousands) |
Years Ended December 31, |
% |
|||||||
2017 |
2016 |
Change |
|||||||
Revenue |
$ |
1,334,939 |
$ |
1,410,471 |
(5.4)% |
||||
Direct operating expenses |
828,652 |
851,748 |
(2.7)% |
||||||
SG&A expenses |
289,170 |
289,787 |
(0.2)% |
||||||
Depreciation and amortization |
131,224 |
152,758 |
(14.1)% |
||||||
Operating income |
$ |
85,893 |
$ |
116,178 |
(26.1)% |
International revenue decreased $75.5 million during 2017 compared to 2016. Excluding the $4.9 million impact from movements in foreign exchange rates, International revenue decreased $80.4 million during 2017 compared to 2016. The decrease in revenue is due to a $117.8 million decrease in revenue resulting from the sale of our businesses in Australia and Turkey in 2016. This was partially offset by growth across other markets including Spain, the United Kingdom, Switzerland and China, primarily from new contracts and digital expansion.
International direct operating expenses decreased $23.1 million during 2017 compared to 2016. Excluding the $2.0 million impact from movements in foreign exchange rates, International direct operating expenses decreased $25.1 million during 2017 compared to 2016. The decrease was driven by a $70.3 million decrease in direct operating expenses resulting from the 2016 sales of our businesses in Australia and Turkey, partially offset by higher site lease and production expenses primarily in countries experiencing revenue growth. International SG&A expenses decreased $0.6 million during 2017 compared to 2016. Excluding the $1.7 million impact from movements in foreign exchange rates, International SG&A expenses decreased $2.3 million during 2017 compared to 2016. The decrease in SG&A expenses was primarily due to a $22.6 million decrease resulting from the sale of our businesses in Australia and Turkey, partially offset by higher spending related to growth in certain countries. Included within SG&A expenses is $9.6 million recorded in the fourth quarter of 2017 to correct for accounting errors related to the misappropriation of cash identified at our China subsidiary. Such corrections are not considered to be material to the current year or prior year financial results.
Depreciation and amortization decreased $21.5 million primarily due to the sale of our businesses in Australia and Turkey in 2016 and assets becoming fully depreciated or fully amortized.
39
Consolidated Results of Operations
The comparison of our historical results of operations for the year ended December 31, 2016 to the year ended December 31, 2015 is as follows:
(In thousands) |
Years Ended December 31, |
% |
|||||||
2016 |
2015 |
Change |
|||||||
Revenue |
$ |
2,688,884 |
$ |
2,806,204 |
(4.2)% |
||||
Operating expenses: |
|||||||||
Direct operating expenses (excludes depreciation and amortization) |
1,422,058 |
1,494,902 |
(4.9)% |
||||||
Selling, general and administrative expenses (excludes depreciation and amortization) |
515,202 |
531,504 |
(3.1)% |
||||||
Corporate expenses (excludes depreciation and amortization) |
117,436 |
116,523 |
0.8% |
||||||
Depreciation and amortization |
344,124 |
375,962 |
(8.5)% |
||||||
Impairment charges |
7,274 |
21,631 |
(66.4)% |
||||||
Other operating (expense) income, net |
354,688 |
(4,824 |
) |
(7,452.6)% |
|||||
Operating income |
637,478 |
260,858 |
144.4% |
||||||
Interest expense |
374,892 |
355,669 |
|||||||
Interest income on Due from iHeartCommunications |
50,309 |
61,439 |
|||||||
Loss on investments, net |
531 |
— |
|||||||
Equity in earnings (loss) of nonconsolidated affiliates |
(1,689 |
) |
(289 |
) |
|||||
Other income, net |
(70,682 |
) |
12,387 |
||||||
Income (loss) before income taxes |
241,055 |
(21,274 |
) |
||||||
Income tax benefit (expense) |
(76,656 |
) |
(49,943 |
) |
|||||
Consolidated loss |
164,399 |
(71,217 |
) |
||||||
Less amount attributable to noncontrolling interest |
23,002 |
24,764 |
|||||||
Net loss attributable to the Company |
$ |
141,397 |
$ |
(95,981 |
) |
Consolidated Revenue
Consolidated revenue decreased $117.3 million during 2016 compared to 2015. Excluding a $47.6 million impact from movements in foreign exchange rates, consolidated revenue decreased $69.7 million during 2016 compared to 2015. The decrease in consolidated revenue is primarily due to the sale of certain U.S. markets and International businesses which generated $248.9 million in revenue in 2015 and $123.5 million in 2016. This decrease was partially offset by revenues from new digital assets and new contracts.
Consolidated Direct Operating Expenses
Consolidated direct operating expenses decreased $72.8 million during 2016 compared to 2015. Excluding the $29.0 million impact from movements in foreign exchange rates, consolidated direct operating expenses decreased $43.8 million during 2016 compared to 2015. Lower direct operating expenses was primarily due to the sale of certain U.S. markets and International businesses.
Consolidated Selling, General and Administrative (“SG&A”) Expenses
Consolidated SG&A expenses decreased $16.3 million during 2016 compared to 2015. Excluding the $9.9 million impact from movements in foreign exchange rates, consolidated SG&A expenses decreased $6.4 million during 2016 compared to 2015. SG&A expenses were lower primarily due to the sale of nine non-strategic U.S. markets in the first quarter of 2016, and were partially offset by higher variable compensation expenses.
Corporate Expenses
Corporate expenses increased $0.9 million during 2016 compared to 2015. Excluding the $4.1 million impact from movements in foreign exchange rates, corporate expenses increased $5.0 million during 2016 compared to 2015 primarily resulting from higher litigation costs and higher expenses related to non-cash compensation plans.
40
Revenue and Efficiency Initiatives
Included in the amounts for direct operating expenses, SG&A and corporate expenses discussed above are expenses of $13.0 million and $20.3 million incurred in 2016 and 2015, respectively, in connection with our strategic revenue and efficiency initiatives. The costs were incurred to improve revenue growth, enhance yield, reduce costs, and organize each business to maximize performance and profitability. These costs consist primarily of severance related to workforce initiatives, consolidation of locations and positions, consulting expenses and other costs incurred in connection with streamlining our businesses. These costs are expected to provide benefits in future periods as the initiative results are realized. Of these costs for 2016, $2.7 million are reported within direct operating expenses, $7.8 million are reported within SG&A and $2.5 million are reported within corporate expense. In 2015, such costs totaled $9.2 million, $4.3 million, and $6.8 million, respectively.
Depreciation and Amortization
Depreciation and amortization decreased $31.8 million during 2016 compared to 2015 primarily due to assets becoming fully depreciated or fully amortized, the sale of certain U.S. markets and International businesses, as well as the impact of movements in foreign exchange rates.
Impairment Charges
We perform our annual impairment test on our goodwill, billboard permits, and other intangible assets as of July 1 of each year. In addition, we test for impairment of property, plant and equipment whenever events and circumstances indicate that depreciable assets might be impaired. As a result of these impairment tests, during 2016, we recorded an impairment charge of $7.3 million during 2016 related to goodwill in one International business. During 2015, we recognized a $21.6 million impairment charge related to billboard permits in one Americas market. Please see Note 2 to the consolidated financial statements included in Item 8 of Part II of this Annual Report on Form 10-K for a further description of the impairment charges.
Other Operating Income (Expense), Net
Other operating income, net of $354.7 million in 2016 primarily related to the net gain of $278.3 million on sale of nine non-strategic markets in the first quarter of 2016 and the net gain of $127.6 million on sale on our business in Australia in the fourth quarter of 2016, partially offset by the $56.6 million loss, which includes $32.2 million in cumulative translation adjustments, on the sale of our business in Turkey in the second quarter of 2016. In the first quarter of 2016, Americas sold nine non-strategic markets including Cleveland and Columbus, Ohio, Des Moines, Iowa, Ft. Smith, Arkansas, Memphis, Tennessee, Portland, Oregon, Reno, Nevada, Seattle, Washington and Wichita, Kansas for net proceeds of $592.3 million in cash and certain advertising assets in Florida.
Other operating expense, net of $4.8 million in 2015 primarily related to acquisition/disposition transaction costs.
Interest Expense
Interest expense increased $19.2 million in 2016 compared to 2015, primarily due to the issuance by Clear Channel International B.V. of its 8.75% Senior Notes due 2020 during the fourth quarter of 2015.
Interest Income on Due From iHeartCommunications
Interest income decreased $11.1 million during 2016 compared to 2015 due to the decrease in the average outstanding balance on the Due from iHeartCommunications note.
Equity in Loss of Nonconsolidated Affiliates
Equity in loss of nonconsolidated affiliates of $1.7 million and $0.3 million for 2016 and 2015, respectively, included the loss from our equity investments in our Americas and International segments.
Other Income (Expense), Net
Other expense was $70.2 million for 2016. Other income was $12.4 million for 2015. These amounts relate primarily to net foreign exchange gains and losses recognized in connection with intercompany notes denominated in foreign currencies. The decline in value during 2016 of the British pound against the Euro impacted Euro-denominated notes payable by one of our UK subsidiaries, which was the primary driver of the foreign exchange loss in 2016.
Income Tax Benefit (Expense)
Our operations are included in a consolidated income tax return filed by iHeartMedia. However, for our financial statements, our provision for income taxes was computed as if we file separate consolidated federal income tax returns with our subsidiaries.
41
The effective tax rate for 2016 was 31.8% and was primarily impacted by the deferred tax benefits recorded in the current period for the release of valuation allowances in the U.S. and France. The release of the valuation allowance of $32.9 million in the U.S. was primarily due to the taxable income generated from the sale of nine non-strategic U.S. outdoor markets during the first quarter of 2016 and the release of valuation allowance in France of $43.3 million was due to positive evidence that existed related to the Company’s ability to utilize certain net operating loss carryforwards in the future. The deferred tax benefits described above were partially offset by $54.7 million in tax expense attributable to the sale of our business in Australia during the period.
The effective tax rate for 2015 was (234.7)% and was primarily impacted by the $32.9 million valuation allowance recorded during the period as additional deferred tax expense. The valuation allowance was recorded against a portion of the U.S. Federal and State net operating losses due to the uncertainty of the ability to utilize those losses in future periods. Additionally, the Company recorded additional taxes due to the inability to benefit from losses in certain foreign jurisdictions.
Americas Results of Operations
Our Americas operating results were as follows:
(In thousands) |
Years Ended December 31, |
% |
|||||||
2016 |
2015 |
Change |
|||||||
Revenue |
$ |
1,278,413 |
$ |
1,349,021 |
(5.2)% |
||||
Direct operating expenses |
570,310 |
597,382 |
(4.5)% |
||||||
SG&A expenses |
225,415 |
233,254 |
(3.4)% |
||||||
Depreciation and amortization |
185,654 |
204,514 |
(9.2)% |
||||||
Operating income |
$ |
297,034 |
$ |
313,871 |
(5.4)% |
Americas revenue decreased $70.6 million during 2016 compared to 2015. Excluding the $7.7 million impact from movements in foreign exchange rates, Americas revenue decreased $62.9 million during 2016 compared to 2015. The decrease in revenue is due to the $102.7 million impact of the sale of nine non-strategic U.S. markets in the first quarter of 2016. The decrease in revenue resulting from these sales was partially offset by increased revenues from digital billboards from new deployments and higher occupancy on existing digital billboards, as well as new airport contracts, and higher revenues in Latin America.
Americas direct operating expenses decreased $27.1 million during 2016 compared to 2015. Excluding the $3.6 million impact from movements in foreign exchange rates, Americas direct operating expenses decreased $23.5 million during 2016 compared to 2015. The decrease in direct operating expenses was driven by a $35.4 million decrease in direct operating expenses resulting from the sale of the nine non-strategic markets in the first quarter of 2016, partially offset by higher site lease expenses related to new airport contracts. Americas SG&A expenses decreased $7.8 million during 2016 compared to 2015. Excluding the $2.1 million impact from movements in foreign exchange rates, Americas SG&A expenses decreased $5.7 million during 2016 compared to 2015. This decrease was due to a $20.4 million decrease in SG&A expenses resulting from the sale of the nine non-strategic U.S. markets in the first quarter of 2016, partially offset by higher variable compensation expense related to higher revenues.
Depreciation and amortization decreased $18.9 million. Excluding the $0.8 million impact from movements in foreign exchange rates, depreciation and amortization decreased $18.1 million primarily due to the sale of the nine non-strategic U.S. markets in the first quarter of 2016 and assets becoming fully depreciated or fully amortized.
International Results of Operations
Our International operating results were as follows:
(In thousands) |
Years Ended December 31, |
% |
|||||||
2016 |
2015 |
Change |
|||||||
Revenue |
$ |
1,410,471 |
$ |
1,457,183 |
(3.2)% |
||||
Direct operating expenses |
851,748 |
897,520 |
(5.1)% |
||||||
SG&A expenses |
289,787 |
298,250 |
(2.8)% |
||||||
Depreciation and amortization |
152,758 |
166,060 |
(8.0)% |
||||||
Operating income |
$ |
116,178 |
$ |
95,353 |
21.8% |
42
International revenue decreased $46.7 million during 2016 compared to 2015. Excluding the $39.9 million impact from movements in foreign exchange rates, International revenue decreased $6.8 million during 2016 compared to 2015. The decrease in revenue is due to a $22.7 million decrease in revenue resulting from the sale of our businesses in Turkey and Australia in the second and fourth quarters of 2016, respectively, as well as lower revenue in the United Kingdom as a result of the London bus shelter contract not being renewed. These decreases were partially offset by growth across most of our markets including China, Spain, Sweden, France and Belgium, primarily from new digital assets and new contracts.
International direct operating expenses decreased $45.8 million during 2016 compared to 2015. Excluding the $25.4 million impact from movements in foreign exchange rates, International direct operating expenses decreased $20.4 million during 2016 compared to 2015. The decrease was driven by a $14.6 million decrease in direct operating expenses resulting from the sale of our businesses in Turkey and Australia and lower rent expense due to lower revenue in the United Kingdom as a result of the London bus shelter contract not being renewed. These decreases were partially offset by higher site lease and production expenses in countries experiencing revenue growth. International SG&A expenses decreased $8.5 million during 2016 compared to 2015. Excluding the $7.8 million impact from movements in foreign exchange rates, International SG&A expenses decreased $0.7 million during 2016 compared to 2015. The decrease in SG&A expenses was primarily due to a $3.0 million decrease resulting from the sale of our businesses in Turkey and Australia, partially offset by higher variable compensation expenses.
Included in 2015 International Outdoor direct operating expenses and SG&A expenses are $8.2 million and $3.2 million, respectively, recorded in the fourth quarter of 2015 to correct for accounting errors included in the results of our Netherlands subsidiary reported in prior years. Such corrections are not considered to be material to the prior year financial results.
Depreciation and amortization decreased $13.3 million. Excluding the $5.5 million impact from movements in foreign exchange rates, depreciation and amortization decreased $7.8 million primarily due to assets becoming fully depreciated or fully amortized.
Reconciliation of Segment Operating Income to Consolidated Operating Income
(In thousands) |
Years Ended December 31, |
||||||||||
2017 |
2016 |
2015 |
|||||||||
Americas |
$ |
273,039 |
297,034 |
313,871 |
|||||||
International |
85,893 |
116,178 |
95,353 |
||||||||
Impairment charges |
(4,159 |
) |
(7,274 |
) |
(21,631 |
) |
|||||
Corporate and other (1)
|
(148,738 |
) |
(123,148 |
) |
(121,911 |
) |
|||||
Other operating income (expense), net |
26,391 |
354,688 |
(4,824 |
) |
|||||||
Consolidated operating income |
$ |
232,426 |
$ |
637,478 |
$ |
260,858 |
(1) |
Corporate and other includes expenses related to Americas and International and as well as overall executive, administrative and support functions. |
Share-Based Compensation Expense
As of December 31, 2017, there was $13.0 million of unrecognized compensation cost related to unvested share-based compensation arrangements that will vest based on service conditions. Based on the terms of the award agreements, this cost is expected to be recognized over a weighted average period of approximately three years.
Share-based compensation expenses are recorded in corporate expenses and were $9.6 million, $10.3 million and $8.5 million for the years ended December 31, 2017, 2016 and 2015, respectively.
43
LIQUIDITY AND CAPITAL RESOURCES
Cash Flows
The following discussion highlights cash flow activities during the years ended December 31, 2017, 2016 and 2015.
(In thousands) |
Years Ended December 31, |
||||||||||
2017 |
2016 |
2015 |
|||||||||
Cash provided by (used for): |
|||||||||||
Operating activities |
$ |
147,588 |
$ |
310,293 |
$ |
298,933 |
|||||
Investing activities |
$ |
(175,901 |
) |
$ |
551,499 |
$ |
(257,725 |
) |
|||
Financing activities |
$ |
(379,513 |
) |
$ |
(726,499 |
) |
$ |
199,054 |
Operating Activities
2017
Cash provided by operating activities was $147.6 million in 2017 compared to $310.3 million of cash provided in 2016. Our consolidated net loss included $840.0 million of non-cash items in 2017. Our consolidated net income in 2016 included $121.4 million of non-cash items. Non-cash items affecting our net loss include impairment charges, depreciation and amortization, deferred taxes, provision for doubtful accounts, amortization of deferred financing charges and note discounts, net, share-based compensation, gain on disposal of operating and fixed assets, loss on Due from iHeartCommunications, (gain) loss on investments, equity in loss of nonconsolidated affiliates and other reconciling items, net as presented on the face of the consolidated statement of cash flows. The decrease in cash provided by operating activities is primarily attributed to lower operating income as well as changes in working capital balances, particularly accounts receivable at our International business, which was impacted by slower collections.
2016
Cash provided by operating activities was $310.3 million in 2016 compared to $298.9 million of cash provided in 2015. Our consolidated net income included $121.4 million of non-cash items in 2016. Our consolidated net loss in 2015 included $412.9 million of non-cash items. Non-cash items affecting our net loss include impairment charges, depreciation and amortization, deferred taxes, provision for doubtful accounts, amortization of deferred financing charges and note discounts, net, share-based compensation, gain on disposal of operating and fixed assets, equity in (earnings) loss of nonconsolidated affiliates and other reconciling items, net as presented on the face of the consolidated statement of cash flows. The increase in cash provided by operating activities is primarily attributed to changes in working capital balances, particularly accounts receivable, which was driven primarily by lower revenues and improved collections, partially offset by an increase in cash paid for interest.
2015
Cash provided by operating activities was $298.9 million in 2015 compared to $348.4 million of cash provided in 2014. Our consolidated net loss included $412.9 million of net non-cash items in 2015. Our consolidated net loss in 2014 included $373.6 million of net non-cash items. Non-cash items affecting our net loss include impairment charges, depreciation and amortization, deferred taxes, provision for doubtful accounts, amortization of deferred financing charges and note discounts, net, share-based compensation, gain on disposal of operating and fixed assets, gain on marketable securities, equity in (earnings) loss of nonconsolidated affiliates, loss on extinguishment of debt, and other reconciling items, net as presented on the face of the consolidated statement of cash flows. The decrease in cash provided by operating activities is primarily attributed to a decrease in net income as well as changes in working capital balances, particularly accounts receivable.
Investing Activities
2017
Cash used for investing activities of $175.9 million during 2017 reflected our capital expenditures of $224.2 million. We spent $74.6 million in our Americas segment primarily related to the construction of new advertising structures such as digital displays, $146.4 million in our International segment primarily related to street furniture advertising and digital billboard structures, and $3.2 million by Corporate primarily related to equipment and software. This cash usage was partially offset by $72.0 million of net cash proceeds from the disposals of assets.
44
2016
Cash provided by investing activities of $551.5 million during 2016 primarily reflected $592.3 million of net cash proceeds from the sale of nine non-strategic outdoor markets including Cleveland and Columbus, Ohio, Des Moines, Iowa, Ft. Smith, Arkansas, Memphis, Tennessee, Portland, Oregon, Reno, Nevada, Seattle, Washington and Wichita, Kansas, and the sale of our business in Australia for $195.7 million, net of cash retained by the purchaser and closing costs. Those sale proceeds were partially offset by $229.8 million used for capital expenditures. We spent $81.4 million in our Americas segment primarily related to the construction of new advertising structures such as digital displays, $143.8 million in our International segment primarily related to street furniture advertising structures, and $4.6 million by Corporate primarily related to equipment and software.
2015
Cash used for investing activities of $257.7 million during 2015 reflected our capital expenditures of $218.3 million. We spent $82.2 million in our Americas segment primarily related to the construction of new advertising structures such as digital displays, $132.6 million in our International segment primarily related to street furniture advertising and digital billboard structures, and $3.5 million by Corporate primarily related to equipment and software. Other cash provided by investing activities were $11.3 million of proceeds from sales of other operating and fixed assets.
Financing Activities
2017
Cash used for financing activities of $379.5 million during 2017 primarily reflected cash dividends paid in the aggregate amount of $332.8 million and net transfers of $181.9 million in cash to iHeartCommunications, which represents the activity in the “Due from iHeartCommunications” account, partially offset by proceeds from the issuance by CCIBV of $150.0 million of additional 8.75% Senior Notes due 2020, which were issued at a premium, resulting in $156.0 million in proceeds.
2016
Cash used for financing activities of $726.5 million during 2016 primarily reflected two cash dividends paid in the aggregate amount of $755.5 million, partially offset by net transfers of $45.1 million in cash from iHeartCommunications, which represents the activity in the “Due from iHeartCommunications” account.
2015
Cash provided by financing activities of $199.1 million during 2015 primarily reflected the proceeds from the issuance of $225.0 million of senior notes by our subsidiary Clear Channel International B.V. We also received $17.0 million in cash from iHeartCommunications, which represents the activity in the “Due from/to iHeartCommunications” account.
On December 20, 2015, our board of directors declared a special cash dividend of $217.8 million that was paid on January 7, 2016 and was reflected as cash used for financing activities in the first quarter of 2016.
Anticipated Cash Requirements
Our primary sources of liquidity are cash on hand, cash flow from operations, cash from the intercompany arrangement with iHeartComunications described below and our senior revolving credit facility. As of December 31, 2017, we had $144.1 million of cash on our balance sheet, including $119.0 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 and the mutual agreement of iHeartCommunications and us. 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, which gives us 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 expenditure, debt service, dividends and other funding requirements. Based on our current and anticipated levels of operations and conditions in our markets, we believe that cash on hand, cash flows from operations, cash from the intercompany arrangement with iHeartCommunications described below and borrowing capacity under our senior revolving credit facility will enable us to meet our working capital, capital expenditure, debt service, dividends and other funding requirements, including the debt service on the CCWH Senior Notes, the 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
45
displays, will enable us to continue generating cash flows from operations sufficient to meet our liquidity and funding requirements long term. However, our anticipated results are subject to significant uncertainty. Our ability to fund our working capital, capital expenditures, debt service, special dividend and other obligations depends on our future operating performance and cash from operations. If our future operating performance does not meet our expectations or our plans materially change in an adverse manner or prove to be materially inaccurate, we may need additional financing. We may not be able to secure any such additional financing on terms favorable to us or at all.
During the fourth quarter of 2016, we sold our business in Australia for cash proceeds of $195.7 million, net of cash retained by the purchaser and closing costs. In January 2017, we sold our Indianapolis, Indiana outdoor market in exchange for certain assets in Atlanta, Georgia, plus approximately $43.1 million in cash, net of closing costs. On February 23, 2017, we paid a special cash dividend to our stockholders of $282.5 million using proceeds from the sales of certain non-strategic U.S. markets and of our business in Australia. iHeartCommunications received 89.9% or approximately $254.0 million, of the dividend, with the remaining 10.1%, or approximately $28.5 million, paid to our public stockholders. On August 14, 2017, CCIBV, our indirect subsidiary, issued $150.0 million in aggregate principal amount of 8.75% Senior Notes due 2020, as additional notes under the indenture governing CCIBV's existing 8.75% Senior Notes due 2020. Partially as a result of these transactions, our cash flows from operations have decreased due to lower revenues and higher interest expense. On October 5, 2017, we made a demand for repayment of $25.0 million outstanding under the Due from iHeartCommunications Note and simultaneously paid a special cash dividend of $25.0 million. iHeartCommunications received approximately 89.5%, or approximately $22.4 million, of the proceeds of the dividend through its wholly-owned subsidiaries, with the remaining approximately 10.5%, or approximately $2.6 million, of the proceeds of the dividend paid to our public stockholders. On October 31, 2017, we made a demand for repayment of $25.0 million outstanding under the Due from iHeartCommunications Note and simultaneously paid a special cash dividend of $25.0 million. iHeartCommunications received approximately 89.5%, or approximately $22.4 million, of the proceeds of the dividend through its wholly-owned subsidiaries, with the remaining approximately 10.5%, or approximately $2.6 million, of the proceeds of the dividend paid to our public stockholders. On January 24, 2018, we made a demand for repayment of $30.0 million outstanding under the Due from iHeartCommunications Note and simultaneously paid a special cash dividend of $30.0 million. iHeartCommunications received approximately 89.5%, or approximately $26.8 million, of the proceeds of the dividend through its wholly-owned subsidiaries, with the remaining approximately 10.5%, or approximately $3.2 million, of the proceeds of the dividend paid to our public stockholders. The payment of these special dividends reduces the amount of cash available to us for future working capital, capital expenditure, debt service and other funding requirements. Future special cash dividends will be dependent upon, among other things, our having sufficient available cash.
Historically, repayments of amounts outstanding under the Due from iHeartCommunications Note has been a source of liquidity for us. On March 14, 2018, iHeartMedia, iHeartCommunications and certain of iHeartMedia's direct and indirect domestic subsidiaries, not including the Company or any of its subsidiaries, filed voluntary petitions for relief under Chapter 11 of the United States Bankruptcy Code, in the United States Bankruptcy Court for the Southern District of Texas, Houston Division. It is still early in the iHeart Chapter 11 Cases, and we cannot predict at this time the outcome of iHeartCommunications' efforts to restructure its indebtedness. As an unsecured creditor of iHeartCommunications, we do not expect that we will be able to recover all of the amounts owed to us under the Due from iHeartCommunications Note upon the implementation of any plan of reorganization that is ultimately accepted by the requisite creditors and approved by the Bankruptcy Court. Consequently, the amounts owed under the Due from iHeartCommunications Note may not continue to be a source of liquidity for us in the future.
The settlement of the Due from iHeartCommunications Note is expected to be addressed in the plan of reorganization in the iHeart Chapter 11 Cases. See "--Promissory Notes with iHeartCommunications."
iHeartCommunications provides the day-to-day cash management services for our cash activities and balances in the U.S. We do not have any material committed external sources of capital other than iHeartCommunications, and iHeartCommunications is not required to provide us with funds to finance our working capital or other cash requirements. We have no access to the cash transferred from us to iHeartCommunications under the cash management arrangement. As of December 31, 2017, iHeartCommunications had $267.1 million recorded as “Cash and cash equivalents” on its consolidated balance sheets, of which $144.1 million was held by us and our subsidiaries. Pursuant to a final order entered by the Bankruptcy Court, as of March 14, 2018, the actual pre-iHeart bankruptcy balance of the Due from iHeartCommunications Note is frozen, and following March 14, 2018, intercompany allocations that would have been reflected in adjustments to the balance of the Due from iHeartCommunications Note are instead reflected in a new intercompany balance that accrues interest at a rate equal to the interest under the Due from iHeart Communications Note. As a result, iHeartCommunications is continuing to provide the day-to-day cash management services for us during the iHeart Chapter 11 Cases and we expect it to continue to do so until such arrangements are addressed through the iHeart Chapter 11 Cases. We are an unsecured creditor of iHeartCommunications with respect to amounts owed under the Due from iHeartCommunications Note. It is still early in the iHeart Chapter 11 Cases, and we cannot predict at this time the outcome of iHeartCommunications' efforts to restructure its indebtedness. We do not expect to recover all of the amounts owed to us under the Due from iHeartCommunications Note upon the implementation of any plan of
46
reorganization that is ultimately accepted by the requisite majority of creditors and approved by the Bankruptcy Court. If we do not recognize the expected recovery under the Due from iHeartCommunications Note, or if we cannot generate sufficient liquidity from our operations or other sources on a timely basis, we could experience a liquidity shortfall. In addition, any repayments that we received on the Due from iHeartCommunications Note during the one-year preference period prior to the filing of the iHeart Chapter 11 Cases may potentially be avoidable as a preference and subject to recovery by the iHeartCommunications bankruptcy estate, which could further exacerbate any liquidity shortfall.
We were in compliance with the covenants contained in our material financing agreements as of December 31, 2017. Our ability to comply with the maintenance covenant in our senior secured credit facility may be affected by events beyond our control, including prevailing economic, financial and industry conditions.
On August 14, 2017, CCIBV, our indirect subsidiary, issued an additional $150.0 million in aggregate principal amount of its 8.75% Senior Notes due 2020 (the “New CCIBV Notes”). The New CCIBV Notes were issued as additional notes under the indenture governing CCIBV’s existing 8.75% Senior Notes due 2020 and were issued at a premium, resulting in $156.0 million in proceeds. The New CCIBV Notes mature on December 15, 2020 and bear interest at a rate of 8.75% per annum, payable semi-annually in arrears on June 15 and December 15 of each year.
We frequently evaluate strategic opportunities both within and outside our existing lines of business. We expect from time to time to dispose of certain businesses and may pursue acquisitions. These dispositions or acquisitions could be material.
Sources of Capital
As of December 31, 2017 and 2016, we had the following debt outstanding, cash and cash equivalents and amounts due from iHeartCommunications:
December 31, |
|||||||
(In millions) |
2017 |
2016 |
|||||
Clear Channel Worldwide Holdings Senior Notes due 2022 |
$ |
2,725.0 |
$ |
2,725.0 |
|||
Clear Channel Worldwide Holdings Senior Subordinated Notes due 2020 |
2,200.0 |
2,200.0 |
|||||
Senior Revolving Credit Facility due 2018(1)
|
— |
— |
|||||
Clear Channel International B.V. Senior Notes due 2020 |
375.0 |
225.0 |
|||||
Other debt |
2.4 |
14.8 |
|||||
Original issue discount |
(0.2 |
) |
(6.7 |
) |
|||
Long-term debt fees |
(35.5 |
) |
(41.1 |
) |
|||
Total debt |
5,266.7 |
5,117.0 |
|||||
Less: Cash and cash equivalents |
144.1 |
542.0 |
|||||
Less: Due from iHeartCommunications |
212.0 |
885.7 |
|||||
$ |
4,910.6 |
$ |
3,689.3 |
(1) The senior revolving credit facility provides for borrowings up to $75.0 million (the revolving credit commitment). As of December 31, 2017, we had $71.2 million of letters of credit outstanding, and $3.8 million of availability, under the senior revolving credit facility.
We may from time to time repay our outstanding debt or seek to purchase our outstanding equity securities. Such transactions, if any, will depend on prevailing market conditions, our liquidity requirements, contractual restrictions and other factors.
Promissory Notes with iHeartCommunications
We maintain accounts that represent net amounts due to or from iHeartCommunications, which are recorded as “Due from iHeartCommunications” on our consolidated balance sheets. On November 29, 2017, we amended the Due from iHeartCommunications Note to extend the maturity date to May 15, 2019 and to increase the interest rate from 6.5% to 9.3%. The accounts represent our revolving promissory note issued by us to iHeartCommunications and the revolving promissory note issued by iHeartCommunications to us, in each case in the face amount of $1.0 billion, or if more or less than such amount, the aggregate unpaid principal amount of all advances. The accounts accrue interest pursuant to the terms of the promissory notes and are generally payable on demand or when they mature on May 15, 2019. Included in the accounts are the net activities resulting from day-to-day cash management services provided by iHeartCommunications. Such day-to-day cash management services relate only to our cash activities and balances in the U.S. and exclude any cash activities and balances of our non-U.S. subsidiaries. As of December 31, 2017 and December 31, 2016, the asset recorded in “Due from iHeartCommunications” on our consolidated
47
balance sheet was $212.0 million and $885.7 million, respectively. At December 31, 2017, the principal amount outstanding under the Due from iHeartCommunications Note was $1,067.6 million. As a result of the iHeart Chapter 11 Cases, CCOH recognized a loss of $855.6 million on the Due from iHeartCommunications Note during the fourth quarter of 2017 to reflect the estimated recoverable amount of the note as of December 31, 2017, based on management's best estimate of the cash settlement amount. As of December 31, 2017, we had no borrowings under the revolving promissory note to iHeartCommunications.
In accordance with the terms of the settlement for the derivative litigation filed by our stockholders regarding the Due from iHeartCommunications Note, we established a committee of our board of directors, consisting of our independent and disinterested directors, for the specific purpose of monitoring the Due from iHeartCommunications Note. This committee has the non-exclusive authority to demand payments under the Due from iHeartCommunications Note under certain specified circumstances tied to iHeartCommunications’ liquidity or the amount outstanding under the Due from iHeartCommunications Note, as long as our board of directors declares a simultaneous dividend equal to the amount so demanded. The committee last made a demand under the Due from iHeartCommunications Note on August 11, 2014. As of May 3, 2018, the committee has the right pursuant to the terms of the settlement of the derivative litigation filed by our stockholders regarding the Due from iHeartCommunications Note but not the obligation, to make a demand on the Due from iHeartCommunications Note; however, as described below, the balance of the Due from iHeartCommunications Note is currently frozen and any payment pursuant to such demand would be subject to the approval of the bankruptcy court.
Pursuant to an order entered by the Bankruptcy Court, as of March 14, 2018, the balance of the Due from iHeartCommunications Note is frozen, and following March 14, 2018, intercompany allocations that would have been reflected in adjustments to the balance of the Due from iHeartCommunications Note are instead reflected in an intercompany balance that accrues interest at a rate equal to the interest under the Due from iHeart Communications Note. Our board of directors has established a special committee consisting of our independent directors (the "Special Committee") to consider, review and negotiate certain transactions between iHeartCommunications and CCOH in connection with the iHeart Chapter 11 Cases, and discussions regarding the outcome of the Due from iHeartCommunications Note are ongoing. On March 16, 2018, iHeartMedia and the other Debtors and certain creditors and equity holders entered into the iHeart RSA. The iHeart RSA contemplates that our business will be separated from iHeartCommunications at the conclusion of the iHeart Chapter 11 Cases and that the Due from iHeartCommunications Note will receive treatment in a form and substance acceptable to the Debtors, to the Company and to certain consenting senior creditors of iHeartCommunications, which treatment will be set forth in a plan of reorganization and approved by the Bankruptcy Court. It is still early in the iHeart Chapter 11 Cases, and we cannot predict at this time the outcome of iHeartCommunications' efforts to restructure its indebtedness. As an unsecured creditor of iHeartCommunications, we do not expect that we will be able to recover all of the amounts owed to us under the Due from iHeartCommunications Note upon the implementation of any plan of reorganization that is ultimately accepted by the requisite majority of creditors and approved by the Bankruptcy Court. As a result, we recognized a loss of $855.6 million on the Due from iHeartCommunications Note during the fourth quarter of 2017 to reflect the estimated recoverable amount of the note as of December 31, 2017, based on management's best estimate of the cash settlement amount. Consequently, we may not have the "Due from iHeartCommunications" asset available to us in the future as a source of liquidity for ongoing working capital, capital expenditure, debt service and other funding requirements.
The net interest income for the years ended December 31, 2017, 2016 and 2015 was $68.9 million, $50.3 million and $61.4 million, respectively. As noted above, on November 29, 2017, the “Due from iHeartCommunications” account was amended to extend its maturity from December 15, 2017 to May 15, 2019. The note's interest rate was also amended and increased from 6.5% to 9.3%. Any balance above $1.0 billion continues to accrue interest capped at a rate of 20.0%, while the balance up to $1.0 billion will accrue interest at a rate of 9.3%.
If we are unable to obtain financing from iHeartCommunications under the intercompany arrangement or pursuant to any recoveries of the Due from iHeartCommunications Note in the Chapter 11 Cases, 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 at some future date. We may be unable to successfully obtain additional debt or equity financing on satisfactory terms or at all.
As long as the Master Agreement continues to govern the relationship between iHeartCommunications and us, iHeartCommunications will have the option to limit our ability to incur debt or issue equity securities, among other limitations, which could adversely affect our ability to meet our liquidity needs. Under the Master Agreement with iHeartCommunications, we are limited in our borrowings from third parties to no more than $400.0 million at any one time outstanding, without the prior written consent of iHeartCommunications.
CCWH Senior Notes
48
As of December 31, 2017, CCWH senior notes represented $2.7 billion aggregate principal amount of indebtedness outstanding, which consisted of $735.8 million aggregate principal amount of Series A Senior Notes due 2022 (the “Series A CCWH Senior Notes”) and $1,989.2 million aggregate principal amount of Series B CCWH Senior Notes due 2022 (the “Series B CCWH Senior Notes”). The CCWH Senior Notes are guaranteed by us, Clear Channel Outdoor, Inc. (“CCOI”) and certain of our direct and indirect subsidiaries.
The CCWH Senior Notes are senior obligations that rank pari passu in right of payment to all unsubordinated indebtedness of CCWH and the guarantees of the CCWH Senior Notes rank pari passu in right of payment to all unsubordinated indebtedness of the guarantors. Interest on the CCWH Senior Notes is payable to the trustee weekly in arrears and to the noteholders on May 15 and November 15 of each year.
CCWH may redeem the CCWH Senior Notes, in whole or in part at the redemption prices set forth in the applicable indenture governing the CCWH Senior Notes plus accrued and unpaid interest to the redemption date. Notwithstanding the foregoing, neither CCOH nor any of its subsidiaries is permitted to make any purchase of, or otherwise effectively cancel or retire any Series A CCWH Senior Notes or Series B CCWH Senior Notes if, after giving effect thereto and, if applicable, any concurrent purchase of or other addition with respect to any Series B CCWH Senior Notes or Series A CCWH Senior Notes, as applicable, the ratio of (a) the outstanding aggregate principal amount of the Series A CCWH Senior Notes to (b) the outstanding aggregate principal amount of the Series B CCWH Senior Notes shall be greater than 0.25, subject to certain exceptions.
The indenture governing the Series A CCWH Senior Notes contains covenants that limit us and our restricted subsidiaries ability to, among other things:
• |
incur or guarantee additional debt to persons other than iHeartCommunications and its subsidiaries (other than us) or issue certain preferred stock; |
• |
create liens on its restricted subsidiaries’ assets to secure such debt; |
• |
create restrictions on the payment of dividends or other amounts to us from our restricted subsidiaries that are not guarantors of the CCWH Senior Notes; |
• |
enter into certain transactions with affiliates; and |
• |
merge or consolidate with another person, or sell or otherwise dispose of all or substantially all of its assets. |
In addition, the indenture governing the Series A CCWH Senior Notes provides that if CCWH (i) makes an optional redemption of the Series B CCWH Senior Notes or purchases or makes an offer to purchase the Series B CCWH Senior Notes at or above 100% of the principal amount thereof, then CCWH shall apply a pro rata amount to make an optional redemption or purchase a pro rata amount of the Series A CCWH Senior Notes or (ii) makes an asset sale offer under the indenture governing the Series B CCWH Senior Notes, then CCWH shall apply a pro rata amount to make an offer to purchase a pro rata amount of Series A CCWH Senior Notes.
The indenture governing the Series A CCWH Senior Notes does not include limitations on dividends, distributions, investments or asset sales.
The indenture governing the Series B CCWH Senior Notes contains covenants that limit us and our restricted subsidiaries ability to, among other things:
• |
incur or guarantee additional debt or issue certain preferred stock; |
• |
redeem, repurchase or retire our subordinated debt; |
• |
make certain investments; |
• |
create liens on its or its restricted subsidiaries’ assets to secure debt; |
• |
create restrictions on the payment of dividends or other amounts to it from its restricted subsidiaries that are not guarantors of the CCWH Senior Notes; |
• |
enter into certain transactions with affiliates; |
• |
merge or consolidate with another person, or sell or otherwise dispose of all or substantially all of its assets; |
• |
sell certain assets, including capital stock of its subsidiaries; |
• |
designate its subsidiaries as unrestricted subsidiaries; and |
• |
pay dividends, redeem or repurchase capital stock or make other restricted payments. |
The Series A CCWH Senior Notes indenture and 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. In order to incur (i) additional indebtedness under this test, our debt to adjusted EBITDA ratios (as defined by the indentures) must be lower than 7.0:1 and 5.0:1 for total debt and senior debt, respectively, and (ii) additional indebtedness that is subordinated to the CCWH Senior Notes under this test, our debt to adjusted EBITDA ratios (as defined by the indentures) must be lower than 7.0:1 for total debt. The indentures
49
contain certain other exceptions that allow us to incur additional indebtedness. The Series B CCWH Senior Notes indenture also permits us to pay dividends from the proceeds of indebtedness or the excess proceeds from asset sales after making an asset sale offer if our debt to adjusted EBITDA ratios (as defined by the indentures) are lower than 7.0:1 and 5.0:1 for total debt and senior debt, respectively. The Series A CCWH Senior Notes indenture does not limit our ability to pay dividends. 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 exceptions in the Series B CCWH Senior Notes indenture that allow us to pay dividends include (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 revolving promissory note issued by iHeartCommunications to us. We have used substantially all of the $525.0 million general restricted payments basket capacity in the Series B CCWH Senior Notes indenture. The Series A CCWH Senior Notes indenture does not limit our ability to pay dividends.
Our consolidated leverage ratio, defined as total debt divided by EBITDA (as defined by the CCWH Senior Notes indentures) for the preceding four quarters was 8.9:1 at December 31, 2017, and senior leverage ratio, defined as senior debt divided by EBITDA (as defined by the CCWH Senior Notes indentures) for the preceding four quarters was 4.6:1 at December 31, 2017. As required by the definition of EBITDA in the CCWH Senior Notes indentures, our EBITDA for the preceding four quarters of $599.8 million is calculated as operating income (loss) before depreciation, amortization, impairment charges and other operating income (expense), net, plus share-based compensation, and is further adjusted for the following: (i) costs incurred in connection with severance, the closure and/or consolidation of facilities, retention charges, consulting fees and other permitted activities; (ii) extraordinary, non-recurring or unusual gains or losses or expenses; (iii) non-cash charges; 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.
The following table reflects a reconciliation of EBITDA (as defined by the CCWH Senior Notes indentures) to operating income and net cash provided by operating activities for the four quarters ended December 31, 2017:
Four Quarters Ended |
|||
(In millions) |
December 31, 2017 |
||
EBITDA (as defined by the CCWH Senior Notes indentures)
|
$ |
599.8 |
|
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 |
(12.2 |
) |
|
Extraordinary, non-recurring or unusual gains or losses or expenses (as referenced in the definition of EBITDA in the CCWH Senior Notes indentures) |
(19.6 |
) |
|
Non-cash charges |
(20.1 |
) |
|
Other items |
(2.6 |
) |
|
Less: Depreciation and amortization, Impairment charges, Other operating income, net and Share-based compensation expense |
(312.9 |
) |
|
Operating income |
232.4 |
||
Plus: Depreciation and amortization, Impairment charges, Gain (loss) on disposal of operating and fixed assets and Share-based compensation expense |
310.4 |
||
Less: Interest expense |
(381.2 |
) |
|
Plus: Interest income on Due from iHeartCommunications |
68.9 |
||
Less: Current income tax expense |
(30.9 |
) |
|
Plus: Other income, net |
29.8 |
||
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) |
(17.0 |
) |
|
Change in assets and liabilities, net of assets acquired and liabilities assumed |
(64.8 |
) |
|
Net cash provided by operating activities |
$ |
147.6 |
50
CCWH Senior Subordinated Notes
As of December 31, 2017, CCWH Subordinated Notes represented $2.2 billion of aggregate principal amount of indebtedness outstanding, which consist of $275.0 million aggregate principal amount of 7.625% Series A Senior Subordinated Notes due 2020 (the “Series A CCWH Subordinated Notes”) and $1,925.0 million aggregate principal amount of 7.625% Series B Senior Subordinated Notes due 2020 (the “Series B CCWH Subordinated Notes”). Interest on the CCWH Subordinated Notes is payable to the trustee weekly in arrears and to the noteholders on March 15 and September 15 of each year.
The CCWH Subordinated Notes are CCWH’s senior subordinated obligations and are fully and unconditionally guaranteed, jointly and severally, on a senior subordinated basis by us, CCOI and certain of our other domestic subsidiaries. The CCWH Subordinated Notes are unsecured senior subordinated obligations that rank junior to all of CCWH’s existing and future senior debt, including the CCWH Senior Notes, equally with any of CCWH’s existing and future senior subordinated debt and ahead of all of CCWH’s existing and future debt that expressly provides that it is subordinated to the CCWH Subordinated Notes. The guarantees of the CCWH Subordinated Notes rank junior to each guarantor’s existing and future senior debt, including the CCWH Senior Notes, equally with each guarantor’s existing and future senior subordinated debt and ahead of each guarantor’s existing and future debt that expressly provides that it is subordinated to the guarantees of the CCWH Subordinated Notes.
CCWH may redeem the CCWH Subordinated Notes, in whole or in part, at the redemption prices set forth in the applicable indenture governing the CCWH Subordinated Notes plus accrued and unpaid interest to the redemption date. Neither us nor any of our subsidiaries is permitted to make any purchase of, or otherwise effectively cancel or retire any Series A CCWH Subordinated Notes or Series B CCWH Subordinated Notes if, after giving effect thereto and, if applicable, any concurrent purchase of or other addition with respect to any Series B CCWH Subordinated Notes or Series A CCWH Subordinated Notes, as applicable, the ratio of (a) the outstanding aggregate principal amount of the Series A CCWH Subordinated Notes to (b) the outstanding aggregate principal amount of the Series B CCWH Subordinated Notes shall be greater than 0.25, subject to certain exceptions.
The indenture governing the Series A CCWH Subordinated Notes contains covenants that limit us and our restricted subsidiaries ability to, among other things:
• |
incur or guarantee additional debt to persons other than iHeartCommunications and its subsidiaries (other than us) or issue certain preferred stock; |
• |
create restrictions on the payment of dividends or other amounts to us from our restricted subsidiaries that are not guarantors of the notes; |
• |
enter into certain transactions with affiliates; and |
• |
merge or consolidate with another person, or sell or otherwise dispose of all or substantially all of CCOH’s assets. |
In addition, the indenture governing the Series A CCWH Subordinated Notes provides that if CCWH (i) makes an optional redemption of the Series B CCWH Subordinated Notes or purchases or makes an offer to purchase the Series B CCWH Subordinated Notes at or above 100% of the principal amount thereof, then CCWH shall apply a pro rata amount to make an optional redemption or purchase a pro rata amount of the Series A CCWH Subordinated Notes or (ii) makes an asset sale offer under the indenture governing the Series B CCWH Subordinated Notes, then CCWH shall apply a pro rata amount to make an offer to purchase a pro rata amount of Series A CCWH Subordinated Notes.
The indenture governing the Series A CCWH Subordinated Notes does not include limitations on dividends, distributions, investments or asset sales.
The indenture governing the Series B CCWH Subordinated Notes contains covenants that limit us and our restricted subsidiaries ability to, among other things:
• |
incur or guarantee additional debt or issue certain preferred stock; |
• |
make certain investments; |
• |
create restrictions on the payment of dividends or other amounts to us from our restricted subsidiaries that are not guarantors of the notes; |
• |
enter into certain transactions with affiliates; |
• |
merge or consolidate with another person, or sell or otherwise dispose of all or substantially all of our assets; |
• |
sell certain assets, including capital stock of our subsidiaries; |
• |
designate our subsidiaries as unrestricted subsidiaries; and |
• |
pay dividends, redeem or repurchase capital stock or make other restricted payments. |
The Series A CCWH Subordinated Notes indenture and Series B CCWH Subordinated Notes indenture restrict CCOH’s ability to incur additional indebtedness but permit us to incur additional indebtedness based on an incurrence test. In order to incur additional indebtedness under this test, our debt to adjusted EBITDA ratios (as defined by the indentures) must be lower
51
than 7.0:1. The indentures contain certain other exceptions that allow us to incur additional indebtedness. The Series B CCWH Subordinated Notes indenture also permits us to pay dividends from the proceeds of indebtedness or the excess proceeds from asset sales after making an asset sale offer if its debt to adjusted EBITDA ratios (as defined by the indentures) is lower than 7.0:1. The Series A CCWH Senior Subordinated Notes indenture does not limit our ability to pay dividends. 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 Subordinated Notes indenture and the Series B CCWH Subordinated 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 Subordinated Notes indenture. There are other exceptions in these indentures that allow us to incur additional indebtedness and pay dividends. The exceptions in the Series B CCWH Subordinated Notes indenture that allow us to pay dividends include (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 revolving promissory note issued by iHeartCommunications to us. We have used substantially all of the $525.0 million general restricted payments basket capacity in the Series B CCWH Senior Subordinated Notes indenture. The Series A CCWH Senior Subordinated Notes indenture does not limit our ability to pay dividends.
CCIBV Senior Notes
During the third quarter of 2017, Clear Channel International B.V., an international subsidiary of ours, issued $150.0 million in additional aggregate principal amount of 8.75% Senior Notes due 2020 (“CCIBV Senior Notes”), bringing the total amount outstanding under the CCIBV Senior Notes as of December 31, 2017 to $375.0 million.
The CCIBV Senior Notes mature on December 15, 2020 and bear interest at a rate of 8.75% per annum, payable semi-annually in arrears on June 15 and December 15 of each year. The CCIBV Senior Notes are guaranteed by certain of our International outdoor business’s existing and future subsidiaries. The Company does not guarantee or otherwise assume any liability for the CCIBV Senior Notes. The notes are senior unsecured obligations that rank pari passu in right of payment to all unsubordinated indebtedness of Clear Channel International B.V., and the guarantees of the notes are senior unsecured obligations that rank pari passu in right of payment to all unsubordinated indebtedness of the guarantors of the notes.
Clear Channel International B.V. may redeem the notes, in whole or in part at the redemption prices set forth in the indenture plus accrued and unpaid interest to the redemption date.
The indenture governing the CCIBV Senior Notes contains covenants that limit Clear Channel International B.V.’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) engage in certain transactions with affiliates; (vi) create restrictions on dividends or other payments by the restricted subsidiaries; and (vii) merge, consolidate or sell substantially all of Clear Channel International B.V.’s assets.
Senior Revolving Credit Facility Due 2018
During the third quarter of 2013, we entered into a five-year senior secured revolving credit facility with an aggregate principal amount of $75.0 million. The revolving credit facility may be used for working capital needs, to issue letters of credit and for other general corporate purposes. As of December 31, 2017, there were no amounts outstanding under the revolving credit facility, and $71.2 million of letters of credit under the revolving credit facility which reduce availability under the facility. The revolving credit facility contains a springing covenant that requires us to maintain a secured leverage ratio (as defined in the revolving credit facility) of not more than 1.5:1 that is tested at the end of a quarter if availability under the facility is less than 75% of the aggregate commitments under the facility. We were in compliance with the secured leverage ratio covenant as of December 31, 2017.
Other Debt
Other debt includes various borrowings and capital leases utilized for general operating purposes. As of December 31, 2017, approximately $2.4 million was outstanding as other debt.
iHeartCommunications’ Debt Covenants
On March 14, 2018, iHeartMedia, iHeartCommunications and certain of iHeartMedia's direct and indirect domestic subsidiaries, not including the Company or any of its subsidiaries, filed voluntary petitions for relief under Chapter 11 of the United States Bankruptcy Code, in the United States Bankruptcy Court for the Southern District of Texas, Houston Division. The filing of the voluntary petitions triggered an event of default under the iHeartCommunications' senior credit facility and other debt agreements. The ability of iHeartCommunications' creditors to seek remedies to enforce their rights under such debt agreements is automatically stayed as a result of the filing of the iHeart Chapter 11 Cases, and the creditors' rights of enforcement are subject to the applicable provisions of the Bankruptcy Code.
52
Dispositions and Other
In January 2017, we sold our Indianapolis, Indiana market in exchange for certain assets in Atlanta, Georgia, plus approximately $43.1 million in cash, net of closing costs. A net gain of $28.9 million was recognized related to the sale.
During the third quarter of 2017, the Company sold its ownership interest in a joint venture in Canada. As a result, the Company recognized a net loss on sale of $12.1 million, which is included within Other operating income (expense), net.
In the first quarter of 2016, Americas outdoor sold nine non-strategic outdoor markets including Cleveland and Columbus, Ohio, Des Moines, Iowa, Ft. Smith, Arkansas, Memphis, Tennessee, Portland, Oregon, Reno, Nevada, Seattle, Washington and Wichita, Kansas for net proceeds of $592.3 million in cash and certain advertising assets in Florida. We recognized a net gain of $278.3 million related to the sale, which is included within Other operating income (expense), net.
In the second quarter of 2016, International outdoor sold its business in Turkey. As a result, we recognized a net loss of $56.6 million, which includes $32.2 million in cumulative translation adjustments that were recognized upon sale of the subsidiaries in Turkey.
In the fourth quarter 2016, International outdoor sold its business in Australia for cash proceeds of $195.7 million. As a result, we recognized a net gain of $127.6 million, which is net of $14.6 million in cumulative translation adjustments that were recognized upon the sale of our business in Australia.
Uses of Capital
Capital Expenditures
Our capital expenditures for the years ended December 31, 2017, 2016 and 2015 were as follows:
(In millions) |
Years Ended December 31, |
||||||||||
2017 |
2016 |
2015 |
|||||||||
Americas advertising |
$ |
74.6 |
$ |
81.4 |
$ |
82.2 |
|||||
International advertising |
146.4 |
143.8 |
132.6 |
||||||||
Corporate |
3.2 |
4.6 |
3.5 |
||||||||
Total capital expenditures |
$ |
224.2 |
$ |
229.8 |
$ |
218.3 |
Our capital expenditures are not of significant size individually and primarily relate to the ongoing deployment of digital displays and improvements to traditional displays in our Americas segment as well as new billboard and street furniture contracts and renewals of existing contracts in our International segment.
See the Contractual Obligations table under “Commitments and Contingencies” and Note 5 to our Consolidated Financial Statements located in Item 8 of Part II of this Annual Report on Form 10-K for the Company's future capital expenditure commitments.
Part of our long-term strategy is to pursue the technology of digital displays, including flat screens, LCDs and LEDs, as alternatives to traditional methods of displaying our clients’ advertisements. We are currently installing these technologies in certain markets. We believe cash flow from operations will be sufficient to fund these expenditures because we expect enhanced margins through: (i) lower cost of production as the advertisements will be digital and controlled by a central computer network, (ii) decreased down time on displays because the advertisements will be digitally changed rather than manually posted paper or vinyl on the face of the display, and (iii) incremental revenue through more targeted and time specific advertisements.
Commitments, Contingencies and Guarantees
We are currently involved in certain legal proceedings arising in the ordinary course of business and, as required, have accrued our estimate of the probable costs for resolution of those claims for which the occurrence of loss is probable and the amount can be reasonably estimated. These estimates have been developed in consultation with counsel and are based upon an analysis of potential results, assuming a combination of litigation and settlement strategies. It is possible, however, that future results of operations for any particular period could be materially affected by changes in our assumptions or the effectiveness of our strategies related to these proceedings. Please see Item 3. Legal Proceedings within Part I of this Annual Report on Form 10-K.
Our short and long term cash requirements include minimum annual guarantees for our street furniture contracts and operating leases. Noncancelable contracts and operating lease requirements are included in our direct operating expenses, which
53
historically have been satisfied by cash flows from operations. For 2018, we are committed to $143.1 million and $359.2 million for minimum annual guarantees and operating leases, respectively. Our long-term commitments for minimum annual guarantees, operating leases and capital expenditure requirements are included in the table below.
Certain agreements relating to acquisitions provide for purchase price adjustments and other future contingent payments based on the financial performance of the acquired companies generally over a one to five year period. The aggregate of these contingent payments, if performance targets are met, would not significantly impact our financial position or results of operations.
In addition to the scheduled maturities on debt issued by CCWH and CCIBV, we have future cash obligations under various types of contracts. We lease office space, certain equipment and the majority of the land occupied by our advertising structures under long-term operating leases. Some of our lease agreements contain renewal options and annual rental escalation clauses (generally tied to the consumer price index), as well as provisions for our payment of utilities and maintenance.
We have minimum franchise payments associated with non-cancelable contracts that enable us to display advertising on such media as buses, trains, bus shelters and terminals. The majority of these contracts contain rent provisions that are calculated as the greater of a percentage of the relevant advertising revenue or a specified guaranteed minimum annual payment.
The scheduled maturities of the CCWH Senior Notes, CCWH Subordinated Notes, CCIBV Senior Notes and other debt outstanding, and our future minimum rental commitments under non-cancelable lease agreements, minimum payments under other non-cancelable contracts, capital expenditure commitments and other long-term obligations as of December 31, 2017, are as follows:
(In thousands) |
Payments due by Period |
||||||||||||||||||
Contractual Obligations |
Total |
2018 |
2019-2020 |
2021-2022 |
Thereafter |
||||||||||||||
Long-term Debt: |
|||||||||||||||||||
CCWH Senior Notes |
$ |
2,725,000 |
$ |
— |
$ |
— |
$ |
2,725,000 |
$ |
— |
|||||||||
CCWH Senior Subordinated Notes |
2,200,000 |
— |
2,200,000 |
— |
— |
||||||||||||||
CCIBV Senior Notes |
375,000 |
— |
375,000 |
— |
— |
||||||||||||||
Other Long-term Debt |
2,393 |
533 |
311 |
363 |
1,186 |
||||||||||||||
Interest payments on long-term debt (1)
|
1,322 |
378 |
672 |
266 |
6 |
||||||||||||||
Non-cancelable operating leases |
2,602,429 |
359,175 |
608,294 |
465,089 |
1,169,871 |
||||||||||||||
Non-cancelable contracts |
1,839,611 |
393,980 |
634,614 |
417,418 |
393,599 |
||||||||||||||
Employment contracts |
— |
— |
— |
— |
— |
||||||||||||||
Capital expenditures |
68,110 |
38,444 |
10,699 |
9,090 |
9,877 |
||||||||||||||
Unrecognized tax benefits (2)
|
22,419 |
— |
— |
— |
22,419 |
||||||||||||||
Other long-term obligations (3)
|
247,997 |
8,699 |
12,996 |
34,059 |
192,243 |
||||||||||||||
Total |
$ |
10,084,281 |
$ |
801,209 |
$ |
3,842,586 |
$ |
3,651,285 |
$ |
1,789,201 |
(1) |
Interest payments on long-term debt consist primarily of interest on the CCWH Senior Notes, the CCWH Senior Subordinated Notes and the CCIBV Senior Notes. |
(2) |
The non-current portion of the unrecognized tax benefits is included in the “Thereafter” column as we cannot reasonably estimate the timing or amounts of additional cash payments, if any, at this time. For additional information, see Note 7 included in Item 8 of Part II of this Annual Report on Form 10-K. |
(3) |
Other long-term obligations consist of $44.8 million related to asset retirement obligations recorded pursuant to ASC 410-20, which assumes the underlying assets will be removed at some period over the next 55 years. Also included in the table is $52.2 million related to retirement plans and $151.0 million related to other long-term obligations with a specific maturity. |
SEASONALITY
Typically, both our Americas and International segments experience their lowest financial performance in the first quarter of the calendar year, with International historically experiencing a loss from operations in that period. Our International segment typically experiences its strongest performance in the second and fourth quarters of the calendar year. We expect this trend to continue in the future.
MARKET RISK
54
We are exposed to market risks arising from changes in market rates and prices, including movements in equity security prices, foreign currency exchange rates and inflation.
Foreign Currency Exchange Rate Risk
We have operations in countries throughout the world. 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 believe we mitigate a small portion of our exposure to foreign currency fluctuations with a natural hedge through borrowings in currencies other than the U.S. dollar. Our foreign operations reported net income of $6.7 million for year ended December 31, 2017. We estimate a 10% increase in the value of the U.S. dollar relative to foreign currencies would have decreased our net income for the year ended December 31, 2017 by $0.7 million. A 10% decrease in the value of the U.S. dollar relative to foreign currencies would have increased our net income for the year ended December 31, 2017 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.
NEW ACCOUNTING PRONOUNCEMENTS
During the third quarter of 2015, the FASB issued ASU 2015-14, Revenue from Contracts with Customers (Topic 606): Deferral of the Effective Date. This update provides a one-year deferral of the effective date for ASU No. 2014-09, Revenue from Contracts with Customers. ASU No. 2014-09 provides guidance for the recognition, measurement and disclosure of revenue resulting from contracts with customers and will supersede virtually all of the current revenue recognition guidance under U.S. GAAP. The standard is effective for the first interim period within annual reporting periods beginning after December 15, 2017. The two permitted transition methods under the new standard are the full retrospective method, in which case the standard would be applied to each prior reporting period presented and the cumulative effect of applying the standard would be recognized at the earliest period shown, or the modified retrospective method, in which case the cumulative effect of applying the standard would be recognized at the date of initial application. The Company expects to utilize the full retrospective method. The Company has substantially completed its evaluation of the potential changes from adopting the new standard on its future financial reporting and disclosures, which included reviews of contractual terms for all of the Company’s significant revenue streams and the development of an implementation plan. The Company continues to execute on its implementation plan, including detailed policy drafting and training of segment personnel. Based on its evaluation, the Company does not expect material changes to its consolidated revenues, operating income or balance sheets as a result of the implementation of this standard.
During the first quarter of 2016, the FASB issued ASU No. 2016-02, Leases (Topic 842). The new leasing standard presents significant changes to the balance sheets of lessees. Lessor accounting is updated to align with certain changes in the lessee model and the new revenue recognition standard which was issued in the third quarter of 2015. The standard is effective for annual periods, and for interim periods within those annual periods, beginning after December 15, 2018. The Company is currently evaluating the impact of the provisions of this new standard on its consolidated financial statements.
During the first quarter of 2017, the FASB issued ASU 2017-04, Intangibles - Goodwill and Other (Topic 350). This update eliminates the requirement to calculate the implied fair value of goodwill to measure a goodwill impairment charge. Entities will record an impairment charge based on the excess of a reporting unit's carrying amount over its fair value. The standard is effective for annual and any interim impairment tests performed for periods beginning after December 15, 2019. The Company is currently evaluating the impact of the provisions of this new standard on its consolidated financial statements.
During the second quarter of 2017, the FASB issued ASU 2017-09, Compensation - Stock Compensation (Topic 718). This update mandates that entities will apply the modification accounting guidance if the value, vesting conditions or classification of the award changes. Entities will have to make all of the disclosures about modifications that are required today, in addition to disclosing that compensation expense hasn't changed. Additionally, the new guidance also clarifies that a modification to an award could be significant and therefore require disclosure, even if the modification accounting is not required. The guidance will be applied prospectively to awards modified on or after the adoption date and is effective for annual periods, and interim periods
55
within those annual periods, beginning after December 15, 2017. The Company does not expect that the adoption of this guidance will have material effect on the Company's consolidated financial statements.
CRITICAL ACCOUNTING ESTIMATES
The preparation of our financial statements in conformity with U.S. GAAP requires management to make estimates, judgments and assumptions that affect the reported amounts of assets and liabilities, and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amount of expenses during the reporting period. On an ongoing basis, we evaluate our estimates that are based on historical experience and on various other assumptions that are believed to be reasonable under the circumstances. The result of these evaluations forms the basis for making judgments about the carrying values of assets and liabilities and the reported amount of expenses that are not readily apparent from other sources. Because future events and their effects cannot be determined with certainty, actual results could differ from our assumptions and estimates, and such difference could be material. Our significant accounting policies are discussed in the notes to our consolidated financial statements included in Item 8 of Part II of this Annual Report on Form 10-K. Management believes that the following accounting estimates are the most critical to aid in fully understanding and evaluating our reported financial results, and they require management’s most difficult, subjective or complex judgments, resulting from the need to make estimates about the effect of matters that are inherently uncertain. The following narrative describes these critical accounting estimates, the judgments and assumptions and the effect if actual results differ from these assumptions.
Allowance for Doubtful Accounts
We evaluate the collectability of our accounts receivable based on a combination of factors. In circumstances where we are aware of a specific customer’s inability to meet its financial obligations, we record a specific reserve to reduce the amounts recorded to what we believe will be collected. For all other customers, we recognize reserves for bad debt based on historical experience for each business unit, adjusted for relative improvements or deteriorations in the agings and changes in current economic conditions.
If our agings were to improve or deteriorate resulting in a 10% change in our allowance, we estimated that our bad debt expense for the year ended December 31, 2017 would have changed by approximately $2.2 million.
Leases
The most significant estimates used by management in accounting for leases and the impact of these estimates are as follows:
Expected lease term Our expected lease term includes both contractual lease periods and cancelable option periods where failure to exercise such options would result in an economic penalty. The expected lease term is used in determining whether the lease is accounted for as an operating lease or a capital lease. A lease is considered a capital lease if the lease term exceeds 75% of the leased asset's useful life. The expected lease term is also used in determining the depreciable life of the asset. An increase in the expected lease term will increase the probability that a lease may be considered a capital lease and will generally result in higher interest and depreciation expense for a leased property recorded on our balance sheet.
Incremental borrowing rate The incremental borrowing rate is primarily used in determining whether the lease is accounted for as an operating lease or a capital lease. A lease is considered a capital lease if the net present value of the minimum lease payments is greater than 90% of the fair market value of the property. An increase in the incremental borrowing rate decreases the net present value of the minimum lease payments and reduces the probability that a lease will be considered a capital lease.
Fair market value of leased asset The fair market value of leased property is generally estimated based on comparable market data as provided by third-party sources. Fair market value is used in determining whether the lease is accounted for as an operating lease or a capital lease. A lease is considered a capital lease if the net present value of the minimum lease payments equals or exceeds 90% of the fair market value of the leased property. A higher fair market value reduces the likelihood that a lease will be considered a capital lease.
Long-lived Assets
Long-lived assets, including structures and other property, plant and equipment and definite-lived intangibles, are reported at historical cost less accumulated depreciation and amortization. We estimate the useful lives for various types of advertising structures and other long-lived assets based on our historical experience and our plans regarding how we intend to use those assets. Advertising structures have different lives depending on their nature, with large format bulletins generally having longer depreciable lives and posters and other displays having shorter depreciable lives. Street furniture and transit displays are depreciated over their estimated useful lives or appropriate contractual periods, whichever is shorter. Our experience indicates that the estimated useful lives applied to our portfolio of assets have been reasonable, and we do not expect significant changes to the estimated useful lives
56
of our long-lived assets in the future. When we determine that structures or other long-lived assets will be disposed of prior to the end of their useful lives, we estimate the revised useful lives and depreciate the assets over the revised period. We also review long-lived assets for impairment when events and circumstances indicate that depreciable and amortizable long-lived assets might be impaired and the undiscounted cash flows estimated to be generated by those assets are less than the carrying amounts of those assets. When specific assets are determined to be unrecoverable, the cost basis of the asset is reduced to reflect the current fair market value.
We use various assumptions in determining the remaining useful lives of assets to be disposed of prior to the end of their useful lives and in determining the current fair market value of long-lived assets that are determined to be unrecoverable. Estimated useful lives and fair values are sensitive to factors including contractual commitments, regulatory requirements, future expected cash flows, industry growth rates and discount rates, as well as future salvage values. Our impairment loss calculations require management to apply judgment in estimating future cash flows, including forecasting useful lives of the assets and selecting the discount rate that reflects the risk inherent in future cash flows.
If actual results are not consistent with our assumptions and judgments used in estimating future cash flows and asset fair values, we may be exposed to future impairment losses that could be material to our results of operations.
Annual Impairment Test
The Company performs its annual impairment test on indefinite-lived intangible assets and goodwill as of July 1 of each year.
Indefinite-lived Intangible Assets
Indefinite-lived intangible assets, such as our billboard permits, are reviewed annually for possible impairment using the direct valuation method as prescribed in ASC 805-20-S99. Under the direct valuation method, the estimated fair value of the indefinite-lived intangible assets was calculated at the market level as prescribed by ASC 350-30-35. Under the direct valuation method, it is assumed that rather than acquiring indefinite-lived intangible assets as a part of a going concern business, the buyer hypothetically obtains indefinite-lived intangible assets and builds a new operation with similar attributes from scratch. Thus, the buyer incurs start-up costs during the build-up phase which are normally associated with going concern value. Initial capital costs are deducted from the discounted cash flows model which results in value that is directly attributable to the indefinite-lived intangible assets.
Our key assumptions using the direct valuation method are market revenue growth rates, market share, profit margin, duration and profile of the build-up period, estimated start-up capital costs 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.
On July 1, 2017, we performed our annual impairment test in accordance with ASC 350-30-35, resulting in no impairment charge
In determining the fair value of our billboard permits, the following key assumptions were used:
• |
Industry revenue growth forecasts between 0.5% and 3.5% was used for the initial four-year period; |
• |
3.0% revenue growth was assumed beyond the initial four-year period; |
• |
Revenue was grown over a build-up period, reaching maturity by year 2; |
• |
Operating margins gradually climb to the industry average margin of up to 55.9%, depending on market size, by year 3; and |
• |
Assumed discount rate of 7.5%. |
While we believe we have made reasonable estimates and utilized appropriate assumptions to calculate the fair value of our indefinite-lived intangible assets, it is possible a material change could occur. If future results are not consistent with our assumptions and estimates, we may be exposed to impairment charges in the future. The following table shows the decline in the fair value of our indefinite-lived intangible assets that would result from a 100 basis point decline in our discrete and terminal period revenue growth rate and profit margin assumptions, and a 100 basis point increase in our discount rate assumption:
(In thousands) |
||||||||||||
Description |
Revenue growth rate |
Profit margin |
Discount rate |
|||||||||
Billboard permits |
$ |
1,107,600 |
$ |
161,800 |
$ |
1,118,300 |
57
The estimated fair value of our billboard permits at July 1, 2017 was $3.7 billion while the carrying value was $1.0 billion. The estimated fair value of our billboard permits at July 1, 2016 was $4.0 billion while the carrying value was $1.0 billion.
Goodwill
Goodwill represents the excess of the purchase price over the fair value of 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 net assets of each reporting unit. To the extent that the carrying amount of net assets would exceed the fair value, an impairment charge may be required to be recorded.
The discounted cash flow approach we use for valuing goodwill as part of the two-step impairment testing approach involves estimating future cash flows expected to be generated from the related assets, discounted to their present value using a risk-adjusted discount rate. Terminal values are also estimated and discounted to their present value.
On July 1, 2017, we performed our annual impairment test in accordance with ASC 350-30-35, resulting in a goodwill impairment charge of $1.6 million related to one of our International outdoor markets. In determining the fair value of our reporting units, we used the following assumptions:
• |
Expected cash flows underlying our business plans for the periods 2017 through 2021. Our cash flow assumptions 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 2021 are projected to grow at a perpetual growth rate, which we estimated at 3.0%.
|
• |
In order to risk adjust the cash flow projections in determining fair value; we utilized a discount rate of approximately 8.0% to 11.5% for each of our reporting units. |
Based on our annual 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 decline in the fair value of each of our reportable segments that would result from a 100 basis point decline in our discrete and terminal period revenue growth rate and profit margin assumptions and a 100 basis point increase in our discount rate assumption:
(In thousands) |
||||||||||||
Description |
Revenue growth rate |
Profit margin |
Discount rates |
|||||||||
Americas |
$ |
820,000 |
$ |
170,000 |
$ |
780,000 |
||||||
International |
$ |
260,000 |
$ |
210,000 |
$ |
220,000 |
Tax Provisions
Our estimates of income taxes and the significant items giving rise to the deferred tax assets and liabilities are shown in the notes to our consolidated financial statements and reflect our assessment of actual future taxes to be paid on items reflected in the financial statements, giving consideration to both timing and probability of these estimates. Actual income taxes could vary from these estimates due to future changes in income tax law or results from the final review of our tax returns by federal, state or foreign tax authorities.
We use our judgment to determine whether it is more likely than not that our deferred tax assets will be realized. Deferred tax assets are reduced by valuation allowances if the Company believes it is more than likely than not that some portion or the entire asset will not be realized.
We use our judgment to determine whether it is more likely than not that we will sustain positions that we have taken on tax returns and, if so, the amount of benefit to initially recognize within our financial statements. We regularly review our uncertain tax positions and adjust our unrecognized tax benefits (UTBs) in light of changes in facts and circumstances, such as changes in tax law, interactions with taxing authorities and developments in case law. These adjustments to our UTBs may affect our income tax expense. Settlement of uncertain tax positions may require use of our cash.
On December 22, 2017, the U.S. government enacted comprehensive income tax legislation, referred to as The Tax Cuts and Jobs Act (the Tax Act). The Tax Act reduces the U.S. federal corporate tax rate from 35% percent to 21% effective January 1, 2018, requires companies to pay a one-time transition tax on earnings of certain foreign subsidiaries that were previously tax
58
deferred, and creates new U.S. taxes on certain foreign earnings. To account for the reduction in the U.S. federal corporate income tax rate, we remeasured our deferred tax assets and liabilities based on the rates at which they are expected to reverse in the future, generally 21% percent. To determine the impact from the one-time transition tax on accumulated foreign earnings, we analyzed our cumulative foreign earnings and profits in accordance with the rules provided in the Tax Act. Based upon our preliminary analysis which is not yet complete, we have not recorded income tax expense in the current period for the one-time transition tax due to the net accumulated deficit in our foreign earnings and profits.
Litigation Accruals
We are currently involved in certain legal proceedings. Based on current assumptions, we 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. Future results of operations could be materially affected by changes in these assumptions or the effectiveness of our strategies related to these proceedings.
Management’s 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.
Asset Retirement Obligations
ASC 410-20 requires us to estimate our obligation upon the termination or nonrenewal of a lease, to dismantle and remove our billboard structures from the leased land and to reclaim the site to its original condition.
Due to the high rate of lease renewals over a long period of time, our calculation assumes all related assets will be removed at some period over the next 55 years. An estimate of third-party cost information is used with respect to the dismantling of the structures and the reclamation of the site. The interest rate used to calculate the present value of such costs over the retirement period is based on an estimated risk-adjusted credit rate for the same period. If our assumption of the risk-adjusted credit rate used to discount current year additions to the asset retirement obligation decreased approximately 1%, our liability as of December 31, 2017 would not be materially impacted. Similarly, if our assumption of the risk-adjusted credit rate increased approximately 1%, our liability would not be materially impacted.
Share-Based Compensation
Under the fair value recognition provisions of ASC 718-10, share-based compensation cost is measured at the grant date based on the fair value of the award. Determining the fair value of share-based awards at the grant date requires assumptions and judgments about expected volatility and forfeiture rates, among other factors. If actual results differ significantly from these estimates, our results of operations could be materially impacted.
59
ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
Required information is located within Item 7 of Part II of this Annual Report on Form 10-K.
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
Report of Independent Registered Public Accounting Firm
To the Stockholders and the Board of Directors of Clear Channel Outdoor Holdings, Inc.
Opinion on the Financial Statements
We have audited the accompanying consolidated balance sheets of Clear Channel Outdoor Holdings, Inc. and subsidiaries (the Company) as of December 31, 2017 and 2016, the related consolidated statements of comprehensive income (loss), changes in stockholders' deficit and cash flows for each of the three years in the period ended December 31, 2017, and the related notes and the financial statement schedule listed in the Index at Item 15(a)2 (collectively referred to as the "consolidated financial statements"). In our opinion, the consolidated financial statements present fairly, in all material respects, the financial position of the Company at December 31, 2017 and 2016, and the results of its operations and its cash flows for each of the three years in the period ended December 31, 2017, in conformity with U.S. generally accepted accounting principles.
We also have audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States) (PCAOB), the Company's internal control over financial reporting as of December 31, 2017, based on the criteria established in Internal Control-Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission (2013 Framework) and our report dated May 3, 2018 expressed an adverse opinion thereon.
Basis for Opinion
These financial statements are the responsibility of the Company's management. Our responsibility is to express an opinion on the Company's financial statements based on our audits. We are a public accounting firm registered with the PCAOB and are required to be independent with respect to the Company in accordance with the U.S. federal securities laws and the applicable rules and regulations of the Securities and Exchange Commission and the PCAOB.
We conducted our audits in accordance with the standards of the PCAOB. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement, whether due to error or fraud. Our audits included performing procedures to assess the risks of material misstatement of the financial statements, whether due to error or fraud, and performing procedures that respond to those risks. Such procedures included examining, on a test basis, evidence regarding the amounts and disclosures in the financial statements. Our audits also included evaluating the accounting principles used and significant estimates made by management, as well as evaluating the overall presentation of the financial statements. We believe that our audits provide a reasonable basis for our opinion.
/s/ Ernst & Young LLP
We have served as the Company's auditor since 2005.
San Antonio, Texas
May 3, 2018
60
CONSOLIDATED BALANCE SHEETS
CLEAR CHANNEL OUTDOOR HOLDINGS, INC. AND SUBSIDIARIES
(In thousands) |
December 31, |
December 31, |
|||||
2017 |
2016 |
||||||
CURRENT ASSETS |
|||||||
Cash and cash equivalents |
$ |
144,119 |
$ |
541,995 |
|||
Accounts receivable, net of allowance of $22,487 in 2017 and $22,398 in 2016 |
659,463 |
593,070 |
|||||
Prepaid expenses |
111,876 |
111,569 |
|||||
Assets held for sale |
— |
55,602 |
|||||
Other current assets |
58,714 |
39,199 |
|||||
Total Current Assets |
974,172 |
1,341,435 |
|||||
PROPERTY, PLANT AND EQUIPMENT |
|||||||
Structures, net |
1,180,882 |
1,196,676 |
|||||
Other property, plant and equipment, net |
214,147 |
216,157 |
|||||
INTANGIBLE ASSETS AND GOODWILL |
|||||||
Indefinite-lived intangibles |
977,152 |
960,966 |
|||||
Other intangibles, net |
273,862 |
299,617 |
|||||
Goodwill |
714,043 |
696,263 |
|||||
OTHER ASSETS |
|||||||
Due from iHeartCommunications, net of allowance of $855,648 in 2017 and $0 in 2016 |
211,990 |
885,701 |
|||||
Other assets |
124,534 |
122,013 |
|||||
Total Assets |
$ |
4,670,782 |
$ |
5,718,828 |
|||
CURRENT LIABILITIES |
|||||||
Accounts payable |
$ |
87,960 |
$ |
86,870 |
|||
Accrued expenses |
509,801 |
480,872 |
|||||
Deferred income |
59,178 |
67,005 |
|||||
Current portion of long-term debt |
573 |
6,971 |
|||||
Total Current Liabilities |
657,512 |
641,718 |
|||||
Long-term debt |
5,266,153 |
5,110,020 |
|||||
Deferred tax liability |
318,107 |
638,705 |
|||||
Other long-term liabilities |
270,415 |
259,311 |
|||||
Commitments and contingent liabilities (Note 5) |
|||||||
STOCKHOLDERS’ DEFICIT |
|||||||
Noncontrolling interest |
157,040 |
149,886 |
|||||
Preferred stock, $.01 par value, 150,000,000 shares authorized, no shares issued and outstanding |
— |
— |
|||||
Class A common stock, par value $.01 per share, authorized 750,000,000 shares, issued 49,955,300 and 47,947,123 shares in 2017 and 2016, respectively |
500 |
479 |
|||||
Class B common stock, $.01 par value, 600,000,000 shares authorized, 315,000,000 shares issued and outstanding |
3,150 |
3,150 |
|||||
Additional paid-in capital |
3,108,148 |
3,432,121 |
|||||
Accumulated deficit |
(4,765,514 |
) |
(4,125,798 |
) |
|||
Accumulated other comprehensive loss |
(338,936 |
) |
(386,658 |
) |
|||
Cost of shares (946,415 in 2017 and 633,851 in 2016) held in treasury |
(5,793 |
) |
(4,106 |
) |
|||
Total Stockholders’ Deficit |
(1,841,405 |
) |
(930,926 |
) |
|||
Total Liabilities and Stockholders’ Deficit |
$ |
4,670,782 |
$ |
5,718,828 |
See Notes to Consolidated Financial Statements
61
CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME (LOSS)
CLEAR CHANNEL OUTDOOR HOLDINGS, INC. AND SUBSIDIARIES
(In thousands, except per share data) |
Years Ended December 31, |
||||||||||
2017 |
2016 |
2015 |
|||||||||
Revenue |
$ |
2,591,265 |
$ |
2,688,884 |
$ |
2,806,204 |
|||||
Operating expenses: |
|||||||||||
Direct operating expenses (excludes depreciation and amortization) |
1,402,765 |
1,422,058 |
1,494,902 |
||||||||
Selling, general and administrative expenses (excludes depreciation and amortization) |
508,637 |
515,202 |
531,504 |
||||||||
Corporate expenses (excludes depreciation and amortization) |
143,678 |
117,436 |
116,523 |
||||||||
Depreciation and amortization |
325,991 |
344,124 |
375,962 |
||||||||
Impairment charges |
4,159 |
7,274 |
21,631 |
||||||||
Other operating income (expense), net |
26,391 |
354,688 |
(4,824 |
) |
|||||||
Operating income |
232,426 |
637,478 |
260,858 |
||||||||
Interest expense |
381,149 |
374,892 |
355,669 |
||||||||
Interest income on Due from iHeartCommunications |
68,871 |
50,309 |
61,439 |
||||||||
Loss on Due from iHeartCommunications
|
(855,648 |
) |
— |
— |
|||||||
Gain (loss) on investments, net |
(1,045 |
) |
531 |
— |
|||||||
Equity in loss of nonconsolidated affiliates |
(990 |
) |
(1,689 |
) |
(289 |
) |
|||||
Other income (expense), net |
29,800 |
(70,682 |
) |
12,387 |
|||||||
Income (loss) before income taxes |
(907,735 |
) |
241,055 |
(21,274 |
) |
||||||
Income tax benefit (expense) |
280,218 |
(76,656 |
) |
(49,943 |
) |
||||||
Consolidated net income (loss) |
(627,517 |
) |
164,399 |
(71,217 |
) |
||||||
Less amount attributable to noncontrolling interest |
12,199 |
23,002 |
24,764 |
||||||||
Net income (loss) attributable to the Company |
$ |
(639,716 |
) |
$ |
141,397 |
$ |
(95,981 |
) |
|||
Other comprehensive income (loss), net of tax: |
|||||||||||
Foreign currency translation adjustments |
45,151 |
22,408 |
(112,729 |
) |
|||||||
Unrealized holding gain (loss) on marketable securities |
(414 |
) |
(576 |
) |
553 |
||||||
Other adjustments to comprehensive income (loss) |
6,720 |
(11,814 |
) |
(10,266 |
) |
||||||
Reclassification adjustments |
5,441 |
46,730 |
808 |
||||||||
Other comprehensive income (loss) |
56,898 |
56,748 |
(121,634 |
) |
|||||||
Comprehensive income (loss) |
(582,818 |
) |
198,145 |
(217,615 |
) |
||||||
Less amount attributable to noncontrolling interest |
9,176 |
(8,427 |
) |
(11,154 |
) |
||||||
Comprehensive income (loss) attributable to the Company |
$ |
(591,994 |
) |
$ |
206,572 |
$ |
(206,461 |
) |
|||
Net income (loss) attributable to the Company per common share: |
|||||||||||
Basic |
$ |
(1.77 |
) |
$ |
0.39 |
$ |
(0.27 |
) |
|||
Weighted average common shares outstanding – Basic |
361,141 |
360,294 |
359,508 |
||||||||
Diluted |
$ |
(1.77 |
) |
$ |
0.39 |
$ |
(0.27 |
) |
|||
Weighted average common shares outstanding – Diluted |
361,141 |
361,612 |
359,508 |
See Notes to Consolidated Financial Statements
62
CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS’ DEFICIT OF
CLEAR CHANNEL OUTDOOR HOLDINGS, INC. AND SUBSIDIARIES
(In thousands, except share data) |
Controlling Interest |
||||||||||||||||||||||||||||||||
Class A
Common
Shares
Issued
|
Class B Common Shares
Issued
|
Non-controlling
Interest
|
Common
Stock
|
Additional Paid-in
Capital
|
Accumulated
Deficit
|
Accumulated Other Comprehensive
Loss
|
Treasury Stock |
Total |
|||||||||||||||||||||||||
Balances at December 31, 2014 |
45,231,282 |
315,000,000 |
$ |
203,334 |
$ |
3,602 |
$ |
4,167,491 |
$ |
(4,171,214 |
) |
$ |
(341,353 |
) |
$ |
(1,192 |
) |
$ |
(139,332 |
) |
|||||||||||||
Net income (loss) |
— |
— |
24,764 |
— |
— |
(95,981 |
) |
— |
— |
(71,217 |
) |
||||||||||||||||||||||
Exercise of stock options and other |
1,429,832 |
— |
— |
15 |
3,783 |
— |
— |
(912 |
) |
2,886 |
|||||||||||||||||||||||
Share-based payments |
— |
— |
— |
— |
8,502 |
— |
— |
— |
8,502 |
||||||||||||||||||||||||
Dividends and other payments to noncontrolling interests |
— |
— |
(30,870 |
) |
— |
— |
— |
— |
— |
(30,870 |
) |
||||||||||||||||||||||
Dividends declared and paid ($0.6026/share) |
— |
— |
— |
— |
(217,796 |
) |
— |
— |
— |
(217,796 |
) |
||||||||||||||||||||||
Other |
— |
— |
1,701 |
— |
(64 |
) |
— |
— |
— |
1,637 |
|||||||||||||||||||||||
Other comprehensive loss |
— |
— |
(11,154 |
) |
— |
— |
— |
(110,480 |
) |
— |
(121,634 |
) |
|||||||||||||||||||||
Balances at December 31, 2015 |
46,661,114 |
315,000,000 |
$ |
187,775 |
$ |
3,617 |
$ |
3,961,916 |
$ |
(4,267,195 |
) |
$ |
(451,833 |
) |
$ |
(2,104 |
) |
$ |
(567,824 |
) |
|||||||||||||
Net income |
— |
— |
23,002 |
— |
— |
141,397 |
— |
— |
164,399 |
||||||||||||||||||||||||
Exercise of stock options and other |
1,286,009 |
— |
— |
12 |
624 |
— |
— |
(2,002 |
) |
(1,366 |
) |
||||||||||||||||||||||
Share-based payments |
— |
— |
— |
— |
10,291 |
— |
— |
— |
10,291 |
||||||||||||||||||||||||
Disposal of noncontrolling interest |
(36,846 |
) |
(36,846 |
) |
|||||||||||||||||||||||||||||
Dividends and other payments to noncontrolling interests |
— |
— |
(16,917 |
) |
— |
— |
— |
— |
— |
(16,917 |
) |
||||||||||||||||||||||
Dividends declared and paid ($1.4937/share) |
— |
— |
— |
— |
(540,034 |
) |
— |
— |
— |
(540,034 |
) |
||||||||||||||||||||||
Other |
— |
— |
1,299 |
— |
(676 |
) |
— |
— |
— |
623 |
|||||||||||||||||||||||
Other comprehensive income (loss) |
— |
— |
(8,427 |
) |
— |
— |
— |
65,175 |
— |
56,748 |
|||||||||||||||||||||||
Balances at December 31, 2016 |
47,947,123 |
315,000,000 |
$ |
149,886 |
$ |
3,629 |
$ |
3,432,121 |
$ |
(4,125,798 |
) |
$ |
(386,658 |
) |
$ |
(4,106 |
) |
$ |
(930,926 |
) |
|||||||||||||
Net income |
— |
— |
12,199 |
— |
— |
(639,716 |
) |
— |
— |
(627,517 |
) |
||||||||||||||||||||||
Exercise of stock options and other |
2,008,177 |
— |
— |
21 |
198 |
— |
— |
(1,687 |
) |
(1,468 |
) |
||||||||||||||||||||||
Share-based payments |
— |
— |
931 |
— |
8,659 |
— |
— |
— |
9,590 |
||||||||||||||||||||||||
Disposal of noncontrolling interest |
— |
— |
(2,439 |
) |
— |
— |
— |
— |
— |
(2,439 |
) |
||||||||||||||||||||||
Dividends and other payments to noncontrolling interests |
— |
— |
(12,010 |
) |
— |
— |
— |
— |
— |
(12,010 |
) |
||||||||||||||||||||||
Dividends declared and paid ($0.9171/share) |
— |
— |
— |
— |
(332,498 |
) |
— |
— |
— |
(332,498 |
) |
||||||||||||||||||||||
Other |
— |
— |
(703 |
) |
— |
(332 |
) |
— |
— |
— |
(1,035 |
) |
|||||||||||||||||||||
Other comprehensive income |
— |
— |
9,176 |
— |
— |
— |
47,722 |
— |
56,898 |
||||||||||||||||||||||||
Balances at December 31, 2017 |
49,955,300 |
315,000,000 |
$ |
157,040 |
$ |
3,650 |
$ |
3,108,148 |
$ |
(4,765,514 |
) |
$ |
(338,936 |
) |
$ |
(5,793 |
) |
$ |
(1,841,405 |
) |
See Notes to Consolidated Financial Statements
63
CONSOLIDATED STATEMENTS OF CASH FLOWS OF
CLEAR CHANNEL OUTDOOR HOLDINGS, INC. AND SUBSIDIARIES
(In thousands) |
Years Ended December 31, |
||||||||||
2017 |
2016 |
2015 |
|||||||||
Cash flows from operating activities: |
|||||||||||
Consolidated net income (loss) |
$ |
(627,517 |
) |
$ |
164,399 |
$ |
(71,217 |
) |
|||
Reconciling items: |
|||||||||||
Impairment charges |
4,159 |
7,274 |
21,631 |
||||||||
Depreciation and amortization |
325,991 |
344,124 |
375,962 |
||||||||
Deferred taxes |
(311,112 |
) |
31,314 |
3,305 |
|||||||
Provision for doubtful accounts |
6,740 |
10,659 |
13,384 |
||||||||
Amortization of deferred financing charges and note discounts, net |
10,527 |
10,572 |
8,770 |
||||||||
Share-based compensation |
9,590 |
10,291 |
8,502 |
||||||||
Gain on disposal of operating and other assets |
(29,347 |
) |
(363,485 |
) |
(5,468 |
) |
|||||
Loss on Due from iHeartCommunications
|
855,648 |
— |
— |
||||||||
(Gain) loss on investments |
1,045 |
(531 |
) |
— |
|||||||
Equity in loss of nonconsolidated affiliates |
990 |
1,689 |
289 |
||||||||
Foreign exchange transaction (gain) loss |
(29,563 |
) |
69,599 |
(14,790 |
) |
||||||
Other reconciling items, net |
(4,710 |
) |
(135 |
) |
1,350 |
||||||
Changes in operating assets and liabilities, net of effects of acquisitions and dispositions: |
|||||||||||
(Increase) decrease in accounts receivable |
(39,790 |
) |
30,308 |
(56,580 |
) |
||||||
(Increase) decrease in prepaid expenses and other current assets |
9,552 |
(15,578 |
) |
(1,728 |
) |
||||||
Increase (decrease) in accrued expenses |
(7,316 |
) |
25,518 |
4,565 |
|||||||
Increase (decrease) in accounts payable |
(4,126 |
) |
(3,797 |
) |
30,642 |
||||||
Increase (decrease) in accrued interest |
431 |
194 |
(4,072 |
) |
|||||||
Increase (decrease) in deferred income |
(13,273 |
) |
(18,119 |
) |
2,549 |
||||||
Changes in other operating assets and liabilities |
(10,331 |
) |
5,997 |
(18,161 |
) |
||||||
Net cash provided by operating activities |
147,588 |
310,293 |
298,933 |
||||||||
Cash flows from investing activities: |
|||||||||||
Purchases of property, plant and equipment |
(224,238 |
) |
(229,772 |
) |
(218,332 |
) |
|||||
Proceeds from disposal of assets |
72,049 |
808,194 |
11,264 |
||||||||
Purchases of other operating assets |
(837 |
) |
(2,244 |
) |
(23,640 |
) |
|||||
Change in other, net |
(22,875 |
) |
(24,679 |
) |
(27,017 |
) |
|||||
Net cash provided by (used for) investing activities |
(175,901 |
) |
551,499 |
(257,725 |
) |
||||||
Cash flows from financing activities: |
|||||||||||
Payments on credit facilities |
(909 |
) |
(2,100 |
) |
(3,849 |
) |
|||||
Proceeds from long-term debt |
156,000 |
6,856 |
222,777 |
||||||||
Payments on long-term debt |
(748 |
) |
(2,334 |
) |
(56 |
) |
|||||
Net transfers from (to) iHeartCommunications |
(181,939 |
) |
45,099 |
17,007 |
|||||||
Dividends and other payments to noncontrolling interests |
(12,010 |
) |
(16,917 |
) |
(30,870 |
) |
|||||
Dividends paid |
(332,824 |
) |
(755,538 |
) |
— |
||||||
Change in other, net |
(7,083 |
) |
(1,565 |
) |
(5,955 |
) |
|||||
Net cash provided by (used for) financing activities |
(379,513 |
) |
(726,499 |
) |
199,054 |
||||||
Effect of exchange rate changes on cash |
9,950 |
(6,041 |
) |
(13,723 |
) |
||||||
Net increase (decrease) in cash and cash equivalents |
(397,876 |
) |
129,252 |
226,539 |
|||||||
Cash and cash equivalents at beginning of year |
541,995 |
412,743 |
186,204 |
||||||||
Cash and cash equivalents at end of year |
$ |
144,119 |
$ |
541,995 |
$ |
412,743 |
|||||
SUPPLEMENTAL DISCLOSURES: |
|||||||||||
Cash paid during the year for interest |
$ |
374,309 |
$ |
368,051 |
$ |
356,021 |
|||||
Cash paid during the year for income taxes |
33,747 |
40,185 |
43,781 |
See Notes to Consolidated Financial Statements
64
CLEAR CHANNEL OUTDOOR HOLDINGS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 1 — SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Nature of Business
Clear Channel Outdoor Holdings, Inc. (the “Company”) is an outdoor advertising company which owns or operates advertising display faces domestically and internationally. On November 11, 2005, the Company became a publicly traded company through an initial public offering (“IPO”), in which 10%, or 35.0 million shares, of the Company’s Class A common stock was sold. Prior to the IPO, the Company was an indirect wholly-owned subsidiary of iHeartCommunications, Inc. (“iHeartCommunications”), a diversified media and entertainment company. As of December 31, 2017, iHeartCommunications indirectly holds all of the 315.0 million shares of Class B common stock outstanding and 10,726,917 shares of Class A common stock, collectively representing 89.5% of the shares outstanding and approximately 99% of the voting power. The holders of Class A common stock and Class B common stock have identical rights, except holders of Class A common stock are entitled to one vote per share while holders of Class B common stock are entitled to 20 votes per share. The Class B shares of common stock are convertible, at the option of the holder at any time or upon any transfer, into shares of Class A common stock on a one-for-one basis, subject to certain limited exceptions.
The Company operates in the outdoor advertising industry by selling advertising on billboards, street furniture displays, transit displays and other advertising displays. The Company has two reportable business segments: Americas and International. The Americas segment primarily includes operations in the United States and Latin America; the International segment primarily includes operations in Europe and Asia.
During the first quarter of 2018, the Company reevaluated its segment reporting and determined that its Latin America operations should be managed by its International outdoor leadership team. As such, beginning January 1, 2018, our Latin American operations will be included in our International outdoor segment.
Agreements with iHeartCommunications
There are several agreements which govern the Company’s relationship with iHeartCommunications including the Master Agreement, Corporate Services Agreement, Employee Matters Agreement, Tax Matters Agreement and Trademark and License Agreement. iHeartCommunications has the right to terminate these agreements in various circumstances. As of the date of the filing of this report, no notice of termination of any of these agreements has been received from iHeartCommunications.
On March 14, 2018, iHeartMedia, iHeartCommunications and certain of iHeartMedia's direct and indirect domestic subsidiaries, not including the Company or any of its subsidiaries (collectively, the "Debtors"), filed voluntary petitions for relief (the "iHeart Chapter 11 Cases") under Chapter 11 of the United States 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 Chapter 11 cases.
Use of Estimates
The preparation of the consolidated financial statements in conformity with U.S. generally accepted accounting principles (“GAAP”) requires management to make estimates, judgments, and assumptions that affect the amounts reported in the consolidated financial statements and accompanying notes including, but not limited to, legal, tax and insurance accruals. The Company bases its estimates on historical experience and on various other assumptions that are believed to be reasonable under the circumstances. Actual results could differ from those estimates.
Principles of Consolidation
The consolidated financial statements include the accounts of the Company and its subsidiaries. Also included in the consolidated financial statements are entities for which the Company has a controlling financial interest or is the primary beneficiary. Investments in companies in which the Company owns 20 percent to 50 percent of the voting common stock or otherwise exercises significant influence over operating and financial policies of the Company are accounted for using the equity method of accounting. All significant intercompany accounts have been eliminated in consolidation.
Certain prior period amounts have been reclassified to conform to the 2017 presentation.
Included in Selling, general and administrative expenses and Interest expense is $9.6 million and $1.4 million, respectively, recorded in the fourth quarter of 2017 to correct for accounting errors related to the misappropriation of cash identified at our China subsidiary. Such corrections are not considered to be material to current year or prior year financial results.
65
CLEAR CHANNEL OUTDOOR HOLDINGS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Cash and Cash Equivalents
Cash and cash equivalents include all highly liquid investments with an original maturity of three months or less.
Accounts Receivable
Accounts receivable are recorded at the invoiced amount, net of reserves for sales returns and allowances, and allowances for doubtful accounts. The Company evaluates the collectability of its accounts receivable based on a combination of factors. In circumstances where it is aware of a specific customer’s inability to meet its financial obligations, it records a specific reserve to reduce the amounts recorded to what it believes will be collected. For all other customers, it recognizes reserves for bad debt based on historical experience of bad debts as a percent of revenue for each business unit, adjusted for relative improvements or deteriorations in the agings and changes in current economic conditions. The Company believes its concentration of credit risk is limited due to the large number and the geographic diversification of its customers.
Business Combinations
The Company accounts for its business combinations under the acquisition method of accounting. The total cost of an acquisition is allocated to the underlying identifiable net assets, based on their respective estimated fair values. The excess of the purchase price over the estimated fair values of the net assets acquired is recorded as goodwill. Determining the fair value of assets acquired and liabilities assumed requires management's judgment and often involves the use of significant estimates and assumptions, including assumptions with respect to future cash inflows and outflows, discount rates, asset lives and market multiples, among other items. Various acquisition agreements may include contingent purchase consideration based on performance requirements of the investee. The Company accounts for these payments in conformity with the provisions of ASC 805-20-30, which establish the requirements related to recognition of certain assets and liabilities arising from contingencies.
Property, Plant and Equipment
Property, plant and equipment are stated at cost. Depreciation is computed using the straight-line method at rates that, in the opinion of management, are adequate to allocate the cost of such assets over their estimated useful lives, which are as follows:
Buildings and improvements — 10 to 39 years
Structures — 3 to 20 years
Furniture and other equipment — 2 to 20 years
Leasehold improvements — shorter of economic life or lease term assuming renewal periods, if appropriate
For assets associated with a lease or contract, the assets are depreciated at the shorter of the economic life or the lease or contract term, assuming renewal periods, if appropriate. Expenditures for maintenance and repairs are charged to operations as incurred, whereas expenditures for renewal and betterments are capitalized.
The Company tests for possible impairment of property, plant and equipment whenever events and circumstances indicate that depreciable assets might be impaired and the undiscounted cash flows estimated to be generated by those assets are less than the carrying amounts of those assets. When specific assets are determined to be unrecoverable, the cost basis of the asset is reduced to reflect the current fair market value.
Assets and businesses are classified as held for sale if their carrying amount will be recovered or settled principally through a sale transaction rather than through continuing use. The asset or business must be available for immediate sale and the sale must be highly probable within one year.
Land Leases and Other Structure Leases
Most of the Company’s advertising structures are located on leased land. Americas land leases are typically paid in advance for periods ranging from one to 12 months. International land leases are paid both in advance and in arrears, for periods ranging up to 12 months. Most international street furniture display faces are operated through contracts with municipalities for up to 15 years. The leased land and street furniture contracts often include a percent of revenue to be paid along with a base rent payment. Prepaid land leases are recorded as an asset and expensed ratably over the related rental term and rent payments in arrears are recorded as an accrued liability.
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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Intangible Assets
The Company’s indefinite-lived intangible assets include billboard permits in its Americas segment. The Company’s indefinite-lived intangible assets are not subject to amortization, but are tested for impairment at least annually. The Company tests for possible impairment of indefinite-lived intangible assets whenever events or changes in circumstances, such as a significant reduction in operating cash flow or a dramatic change in the manner for which the asset is intended to be used indicate that the carrying amount of the asset may not be recoverable.
The Company performs its annual impairment test for its permits using a direct valuation technique as prescribed in ASC 805-20-S99. The Company engages a third party valuation firm, to assist the Company in the development of these assumptions and the Company’s determination of the fair value of its permits.
Other intangible assets include definite-lived intangible assets and permanent easements. The Company’s definite-lived intangible assets include primarily transit and street furniture contracts, site leases and other contractual rights, all of which are amortized over the shorter of either the respective lives of the agreements or over the period of time the assets are expected to contribute directly or indirectly to the Company’s future cash flows. The Company periodically reviews the appropriateness of the amortization periods related to its definite-lived intangible assets. These assets are recorded at cost. Permanent easements are indefinite-lived intangible assets which include certain rights to use real property not owned by the Company.
The Company tests for possible impairment of other intangible assets whenever events and circumstances indicate that they might be impaired and the undiscounted cash flows estimated to be generated by those assets are less than the carrying amounts of those assets. When specific assets are determined to be unrecoverable, the cost basis of the asset is reduced to reflect the current fair market value.
Goodwill
The Company performs its annual impairment test on July 1 of each year. The Company uses a discounted cash flow model to determine if the carrying value of the reporting unit, including goodwill, is less than the fair value of the reporting unit. The Company identified its reporting units in accordance with ASC 350-20-55. The Company’s U.S. outdoor advertising markets are aggregated into a single reporting unit for purposes of the goodwill impairment test. The Company also determined that within its Americas segment and its International outdoor segment each country constitutes a separate reporting unit. The Company had impairment of goodwill of $1.6 million and $7.3 million for 2017 and 2016, respectively. The Company had no impairment of goodwill for 2015.
Nonconsolidated Affiliates
In general, investments in which the Company owns 20 percent to 50 percent of the common stock or otherwise exercises significant influence over the investee are accounted for under the equity method. The Company does not recognize gains or losses upon the issuance of securities by any of its equity method investees. The Company reviews the value of equity method investments and records impairment charges in the statement of operations as a component of “Equity in loss of nonconsolidated affiliates” for any decline in value that is determined to be other-than-temporary.
Other Investments
Other investments are composed primarily of equity securities. Securities for which fair value is determinable are classified as available-for-sale or trading and are carried at fair value based on quoted market prices. Securities are carried at historical cost when quoted market prices are unavailable. The net unrealized gains or losses on the available-for-sale securities, net of tax, are reported in accumulated other comprehensive loss as a component of stockholders’ deficit.
The Company periodically assesses the value of available-for-sale and non-marketable securities and records impairment charges in the statement of comprehensive income (loss) for any decline in value that is determined to be other-than-temporary. The average cost method is used to compute the realized gains and losses on sales of equity securities. Based on these assessments, the Company recognized an impairment of $1.0 million during the year ended December 31, 2017, which was recorded in “Other income (expense), net,” and no impairments during the years ended December 31, 2016 and 2015.
Financial Instruments
Due to their short maturity, the carrying amounts of accounts and notes receivable, accounts payable, accrued liabilities and short-term borrowings approximated their fair values at December 31, 2017 and 2016.
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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Asset Retirement Obligation
ASC 410-20 requires the Company to estimate its obligation upon the termination or non-renewal of a lease to dismantle and remove its advertising structures from the leased land and to reclaim the site to its original condition. The Company’s asset retirement obligation is reported in “Other long-term liabilities.” The Company records the present value of obligations associated with the retirement of its advertising structures in the period in which the obligation is incurred. When the liability is recorded, the cost is capitalized as part of the related advertising structures carrying amount. Over time, accretion of the liability is recognized as an operating expense and the capitalized cost is depreciated over the expected useful life of the related asset.
Income Taxes
The Company accounts for income taxes using the liability method. Under this method, deferred tax assets and liabilities are determined based on differences between financial reporting bases and tax bases of assets and liabilities and are measured using the enacted tax rates expected to apply to taxable income in the periods in which the deferred tax asset or liability is expected to be realized or settled. Deferred tax assets are reduced by valuation allowances if the Company believes it is more likely than not that some portion or the entire asset will not be realized. The Company has not provided U.S. federal income taxes for temporary differences with respect to investments in foreign subsidiaries, which at December 31, 2017, currently result in tax basis amounts greater than the financial reporting basis. It is not apparent that these unrecognized deferred tax assets will reverse in the foreseeable future. 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, which gives us 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. We regularly review our tax liabilities on amounts that may be distributed in future periods and provide for foreign withholding and other current and deferred taxes on any such amounts.
The operations of the Company are included in a consolidated U.S. federal income tax return filed by iHeartMedia. However, for financial reporting purposes, the Company’s provision for income taxes has been computed on the basis that the Company files separate consolidated U.S. federal income tax returns with its subsidiaries.
Revenue Recognition
The Company’s advertising contracts cover periods of a few weeks up to one year, and are generally billed monthly. Revenue for advertising space rental is recognized ratably over the term of the contract. Advertising revenue is reported net of agency commissions. Agency commissions are calculated based on a stated percentage applied to gross billing revenue for the Company’s operations. Payments received in advance of being earned are recorded as deferred income. Revenue arrangements typically contain multiple products and services and revenues are allocated based on the relative fair value of each delivered item and recognized in accordance with the applicable revenue recognition criteria for the specific unit of accounting.
Advertising Expense
The Company records advertising expense as it is incurred. Advertising expenses were $15.5 million, $19.3 million and $21.1 million for the years ended December 31, 2017, 2016 and 2015, respectively.
Share-Based Compensation
Under the fair value recognition provisions of ASC 718-10, share-based compensation cost is measured at the grant date based on the fair value of the award. For awards that vest based on service conditions, this cost is recognized as expense on a straight-line basis over the vesting period. For awards that will vest based on market or performance conditions, this cost will be recognized when it becomes probable that the performance conditions will be satisfied. Determining the fair value of share-based awards at the grant date requires assumptions and judgments about expected volatility and forfeiture rates, among other factors.
Foreign Currency
Results of operations for foreign subsidiaries and foreign equity investees are translated into U.S. dollars using the average exchange rates during the year. The assets and liabilities of those subsidiaries and investees are translated into U.S. dollars using the exchange rates at the balance sheet date. The related translation adjustments are recorded in a separate component of stockholders’ equity (deficit), “Accumulated other comprehensive loss”. Foreign currency transaction gains and losses are included in operations.
New Accounting Pronouncements
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CLEAR CHANNEL OUTDOOR HOLDINGS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
During the third quarter of 2015, the FASB issued ASU 2015-14, Revenue from Contracts with Customers (Topic 606): Deferral of the Effective Date. This update provides a one-year deferral of the effective date for ASU No. 2014-09, Revenue from Contracts with Customers. ASU No. 2014-09 provides guidance for the recognition, measurement and disclosure of revenue resulting from contracts with customers and will supersede virtually all of the current revenue recognition guidance under U.S. GAAP. The standard is effective for the first interim period within annual reporting periods beginning after December 15, 2017. The two permitted transition methods under the new standard are the full retrospective method, in which case the standard would be applied to each prior reporting period presented and the cumulative effect of applying the standard would be recognized at the earliest period shown, or the modified retrospective method, in which case the cumulative effect of applying the standard would be recognized at the date of initial application. The Company is using the full retrospective method. The Company has completed its evaluation of the changes from adopting the new standard on its future financial reporting and disclosures, which included reviews of contractual terms for all of the Company’s significant revenue streams and the development of an implementation plan. The Company has executed on its implementation plan, including drafting a detailed policy and training segment personnel. Based on its evaluation, the Company does not expect material changes to its consolidated revenues, operating income or balance sheets as a result of the implementation of this standard.
During the first quarter of 2016, the FASB issued ASU No. 2016-02, Leases (Topic 842). The new leasing standard presents significant changes to the balance sheets of lessees. Lessor accounting is updated to align with certain changes in the lessee model and the new revenue recognition standard which was issued in the third quarter of 2015. The standard is effective for annual periods, and for interim periods within those annual periods, beginning after December 15, 2018. The Company is currently evaluating the impact of the provisions of this new standard on its consolidated financial statements. The Company expects the primary impact to our consolidated financial statements will be the recognition, on a discounted basis, of our minimum commitments under non-cancelable operating leases on our consolidated balance sheets resulting in the recording of right of use assets and lease obligations. Our current minimum commitments under non-cancelable operating leases are disclosed in Note 5.
During the first quarter of 2017, the FASB issued ASU 2017-04, Intangibles - Goodwill and Other (Topic 350). This update eliminates the requirement to calculate the implied fair value of goodwill to measure a goodwill impairment charge. Entities will record an impairment charge based on the excess of a reporting unit's carrying amount over its fair value. The standard is effective for annual and any interim impairment tests performed for periods beginning after December 15, 2019. The Company is currently evaluating the impact of the provisions of this new standard on its consolidated financial statements.
During the second quarter of 2017, the FASB issued ASU 2017-09, Compensation - Stock Compensation (Topic 718). This update mandates that entities will apply the modification accounting guidance if the value, vesting conditions or classification of the award changes. Entities will have to make all of the disclosures about modifications that are required today, in addition to disclosing that compensation expense hasn't changed. Additionally, the new guidance also clarifies that a modification to an award could be significant and therefore require disclosure, even if the modification accounting is not required. The guidance will be applied prospectively to awards modified on or after the adoption date and is effective for annual periods, and interim periods within those annual periods, beginning after December 15, 2017. The Company does not expect that the adoption of this guidance will have material effect on the Company's consolidated financial statements.
NOTE 2 – PROPERTY, PLANT AND EQUIPMENT, INTANGIBLE ASSETS AND GOODWILL
Dispositions
In January 2017, Americas sold its Indianapolis, Indiana market in exchange for certain assets in Atlanta, Georgia with a fair value of $39.4 million, plus $43.1 million in cash, net of closing costs. The assets acquired as part of the transaction consisted of $9.9 million in fixed assets and $29.5 million in intangible assets (including $2.3 million in goodwill). The Company recognized a net gain of $28.9 million related to the sale, which is included within Other operating income (expense), net.
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CLEAR CHANNEL OUTDOOR HOLDINGS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
During the third quarter of 2017, Americas sold its ownership interest in a joint venture in Canada. As a result, the Company recognized a net loss on sale of $12.1 million, including a $6.3 million cumulative translation adjustment, which is included within Other operating income (expense), net.
Property, Plant and Equipment
The Company’s property, plant and equipment consisted of the following classes of assets as of December 31, 2017 and 2016, respectively.
(In thousands) |
December 31, |
December 31, |
|||||
2017 |
2016 |
||||||
Land, buildings and improvements |
$ |
145,763 |
$ |
152,775 |
|||
Structures |
2,864,442 |
2,684,673 |
|||||
Furniture and other equipment |
179,215 |
148,516 |
|||||
Construction in progress |
55,753 |
58,585 |
|||||
3,245,173 |
3,044,549 |
||||||
Less: accumulated depreciation |
1,850,144 |
1,631,716 |
|||||
Property, plant and equipment, net |
$ |
1,395,029 |
$ |
1,412,833 |
The Company recognized an impairment of $2.6 million during the year ended December 31, 2017 in relation to advertising assets that were no longer usable in one country in the Company's International segment.
Indefinite-lived Intangible Assets
The Company’s indefinite-lived intangible assets consist primarily of billboard permits. The Company’s billboard permits are granted for the right to operate an advertising structure at the specified location as long as the structure is in compliance with the laws and regulations of each jurisdiction. The Company’s permits are located on owned land, leased land or land for which we have acquired permanent easements. In cases where the Company’s permits are located on leased land, the leases typically have initial terms of between 10 and 20 years and renew indefinitely, with rental payments generally escalating at an inflation-based index. If the Company loses its lease, the Company will typically obtain permission to relocate the permit or bank it with the municipality for future use. Due to significant differences in both business practices and regulations, billboards in the International segment are subject to long-term, finite contracts unlike the Company’s permits in the United States. Accordingly, there are no indefinite-lived intangible assets in the International segment.
Annual Impairment Test to Billboard Permits
The Company performs its annual impairment test on July 1 of each year. The impairment tests for indefinite-lived intangible assets consist of a comparison between the fair value of the indefinite-lived intangible asset at the market level with its carrying amount. If the carrying amount of the indefinite-lived intangible asset exceeds its fair value, an impairment loss is recognized equal to that excess. After an impairment loss is recognized, the adjusted carrying amount of the indefinite-lived asset is its new accounting basis. The fair value of the indefinite-lived asset is determined using the direct valuation method as prescribed in ASC 805-20-S99. Under the direct valuation method, the fair value of the indefinite-lived assets is calculated at the market level as prescribed by ASC 350-30-35. The Company engaged a third-party valuation firm, to assist it in the development of the assumptions and the Company’s determination of the fair value of its indefinite-lived intangible assets.
The application of the direct valuation method attempts to isolate the income that is properly attributable to the indefinite-lived intangible asset alone (that is, apart from tangible and identified intangible assets and goodwill). It is based upon modeling a hypothetical “greenfield” build-up to a “normalized” enterprise that, by design, lacks inherent goodwill and whose only other assets have essentially been paid for (or added) as part of the build-up process. The Company forecasts revenue, expenses and cash flows over a ten-year period for each of its markets in its application of the direct valuation method. The Company also calculates a “normalized” residual year which represents the perpetual cash flows of each market. The residual year cash flow was capitalized to arrive at the terminal value of the permits in each market.
Under the direct valuation method, it is assumed that rather than acquiring indefinite-lived intangible assets as part of a going concern business, the buyer hypothetically develops indefinite-lived intangible assets and builds a new operation with similar
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CLEAR CHANNEL OUTDOOR HOLDINGS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
attributes from scratch. Thus, the buyer incurs start-up costs during the build-up phase which are normally associated with going concern value. Initial capital costs are deducted from the discounted cash flow model which results in value that is directly attributable to the indefinite-lived intangible assets.
The 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 billboard permit within a market.
During 2017 and 2016, the Company recognized no impairment charges related to billboard permits.
Other Intangible Assets
Other intangible assets include definite-lived intangible assets and permanent easements. The Company’s definite-lived intangible assets consist primarily of transit and street furniture contracts, site-leases and other contractual rights, all of which are amortized over the shorter of either the respective lives of the agreements or over the period of time the assets are expected to contribute directly or indirectly to the Company’s future cash flows. Permanent easements are indefinite-lived intangible assets which include certain rights to use real property not owned by the Company. The Company periodically reviews the appropriateness of the amortization periods related to its definite-lived intangible assets. These assets are recorded at cost.
The following table presents the gross carrying amount and accumulated amortization for each major class of other intangible assets as of December 31, 2017 and 2016, respectively:
(In thousands) |
December 31, 2017 |
December 31, 2016 |
|||||||||||||
Gross Carrying Amount |
Accumulated Amortization |
Gross Carrying Amount |
Accumulated Amortization |
||||||||||||
Transit, street furniture and other outdoor
contractual rights
|
$ |
548,918 |
$ |
(440,284 |
) |
$ |
563,863 |
$ |
(426,752 |
) |
|||||
Permanent easements |
162,920 |
— |
159,782 |
— |
|||||||||||
Other |
4,626 |
(2,318 |
) |
4,536 |
(1,812 |
) |
|||||||||
Total |
$ |
716,464 |
$ |
(442,602 |
) |
$ |
728,181 |
$ |
(428,564 |
) |
Total amortization expense related to definite-lived intangible assets for the years ended December 31, 2017, 2016 and 2015 was $27.9 million, $37.8 million, and $49.2 million, respectively.
As acquisitions and dispositions occur in the future, amortization expense may vary. The following table presents the Company’s estimate of amortization expense for each of the five succeeding fiscal years for definite-lived intangible assets:
(In thousands) |
|||
2018 |
$ |
21,787 |
|
2019 |
14,165 |
||
2020 |
11,974 |
||
2021 |
11,864 |
||
2022 |
10,325 |
Annual Impairment Test to Goodwill
The Company performs its annual impairment test on July 1 of each year. Each of the Company’s advertising markets are components. The U.S. advertising markets are aggregated into a single reporting unit for purposes of the goodwill impairment test using the guidance in ASC 350-20-55. The Company also determined that within its Americas segment, each country in its International segment constitutes a separate reporting unit.
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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
The goodwill impairment test is a two-step process. The first step, used to screen for potential impairment, compares the fair value of the reporting unit with its carrying amount, including goodwill. If applicable, the second step, used to measure the amount of the impairment loss, compares the implied fair value of the reporting unit goodwill with the carrying amount of that goodwill.
Each of the Company’s reporting units is valued using a discounted cash flow model which requires estimating future cash flows expected to be generated from the reporting unit, discounted to their present value using a risk-adjusted discount rate. Terminal values were also estimated and discounted to their present value. Assessing the recoverability of goodwill requires the Company to make estimates and assumptions about sales, operating margins, growth rates and discount rates based on its budgets, business plans, economic projections, anticipated future cash flows and marketplace data. There are inherent uncertainties related to these factors and management’s judgment in applying these factors.
Based on declining future cash flows expected, the Company recognized goodwill impairment of $1.6 million for the year ended December 31, 2017 for one country in the International segment and $7.3 million for the year ended December 31, 2016 for one country in the International segment.
The following table presents the changes in the carrying amount of goodwill in each of the Company’s reportable segments:
(In thousands) |
Americas |
International |
Consolidated |
||||||||
Balance as of December 31, 2015 |
$ |
534,683 |
$ |
223,892 |
$ |
758,575 |
|||||
Impairment |
— |
(7,274 |
) |
(7,274 |
) |
||||||
Dispositions |
(6,934 |
) |
(30,718 |
) |
(37,652 |
) |
|||||
Foreign currency |
(1,998 |
) |
(5,051 |
) |
(7,049 |
) |
|||||
Assets held for sale |
(10,337 |
) |
— |
(10,337 |
) |
||||||
Balance as of December 31, 2016 |
$ |
515,414 |
$ |
180,849 |
$ |
696,263 |
|||||
Impairment |
— |
(1,591 |
) |
(1,591 |
) |
||||||
Acquisitions |
2,252 |
— |
2,252 |
||||||||
Dispositions |
— |
(1,817 |
) |
(1,817 |
) |
||||||
Foreign currency |
777 |
18,070 |
18,847 |
||||||||
Assets held for sale |
89 |
— |
89 |
||||||||
Balance as of December 31, 2017 |
$ |
518,532 |
$ |
195,511 |
$ |
714,043 |
The balance at December 31, 2015 is net of cumulative impairments of $2.6 billion and $326.6 million in the Company’s Americas and International segments, respectively.
NOTE 3 – ASSET RETIREMENT OBLIGATION
The Company’s asset retirement obligation is reported in “Other long-term liabilities” with the current portion recorded in “Accrued liabilities” and relates to its obligation to dismantle and remove outdoor advertising displays from leased land and to reclaim the site to its original condition upon the termination or non-renewal of a lease or contract. When the liability is recorded, the cost is capitalized as part of the related long-lived assets’ carrying value. Due to the high rate of lease renewals over a long period of time, the calculation assumes that all related assets will be removed at some period over the next 55 years. An estimate of third-party cost information is used with respect to the dismantling of the structures and the reclamation of the site. The interest rate used to calculate the present value of such costs over the retirement period is based on an estimated risk adjusted credit rate for the same period.
The following table presents the activity related to the Company’s asset retirement obligation:
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CLEAR CHANNEL OUTDOOR HOLDINGS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(In thousands) |
Years Ended December 31, |
||||||
2017 |
2016 |
||||||
Beginning balance |
$ |
39,451 |
$ |
45,125 |
|||
Adjustment due to changes in estimates |
2,166 |
(5,431 |
) |
||||
Accretion of liability |
3,373 |
4,863 |
|||||
Liabilities settled |
(2,712 |
) |
(4,104 |
) |
|||
Foreign Currency |
2,501 |
(1,002 |
) |
||||
Ending balance |
$ |
44,779 |
$ |
39,451 |
NOTE 4 – LONG-TERM DEBT
Long-term debt at December 31, 2017 and 2016 consisted of the following:
(In thousands) |
December 31, |
December 31, |
|||||
2017 |
2016 |
||||||
Clear Channel Worldwide Holdings Notes |
$ |
4,925,000 |
$ |
4,925,000 |
|||
Clear Channel International B.V. Senior Notes |
375,000 |
225,000 |
|||||
Senior revolving credit facility due 2018 |
— |
— |
|||||
Other debt |
2,393 |
14,798 |
|||||
Original issue discount |
(241 |
) |
(6,738 |
) |
|||
Long-term debt fees |
(35,426 |
) |
(41,069 |
) |
|||
Total debt |
$ |
5,266,726 |
$ |
5,116,991 |
|||
Less: current portion |
573 |
6,971 |
|||||
Total long-term debt |
$ |
5,266,153 |
$ |
5,110,020 |
(1) |
The Senior revolving credit facility provides for borrowings up to $75.0 million (the revolving credit commitment). As of December 31, 2017, we had $71.2 million of letters of credit outstanding, and $3.8 million of availability, under the senior revolving credit facility.
|
The aggregate market value of the Company’s debt based on market prices for which quotes were available was approximately $5.3 billion and $5.2 billion at December 31, 2017 and December 31, 2016, respectively. Under the fair value hierarchy established by ASC 820-10-35, the market value of the Company’s debt is classified as Level 1.
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CLEAR CHANNEL OUTDOOR HOLDINGS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Senior Notes
As of December 31, 2017 and 2016, the Company had Senior Notes consisting of:
(In thousands) |
Maturity Date |
Interest Rate |
Interest Payment Terms |
12/31/2017 |
12/31/2016 |
||||||||
CCWH Senior Notes: |
|||||||||||||
6.5% Series A Senior Notes Due 2022 |
11/15/2022 |
6.5% |
Payable to the trustee weekly in arrears and to noteholders on May 15 and November 15 of each year |
$ |
735,750 |
$ |
735,750 |
||||||
6.5% Series B Senior Notes Due 2022 |
11/15/2022 |
6.5% |
Payable to the trustee weekly in arrears and to noteholders on May 15 and November 15 of each year |
1,989,250 |
1,989,250 |
||||||||
CCWH Senior Subordinated Notes: |
|||||||||||||
7.625% Series A Senior Notes Due 2020 |
3/15/2020 |
7.625% |
Payable to the trustee weekly in arrears and to noteholders on March 15 and September 15 of each year |
275,000 |
275,000 |
||||||||
7.625% Series B Senior Notes Due 2020 |
3/15/2020 |
7.625% |
Payable to the trustee weekly in arrears and to noteholders on March 15 and September 15 of each year |
1,925,000 |
1,925,000 |
||||||||
Total CCWH Notes |
$ |
4,925,000 |
$ |
4,925,000 |
|||||||||
Clear Channel International B.V. Senior Notes: |
|||||||||||||
8.75% Senior Notes Due 2020 |
12/15/2020 |
8.750% |
Payable semi-annually in arrears on June 15 and December 15 of each year |
375,000 |
225,000 |
||||||||
Total Senior Notes |
$ |
5,300,000 |
$ |
5,150,000 |
Guarantees and Security
The CCWH Senior Notes are guaranteed by CCOH, Clear Channel Outdoor, Inc. (“CCOI”) and certain of CCOH’s direct and indirect subsidiaries. The CCWH Senior Subordinated Notes are fully and unconditionally guaranteed, jointly and severally, on a senior subordinated basis by CCOH, CCOI and certain of CCOH’s other domestic subsidiaries and rank junior to each guarantor’s existing and future senior debt, including the CCWH Senior Notes, equally with each guarantor’s existing and future senior subordinated debt and ahead of each guarantor’s existing and future debt that expressly provides that it is subordinated to the guarantees of the CCWH Senior Subordinated Notes.
The CCWH Senior Notes are senior obligations that rank pari passu in right of payment to all unsubordinated indebtedness of CCWH and the guarantees of the CCWH Senior Notes rank pari passu in right of payment to all unsubordinated indebtedness of the guarantors. The CCWH Senior Subordinated Notes are unsecured senior subordinated obligations that rank junior to all of CCWH’s existing and future senior debt, including the CCWH Senior Notes, equally with any of CCWH’s existing and future senior subordinated debt and ahead of all of CCWH’s existing and future debt that expressly provides that it is subordinated to the CCWH Senior Subordinated Notes.
Redemptions
CCWH may redeem the Senior Notes and Senior Subordinated Notes at its option, in whole or part, at redemption prices set forth in the indentures plus accrued and unpaid interest to the redemption date and plus an applicable premium.
Certain Covenants
The indentures governing the Senior Notes and Senior Subordinated Notes contain covenants that limit CCOH and its restricted subsidiaries ability to, among other things:
• |
incur or guarantee additional debt or issue certain preferred stock; |
• |
make certain investments; |
• |
in case of the Senior Notes, create liens on its restricted subsidiaries’ assets to secure such debt; |
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CLEAR CHANNEL OUTDOOR HOLDINGS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
• |
create restrictions on the payment of dividends or other amounts to it from its restricted subsidiaries that are not guarantors of the notes; |
• |
enter into certain transactions with affiliates; |
• |
merge or consolidate with another person, or sell or otherwise dispose of all or substantially all of its assets; |
• |
sell certain assets, including capital stock of its subsidiaries; and |
• |
in the case of the Series B CCWH Senior Notes and the Series B CCWH Senior Subordinated Notes, pay dividends, redeem or repurchase capital stock or make other restricted payments. |
Clear Channel International B.V. Senior Notes
The CCIBV Senior Notes are guaranteed by certain of the International outdoor business’s existing and future subsidiaries. The Company does not guarantee or otherwise assume any liability for the CCIBV Senior Notes. The notes are senior unsecured obligations that rank pari passu in right of payment to all unsubordinated indebtedness of Clear Channel International B.V., and the guarantees of the notes are senior unsecured obligations that rank pari passu in right of payment to all unsubordinated indebtedness of the guarantors of the notes.
On August 14, 2017, CCIBV issued $150.0 million in aggregate principal amount of 8.75% Senior Notes due 2020 (the “New CCIBV Notes”). The New CCIBV Notes were issued as additional notes under the indenture governing CCIBV’s existing 8.75% Senior Notes due 2020 and were issued at a premium, resulting in $156.0 million in proceeds. The New CCIBV Notes mature on December 15, 2020 and bear interest at a rate of 8.75% per annum, payable semi-annually in arrears on June 15 and December 15 of each year.
Redemptions
Clear Channel International B.V. may redeem the notes at its option, in whole or part, at the redemption prices set forth in the indenture plus accrued and unpaid interest to the redemption date.
Certain Covenants
The indenture governing the CCIBV Senior Notes contains covenants that limit Clear Channel International B.V.’s ability and the ability of its restricted subsidiaries to, among other things:
• |
pay dividends, redeem stock or make other distributions or investments; |
• |
incur additional debt or issue certain preferred stock; |
• |
transfer or sell assets; |
• |
create liens on assets; |
• |
engage in certain transactions with affiliates; |
• |
create restrictions on dividends or other payments by the restricted subsidiaries; and |
• |
merge, consolidate or sell substantially all of Clear Channel International B.V.’s assets. |
Senior Revolving Credit Facility Due 2018
During the third quarter of 2013, the Company entered into a five-year senior secured revolving credit facility with an aggregate principal amount of $75.0 million. The revolving credit facility may be used for working capital needs, to issue letters of credit and for other general corporate purposes. As of December 31, 2017, there were no amounts outstanding under the revolving credit facility, and $71.2 million of letters of credit under the revolving credit facility which reduce availability under the facility. The revolving credit facility contains a springing covenant that requires us to maintain a secured leverage ratio (as defined in the revolving credit facility) of not more than 1.5:1 that is tested at the end of a quarter if availability under the facility is less than 75% of the aggregate commitments under the facility. The Company was in compliance with the secured leverage ratio covenant as of December 31, 2017.
Other Debt
Other debt includes various borrowings and capital leases utilized for general operating purposes. Included in the $2.4 million balance at December 31, 2017 is $0.6 million that matures in less than one year.
Future Maturities of Long-term Debt
Future maturities of long-term debt as of December 31, 2017 are as follows:
75
CLEAR CHANNEL OUTDOOR HOLDINGS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(in thousands) |
|||
2018 |
$ |
533 |
|
2019 |
168 |
||
2020 |
2,575,143 |
||
2021 |
169 |
||
2022 |
2,725,194 |
||
Thereafter |
1,186 |
||
Total (1)
|
$ |
5,302,393 |
(1) |
Excludes original issue discount and long-term debt fees of $0.2 million and $35.5 million, respectively, which are amortized through interest expense over the life of the underlying debt obligations.
|
Guarantees
As of December 31, 2017, the Company had $95.9 million in letters of credit outstanding, a portion of which were supported by $25.4 million of cash collateral. Additionally, as of December 31, 2017, iHeartCommunications had outstanding commercial standby letters of credit and surety bonds of $1.2 million and $55.4 million, respectively, held on behalf of the Company. These letters of credit and surety bonds relate to various operational matters, including insurance, bid and performance bonds, as well as other items.
In addition, as of December 31, 2017, the Company had outstanding bank guarantees of $37.3 million related to international subsidiaries, a portion of which were supported by $17.6 million of cash collateral.
NOTE 5 – COMMITMENTS AND CONTINGENCIES
Commitments and Contingencies
The Company accounts for its rentals that include renewal options, annual rent escalation clauses, minimum franchise payments and maintenance related to displays under the guidance in ASC 840.
The Company considers its non-cancelable contracts that enable it to display advertising on buses, bus shelters, trains, etc. to be leases in accordance with the guidance in ASC 840-10. These contracts may contain minimum annual franchise payments which generally escalate each year. The Company accounts for these minimum franchise payments on a straight-line basis. If the rental increases are not scheduled in the lease, such as an increase based on subsequent changes in the index or rate, those rents are considered contingent rentals and are recorded as expense when accruable. Other contracts may contain a variable rent component based on revenue. The Company accounts for these variable components as contingent rentals and records these payments as expense when accruable. No single contract or lease is material to the Company’s operations.
The Company accounts for annual rent escalation clauses included in the lease term on a straight-line basis under the guidance in ASC 840-20-25. The Company considers renewal periods in determining its lease terms if at inception of the lease there is reasonable assurance the lease will be renewed. Expenditures for maintenance are charged to operations as incurred, whereas expenditures for renewal and betterments are capitalized.
The Company leases office space, equipment and the majority of the land occupied by its advertising structures under long-term operating leases. The Company accounts for these leases in accordance with the policies described above.
The Company’s contracts with municipal bodies or private companies relating to street furniture, billboards, transit and malls generally require the Company to build bus stops, kiosks and other public amenities or advertising structures during the term of the contract. The Company owns these structures and is generally allowed to advertise on them for the remaining term of the contract. Once the Company has built the structure, the cost is capitalized and expensed over the shorter of the economic life of the asset or the remaining life of the contract.
In addition, the Company has commitments relating to required purchases of property, plant, and equipment under certain street furniture contracts. Certain of the Company’s contracts contain penalties for not fulfilling its commitments related to its obligations to build bus stops, kiosks and other public amenities or advertising structures. Historically, any such penalties have not materially impacted the Company’s financial position or results of operations.
76
CLEAR CHANNEL OUTDOOR HOLDINGS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
As of December 31, 2017, the Company’s future minimum rental commitments under non-cancelable operating lease agreements with terms in excess of one year, minimum payments under non-cancelable contracts in excess of one year, capital expenditure commitments and employment contracts consist of the following:
(In thousands) |
Capital |
||||||||||
Non-Cancelable |
Non-Cancelable |
Expenditure |
|||||||||
Operating Lease |
Contracts |
Commitments |
|||||||||
2018 |
$ |
359,175 |
$ |
393,980 |
$ |
38,444 |
|||||
2019 |
318,213 |
343,578 |
7,928 |
||||||||
2020 |
290,081 |
291,036 |
2,771 |
||||||||
2021 |
253,979 |
255,356 |
4,499 |
||||||||
2022 |
211,110 |
162,062 |
4,591 |
||||||||
Thereafter |
1,169,871 |
393,599 |
9,877 |
||||||||
Total |
$ |
2,602,429 |
$ |
1,839,611 |
$ |
68,110 |
Rent expense charged to operations for the years ended December 31, 2017, 2016 and 2015 was $954.3 million, $947.4 million and $978.6 million, respectively.
In various areas in which the Company operates, outdoor advertising is the object of restrictive and, in some cases, prohibitive zoning and other regulatory provisions, either enacted or proposed. The impact to the Company of loss of displays due to governmental action has been somewhat mitigated by Federal and state laws mandating compensation for such loss and constitutional restraints.
The Company and its subsidiaries 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 the Company’s 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 the Company’s financial condition or results of operations.
Although the Company is involved in a variety of legal proceedings in the ordinary course of business, a large portion of its litigation arises in the following contexts: commercial disputes; misappropriation of likeness and right of publicity claims; employment and benefits related claims; governmental fines; intellectual property claims; and tax disputes.
Stockholder Litigation
On May 9, 2016, a stockholder of the Company filed a derivative lawsuit in the Court of Chancery of the State of Delaware, captioned GAMCO Asset Management Inc. v. iHeartMedia Inc. et al., C.A. No. 12312-VCS. The complaint names 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 “Sponsor Defendants”), iHeartMedia’s private equity sponsors and majority owners, and the members of the Company’s board of directors. The Company also is named as a nominal defendant. The complaint alleges that the Company has 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 Sponsor Defendants to the detriment of the Company and its minority stockholders. Specifically, the complaint alleges that the defendants have breached their fiduciary duties by causing the Company to: (i) continue to loan cash to iHeartCommunications under the intercompany note at below-market rates; (ii) abandon its growth and acquisition strategies in favor of transactions that would provide cash to iHeartMedia and iHeartCommunications; (iii) issue new debt in the CCIBV note offering (the “CCIBV Note Offering”) to provide cash to iHeartMedia and iHeartCommunications through a dividend; and (iv) effect the sales of certain outdoor markets in the U.S. (the “Outdoor Asset Sales”) allegedly to provide cash to iHeartMedia and iHeartCommunications through a dividend. The complaint also alleges that iHeartMedia, iHeartCommunications and the Sponsor Defendants aided and abetted the directors’
77
CLEAR CHANNEL OUTDOOR HOLDINGS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
breaches of their fiduciary duties. The complaint further alleges that iHeartMedia, iHeartCommunications and the Sponsor Defendants were unjustly enriched as a result of these transactions and that these transactions constituted a waste of corporate assets for which the defendants are liable to the Company. The plaintiff is seeking, among other things, a ruling that the defendants breached their fiduciary duties to the Company and that iHeartMedia, iHeartCommunications and the 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 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 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 in the Court of Chancery of the State of Delaware, captioned Norfolk County Retirement System, v. iHeartMedia, Inc., et al., C.A. No. 2017-0930-JRS. The complaint names as defendants iHeartMedia, iHeartCommunications, the 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. Specifically, the complaint alleges that (i) iHeartMedia and Sponsor defendants breached their fiduciary duties by exploiting their position of control to require the Company to enter the Third Amendment on terms unfair to the Company; (ii) the Company Board breached their duty of loyalty by approving the Third Amendment and elevating the interests of iHeartMedia, iHeartCommunications and the Sponsor Defendants over the interests of the Company and its minority unaffiliated stockholders; and (iii) the terms of the Third Amendment could not have been agreed to in good faith and represent a waste of corporate assets by the Company Board. The complaint further alleges that iHeartMedia, iHeartCommunications and the Sponsor defendants were unjustly enriched as a result of the unfairly favorable terms of the Third Amendment. The plaintiff is seeking, 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, iHM filed a Notice of Suggestion of Pendency of Bankruptcy and Automatic Stay of Proceedings.
China Investigation
Several employees of Clear Media Limited, an indirect, non-wholly-owned subsidiary of the Company whose ordinary shares are listed on, but are currently suspended from trading on, the Hong Kong Stock Exchange, are subject to an ongoing police investigation in China for misappropriation of funds. Clear Media Limited has conducted additional procedures and processes, including a special investigation by forensic accountants and an external law firm appointed by Clear Media Limited’s board of directors and approved by the Company’s Audit Committee, into the misappropriation of funds. During the course of the special investigation, it was discovered that three bank accounts were opened in the name of Clear Media Limited entities, which were not authorized, and certain transactions were recorded therein. The opening of the unauthorized bank accounts has also been referred to the police in China for investigation. The misappropriation of funds resulted in discrepancies between actual cash balances and cash amounts included in the Company’s accounting records as of December 31, 2016 and 2015. Included in Selling, general and administrative expenses and Interest expense is $9.6 million and $1.4 million, respectively, recorded in the fourth quarter of 2017 to correct for the accounting errors resulting from the discrepancies. Such accounting errors are not considered to be material to the current year or prior year financial statements.
The Company advised both the United States Securities and Exchange Commission and the United States Department of Justice of the investigation at Clear Media Limited, and the Company intends to cooperate with both agencies in connection with any investigation that may be conducted in this matter.
78
CLEAR CHANNEL OUTDOOR HOLDINGS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
The police investigation is on-going, and the Company is not aware of any litigation, claim or assessment pending against the Company related to the matters described above. 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 investigations are not material to the Company's consolidated financial statements. In 2017, Clear Media Limited accounted for 9.8% of the Company’s net revenue and 9.9% of its consolidated total assets.
The investigation could implicate the books and records, internal controls and anti-bribery provisions of the U.S. Foreign Corrupt Practices Act, which statute and regulations provide 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 Company in connection with this matter. The nature and amount of any monetary penalty or other sanctions cannot reasonably be estimated at this time.
NOTE 6 — RELATED PARTY TRANSACTIONS
The Company records net amounts due from or to iHeartCommunications as “Due from/to iHeartCommunications” on the consolidated balance sheets, net of allowance for credit losses. The accounts represent the revolving promissory note issued by the Company to iHeartCommunications and the revolving promissory note issued by iHeartCommunications to the Company in the face amount of $1.0 billion, or if more or less than such amount, the aggregate unpaid principal amount of all advances. The accounts accrue interest pursuant to the terms of the promissory notes and are generally payable on demand or when they mature on May 15, 2019.
Included in the accounts are the net activities resulting from day-to-day cash management services provided by iHeartCommunications. As a part of these services, the Company maintains collection bank accounts swept daily into accounts of iHeartCommunications (after satisfying the Company's controlled disbursement accounts and the funding requirements of the Trustee Accounts under the CCWH Senior Notes and the CCWH Subordinated Notes). The Company’s claim in relation to cash transferred from its concentration account is on an unsecured basis and is limited to the balance of the “Due from iHeartCommunications” account.
As of December 31, 2017 and December 31, 2016, the asset recorded in “Due from iHeartCommunications” on the consolidated balance sheet was $212.0 million and $885.7 million, respectively. On March 14, 2018, iHeartMedia, iHeartCommunications and certain of iHeartMedia's direct and indirect domestic subsidiaries, not including the Company or any of its subsidiaries (collectively, the "Debtors"), filed voluntary petitions for relief (the "iHeart Chapter 11 Cases") under Chapter 11 of the United States Bankruptcy Code, in the United States Bankruptcy Court for the Southern District of Texas, Houston Division (the "Bankruptcy Court"). As an unsecured creditor of iHeartCommunications, the Company does not expect that the Company will be able to recover all of the amounts owed under the Due from iHeartCommunications Note upon the implementation of any plan of reorganization that is ultimately accepted by the requisite creditors and approved by the Bankruptcy Court. As a result, the Company recognized a loss of $855.6 million on the Due from iHeartCommunications Note during the fourth quarter of 2017 to reflect the estimated recoverable amount of the note as of December 31, 2017, based on management's best estimate of the cash settlement amount. The loss recognized reduced the amount outstanding of $1,067.6 million to $212.0 million.
If the Company does not recognize the expected recovery under the Due from iHeartCommunications Note, or cannot obtain that amount on a timely basis, the Company could experience a liquidity shortfall. In addition, any repayments that the Company received on the Due from iHeartCommunications Note during the one-year preference period prior to the filing of the iHeart Chapter 11 Cases may potentially be avoidable as a preference and subject to recovery by the iHeartCommunications bankruptcy estate, which could further exacerbate any liquidity shortfall.
On November 29, 2017, the “Due from iHeartCommunications” note was amended to extend its maturity from December 15, 2017 to May 15, 2019. The note's interest rate was also amended and increased from 6.5% to 9.3%. Any balance above $1.0 billion continues to accrue interest capped at a rate of 20.0%, while the balance up to $1.0 billion will accrue interest at a rate of 9.3%. The net interest income recognized in the years ended December 31, 2017, 2016 and 2015 was $68.9 million, $50.3 million, and $61.4 million, respectively.
The Company provides advertising space on its billboards for radio stations owned by iHeartCommunications. For the years ended December 31, 2017, 2016 and 2015, the Company recorded $6.9 million, $3.5 million, and $2.7 million, respectively, in revenue for these advertisements.
Under the Corporate Services Agreement between iHeartCommunications and the Company, iHeartCommunications provides management services to the Company, which include, among other things: (i) treasury, payroll and other financial related services;
79
CLEAR CHANNEL OUTDOOR HOLDINGS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(ii) certain executive officer services; (iii) human resources and employee benefits services; (iv) legal and related services; (v) information systems, network and related services; (vi) investment services; (vii) procurement and sourcing support services; and (viii) other general corporate services. These services are charged to the Company based on actual direct costs incurred or allocated by iHeartCommunications based on headcount, revenue or other factors on a pro rata basis. For the years ended December 31, 2017, 2016 and 2015, the Company recorded $68.7 million, $36.0 million, and $30.1 million, respectively, as a component of corporate expenses for these services.
In February 2017, the Company and its indirect parent company, iHeartMedia, Inc., entered into an agreement related to the potential purchase at fair value of the Clear Channel registered trademarks and domain names. The agreements provide that CCOH will pay a license fee to iHeartMedia, Inc. in 2017 based on revenues of entities using the Clear Channel name, pursuant to the Amended and Restated License Agreement, dated November 10, 2005, by and between iHM Identity, Inc. and Outdoor Management Services, Inc. Included within the management services expense recognized in the year ended December 31, 2017 is an expense related to this license of $36.8 million.
Pursuant to the Tax Matters Agreement between iHeartCommunications and the Company, the operations of the Company are included in a consolidated federal income tax return filed by iHeartCommunications. The Company’s provision for income taxes has been computed on the basis that the Company files separate consolidated federal income tax returns with its subsidiaries. Tax payments are made to iHeartCommunications on the basis of the Company’s separate taxable income. Tax benefits recognized on the Company’s employee stock option exercises are retained by the Company.
The Company computes its deferred income tax provision using the liability method in accordance with the provisions of ASC 740-10, as if the Company was a separate taxpayer. Deferred tax assets and liabilities are determined based on differences between financial reporting basis and tax basis of assets and liabilities and are measured using the enacted tax rates expected to apply to taxable income in the periods in which the deferred tax asset or liability is expected to be realized or settled. Deferred tax assets are reduced by valuation allowances if the Company believes it is more likely than not some portion or all of the asset will not be realized.
Pursuant to the Employee Matters Agreement, the Company’s employees participate in iHeartCommunications’ employee benefit plans, including employee medical insurance and a 401(k) retirement benefit plan. For the years ended December 31, 2017, 2016 and 2015, the Company recorded $9.5 million, $9.4 million and $10.7 million, respectively, as a component of selling, general and administrative expenses for these services.
Stock Purchases
On August 9, 2010, iHeartCommunications announced that its board of directors approved a stock purchase program under which iHeartCommunications or its subsidiaries may purchase up to an aggregate of $100 million of the Company’s Class A common stock and/or the Class A common stock of iHeartMedia, Inc. (“iHeartMedia”). The stock purchase program did not have a fixed expiration date and could be modified, suspended or terminated at any time at iHeartCommunications’ discretion. As of December 31, 2014, an aggregate $34.2 million was available under this program. In January 2015, CC Finco, LLC (“CC Finco”), an indirect wholly-owned subsidiary of iHeartCommunications, purchased an additional 2,000,000 shares of the Company’s Class A common stock for $20.4 million. On April 2, 2015, CC Finco purchased an additional 2,172,946 shares of the Company’s Class A common stock for $22.2 million, increasing iHeartCommunications’ collective holdings to represent approximately 90% of the outstanding shares of the Company’s common stock on a fully-diluted basis, assuming the conversion of all of the Company’s Class B common stock into Class A common stock. As a result of this purchase, the stock purchase program concluded. The purchase of shares in excess of the amount available under the stock purchase program was separately approved by the iHeartCommunications’ board of directors.
Dividends
On February 23, 2017, the Company paid a special cash dividend to our stockholders of $282.5 million, using proceeds from the sales of certain non-strategic U.S. markets and of our business in Australia. iHeartCommunications received 89.9%, or approximately $254.0 million, with the remaining 10.1%, or approximately $28.5 million, paid to our public stockholders. The payment of these special dividends reduces the amount of cash available to us for future working capital, capital expenditure, debt service and other funding requirements.
On October 5, 2017, the Company paid a special cash dividend to Class A and Class B stockholders of record at the closing of business on October 2, 2017, in an aggregate amount equal to $25.0 million. On October 31, 2017, the board of directors of the
80
CLEAR CHANNEL OUTDOOR HOLDINGS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Company paid a special cash dividend to Class A and Class B stockholders of record at the closing of business on October 26, 2017, in an aggregate amount equal to $25.0 million.
On January 24, 2018, the Company paid a special cash dividend to Class A and Class B stockholders of record at the closing of business on January 19, 2018, in an aggregate amount equal to $30.0 million.
NOTE 7 — INCOME TAXES
The operations of the Company are included in a consolidated U.S. federal income tax return filed by iHeartMedia. However, for financial reporting purposes, the Company’s provision for income taxes has been computed on the basis that the Company files separate consolidated U.S. federal income tax returns with its subsidiaries.
On December 22, 2017, the U.S. government enacted comprehensive income tax legislation, referred to as The Tax Cuts and Jobs Act (the Tax Act). The Tax Act reduces the U.S. federal corporate tax rate from 35% percent to 21% effective January 1, 2018, percent, requires companies to pay a one-time transition tax on earnings of certain foreign subsidiaries that were previously tax deferred and creates new U.S taxes on certain foreign earnings. To account for the reduction in the U.S. federal corporate income tax rate, the Company remeasured its deferred tax assets and liabilities based on the rates at which they are expected to reverse in the future, generally 21%, which resulted in recording of a provisional deferred tax benefit of $228.0 million during 2017. To determine the impact from the one-time transition tax on accumulated foreign earnings, we analyzed our cumulative foreign earnings and profits in accordance with the rules provided in the Tax Act. Based upon our preliminary analysis which is not yet complete, we have not recorded income tax expense in the current period for the one-time transition tax due to the net accumulated deficit in our foreign earnings and profits.
The provisions in the Tax Act are broad and complex. The Company has not yet completed its analysis of the income tax effects of the Tax Act as of December 31, 2017, but has made reasonable estimates of those effects on existing deferred income tax balances and the one-time transition tax. The final financial statement impact of the Tax Act may differ from the above estimates, possibly materially, due to, among other things, changes in interpretations of the Tax Act, any legislative action to address questions that arise because of the Tax Act, and changes in accounting standards for income taxes or related interpretations in response to the Tax Act, or any updates to estimates the Company has utilized to calculate the provisional impacts. The Securities and Exchange Commission (SEC) has issued rules that allow for a measurement period of up to one year after the enactment date of the Tax Act to finalize the recording of the related income tax impacts.
Significant components of the provision for income tax benefit (expense) are as follows:
(In thousands) |
Years Ended December 31, |
||||||||||
2017 |
2016 |
2015 |
|||||||||
Current - federal |
$ |
(87 |
) |
$ |
— |
$ |
(270 |
) |
|||
Current - foreign |
(29,430 |
) |
(43,611 |
) |
(45,322 |
) |
|||||
Current - state |
(1,377 |
) |
(1,731 |
) |
(1,046 |
) |
|||||
Total current expense |
(30,894 |
) |
(45,342 |
) |
(46,638 |
) |
|||||
Deferred - federal |
306,078 |
(89,049 |
) |
(8,025 |
) |
||||||
Deferred - foreign |
(2,521 |
) |
56,759 |
5,282 |
|||||||
Deferred - state |
7,555 |
976 |
(562 |
) |
|||||||
Total deferred benefit (expense) |
311,112 |
(31,314 |
) |
(3,305 |
) |
||||||
Income tax benefit (expense) |
$ |
280,218 |
$ |
(76,656 |
) |
$ |
(49,943 |
) |
For the year ended December 31, 2017 the Company recorded current tax expense of $30.9 million as compared to $45.3 million for the 2016 year. The current tax expense for 2017 was primarily related to foreign income taxes on operating profits generated in certain jurisdictions during the period.
For the year ended December 31, 2016 the Company recorded current tax expense of $45.3 million as compared to $46.6 million for the 2015 year. The current tax expense for 2016 was primarily related to foreign income taxes on operating profits generated in certain jurisdictions during the period.
81
CLEAR CHANNEL OUTDOOR HOLDINGS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Deferred tax benefit of $311.1 million was recorded for 2017 compared with a deferred tax expense of $31.3 million for 2016. The change in deferred taxes is primarily due to the provisional deferred tax benefit of $228.0 million recorded in 2017 related to the reduction of the U.S. federal corporate tax rate to 21% in connection with the enactment of the Tax Act mentioned above. The change in foreign deferred taxes was the result of foreign deferred tax benefit recorded in 2016 for the release of valuation allowance against certain net operating loss carryforwards in France.
Deferred tax expense of $31.3 million was recorded for 2016 compared with a deferred tax expense of $3.3 million for 2015. The change in deferred tax expense is primarily due to the utilization of net operating loss carryforwards in the U.S. which offset taxable income from the gains on the sales of nine non-strategic U.S. outdoor markets during the first quarter of 2016 and the sale of the Company's Australia business during the fourth quarter of 2016. The 2016 federal deferred tax expense was partially offset by foreign deferred tax benefit attributable to the release of $43.3 million of valuation allowance against certain net operating losses in France.
Significant components of the Company’s deferred tax liabilities and assets as of December 31, 2017 and 2016 are as follows:
(In thousands) |
December 31, |
December 31, |
|||||
2017 |
2016 |
||||||
Deferred tax liabilities: |
|||||||
Intangibles and fixed assets |
$ |
504,290 |
$ |
801,442 |
|||
Equity in earnings |
2,106 |
2,816 |
|||||
Other |
14,058 |
16,971 |
|||||
Total deferred tax liabilities |
520,454 |
821,229 |
|||||
Deferred tax assets: |
|||||||
Accrued expenses |
16,927 |
19,458 |
|||||
Net operating loss carryforwards |
229,398 |
257,613 |
|||||
Bad debt reserves |
3,656 |
3,364 |
|||||
Due from iHeartCommunications |
202,461 |
— |
|||||
Other |
24,124 |
38,128 |
|||||
Total deferred tax assets |
476,566 |
318,563 |
|||||
Less: Valuation allowance |
274,219 |
136,039 |
|||||
Net deferred tax assets |
202,347 |
182,524 |
|||||
Net deferred tax liabilities |
$ |
318,107 |
$ |
638,705 |
The deferred tax liabilities associated with intangibles and fixed assets primarily relates to the difference in book and tax basis of acquired billboard permits and tax deductible goodwill created from the Company’s various stock acquisitions. In accordance with ASC 350-10, Intangibles—Goodwill and Other, the Company does not amortize its book basis in permits. As a result, this deferred tax liability will not reverse over time unless the Company recognizes future impairment charges related to its permits and tax deductible goodwill or sells its permits. As the Company continues to amortize its tax basis in its permits and tax deductible goodwill, the deferred tax liability will increase over time. The Company’s net foreign deferred tax assets for the period ending December 31, 2017 and 2016 were $57.0 million and $50.0 million, respectively.
At December 31, 2017, the Company had recorded deferred tax assets for net operating loss carryforwards (tax effected) for federal and state income tax purposes of $84.5 million, which expire in various amounts through 2037. In addition, the Company recorded a deferred tax asset of $202.5 million related to the impairment loss on the Due from iHeartCommunications Note. The Company expects to realize the benefits of a portion of its deferred tax assets based upon expected future taxable income from deferred tax liabilities that reverse in the relevant federal and state jurisdictions and carryforward periods. As of December 31, 2017, the Company had recorded a valuation allowance of $149.2 million against a portion of these deferred tax assets which it does not expect to realize. The Company recorded a net decrease of $11.0 million in valuation allowances against its foreign deferred tax assets during the year ended December 31, 2017. At December 31, 2017, the Company had recorded $144.9 million (tax-effected) of deferred tax assets for foreign net operating losses, which are offset in part by an associated valuation allowance of $94.2 million. The remaining deferred tax valuation allowance of $30.8 million offsets other foreign deferred tax assets that are not expected to be realized. Realization of these foreign deferred tax assets is dependent upon the Company’s ability to generate future taxable
82
CLEAR CHANNEL OUTDOOR HOLDINGS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
income in appropriate tax jurisdictions to obtain benefits. Due to the Company’s evaluation of all available evidence, including significant negative evidence of cumulative losses in these jurisdictions, the Company continues to record valuation allowances on the foreign deferred tax assets that are not expected to be realized. The Company expects to realize its remaining gross deferred tax assets based upon its assessment of deferred tax liabilities that will reverse in the same carryforward period and jurisdiction and are of the same character as the net operating loss carryforwards and temporary differences that give rise to the deferred tax assets. Any deferred tax liabilities associated with billboard permits and tax deductible goodwill intangible assets are not relied upon as a source of future taxable income, as these intangible assets have an indefinite life.
At December 31, 2017 and 2016, net deferred tax assets include a deferred tax asset of $9.6 million and $14.9 million, respectively, relating to stock-based compensation expense under ASC 718-10, Compensation—Stock Compensation. Full realization of this deferred tax asset requires stock options to be exercised at a price equaling or exceeding the sum of the grant price plus the fair value of the option at the grant date and restricted stock to vest at a price equaling or exceeding the fair market value at the grant date. Accordingly, there can be no assurance that the stock price of the Company’s Common Stock will rise to levels sufficient to realize the entire deferred tax benefit currently reflected in our balance sheet. See Note 8 for additional discussion of ASC 718-10.
Income (loss) before income taxes:
(In thousands) |
Years Ended December 31, |
||||||||||
2017 |
2016 |
2015 |
|||||||||
US |
$ |
(942,297 |
) |
$ |
182,258 |
$ |
(69,819 |
) |
|||
Foreign |
34,562 |
58,797 |
48,545 |
||||||||
Total income (loss) before income taxes |
$ |
(907,735 |
) |
$ |
241,055 |
$ |
(21,274 |
) |
The reconciliation of income tax computed at the U.S. federal statutory rates to income tax benefit is:
(In thousands) |
Years Ended December 31, |
|||||||||||||||||||
2017 |
2016 |
2015 |
||||||||||||||||||
Amount |
Percent |
Amount |
Percent |
Amount |
Percent |
|||||||||||||||
Income tax benefit (expense) at statutory rates |
$ |
317,707 |
35.0 |
% |
$ |
(84,369 |
) |
35.0 |
% |
$ |
7,446 |
35.0 |
% |
|||||||
State income taxes, net of federal tax effect |
23,378 |
2.6 |
% |
(4,602 |
) |
1.9 |
% |
2,238 |
10.5 |
% |
||||||||||
Foreign income taxes |
(19,866 |
) |
(2.2 |
)% |
(20,725 |
) |
8.6 |
% |
(23,062 |
) |
(108.4 |
)% |
||||||||
Nondeductible items |
(646 |
) |
(0.1 |
)% |
(687 |
) |
0.3 |
% |
(754 |
) |
(3.5 |
)% |
||||||||
Changes in valuation allowance and other estimates |
(148,389 |
) |
(16.2 |
)% |
34,597 |
(14.4 |
)% |
(33,684 |
) |
(158.3 |
)% |
|||||||||
U.S. tax reform |
228,010 |
25.1 |
% |
— |
— |
% |
— |
— |
% |
|||||||||||
U.S. rate differential on impairment of related party note |
(115,755 |
) |
(12.8 |
)% |
— |
— |
% |
— |
— |
% |
||||||||||
Other, net |
$ |
(4,221 |
) |
(0.5 |
)% |
$ |
(870 |
) |
0.4 |
% |
$ |
(2,127 |
) |
(10.0 |
)% |
|||||
Income tax benefit (expense) |
$ |
280,218 |
30.9 |
% |
$ |
(76,656 |
) |
31.8 |
% |
$ |
(49,943 |
) |
(234.7 |
)% |
During 2017, the Company recorded tax benefit of approximately $280.2 million. The 2017 income tax benefit and 30.9% effective tax rate were impacted primarily by the $228.0 million provisional deferred tax benefits recorded in connection with the reduction in the U.S. federal corporate tax rate to 21% upon enactment of the Tax Act described above. Additionally, subsequent to the enactment of the Tax Act and as further described in Note 6 above, the Company recorded an impairment loss of $855.6 million on the Due from iHeartCommunications Note. In connection with this impairment loss, the Company recorded a deferred tax asset at the newly enacted U.S. federal corporate tax rate. As this deferred tax asset was recorded subsequent to the enactment of the Tax Act, the associated impact to the Company’s 2017 effective tax rate is separately described in the table above “U.S. rate differential on impairment of related party note”. The Company also recorded tax expense of $149.2 million in connection with the valuation allowance recorded against federal and state deferred tax assets generated in the current period due to the uncertainty of the ability to utilize those assets in future periods.
83
CLEAR CHANNEL OUTDOOR HOLDINGS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
During 2016, the Company recorded tax expense of approximately $76.7 million. The 2016 income tax expense and 31.8% effective tax rate were impacted primarily by the $32.9 million and $43.3 million deferred tax benefits recorded in connection with the release of valuation allowances in the U.S. and France, respectively. These deferred tax benefits were partially offset by $54.7 million in tax expense attributable to the sale of our Australia outdoor business.
During 2015, the Company recorded tax expense of approximately $49.9 million. The 2015 income tax expense and (234.7)% effective tax rate were impacted primarily by a $32.9 million valuation allowance recorded against the Company’s federal and state net operating losses during 2015. Additionally, the Company recorded additional taxes due to the inability to benefit from losses in certain foreign jurisdictions.
The Company provides for any related tax liability on undistributed earnings that the Company does not intend to be indefinitely reinvested outside the United States and that would become taxable upon remittance within our foreign structure. At December 31, 2017, all undistributed earnings of our international subsidiaries have been included in our provisional computation of the one-time transition tax associated with the enactment of the Tax Act. Based upon our preliminary analysis of the effects of the Tax Act which is not yet complete, the Company has not provided U.S. federal income taxes for temporary differences with respect to investments in our foreign subsidiaries, which at December 31, 2017 currently result in tax basis amounts greater than the financial reporting basis. 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, which give us flexibility to make future cash distributions as non-taxable returns of capital. Additionally, as a result of U.S. tax reform described above, future dividend distributions from our international subsidiaries are exempt from U.S. federal income tax beginning January 1, 2018. All tax liabilities owed by the Company are paid either by the Company or on behalf of the Company by iHeartCommunications through an operating account that represents net amounts due to or from iHeartCommunications.
The Company continues to record interest and penalties related to unrecognized tax benefits in current income tax expense. The total amount of interest accrued at December 31, 2017 and 2016, was $3.2 million and $3.4 million, respectively. The total amount of unrecognized tax benefits including accrued interest and penalties at December 31, 2017 and 2016, was $36.7 million and $39.7 million, respectively, of which $22.4 million and $23.8 million is included in “Other long-term liabilities.” In addition, $14.3 million and $15.9 million of unrecognized tax benefits are recorded net with the Company’s deferred tax assets for its net operating losses as opposed to being recorded in “Other long-term liabilities” at December 31, 2017 and 2016, respectively. The total amount of unrecognized tax benefits at December 31, 2017 and 2016 that, if recognized, would impact the effective income tax rate is $18.5 million and $18.6 million, respectively.
A reconciliation of the beginning and ending amount of unrecognized tax benefits is as follows:
(In thousands) |
Years Ended December 31, |
|||||||
Unrecognized Tax Benefits |
2017 |
2016 |
||||||
Balance at beginning of period |
$ |
36,332 |
$ |
39,908 |
||||
Increases for tax position taken in the current year |
4,327 |
6,996 |
||||||
Increases for tax positions taken in previous years |
2,046 |
2,199 |
||||||
Decreases for tax position taken in previous years |
(499 |
) |
(6,148 |
) |
||||
Decreases due to settlements with tax authorities |
(225 |
) |
(717 |
) |
||||
Decreases due to lapse of statute of limitations |
(8,511 |
) |
(5,906 |
) |
||||
Balance at end of period |
$ |
33,470 |
$ |
36,332 |
Pursuant to the Tax Matters Agreement between iHeartCommunications and the Company, the operations of the Company are included in a consolidated U.S. federal income tax return filed by iHeartMedia. In addition, the Company and its subsidiaries file income tax returns in various state and foreign jurisdictions. During 2017 and 2016, the Company reversed $9.2 million and $6.2 million in unrecognized tax benefits, respectively, inclusive of interest, as a result of the expiration of statutes of limitations to assess taxes in certain state and foreign jurisdictions. During 2016, the Company settled certain tax examinations that resulted in the reduction of uncertain tax positions of $6.8 million, inclusive of interest. All federal income tax matters through 2013 are closed. Substantially all material state, local, and foreign income tax matters have been concluded for years through 2008.
84
CLEAR CHANNEL OUTDOOR HOLDINGS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 8 – STOCKHOLDERS’ EQUITY (DEFICIT)
The Company reports its noncontrolling interests in consolidated subsidiaries as a component of equity separate from the Company’s equity. The following table shows the changes in stockholders’ equity attributable to the Company and the noncontrolling interests of subsidiaries in which the Company has a majority, but not total, ownership interest:
(In thousands) |
The Company |
Noncontrolling
Interests
|
Consolidated |
||||||||
Balances as of January 1, 2017 |
$ |
(1,080,812 |
) |
$ |
149,886 |
$ |
(930,926 |
) |
|||
Net income |
(639,716 |
) |
12,199 |
(627,517 |
) |
||||||
Dividends declared |
(332,498 |
) |
— |
(332,498 |
) |
||||||
Dividends and other payments to noncontrolling interests |
— |
(12,010 |
) |
(12,010 |
) |
||||||
Disposal of noncontrolling interests |
— |
(2,439 |
) |
(2,439 |
) |
||||||
Share-based compensation |
8,659 |
931 |
9,590 |
||||||||
Foreign currency translation adjustments |
35,975 |
9,176 |
45,151 |
||||||||
Unrealized holding loss on marketable securities |
(414 |
) |
— |
(414 |
) |
||||||
Other adjustments to comprehensive loss |
6,720 |
— |
6,720 |
||||||||
Reclassifications |
5,441 |
— |
5,441 |
||||||||
Other, net |
(1,800 |
) |
(703 |
) |
(2,503 |
) |
|||||
Balances as of December 31, 2017 |
$ |
(1,998,445 |
) |
$ |
157,040 |
$ |
(1,841,405 |
) |
|||
Balance as of January 1, 2016 |
$ |
(755,599 |
) |
$ |
187,775 |
$ |
(567,824 |
) |
|||
Net income |
141,397 |
23,002 |
164,399 |
||||||||
Dividends declared |
(540,034 |
) |
— |
(540,034 |
) |
||||||
Dividends and other payments to noncontrolling interests |
— |
(16,917 |
) |
(16,917 |
) |
||||||
Disposal of noncontrolling interests |
— |
(36,846 |
) |
(36,846 |
) |
||||||
Share-based compensation |
10,291 |
— |
10,291 |
||||||||
Foreign currency translation adjustments |
30,835 |
(8,427 |
) |
22,408 |
|||||||
Unrealized holding loss on marketable securities |
(576 |
) |
— |
(576 |
) |
||||||
Other adjustments to comprehensive loss |
(11,814 |
) |
— |
(11,814 |
) |
||||||
Reclassifications |
46,730 |
— |
46,730 |
||||||||
Other, net |
(2,042 |
) |
1,299 |
(743 |
) |
||||||
Balances as of December 31, 2016 |
$ |
(1,080,812 |
) |
$ |
149,886 |
$ |
(930,926 |
) |
Share-Based Awards
Stock Options
The Company has granted options to purchase shares of its Class A common stock to certain employees and directors of the Company and its affiliates under its equity incentive plan at no less than the fair value of the underlying stock on the date of grant. These options are granted for a term not exceeding ten years and are forfeited, except in certain circumstances, in the event the employee or director terminates his or her employment or relationship with the Company or one of its affiliates. These options vest solely on continued service over a period of up to five years. The equity incentive plan contains anti-dilutive provisions that permit an adjustment for any change in capitalization.
The Company accounts for its share-based payments using the fair value recognition provisions of ASC 718-10. The fair value of the options is estimated using a Black-Scholes option-pricing model and amortized straight-line to expense over the vesting period. ASC 718-10 requires the cash flows from the tax benefits resulting from tax deductions in excess of the compensation cost recognized for those options (excess tax benefits) to be classified as financing cash flows. The excess tax benefit that is required to be classified as a financing cash inflow after application of ASC 718-10 is not material.
85
CLEAR CHANNEL OUTDOOR HOLDINGS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
The fair value of each option awarded is estimated on the date of grant using a Black-Scholes option-pricing model. Expected volatilities are based on historical volatility of the Company’s stock over the expected life of the options. The expected life of options granted represents the period of time that options granted are expected to be outstanding. The Company uses historical data to estimate option exercise and employee terminations within the valuation model. The Company includes estimated forfeitures in its compensation cost and updates the estimated forfeiture rate through the final vesting date of awards. The risk free interest rate is based on the U.S. Treasury yield curve in effect at the time of grant for periods equal to the expected life of the option. The following assumptions were used to calculate the fair value of the Company’s options on the date of grant:
Years Ended December 31, |
|||||
2017 |
2016 |
2015 |
|||
Expected volatility |
42% |
42% – 44% |
37% – 56% |
||
Expected life in years |
6.3 |
6.3 |
6.3 |
||
Risk-free interest rate |
2.12% |
1.12% – 1.41% |
1.70% – 2.07% |
||
Dividend yield |
—% |
—% |
—% |
The following table presents a summary of the Company's stock options outstanding at and stock option activity during the year ended December 31, 2017:
(In thousands, except per share data) |
Options |
Price(3)
|
Weighted
Average
Remaining
Contractual
Term
|
Aggregate
Intrinsic
Value
|
||||||||
Outstanding, January 1, 2017 |
5,033 |
$ |
7.04 |
4.9 years |
$ |
2,539 |
||||||
Granted (1)
|
4 |
4.25 |
||||||||||
Exercised (2)
|
(71 |
) |
3.10 |
|||||||||
Forfeited |
(96 |
) |
6.85 |
|||||||||
Expired |
(760 |
) |
12.49 |
|||||||||
Outstanding, December 31, 2017 |
4,110 |
6.10 |
4.1 years |
$ |
2,378 |
|||||||
Exercisable |
3,392 |
6.01 |
3.4 years |
$ |
2,359 |
|||||||
Expected to vest |
718 |
6.52 |
7.5 years |
$ |
19 |
(1) |
The weighted average grant date fair value of the Company’s options granted during the years ended December 31, 2017, 2016 and 2015 was $2.04, $2.82 and $4.25 per share, respectively.
|
(2) |
Cash received from option exercises during the years ended December 31, 2017, 2016 and 2015 was $0.2 million, $0.6 million and $3.8 million, respectively. The total intrinsic value of the options exercised during the years ended December 31, 2017, 2016 and 2015 was $0.2 million, $0.4 million and $2.8 million, respectively.
|
(3) |
Reflects the weighted average exercise price per share. |
86
CLEAR CHANNEL OUTDOOR HOLDINGS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
A summary of the Company’s unvested options at and changes during the year ended December 31, 2017 is presented below:
(In thousands, except per share data) |
Options |
Weighted Average Grant Date Fair Value |
||||
Unvested, January 1, 2017 |
1,164 |
$ |
4.25 |
|||
Granted |
4 |
2.04 |
||||
Vested (1)
|
(354 |
) |
4.37 |
|||
Forfeited |
(96 |
) |
4.15 |
|||
Unvested, December 31, 2017 |
718 |
$ |
4.19 |
(1) |
The total fair value of the Company’s options vested during the years ended December 31, 2017, 2016 and 2015 was $1.6 million, $2.7 million and $4.2 million, respectively.
|
Restricted Stock Awards
The Company has also granted both restricted stock and restricted stock unit awards to its employees and affiliates under its equity incentive plan. The restricted stock awards represent shares of Class A common stock that contain a legend which restricts their transferability for a term of up to five years. The restricted stock units represent the right to receive shares upon vesting, which is generally over a period of up to five years. Both restricted stock awards and restricted stock units are forfeited, except in certain circumstances, in the event the employee terminates his or her employment or relationship with the Company prior to the lapse of the restriction.
The following table presents a summary of the Company's restricted stock and restricted stock units outstanding at and activity during the year ended December 31, 2017 (“Price” reflects the weighted average share price at the date of grant):
(In thousands, except per share data) |
Awards |
Price |
||||
Outstanding, January 1, 2017 |
2,743 |
$ |
7.63 |
|||
Granted |
2,539 |
4.30 |
||||
Vested (restriction lapsed) |
(1,040 |
) |
7.16 |
|||
Forfeited |
(342 |
) |
7.39 |
|||
Outstanding, December 31, 2017 |
3,900 |
5.61 |
Share-Based Compensation Cost
The share-based compensation cost is measured at the grant date based on the fair value of the award and is recognized as expense on a straight-line basis over the vesting period. Share-based compensation payments are recorded in corporate expenses and were $9.6 million, $10.3 million and $8.5 million, during the years ended December 31, 2017, 2016 and 2015, respectively.
The tax benefit related to the share-based compensation expense for the years ended December 31, 2017, 2016 and 2015 was $3.3 million, $3.9 million and $3.2 million, respectively.
As of December 31, 2017, there was $13.0 million of unrecognized compensation cost related to unvested share-based compensation arrangements that will vest based on service conditions. This cost is expected to be recognized over a weighted average period of approximately three years.
87
CLEAR CHANNEL OUTDOOR HOLDINGS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Net Income (Loss) per Share
The following table presents the computation of earnings (loss) per share for the years ended December 31, 2017, 2016 and 2015:
(In thousands, except per share data) |
Years Ended December 31, |
||||||||||
2017 |
2016 |
2015 |
|||||||||
NUMERATOR: |
|||||||||||
Net income (loss) attributable to the Company – common shares |
$ |
(639,716 |
) |
$ |
141,397 |
$ |
(95,981 |
) |
|||
DENOMINATOR: |
|||||||||||
Weighted average common shares outstanding – basic |
361,141 |
360,294 |
359,508 |
||||||||
Stock options and restricted stock(1):
|
— |
1,318 |
|||||||||
Weighted average common shares outstanding – diluted |
361,141 |
361,612 |
359,508 |
||||||||
Net income (loss) attributable to the Company per common share: |
|||||||||||
Basic |
$ |
(1.77 |
) |
$ |
0.39 |
$ |
(0.27 |
) |
|||
Diluted |
$ |
(1.77 |
) |
$ |
0.39 |
$ |
(0.27 |
) |
(1) |
8.0 million, 5.6 million and 8.1 million stock options and restricted shares were outstanding at December 31, 2017, 2016 and 2015, respectively, that were not included in the computation of diluted earnings per share because to do so would have been anti-dilutive.
|
NOTE 9 – EMPLOYEE STOCK AND SAVINGS PLANS
The Company’s U.S. employees are eligible to participate in various 401(k) savings and other plans provided by iHeartCommunications for the purpose of providing retirement benefits for substantially all employees. Under these plans, a Company employee can make pre-tax contributions and the Company will match 50% of the employee’s first 5% of pay contributed to the plan. Employees vest in these Company matching contributions based upon their years of service to the Company. Contributions to these plans of $2.2 million, $2.3 million and $2.4 million for the years ended December 31, 2017, 2016 and 2015, respectively, were recorded as a component of operating expenses.
In addition, employees in the Company’s International markets participate in retirement plans administered by the Company which are not part of the 401(k) savings and other plans sponsored by iHeartCommunications. Contributions to these plans of $13.1 million, $15.1 million and $13.6 million for the years ended December 31, 2017, 2016 and 2015, respectively, were recorded as a component of operating expenses.
Certain highly compensated executives of the Company are eligible to participate in a non-qualified deferred compensation plan sponsored by iHeartCommunications, under which such executives were able to make an annual election to defer up to 50% of their annual salary and up to 80% of their bonus before taxes. The Company suspended all salary and bonus deferral and company matching contributions to the deferred compensation plan on January 1, 2010. Matching credits on amounts deferred may be made in the sole discretion of iHeartCommunications and iHeartCommunications retains ownership of all assets until distributed. Participants in the plan have the opportunity to allocate their deferrals and any matching credits among different investment options, the performance of which is used to determine the amounts paid to participants under the plan. There is no liability recorded by the Company under this deferred compensation plan as the liability of this plan is that of iHeartCommunications.
88
CLEAR CHANNEL OUTDOOR HOLDINGS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 10 — OTHER INFORMATION
The following table discloses the components of “Other income (expense)” for the years ended December 31, 2017, 2016 and 2015, respectively:
(In thousands) |
Years Ended December 31, |
||||||||||
2017 |
2016 |
2015 |
|||||||||
Foreign exchange loss |
$ |
29,563 |
$ |
(69,599 |
) |
$ |
14,790 |
||||
Other |
237 |
(1,083 |
) |
(2,403 |
) |
||||||
Total other income (expense) — net |
$ |
29,800 |
$ |
(70,682 |
) |
$ |
12,387 |
For the years ended December 31, 2017, 2016 and 2015 the total increase (decrease) in other comprehensive income (loss) related to the impact of pensions on deferred income tax liabilities were $(0.3) million, ($1.0) million and $1.6 million, respectively.
The following table discloses the components of “Other current assets” as of December 31, 2017 and 2016, respectively:
(In thousands) |
As of December 31, |
||||||
2017 |
2016 |
||||||
Inventory |
$ |
21,940 |
$ |
21,190 |
|||
Deposits |
1,720 |
1,445 |
|||||
Other receivables |
4,906 |
9,302 |
|||||
Restricted cash |
26,096 |
680 |
|||||
Other |
4,052 |
6,582 |
|||||
Total other current assets |
$ |
58,714 |
$ |
39,199 |
During 2017, CCOH established a separate bi-lateral letter of credit facility to issue additional letters of credit to be supported by cash collateral posted by the Company. As of December 31, 2017, the amount of letters of credit issued under this facility totaled $24.7 million and was backed by cash collateral of $25.4 million, which is classified as Restricted cash.
The following table discloses the components of “Other assets” as of December 31, 2017 and 2016, respectively:
(In thousands) |
As of December 31, |
||||||
2017 |
2016 |
||||||
Investments |
$ |
10,042 |
$ |
10,183 |
|||
Deposits |
23,096 |
19,318 |
|||||
Prepaid expenses |
60,294 |
61,814 |
|||||
Restricted cash |
18,095 |
20,474 |
|||||
Other |
13,007 |
10,224 |
|||||
Total other assets |
$ |
124,534 |
$ |
122,013 |
The following table discloses the components of “Other long-term liabilities” as of December 31, 2017 and 2016, respectively:
(In thousands) |
As of December 31, |
||||||
2017 |
2016 |
||||||
Unrecognized tax benefits |
$ |
22,419 |
$ |
23,772 |
|||
Asset retirement obligation |
44,779 |
39,451 |
|||||
Deferred rent |
105,324 |
101,673 |
|||||
Employee related liabilities |
52,212 |
55,460 |
|||||
Other |
45,681 |
38,955 |
|||||
Total other long-term liabilities |
$ |
270,415 |
$ |
259,311 |
89
CLEAR CHANNEL OUTDOOR HOLDINGS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
The following table discloses the components of “Accumulated other comprehensive loss,” net of tax, as of December 31, 2017 and 2016, respectively:
(In thousands) |
As of December 31, |
||||||
2017 |
2016 |
||||||
Cumulative currency translation adjustments and other |
$ |
(340,109 |
) |
$ |
(388,246 |
) |
|
Cumulative unrealized gain on securities |
1,173 |
1,588 |
|||||
Total accumulated other comprehensive loss |
$ |
(338,936 |
) |
$ |
(386,658 |
) |
NOTE 12 — QUARTERLY RESULTS OF OPERATIONS (Unaudited)
(In thousands, except per share data)
Three Months Ended
March 31,
|
Three Months Ended
June 30,
|
Three Months Ended
September 30,
|
Three Months Ended
December 31,
|
||||||||||||||||||||||||||||
2017 |
2016 |
2017 |
2016 |
2017 |
2016 |
2017 |
2016 |
||||||||||||||||||||||||
Revenue |
$ |
544,726 |
$ |
589,014 |
$ |
672,319 |
$ |
708,086 |
$ |
645,089 |
$ |
669,221 |
$ |
729,131 |
$ |
722,563 |
|||||||||||||||
Operating expenses: |
|||||||||||||||||||||||||||||||
Direct operating expenses |
327,931 |
341,987 |
350,173 |
362,001 |
356,100 |
362,250 |
368,561 |
355,820 |
|||||||||||||||||||||||
Selling, general and administrative expenses |
115,774 |
126,801 |
125,898 |
135,567 |
128,397 |
126,164 |
138,568 |
126,670 |
|||||||||||||||||||||||
Corporate expenses |
34,540 |
28,224 |
35,340 |
29,673 |
35,333 |
28,103 |
38,465 |
31,436 |
|||||||||||||||||||||||
Depreciation and amortization |
77,494 |
85,395 |
78,290 |
86,974 |
81,096 |
85,780 |
89,111 |
85,975 |
|||||||||||||||||||||||
Impairment charges |
— |
— |
— |
— |
1,591 |
7,274 |
2,568 |
— |
|||||||||||||||||||||||
Other operating income (expense), net |
32,611 |
284,774 |
7,829 |
(59,384 |
) |
(11,783 |
) |
1,095 |
(2,266 |
) |
128,203 |
||||||||||||||||||||
Operating income |
21,598 |
291,381 |
90,447 |
34,487 |
30,789 |
60,745 |
89,592 |
250,865 |
|||||||||||||||||||||||
Interest expense |
92,633 |
93,873 |
94,630 |
94,650 |
95,467 |
93,313 |
98,419 |
93,056 |
|||||||||||||||||||||||
Interest income on Due from iHeartCommunications |
14,807 |
12,713 |
15,383 |
11,291 |
17,087 |
12,429 |
21,594 |
13,876 |
|||||||||||||||||||||||
Loss on Due from iHeartCommunications |
— |
— |
— |
— |
— |
— |
(855,648 |
) |
— |
||||||||||||||||||||||
Gain (loss) on investments, net |
(125 |
) |
— |
(135 |
) |
— |
(532 |
) |
781 |
(253 |
) |
(250 |
) |
||||||||||||||||||
Equity in earnings (loss) of nonconsolidated affiliates |
(472 |
) |
(415 |
) |
271 |
(232 |
) |
(628 |
) |
(727 |
) |
(161 |
) |
(315 |
) |
||||||||||||||||
Other income (expense), net |
3,992 |
(5,803 |
) |
8,908 |
(33,871 |
) |
9,696 |
(7,305 |
) |
7,204 |
(23,703 |
) |
|||||||||||||||||||
Income (loss) before income taxes |
(52,833 |
) |
204,003 |
20,244 |
(82,975 |
) |
(39,055 |
) |
(27,390 |
) |
(836,091 |
) |
147,417 |
||||||||||||||||||
Income tax benefit (expense) |
21,837 |
(62,917 |
) |
(18,390 |
) |
21,719 |
(16,347 |
) |
3,619 |
293,118 |
(39,077 |
) |
|||||||||||||||||||
Consolidated net income (loss) |
(30,996 |
) |
141,086 |
1,854 |
(61,256 |
) |
(55,402 |
) |
(23,771 |
) |
(542,973 |
) |
108,340 |
||||||||||||||||||
Less amount attributable to noncontrolling interest |
(1,995 |
) |
976 |
6,631 |
7,857 |
6,237 |
7,329 |
1,326 |
6,840 |
||||||||||||||||||||||
Net income (loss) attributable to the Company |
$ |
(29,001 |
) |
$ |
140,110 |
$ |
(4,777 |
) |
$ |
(69,113 |
) |
$ |
(61,639 |
) |
$ |
(31,100 |
) |
$ |
(544,299 |
) |
$ |
101,500 |
|||||||||
Net income (loss) per common share: |
|||||||||||||||||||||||||||||||
Basic |
$ |
(0.08 |
) |
$ |
0.39 |
$ |
(0.01 |
) |
$ |
(0.19 |
) |
$ |
(0.17 |
) |
$ |
(0.09 |
) |
$ |
(1.51 |
) |
$ |
0.28 |
|||||||||
Diluted |
$ |
(0.08 |
) |
$ |
0.39 |
$ |
(0.01 |
) |
$ |
(0.19 |
) |
$ |
(0.17 |
) |
$ |
(0.09 |
) |
$ |
(1.51 |
) |
$ |
0.28 |
90
CLEAR CHANNEL OUTDOOR HOLDINGS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 11 – SEGMENT DATA
The Company has two reportable segments, which it believes best reflect how the Company is currently managed – Americas and International. The Americas segment consists of operations primarily in the United States and Latin America, and the International segment primarily includes operations in Europe and Asia. The Americas and International display inventory consists primarily of billboards, street furniture displays and transit displays. Corporate includes infrastructure and support including information technology, human resources, legal, finance and administrative functions of each of the Company’s reportable segments, as well as overall executive, administrative and support functions. Share-based payments are recorded in corporate expenses.
During the first quarter of 2018, the Company revised its segment reporting, as discussed in Note 1.
91
CLEAR CHANNEL OUTDOOR HOLDINGS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
The following table presents the Company’s reportable segment results for the years ended December 31, 2017, 2016 and 2015:
(In thousands) |
Americas Outdoor Advertising |
International Outdoor Advertising |
Corporate and other reconciling items |
Consolidated |
|||||||||||
Year Ended December 31, 2017 |
|||||||||||||||
Revenue |
$ |
1,256,326 |
$ |
1,334,939 |
$ |
— |
$ |
2,591,265 |
|||||||
Direct operating expenses |
574,113 |
828,652 |
— |
1,402,765 |
|||||||||||
Selling, general and administrative expenses |
219,467 |
289,170 |
— |
508,637 |
|||||||||||
Corporate expenses |
— |
— |
143,678 |
143,678 |
|||||||||||
Depreciation and amortization |
189,707 |
131,224 |
5,060 |
325,991 |
|||||||||||
Impairment charges |
— |
— |
4,159 |
4,159 |
|||||||||||
Other operating income, net |
— |
— |
26,391 |
26,391 |
|||||||||||
Operating income (loss) |
$ |
273,039 |
$ |
85,893 |
$ |
(126,506 |
) |
$ |
232,426 |
||||||
Segment assets |
$ |
2,969,326 |
$ |
1,449,365 |
$ |
252,091 |
$ |
4,670,782 |
|||||||
Capital expenditures |
$ |
74,580 |
$ |
146,392 |
$ |
3,266 |
$ |
224,238 |
|||||||
Share-based compensation expense |
$ |
— |
$ |
— |
$ |
9,590 |
$ |
9,590 |
|||||||
Year Ended December 31, 2016 |
|||||||||||||||
Revenue |
$ |
1,278,413 |
$ |
1,410,471 |
$ |
— |
$ |
2,688,884 |
|||||||
Direct operating expenses |
570,310 |
851,748 |
— |
1,422,058 |
|||||||||||
Selling, general and administrative expenses |
225,415 |
289,787 |
— |
515,202 |
|||||||||||
Corporate expenses |
— |
— |
117,436 |
117,436 |
|||||||||||
Depreciation and amortization |
185,654 |
152,758 |
5,712 |
344,124 |
|||||||||||
Impairment charges |
— |
— |
7,274 |
7,274 |
|||||||||||
Other operating income, net |
— |
— |
354,688 |
354,688 |
|||||||||||
Operating income |
$ |
297,034 |
$ |
116,178 |
$ |
224,266 |
$ |
637,478 |
|||||||
Segment assets |
$ |
3,175,355 |
$ |
1,342,356 |
$ |
1,201,117 |
$ |
5,718,828 |
|||||||
Capital expenditures |
$ |
81,401 |
$ |
143,788 |
$ |
4,583 |
$ |
229,772 |
|||||||
Share-based compensation expense |
$ |
— |
$ |
— |
$ |
10,291 |
$ |
10,291 |
|||||||
Year Ended December 31, 2015 |
|||||||||||||||
Revenue |
$ |
1,349,021 |
$ |
1,457,183 |
$ |
— |
$ |
2,806,204 |
|||||||
Direct operating expenses |
597,382 |
897,520 |
— |
1,494,902 |
|||||||||||
Selling, general and administrative expenses |
233,254 |
298,250 |
— |
531,504 |
|||||||||||
Corporate expenses |
— |
— |
116,523 |
116,523 |
|||||||||||
Depreciation and amortization |
204,514 |
166,060 |
5,388 |
375,962 |
|||||||||||
Impairment charges |
— |
— |
21,631 |
21,631 |
|||||||||||
Other operating expense, net |
— |
— |
(4,824 |
) |
(4,824 |
) |
|||||||||
Operating income (loss) |
$ |
313,871 |
$ |
95,353 |
$ |
(148,366 |
) |
$ |
260,858 |
||||||
Segment assets |
$ |
3,567,764 |
$ |
1,573,161 |
$ |
1,165,863 |
$ |
6,306,788 |
|||||||
Capital expenditures |
$ |
82,165 |
$ |
132,554 |
$ |
3,613 |
$ |
218,332 |
|||||||
Share-based compensation expense |
— |
— |
$ |
8,502 |
$ |
8,502 |
Revenue of $1.5 billion, $1.5 billion and $1.6 billion derived from the Company’s foreign operations are included in the data above for the years ended December 31, 2017, 2016 and 2015, respectively. Revenue of $0.3 billion, $0.3 billion and $0.3 billion derived from France are included in the data above for the years ended December 31, 2017, 2016 and 2015, respectively. Revenue of $1.1
92
CLEAR CHANNEL OUTDOOR HOLDINGS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
billion, $1.1 billion and $1.2 billion derived from the Company’s U.S. operations are included in the data above for the years ended December 31, 2017, 2016 and 2015.
Identifiable long-lived assets of $0.6 billion, $0.5 billion and $0.7 billion derived from the Company’s foreign operations are included in the data above for the years ended December 31, 2017, 2016 and 2015, respectively. Identifiable long-lived assets of $0.3 billion, $0.2 billion and $0.2 billion derived from China are included in the data above for the years ended December 31, 2017, 2016 and 2015, respectively. Identifiable long-lived assets of $0.8 billion, $0.9 billion and $1.0 billion derived from the Company’s U.S. operations are included in the data above for the years ended December 31, 2017, 2016 and 2015, respectively.
93
CLEAR CHANNEL OUTDOOR HOLDINGS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 13 – GUARANTOR SUBSIDIARIES
The Company and certain of the Company’s direct and indirect wholly-owned domestic subsidiaries (the “Guarantor Subsidiaries”) fully and unconditionally guarantee on a joint and several basis certain of the outstanding indebtedness of Clear Channel Worldwide Holdings, Inc. ("CCWH" or the “Subsidiary Issuer”). The following consolidating schedules present financial information on a combined basis in conformity with the SEC’s Regulation S-X Rule 3-10(d):
(In thousands) |
December 31, 2017 |
||||||||||||||||||||||
Parent |
Subsidiary |
Guarantor |
Non-Guarantor |
||||||||||||||||||||
Company |
Issuer |
Subsidiaries |
Subsidiaries |
Eliminations |
Consolidated |
||||||||||||||||||
Cash and cash equivalents |
2,212 |
— |
22,841 |
119,066 |
— |
$ |
144,119 |
||||||||||||||||
Accounts receivable, net of allowance |
— |
— |
192,493 |
466,970 |
— |
659,463 |
|||||||||||||||||
Intercompany receivables |
— |
785,075 |
2,924,888 |
88,053 |
(3,798,016 |
) |
— |
||||||||||||||||
Prepaid expenses |
291 |
3,433 |
50,028 |
58,124 |
— |
111,876 |
|||||||||||||||||
Other current assets |
25,441 |
— |
2,552 |
30,721 |
— |
58,714 |
|||||||||||||||||
Total Current Assets |
27,944 |
788,508 |
3,192,802 |
762,934 |
(3,798,016 |
) |
974,172 |
||||||||||||||||
Structures, net |
— |
— |
675,443 |
505,439 |
— |
1,180,882 |
|||||||||||||||||
Other property, plant and equipment, net |
— |
— |
119,856 |
94,291 |
— |
214,147 |
|||||||||||||||||
Indefinite-lived intangibles |
— |
— |
977,152 |
— |
— |
977,152 |
|||||||||||||||||
Other intangibles, net |
— |
— |
248,674 |
25,188 |
— |
273,862 |
|||||||||||||||||
Goodwill |
— |
— |
507,820 |
206,223 |
— |
714,043 |
|||||||||||||||||
Due from iHeartCommunications |
211,990 |
— |
— |
— |
— |
211,990 |
|||||||||||||||||
Intercompany notes receivable |
182,026 |
5,087,742 |
12,437 |
16,273 |
(5,298,478 |
) |
— |
||||||||||||||||
Other assets |
447,152 |
111,432 |
1,335,346 |
70,897 |
(1,840,293 |
) |
124,534 |
||||||||||||||||
Total Assets |
$ |
869,112 |
$ |
5,987,682 |
$ |
7,069,530 |
$ |
1,681,245 |
$ |
(10,936,787 |
) |
$ |
4,670,782 |
||||||||||
Accounts payable |
$ |
— |
$ |
— |
$ |
7,592 |
$ |
80,368 |
$ |
— |
$ |
87,960 |
|||||||||||
Intercompany payable |
2,924,888 |
— |
873,128 |
— |
(3,798,016 |
) |
— |
||||||||||||||||
Accrued expenses |
1,167 |
(1,315 |
) |
91,325 |
418,624 |
— |
509,801 |
||||||||||||||||
Deferred income |
— |
— |
25,278 |
33,900 |
— |
59,178 |
|||||||||||||||||
Current portion of long-term debt |
— |
— |
115 |
458 |
— |
573 |
|||||||||||||||||
Total Current Liabilities |
2,926,055 |
(1,315 |
) |
997,438 |
533,350 |
(3,798,016 |
) |
657,512 |
|||||||||||||||
Long-term debt |
— |
4,895,104 |
1,820 |
369,229 |
— |
5,266,153 |
|||||||||||||||||
Intercompany notes payable |
— |
16,273 |
5,046,119 |
236,086 |
(5,298,478 |
) |
— |
||||||||||||||||
Deferred tax liability |
(93,111 |
) |
853 |
466,827 |
(56,462 |
) |
— |
318,107 |
|||||||||||||||
Other long-term liabilities |
1,157 |
— |
140,272 |
128,986 |
— |
270,415 |
|||||||||||||||||
Total stockholders' equity (deficit) |
(1,964,989 |
) |
1,076,767 |
417,054 |
470,056 |
(1,840,293 |
) |
(1,841,405 |
) |
||||||||||||||
Total Liabilities and Stockholders' Equity |
$ |
869,112 |
$ |
5,987,682 |
$ |
7,069,530 |
$ |
1,681,245 |
$ |
(10,936,787 |
) |
$ |
4,670,782 |
94
CLEAR CHANNEL OUTDOOR HOLDINGS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(In thousands) |
December 31, 2016 |
||||||||||||||||||||||
Parent |
Subsidiary |
Guarantor |
Non-Guarantor |
||||||||||||||||||||
Company |
Issuer |
Subsidiaries |
Subsidiaries |
Eliminations |
Consolidated |
||||||||||||||||||
Cash and cash equivalents |
$ |
300,285 |
$ |
— |
$ |
61,542 |
$ |
180,168 |
$ |
— |
$ |
541,995 |
|||||||||||
Accounts receivable, net of allowance |
— |
— |
193,474 |
399,596 |
— |
593,070 |
|||||||||||||||||
Intercompany receivables |
— |
687,043 |
2,694,094 |
99,431 |
(3,480,568 |
) |
— |
||||||||||||||||
Prepaid expenses |
1,363 |
3,433 |
51,751 |
55,022 |
— |
111,569 |
|||||||||||||||||
Assets held for sale |
— |
— |
55,602 |
— |
— |
55,602 |
|||||||||||||||||
Other current assets |
— |
— |
6,873 |
32,326 |
— |
39,199 |
|||||||||||||||||
Total Current Assets |
301,648 |
690,476 |
3,063,336 |
766,543 |
(3,480,568 |
) |
1,341,435 |
||||||||||||||||
Structures, net |
— |
— |
746,877 |
449,799 |
— |
1,196,676 |
|||||||||||||||||
Other property, plant and equipment, net |
— |
— |
124,138 |
92,019 |
— |
216,157 |
|||||||||||||||||
Indefinite-lived intangibles |
— |
— |
951,439 |
9,527 |
— |
960,966 |
|||||||||||||||||
Other intangibles, net |
— |
— |
259,915 |
39,702 |
— |
299,617 |
|||||||||||||||||
Goodwill |
— |
— |
505,478 |
190,785 |
— |
696,263 |
|||||||||||||||||
Due from iHeartCommunications |
885,701 |
— |
— |
— |
— |
885,701 |
|||||||||||||||||
Intercompany notes receivable |
182,026 |
4,887,354 |
— |
— |
(5,069,380 |
) |
— |
||||||||||||||||
Other assets |
280,435 |
418,658 |
1,320,838 |
65,589 |
(1,963,507 |
) |
122,013 |
||||||||||||||||
Total Assets |
$ |
1,649,810 |
$ |
5,996,488 |
$ |
6,972,021 |
$ |
1,613,964 |
$ |
(10,513,455 |
) |
$ |
5,718,828 |
||||||||||
Accounts payable |
$ |
— |
$ |
— |
$ |
14,897 |
$ |
71,973 |
$ |
— |
$ |
86,870 |
|||||||||||
Intercompany payable |
2,694,094 |
— |
786,474 |
— |
(3,480,568 |
) |
— |
||||||||||||||||
Accrued expenses |
2,223 |
58,652 |
35,509 |
384,488 |
— |
480,872 |
|||||||||||||||||
Deferred income |
— |
— |
33,471 |
33,534 |
— |
67,005 |
|||||||||||||||||
Current portion of long-term debt |
— |
— |
89 |
6,882 |
— |
6,971 |
|||||||||||||||||
Total Current Liabilities |
2,696,317 |
58,652 |
870,440 |
496,877 |
(3,480,568 |
) |
641,718 |
||||||||||||||||
Long-term debt |
— |
4,886,318 |
1,711 |
221,991 |
— |
5,110,020 |
|||||||||||||||||
Intercompany notes payable |
— |
5,000 |
5,027,681 |
36,699 |
(5,069,380 |
) |
— |
||||||||||||||||
Deferred tax liability |
772 |
1,367 |
685,780 |
(49,214 |
) |
— |
638,705 |
||||||||||||||||
Other long-term liabilities |
1,055 |
— |
135,094 |
123,162 |
— |
259,311 |
|||||||||||||||||
Total stockholders' equity (deficit) |
(1,048,334 |
) |
1,045,151 |
251,315 |
784,449 |
(1,963,507 |
) |
(930,926 |
) |
||||||||||||||
Total Liabilities and Stockholders' Equity |
$ |
1,649,810 |
$ |
5,996,488 |
$ |
6,972,021 |
$ |
1,613,964 |
$ |
(10,513,455 |
) |
$ |
5,718,828 |
95
CLEAR CHANNEL OUTDOOR HOLDINGS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(In thousands) |
Year Ended December 31, 2017 |
||||||||||||||||||||||
Parent |
Subsidiary |
Guarantor |
Non-Guarantor |
||||||||||||||||||||
Company |
Issuer |
Subsidiaries |
Subsidiaries |
Eliminations |
Consolidated |
||||||||||||||||||
Revenue |
$ |
— |
$ |
— |
$ |
1,137,003 |
$ |
1,454,262 |
$ |
— |
$ |
2,591,265 |
|||||||||||
Operating expenses: |
|||||||||||||||||||||||
Direct operating expenses |
— |
— |
510,271 |
892,494 |
— |
1,402,765 |
|||||||||||||||||
Selling, general and administrative expenses |
— |
— |
192,452 |
316,185 |
— |
508,637 |
|||||||||||||||||
Corporate expenses |
14,660 |
— |
93,232 |
35,786 |
— |
143,678 |
|||||||||||||||||
Depreciation and amortization |
— |
— |
181,906 |
144,085 |
— |
325,991 |
|||||||||||||||||
Impairment charges |
— |
— |
— |
4,159 |
— |
4,159 |
|||||||||||||||||
Other operating income (expense), net |
(406 |
) |
— |
34,943 |
(8,146 |
) |
— |
26,391 |
|||||||||||||||
Operating income (loss) |
(15,066 |
) |
— |
194,085 |
53,407 |
— |
232,426 |
||||||||||||||||
Interest (income) expense, net |
(414 |
) |
353,082 |
(205 |
) |
28,686 |
— |
381,149 |
|||||||||||||||
Interest income on Due from iHeartCommunications |
68,871 |
— |
— |
— |
— |
68,871 |
|||||||||||||||||
Intercompany interest income |
16,349 |
339,925 |
69,424 |
184 |
(425,882 |
) |
— |
||||||||||||||||
Intercompany interest expense |
68,871 |
406 |
356,458 |
147 |
(425,882 |
) |
— |
||||||||||||||||
Loss on Due from iHeartCommunications
|
(855,648 |
) |
— |
— |
— |
— |
(855,648 |
) |
|||||||||||||||
Loss on investments, net |
— |
— |
— |
(1,045 |
) |
— |
(1,045 |
) |
|||||||||||||||
Equity in earnings (loss) of nonconsolidated affiliates |
118,995 |
4,749 |
(18,122 |
) |
(1,981 |
) |
(104,631 |
) |
(990 |
) |
|||||||||||||
Other income, net |
3,167 |
— |
11,232 |
15,401 |
— |
29,800 |
|||||||||||||||||
Income (loss) before income taxes |
(731,789 |
) |
(8,814 |
) |
(99,634 |
) |
37,133 |
(104,631 |
) |
(907,735 |
) |
||||||||||||
Income tax benefit (expense) |
92,073 |
2,405 |
218,629 |
(32,889 |
) |
— |
280,218 |
||||||||||||||||
Consolidated net income (loss) |
(639,716 |
) |
(6,409 |
) |
118,995 |
4,244 |
(104,631 |
) |
(627,517 |
) |
|||||||||||||
Less amount attributable to noncontrolling interest |
— |
— |
— |
12,199 |
— |
12,199 |
|||||||||||||||||
Net income (loss) attributable to the Company |
$ |
(639,716 |
) |
$ |
(6,409 |
) |
$ |
118,995 |
$ |
(7,955 |
) |
$ |
(104,631 |
) |
$ |
(639,716 |
) |
||||||
Other comprehensive income (loss), net of tax: |
|||||||||||||||||||||||
Foreign currency translation adjustments |
— |
— |
235 |
44,916 |
— |
45,151 |
|||||||||||||||||
Unrealized holding loss on marketable securities |
— |
— |
— |
(414 |
) |
— |
(414 |
) |
|||||||||||||||
Other adjustments to comprehensive income (loss) |
— |
— |
— |
6,720 |
— |
6,720 |
|||||||||||||||||
Reclassification adjustments |
— |
— |
— |
5,441 |
— |
5,441 |
|||||||||||||||||
Equity in subsidiary comprehensive income |
47,722 |
38,025 |
47,487 |
— |
(133,234 |
) |
— |
||||||||||||||||
Comprehensive income (loss) |
(591,994 |
) |
31,616 |
166,717 |
48,708 |
(237,865 |
) |
(582,818 |
) |
||||||||||||||
Less amount attributable to noncontrolling interest |
— |
— |
— |
9,176 |
— |
9,176 |
|||||||||||||||||
Comprehensive income (loss) attributable to the Company |
$ |
(591,994 |
) |
$ |
31,616 |
$ |
166,717 |
$ |
39,532 |
$ |
(237,865 |
) |
$ |
(591,994 |
) |
96
CLEAR CHANNEL OUTDOOR HOLDINGS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(In thousands) |
Year Ended December 31, 2016 |
||||||||||||||||||||||
Parent |
Subsidiary |
Guarantor |
Non-Guarantor |
||||||||||||||||||||
Company |
Issuer |
Subsidiaries |
Subsidiaries |
Eliminations |
Consolidated |
||||||||||||||||||
Revenue |
$ |
— |
$ |
— |
$ |
1,144,445 |
$ |
1,544,439 |
$ |
— |
$ |
2,688,884 |
|||||||||||
Operating expenses: |
|||||||||||||||||||||||
Direct operating expenses |
— |
— |
497,634 |
924,424 |
— |
1,422,058 |
|||||||||||||||||
Selling, general and administrative expenses |
— |
— |
196,006 |
319,196 |
— |
515,202 |
|||||||||||||||||
Corporate expenses |
13,157 |
— |
61,926 |
42,353 |
— |
117,436 |
|||||||||||||||||
Depreciation and amortization |
— |
— |
177,918 |
166,206 |
— |
344,124 |
|||||||||||||||||
Impairment charges |
— |
— |
— |
7,274 |
— |
7,274 |
|||||||||||||||||
Other operating income (expense), net |
(427 |
) |
— |
291,717 |
63,398 |
— |
354,688 |
||||||||||||||||
Operating income (loss) |
(13,584 |
) |
— |
502,678 |
148,384 |
— |
637,478 |
||||||||||||||||
Interest (income) expense, net |
(1,195 |
) |
353,447 |
721 |
21,919 |
— |
374,892 |
||||||||||||||||
Interest income on Due from iHeartCommunications |
50,309 |
— |
— |
— |
— |
50,309 |
|||||||||||||||||
Intercompany interest income |
16,142 |
341,472 |
52,103 |
— |
(409,717 |
) |
— |
||||||||||||||||
Intercompany interest expense |
50,309 |
15 |
357,614 |
1,779 |
(409,717 |
) |
— |
||||||||||||||||
Gain (loss) on investments, net |
— |
— |
(250 |
) |
781 |
— |
531 |
||||||||||||||||
Equity in earnings (loss) of nonconsolidated affiliates |
136,885 |
44,767 |
(19,575 |
) |
(2,837 |
) |
(160,929 |
) |
(1,689 |
) |
|||||||||||||
Other income (expense), net |
3,429 |
— |
(6,376 |
) |
(67,735 |
) |
— |
(70,682 |
) |
||||||||||||||
Income before income taxes |
144,067 |
32,777 |
170,245 |
54,895 |
(160,929 |
) |
241,055 |
||||||||||||||||
Income tax benefit (expense) |
(2,670 |
) |
(55,574 |
) |
(33,360 |
) |
14,948 |
— |
(76,656 |
) |
|||||||||||||
Consolidated net income (loss) |
141,397 |
(22,797 |
) |
136,885 |
69,843 |
(160,929 |
) |
164,399 |
|||||||||||||||
Less amount attributable to noncontrolling interest |
— |
— |
— |
23,002 |
— |
23,002 |
|||||||||||||||||
Net income (loss) attributable to the Company |
$ |
141,397 |
$ |
(22,797 |
) |
$ |
136,885 |
$ |
46,841 |
$ |
(160,929 |
) |
$ |
141,397 |
|||||||||
Other comprehensive loss, net of tax: |
|||||||||||||||||||||||
Foreign currency translation adjustments |
— |
— |
(8,000 |
) |
30,408 |
— |
22,408 |
||||||||||||||||
Unrealized holding loss on marketable securities |
— |
— |
— |
(576 |
) |
— |
(576 |
) |
|||||||||||||||
Other adjustments to comprehensive loss |
— |
— |
— |
(11,814 |
) |
— |
(11,814 |
) |
|||||||||||||||
Reclassification adjustments |
— |
— |
— |
46,730 |
— |
46,730 |
|||||||||||||||||
Equity in subsidiary comprehensive income |
65,175 |
66,758 |
73,175 |
— |
(205,108 |
) |
— |
||||||||||||||||
Comprehensive income |
206,572 |
43,961 |
202,060 |
111,589 |
(366,037 |
) |
198,145 |
||||||||||||||||
Less amount attributable to noncontrolling interest |
— |
— |
— |
(8,427 |
) |
— |
(8,427 |
) |
|||||||||||||||
Comprehensive income attributable to the Company |
$ |
206,572 |
$ |
43,961 |
$ |
202,060 |
$ |
120,016 |
$ |
(366,037 |
) |
$ |
206,572 |
97
CLEAR CHANNEL OUTDOOR HOLDINGS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(In thousands) |
Year Ended December 31, 2015 |
||||||||||||||||||||||
Parent |
Subsidiary |
Guarantor |
Non-Guarantor |
||||||||||||||||||||
Company |
Issuer |
Subsidiaries |
Subsidiaries |
Eliminations |
Consolidated |
||||||||||||||||||
Revenue |
$ |
— |
$ |
— |
$ |
1,193,320 |
$ |
1,612,884 |
$ |
— |
$ |
2,806,204 |
|||||||||||
Operating expenses: |
|||||||||||||||||||||||
Direct operating expenses |
— |
— |
507,729 |
987,173 |
— |
1,494,902 |
|||||||||||||||||
Selling, general and administrative expenses |
— |
— |
199,769 |
331,735 |
— |
531,504 |
|||||||||||||||||
Corporate expenses |
13,049 |
— |
58,719 |
44,755 |
— |
116,523 |
|||||||||||||||||
Depreciation and amortization |
— |
— |
194,891 |
181,071 |
— |
375,962 |
|||||||||||||||||
Impairment charges |
— |
— |
21,631 |
— |
— |
21,631 |
|||||||||||||||||
Other operating income (expense), net |
(458 |
) |
— |
(7,732 |
) |
3,366 |
— |
(4,824 |
) |
||||||||||||||
Operating income (loss) |
(13,507 |
) |
— |
202,849 |
71,516 |
— |
260,858 |
||||||||||||||||
Interest expense, net |
2 |
352,329 |
1,630 |
1,708 |
— |
355,669 |
|||||||||||||||||
Interest income on Due from iHeartCommunications |
61,439 |
— |
— |
— |
— |
61,439 |
|||||||||||||||||
Intercompany interest income |
16,068 |
340,457 |
62,002 |
— |
(418,527 |
) |
— |
||||||||||||||||
Intercompany interest expense |
61,439 |
— |
356,525 |
563 |
(418,527 |
) |
— |
||||||||||||||||
Equity in earnings (loss) of nonconsolidated affiliates |
(75,927 |
) |
10,383 |
5,609 |
(1,935 |
) |
61,581 |
(289 |
) |
||||||||||||||
Other income, net |
2,915 |
3,440 |
20,318 |
10,289 |
(24,575 |
) |
12,387 |
||||||||||||||||
Income (loss) before income taxes |
(70,453 |
) |
1,951 |
(67,377 |
) |
77,599 |
37,006 |
(21,274 |
) |
||||||||||||||
Income tax expense |
(953 |
) |
(575 |
) |
(8,550 |
) |
(39,865 |
) |
— |
(49,943 |
) |
||||||||||||
Consolidated net income (loss) |
(71,406 |
) |
1,376 |
(75,927 |
) |
37,734 |
37,006 |
(71,217 |
) |
||||||||||||||
Less amount attributable to noncontrolling interest |
24,764 |
24,764 |
|||||||||||||||||||||
Net income (loss) attributable to the Company |
$ |
(71,406 |
) |
$ |
1,376 |
$ |
(75,927 |
) |
$ |
12,970 |
$ |
37,006 |
$ |
(95,981 |
) |
||||||||
Other comprehensive loss, net of tax: |
|||||||||||||||||||||||
Foreign currency translation adjustments |
— |
(3,440 |
) |
(16,605 |
) |
(92,684 |
) |
— |
(112,729 |
) |
|||||||||||||
Unrealized holding gain on marketable securities |
— |
— |
— |
553 |
— |
553 |
|||||||||||||||||
Other adjustments to comprehensive loss |
— |
— |
— |
(10,266 |
) |
— |
(10,266 |
) |
|||||||||||||||
Reclassification adjustments |
— |
— |
— |
808 |
— |
808 |
|||||||||||||||||
Equity in subsidiary comprehensive loss |
(110,480 |
) |
(61,867 |
) |
(93,875 |
) |
— |
266,222 |
— |
||||||||||||||
Comprehensive loss |
(181,886 |
) |
(63,931 |
) |
(186,407 |
) |
(88,619 |
) |
303,228 |
(217,615 |
) |
||||||||||||
Less amount attributable to noncontrolling interest |
— |
— |
— |
(11,154 |
) |
— |
(11,154 |
) |
|||||||||||||||
Comprehensive loss attributable to the Company |
$ |
(181,886 |
) |
$ |
(63,931 |
) |
$ |
(186,407 |
) |
$ |
(77,465 |
) |
$ |
303,228 |
$ |
(206,461 |
) |
98
CLEAR CHANNEL OUTDOOR HOLDINGS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(In thousands) |
Year Ended December 31, 2017 |
||||||||||||||||||||||
Parent |
Subsidiary |
Guarantor |
Non-Guarantor |
||||||||||||||||||||
Company |
Issuer |
Subsidiaries |
Subsidiaries |
Eliminations |
Consolidated |
||||||||||||||||||
Cash flows from operating activities: |
|||||||||||||||||||||||
Consolidated net income (loss) |
$ |
(639,716 |
) |
$ |
(6,409 |
) |
$ |
118,995 |
$ |
4,244 |
$ |
(104,631 |
) |
$ |
(627,517 |
) |
|||||||
Reconciling items: |
|||||||||||||||||||||||
Impairment charges |
— |
— |
— |
4,159 |
— |
4,159 |
|||||||||||||||||
Depreciation and amortization |
— |
— |
181,906 |
144,085 |
— |
325,991 |
|||||||||||||||||
Deferred taxes |
(93,882 |
) |
(514 |
) |
(218,955 |
) |
2,239 |
— |
(311,112 |
) |
|||||||||||||
Provision for doubtful accounts |
— |
— |
10,083 |
(3,343 |
) |
— |
6,740 |
||||||||||||||||
Amortization of deferred financing charges and note discounts, net |
— |
8,786 |
— |
1,741 |
— |
10,527 |
|||||||||||||||||
Share-based compensation |
— |
— |
6,432 |
3,158 |
— |
9,590 |
|||||||||||||||||
(Gain) loss on disposal of operating assets, net |
— |
— |
(35,020 |
) |
5,673 |
— |
(29,347 |
) |
|||||||||||||||
Loss on Due from iHeartCommunications
|
855,648 |
— |
— |
— |
— |
855,648 |
|||||||||||||||||
Loss on investments, net |
— |
— |
— |
1,045 |
— |
1,045 |
|||||||||||||||||
Equity in (earnings) loss of nonconsolidated affiliates |
(118,995 |
) |
(4,749 |
) |
18,122 |
1,981 |
104,631 |
990 |
|||||||||||||||
Foreign exchange transaction gain |
— |
— |
(27 |
) |
(29,536 |
) |
— |
(29,563 |
) |
||||||||||||||
Other reconciling items, net |
— |
— |
(3,423 |
) |
(1,287 |
) |
— |
(4,710 |
) |
||||||||||||||
Changes in operating assets and liabilities, net of effects of acquisitions and dispositions: |
|||||||||||||||||||||||
Increase in accounts receivable |
— |
— |
(9,104 |
) |
(30,686 |
) |
— |
(39,790 |
) |
||||||||||||||
Decrease in prepaids and other current assets |
1,072 |
— |
2,410 |
6,070 |
— |
9,552 |
|||||||||||||||||
Increase (decrease) in accrued expenses |
(436 |
) |
(59,968 |
) |
56,926 |
(3,838 |
) |
— |
(7,316 |
) |
|||||||||||||
Increase (decrease) in accounts payable |
— |
— |
(7,305 |
) |
3,179 |
— |
(4,126 |
) |
|||||||||||||||
Increase (decrease) in accrued interest |
— |
— |
(77 |
) |
508 |
— |
431 |
||||||||||||||||
Decrease in deferred income |
— |
— |
(8,401 |
) |
(4,872 |
) |
— |
(13,273 |
) |
||||||||||||||
Changes in other operating assets and liabilities |
— |
— |
(3,067 |
) |
(7,264 |
) |
— |
(10,331 |
) |
||||||||||||||
Net cash provided by (used for) operating activities |
$ |
3,691 |
$ |
(62,854 |
) |
$ |
109,495 |
$ |
97,256 |
$ |
— |
$ |
147,588 |
||||||||||
Cash flows from investing activities: |
|||||||||||||||||||||||
Purchases of property, plant and equipment |
— |
— |
(73,641 |
) |
(150,597 |
) |
— |
(224,238 |
) |
||||||||||||||
Proceeds from disposal of assets |
— |
— |
55,747 |
16,302 |
— |
72,049 |
|||||||||||||||||
Purchases of other operating assets |
— |
— |
(757 |
) |
(80 |
) |
— |
(837 |
) |
||||||||||||||
(Increase) decrease in intercompany notes receivable, net |
— |
149,612 |
11 |
(11,284 |
) |
(138,339 |
) |
— |
|||||||||||||||
Dividends from subsidiaries |
— |
— |
10,710 |
— |
(10,710 |
) |
— |
||||||||||||||||
Change in other, net |
(25,441 |
) |
— |
(5 |
) |
2,571 |
— |
(22,875 |
) |
||||||||||||||
Net cash provided by (used for) investing activities |
$ |
(25,441 |
) |
$ |
149,612 |
$ |
(7,935 |
) |
$ |
(143,088 |
) |
$ |
(149,049 |
) |
$ |
(175,901 |
) |
||||||
Cash flows from financing activities: |
|||||||||||||||||||||||
Payments on credit facilities |
— |
— |
— |
(909 |
) |
— |
(909 |
) |
|||||||||||||||
Proceeds from long-term debt |
— |
— |
— |
156,000 |
— |
156,000 |
|||||||||||||||||
Payments on long-term debt |
— |
— |
(100 |
) |
(648 |
) |
— |
(748 |
) |
||||||||||||||
Net transfers to iHeartCommunications |
(181,939 |
) |
— |
— |
— |
— |
(181,939 |
) |
|||||||||||||||
Dividends and other payments to noncontrolling interests |
— |
— |
— |
(12,010 |
) |
— |
(12,010 |
) |
|||||||||||||||
Dividends paid |
(332,824 |
) |
— |
— |
(10,710 |
) |
10,710 |
(332,824 |
) |
||||||||||||||
Increase (decrease) in intercompany notes payable, net |
— |
11,273 |
— |
(149,612 |
) |
138,339 |
— |
||||||||||||||||
Intercompany funding |
239,908 |
(98,031 |
) |
(140,160 |
) |
(1,717 |
) |
— |
— |
||||||||||||||
Change in other, net |
(1,468 |
) |
— |
(1 |
) |
(5,614 |
) |
— |
(7,083 |
) |
|||||||||||||
Net cash used for financing activities |
(276,323 |
) |
(86,758 |
) |
(140,261 |
) |
(25,220 |
) |
149,049 |
(379,513 |
) |
||||||||||||
Effect of exchange rate changes on cash |
— |
— |
— |
9,950 |
— |
9,950 |
|||||||||||||||||
Net decrease in cash and cash equivalents |
(298,073 |
) |
— |
(38,701 |
) |
(61,102 |
) |
— |
(397,876 |
) |
|||||||||||||
Cash and cash equivalents at beginning of year |
300,285 |
— |
61,542 |
180,168 |
— |
541,995 |
|||||||||||||||||
Cash and cash equivalents at end of year |
$ |
2,212 |
$ |
— |
$ |
22,841 |
$ |
119,066 |
$ |
— |
$ |
144,119 |
99
CLEAR CHANNEL OUTDOOR HOLDINGS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(In thousands) |
Year Ended December 31, 2016 |
||||||||||||||||||||||
Parent |
Subsidiary |
Guarantor |
Non-Guarantor |
||||||||||||||||||||
Company |
Issuer |
Subsidiaries |
Subsidiaries |
Eliminations |
Consolidated |
||||||||||||||||||
Cash flows from operating activities: |
|||||||||||||||||||||||
Consolidated net income (loss) |
$ |
141,397 |
$ |
(22,797 |
) |
$ |
136,885 |
$ |
69,843 |
$ |
(160,929 |
) |
$ |
164,399 |
|||||||||
Reconciling items: |
|||||||||||||||||||||||
Impairment charges |
— |
— |
— |
7,274 |
— |
7,274 |
|||||||||||||||||
Depreciation and amortization |
— |
— |
177,918 |
166,206 |
— |
344,124 |
|||||||||||||||||
Deferred taxes |
— |
— |
88,083 |
(56,769 |
) |
— |
31,314 |
||||||||||||||||
Provision for doubtful accounts |
— |
— |
5,565 |
5,094 |
— |
10,659 |
|||||||||||||||||
Amortization of deferred financing charges and note discounts, net |
— |
8,741 |
— |
1,831 |
— |
10,572 |
|||||||||||||||||
Share-based compensation |
— |
— |
5,658 |
4,633 |
— |
10,291 |
|||||||||||||||||
Gain on sale of operating and fixed assets |
— |
— |
(293,802 |
) |
(69,683 |
) |
— |
(363,485 |
) |
||||||||||||||
(Gain) loss on investments, net |
— |
— |
250 |
(781 |
) |
— |
(531 |
) |
|||||||||||||||
Equity in (earnings) loss of nonconsolidated affiliates |
(136,885 |
) |
(44,767 |
) |
19,575 |
2,837 |
160,929 |
1,689 |
|||||||||||||||
Foreign exchange transaction loss |
— |
— |
22,874 |
46,725 |
— |
69,599 |
|||||||||||||||||
Other reconciling items, net |
— |
— |
1,256 |
(1,391 |
) |
— |
(135 |
) |
|||||||||||||||
Changes in operating assets and liabilities, net of effects of acquisitions and dispositions: |
|||||||||||||||||||||||
Decrease in accounts receivable |
— |
— |
13,660 |
16,648 |
— |
30,308 |
|||||||||||||||||
(Increase) decrease in prepaids and other current assets |
60 |
— |
5,662 |
(21,300 |
) |
(15,578 |
) |
||||||||||||||||
Increase (decrease) in accrued expenses |
(227 |
) |
59,359 |
(70,834 |
) |
37,220 |
— |
25,518 |
|||||||||||||||
Increase (decrease) in accounts payable |
— |
— |
2,764 |
(6,561 |
) |
— |
(3,797 |
) |
|||||||||||||||
Increase (decrease) in accrued interest |
— |
— |
(571 |
) |
765 |
— |
194 |
||||||||||||||||
Decrease in deferred income |
— |
— |
(5,265 |
) |
(12,854 |
) |
— |
(18,119 |
) |
||||||||||||||
Changes in other operating assets and liabilities |
— |
— |
9,846 |
(3,849 |
) |
— |
5,997 |
||||||||||||||||
Net cash provided by operating activities |
$ |
4,345 |
$ |
536 |
$ |
119,524 |
$ |
185,888 |
$ |
— |
$ |
310,293 |
|||||||||||
Cash flows from investing activities: |
|||||||||||||||||||||||
Purchases of property, plant and equipment |
— |
— |
(77,034 |
) |
(152,738 |
) |
— |
(229,772 |
) |
||||||||||||||
Proceeds from disposal of assets |
— |
— |
358,906 |
449,288 |
— |
808,194 |
|||||||||||||||||
Purchases of other operating assets |
— |
— |
(1,689 |
) |
(555 |
) |
— |
(2,244 |
) |
||||||||||||||
Decrease in intercompany notes receivable, net |
— |
220,038 |
— |
— |
(220,038 |
) |
— |
||||||||||||||||
Dividends from subsidiaries |
— |
— |
235,467 |
— |
(235,467 |
) |
— |
||||||||||||||||
Change in other, net |
— |
(79 |
) |
— |
(24,679 |
) |
79 |
(24,679 |
) |
||||||||||||||
Net cash provided by investing activities |
$ |
— |
$ |
219,959 |
$ |
515,650 |
$ |
271,316 |
$ |
(455,426 |
) |
$ |
551,499 |
||||||||||
Cash flows from financing activities: |
|||||||||||||||||||||||
Payments on credit facilities |
— |
— |
— |
(2,100 |
) |
— |
(2,100 |
) |
|||||||||||||||
Proceeds from long-term debt |
— |
— |
801 |
6,055 |
— |
6,856 |
|||||||||||||||||
Payments on long-term debt |
— |
— |
(79 |
) |
(2,255 |
) |
— |
(2,334 |
) |
||||||||||||||
Net transfers to iHeartCommunications |
45,099 |
— |
— |
— |
— |
45,099 |
|||||||||||||||||
Dividends and other payments to noncontrolling interests |
— |
— |
— |
(16,917 |
) |
— |
(16,917 |
) |
|||||||||||||||
Dividends paid |
(755,538 |
) |
— |
(913 |
) |
(234,554 |
) |
235,467 |
(755,538 |
) |
|||||||||||||
Increase (decrease) in intercompany notes payable, net |
— |
5,000 |
(3,604 |
) |
(221,434 |
) |
220,038 |
— |
|||||||||||||||
Intercompany funding |
789,044 |
(225,495 |
) |
(588,292 |
) |
24,743 |
— |
— |
|||||||||||||||
Change in other, net |
(1,366 |
) |
— |
— |
(120 |
) |
(79 |
) |
(1,565 |
) |
|||||||||||||
Net cash provided by (used for) financing activities |
77,239 |
(220,495 |
) |
(592,087 |
) |
(446,582 |
) |
455,426 |
(726,499 |
) |
|||||||||||||
Effect of exchange rate changes on cash |
— |
— |
— |
(6,041 |
) |
— |
(6,041 |
) |
|||||||||||||||
Net increase in cash and cash equivalents |
81,584 |
— |
43,087 |
4,581 |
— |
129,252 |
|||||||||||||||||
Cash and cash equivalents at beginning of year |
218,701 |
— |
18,455 |
175,587 |
— |
412,743 |
|||||||||||||||||
Cash and cash equivalents at end of year |
$ |
300,285 |
$ |
— |
$ |
61,542 |
$ |
180,168 |
$ |
— |
$ |
541,995 |
100
CLEAR CHANNEL OUTDOOR HOLDINGS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(In thousands) |
Year Ended December 31, 2015 |
||||||||||||||||||||||
Parent |
Subsidiary |
Guarantor |
Non-Guarantor |
||||||||||||||||||||
Company |
Issuer |
Subsidiaries |
Subsidiaries |
Eliminations |
Consolidated |
||||||||||||||||||
Cash flows from operating activities: |
|||||||||||||||||||||||
Consolidated net income (loss) |
$ |
(71,406 |
) |
$ |
1,376 |
$ |
(75,927 |
) |
$ |
37,734 |
$ |
37,006 |
$ |
(71,217 |
) |
||||||||
Reconciling items: |
|||||||||||||||||||||||
Impairment charges |
— |
— |
21,631 |
— |
— |
21,631 |
|||||||||||||||||
Depreciation and amortization |
— |
— |
194,891 |
181,071 |
— |
375,962 |
|||||||||||||||||
Deferred taxes |
— |
1,282 |
7,305 |
(5,282 |
) |
— |
3,305 |
||||||||||||||||
Provision for doubtful accounts |
— |
— |
5,398 |
7,986 |
— |
13,384 |
|||||||||||||||||
Amortization of deferred financing charges and note discounts, net |
— |
7,468 |
1,230 |
72 |
— |
8,770 |
|||||||||||||||||
Share-based compensation |
— |
— |
5,855 |
2,647 |
— |
8,502 |
|||||||||||||||||
Gain on sale of operating and fixed assets |
— |
— |
(1,235 |
) |
(4,233 |
) |
— |
(5,468 |
) |
||||||||||||||
Equity in (earnings) loss of nonconsolidated affiliates |
75,927 |
(10,383 |
) |
(5,609 |
) |
1,935 |
(61,581 |
) |
289 |
||||||||||||||
Foreign exchange transaction gain |
— |
(3,440 |
) |
(11 |
) |
(11,339 |
) |
— |
(14,790 |
) |
|||||||||||||
Other reconciling items, net |
— |
— |
1,350 |
— |
— |
1,350 |
|||||||||||||||||
Changes in operating assets and liabilities, net of effects of acquisitions and dispositions: |
|||||||||||||||||||||||
Increase in accounts receivable |
— |
— |
(12,878 |
) |
(43,702 |
) |
— |
(56,580 |
) |
||||||||||||||
(Increase) decrease in prepaids and other current assets |
(124 |
) |
(3,433 |
) |
4,664 |
(2,835 |
) |
— |
(1,728 |
) |
|||||||||||||
Increase (decrease) in accrued expenses |
486 |
(983 |
) |
5,476 |
(414 |
) |
— |
4,565 |
|||||||||||||||
Increase (decrease) in accounts payable |
— |
— |
(15,742 |
) |
26,424 |
19,960 |
30,642 |
||||||||||||||||
Increase (decrease) in accrued interest |
— |
(3,199 |
) |
15 |
(888 |
) |
— |
(4,072 |
) |
||||||||||||||
Increase (decrease) in deferred income |
— |
— |
(6,879 |
) |
9,428 |
— |
2,549 |
||||||||||||||||
Changes in other operating assets and liabilities |
— |
— |
(17,114 |
) |
(1,047 |
) |
— |
(18,161 |
) |
||||||||||||||
Net cash provided by (used by) operating activities |
4,883 |
(11,312 |
) |
112,420 |
197,557 |
(4,615 |
) |
298,933 |
|||||||||||||||
Cash flows from investing activities: |
|||||||||||||||||||||||
Purchases of property, plant and equipment |
— |
— |
(72,374 |
) |
(145,958 |
) |
— |
(218,332 |
) |
||||||||||||||
Proceeds from disposal of assets |
— |
— |
4,626 |
6,638 |
— |
11,264 |
|||||||||||||||||
Purchases of other operating assets |
— |
— |
(23,042 |
) |
(598 |
) |
— |
(23,640 |
) |
||||||||||||||
Decrease in intercompany notes receivable, net |
— |
70,125 |
— |
— |
(70,125 |
) |
— |
||||||||||||||||
Dividends from subsidiaries |
— |
157,570 |
— |
— |
(157,570 |
) |
— |
||||||||||||||||
Change in other, net |
— |
(8,606 |
) |
(909 |
) |
(27,015 |
) |
9,513 |
(27,017 |
) |
|||||||||||||
Net cash provided by (used by) investing activities |
— |
219,089 |
(91,699 |
) |
(166,933 |
) |
(218,182 |
) |
(257,725 |
) |
|||||||||||||
Cash flows from financing activities: |
|||||||||||||||||||||||
Payments on credit facilities |
— |
— |
— |
(3,849 |
) |
— |
(3,849 |
) |
|||||||||||||||
Proceeds from long-term debt |
— |
— |
— |
222,777 |
— |
222,777 |
|||||||||||||||||
Payments on long-term debt |
— |
— |
(56 |
) |
— |
— |
(56 |
) |
|||||||||||||||
Net transfer to iHeartCommunications |
17,007 |
— |
— |
— |
— |
17,007 |
|||||||||||||||||
Dividends and other payments to noncontrolling interests |
— |
— |
— |
(30,870 |
) |
— |
(30,870 |
) |
|||||||||||||||
Dividends paid |
— |
— |
— |
(182,145 |
) |
182,145 |
— |
||||||||||||||||
Decrease in intercompany notes payable, net |
— |
— |
(4,625 |
) |
(65,500 |
) |
70,125 |
— |
|||||||||||||||
Intercompany funding |
193,021 |
(207,777 |
) |
2,415 |
12,341 |
— |
— |
||||||||||||||||
Change in other, net |
2,885 |
— |
— |
673 |
(9,513 |
) |
(5,955 |
) |
|||||||||||||||
Net cash provided by (used by) financing activities |
212,913 |
(207,777 |
) |
(2,266 |
) |
(46,573 |
) |
242,757 |
199,054 |
||||||||||||||
Effect of exchange rate changes on cash |
— |
— |
— |
(13,723 |
) |
— |
(13,723 |
) |
|||||||||||||||
Net increase (decrease) in cash and cash equivalents |
217,796 |
— |
18,455 |
(29,672 |
) |
19,960 |
226,539 |
||||||||||||||||
Cash and cash equivalents at beginning of year |
905 |
— |
— |
205,259 |
(19,960 |
) |
186,204 |
||||||||||||||||
Cash and cash equivalents at end of year |
$ |
218,701 |
$ |
— |
$ |
18,455 |
$ |
175,587 |
$ |
— |
$ |
412,743 |
101
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE
Not Applicable
ITEM 9A. CONTROLS AND PROCEDURES
Disclosure 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. As a result of the material weakness described below, our Chief Executive Officer and Chief Financial Officer concluded that our disclosure controls and procedures were not effective as of December 31, 2017.
Management’s Annual Report on Internal Control Over Financial Reporting
Our management is responsible for establishing and maintaining adequate internal control over financial reporting. Our internal control over financial reporting is a process designed under the supervision of our Chief Executive Officer and Chief Financial Officer to provide reasonable assurance regarding the preparation and reliability of financial reporting and preparation of our financial statements for external purposes in accordance with generally accepted accounting principles.
There are inherent limitations to the effectiveness of any control system, however well designed, including the possibility of human error and the possible circumvention or overriding of controls. Further, the design of a control system must reflect the fact that there are resource constraints, and the benefits of controls must be considered relative to their costs. The design of a control system also is based in part upon assumptions and judgments made by management about the likelihood of future events, and there can be no assurance that a control will be effective under all potential future conditions. As a result, even an effective system of internal control over financial reporting can provide no more than reasonable assurance with respect to the fair presentation of financial statements and the processes under which they were prepared.
A material weakness is a deficiency, or a combination of deficiencies, in internal control over financial reporting, such that there is a reasonable possibility that a material misstatement of the Company’s annual or interim financial statements will not be prevented or detected on a timely basis.
As of December 31, 2017, management assessed the effectiveness of our internal control over financial reporting based on the criteria for effective internal control over financial reporting established in Internal Control – Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission (2013 Framework). Based on the assessment, we determined that there was a material weakness in internal control over financial reporting with respect to Clear Media Limited, our outdoor business in China. Clear Media Limited is an indirect, non-wholly-owned subsidiary of the Company whose ordinary shares are listed but currently suspended from trading on the Hong Kong Stock Exchange. Specifically, falsification of bank statements and other supporting documentation used to complete bank reconciliations, collusion and circumvention of controls enabled an employee of Clear Media Limited to misappropriate $10.2 million over several years and resulted in discrepancies between actual cash balances and cash amounts included in the Company’s accounting records. These discrepancies were identified in January 2018 when the employee surrendered to the police in China and confessed to the misappropriation, and our consolidated financial statements as of and for the year ended December 31, 2017 have been adjusted to accurately reflect the Company’s cash balances.
Upon discovery of the misappropriation, we undertook certain procedures including a forensic investigation and performance of incremental substantive testing of the amounts recorded in the accounting records of our China business. Such procedures identified other matters, including three unauthorized bank accounts opened in the names of certain subsidiaries of our China business of which management was not aware. The unauthorized bank accounts have been reported to the police in China. Our investigation, as well as the investigation by the police, are on-going.
The errors arising from the deficiencies identified at our China business are not material to the consolidated financial statements reported in any interim or annual period, and therefore did not result in a revision to previously filed financial statements. However, the control deficiencies could have resulted in misstatements of the aforementioned accounts and disclosures that could have resulted in a material misstatement or omission to the annual or interim consolidated financial statements that would not have
102
been prevented or detected in a timely manner. Specifically, it was determined that our China business had control deficiencies related to: circumvention of controls and the related control environment through collusion and override of control processes; inadequate segregation of duties; and inadequate controls regarding the safeguarding of authorization mechanisms for bank accounts. We have determined that these control deficiencies constitute a material weakness.
Because of this material weakness, management concluded that we did not maintain effective internal control over financial reporting as of December 31, 2017, based on criteria described in the 2013 Framework.
The effectiveness of the Company’s internal control over financial reporting as of December 31, 2017 has been audited by Ernst & Young LLP, an independent registered public accounting firm, as stated in their report which appears in this Item under the heading “Report of Independent Registered Public Accounting Firm.”
Remediation of the Material Weakness
We are evaluating the material weakness and developing a plan of remediation to strengthen the internal controls over the cash management process and financial reporting of our China business. The remediation plan at Clear Media Limited will include actions to:
▪implement additional monitoring controls through revising and formalizing the cash and cash equivalent review processes;
▪enhance the formality and rigor of review and reconciliation procedures;
▪strengthen controls around access and use of banking authorization tokens and chops; and
▪formalize review and approval processes around related party transactions;
We are committed to maintaining a strong internal control environment and believe that these remediation efforts will address the weakness in controls described above. We have started to implement these steps, however, some of these steps will take time to be fully integrated and confirmed to be effective and sustainable. Additional controls may also be required over time. Until the remediation steps set forth above are fully implemented and tested, the material weakness described above will continue to exist.
Changes in Internal Control Over Financial Reporting
There were no changes in our internal control over financial reporting that occurred during the most recent fiscal quarter that have materially affected, or are reasonably likely to materially affect, our internal control over financial reporting.
103
Report of Independent Registered Public Accounting Firm
To the Stockholders and the Board of Directors of Clear Channel Outdoor Holdings, Inc.
Opinion on Internal Control over Financial Reporting
We have audited Clear Channel Outdoor Holdings, Inc. and subsidiaries' internal control over financial reporting as of December 31, 2017, based on criteria established in Internal Control-Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission (2013 Framework) (the COSO criteria). In our opinion, because of the effect of the material weakness described below on the achievement of the objectives of the control criteria, Clear Channel Outdoor Holdings, Inc. and subsidiaries (the Company) has not maintained effective internal control over financial reporting as of December 31, 2017, based on the COSO criteria.
A material weakness is a deficiency, or combination of deficiencies, in internal control over financial reporting, such that there is a reasonable possibility that a material misstatement of the company’s annual or interim financial statements will not be prevented or detected on a timely basis. The following material weakness has been identified and included in management’s assessment. Management has identified a material weakness in controls related to an inadequate control environment at its China based subsidiary, Clear Media Limited, specifically it was determined that there was inadequate segregation of duties and inadequate controls regarding the safeguarding of authorization mechanisms for transactions.
We also have audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States) (PCAOB), the 2017 consolidated financial statements of the Company and financial statement schedule listed in the Index at Item 15 (a)2. This material weakness was considered in determining the nature, timing and extent of audit tests applied in our audit of the 2017 consolidated financial statements, and this report does not affect our report dated May 3, 2018, which expressed an unqualified opinion thereon.
Basis for Opinion
The Company's management is responsible for maintaining effective internal control over financial reporting and for its assessment of the effectiveness of internal control over financial reporting included in the accompanying Management's Annual Report on Internal Control Over Financial Reporting. Our responsibility is to express an opinion on the Company's internal control over financial reporting based on our audit. We are a public accounting firm registered with the PCAOB and are required to be independent with respect to the Company in accordance with the U.S. federal securities laws and the applicable rules and regulations of the Securities and Exchange Commission and the PCAOB.
We conducted our audit in accordance with the standards of the PCAOB. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether effective internal control over financial reporting was maintained in all material respects.
Our audit included obtaining an understanding of internal control over financial reporting, assessing the risk that a material weakness exists, testing and evaluating the design an operating effectiveness of internal control based on the assessed risk, and performing such other procedures as we considered necessary in the circumstances. We believe that our audit provides a reasonable basis for our opinion.
Definition and Limitations on Internal Control Over Financial Reporting
A company's internal control over financial reporting is a process designed to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles. A company's internal control over financial reporting includes those policies and procedures that (1) pertain to the maintenance of records that, in reasonable detail, accurately and fairly reflect the transactions and dispositions of the assets of the company; (2) provide reasonable assurance that the transactions are recorded as necessary to permit preparation of the financial statements in accordance with generally accepted accounting principles, and that receipts and expenditures of the company are being made only in accordance with authorizations of management and directors of the company; and (3) provide reasonable assurance regarding prevention or timely detection of unauthorized acquisition, use, or disposition of the company's assets that could have a material effect on the financial statements.
Because of its inherent limitations, internal control over financial reporting may not prevent or detect misstatements. Also, projections of any evaluation of effectiveness to future periods are subject to the risk that controls may become inadequate because of changes in conditions, or that the degree of compliance with the policies and procedures may deteriorate.
104
/s/ Ernst & Young LLP
San Antonio, Texas
May 3, 2018
105
ITEM 9B. OTHER INFORMATION
Not Applicable
106
PART III
ITEM 10. DIRECTORS, EXECUTIVE OFFICERS AND CORPORATE GOVERNANCE
The information required by this item with respect to our executive officers is set forth at the end of Part I of this Annual Report on Form 10-K.
Our Code of Business Conduct and Ethics (the “Code of Conduct”) applies to all of our officers, directors and employees, including our principal executive officer, principal financial officer and principal accounting officer. The Code of Conduct is publicly available on our internet website at www.clearchanneloutdoor.com. We intend to satisfy the disclosure requirements of Item 5.05 of Form 8-K regarding any amendment to, or waiver from, a provision of the Code of Conduct that applies to our principal executive officer, principal financial officer or principal accounting officer and relates to any element of the definition of code of ethics set forth in Item 406(b) of Regulation S-K by posting such information on our website, www.clearchanneloutdoor.com.
All other information required by this item is incorporated by reference to the information set forth in a Form 10-K/A or our Definitive Proxy Statement for our 2018 Annual Meeting of Stockholders (the “Definitive Proxy Statement”) to be filed with the Securities and Exchange Commission.
ITEM 11. EXECUTIVE COMPENSATION
The information required by this item is incorporated by reference to a Form 10-K/A or our Definitive Proxy Statement.
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT AND RELATED STOCKHOLDER MATTERS
The following table summarizes information as of December 31, 2017 relating to our equity compensation plans pursuant to which grants of options, restricted stock or other rights to acquire shares may be granted from time to time.
Plan Category |
Number of Securities to be issued upon exercise of outstanding options, warrants and rights |
Weighted-Average exercise price of outstanding options, warrants and rights
(1)
|
Number of Securities remaining available for future issuance under equity compensation plans (excluding securities reflected in column (A)) |
|||||||
Equity Compensation Plans approved by security holders(2)
|
8,010,876(3)
|
$ |
6.10 |
26,849,707 |
||||||
Equity Compensation Plans not approved by security holders |
— |
— |
— |
|||||||
Total |
8,010,876 |
$ |
6.10 |
26,849,707 |
(1) |
The weighted-average exercise price is calculated based solely on the exercise prices of the outstanding options and does not reflect the shares that will be issued upon the vesting of outstanding awards of restricted stock or RSUs, which have no exercise price. |
(2) |
Represents the 2005 Stock Incentive Plan and the 2012 Stock Incentive Plan. The 2005 Stock Incentive Plan automatically terminated (other than with respect to outstanding awards) upon stockholder approval of the 2012 Stock Incentive Plan at our Annual Stockholder Meeting on May 18, 2012 and, as a result, there are no shares available for grant under the 2005 Stock Incentive Plan. |
(3) |
This number includes shares subject to outstanding awards granted, of which 4,110,459 shares are subject to outstanding options, 2,527,419 shares are subject to outstanding restricted shares and 1,372,998 shares are subject to outstanding RSUs. |
All other information required by this item is incorporated by reference to a Form 10-K/A or our Definitive Proxy Statement.
107
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS, AND DIRECTOR INDEPENDENCE
The information required by this item is incorporated by reference to a Form 10-K/A or our Definitive Proxy Statement.
ITEM 14. PRINCIPAL ACCOUNTING FEES AND SERVICES
The information required by this item is incorporated by reference to a Form 10-K/A or our Definitive Proxy Statement.
PART IV
ITEM 15. EXHIBITS AND FINANCIAL STATEMENT SCHEDULES
(a)1. Financial Statements.
The following consolidated financial statements are included in Item 8:
Consolidated Balance Sheets as of December 31, 2017 and 2016.
Consolidated Statements of Comprehensive Income (Loss) for the Years Ended December 31, 2017, 2016 and 2015.
Consolidated Statements of Changes in Stockholders’ Equity (Deficit) for the Years Ended December 31, 2017, 2016 and 2015.
Consolidated Statements of Cash Flows for the Years Ended December 31, 2017, 2016 and 2015.
Notes to Consolidated Financial Statements
(a)2. Financial Statement Schedule.
The following financial statement schedule for the years ended December 31, 2017, 2016 and 2015 and related report of independent auditors is filed as part of this report and should be read in conjunction with the consolidated financial statements.
Schedule II Valuation and Qualifying Accounts
All other schedules for which provision is made in the applicable accounting regulation of the Securities and Exchange Commission are not required under the related instructions or are inapplicable, and therefore have been omitted.
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SCHEDULE II
VALUATION AND QUALIFYING ACCOUNTS
Allowance for Doubtful Accounts
(In thousands) |
Charges |
|||||||||||||||||||
Balance at |
to Costs, |
Write-off |
Balance |
|||||||||||||||||
Beginning |
Expenses |
of Accounts |
at End of |
|||||||||||||||||
Description |
of period |
and other |
Receivable |
Other (1)
|
Period |
|||||||||||||||
Year ended December 31, 2015 |
$ |
24,308 |
$ |
13,384 |
$ |
10,585 |
$ |
(1,759 |
) |
$ |
25,348 |
|||||||||
Year ended December 31, 2016 |
$ |
25,348 |
$ |
10,659 |
$ |
13,069 |
$ |
(540 |
) |
$ |
22,398 |
|||||||||
Year ended December 31, 2017 |
$ |
22,398 |
$ |
6,740 |
$ |
8,057 |
$ |
1,406 |
$ |
22,487 |
(1) |
Primarily foreign currency adjustments and acquisition and/or divestiture activity. |
SCHEDULE II
VALUATION AND QUALIFYING ACCOUNTS
Deferred Tax Asset Valuation Allowance
(In thousands) |
Charges |
|||||||||||||||||||
Balance at |
to Costs, |
Balance |
||||||||||||||||||
Beginning |
Expenses |
at end of |
||||||||||||||||||
Description |
of Period |
and other (1)
|
Reversal (2)
|
Adjustments (3)
|
Period |
|||||||||||||||
Year ended December 31, 2015 |
$ |
168,555 |
$ |
41,704 |
$ |
(457 |
) |
$ |
(24,723 |
) |
$ |
185,079 |
||||||||
Year ended December 31, 2016 |
$ |
185,079 |
$ |
47,795 |
$ |
(82,475 |
) |
$ |
(14,360 |
) |
$ |
136,039 |
||||||||
Year ended December 31, 2017 |
$ |
136,039 |
$ |
158,857 |
$ |
(12,155 |
) |
$ |
(8,522 |
) |
$ |
274,219 |
(1) |
During 2015, 2016 and 2017, the Company recorded valuation allowances on deferred tax assets attributable to net operating losses in certain foreign jurisdictions due to the uncertainty of the ability to utilize those losses in future periods. During 2017, the Company recorded $149.2 million in valuation allowance related to federal and state deferred tax assets and $9.7 million in valuation allowance on foreign deferred tax assets due to the uncertainty of the ability to utilize these assets in future periods.
|
(2) |
During 2015, 2016 and 2017, the Company realized the tax benefits associated with certain foreign deferred tax assets, primarily related to foreign loss carryforwards, on which a valuation allowance was previously recorded. The associated valuation allowance was reversed in the period in which, based on the weight of available evidence, it is more-likely-than-not that the deferred tax asset will be realized. During 2016, the Company released valuation allowances in the U.S. of $32.9 million and in France of $43.3 million.
|
(3) |
During 2015, 2016 and 2017, the Company adjusted certain valuation allowances as a result of changes in tax rates in certain jurisdictions and as a result of the expiration of carryforward periods for net operating loss carryforwards.
|
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(a)3. Exhibits
Exhibit Number |
Description |
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3.1 |
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3.2 |
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4.1 |
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4.2 |
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4.3 |
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4.4 |
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4.5 |
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4.6 |
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4.7 |
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10.1 |
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10.2 |
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110
10.3 |
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10.4 |
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10.5 |
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10.6 |
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10.7 |
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10.8 |
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10.9 |
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10.10 |
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10.11 |
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10.12 |
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10.13 |
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10.14 |
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10.15 |
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111
10.16 |
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10.17 |
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10.18 |
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10.19 |
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10.20§ |
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10.21§ |
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10.22§ |
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10.23§ |
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10.24§ |
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10.25§ |
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10.26§ |
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10.27§ |
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10.28§ |
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10.29§ |
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10.30§ |
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112
10.31§ |
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10.32§ |
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10.33§ |
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10.34§ |
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10.35§ |
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10.36§ |
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10.37§ |
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10.38§ |
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10.39§ |
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10.40§ |
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10.41§ |
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10.42§ |
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10.43§ |
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10.44§ |
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10.45§ |
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10.46§ |
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113
10.47§ |
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10.48§ |
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10.49§ |
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10.50§ |
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10.51 |
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10.52§ |
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10.53§ |
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10.54§ |
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10.55 |
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10.56§ |
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10.57§ |
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10.58§ |
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10.59§ |
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10.60§ |
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114
10.61§ |
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10.62§ |
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10.63 |
|
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10.64§ |
||
10.65§ |
|
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21* |
|
|
23* |
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|
24* |
Power of Attorney (included on signature page).
|
|
31.1* |
|
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31.2* |
|
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32.1** |
|
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32.2** |
|
|
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.
|
_________________
* Filed herewith.
** This exhibit is furnished herewith and shall not be deemed “filed” for purposes of Section 18 of the Securities Exchange Act of 1934, or otherwise subject to the liability of that section, and shall not be deemed to be incorporated by reference into any filing under the Securities Act of 1933 or the Securities Exchange Act of 1934.
115
§ A management contract or compensatory plan or arrangement required to be filed as an exhibit pursuant to Item 601 of Regulation S-K.
ITEM 16. Form 10-K Summary
None
116
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) 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, on May 3, 2018.
CLEAR CHANNEL OUTDOOR HOLDINGS, INC.
By: /s/ Robert W. Pittman
Robert W. Pittman
Chairman & Chief Executive Officer
Power of Attorney
Each person whose signature appears below authorizes Robert W. Pittman, Richard J. Bressler and Scott D. Hamilton, or any one of them, each of whom may act without joinder of the others, to execute in the name of each such person who is then an officer or director of the Registrant and to file any amendments to this Annual Report on Form 10-K necessary or advisable to enable the Registrant to comply with the Securities Exchange Act of 1934, as amended, and any rules, regulations and requirements of the Securities and Exchange Commission in respect thereof, which amendments may make such changes in such report as such attorney-in-fact may deem appropriate.
Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed by the following persons on behalf of the Registrant and in the capacities and on the dates indicated.
Name |
Title |
Date |
/s/ Robert W. Pittman
Robert W. Pittman
|
Chairman, Chief Executive Officer (Principal Executive Officer) and Director |
May 3, 2018 |
/s/ Richard J. Bressler
Richard J. Bressler
|
Chief Financial Officer (Principal Financial Officer)
|
May 3, 2018 |
/s/ Scott D. Hamilton
Scott D. Hamilton
|
Senior Vice President, Chief Accounting Officer (Principal Accounting Officer) and Assistant Secretary |
May 3, 2018 |
/s/ Blair E. Hendrix
Blair E. Hendrix
|
Director
|
May 3, 2018 |
/s/ Paul Keglevic
Paul Keglevic
|
Director
|
May 3, 2018 |
/s/ Daniel G. Jones
Daniel G. Jones
|
Director
|
May 3, 2018 |
/s/ Vicente Piedrahita
Vicente Piedrahita
|
Director
|
May 3, 2018 |
/s/ Olivia C. Sabine
Olivia C. Sabine
|
Director
|
May 3, 2018 |
/s/ Harvey L. Tepner
Harvey L. Tepner
|
Director
|
May 3, 2018 |
/s/ Dale W. Tremblay
Dale W. Tremblay
|
Director
|
May 3, 2018 |
117