Lamar Advertising Company — Q2 2019 Form 10-Q
Reporting period: Quarter and six months ended June 30, 2019. The filing presents Lamar Advertising Company and its wholly owned subsidiary, Lamar Media Corp.; the financial results below are consolidated and stated in U.S. dollars. Amounts are in millions except per-share data.
Business context and key financial results
Lamar primarily sells advertising space on billboard, logo and transit displays. Growth depends on occupancy, pricing, advertising demand and acquisitions. Management said digital billboard revenue was a notable contributor to comparable-period growth.
| Metric | Q2 2019 | Q2 2018 | Six months 2019 | Six months 2018 |
|---|---|---|---|---|
| Revenue | $448.7 | $419.8 | $833.2 | $780.8 |
| Operating income | $144.1 | $135.7 | $234.9 | $201.6 |
| Net income | $118.4 | $100.4 | $169.6 | $115.5 |
| Diluted EPS | $1.18 | $1.02 | $1.69 | $1.17 |
| Operating cash flow | Not separately provided | Not separately provided | $237.0 | $215.8 |
Q2 revenue rose 6.9%, operating income 6.2% and net income 17.9% year over year. Six-month revenue increased 6.7%, operating income 16.5% and net income 46.9%. Reported operating margin was approximately 32.1% for Q2 2019 versus 32.3% in Q2 2018; net margin was approximately 26.4% versus 23.9%. The filing reports cash dividends of $0.96 per common share for Q2 and $1.92 per share for the first half.
Cash flow, debt and liquidity
- First-half operating cash flow was $237.0 million. Investing used $137.1 million, including $78.1 million for acquisitions and $60.6 million of capital expenditures. Operating cash flow less reported capital expenditures was approximately $176.5 million, before acquisitions, financing and distributions.
- At June 30, cash was $17.3 million. Management reported total liquidity of approximately $429.2 million, including $411.9 million available under the revolving credit facility. Working capital deficit was $302.3 million, compared with $91.4 million at year-end; management attributed the increase primarily to lease accounting changes.
- Gross debt was approximately $3.000 billion, versus $2.915 billion at December 31, 2018. Debt net of deferred financing costs was $2.973 billion, including $209.7 million of current maturities. The company also reported $1.203 billion of operating lease liabilities; these are separate from debt.
- Revolver borrowings were $125 million, with $13.1 million of letters of credit and $411.9 million of remaining availability. The $175 million accounts-receivable securitization facility was fully drawn. The company issued $250 million of 5.75% notes in February 2019 and used the net proceeds to repay revolving borrowings.
- Cash paid for interest in the first half was $67.0 million. Variable-rate debt under the credit facility and receivables program totaled approximately $1.297 billion; management estimated a 200-basis-point rate increase would add about $13.3 million to interest expense for the six-month period.
Material changes and unusual items
- Acquisition-adjusted revenue growth was 2.4% for Q2 and 2.3% for the first half, below reported growth of 6.9% and 6.7%, respectively. Management attributed much of reported growth to acquisitions; comparable growth was led by digital billboard revenue.
- Adjusted EBITDA, a non-GAAP measure, increased 6.2% to $207.9 million in Q2 and 5.8% to $354.1 million for the first half. AFFO, also non-GAAP, rose 2.4% to $154.1 million and 2.5% to $253.0 million, respectively. These measures are not substitutes for GAAP earnings or operating cash flow.
- The company adopted ASC 842 lease accounting on January 1, 2019, recognizing about $1.2 billion of operating lease liabilities and corresponding right-of-use assets at adoption. At June 30, right-of-use assets were $1.291 billion; lease liabilities were $1.203 billion. Operating leases had a 12-year weighted-average remaining term.
- First-half earnings included a $17.0 million non-cash tax benefit related to assets transferred into a qualifying REIT subsidiary. The company also recorded a $5.2 million gain on asset dispositions, primarily related to a transit-contract amendment. In first-half 2018, it recorded a $15.4 million loss on extinguishment of debt and a loss on the sale of Puerto Rico assets.
- First-half acquisitions cost $78.1 million. The Fairway acquisition’s purchase-price allocation remained preliminary; management expected to finalize it by year-end 2019. The filing reports a $36.9 million adjustment to Fairway goodwill and a $17.0 million write-off of deferred tax liabilities following a REIT subsidiary transfer.
Outlook, risks and contingencies
- Management expected 2019 capital expenditures of approximately $128 million and aggregate quarterly common distributions of $3.84 per share for 2019. Future distributions remain subject to board discretion, operating cash flow, REIT requirements, debt restrictions and other factors.
- Management believed cash, revolving availability and expected operating cash flow were sufficient for operating needs through fiscal 2019, and expected 2019 operating cash flow to exceed cash needs for operations, capital expenditures and dividends. No full-year revenue or earnings guidance is provided in the supplied filing text.
- The company and Lamar Media reported compliance with debt covenants. Debt agreements restrict additional borrowing, distributions, asset sales, liens and investments; a covenant breach could permit lenders to terminate commitments or accelerate repayment. Lamar Media’s ability to distribute cash to the parent is also restricted.
- Key disclosed risks include advertising-market and economic conditions, substantial indebtedness and interest-rate exposure, competition, regulation, contract renewals, acquisitions and integration, digital deployment, severe weather, and maintaining REIT status. Management reported no material changes to previously disclosed risk factors or commitments and contingencies, and no off-balance-sheet arrangements.
Important facts for investors to verify
- Whether comparable revenue growth, particularly digital billboard growth, is sustained and how results develop excluding acquisitions.
- Debt maturities, variable-rate exposure, covenant headroom and the availability of revolver and securitization funding.
- The cash-flow capacity to fund capital expenditures, acquisitions and planned distributions, including the effect of lease payments.
- The final Fairway purchase-price allocation and the nature and recurrence of the non-cash tax benefit and disposition gains.
- Whether the expected 2019 capital spending and $3.84-per-share distribution plan is achieved; future distributions are not guaranteed.