Lamar Advertising Company — Q2 2018 Form 10-Q
Reporting period: Quarter and six months ended June 30, 2018; comparisons are with the corresponding 2017 periods. Lamar Advertising is an outdoor advertising REIT, earning most revenue from billboard, logo-sign and transit advertising. The filing also includes its wholly owned operating subsidiary, Lamar Media Corp.; consolidated operating results are substantially the same.
Financial performance
| Metric | Q2 2018 | Q2 2017 | Six months 2018 | Six months 2017 |
|---|---|---|---|---|
| Revenue | $419.8m | $397.1m | $780.8m | $743.4m |
| Operating income | $135.7m | $128.2m | $201.6m | $203.6m |
| Net income | $100.4m | $92.4m | $115.5m | $134.2m |
| Diluted EPS | $1.02 | $0.94 | $1.17 | $1.36 |
| Operating cash flow | Not provided separately for the quarter | Not provided separately for the quarter | $215.8m | $194.8m |
- Q2 growth and margins: Revenue increased 5.7%; operating income rose 5.9% and net income rose 8.7%. Calculated operating margin was approximately 32.3%, versus 32.3%; net margin was approximately 23.9%, versus 23.3%.
- First-half results: Revenue increased 5.0%, while operating income declined about 1.0% and net income fell 13.9%. Calculated operating margin declined to approximately 25.8% from 27.4%, and net margin to approximately 14.8% from 18.0%.
- Revenue mix: Q2 billboard revenue was $365.4m, logo advertising $21.4m and transit advertising $33.1m. Management attributed growth to acquisitions and organic gains, including higher digital billboard revenue; transit revenue also increased.
- Non-GAAP measures: Q2 Adjusted EBITDA was about $195.8m, up 7.6%; AFFO was about $150.5m, up 10.2%, and FFO was about $150.9m, up 7.1%. For the first half, Adjusted EBITDA was $334.7m, up 7.9%; AFFO was $246.9m, up 10.7%, while FFO was $229.6m, down 0.4%. These are company-defined supplemental measures, not substitutes for GAAP results or operating cash flow.
Cash, debt and liquidity
- At June 30, cash and cash equivalents were $19.6m, down from $115.5m at December 31, 2017. First-half operating cash flow was $215.8m; investing activities used $61.4m, including $52.5m of capital expenditures and $16.2m for acquisitions. Financing activities used $249.6m, including $261.1m of dividends and distributions.
- Gross debt principal was approximately $2.592bn; reported debt net of deferred financing costs was $2.565bn. Long-term debt net of financing costs was $2.541bn. The company reported total liquidity of $338.6m: $19.6m cash plus $319.0m available on its revolving facility.
- The senior credit facility had $1.143bn outstanding, including $118.0m drawn on the revolving facility. The company reported compliance with its debt covenants. Variable-rate debt represented approximately 44.6% of outstanding long-term debt; management estimated a 200-basis-point increase in rates would have added $9.5m to first-half interest expense.
- Cash interest paid in the first half was $74.4m, compared with $60.3m a year earlier. Interest expense was $65.5m, up from $63.5m.
Material changes, outlook and risks
- Debt refinancing: Lamar Media borrowed the full $600m Term B facility in March, with a March 2025 maturity, and used the proceeds plus cash to redeem its $500m 5⅞% notes due 2022. The redemption produced a $15.4m extinguishment loss, including a $9.8m cash premium and a $5.6m non-cash write-off. This was a major contributor to the first-half net-income decline.
- Puerto Rico divestiture: The company sold substantially all Puerto Rico operating assets on April 16 and recorded a $7.7m loss. Consideration included $3.0m in cash and a $9.5m note due in 2024.
- Guidance: Management estimated 2018 capital expenditures of approximately $110m and said it expected operating cash flows to exceed operating, capital expenditure and dividend needs. The company expected 2018 quarterly distributions to total $3.65 per common share, excluding the January payment; future distributions remain at the board’s discretion and subject to REIT and debt restrictions.
- Equity issuance: Under a new at-the-market program of up to $400m, 213,276 Class A shares had been sold by June 30, generating approximately $15.1m net proceeds; $384.9m remained available. A separate shelf registration filed in August had not yet been used as of August 8.
- Accounting and other risks: The company adopted the new revenue standard on January 1, 2018 with no opening retained-earnings adjustment. It expected the lease standard, effective January 1, 2019, to add right-of-use assets and lease liabilities for operating leases; the impact was still under assessment. Key risks include advertising demand and economic conditions, competition, regulation, contract renewals, acquisitions, digital deployment, indebtedness and interest rates, severe weather, and maintaining REIT status. No material change to previously disclosed risk factors or contingencies was reported.
Important facts for investors to verify
- How much of reported revenue growth reflects organic performance versus acquisitions, particularly digital billboard trends.
- Whether improved Adjusted EBITDA and AFFO translate into sustained GAAP earnings and cash generation after capital spending, interest and distributions.
- The refinancing’s effect on future interest expense, variable-rate exposure, covenant headroom and debt repayment needs.
- The final impact of the 2019 lease-standard adoption and the company’s ability to fund planned capital expenditures and distributions.
- Any further ATM or shelf share issuance, and the resulting dilution and use of proceeds.