Lamar Advertising Company — 2016 Form 10-K
Business context and reporting period. This annual report covers the fiscal year ended December 31, 2016; it is not a standalone fourth-quarter filing. Lamar operates one reporting segment, outdoor advertising, including billboards, logo signs and transit displays. At year-end it operated approximately 149,000 billboards, 144,000 logo displays and 41,000 transit displays across the United States, Canada and Puerto Rico. Lamar Advertising is the parent company; Lamar Media is its wholly owned operating subsidiary and principal borrower.
Financial results and key metrics
| Metric | 2016 | 2015 |
|---|---|---|
| Net revenue | $1.500 billion | $1.353 billion |
| Operating income | $439.0 million | $383.0 million |
| Net income | $298.8 million | $262.6 million |
| Diluted earnings per share | $3.05 | $2.72 |
| Cash provided by operations | $521.8 million | $477.7 million |
| Capital expenditures | $107.6 million | $110.4 million |
| Year-end cash and cash equivalents | $35.5 million | $22.3 million |
| Year-end total debt, net of financing costs | $2.349 billion | $1.891 billion |
- Revenue increased 10.9%; management attributed most of the reported growth to acquired assets. On an acquisition-adjusted basis, revenue increased 2.9% to $1.500 billion from $1.458 billion.
- Operating margin was 29.3%, up from 28.3%; net margin was 19.9%, compared with 19.4%. Direct advertising expense was 35.0% of revenue in both years.
- Adjusted EBITDA, a non-GAAP measure, was $657.5 million, up 11.1%. FFO was $475.6 million and AFFO was $488.9 million; the filing cautions these measures are not substitutes for GAAP results or operating cash flow.
- Operating cash flow less capital expenditures was approximately $414.2 million. Investing activities used $681.0 million, principally reflecting $585.1 million of acquisition spending.
- Working capital was $38.5 million. Reported total liquidity was $245.4 million: $35.5 million cash plus $209.9 million of available revolving credit. The company reported compliance with its debt covenants.
- Interest expense rose to $123.7 million from $98.4 million, primarily following the issuance of $400 million of 5.75% senior notes due 2026. Variable-rate borrowings were approximately $433.1 million; management estimated a 200-basis-point rate increase would add about $10.1 million to annual interest expense.
- Common distributions totaled $3.02 per share in 2016, or approximately $293.6 million. The board declared a $0.83-per-share quarterly dividend for March 2017 and said it expected 2017 distributions to total $3.32 per share.
Material changes versus the prior year
- Reported revenue growth reflected acquisitions, including the January 2016 purchase of assets in five markets from Clear Channel Outdoor for approximately $458.5 million, plus 26 other acquisitions totaling $126.6 million. Billboard revenue rose 10.5%, logo revenue 7.6% and transit revenue 17.7%.
- Acquisition-adjusted revenue grew 2.9%, indicating more modest underlying growth than the 10.9% reported increase.
- Debt increased by approximately $457.7 million net of financing costs, while cash from operations increased by $44.2 million. The company issued the 2026 notes and used proceeds to repay a temporary $300 million term loan and reduce revolving borrowings.
- Net income increased 13.8%; higher operating income was partly offset by higher interest expense and a $3.2 million loss on extinguishment of debt.
Outlook, commentary and risks
- Management expected 2017 capital expenditures to approximate 2016 spending and stated existing cash, revolver availability and expected operating cash flows were sufficient for operating needs through fiscal 2017.
- Management cited occupancy, pricing, local sales execution, digital deployment and strategic acquisitions as operating priorities. Digital billboards generated approximately 21% of billboard advertising net revenue; about 2,600 were in operation at year-end.
- Key risks include substantial indebtedness and covenant restrictions; sensitivity of advertising demand to economic conditions; competition from other media; and the need to renew leased sites and state-awarded logo contracts. Three of 24 logo contracts were subject to renewal in 2017.
- Outdoor advertising is regulated at federal, state and local levels. A 2016 appeals court decision upheld federal guidance allowing states to authorize digital billboards, but a petition for Supreme Court review was pending. Future restrictions could affect existing displays or expansion plans.
- REIT qualification is important to the tax and distribution model. Failure to maintain REIT status could lead to corporate-level taxation and reduced cash available for distributions. Distributions are not guaranteed and remain subject to board discretion, cash needs and debt restrictions.
- The company said it does not consider hurricane and other natural-disaster insurance economical; contingency plans may not prevent significant losses. Management reported no litigation expected to have a material adverse effect.
- Unusual items included an $8.6 million non-cash gain from an exchange of outdoor advertising assets and the $3.2 million debt-extinguishment loss. No goodwill impairment was recorded.
Most important facts for investors to verify
- How much of future revenue growth is organic, compared with growth from acquisitions; assess the 2.9% acquisition-adjusted growth against reported growth of 10.9%.
- Debt maturities, refinancing needs, covenant headroom and the effect of interest-rate changes, particularly given year-end debt of $2.349 billion and the 2019 credit-facility maturity.
- Whether acquisitions deliver expected integration benefits and returns, and how further acquisition spending is funded.
- Renewal outcomes for the three logo contracts due in 2017, alongside billboard site lease renewal costs and expirations.
- Developments in digital-billboard regulation and the pending Supreme Court petition, as well as the company’s ability to sustain REIT qualification and distributions.
- Reconcile reported liquidity, operating cash flow and acquisition-adjusted revenue to the audited financial statements and the filing’s non-GAAP definitions. KPMG issued unqualified audit opinions on the financial statements and internal controls.