OUTFRONT Media Inc. — Q3 2019 Form 10-Q
Reporting period: Three and nine months ended September 30, 2019. Figures are unaudited and in U.S. dollars; financial statement amounts are in millions except per-share data. OUTFRONT is a REIT operating out-of-home advertising businesses in the U.S. and Canada, principally billboards and transit displays.
Financial performance and liquidity
| Metric | Q3 2019 | Q3 2018 | Change |
|---|---|---|---|
| Revenue | $462.5 | $414.2 | +12% |
| Operating income | $85.5 | $78.9 | +8% |
| Adjusted OIBDA | $140.3 | $129.3 | +9% |
| Adjusted OIBDA margin | 30% | 31% | Down 1 percentage point |
| Net income | $38.7 | $46.8 | −17% |
| Diluted EPS | $0.27 | $0.33 | −18% |
For the nine months, revenue was $1,294.1 million (+12%), operating income $211.1 million (+47%), Adjusted OIBDA $370.7 million (+10%; 29% margin, unchanged), net income $95.1 million (+88%), and diluted EPS $0.66 versus $0.35. The net-income comparison benefited materially from a $42.9 million impairment charge recorded in 2018.
- Revenue mix and growth: Q3 billboard revenue rose 7% to $312.0 million; transit and other rose 22% to $150.5 million. Management attributed growth to higher yield, digital display expansion and franchise wins, particularly BART. Digital billboard conversions also supported billboard growth.
- Profitability pressures: Q3 operating expenses increased 14% and SG&A rose 11%, faster than revenue. Operating costs included higher transit franchise, billboard lease, posting and maintenance costs. The U.S. Media Adjusted OIBDA margin declined to 35% from 36%.
- Cash flow (nine months): Operating cash flow was $162.1 million, up from $137.4 million. Investing used $138.1 million, including $65.4 million of capital expenditures and $60.7 million for acquisitions. Financing used $14.7 million; dividends paid were $156.0 million. Cash, cash equivalents and restricted cash ended at $63.7 million.
- Debt and liquidity: Debt, net of issuance costs, was $2,422.5 million at September 30, versus $2,309.6 million at year-end 2018; weighted-average debt cost was 4.9%. Cash and cash equivalents were $58.3 million. Current liabilities exceeded current assets by $185.1 million; management said the deficit primarily reflected adoption of the lease accounting standard. Total leverage ratio was 4.4x and secured leverage 1.3x; the company reported covenant compliance.
- Lease obligations: Adoption of the new lease standard in Q1 added $1.4 billion of operating lease assets and approximately $1.2 billion of lease liabilities. This materially affects balance-sheet comparisons with 2018.
Material changes, outlook and notable items
- Q3 net income declined despite higher revenue and operating income, primarily because of an $11.0 million loss on extinguishment of debt and higher interest expense. The loss followed the July redemption of 5.250% notes due 2022, funded in part by $650 million of 5.000% notes due 2027.
- Nine-month operating cash flow improved, but investing outflows increased substantially year over year, primarily due to acquisitions and MTA deployment spending. The company raised $50.9 million net through its ATM equity program during the nine months; no ATM shares were sold in Q3.
- Management expected approximately $80 million of 2019 capital expenditures, excluding MTA deployment costs, and approximately $150 million of MTA equipment deployment costs for the full year. It expected to use approximately $350 million of incremental third-party financing within the original four-year MTA deployment period. These are spending and financing expectations, not earnings guidance.
- The MTA program requires extensive digital-screen deployment. As of September 30, 3,740 displays had been installed; $197.9 million of deployment costs had been incurred to date, of which $20.8 million had been recouped. If incremental revenues are insufficient, some deployment costs may not be recoverable and could adversely affect results.
- The board approved a $0.36-per-share quarterly dividend payable December 31, 2019. Seasonal advertising patterns generally make Q4 the strongest quarter and Q1 the weakest. The filing gives no specific revenue or earnings forecast.
- Other exposures include advertising-market and economic weakness, competition, municipal contract renewals and bidding, digital deployment execution, substantial indebtedness and variable interest rates, REIT qualification and tax matters, and Canadian business risks. The company reported routine litigation not expected to have a material adverse effect and no material change to previously disclosed risk factors.
Important facts for investors to verify
- Whether revenue and digital-display growth can continue to offset faster growth in operating costs and the modest decline in Adjusted OIBDA margins.
- The MTA rollout pace, remaining deployment commitments, financing plan, revenue recoupment and recoverability of capitalized deployment costs.
- Debt maturities, the short-term AR and repurchase facility balances and renewal terms, interest-rate sensitivity, and covenant headroom.
- Cash generation after dividends, capital expenditures, acquisitions and direct lease acquisition costs; consider that FFO and AFFO are non-GAAP measures and not substitutes for cash available for discretionary use.
- The effects of lease-standard adoption when comparing balance-sheet liabilities and working capital with prior periods, and the outcome of the IRS audit-related tax settlement.