Lamar Advertising Company — Q3 2015 Form 10-Q
Business context and period. The combined filing covers Lamar Advertising Company and its wholly owned subsidiary Lamar Media Corp. for the quarter and nine months ended September 30, 2015. The business primarily rents outdoor advertising space, including billboards, logo signs and transit displays. Dollar amounts below are in millions unless noted.
Financial performance and position
| Metric | Three months ended Sept. 30 | Nine months ended Sept. 30 |
|---|---|---|
| Revenue | $350.7, up 4.7% from $335.0 | $997.4, up 5.0% from $950.4 |
| Operating income | $111.6, versus $86.0 | $278.2, versus $190.2 |
| Net income | $86.0, versus $35.1 | $186.0, versus $45.6 |
| Basic and diluted EPS | $0.89, versus $0.37 | $1.93, versus $0.48 |
| Operating margin | 31.8%, versus 25.7% | 27.9%, versus 20.0% |
Revenue growth on an acquisition-adjusted basis was 1.8% for the quarter and 3.2% for the nine-month period. Management attributed growth to billboard additions and acquisitions, plus increased transit revenue; transit growth included the Alliance Airport Advertising acquisition. Nine-month Adjusted EBITDA was $432.9 million, up 6.3%; FFO was $312.5 million, up 32.5%; and AFFO was $319.5 million, up 17.8%. These are non-GAAP measures and should not be treated as substitutes for GAAP earnings or operating cash flow.
- Cash flow: Nine-month operating cash flow was $313.5 million, compared with $303.2 million. Investing cash outflow was $195.7 million, including $123.3 million of acquisition cash payments and $80.8 million of capital expenditures. Financing cash outflow was $112.7 million. Cash increased $3.0 million to $29.1 million.
- Debt and liquidity: Total debt was $1.968 billion at September 30, 2015, versus $1.900 billion at December 31, 2014. Cash plus available revolving credit totaled approximately $275.4 million, including $246.3 million of revolver availability. The company reported covenant compliance and stated it could draw the full available revolver while remaining in compliance.
- Distributions: Common distributions were $0.69 per share for the quarter and $2.06 per share for the nine months. The filing expected 2015 aggregate quarterly distributions to total $2.75 per common share, subject to Board discretion and applicable constraints.
Material changes and unusual items
- Revenue increased, led by billboard revenue and transit revenue. For the nine months, billboard revenue rose $35.5 million and transit revenue $9.3 million; 186 digital billboard units were added, and 14 transit markets were added.
- Depreciation and amortization fell 29.0% for the nine months, partly because certain billboard structures were fully depreciated and partly because the company changed to straight-line depreciation effective January 1, 2015. The change increased nine-month operating and net income by $8.3 million; the estimated full-year 2015 increase was $11.1 million.
- Comparability of net income benefited from the absence of 2014 charges: a $26.0 million debt-extinguishment loss and a $4.1 million investment impairment. Interest expense also declined $6.8 million year over year for the nine-month period, primarily following the 2014 refinancing.
- Asset-disposition gains included a $4.3 million non-cash gain from an exchange of outdoor advertising assets. Nine-month acquisitions had a total purchase price of $128.0 million, including $123.3 million cash and $4.7 million non-cash consideration.
- The company recorded a $13.5 million non-cash valuation allowance for Puerto Rico net operating losses for the nine months, following a Puerto Rico tax-law change. The reported nine-month effective tax rate was approximately 8.9%, reflecting REIT qualification and foreign items.
Outlook, risks and contingencies
Management expected 2015 operating cash flows to exceed operating, capital-expenditure and dividend needs, and estimated full-year capital expenditures of approximately $100 million. It continued to evaluate acquisition opportunities. No specific earnings or revenue guidance was provided. Future distributions remain at the Board’s discretion and depend on cash flows, REIT requirements, debt restrictions and other factors.
- Key risks include advertising demand and economic conditions, competition, regulation, renewal of site contracts, acquisition integration, digital deployment, severe weather, significant indebtedness and maintaining REIT status.
- Variable-rate debt exposes the company to interest-rate changes. A 200-basis-point increase in the weighted-average rate on senior-credit-facility borrowings was estimated to add $5.8 million to nine-month interest expense.
- Debt agreements restrict, among other matters, additional debt, asset dispositions, liens, investments and distributions. The filing reported compliance with applicable covenants; no material changes to previously disclosed risk factors or commitments and contingencies were reported.
- The company was evaluating the effect and transition method for the new revenue-recognition standard, effective in 2018, and did not yet know its impact. It did not expect the debt-issuance-cost presentation standard to have a material impact.
Important facts for investors to verify
- How much reported earnings growth reflects the depreciation-method change, tax effects, prior-year debt and impairment charges, and non-cash asset-exchange gain.
- Whether acquisition-adjusted revenue growth and operating trends persist, particularly in billboard and transit markets.
- Debt levels, variable-rate exposure, revolver availability, covenant headroom and the capacity to fund acquisitions and distributions.
- Actual full-year capital expenditures, cash generation and distributions versus management’s stated expectations.
- The eventual effect of Puerto Rico tax-law changes and adoption of the new revenue-recognition standard.