OUTFRONT Media Inc. — Q1 2019 Form 10-Q
Reporting period: Three months ended March 31, 2019; comparisons are with Q1 2018 unless otherwise noted. OUTFRONT Media is a REIT providing billboard, transit, and sports-marketing advertising in the U.S. and Canada.
Financial performance and position
- Revenue: $371.7 million, up 10% (organic revenue also up 10%). Billboard revenue rose 5% to $251.0 million; transit and other revenue rose 22% to $120.7 million. Growth reflected higher yield, digital-display expansion, third-party digital equipment sales, and franchise changes.
- Profitability: Operating income was $36.9 million, up 16%; net income was $6.1 million, down 33%. Diluted EPS was $0.04 versus $0.06. Adjusted OIBDA, a non-GAAP measure, was $86.8 million, up 7%; its margin fell to 23% from 24%. U.S. Media Adjusted OIBDA rose 6% to $94.6 million, while Other improved to $1.2 million from a $0.8 million loss.
- Cash flow and investment: Operating cash flow was $41.4 million versus $62.1 million. Investing used $28.7 million, including $18.1 million of capital expenditures and $7.5 million for acquisitions. Financing used $12.8 million; dividends paid were $51.8 million. Cash and restricted cash ended the quarter at $54.1 million, including $52.7 million unrestricted cash.
- Debt and liquidity: Total debt, net, was $2.34 billion, up from $2.31 billion at year-end; weighted-average debt cost was 5.1%. The company reported leverage ratios of 1.5x net secured and 4.6x total, and compliance with covenants. Current liabilities exceeded current assets by $186.8 million; management attributed the working-capital deficit primarily to adoption of the lease standard. The AR facility had about $20 million of remaining capacity; the $75 million repurchase facility had none.
- Margins and expenses: Operating expenses rose 10% to $216.9 million and SG&A rose 13% to $73.3 million. Net interest expense increased to $32.7 million from $30.0 million, mainly due to higher rates and average debt. The income tax benefit fell to $1.0 million from $6.7 million.
Material changes versus Q1 2018
- Revenue growth was led by transit and other, including digital-display growth and the BART franchise; U.S. Media revenue increased 9% to $338.4 million.
- Operating income improved, but net income and FFO declined: FFO was $42.1 million, down 7%; AFFO was $39.2 million, up 3%. FFO and AFFO are non-GAAP/industry measures and are not substitutes for GAAP results.
- Operating cash flow declined by $20.7 million, primarily reflecting higher MTA deployment spending and timing of receivable collections.
- Adoption of the new lease accounting standard on January 1, 2019 added approximately $1.2 billion of operating lease assets and liabilities and reduced beginning retained earnings by $24.8 million. The company said adoption did not materially affect consolidated results.
Outlook, commentary, and risks
- Management expects 2019 capital expenditures of approximately $80 million, excluding MTA deployment costs. MTA deployment costs are expected to be approximately $175 million for 2019; the company expects about $350 million of incremental third-party financing within the original four-year deployment period.
- As of March 31, 1,964 MTA digital displays had been installed, including 735 in Q1. Management cautioned that MTA deployment costs may not be fully recoverable if incremental advertising revenue is insufficient; it reported no impairment triggers based on current projections.
- Advertising results are seasonal, generally strongest in Q4 and weakest in Q1, and sensitive to economic conditions and advertising spending. Key stated risks include competition, obtaining or renewing municipal franchises, digital deployment execution, substantial indebtedness and interest-rate exposure, and REIT qualification and distribution requirements.
- Letters of credit totaled approximately $209.1 million and surety bonds $26.6 million, neither recorded as balance-sheet liabilities. Management said current litigation was not expected to have a material adverse effect; no material changes to previously disclosed risk factors were reported.
- The board approved a $0.36-per-share quarterly dividend for payment June 28, 2019. The company sold 750,000 shares through its ATM program in Q1 for $16.7 million net proceeds.
Important facts for investors to verify
- Whether revenue and digital-display growth translate into sustained operating cash flow and margins as franchise and deployment costs rise.
- The timing, funding, and recoverability of MTA deployment spending, including progress against installation targets and the planned third-party financing.
- Debt maturities, variable-rate exposure, remaining borrowing capacity, covenant headroom, and the effect of further financing or ATM share issuance.
- How the lease-standard balance-sheet changes and working-capital deficit affect liquidity analysis; distinguish lease liabilities from funded debt.
- Dividend sustainability relative to recurring cash needs, capital expenditures, lease obligations, and the company’s REIT distribution requirements.