Lamar Advertising Company — Q3 2019 Form 10-Q
Reporting period: Quarter and nine months ended September 30, 2019; comparisons are with the same 2018 periods. Lamar Media Corp. is the wholly owned operating subsidiary and is included in the combined filing. Financial amounts below are in U.S. dollars; millions are used unless noted.
Business context and financial performance
Lamar earns most of its revenue from advertising space on billboards, with additional logo-sign and transit advertising. Management cites acquisitions, occupancy, pricing and digital advertising as key influences on revenue.
| Metric | Q3 2019 | Q3 2018 | Nine months 2019 | Nine months 2018 |
|---|---|---|---|---|
| Net revenue | $457.8m | $418.5m | $1,291.0m | $1,199.3m |
| Operating income | $141.4m | $128.4m | $376.3m | $329.9m |
| Operating margin | 30.9% | 30.7% | 29.2% | 27.5% |
| Net income | $99.7m | $94.1m | $269.4m | $209.5m |
| Basic and diluted EPS | $0.99 | $0.95 | $2.69 | $2.12 |
| Common dividends per share | $0.96 | $0.91 | $2.88 | $2.73 |
| Adjusted EBITDA (non-GAAP) | $215.2m | $192.5m | $569.2m | $527.2m |
| AFFO (non-GAAP) | $163.0m | $150.1m | $416.0m | $397.0m |
Q3 revenue rose 9.4% and net income 6.0%; nine-month revenue rose 7.6% and net income 28.5%. Acquisition-adjusted revenue growth was 3.4% for Q3 and 2.7% year to date, with management attributing much of the comparable growth to billboard digital revenue. Adjusted EBITDA increased 11.8% for Q3 and 8.0% year to date. These are non-GAAP measures and are not substitutes for GAAP results or cash flow.
Cash flow, debt and liquidity
- Cash from operations: $408.0m for the first nine months of 2019, versus $370.1m in 2018.
- Investing cash flow: $309.8m used, including $214.6m for acquisitions and $97.7m for capital expenditures. Capital expenditures were $82.2m in the comparable 2018 period.
- Financing cash flow: $96.5m used, including $288.6m of dividends/distributions; net cash increased $1.8m to $23.3m.
- Debt: $3.080bn gross principal outstanding at September 30, 2019, before deferred financing costs; carrying value was $3.054bn. Debt was $2.915bn gross at December 31, 2018. Interest expense for the first nine months rose to $114.2m from $97.3m.
- Liquidity: Management reported $345.4m total liquidity: $23.3m cash and $322.1m available under the revolving credit facility. The company reported $215m drawn on the revolver and $12.9m in letters of credit. It was in compliance with debt covenants.
- Leases: At September 30, recognized operating lease liabilities were $1.212bn and right-of-use assets were $1.296bn. The working-capital deficit was $303.6m, up from $91.4m at year-end; management attributed the increase primarily to the new lease accounting standard.
Material changes, outlook and risks
- The company completed outdoor-advertising acquisitions for $214.6m net cash in the first nine months, including a business combination with a preliminary $127m purchase-price allocation. Fairway’s acquisition allocation remained preliminary; finalization was expected by year-end 2019.
- ASC 842 adoption on January 1, 2019 brought approximately $1.2bn of operating lease liabilities and corresponding right-of-use assets onto the balance sheet. Comparative periods were not recast.
- A $17.0m non-cash tax benefit related to assets transferred from a taxable REIT subsidiary to a qualifying REIT subsidiary contributed to the nine-month income tax benefit of $6.7m. The 2018 comparison included a $15.4m debt-extinguishment loss; there was no such loss in 2019.
- Management estimated 2019 capital expenditures of approximately $128m and expected quarterly common distributions totaling $3.84 per share for 2019. It stated that cash, revolver availability and expected operating cash flow were sufficient for operating needs through fiscal 2019. The filing provides no specific revenue or earnings guidance.
- Key stated risks include advertising demand and economic conditions, significant indebtedness and variable interest rates, covenant restrictions, competition and regulation, contract renewals, acquisition integration, digital deployment, severe weather, and maintaining REIT qualification. Management reported no material changes to previously disclosed risk factors or material changes in commitments and contingencies.
- Approximately 44.7% of debt was variable rate. The filing estimated that a 200-basis-point increase in the weighted average rate would increase interest expense by approximately $20.1m for the nine-month period, based on its stated sensitivity analysis.
Important facts for investors to verify
- How much of reported growth came from acquisitions versus organic and digital billboard growth; review the company’s acquisition-adjusted revenue reconciliation.
- Debt maturities, variable-rate exposure, covenant headroom and the availability and terms of the revolving and receivables-financing facilities.
- The sustainability of cash generation and distributions relative to acquisition spending, capital expenditures, lease payments and interest costs.
- Final purchase accounting for 2019 acquisitions and Fairway, and the future effects of lease accounting and REIT-related tax adjustments.
- Assumptions underlying management’s 2019 capital expenditure estimate and its statement that funding needs were covered through year-end.