Lamar Advertising Company — Q2 2010 Form 10-Q
Business context and reporting period. This unaudited combined filing covers the quarter and six months ended June 30, 2010, for Lamar Advertising Company and its wholly owned subsidiary, Lamar Media Corp. Revenue is primarily from selling outdoor advertising, including billboard, logo-sign and transit placements. Unless noted otherwise, amounts below are for Lamar Advertising and are in U.S. dollars.
Financial performance
| Metric | Q2 2010 | Q2 2009 | Six months 2010 | Six months 2009 |
|---|---|---|---|---|
| Net revenue | $286.4 million | $274.7 million | $530.5 million | $522.0 million |
| Operating income | $49.3 million | $34.0 million | $60.1 million | $37.9 million |
| Operating margin | 17.2% | 12.4% | 11.3% | 7.3% |
| Net loss | $8.9 million | $11.8 million | $33.8 million | $33.6 million |
| Basic and diluted loss per share | $0.10 | $0.13 | $0.37 | $0.37 |
- Q2 revenue rose 4.2%; on management’s acquisition-adjusted comparison, growth was 3.7%. First-half revenue rose 1.6%, including 1.6% growth on the acquisition-adjusted comparison. That measure is non-GAAP.
- For the first half, operating cash flow was $93.2 million, versus $116.4 million. Capital expenditures were $15.7 million, implying cash flow after capital expenditures of approximately $77.5 million. Cash and cash equivalents fell to $26.9 million from $112.3 million at year-end 2009.
- At June 30, total debt was approximately $2.547 billion, including current maturities; long-term debt was $2.534 billion. Total liquidity was approximately $190 million, consisting of $26.9 million cash and $163.1 million available under the revolver. Current liabilities were $154.2 million and current assets $320.6 million.
Changes, financing and management commentary
- Operating income improved as revenue increased and depreciation and amortization declined by $5.3 million in Q2 and $12.8 million in the first half. Management attributed the lower depreciation and amortization mainly to fewer dismantles of non-performing structures. Operating costs excluding depreciation, amortization and asset-sale gains were broadly stable; corporate costs increased, partly due to performance-based stock compensation.
- Q2 interest expense declined to $46.6 million from $56.6 million, primarily because of lower amortization of debt issuance fees. First-half interest expense increased to $96.0 million from $93.0 million, which management attributed mainly to prior-year refinancing activity.
- In April, Lamar Media issued $400 million of 7⅞% senior subordinated notes due 2018 and used the proceeds, net of expenses, to repurchase and redeem its 7¼% notes due 2013. It also refinanced its senior credit facility. These transactions generated a $17.4 million first-half debt-extinguishment loss, including approximately $12.6 million of non-cash write-offs and $4.8 million of net cash loss.
- The new facility includes a $250 million revolver and term loans; the filing reports $948.6 million outstanding under the senior credit facility and $163.1 million of unused revolver capacity at quarter-end. Lamar Media reported compliance with the facility’s financial covenants at June 30. Covenant limits tighten over time, and failure to comply could accelerate debt payments.
- Management expected 2010 operating cash flow to exceed operating and capital needs, with excess cash principally directed to debt reduction. It expected 2010 capital expenditures of $35–$40 million and continued reduced acquisition activity because of the recession. Cost-saving measures were expected to continue through 2010.
Risks, restrictions and unusual items
- Advertising demand, pricing and display occupancy are sensitive to economic conditions and advertising spending. Other stated risks include substantial indebtedness, access to additional funding, competition, regulation, renewal of site contracts, and execution of the digital-display strategy and acquisitions.
- Variable-rate borrowings create interest-rate exposure. Approximately $0.95 billion of debt under the senior facility was variable-rate; management estimated that a 200-basis-point rate increase would have raised first-half interest expense by about $10.4 million and reduced net income by about $6.6 million.
- Debt agreements restrict transfers from Lamar Media to its parent. The filing says the total holdings debt ratio exceeded 5.75 to 1 at June 30, restricting transfers under the credit facility, while senior leverage also triggered limits under the 9¾% notes indenture. Permitted transfers were limited to specified categories.
- The company disclosed an immaterial prior-period lease-escalation accounting error; correction overstated reported 2009 net income by $18,000 for Q2 and $423,000 for the first half. Management concluded disclosure controls were effective and reported no material change in internal control over financial reporting.
Investor verification priorities
- Verify the reported debt balance, facility borrowings, available revolver capacity and the impact of the refinancing on future interest and scheduled debt service.
- Track compliance with leverage and fixed-charge covenants, including the tightening thresholds and restrictions on parent-company cash transfers.
- Assess whether revenue growth continues on the acquisition-adjusted basis and whether operating-income gains persist as depreciation and amortization trends change.
- Compare realized operating cash flow and capital spending with management’s 2010 outlook, including the planned use of excess cash for debt reduction.
- Monitor exposure to variable interest rates, advertising-market conditions, contract renewals and digital deployment execution.