OUTFRONT Media Inc. — Q2 2019 Form 10-Q
Reporting period: Three and six months ended June 30, 2019; unaudited. OUTFRONT is a REIT providing billboard, transit and other out-of-home advertising in the U.S. and Canada.
Financial performance and liquidity
| Metric | Q2 2019 | Q2 2018 | Six months 2019 | Six months 2018 |
|---|---|---|---|---|
| Revenue | $459.9M | $401.7M | $831.6M | $739.6M |
| Operating income | $88.7M | $32.9M | $125.6M | $64.6M |
| Net income (loss) | $50.3M | $(5.2)M | $56.4M | $3.9M |
| Diluted EPS | $0.35 | $(0.04) | $0.39 | $0.02 |
| Adjusted OIBDA | $143.6M | $125.2M | $230.4M | $206.4M |
| Adjusted OIBDA margin | 31% | 31% | 28% | 28% |
| FFO / AFFO | $90.6M / $96.3M | $74.1M / $77.2M | $132.7M / $135.5M | $119.4M / $115.3M |
- Q2 billboard revenue grew 9% to $305.8M; transit and other revenue grew 27% to $154.1M. Management attributed growth primarily to improved revenue per display, digital display expansion, and franchise changes, including BART.
- For the first half, revenue increased 12% and organic revenue 13%. Adjusted OIBDA increased 12%; margins were unchanged year over year. U.S. Media Q2 revenue rose 14% and Adjusted OIBDA rose 11%, while its margin declined to 35% from 36%.
- Operating expenses rose 13% in Q2 and SG&A rose 16%; higher transit and billboard lease costs, compensation, bad debt and professional fees contributed. Interest expense increased to $33.9M in Q2 from $31.0M, primarily due to higher rates and average debt.
- First-half operating cash flow was $83.5M, versus $68.2M. Investing cash outflow was $82.5M, including $39.6M of capital expenditures and $34.4M of acquisition payments. Financing provided $420.7M, including debt and ATM equity proceeds; dividends paid were $103.9M.
- At June 30, cash and cash equivalents were $474.8M and total debt, net, was $2.792B. Current liabilities exceeded current assets by $112.5M; management said the deficit was primarily affected by adoption of lease accounting. Operating lease liabilities totaled $1.383B and are distinct from debt.
- Debt covenant ratios were 1.0x net secured leverage and 5.5x total leverage, against respective limits of 4.0x and 6.0x; the company reported compliance. Weighted average debt cost was 5.2%.
Material changes, outlook and risks
- Lease accounting: Adoption of the new lease standard in Q1 recognized operating lease assets and liabilities of approximately $1.2B at adoption and a $24.8M cumulative-effect reduction to beginning equity. Management said adoption did not materially affect consolidated financial statements, but it changed balance-sheet presentation and working capital.
- Debt transactions: The company issued $650M of 5.0% senior notes due 2027 in June. After quarter-end, it used proceeds to redeem $550M of 5.25% notes due 2022 and recorded an $11M extinguishment loss. It also paid $50M on the term loan on July 8. As of August 5, borrowings included $40M under the revolver, $85M under the AR facility and $75M under the repurchase facility.
- Investment plans: Management expected approximately $80M of 2019 capital expenditures, excluding MTA deployment costs, and approximately $150M of MTA equipment deployment costs for the year. It expected to use approximately $350M of incremental third-party financing over the original four-year MTA deployment period. At June 30, 2,768 MTA digital displays had been installed.
- MTA exposure: Deployment costs are recoverable only if contract revenues are sufficient; unrecovered amounts could adversely affect results and financial condition. Management reported no impairment triggers based on its latest projections. Digital-display deployment and transit franchise performance remain important execution factors.
- Other items: The company recorded a $4.5M provision for uncertain tax positions in Q2 to correct an error related to prior open tax years; tax examinations were ongoing. The comparable 2018 period included a $42.9M impairment charge related to the Canadian reporting unit, affecting year-over-year GAAP profit comparisons. 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 payable September 27, 2019. No full-year revenue or earnings guidance is provided in the filing. Advertising demand is sensitive to economic conditions and seasonality; the company typically reports its strongest revenue in Q4 and weakest in Q1.
Investor verification priorities
- Track MTA screen installation pace, deployment spending, third-party financing, and whether incremental revenues allow deployment costs to be recouped.
- Assess total leverage, interest expense, refinancing effects and borrowing levels after quarter-end, including the company’s limited headroom under the 6.0x total-leverage covenant.
- Separate recurring operating performance from prior-year impairment effects and review rising operating and SG&A costs against revenue growth and margins.
- Review cash generation after dividends, capital expenditures, acquisitions and MTA-related spending; confirm dividend sustainability and liquidity access.
- Monitor municipal franchise renewals and competitive bidding, advertising-market conditions, Canadian performance, and resolution of tax examinations and uncertain tax positions.