OUTFRONT Media Inc. — 2018 Form 10-K Summary
Reporting period: Fiscal year ended December 31, 2018. The filing is an annual report, not a standalone fourth-quarter filing; it also provides unaudited quarterly results. Amounts below are in U.S. dollars.
Business context
OUTFRONT is a REIT that sells out-of-home advertising space in the United States and Canada through billboards, transit displays, and sports and educational marketing agreements. U.S. Media is its principal reportable segment. The company’s strategy emphasizes digital display expansion, pricing and yield management, data-enabled targeting, and selective acquisitions.
Key financial results
| Metric | 2018 | 2017 | Change |
|---|---|---|---|
| Revenue | $1,606.2 million | $1,520.5 million | +6% |
| Organic revenue | $1,586.5 million | $1,513.2 million | +5% |
| Operating income | $234.8 million | $241.7 million | -3% |
| Net income | $107.9 million | $125.8 million | -14% |
| Adjusted OIBDA | $479.5 million | $444.1 million | +8% |
| Adjusted OIBDA margin | 30% | 29% | +1 percentage point |
| FFO / Adjusted FFO | $301.0 million / $299.7 million | $277.3 million / $277.6 million | FFO +9%; AFFO +8% |
| Cash from operating activities | $214.3 million | $249.3 million | -14% |
| Capital expenditures | $82.3 million | $70.8 million | +16% |
Revenue growth reflected higher billboard yield, digital conversions, transit digital growth, franchise activity and the Canadian acquisition. Billboard revenue rose 5% and transit and other revenue rose 7%. Digital advertising revenue was $275.7 million, up from $218.7 million; the company had 4,052 digital displays at year-end. U.S. Media Adjusted OIBDA increased 5% to $500.2 million, with a 34% margin.
Net income declined despite revenue and Adjusted OIBDA growth, principally because of a $42.9 million non-cash goodwill impairment related to Canada, higher interest expense, and increased compensation, strategic development and digital-related costs. Interest expense was $125.7 million, versus $116.9 million. Fourth-quarter revenue was $452.4 million and net income was $57.2 million; the company notes that results are typically strongest in Q4 due to holiday advertising.
Liquidity, debt and capital
- Year-end cash and cash equivalents were $52.7 million; current assets were $429.5 million and current liabilities $402.6 million, leaving working capital of $26.9 million, down from $76.4 million.
- Total debt, net, was $2.31 billion, compared with $2.23 billion in 2017; weighted average debt cost was 5.1%, up from 4.8%. Debt included $1.50 billion of senior notes, a term loan and $160 million drawn under receivables-related facilities.
- The $430 million revolving credit facility had no borrowings outstanding, though $66 million of letters of credit used its sublimit. The company reported a 1.4x net secured leverage ratio and 4.6x total leverage ratio and said it was in covenant compliance.
- Operating cash flow fell partly because of MTA deployment spending, receivables timing and prepaid transit costs. Dividends paid were $203.9 million; the declared annual dividend was $1.44 per share. The board approved a $0.36-per-share quarterly dividend for March 2019.
- The company sold 750,000 shares through its ATM program in Q4 for $15.3 million net proceeds; $284.5 million of program capacity remained.
Outlook, commentary and material risks
- Management expected 2019 capital expenditures of approximately $80 million, excluding MTA equipment deployment costs. It expected approximately $175 million of MTA deployment costs in 2019.
- The 15-year MTA agreement requires extensive digital screen deployment. The company said projected total deployment costs over the agreement would be materially higher than its initial $800 million estimate, while it pursued cost reductions, installation efficiencies and scope changes. It expected to use approximately $350 million of incremental third-party financing within the original four-year timeframe.
- At year-end, only $1.7 million of $96.8 million in MTA deployment costs incurred to date had been recouped. Recovery depends on sufficient incremental advertising revenues; unrecovered costs could adversely affect results. The company had installed 1,229 displays and was scheduled to begin rolling-stock screen deployment in 2019.
- Management expects digital expansion to support growth; digital billboards generate about four times the revenue per display of static billboards on average, but also incur higher costs. Results remain exposed to advertising demand, competition, lease and municipal franchise renewals, regulation of digital signs, interest rates, and the company’s substantial debt.
- Other notable risks include REIT qualification and distribution requirements, privacy and cybersecurity, foreign-exchange exposure, and possible additional impairment. A fourth-quarter goodwill review identified no further impairment; the Canadian unit had underperformed forecasts earlier in the year.
- About 68% of outdoor advertising site leases expire or become renewable within five years. Litigation is ongoing, but management said current matters were not expected to have a material adverse effect. The auditor reported effective internal controls and an unqualified opinion on the financial statements.
Most important facts for investors to verify
- Whether digital revenue and display growth translate into durable organic revenue, cash flow and margin improvement, particularly as transit installations scale.
- The updated MTA deployment budget, financing plan, implementation schedule, revenue-share economics and pace of cost recovery against the stated $175 million 2019 deployment estimate.
- Whether operating cash flow can support MTA investment, other capital needs, debt service and distributions without sustained additional borrowing or equity issuance.
- Debt maturity and refinancing exposure, variable-rate debt and covenant headroom; total leverage was 4.6x at year-end.
- Canadian operating performance and the assumptions underlying the $42.9 million impairment, along with any risk of further impairment.
- 2019 lease and transit franchise renewals, REIT compliance, and the effects of the new lease accounting standard, for which the company expected to recognize right-of-use assets and lease liabilities exceeding $1 billion.