Lamar Advertising Company — Q3 2020 Form 10-Q
Reporting period: Quarter and nine months ended September 30, 2020. Unaudited consolidated results are presented below in U.S. dollars; amounts are rounded to millions. Lamar Media Corp. is the Company’s wholly owned subsidiary and the principal borrower.
Business context and reporting period
Lamar earns most of its revenue from selling advertising space on billboard, logo and transit displays. COVID-19 restrictions and reduced travel and public activity weakened advertiser demand. Management reported customer activity improving from June through October, but said the recovery’s pace remained uncertain.
Key financial metrics
| Metric | Q3 2020 | Q3 2019 | Nine months 2020 | Nine months 2019 |
|---|---|---|---|---|
| Revenue | $386.1m | $457.8m | $1,140.3m | $1,291.0m |
| Operating income | $105.9m | $141.4m | $268.9m | $376.3m |
| Net income | $62.8m | $99.7m | $134.7m | $269.4m |
| Diluted EPS | $0.62 | $0.99 | $1.33 | $2.69 |
| Adjusted EBITDA (non-GAAP) | $170.7m | $215.2m | $463.7m | $569.2m |
| Operating cash flow | Not separately stated | Not separately stated | $361.5m | $408.0m |
Q3 operating margin was approximately 27.4%, versus 30.9% a year earlier; net margin was approximately 16.3%, versus 21.8%. Nine-month operating and net margins were approximately 23.6% and 11.8%, respectively, versus 29.1% and 20.9% in 2019. Adjusted EBITDA and these margins are supplemental measures; adjusted EBITDA is non-GAAP.
- Cash and liquidity: Cash was $68.6m at September 30. Management reported total liquidity of approximately $770.8m, including $666.9m available on the revolving credit facility and $35.3m under the receivables securitization program. Working capital was negative $192.1m.
- Debt: Debt carrying value, net of financing costs, was approximately $2.964bn; gross debt was approximately $3.006bn. Operating lease liabilities totaled approximately $1.209bn and are separate from debt. The company reported $70m drawn on its $750m revolver and compliance with applicable credit facility and note covenants.
- Cash uses: Nine-month capital expenditures were $44.6m; operating cash flow less capital expenditures was approximately $316.8m. Cash dividends/distributions were $2.00 per common share for the first nine months, compared with $2.88 in 2019.
Material changes versus the prior comparable period
- Q3 revenue fell 15.7%; acquisition-adjusted revenue fell 15.5%. Nine-month revenue fell 11.7%; acquisition-adjusted revenue fell 12.3%. Billboard and transit advertising accounted for most of the declines.
- Q3 net income declined 37.1%, while nine-month net income declined 50.0%. Nine-month adjusted EBITDA fell 18.5%; nine-month FFO and AFFO fell 26.9% and 17.6%, respectively.
- Cost reductions partly offset weaker revenue. Q3 operating expenses, excluding depreciation and asset-disposition gains, decreased $32.3m, or 12.8%; management cited lower franchise and billboard lease costs and an approximately 8% workforce reduction through attrition and selected layoffs.
- Nine-month operating cash flow declined to $361.5m from $408.0m. Capital expenditures decreased to $44.6m from $97.7m, and acquisition spending to $28.7m from $214.6m.
Outlook, risks and unusual items
- Outlook: Management expected liquidity to cover operating needs for the next 12 months, while cautioning that pandemic duration and recovery were uncertain. It reduced expected 2020 capital expenditures to approximately $65m and was limiting acquisitions. No revenue or earnings guidance was provided.
- COVID-19 and credit risk: Demand remained exposed to economic conditions, advertising spending, travel restrictions and potential renewed restrictions. The allowance for doubtful accounts was $16.6m, and the company said it continued monitoring expected credit losses. Management reported no material impairment charges as of September 30.
- Debt refinancing: The company issued new notes and refinanced its credit facility, redeemed $510m of 5⅜% notes and redeemed all $535m of 5% subordinated notes. Nine-month debt-extinguishment loss was $25.2m, including $7.1m in Q3; $4.5m of the Q3 loss was cash prepayment penalties. Interest expense decreased year over year.
- Dividend and REIT status: The quarterly common dividend was reduced from $0.96 to $0.50 per share in 2020. The board said future distributions would be reviewed quarterly, considering liquidity, leverage, operations, debt restrictions and REIT requirements. Future dividend amounts are not assured.
- Subsequent event: An October 23, 2020 amendment to the receivables financing program changed delinquency and funding thresholds. The filing also identifies interest-rate exposure: a 200-basis-point increase was estimated to add approximately $14.5m to nine-month 2020 interest expense.
Important facts for investors to verify
- Whether advertising demand and customer spending continued to recover after October, and how that affected revenue, occupancy and margins.
- Available liquidity, revolver and securitization borrowings, covenant compliance and debt maturities, including the effects of the October securitization amendment.
- Whether cash generation supports the reduced dividend, required REIT distributions, planned capital spending and debt service.
- Credit-loss allowance and collectability of receivables, given pandemic-related customer stress and the amended securitization thresholds.
- Cash versus noncash components of the $25.2m debt-extinguishment loss and the ongoing cost and benefit of the 2020 refinancing.