Lamar Advertising Company — Q1 2017 Form 10-Q
Business context and reporting period
Quarter ended March 31, 2017; results are unaudited and compare with Q1 2016. Lamar earns most revenue from outdoor advertising displays, with additional logo-sign and transit advertising businesses. The filing also reports Lamar Media Corp., its wholly owned subsidiary and primary borrower; consolidated operating results are substantially similar.
Key financial metrics
| Metric | Q1 2017 | Q1 2016 | Change |
|---|---|---|---|
| Revenue | $346.4 million | $338.5 million | +2.3% |
| Operating income | $75.5 million | $86.8 million | Down $11.4 million |
| Net income | $41.8 million | $51.3 million | Down 18.6% |
| Diluted EPS | $0.42 | $0.53 | Down $0.11 |
| Operating cash flow | $34.5 million | $51.5 million | Down $17.0 million |
| Adjusted EBITDA | $128.3 million | $130.2 million | Down 1.4% |
| FFO / AFFO | $89.6 million / $86.4 million | $87.9 million / $92.3 million | FFO +2.0%; AFFO -6.4% |
All dollar amounts are in U.S. dollars. Adjusted EBITDA, FFO and AFFO are non-GAAP measures; the company cautions they are not substitutes for GAAP results or operating cash flow. Operating margin was approximately 21.8%, versus 25.7% in Q1 2016.
- Revenue drivers: Billboard revenue rose $5.4 million, logo revenue $1.0 million and transit revenue $1.5 million. On an acquisition-adjusted basis, revenue grew 1.3%, with reported growth also reflecting acquisitions.
- Costs and earnings: Operating expenses excluding depreciation and amortization and asset-sale gains increased $9.0 million (4.2%). Depreciation and amortization was broadly unchanged at $51.4 million. Interest expense was $31.5 million, up $1.4 million. The effective tax rate was 5.0%, primarily reflecting REIT status and foreign items.
- Cash flow and investment: Capital expenditures were $19.2 million, including $7.6 million for digital billboards; acquisitions used $17.8 million. Cash and cash equivalents ended at $31.6 million. Operating cash flow less capital expenditures was approximately $15.3 million.
- Debt and liquidity: Debt principal was approximately $2.453 billion ($2.425 billion net of deferred financing costs), compared with $2.378 billion principal at year-end 2016. Cash plus revolver availability totaled approximately $159.9 million. The revolver had $260.0 million drawn and $128.3 million available after letters of credit. The filing reports compliance with debt covenants.
- Dividends: Common dividends were $0.83 per share, up from $0.75 a year earlier; cash distributions to common and preferred holders totaled approximately $81.3 million. The Board declared an expected 2017 total of $3.32 per common share, subject to its discretion and applicable restrictions.
Material changes versus the prior period
Revenue increased, but net income and operating income declined. Asset-disposition gains fell to $1.0 million from $11.3 million; Q1 2016 included approximately $8.3 million of acquisition-swap gains that did not recur. Conversely, Q1 2017 had no debt-extinguishment loss, compared with $3.1 million in Q1 2016. Operating cash flow decreased, partly reflecting changes in operating assets and liabilities, including higher prepaid lease expense and lower accrued expenses. The company spent much less on acquisitions than in Q1 2016, when acquisition outlays were $502.1 million.
Outlook, risks and unusual items
- Management expected 2017 capital expenditures of approximately $110 million and stated it expected 2017 operating cash flows to exceed operating, capital expenditure and dividend needs.
- No earnings or revenue forecast was provided. Management said revenue-contract review was underway for the new revenue recognition standard and did not then expect a material financial-statement impact. The company expected the new lease standard to bring operating-lease assets and obligations onto the balance sheet.
- Key disclosed risks include economic and advertising-demand sensitivity, competition, regulation, renewal of site contracts, acquisition integration, digital deployment, significant indebtedness and interest-rate exposure, severe weather, and maintaining REIT qualification.
- Variable-rate debt was approximately $507.5 million; a 200-basis-point increase in the assumed weighted-average rate would have increased quarterly interest expense by approximately $2.3 million. Management reported covenant compliance and no material changes in commitments and contingencies.
- The company reported effective disclosure controls and no material change in internal control over financial reporting during the quarter.
Important facts for investors to verify
- Whether acquisition-adjusted and organic revenue growth continues, particularly in digital, billboard, logo and transit advertising.
- Whether operating costs, interest expense and maintenance capital spending pressure AFFO and cash generation.
- How the company funds dividends and planned capital expenditures while carrying approximately $2.45 billion of debt; confirm covenant headroom and revolving-credit availability.
- Progress against the $110 million 2017 capital expenditure plan and the expected $3.32 per-share annual dividend, which remains subject to Board discretion.
- The eventual effects and transition treatment of revenue-recognition and lease-accounting standards, and developments in REIT, regulatory, weather and advertising-market risks.