LAMAR ADVERTISING CO quarterly report, Q2 FY2015

Business context and reporting period

Lamar Advertising Company, together with wholly owned subsidiary Lamar Media Corp., filed this unaudited Form 10-Q for the quarter ended June 30, 2015. The business primarily rents outdoor advertising space, including billboards, logo signs and transit displays. Comparisons below are with the corresponding 2014 period; amounts are in U.S. dollars.

Financial performance and condition

For the first half, revenue growth reflected higher local billboard sales and 247 digital billboard units added since June 2014; logo and transit revenue also increased. On an acquisition-adjusted basis, revenue rose 3.9% for the first half and 2.9% for the quarter. First-half gross margin (revenue less direct advertising expense) was approximately 64.6%, versus 63.3% a year earlier. Reported operating margin was approximately 25.8%, versus 16.9%; the comparison is substantially affected by the depreciation-method change described below.

First-half operating cash flow was $188.2 million, compared with $173.4 million. Investing cash use was $110.1 million, including $59.4 million for acquisitions and $56.4 million of capital expenditures. Financing cash use was $75.9 million; cash ended the period at $27.5 million. At June 30, total debt was $1.940 billion, including $17.6 million current maturities, versus $1.900 billion at year-end 2014. Lamar reported total liquidity of approximately $307.6 million: $27.5 million cash and $280.1 million available on the revolving facility. It reported compliance with debt covenants.

Material changes and unusual items

• Net income increased sharply year over year, but the comparison includes the absence of 2014 debt-extinguishment losses ($26.0 million for the first half; $20.8 million in the second quarter) and a 2014 investment impairment ($4.1 million for the first half). Lower depreciation also materially lifted 2015 operating income.
• Effective January 1, 2015, the company changed depreciation from double-declining balance to straight-line. Management estimated this increased first-half 2015 operating and net income by $5.5 million; the estimated full-year 2015 effect was $11.1 million. Some billboard structures were also fully depreciated.
• Interest expense declined to $49.2 million for the first half from $56.4 million, primarily following the 2014 refinancing. Debt rose modestly from year-end; the senior credit facility had $394.3 million outstanding, including $113.0 million revolving borrowings and $281.3 million Term A loans.
• A Puerto Rico tax-law change prompted a non-cash $13.1 million valuation allowance against operating-loss carryforwards in the first half. The company reported first-half income tax expense of $17.3 million and an effective tax rate of approximately 14.7%.

Outlook, risks and contingencies

• Management expected 2015 capital expenditures of approximately $100 million; $56.4 million had been spent in the first half. It stated that cash, revolving-credit availability and expected operating cash flows were sufficient for operating needs through 2015 and that it expected operating cash flows to exceed operating, capital expenditure and dividend needs.
• The company expected aggregate 2015 quarterly distributions to total $2.75 per common share. The board retains discretion over future distributions, which are affected by REIT requirements, cash flows, debt restrictions and other factors. First-half REIT distributions totaled $131.8 million, or $1.37 per share.
• Key risks include advertising demand and economic conditions, competition, regulation and contract renewals, acquisition integration, digital deployment, severe weather, significant indebtedness and maintaining REIT status. The filing reported no material changes to previously disclosed risk factors or commitments and contingencies.
• Approximately $394.3 million of debt was variable-rate. A 200-basis-point rate increase would have raised first-half interest expense by an estimated $3.8 million. Lamar Media was in compliance with its credit agreement and note indentures; debt agreements nevertheless restrict additional debt, distributions and other actions.
• The company was evaluating the new revenue-recognition standard, effective in 2018 under the announced deferral, and had not determined its effect or transition method. It did not expect the debt-issuance-cost presentation standard to have a material impact.

Important facts for investors to verify

• How much reported earnings growth reflects underlying operations versus lower depreciation, the accounting-method change and the absence of prior-year debt and investment charges.
• Whether acquisition-adjusted organic revenue growth, particularly billboard and digital-display growth, continues and supports margins as operating costs rise.
• Debt repayment capacity and covenant headroom, including exposure to variable interest rates and the availability of revolving credit.
• Whether projected cash generation supports the stated capital expenditure plan and $2.75-per-share expected 2015 distributions while maintaining REIT qualification.
• The realizability of Puerto Rico tax-loss carryforwards and any further effects of tax-law changes; and the eventual financial-reporting impact of the revenue-recognition standard.