Business context and reporting period
Lamar Advertising Company’s combined Form 10-K with wholly owned operating subsidiary Lamar Media Corp. covers the fiscal year ended December 31, 2013; it is an annual filing, not a standalone fourth-quarter report. Lamar sells outdoor advertising across billboards, logo signs and transit displays, operating in one reporting segment. At year-end it had more than 145,000 billboard displays, including over 1,880 digital billboards, approximately 120,000 logo displays and approximately 38,000 transit displays.
Unless otherwise indicated, financial figures below are for Lamar Advertising and are in U.S. dollars. The filing’s selected quarterly data reports fourth-quarter 2013 revenue of $320.4 million and net income applicable to common stock of $10.1 million, or $0.11 per share; fourth-quarter 2012 figures were $306.6 million, $7.8 million and $0.08 per share, respectively.
Financial performance and position
| Metric | FY 2013 | FY 2012 | Change |
|---|---|---|---|
| Net revenue | $1,245.8 million | $1,179.7 million | +5.6% |
| Operating income | $223.4 million | $214.5 million | +4.2% |
| Operating margin | 17.9% | 18.2% | Down 0.3 percentage points |
| Net income | $40.1 million | $7.9 million | Up $32.2 million |
| Net income applicable to common stock | $39.8 million | $7.5 million | |
| Basic and diluted earnings per share | $0.42 | $0.08 | |
| Cash from operating activities | $394.7 million | $375.9 million | +5.0% |
| Capital expenditures | $105.7 million | $105.6 million | Approximately flat |
Revenue rose across billboards (+5.0%), logo signs (+9.5%) and transit (+11.8%). Excluding acquisition contribution, revenue increased 2.2% year over year. Direct advertising expense declined to 35.1% of revenue from 35.5%, while general and administrative expense rose to 18.6% from 17.9%. Interest expense fell to $146.3 million from $157.1 million; the year included a $14.3 million loss on extinguishment of debt. The effective tax rate was 36.3%.
At December 31, 2013, cash was $33.2 million, working capital $36.7 million, total assets $3.40 billion, total debt $1.94 billion and stockholders’ equity $932.9 million. Total debt was down from $2.16 billion a year earlier. Year-end liquidity was approximately $126.2 million, comprising cash and $93.0 million of revolving-credit availability. Lamar reported compliance with its debt covenants. Cash from operating activities exceeded net income substantially, primarily reflecting $300.6 million of depreciation and amortization.
Material changes versus the prior comparable period
- Reported revenue increased 5.6%; acquisition-adjusted growth was 2.2%, highlighting the effect of acquisitions on reported growth.
- Net income increased to $40.1 million from $7.9 million. Higher operating income and lower interest expense contributed; the prior-year comparison included a larger $41.6 million debt-extinguishment loss versus $14.3 million in 2013.
- Operating margin eased despite higher operating income, as operating costs grew faster than acquisition-adjusted revenue.
- Investing cash outflow decreased to $191.9 million from $303.4 million, mainly because acquisition spending fell to $92.2 million from $206.1 million. Financing cash outflow rose to $227.2 million, including the redemption of the 9¾% notes.
- In the fourth quarter, the company corrected an immaterial revenue-recognition error, changing recognition from monthly to daily over contract terms. It revised prior-period figures; the correction increased deferred income liabilities by $21.7 million at year-end 2012 and reduced 2012 net revenue and net income by $3.2 million and $2.8 million, respectively. Quarterly 2013 data is also presented on an adjusted basis.
Outlook, risks and unusual items
- Management expected 2014 capital expenditures of approximately $100 million, near 2013 spending. It stated that cash on hand, credit availability and expected operating cash flow were sufficient for operating needs through 2014.
- After year-end, Lamar Media issued $510 million of 5⅜% senior notes due 2024, receiving approximately $502.3 million net proceeds to repay amounts outstanding under its senior credit facility. On February 3, 2014, the facility was amended: the revolving commitment increased from $250 million to $400 million, the incremental facility from $300 million to $500 million, and maturity was extended to February 2, 2019.
- Lamar was considering REIT status effective January 1, 2014, subject to board approval, an IRS private-letter ruling and satisfying qualification requirements. Management believed it could be positioned to convert, but gave no assurance that it would elect, qualify for or maintain REIT status. REIT distributions, tax exposure, debt covenants and limits on retaining cash are material considerations.
- Key risks include substantial indebtedness and covenant restrictions; sensitivity of advertising demand to economic conditions; competition and acquisition integration; renewal of state logo-sign contracts (five of 23 contracts were subject to renewal in 2014); and regulation of billboards. A Scenic America lawsuit challenges federal guidance on digital billboards, and changing federal, state or local rules could restrict existing displays or planned expansion. The company reported no material adverse litigation in management’s view.
- Revenue and operating results are seasonal, typically weakest in the first quarter and strongest in summer and fall; many expenses are fixed. The company also noted uninsured hurricane and natural-disaster exposure. The Reilly family held approximately 65% of voting power at year-end.
- Unusual accounting and estimate items include $24.9 million of non-cash compensation and an annual goodwill test that identified no impairment. Auditors issued unqualified opinions on the financial statements and internal controls; management reported internal control over financial reporting was effective.
Important facts for investors to verify
- Reconcile reported 5.6% revenue growth with the 2.2% acquisition-adjusted increase, and review the non-GAAP adjustment methodology.
- Review the revenue-recognition correction and its effect on 2013 quarterly comparisons and deferred income.
- Confirm post-refinancing debt balances, interest costs, covenant headroom and liquidity; year-end debt and availability precede the February 2014 facility amendment.
- Track the board’s REIT decision, IRS ruling, qualification conditions, distribution requirements and any resulting tax or financing effects.
- Assess digital-billboard regulatory and litigation developments, as well as 2014 renewals of the five logo-sign contracts.