Lamar Advertising Company (with Lamar Media Corp.) — Q3 2011 Form 10-Q
Business context and reporting period. The combined, unaudited filing covers the quarter and nine months ended September 30, 2011, compared with the corresponding 2010 periods. Lamar earns most revenue from outdoor advertising displays; Lamar Media is its wholly owned operating and borrowing subsidiary.
Key financial results
Amounts below are in millions of dollars except per-share data. Lamar Media reports substantially the same operating results; Lamar Advertising’s common-stock earnings reflect preferred dividends.
| Metric | Q3 2011 | Q3 2010 | Nine months 2011 | Nine months 2010 |
|---|---|---|---|---|
| Revenue | $296.7 | $286.1 | $845.2 | $816.6 |
| Operating income | $55.4 | $46.6 | $140.5 | $106.7 |
| Operating margin | 18.7% | 16.3% | 16.6% | 13.1% |
| Net income (loss), Lamar Advertising | $4.0 | $0.8 | $2.2 | $(33.0) |
| Basic and diluted EPS | $0.04 | $0.01 | $0.02 | $(0.36) |
| Interest expense | $42.5 | $45.4 | $129.5 | $141.3 |
- Revenue growth: Q3 revenue rose 3.7%; nine-month revenue rose 3.5%. On management’s acquisition-adjusted, non-GAAP basis, growth was 3.2% for Q3 and 3.1% for the nine months.
- Cash flow: Nine-month operating cash flow was $222.7 million, up from $190.2 million. Investing used $88.0 million, including $83.2 million of capital expenditures and $15.2 million for acquisitions. Financing used $184.4 million, primarily for debt repayment. Cash declined $50.2 million to $41.5 million.
- Debt and liquidity: Debt was $2.223 billion at September 30, 2011, versus $2.409 billion at December 31, 2010. The senior credit facility balance was $640.5 million; no revolving loans were outstanding, with $240.4 million available after letters of credit. Reported total liquidity was $281.9 million.
- Balance sheet: Current assets were $286.9 million and current liabilities $176.7 million. Total assets were $3.502 billion and stockholders’ equity $826.6 million at September 30.
Material changes and unusual items
- Operating income increased $8.9 million in Q3 and $33.8 million in the nine-month period. Revenue gains were led by billboard and logo-sign advertising; Q3 transit revenue declined 4.0%.
- Lower debt and lower borrowing rates following the 2010 refinancing reduced nine-month interest expense by about $11.9 million. The prior-year period included a $17.4 million debt-extinguishment loss; 2011 included a $0.5 million loss.
- Nine-month depreciation and amortization declined $12.7 million, primarily because fewer non-performing structures were dismantled. An $8.0 million gain on asset dispositions was mainly from selling the corporate aircraft, which had been replaced by an aircraft purchased in January 2011.
- Q3 operating expenses included $1.2 million of settlements of two unrelated claims; corporate expenses included $0.6 million of associated legal fees. Both claims were resolved during the quarter.
- Effective tax rates were unusually high: 69.0% in Q3 and 80.3% for the nine months at Lamar Advertising, attributed to nondeductible items and, for the nine-month period, a Puerto Rico federal tax-rate change. Nine-month income was therefore only $2.2 million despite higher operating income.
Outlook, risks and contingencies
- Management expected 2011 capital expenditures of approximately $100 million; $83.2 million had been spent through September. It planned to limit acquisitions, with no material acquisition spending then planned.
- Management expected 2011 operating cash flow to exceed operating and capital-expenditure needs, with excess cash principally used to reduce debt. It did not anticipate a mandatory excess-cash-flow prepayment for 2011 and stated that cash, revolver availability and future operating cash flow were sufficient for needs through fiscal 2011.
- The company repaid $168.4 million under its senior credit facility during the nine months, including approximately $150 million of optional prepayments. It repurchased or agreed to repurchase $25.525 million principal of 6⅝% notes by September 30; a further $22.375 million was repurchased in October 2011.
- Lamar Media was in compliance with senior-credit-facility financial tests at September 30. Debt agreements include leverage and fixed-charge covenants, and covenant failure could accelerate debt payments. Distributions from Lamar Media to its parent are subject to debt-agreement restrictions.
- Approximately $640.5 million, or 28.8% of long-term debt, bore variable rates. Management estimated that a 200-basis-point rate increase would have added about $10.9 million to nine-month interest expense and reduced net income by about $6.6 million.
- Key disclosed risks include economic conditions and advertising spending, substantial indebtedness and access to funding, competition, regulation, contract renewals, digital-display execution and acquisition integration. The filing provides no specific revenue or earnings guidance.
Most important facts for investors to verify
- Whether organic advertising demand and occupancy sustain the reported acquisition-adjusted revenue growth.
- Debt balances, scheduled and optional repayments, covenant headroom, and the effect of variable interest rates.
- Whether cash generation supports the stated capital-spending plan and continued debt reduction.
- The persistence of elevated effective tax rates and the impact of nondeductible compensation and other tax items.
- The final cash and debt effects of the October 2011 note repurchases and the settlements disclosed for Q3.