Lamar Advertising Company — Q3 2010 Form 10-Q
Business context and reporting period: Combined quarterly filing for Lamar Advertising Company and wholly owned subsidiary Lamar Media Corp. The unaudited quarter and nine months ended September 30, 2010 are compared with the corresponding 2009 periods. Revenue is primarily from outdoor advertising displays, with logo-sign and transit operations also contributing. Amounts below are in U.S. dollars; financial figures are in millions unless noted.
Financial performance and position
| Metric | Three months ended September 30 | Nine months ended September 30 |
|---|---|---|
| Revenue | $286.1; +5.3% from $271.8 | $816.6; +2.9% from $793.8 |
| Operating income | $46.6, versus $39.3 | $106.7, versus $77.2 |
| Operating margin | 16.3%, versus 14.4% | 13.1%, versus 9.7% |
| Net income (loss) | $0.8, versus a $4.8 loss | $33.0 loss, versus a $38.4 loss |
| Net income (loss) applicable to common stock | $0.7, or $0.01 per diluted share, versus a $4.9 loss, or $0.05 per share | $33.3 loss, or $0.36 per share, versus a $38.6 loss, or $0.42 per share |
| Operating cash flow | Not separately stated in the supplied filing text | $190.2, versus $191.4 |
| Capital expenditures | Not separately stated in the supplied filing text | $27.7, versus $29.0 |
Margins: Nine-month net loss was approximately 4.0% of revenue, compared with approximately 4.8% in 2009. Q3 net income was approximately 0.3% of revenue; the comparable quarter had a net loss margin of approximately 1.8%.
Debt and liquidity at September 30, 2010: Total debt, including current maturities, was $2,472.8, compared with $2,674.9 at December 31, 2009. Cash was $38.4, down from $112.3. Management reported total liquidity of approximately $276.6, comprising cash and $238.2 of available revolving credit. Current assets were $321.4 and current liabilities $168.2. Long-term debt fair value was reported as $2,605.1 versus carrying value of $2,472.8.
Cash flow: Nine-month operating cash flow of $190.2 was largely supported by noncash adjustments, including $234.1 of depreciation and amortization and the $17.4 debt-extinguishment loss. Investing activities used $24.9; financing activities used $239.4. Cash declined by $73.8 during the period.
Material changes versus the prior comparable period
- Q3 revenue rose 5.3%; management attributed the increase mainly to billboard revenue growth of $11.0 and transit growth of $3.4. On an acquisition-adjusted basis, revenue rose 4.6% in Q3 and 2.7% for the nine months.
- Nine-month billboard revenue increased $14.9, logo-sign revenue $2.8, and transit revenue $5.1. Management said acquisition activity remained limited.
- Operating income improved in both periods, helped by higher revenue and lower depreciation and amortization. Nine-month depreciation and amortization fell $18.7, primarily because fewer non-performing structures were dismantled.
- Q3 general and administrative and corporate expenses increased, reflecting higher noncash performance-award compensation and the reinstatement of the 401(k) match effective July 1, 2010. Nine-month operating expenses, excluding depreciation and asset-sale gains, rose to $479.6 from $468.9.
- Interest expense fell $6.7 in Q3, primarily due to refinancing. For the nine months it declined $3.8 at Lamar Advertising, though Lamar Media reported a $1.2 increase, reflecting differences in presentation and subsidiary-level results.
- Cash from operations was nearly flat year over year, while cash declined substantially as the company used funds for debt reduction and refinancing-related financing activity.
Outlook, financing, risks, and unusual items
- Management outlook: The company expected 2010 capital expenditures of $35–$40 and planned to continue cost-saving strategies through year-end. It expected operating cash flow to exceed operating and capital expenditure needs, with excess cash principally directed to debt reduction. No specific revenue or earnings guidance is provided in the supplied filing text.
- Refinancing: In April 2010, Lamar Media issued $400 of 7⅞% senior subordinated notes due 2018 and used the proceeds to repurchase or redeem its 7¼% notes due 2013. It also refinanced its senior credit facility. The refinancing generated a $17.4 loss on early extinguishment of debt, including approximately $12.6 of noncash write-offs and $4.8 of net cash loss.
- Credit agreement and debt service: The new facility includes a $250 revolving facility and term loans, with maturities from 2015 to 2016. Lamar Media reported $872.1 outstanding under the senior credit facility and approximately $238.2 of unused revolving capacity. It said it was in compliance with applicable financial covenants at September 30. Covenant thresholds tighten over time; failure to comply could accelerate debt payments. A mandatory excess-cash-flow payment may apply, initially at 50% for 2010, subject to leverage-based reductions.
- Interest-rate exposure: Approximately $0.87 billion, or 35.3% of long-term debt, was variable-rate debt. The weighted average rate on senior-facility borrowings was 4.6% for the nine months. Management estimated a 200-basis-point increase would have raised nine-month interest expense by approximately $15.0 and reduced net income by approximately $9.5.
- Key business risks: Results depend on economic conditions and advertising spending, occupancy and pricing, competition, regulation, contract renewals, acquisition integration, digital deployment, and the company’s ability to manage substantial indebtedness and obtain funding.
- Other disclosures: Asset retirement obligations increased to $171.7 from $160.3 at year-end, including revisions to cash-flow estimates and accretion. Management concluded disclosure controls were effective and reported no material change in internal control over financial reporting during the quarter.
Important facts for investors to verify
- Whether revenue growth and improving operating margins continue, particularly on an acquisition-adjusted basis and across billboard, logo, and transit businesses.
- Whether operating cash flow remains sufficient to fund capital expenditures, scheduled debt service, and any required excess-cash-flow prepayments.
- Debt maturities, refinancing terms, available revolver capacity, covenant headroom, and compliance as leverage thresholds tighten.
- The effects of variable interest rates on interest expense and the effectiveness of any rate-risk mitigation measures.
- Whether the $35–$40 full-year capital expenditure outlook and stated debt-reduction priorities are achieved, and how performance-based compensation affects expenses.
- The continuing adequacy of cash and liquidity, given the period’s cash decline and the company’s substantial debt burden.