Lamar Advertising Company and Lamar Media Corp. — Q3 2013 Form 10-Q
Reporting period: Three and nine months ended September 30, 2013; filed November 6, 2013. Amounts below are in U.S. dollars. Lamar Media is a wholly owned subsidiary and principal borrower. Lamar earns most revenue from advertising space on outdoor displays, with additional logo-sign and transit operations.
Financial performance
| Metric | Q3 2013 | Q3 2012 | Nine months 2013 | Nine months 2012 |
|---|---|---|---|---|
| Revenue | $323.2 million | $306.3 million | $931.3 million | $877.4 million |
| Operating income | $69.3 million | $63.5 million | $165.5 million | $153.8 million |
| Net income | $18.3 million | $11.5 million | $33.5 million | $2.6 million |
| Net income per diluted share | $0.19 | $0.12 | $0.35 | $0.02 |
- Revenue rose 5.5% in Q3 and 6.1% year to date. On the company’s non-GAAP acquisition-adjusted comparison, growth was 2.1% for Q3 and 2.4% year to date.
- Operating margins were approximately 21.4% in Q3 versus 20.7% a year earlier, and 17.8% year to date versus 17.5%.
- Nine-month operating cash flow was $294.7 million, compared with $253.3 million. Capital expenditures were $77.7 million; operating cash flow less capital expenditures was approximately $217.0 million, before acquisitions and financing.
- Cash at September 30 was $182.7 million. Total liquidity was approximately $425.7 million, including $243.0 million available on the revolving facility.
- Debt totaled approximately $2.143 billion, including $393.8 million classified as current; long-term debt excluding current maturities was $1.749 billion. The revolving facility had no borrowings outstanding. Variable-rate senior credit facility debt was $360.3 million, at a nine-month weighted average rate of 2.9%.
Changes and drivers versus prior periods
- Q3 revenue increased $16.9 million; year-to-date revenue increased $53.9 million. Billboard revenue was the largest contributor, with growth also in logo-sign and transit revenue.
- Year-to-date operating expenses excluding depreciation, amortization, and asset-sale gains increased 7.6%, faster than revenue growth. Management cited higher direct costs, general and administrative and corporate expenses, including $12.2 million more non-cash compensation and approximately $1.7 million of REIT-evaluation costs.
- Year-to-date net income rose substantially partly because 2012 included a $32.0 million loss on extinguishment of debt. Interest expense declined $4.8 million year over year, which management attributed to lower debt and refinancing-related rate reductions.
- The effective tax rate was 37.1% for the first nine months and 42.0% in Q3. Management cited a Puerto Rico tax-rate change and its effect on net operating loss carryforwards.
- The company spent $83.8 million on acquisitions during the first nine months, versus $54.7 million in the comparable 2012 period; capital expenditures were approximately unchanged year over year.
Outlook, debt, risks and unusual items
- Management expected 2013 capital expenditures of approximately $100 million and expected cash flows from operations to exceed operating and capital expenditure needs, with excess cash available for debt reduction or acquisitions. It did not expect a mandatory excess-cash-flow debt prepayment for fiscal 2013 and considered liquidity adequate for operating needs through year-end.
- Lamar Media’s $350 million 9.75% senior notes were due April 2014 and classified within current maturities. On November 4, 2013, Lamar Media announced plans to redeem them in full, expected December 4, using cash and revolver borrowings. The redemption price includes principal, a make-whole amount, and accrued interest. The filing notes senior credit facility debt could be accelerated at December 31, 2013 if the notes had not been repaid.
- The company was evaluating a REIT election effective January 1, 2014, subject to board approval, IRS developments, qualification requirements, and restructuring before year-end. The IRS ruling request remained under review; the company gave no assurance that it would convert or realize expected benefits.
- Debt agreements impose covenants and restrict additional debt, asset sales, investments, and distributions. The registrants reported compliance with applicable covenants at September 30. Cash transfers from Lamar Media to the parent are also subject to restrictions.
- Interest-rate risk is material: management estimated that a 200-basis-point increase in the weighted average rate on variable-rate debt would have increased nine-month interest expense by approximately $5.6 million and reduced net income by approximately $3.5 million.
- Other cited risks include economic and advertising-market conditions, demand and competition, contract renewals, regulation, acquisition integration, funding needs, digital deployment, and REIT qualification and tax-law changes. Management concluded disclosure controls were effective and reported no material change in internal control over financial reporting.
Important facts for investors to verify
- Completion, funding source, and final cost of the announced redemption of the 9.75% notes, and any related use of the revolver.
- Whether the REIT election proceeds, the IRS ruling and board decision, required restructuring, and any associated costs or tax effects.
- Underlying organic revenue trends: acquisition-adjusted growth was lower than reported growth; this comparison is a company-defined non-GAAP measure.
- Debt maturities, covenant headroom, distribution restrictions, and sensitivity to variable interest rates.
- Whether expense growth, particularly compensation and corporate costs, remains above revenue growth, and whether the stated 2013 capital expenditure outlook is achieved.