OUTFRONT Media Inc. — Q2 2020 Form 10-Q
Reporting period: Three and six months ended June 30, 2020. OUTFRONT is a REIT operating out-of-home advertising displays, principally billboards and transit advertising, in the U.S. and Canada. Results were significantly affected by COVID-19.
Financial results and liquidity
| Metric | Q2 2020 | Q2 2019 | Six months 2020 | Six months 2019 |
|---|---|---|---|---|
| Revenue | $232.9m | $459.9m | $618.2m | $831.6m |
| Operating income (loss) | ($25.9m) | $88.7m | $7.9m | $125.6m |
| Net income (loss) attributable to OUTFRONT | ($57.9m) | $50.3m | ($51.8m) | $56.4m |
| Diluted EPS | ($0.44) | $0.35 | ($0.40) | $0.39 |
| Adjusted OIBDA | $21.7m | $143.6m | $108.5m | $230.4m |
| Adjusted OIBDA margin | 9% | 31% | 18% | 28% |
Q2 billboard revenue fell 38% to $188.5m, while transit and other revenue fell 71% to $44.4m. For the first half, the respective declines were 17% and 42%. Management attributed the reductions mainly to weaker advertising demand, cancellations and lower revenue per display amid the pandemic. Q2 operating expenses declined 30%, but not enough to offset the revenue drop; SG&A was $62.4m, or 27% of revenue, versus 18% a year earlier. Interest expense, net, was $33.3m in Q2 and $63.1m for the first half.
First-half operating cash flow was $50.7m, down from $83.5m. Investing activities used $49.3m, including $31.9m of capital expenditures; financing activities provided $588.3m. Cash and cash equivalents were $647.8m at June 30, versus $59.1m at year-end 2019; cash including restricted cash was $649.6m. Working capital was $380.0m, compared with a $214.2m deficit at year-end.
Total debt, net, was $2.698bn, compared with $2.417bn at year-end; weighted-average debt cost was 4.5%. The $500m revolving facility had no borrowings at quarter-end. The AR Facility was temporarily suspended, and the $80m Repurchase Facility was fully drawn with no remaining capacity. OUTFRONT reported compliance with debt covenants; its total leverage ratio was 6.7x, while its secured net leverage ratio was 1.0x.
Material changes and financing
- On April 20, OUTFRONT issued $400m of Series A preferred stock in a private placement. It carries a cumulative 7% annual dividend and is convertible at an initial $16 per common share, subject to terms and a share cap. Preferred dividends were $5.5m in Q2.
- In May, the company issued $400m of 6.25% senior notes due 2025 and used proceeds, with cash on hand, to repay $400m of revolver borrowings. It had previously borrowed $470m under the revolver in response to pandemic-related uncertainty.
- The credit agreement was amended to adjust certain covenant calculations through September 2021 and restrict certain distributions without lender consent, subject to exceptions. The common dividend was suspended, subject to minimum REIT distribution requirements.
- The company recorded $11.3m of first-half provisions for doubtful accounts, including its estimate of pandemic-related collection impacts. Receivables allowance rose to $20.5m from $12.1m at year-end.
Outlook, risks and unusual items
Management expects 2020 revenue and expenses to be materially below historical levels, with the impact expected to be greater in Q2 than in Q3 and Q4. It cautioned that first-half results are not indicative of full-year results and that it cannot reasonably estimate the pandemic’s full impact. Management expects lease, transit franchise and other operating costs to rise materially as a percentage of revenue when revenue declines. No specific revenue or earnings recovery forecast was provided.
- For full-year 2020, capital expenditures were expected to be approximately $50m, primarily for necessary safety maintenance and digital-display projects already ordered or received. New acquisition activity was paused, and discretionary spending and staffing costs were reduced.
- The MTA agreement was amended: for up to $143m of post-June deployment costs, the MTA and OUTFRONT will pay 70% and 30%, respectively; certain 2020 minimum payments were deferred into equal increments for 2022–2026. Deployment resumed in Q3. OUTFRONT had not recouped MTA equipment costs in the first half and said recovery in 2020 was unlikely; management identified no impairment in its reviews to date.
- Workforce reductions affected approximately 70 U.S. employees and 20 Canadian employees, generating $4.7m of restructuring charges. Management also cited temporary salary reductions and other cost controls.
- Key uncertainties include the duration and severity of COVID-19, advertising demand and collections, fixed or minimum lease and franchise obligations, MTA cost recovery and possible asset impairment, refinancing and capital-market access, and substantial debt. Outstanding letters of credit and surety bonds were approximately $72.6m and $161.5m, respectively, and were not recorded as balance-sheet liabilities.
- Management said ongoing litigation was not expected to have a material adverse effect. Previously disclosed risk factors were not materially changed, though pandemic-related risks were heightened.
Important facts for investors to verify
- Whether advertising demand, revenue per display and customer collections improved after Q2, and how that affected subsequent results.
- Cash generation, available borrowing capacity and covenant compliance, particularly given 6.7x total leverage and no remaining AR securitization capacity at quarter-end.
- Progress on MTA deployments, the economics of the amended agreement, and recoverability of the recorded MTA-related assets.
- The terms, cash cost and potential dilution associated with the 7% preferred stock, including conversion and redemption provisions.
- Actual 2020 capital spending, cost savings and any decisions on resuming common dividends, subject to REIT requirements and financing restrictions.