Lamar Advertising Company — 2018 Form 10-K
Reporting period: Fiscal year ended December 31, 2018; filed jointly with wholly owned subsidiary Lamar Media Corp. Although the request labels the period “2018 Q4,” this is an annual filing. Fourth-quarter figures are noted separately below. Amounts are in U.S. dollars.
Business context and reporting period
Lamar operates one advertising segment, renting space on billboards, logo signs and transit displays in the United States and Canada. At year-end it operated approximately 156,900 billboards, including more than 3,100 digital displays, approximately 149,000 logo displays and more than 53,300 transit displays. Lamar Advertising is taxed as a REIT; certain operations are held in taxable REIT subsidiaries.
Financial performance and position
- Revenue: $1.627 billion, up 5.6% from $1.541 billion in 2017. On an acquisition-adjusted basis, revenue rose 3.4%. Billboard revenue increased 5.4%, logo revenue 1.8% and transit revenue 10.1%.
- Profit: Operating income was $460.6 million, up 1.1%; net income was $305.2 million, down 3.9%; diluted EPS was $3.08, versus $3.23. The effective tax rate was approximately 3.4%, primarily reflecting REIT status and foreign items.
- Margins: Operating margin was 28.3%, compared with 29.5% in 2017; net margin was 18.8%, compared with 20.6%. Direct advertising expense was 34.5% of revenue, versus 35.1%.
- Non-GAAP measures: Adjusted EBITDA was $722.5 million, up 7.6%; FFO was $527.0 million, up 2.7%; AFFO was $544.5 million, up 9.7%. The filing cautions these measures are not substitutes for GAAP results or operating cash flow.
- Cash flow and investment: Operating cash flow was $564.8 million, versus $507.0 million. Capital expenditures were $117.6 million, including $45.9 million for digital technology. Acquisitions used $477.4 million of cash; investing cash outflow totaled $584.1 million.
- Debt and liquidity: Year-end debt, net of deferred financing costs, was $2.889 billion, up from $2.557 billion. Cash was $21.5 million and revolving-credit availability was $156.8 million, for reported total liquidity of $178.3 million. Working capital was negative $91.4 million. Interest expense was $129.7 million.
- Distributions: Lamar declared common distributions of $3.65 per share for 2018. Cash distributions paid during the year were $442.6 million, including a distribution declared in 2017.
Material changes versus the prior comparable period
- Reported revenue growth benefited from acquisitions and digital inventory expansion; management reported 3.4% growth after acquisition adjustments. More than 250 digital displays were added during 2018.
- Operating expenses excluding depreciation, amortization and asset-disposition gains increased 6.2%. Stock-based compensation expense increased $19.8 million, contributing to higher reported expenses.
- Net income declined despite higher revenue and operating income, mainly reflecting a $15.4 million debt-extinguishment loss and increased interest expense. The debt loss followed redemption of $500 million of 5⅞% senior subordinated notes; it included a $9.8 million cash premium and a $5.6 million non-cash write-off.
- The company completed more than 30 acquisitions for approximately $489.7 million in total purchase price, including the $418.5 million Fairway Outdoor Advertising transaction closed on December 21, 2018. Fairway’s year-end purchase-price allocation was preliminary.
- Cash declined to $21.5 million from $115.5 million. The company also established a $175 million accounts-receivable securitization program in December, fully drawn at year-end.
- Fourth quarter: Revenue was $427.9 million, versus $398.5 million in fourth-quarter 2017. Net income applicable to common stock was $95.6 million, versus $87.1 million; diluted EPS was $0.96, versus $0.89.
Outlook, commentary, risks and unusual items
- Management expected 2019 capital expenditures to approximate 2018 spending and stated that cash on hand, revolving availability and expected operating cash flows should meet operating needs through fiscal 2019.
- After year-end, Lamar Media increased revolving commitments by $100 million, to $550 million, and issued $250 million of 5¾% senior notes due 2026; proceeds were used to repay revolver borrowings.
- Variable-rate borrowings represented approximately 54.1% of debt at year-end. Management estimated that a 200-basis-point increase in rates would have added approximately $20.8 million to 2018 interest expense. The company was in compliance with its debt covenants at year-end.
- Management expects seasonality, with typically weaker first-quarter performance and stronger summer and fall results. Advertising demand is sensitive to economic conditions, and a significant portion of expenses is fixed.
- Principal risks include substantial debt and covenant restrictions; competition and shifts in advertising spending; regulation of billboards, especially digital displays; renewal or loss of logo and transit contracts; landlord lease renewals; REIT qualification and tax-law changes; and uninsured hurricane or other severe-weather losses. Six logo-sign contracts were due for renewal or expiration in 2019.
- Operating leases were expected to produce a material accounting change upon adoption of the new lease standard on January 1, 2019: management estimated more than $1.1 billion of additional operating lease liabilities and corresponding right-of-use assets.
- The Puerto Rico asset sale closed April 16, 2018 and resulted in a $7.8 million loss. Management said ordinary-course litigation was not expected to have a material adverse effect. KPMG gave unqualified opinions on the financial statements and internal control; Fairway’s controls were excluded from the year-end internal-control assessment.
Important facts for investors to verify
- Whether acquisition-adjusted revenue and EBITDA growth are sustained through organic pricing, occupancy and digital-display performance, rather than acquisitions alone.
- The Fairway purchase-price allocation and integration results, including the substantial goodwill recorded and the effect on subsequent earnings and cash flow.
- Debt balances, maturities, covenant headroom, variable-rate exposure and the use of proceeds from the February 2019 note issuance.
- Cash generation relative to acquisition spending, capital expenditures and distributions, given low year-end cash and negative working capital.
- The actual balance-sheet effect of lease-standard adoption and the renewal economics of site leases and logo-sign contracts.
- Whether REIT qualification, distribution capacity and restrictions under debt agreements remain compatible as cash needs and taxable income change.