Lamar Advertising Company — Q3 2017 Form 10-Q
Reporting period: Quarter and nine months ended September 30, 2017; comparisons are to the corresponding 2016 periods. Figures are in millions of dollars except per-share amounts. Lamar Media Corp. is the company’s wholly owned subsidiary and principal borrower; its results are substantially similar to the consolidated company results.
Financial performance
| Metric | Q3 2017 | Q3 2016 | Nine months 2017 | Nine months 2016 |
|---|---|---|---|---|
| Revenue | $399.3 | $387.5 | $1,142.8 | $1,113.6 |
| Operating income | $131.7 | $119.8 | $335.4 | $323.7 |
| Net income | $96.3 | $85.1 | $230.5 | $218.3 |
| Basic EPS | $0.98 | $0.87 | $2.35 | $2.25 |
| Adjusted EBITDA (non-GAAP) | $182.8 | $177.3 | $493.0 | $483.8 |
| AFFO (non-GAAP) | $137.5 | $134.0 | $360.5 | $360.0 |
Revenue increased 3.1% in Q3 and 2.6% year to date. On an acquisition-adjusted basis, revenue growth was 1.0% in Q3 and 1.4% year to date. Management attributed growth to billboard, logo-sign and transit revenue, including digital billboard revenue. Derived operating margin was approximately 33.0% in Q3 versus 30.9%, and 29.3% year to date versus 29.1%.
For the first nine months, operating cash flow was $320.6 million, down from $337.8 million. Capital expenditures were $74.4 million; operating cash flow less capital expenditures was approximately $246.2 million, a derived measure. Cash and cash equivalents were $29.4 million at September 30, 2017.
Total debt principal was approximately $2.479 billion at quarter-end, compared with $2.378 billion at December 31, 2016; reported debt net of deferred financing costs was $2.449 billion. The company reported $376.3 million of total liquidity, including $346.9 million of revolving-credit availability. Current liabilities were $238.7 million and current assets were $370.5 million.
Material changes and capital allocation
- Q3 net income rose 13.2%; year-to-date net income rose 5.6%. Interest expense increased year to date by about $3.0 million, mainly due to higher debt outstanding following credit-facility refinancing.
- Year-to-date operating cash flow declined despite revenue growth, reflecting operating costs and changes in operating assets and liabilities. AFFO was nearly flat year over year, as higher gross margin was offset in part by maintenance capital spending, interest and operating expenses.
- In May 2017, Lamar Media refinanced its senior credit facility with a $450 million revolving facility and a $450 million Term A loan, both maturing May 15, 2022. At September 30, $444.4 million of Term A loans and $90.0 million of revolver borrowings were outstanding; letters of credit were $13.1 million.
- The company completed 36 acquisitions for approximately $119.9 million in cash during the first nine months, including more than 480 billboard displays acquired from Steen Outdoor Advertising.
- Common distributions were $0.83 per share for Q3 and $2.49 per share year to date. Management expected 2017 distributions to total $3.32 per common share; future distributions remain subject to board discretion, REIT requirements and debt restrictions.
Outlook, risks and unusual items
- Management expected 2017 capital expenditures of approximately $110 million and stated that cash on hand, revolver availability and expected operating cash flows were sufficient for operating needs through fiscal 2017. It expected operating cash flow to exceed operating, capital-expenditure and dividend needs. No specific revenue or earnings forecast is provided in the filing.
- Hurricanes Harvey and Irma caused little or no structural damage and minimal reported impact in affected U.S. markets. Puerto Rico’s billboard structures were largely unaffected, but the island was largely without power at the reporting date; operations could take several months to fully recover. Management did not expect a material consolidated financial impact, while continuing to assess the situation.
- Variable-rate debt was approximately $534.4 million, or 21.8% of debt. A hypothetical 200-basis-point increase in the weighted-average rate would have increased nine-month interest expense by $7.2 million. The company noted that mitigation actions may not be feasible or effective.
- The company reported compliance with its debt covenants. Distributions from Lamar Media to the parent are subject to note-indenture and credit-facility limitations. The company identified economic conditions, advertising demand, competition, regulation, contract renewals, acquisitions, digital deployment, severe weather, indebtedness and continued REIT qualification as risks.
- Q3 gain on asset dispositions was $2.7 million, including a gain related to acquisition-swap transactions. Year-to-date debt-extinguishment loss was $0.1 million. The effective tax rate was 3.3% for Q3 and 3.9% year to date, primarily reflecting REIT status and foreign items.
Important facts for investors to verify
- Whether acquisition-adjusted organic revenue growth and digital billboard revenue continue to develop as management describes.
- Debt balances, variable-rate exposure, covenant headroom and available revolver capacity after subsequent borrowing or distributions.
- Whether cash generation supports planned capital expenditures, acquisitions and the expected $3.32 per-share 2017 distribution.
- The duration and financial effects of Puerto Rico operating disruption, including customer demand and recovery progress.
- The basis and reconciliation of non-GAAP Adjusted EBITDA, FFO and AFFO, which are supplemental measures and are not substitutes for GAAP results or operating cash flow.
- The company’s expected transition to the new revenue-recognition standard in 2018 and the balance-sheet effects of the lease standard expected in 2019.