Lamar Advertising Company — Q3 2016 Form 10-Q
Reporting period: Three and nine months ended September 30, 2016; filed November 3, 2016. Lamar Media Corp. is Lamar Advertising’s wholly owned subsidiary and the principal borrower. Unless noted, amounts below are in millions; financial statements are unaudited.
Business context and results
Lamar earns most revenue by renting outdoor advertising display space, with additional logo-sign and transit businesses. Management identifies occupancy, advertising rates, acquisitions, economic conditions and advertising demand as key drivers.
| Metric | Q3 2016 | Q3 2015 | Nine months 2016 | Nine months 2015 |
|---|---|---|---|---|
| Revenue | $387.5 | $350.7 | $1,113.6 | $997.4 |
| Operating income | $119.8 | $111.6 | $323.7 | $278.2 |
| Net income | $85.1 | $86.0 | $218.3 | $186.0 |
| Diluted EPS | $0.87 | $0.89 | $2.23 | $1.93 |
| Adjusted EBITDA | $177.3 | $159.0 | $483.8 | $432.9 |
| AFFO | $134.0 | $122.6 | $360.0 | $319.5 |
Revenue grew 10.5% in Q3 and 11.6% for the nine-month period. On management’s acquisition-adjusted comparison, growth was 3.6% in Q3 and 3.3% for the nine months. Approximate GAAP operating margin was 30.9% in Q3 versus 31.8% a year earlier, and 29.1% for nine months versus 27.9%. Approximate net margin was 22.0% in Q3 versus 24.5%, and 19.6% for nine months versus 18.6%.
Cash flow, debt and liquidity
- Nine-month operating cash flow was $337.8 million, up from $313.5 million. Investing cash use was $597.1 million, including $526.0 million for acquisitions and $78.8 million of capital expenditures.
- Financing provided $273.5 million; cash increased $15.2 million to $37.5 million at September 30.
- Debt carrying value was $2.410 billion, including $28.8 million current maturities, compared with $1.919 billion at December 31, 2015. Cash-adjusted debt was approximately $2.373 billion. The filing estimates debt fair value at $2.517 billion.
- Reported total liquidity was approximately $222.4 million: $37.5 million cash plus $184.9 million revolver availability. Revolver borrowings were $206.0 million, with $9.1 million of letters of credit outstanding.
- Interest expense was $31.1 million in Q3 and $92.5 million for nine months, versus $24.7 million and $74.0 million, respectively. Variable-rate debt was approximately $464.8 million; management estimated a 200-basis-point rate increase would have added $7.8 million to nine-month interest expense.
Material changes and unusual items
- Completed 18 acquisitions for total purchase consideration of $535.0 million, including $526.0 million cash. The largest was the January purchase of assets in five U.S. markets from Clear Channel Outdoor for approximately $458.5 million. Acquisitions contributed materially to reported revenue growth.
- Management cited approximately 300 digital displays added since October 2015 and increased Q3 political advertising sales. Acquisition-adjusted revenue increased $13.3 million in Q3 and $35.2 million year to date.
- Increased interest expense primarily reflected the January issuance of $400 million of 5.75% senior notes due 2026. Proceeds also funded repayment of a $300 million Term A-1 loan; the repayment generated a $3.2 million debt-extinguishment loss.
- Q3 net income declined slightly despite higher revenue and operating income, as interest expense and tax expense rose and the prior-year quarter included a larger gain on asset dispositions. Nine-month net income increased 17.3%.
- The nine-month effective tax rate was approximately 4.3%, largely reflecting REIT tax treatment and foreign items.
Outlook, risks and contingencies
- Management expected 2016 capital expenditures of approximately $100 million and stated that cash on hand, revolver availability and operating cash flow should be sufficient for operating needs through fiscal 2016. It expected 2016 quarterly common distributions to total $3.02 per share; future distributions remain at the board’s discretion. No specific revenue or earnings guidance was provided.
- Lamar reported compliance with its debt agreements and covenant tests. The senior credit facility requires a senior debt ratio no greater than 3.5:1 and imposes additional conditions on debt incurrence and distributions. Debt agreements also restrict certain actions and distributions; covenant breach could permit lenders to terminate commitments or accelerate debt.
- Key disclosed risks include advertising demand and economic conditions, significant indebtedness and refinancing needs, interest-rate exposure, competition, regulation, contract renewals, acquisition integration, digital deployment, severe weather, and maintaining REIT qualification. The filing reported no material change to the prior annual-report risk factors and no material change in commitments and contingencies during the nine months.
- Management said disclosure controls were effective and reported no material change in internal control over financial reporting. The company was evaluating the impact of new revenue-recognition and lease-accounting standards.
Important facts for investors to verify
- How much of reported growth and future performance comes from acquired assets versus underlying organic growth, and whether acquisition integration and digital-display additions deliver expected results.
- Current leverage and covenant headroom after the acquisition spending and increase in debt; confirm maturity, refinancing and variable-rate exposure.
- Whether operating cash flow can support planned capital spending, acquisition activity and the stated distribution expectations without additional borrowing.
- How sustainable margins and earnings are given rising operating costs and interest expense, and the effects of asset-sale gains and REIT-related tax treatment.
- Whether the company continues to meet REIT requirements and debt-agreement distribution restrictions; the filing does not provide a clear numerical debt-ratio value.