Lamar Advertising Company — FY 2014 Form 10-K
Business context and reporting period. This annual report covers the year ended December 31, 2014; it is not a standalone fourth-quarter filing. Lamar operates outdoor advertising displays in a single advertising segment, including billboards, logo signs and transit advertising. Lamar Media Corp. is its wholly owned operating subsidiary and principal borrower. Lamar Advertising elected REIT status effective January 1, 2014.
Financial performance and liquidity
Unless otherwise noted, amounts are in millions of dollars and reflect Lamar Advertising’s consolidated results.
| Metric | FY 2014 | FY 2013 | Change |
|---|---|---|---|
| Net revenue | $1,287.1 | $1,245.8 | +3.3% |
| Operating income | $278.7 | $223.4 | +24.7% |
| Operating margin | 21.7% | 17.9% | +3.8 percentage points |
| Net income | $253.5 | $40.1 | + $213.4 |
| Basic and diluted EPS | $2.66 | $0.42 | +$2.24 |
| Adjusted EBITDA | $558.0 | $545.1 | +2.4% |
| Cash from operating activities | $452.5 | $394.7 | +14.6% |
| Capital expenditures | $107.6 | $105.7 | +$1.9 |
| Cash and cash equivalents at year-end | $26.0 | $33.2 | -$7.2 |
| Total debt at year-end | $1,899.9 | $1,938.8 | -$38.9 |
| Working capital at year-end | $47.8 | $36.7 | +$11.1 |
Net income included a $110.1 million income tax benefit, principally from writing off deferred tax liabilities following the REIT conversion. The filing also reports a $26.0 million loss on extinguishment of debt and a $4.1 million investment impairment. Thus, the sharp rise in GAAP net income should not be read as equivalent growth in recurring operating performance. Adjusted EBITDA is a non-GAAP measure; the company cautions that it is not a substitute for GAAP results or operating cash flow.
Revenue growth was led by billboards, up $35.7 million, with logo-sign revenue up $4.0 million and transit revenue up $1.5 million. Compared with acquisition-adjusted 2013 revenue, 2014 revenue increased $28.6 million, or 2.3%. Direct advertising expense was $453.3 million, about 35.2% of revenue; revenue less direct advertising expense was $833.8 million, a 64.8% margin. Adjusted EBITDA margin was approximately 43.4%.
Q4 2014 revenue was $336.7 million versus $320.4 million in Q4 2013. Net income applicable to common stock was $207.8 million versus $10.1 million; the filing’s quarterly table does not clearly attribute the quarter-specific net income swing, while the annual results identify a substantial REIT-related tax benefit. The business is seasonal, with typically weaker first-quarter and stronger summer and fall performance.
Year-end liquidity was approximately $354.2 million: $26.0 million cash and $328.2 million available under the revolving facility. The company reported compliance with debt covenants and said it would remain compliant after borrowing the full available revolver. Total debt was approximately $1.9 billion; current maturities were $15.6 million. The $400 million revolving facility matures in 2019; $353.8 million was outstanding under the senior credit facility, including term borrowings. Variable-rate debt was approximately 18.6% of total debt; management estimated a 200-basis-point rate increase would have raised 2014 interest expense by about $5.3 million.
Material changes, outlook and risks
- REIT conversion: The 2014 conversion drove a large noncash deferred-tax benefit and changed the company’s distribution and tax framework. Transit, advertising services and most foreign operations are held in taxable REIT subsidiaries.
- Debt refinancing: Lamar Media issued $510 million of 5⅜% senior notes due 2024, amended and expanded its credit arrangements, and redeemed $400 million of 7⅞% notes due 2018. Interest expense fell $41.0 million year over year, partly due to lower debt and refinancing rates.
- Investment and distributions: Lamar spent $65.0 million on acquisitions and $53.5 million on digital billboard capital expenditures in 2014. It paid common distributions of $2.50 per share during the year and authorized a $250 million share-repurchase program; no program repurchases occurred in 2014.
- Management outlook: 2015 capital expenditures were expected to be approximately $100 million. The board declared a $0.68-per-share quarterly dividend payable March 31, 2015; management expected 2015 common distributions to total $2.75 per share. Future distributions remain subject to board discretion, cash generation, REIT requirements and debt restrictions.
- Key risks: Significant debt and restrictive covenants; sensitivity of advertising demand to economic conditions and competing media; regulatory limits on outdoor and digital displays; site-lease renewals and costs; acquisitions and integration; and maintaining REIT qualification and funding required distributions. Five logo-sign contracts were subject to renewal in 2015.
- Regulatory and operating contingencies: Scenic America’s appeal of a district court decision upholding federal digital-billboard guidance was pending as of February 23, 2015. Changes to federal, state or local rules could restrict digital displays. The company also states it does not consider natural-disaster insurance economical and relies on mitigation plans for hurricanes and severe weather.
- Governance and assurance: The Reilly family and affiliates held approximately 65% of voting power as of year-end 2014. Management and KPMG reported effective internal controls; KPMG issued an unqualified opinion on the financial statements.
Investor verification priorities
- Separate recurring operating improvement from the noncash REIT-conversion tax benefit, debt-extinguishment charges and investment impairment.
- Review acquisition-adjusted revenue growth and confirm how much growth came from pricing, occupancy, digital units and acquisitions.
- Assess debt maturities, covenant headroom, variable-rate exposure and whether operating cash flow can support debt service, capital spending and distributions.
- Verify 2015 distribution plans against REIT taxable income, available net operating losses, subsidiary cash-transfer limits and debt covenants.
- Monitor renewals of the five logo-sign contracts and developments in digital-billboard regulation and the Scenic America appeal.