Lamar Advertising Company — Q3 2014 Form 10-Q
Business context and reporting period. This combined, unaudited filing covers the quarter and nine months ended September 30, 2014, with comparative periods in 2013. Lamar earns most revenue from outdoor advertising displays, including billboards, logo signs and transit advertising. Lamar Media Corp. is its wholly owned operating and debt-issuing subsidiary. Dollar amounts below are in millions unless noted.
Financial performance and position
| Metric | Q3 2014 | Q3 2013 | Nine months 2014 | Nine months 2013 |
|---|---|---|---|---|
| Revenue | $335.0 | $321.1 | $950.4 | $925.5 |
| Operating income | $86.0 | $67.2 | $190.2 | $159.6 |
| Net income | $35.1 | $17.1 | $45.6 | $30.0 |
| Diluted EPS | $0.37 | $0.18 | $0.48 | $0.31 |
| Adjusted EBITDA | $153.4 | $145.5 | $407.4 | $400.1 |
| AFFO | $109.5 | $97.3 | $271.2 | $247.2 |
| FFO | $93.5 | $86.3 | $235.9 | $236.5 |
Margins and drivers. Q3 operating margin was approximately 25.7%, versus 20.9% a year earlier; nine-month operating margin was approximately 20.0%, versus 17.2%. Revenue rose 4.3% in Q3 and 2.7% year to date. Management cited higher billboard pricing and occupancy and more than 150 additional digital billboard displays, alongside growth in logo-sign revenue. Acquisition-adjusted revenue growth was 3.3% for Q3 and 1.5% for the nine-month period. Adjusted EBITDA increased 5.4% in Q3 and 1.8% year to date; FFO was nearly flat year to date, while AFFO rose 12.5% and 9.7%, respectively.
Cash flow, debt and liquidity. Nine-month operating cash flow was $303.2, compared with $294.7 in 2013. Investing cash use was $130.9, including $83.9 of capital expenditures and $54.1 for acquisitions. Financing cash use was $176.8, including $158.5 of common-stock distributions. Cash ended the period at $28.0, down $5.3 from year-end 2013. Total debt was $1,941.1, including $15.6 current maturities; total debt at December 31, 2013 was $1,938.8. Total liquidity was approximately $319.1, comprising cash and $291.1 of revolver availability after letters of credit. Lamar Media had $102.0 drawn on its revolving facility and $292.5 outstanding under Term A loans. The filing reports compliance with applicable debt covenants.
Material changes and unusual items
- Q3 operating income and net income increased substantially year over year, supported by revenue growth, lower depreciation and amortization, and lower interest expense. Interest expense declined to $24.4 in Q3 from $37.7; for nine months it declined to $80.8 from $112.3, primarily due to refinancing.
- In January 2014, Lamar Media issued $510.0 of 5.375% senior notes due 2024. It used financing transactions, cash and credit-facility borrowings to repay prior term loans and redeem all $400.0 of 7.875% notes due 2018 in April. The nine-month results include a $26.0 loss on debt extinguishment, of which approximately $10.3 was noncash, and a $4.1 other-than-temporary investment impairment.
- The company paid common-stock distributions of $1.66 per share in the first nine months, versus none in the comparable 2013 period, in anticipation of REIT operation. The Board approved remaining steps toward the REIT conversion on September 25; the merger proposal was scheduled for a November 17, 2014 stockholder vote. Conversion was not yet complete at quarter-end.
- The company corrected an immaterial revenue-recognition error by changing from monthly to daily recognition over contract terms and revised 2013 comparative results. The filing says the correction was immaterial to current and prior periods.
Outlook, risks and contingencies
Management expected 2014 operating cash flow to exceed operating and capital-expenditure needs and believed available cash, revolver capacity and future operating cash flow were sufficient for needs through fiscal 2014. It anticipated approximately $100 million of total 2014 capital expenditures. These are management expectations, not guarantees. No material changes to reported commitments and contingencies were disclosed; operating leases were identified as the exception to the company’s statement that it had no off-balance-sheet arrangements.
Risks highlighted include economic conditions and advertising demand, competition, regulation, renewal of site and other contracts, acquisition integration, digital-display execution, severe weather, substantial indebtedness, covenant compliance and access to financing. Variable-rate debt exposes the company to interest-rate risk: $394.5 was outstanding under the senior credit facility at quarter-end, and management estimated a 200-basis-point rate increase would have added about $3.4 of nine-month interest expense and reduced net income by about $1.9. REIT conversion and continuing qualification were subject to execution, tax-law and distribution constraints; future distribution amounts and timing remain at the Board’s discretion. Management reported disclosure controls were effective and no material change in internal control over financial reporting.
Most important facts for investors to verify
- Whether stockholders approved the proposed merger and whether the REIT conversion was completed and qualified as intended.
- Organic revenue growth and operating costs, including the extent to which growth came from pricing, occupancy, digital displays or acquisitions.
- Debt balances, refinancing economics, variable-rate exposure, covenant headroom and revolver availability.
- Cash generation after capital expenditures, acquisitions and REIT-related distributions, and the company’s capacity to meet required distributions.
- How the debt-extinguishment loss, investment impairment, tax expense and revised 2013 revenue figures affect comparisons and recurring earnings.