Lamar Advertising Company — Q2 2014 Form 10-Q
Business context and reporting period
Combined quarterly filing for Lamar Advertising Company and its wholly owned operating subsidiary, Lamar Media Corp. The unaudited period ended June 30, 2014; comparisons are with the three and six months ended June 30, 2013. Lamar earns most revenue by renting space on outdoor advertising displays, including billboards, logo signs and transit displays. Unless noted, amounts below are in millions of dollars.
Financial results and liquidity
| Metric | Q2 2014 | Q2 2013 | Six months 2014 | Six months 2013 |
|---|---|---|---|---|
| Revenue | $330.4 | $327.7 | $615.4 | $604.3 |
| Operating income | $73.0 | $73.3 | $104.2 | $92.4 |
| Net income | $15.4 | $23.1 | $10.6 | $12.9 |
| Diluted EPS | $0.16 | $0.24 | $0.11 | $0.13 |
| Adjusted EBITDA | $149.7 | $151.4 | $254.0 | $254.6 |
| FFO | $82.0 | $90.9 | $142.4 | $150.2 |
| AFFO | $102.9 | $99.7 | $161.7 | $149.9 |
Q2 revenue rose 0.8%, while revenue for the first half rose 1.8%. Against acquisition-adjusted prior-year revenue, Q2 was down 0.2% and the first half was up 0.6%. Operating margin was approximately 22.1% in Q2 (22.4% prior year) and 16.9% for the first half (15.3% prior year). Net income fell in both comparisons, while first-half operating income improved.
- Cash flow: First-half operating cash flow was $173.4, versus $152.0 a year earlier. Capital expenditures were $54.3; operating cash flow less capital expenditures was $119.2. Ending cash was $34.4, compared with $33.2 at year-end 2013.
- Debt and liquidity: Debt carrying value, including current maturities, was $1,927.9 at June 30, 2014, versus $1,938.8 at December 31, 2013. Total liquidity was approximately $342.4: $34.4 cash plus $308.0 available under the revolving facility. Current liabilities were $235.2 and current assets $332.2.
- Distributions: Lamar paid approximately $79.0, or $0.83 per common share, during the first half in anticipation of its planned REIT election. Preferred dividends were $0.2.
Material changes versus the prior period
- First-half revenue growth was led by billboards; logo-sign and transit revenue also increased. Operating costs rose, including direct and general and administrative expenses, while depreciation and amortization fell $5.7.
- Interest expense declined $18.2 in the first half, mainly reflecting refinancing transactions. The improvement was offset in reported earnings by a $26.0 debt-extinguishment loss and a $4.1 investment impairment; first-half net income was $2.3 lower year over year.
- In January, Lamar Media issued $510.0 of 5⅜% senior notes due 2024 and repaid outstanding term loans. It also amended and restated its credit facility. In April, it borrowed $300.0 under a Term A facility and redeemed all $400.0 of 7⅞% notes due 2018, at a total redemption price of approximately $416.3. The redemption and credit-facility changes generated the debt-extinguishment charge.
- Digital billboard capital spending increased: first-half digital billboard expenditures were $27.9 versus $23.6 in 2013. Total first-half acquisitions cost $9.2, down from $32.8 in the prior-year period.
Outlook, commentary, risks and unusual items
- Management anticipated approximately $100 million of capital expenditures for full-year 2014 and said existing cash, revolver availability and expected operating cash flows should be sufficient for operating needs through 2014. No specific revenue or earnings guidance was provided.
- The company received an IRS private letter ruling supporting its planned REIT treatment and continued to anticipate an election effective January 1, 2014. The election remained subject to board approval and a proposed merger requiring a stockholder vote; a special meeting was expected in Q4 2014. The ruling does not guarantee REIT qualification or completion of the conversion.
- A REIT would generally have to distribute at least 90% of REIT taxable income to maintain qualification. Future distributions are at the board’s discretion and depend on cash flows, tax needs, debt restrictions and other factors. Lamar also noted restrictions on distributions and other actions under its debt agreements.
- The company reported compliance with applicable debt covenants at June 30. Variable-rate debt was approximately $381.3; management estimated a 200-basis-point rate increase would have raised first-half interest expense by about $1.7 and reduced net income by about $1.0.
- Management cited sensitivity to economic conditions and advertising spending, competition, regulation, contract renewals, acquisition integration, digital deployment, severe weather, indebtedness and REIT qualification and tax-law risks.
- The company corrected an immaterial revenue-recognition error, changing recognition from monthly to daily over contract terms, and revised prior-period figures. It also disclosed a new revenue standard effective for it in 2017; adoption effects were still being evaluated.
Important facts for investors to verify
- Whether the proposed merger and REIT election were completed, and whether the company qualified for REIT status effective January 1, 2014.
- Subsequent operating results on an acquisition-adjusted basis, given modest organic revenue changes and weaker Q2 Adjusted EBITDA and FFO.
- Debt balances, facility availability, covenant compliance and the sensitivity of interest expense to variable rates.
- Whether operating cash generation supports planned capital spending and distributions, including any constraints under debt agreements and REIT requirements.
- The treatment and comparability of the debt-redemption loss, investment impairment and prior-period revenue-recognition revisions.