Lamar Advertising Company — Q2 2013 Form 10-Q
Reporting period: Quarter and six months ended June 30, 2013; comparative periods ended June 30, 2012. Lamar Advertising Company and wholly owned subsidiary Lamar Media Corp. filed combined reports. Amounts below are in U.S. dollars; financial figures are generally in millions.
Business context and key financial results
Revenue is generated primarily by renting outdoor advertising display space, including billboards, logo signs and transit advertising. Results are affected by advertising demand, occupancy, rates, economic conditions and acquisitions.
| Metric | Q2 2013 | Q2 2012 | Six months 2013 | Six months 2012 |
|---|---|---|---|---|
| Net revenue | $324.7 | $304.9 | $608.2 | $571.1 |
| Operating income | $70.3 | $64.5 | $96.2 | $90.3 |
| Operating margin | 21.6% | 21.1% | 15.8% | 15.8% |
| Net income (loss) | $21.3 | $13.9 | $15.2 | $(8.9) |
| Diluted EPS | $0.22 | $0.15 | $0.16 | $(0.10) |
| Interest expense | $37.9 | $38.6 | $74.6 | $78.5 |
Cash flow, debt and liquidity
- Six-month operating cash flow was $152.0 million, up from $134.0 million. Investing activities used $82.3 million, including $52.7 million of capital expenditures and $32.8 million for acquisitions.
- Cash and cash equivalents were $118.9 million at June 30, 2013, compared with $58.9 million at year-end 2012. Total liquidity, including available revolving credit, was approximately $361.9 million.
- Total debt was approximately $2.149 billion, including $384.2 million classified as current. The current classification includes $343.3 million of 9¾% Senior Notes due April 1, 2014. The company said the notes should be repaid before December 31, 2013 to avoid potential acceleration under the credit facility.
- The $250 million revolving facility had no borrowings and approximately $243.0 million available after letters of credit. Lamar Media reported compliance with applicable debt covenants.
Material changes and management commentary
- Reported revenue rose 6.5% in both the quarter and six-month period. On the company’s non-GAAP acquisition-adjusted comparison, growth was 2.7% for Q2 and 2.5% for the six months. Billboard, logo-sign and transit revenues all increased.
- Operating income improved, while six-month net income turned positive from a prior-year loss. The 2012 six-month comparison included a $30.0 million loss on extinguishment of debt related to a refinancing; interest expense also declined in 2013 following 2012 refinancing transactions.
- Six-month operating expenses excluding depreciation, amortization and asset-sale gains increased 7.9%. General and administrative and corporate expense increases included $10.2 million more non-cash compensation expense year over year; REIT-evaluation costs were approximately $1.0 million for the six months.
- Management expected 2013 capital expenditures, excluding acquisitions, of approximately $100 million and said it expected operating cash flows to exceed operating and capital needs, with excess cash principally directed to debt reduction. Acquisitions remain under consideration; approximately $32.8 million were completed in the first half.
- The company was evaluating a possible REIT election for tax year 2014. The IRS had said it was studying its legal standards for defining real estate, potentially delaying a requested private letter ruling. The board had not made a final decision, and qualification or realization of expected benefits was not assured.
Risks, contingencies and other items
- Key risks include advertising demand and economic conditions, significant indebtedness and refinancing needs, covenant restrictions, regulation of outdoor advertising, contract renewals, competition, acquisitions and execution of the digital-display strategy.
- Variable-rate senior-facility debt was approximately $368.4 million, at a six-month weighted average rate of 3.0%. Management estimated that a 200-basis-point rate increase would have raised six-month interest expense by approximately $3.8 million and reduced net income by approximately $2.7 million.
- Asset retirement obligations were $193.8 million at June 30, 2013. The filing also notes restrictions on distributions from Lamar Media to the parent under debt agreements.
- Management concluded disclosure controls were effective and reported no material change in internal control over financial reporting during the quarter.
Most important facts for investors to verify
- Whether the 9¾% notes due in 2014 were repaid or refinanced before the December 31, 2013 acceleration trigger, and on what terms.
- Whether acquisition-adjusted revenue growth translated into sustained operating improvement, given higher operating expenses and compensation costs.
- Actual 2013 capital expenditures, acquisitions and cash available for debt reduction compared with management’s expectations.
- The outcome and timing of the IRS ruling request, the board’s REIT decision, and the expected costs, tax consequences and qualification requirements.
- Debt covenant headroom and sensitivity to interest rates, advertising-market weakness and other changes in cash generation.