Business context and reporting period
CBS Outdoor Americas Inc. (subsequently rebranded OUTFRONT Media) filed this unaudited Form 10-Q for the quarter ended September 30, 2014. It sells out-of-home advertising across the U.S., Canada and Latin America through U.S. and International segments. In July, it separated from CBS and began operating to qualify as a REIT for U.S. federal tax purposes.
Financial performance and liquidity
Amounts are in millions except per-share data. Comparisons are with the corresponding 2013 period.
| Metric | Q3 2014 | Q3 2013 | Nine months 2014 | Nine months 2013 |
|---|---|---|---|---|
| Revenue | $336.5 | $338.2 | $958.8 | $950.1 |
| Operating income | $47.6 | $64.6 | $132.6 | $162.1 |
| Adjusted OIBDA | $106.9 | $116.1 | $292.8 | $304.6 |
| Net income | $248.3 | $37.2 | $279.1 | $93.5 |
| Operating cash flow | — | — | $184.5 | $178.7 |
| Capital expenditures | — | — | $43.6 | $41.5 |
- Q3 revenue declined 1%; nine-month revenue increased 1% (2% in constant dollars). Same-site revenue grew 1% and 2%, respectively.
- Adjusted OIBDA margin was approximately 31.8% in Q3 and 30.5% for nine months, versus approximately 34.3% and 32.1% in 2013. Comparable-basis Adjusted OIBDA was down 4% for Q3 and up 1% for nine months.
- GAAP net income includes a $232.3 million non-cash tax benefit from reversing substantially all deferred tax liabilities after the REIT conversion; it is not a measure of recurring operating performance. Comparable-basis AFFO was $70.2 million in Q3 and $166.1 million for nine months, up 4% and 1%, respectively.
- Cash and cash equivalents were $272.2 million at September 30, versus $29.8 million at year-end 2013. Current assets were $560.8 million and current liabilities $237.9 million; reported working capital was $322.9 million.
- Debt was $1.598 billion, with a reported weighted average cost of 4.2%. The $425 million revolving facility had no borrowings; $20.5 million of letters of credit were outstanding against it. Secured and total leverage ratios were 1.6x and 3.9x, respectively.
- Operating cash flow less capital expenditures was approximately $140.9 million for the nine months. Cash flow from financing was $100.4 million, including IPO and debt proceeds, dividends, and distributions to CBS.
Changes versus prior period
Q3 operating income fell 26% and reported Adjusted OIBDA fell 8%, despite nearly flat revenue; higher operating and corporate costs, restructuring, acquisition-related costs, and weaker International results contributed. U.S. Q3 Adjusted OIBDA declined 6%; International declined 20%. For nine months, U.S. revenue increased 2%, while International revenue declined 5% in reported dollars (up 3% in constant dollars). Higher interest expense followed the company’s January 2014 debt issuance; reported interest expense was $26.3 million in Q3 and $57.3 million for nine months.
The 2013 cash-flow comparison was revised: the filing reclassified $13.8 million of non-cash property-and-equipment purchases, increasing reported operating cash flow and investing cash use by that amount. The company said the prior misclassification was not material.
Outlook, commentary, and risks
- Management expected 2014 capital expenditures of approximately $65 million, primarily for digital displays, billboard improvements, rebranding and office renovations. No earnings or revenue guidance is provided.
- On October 1, 2014, after quarter-end, the company completed the $690 million Van Wagner acquisition, funded with $600 million of new notes and cash on hand. It also reported approximately $15 million of additional tuck-in acquisitions completed by November 6. Purchase-price allocation for Van Wagner was not yet available.
- The board approved a regular quarterly dividend of $0.37 per share and a special REIT-related dividend of approximately $547.7 million, payable December 31, 2014. The special dividend was expected to include approximately $109.5 million in cash, with the balance payable in stock subject to shareholder elections.
- Risks include advertising-market and seasonal fluctuations, competition, foreign-exchange exposure, digital-display execution, municipal and transit concession renewals, substantial debt and variable interest rates, acquisition integration, and maintaining REIT qualification and required distributions. The company reported no material change to previously disclosed risk factors and no current litigation expected to have a material adverse effect.
- Q3 included a $6.2 million restructuring charge tied to the departure of the President and COO, including $3.5 million of stock-based compensation, and $1.4 million of acquisition costs. The company also recorded $7.6 million of commitment and other fees related to a bridge financing commitment for the acquisition.
Important facts for investors to verify
- Separate recurring operating performance from the $232.3 million non-cash REIT tax benefit; review comparable-basis AFFO and Adjusted OIBDA reconciliations.
- Assess post-quarter leverage, interest burden and liquidity after the Van Wagner acquisition and new $600 million note issuance, as well as the cash demands of the special dividend.
- Check subsequent acquisition integration, purchase-price allocation and expected benefits; these were not fully quantified in the filing.
- Monitor REIT qualification, distribution requirements and tax obligations, including whether the announced special dividend fully satisfies the accumulated earnings-and-profits distribution.
- Review the $13.8 million prior-period cash-flow reclassification and the effects of standalone-company costs on comparisons with CBS-era carve-out results.