Lamar Advertising Company — Q2 2017 Form 10-Q
Business context and reporting period. The combined filing covers Lamar Advertising Company and its wholly owned subsidiary, Lamar Media Corp. (the operating borrower), for the quarter and six months ended June 30, 2017; interim financial statements are unaudited. Revenue is primarily from rental of outdoor advertising display space, including billboards, logo signs and transit advertising. Unless stated otherwise, amounts below are in U.S. dollars.
Financial results
| Metric | Q2 2017 | Q2 2016 | Six months 2017 | Six months 2016 |
|---|---|---|---|---|
| Revenue | $397.1 million | $387.5 million | $743.4 million | $726.1 million |
| Operating income | $128.2 million | $117.1 million | $203.6 million | $203.9 million |
| Net income | $92.4 million | $81.9 million | $134.2 million | $133.2 million |
| EPS, diluted | $0.94 | $0.84 | $1.36 | $1.36 |
| Operating cash flow | Not separately stated | Not separately stated | $194.8 million | $211.0 million |
- Q2 revenue increased 2.5% and net income rose 12.8% year over year. Six-month revenue increased 2.4%, while net income rose 0.7%.
- On an acquisition-adjusted basis, revenue growth was 1.7% for Q2 and 1.5% for the first half. Management attributed growth mainly to billboard digital revenue; Q2 transit revenue declined.
- Reported operating margin, calculated as operating income divided by revenue, was approximately 32.3% in Q2 2017 versus 30.2% in Q2 2016, and 27.4% versus 28.1% for the first half. First-half Adjusted EBITDA was $310.2 million, up 1.2%; FFO was $230.6 million, up 5.7%; AFFO was $223.0 million, down 1.3%. These are non-GAAP measures.
- First-half investing cash outflow was $73.4 million, including $28.1 million of acquisitions and $47.8 million of capital expenditures. Financing cash outflow was $114.8 million, including $162.7 million of dividends and distributions. Cash increased $7.4 million to $42.9 million.
- At June 30, cash was $42.9 million, current assets $385.3 million and current liabilities $260.6 million (derived current ratio approximately 1.48). Debt carrying value, net of deferred financing costs, was $2.392 billion, including $17.5 million current maturities. The filing estimates debt fair value at $2.518 billion.
- Total liquidity was approximately $452.8 million: $42.9 million cash and $409.9 million available on the revolver, after $28.0 million borrowings and $12.1 million letters of credit. The company reported compliance with debt covenants.
Material changes and financing
- On May 15, 2017, Lamar Media refinanced and restated its senior credit facility: a $450 million Term A loan and a $450 million revolving facility, both maturing May 15, 2022. The Term A proceeds, revolver borrowings and cash on hand were used to repay the prior facility. Term A amortization begins September 30, 2017.
- Six-month interest expense rose $2.1 million to $63.5 million, primarily due to higher debt outstanding following the refinancing. Variable-rate debt was $478 million; management estimated a 200-basis-point rate increase would add $4.6 million of interest expense over six months.
- First-half 2016 included approximately $8.3 million of gains from acquisition swap transactions that did not recur. Total asset-disposition gains fell from $12.0 million to $1.6 million in the first half of 2017. A $0.1 million debt-extinguishment loss related to the facility amendment was recorded in 2017.
Outlook, risks and other disclosures
- Management expected 2017 capital expenditures of approximately $110 million and stated that operating cash flows were expected to exceed operating, capital expenditure and dividend needs. It considered cash, revolver availability and projected operating cash flow sufficient through fiscal 2017.
- The company expected 2017 aggregate quarterly common distributions to total $3.32 per share. Future distributions remain at the board’s discretion and depend on cash flows, REIT requirements, debt restrictions and other factors.
- Key risks include economic conditions and advertising demand, competition, contract renewals and regulation, acquisition integration, digital deployment, significant indebtedness and variable interest rates, severe weather, and maintaining REIT status. Management reported no material change in risk factors from the 2016 Form 10-K.
- The company said it was assessing the effects of the new lease accounting standard, expecting recognition of right-of-use assets and lease obligations for operating leases. It did not expect a material impact from adoption of the new revenue recognition standard, which was to become effective in 2018.
- Management concluded disclosure controls were effective and reported no material change in internal control over financial reporting during the quarter.
Important facts for investors to verify
- Whether acquisition-adjusted organic revenue growth, especially digital billboard revenue, continues and offsets weakness in transit advertising.
- How operating cash flow and AFFO develop relative to maintenance and growth capital expenditures and the stated dividend expectations.
- Debt balances, refinancing terms, upcoming Term A amortization, covenant compliance, and exposure to floating interest rates.
- Execution of the $110 million 2017 capital expenditure plan and the contribution of digital investments and recent acquisitions.
- Potential effects of lease accounting adoption and the company’s ability to maintain REIT qualification and meet distribution requirements.