Lamar Advertising Company — FY2015 Form 10-K
Reporting period: Year ended December 31, 2015; the filing also provides fourth-quarter results. This combined filing covers Lamar Advertising Company and wholly owned subsidiary Lamar Media Corp. Lamar operates a single advertising segment, renting billboard, logo-sign and transit advertising space, and elected REIT status beginning in 2014.
Business context and financial performance
At year-end, Lamar operated approximately 144,000 billboard displays, including 2,300 digital billboards, 134,000 logo displays and 42,000 transit displays. Local advertising represented approximately 79% of 2015 net revenue. Digital billboards contributed approximately 19% of billboard advertising net revenue.
| Metric | FY2015 | FY2014 | Change / context |
|---|---|---|---|
| Net revenue | $1,353.4 million | $1,287.1 million | Up 5.2%; acquisition-adjusted organic growth was 3.0% |
| Operating income | $383.0 million | $278.7 million | Up $104.4 million; operating margin 28.3%, versus 21.7% |
| Net income | $262.6 million | $253.5 million | Up 3.6%; diluted EPS was $2.72 versus $2.66 |
| Adjusted EBITDA | $591.6 million | $558.0 million | Up 6.0%; non-GAAP measure |
| FFO / AFFO | $430.9 million / $442.1 million | $372.7 million / $388.5 million | FFO up 15.6%; AFFO up 13.8%; non-GAAP measures |
| Cash from operating activities | $477.7 million | $452.5 million | Up $25.1 million |
| Capital expenditures / acquisitions | $110.4 million / $153.9 million cash | $107.6 million / $65.0 million cash | Acquisition spending increased |
| Cash and total debt at year-end | $22.3 million / $1,919.5 million | $26.0 million / $1,899.9 million | Debt increased modestly |
| Liquidity at year-end | $313.4 million | Not stated here | $22.3 million cash plus $291.1 million revolver availability |
Direct advertising expenses were $473.8 million, leaving $879.6 million of revenue less direct advertising expense (about 65.0% of revenue). Interest expense declined to $98.4 million from $105.3 million. Working capital was $40.1 million; total assets were $3.39 billion and stockholders’ equity was $1.02 billion.
Material changes versus the prior period
- Revenue increased $66.3 million. Billboard revenue rose $47.7 million, logo revenue $3.5 million and transit revenue $15.2 million. Transit growth reflected 14 added markets, including 11 airport markets; billboard growth included acquisitions and approximately 175 added digital panels.
- On an acquisition-adjusted basis, revenue grew 3.0%, indicating reported growth also benefited from acquired operations.
- Operating income rose substantially in part because depreciation and amortization declined $67.0 million. The company changed billboard depreciation from double-declining balance to straight-line effective January 1, 2015; management estimated this increased 2015 operating and net income by $11.1 million.
- Net income comparisons are affected by the 2014 REIT-conversion deferred tax benefit. In 2015 the company recorded $22.1 million of income tax expense, including a $13.8 million non-cash valuation allowance related to Puerto Rico deferred tax assets.
- Cash used in investing activities increased to $253.9 million, principally reflecting higher acquisition spending. Cash distributions to common stockholders were approximately $265.1 million, or $2.75 per share, in 2015.
Outlook, risks and unusual items
- Management expected 2016 capital expenditures to approximate 2015 spending. It stated that cash on hand, revolver availability and anticipated operating cash flow were sufficient for operating needs through fiscal 2016.
- After year-end, Lamar acquired Clear Channel Outdoor assets in five U.S. markets for approximately $458.5 million. The purchase was initially funded with $300 million of incremental term borrowing and $160 million from the revolver. A January 2016 private placement of $400 million of 5.75% senior notes due 2026 provided approximately $394.5 million net proceeds, used to repay the term loan and part of the revolver borrowing.
- The board declared a February 2016 quarterly dividend of $0.75 per share. Management expected 2016 distributions to total $3.02 per common share, subject to board discretion, cash generation, REIT requirements and debt restrictions.
- Debt was substantial: approximately $1.92 billion at December 31, 2015. The company reported compliance with debt covenants and $291.1 million of unused revolver capacity. Variable-rate borrowings were approximately $373.8 million; a 200-basis-point rate increase was estimated to add about $7.7 million to 2015 interest expense.
- Material risks include economic sensitivity of advertising spending, competition from other media, debt and covenant restrictions, dependence on renewals of billboard site leases, and regulation of outdoor and digital displays. Five logo-sign contracts were subject to renewal in 2016. Approximately 64% of billboard leases were due to expire or renew within five years.
- Scenic America’s appeal concerning federal digital-billboard guidance remained pending as of February 23, 2016. New restrictions could affect existing digital displays and expansion plans. Management reported no litigation expected to have a material adverse effect.
- The company stated that it does not find insurance against hurricane and other natural-disaster losses economical. Results are seasonal, typically weakest in the first quarter and strongest in summer and fall; a large portion of costs is fixed.
- The Reilly family and affiliates held approximately 65% of voting power at year-end. REIT qualification, required distributions, and tax-law changes are additional risks. No goodwill impairment was recorded in 2015.
Important facts for investors to verify
- Separate organic revenue growth from acquisition-related growth, and assess whether the 3.0% acquisition-adjusted growth rate is sustainable.
- Review the impact of the depreciation-method change on reported operating income, net income and future depreciation expense.
- Assess leverage, covenant headroom, maturities and the effect of the 2016 acquisition and subsequent $400 million note issuance on pro forma debt and interest costs.
- Confirm the outcomes of 2016 logo-contract and billboard-site lease renewals, and monitor any regulatory developments affecting digital billboards.
- Evaluate dividend coverage and the assumptions behind the projected $3.02 per-share 2016 distribution, including REIT taxable income, cash flow and debt restrictions.
- Consider the non-GAAP nature of Adjusted EBITDA, FFO and AFFO and reconcile them to GAAP results; verify that the change in reported profit is not interpreted without the prior-year REIT tax benefit.
KPMG issued unqualified opinions on the consolidated financial statements and internal control over financial reporting. The filing does not provide a formal revenue or earnings forecast.