Lamar Advertising Company — Q2 2011 Form 10-Q
Business context and period. The combined filing covers Lamar Advertising Company and wholly owned subsidiary Lamar Media Corp. for the quarter and six months ended June 30, 2011; financial statements are unaudited. Revenue is primarily from selling advertising on outdoor displays, including billboards, logo signs and transit assets. Amounts below are in U.S. dollars; financial figures are converted to millions unless stated otherwise.
Financial performance and position
| Metric | Q2 2011 | Q2 2010 | Six months 2011 | Six months 2010 |
|---|---|---|---|---|
| Net revenue | $293.3m | $286.4m | $548.5m | $530.5m |
| Operating income | $59.4m | $49.3m | $85.0m | $60.1m |
| Operating margin | 20.3% | 17.2% | 15.5% | 11.3% |
| Net income (loss) | $11.4m | $(8.9)m | $(1.8)m | $(33.8)m |
| EPS, basic and diluted | $0.12 | $(0.10) | $(0.02) | $(0.37) |
Cash flow and liquidity: For the first six months, operating cash flow was $110.4m, versus $93.2m a year earlier. Investing activities used $54.4m, including $54.7m of capital expenditures and $9.2m for acquisitions, partly offset by $9.3m of asset-sale proceeds. Financing activities used $129.3m, primarily reflecting $128.4m of net payments under the senior credit agreement. Cash fell $73.0m from year-end to $18.7m. At June 30, total liquidity was about $259.1m: cash of $18.7m plus $240.4m available under the revolving facility.
Debt and balance sheet: Total debt was $2.286bn, down from $2.409bn at December 31, 2010; $680.5m was outstanding under the senior credit facility. No revolving borrowings were outstanding; $9.6m of letters of credit reduced availability. Current assets were $279.9m and current liabilities $154.0m. Total liabilities were $2.717bn and stockholders’ equity $820.9m. The filing reports estimated fair value of long-term debt, including current maturities, of $2.412bn, above its $2.286bn carrying amount.
Interest and margins: Six-month interest expense declined to $86.9m from $96.0m, attributed to lower debt and rates following the prior-year refinancing. Direct advertising, general and administrative, and corporate expenses (excluding depreciation and amortization) totaled $324.6m for the six months, up from $316.5m. The filing does not provide a clear gross margin or EBITDA value.
Changes versus prior comparable period
- Reported revenue grew 2.4% in Q2 and 3.4% for the six months. On management’s acquisition-adjusted, non-GAAP comparison, growth was 2.1% and 3.0%, respectively.
- Management attributed revenue gains to billboard, logo-sign and transit operations; logo-sign revenue had the highest stated percentage growth.
- Operating income increased in both comparisons. Depreciation and amortization declined $5.8m in Q2 and $10.2m for the six months, primarily because fewer non-performing structures were dismantled.
- Q2 returned to net income from a prior-year loss. The six-month net loss narrowed substantially, but remained a loss.
- The prior-year periods included debt-extinguishment losses of $17.1m for Q2 and $17.4m for six months; there was no corresponding 2011 charge. The 2010 loss included non-cash debt-issuance-fee write-offs and a cash component.
Outlook, commentary and risks
- Management expected 2011 operating cash flows to exceed operating and capital-expenditure needs, with excess cash principally used to reduce debt. It believed cash, revolver availability and future operating cash flow were sufficient for operating needs through fiscal 2011.
- 2011 capital expenditures were estimated at approximately $100m. Spending during the first half was $54.7m, materially above $15.7m in the prior-year period, including increased traditional and digital billboard investment.
- First-half acquisitions totaled approximately $9.2m, funded with cash. Management intended to limit 2011 acquisitions and reported no material acquisition spending planned.
- The company reduced senior-credit-facility debt by $128.4m during the first half, including about $110m of optional Term Loan B prepayments. Management did not anticipate a mandatory excess-cash-flow prepayment for 2011; the amount, if any, is subject to facility terms.
- Lamar Media was in compliance with senior credit facility tests at June 30, 2011. Covenant limits tighten over time, and failure to comply could accelerate debt payments. Debt documents also restrict additional borrowing and certain transfers to the parent.
- About $680.5m of debt bore variable rates. Management estimated that a 200-basis-point increase in the weighted-average rate would have raised first-half interest expense by about $7.5m and increased the six-month net loss by about $4.6m. The company described possible rate-mitigation measures but could not assure their effectiveness.
- Key stated risks include economic conditions and advertising spending, substantial indebtedness and access to funding, competition, industry regulation, renewal of contracts, and execution of the digital-display strategy. Forward-looking statements are not guarantees.
- Unusual items included a $7.4m six-month gain on asset dispositions, primarily from selling the corporate aircraft, and purchase of a replacement aircraft in January 2011 for $11.5m; $4.0m of the purchase was a non-cash investing item reflecting deposits paid in prior periods.
Important facts for investors to verify
- Whether revenue and operating-income growth continue, including performance on the acquisition-adjusted basis and the contribution from each business line.
- Progress against the approximately $100m full-year capital-expenditure estimate, particularly digital billboard investment, and the resulting cash available for debt reduction.
- Debt maturities, covenant headroom, variable-rate exposure and actual interest costs; the filing does not state a clear headroom figure for each covenant.
- Liquidity and cash-flow assumptions behind management’s expectation that 2011 cash generation will cover operating and capital needs.
- The sustainability of reported earnings after separating operating performance from lower depreciation, the prior-year refinancing charge and the 2011 aircraft-related gain.
- The filing reports effective tax rates of 29.3% for Q2 and 0.2% for the six months; verify the tax effects and the stated Puerto Rico tax-rate change when assessing earnings comparability.