Lamar Advertising Company — Q2 2012 Form 10-Q
Business context and reporting period
Combined quarterly filing for Lamar Advertising Company and its wholly owned subsidiary, Lamar Media Corp., for the quarter and six months ended June 30, 2012. Revenue is primarily from selling advertising on outdoor displays, including billboards, logo signs and transit assets. Financial figures below are in millions of dollars unless noted.
Key financial metrics
| Metric | Q2 2012 | Q2 2011 | Six months 2012 | Six months 2011 |
|---|---|---|---|---|
| Revenue | $304.9 | $293.3 | $571.1 | $548.5 |
| Operating income | $64.5 | $59.4 | $90.3 | $85.0 |
| Operating margin | 21.1% | 20.3% | 15.8% | 15.5% |
| Net income (loss) | $13.9 | $11.4 | $(8.9) | $(1.8) |
| Net income (loss) per share | $0.15 | $0.12 | $(0.10) | $(0.02) |
- Six-month operating cash flow was $134.0, versus $110.4 in 2011. Investing cash use was $59.1; financing cash use was $9.5. Cash ended June at $98.9.
- Debt totaled $2.190 billion carrying value ($2.305 billion estimated fair value), including $158.0 current maturities. The company reported $340.6 of liquidity: $98.9 cash and $241.7 available on its revolver.
- Capital expenditures were $49.5 for the first half. Current assets were $360.6 and current liabilities $309.0.
Material changes versus prior comparable periods
- Revenue increased 3.9% in Q2 and 4.1% for the first half. On management’s acquisition-adjusted basis, growth was 3.6% and 3.8%, respectively. Growth came mainly from billboards, with gains in logo and transit revenue as well.
- Q2 operating income rose $5.0 million; six-month operating income rose $5.2 million. Operating expenses before depreciation, amortization and asset-sale gains grew faster than revenue: 5.3% in Q2 and 4.8% for the half.
- Q2 net income improved to $13.9 million. The first-half net loss widened, primarily reflecting a $30.0 million debt-extinguishment loss from the 6⅝% notes tender offer; approximately $14.4 million of that charge was noncash. Interest expense fell $8.4 million for the half to $78.5 million.
- In February, Lamar Media issued $500 million of 5⅞% notes due 2022 and a $100 million term loan, using proceeds principally to repurchase approximately $583 million principal amount of 6⅝% notes. The transactions reduced interest expense but generated the extinguishment loss.
Outlook, commentary, risks and unusual items
- Management expected 2012 capital expenditures of approximately $100 million, anticipated operating cash flow in excess of operating and capital needs, and expected to use excess cash principally to reduce debt. It stated available cash, revolver capacity and expected operating cash flows should meet operating needs through fiscal 2012.
- The company completed a $38.5 million cash acquisition on July 2, 2012; management also reported approximately $50 million of acquisitions during the seven months ended July 31.
- On July 30, the company gave notice it intended to redeem $122.8 million principal amount of 6⅝% notes on August 29 at 101.104% of principal plus accrued interest, funded with cash and revolver borrowings. This was subsequent to quarter-end.
- Management was considering a REIT election, potentially for the tax year beginning January 1, 2014, subject to further review, an IRS private-letter ruling process and board approval; no decision was assured.
- Risks include advertising-market and economic sensitivity, substantial indebtedness and covenant limits, variable-rate exposure, competition and regulation, contract-renewal terms, and execution of digital expansion and acquisitions. At June 30, $695.5 million of debt was variable-rate; management estimated a 200-basis-point rate increase would have raised first-half interest expense by about $6.3 million.
- The company and Lamar Media reported compliance with applicable debt covenants. 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 revenue growth and operating-margin improvement persisted after Q2, including underlying performance excluding acquired assets.
- Execution and funding of the announced note redemption and the effect of refinancing on total debt, interest expense and liquidity.
- Progress toward the approximately $100 million 2012 capex plan, acquisitions and management’s projected cash generation and debt reduction.
- Debt covenant headroom, maturity schedule and sensitivity to interest-rate increases; confirm the later status of the planned August redemption.
- Any decision, timing, tax implications or required approvals concerning a potential REIT election.