Lamar Advertising Company — Q3 2012 Form 10-Q
Business context and period. The combined, unaudited filing covers Lamar Advertising Company and its wholly owned subsidiary Lamar Media Corp. for the quarter and nine months ended September 30, 2012, with comparisons to 2011. Revenue is primarily from selling advertising on outdoor displays, including billboards, logo signs and transit advertising. Lamar Media is the principal borrower and holds operating cash; its financial results substantially mirror the parent’s, so they should not be counted twice.
Financial performance
Amounts below are in millions of dollars unless stated otherwise. Lamar reported positive operating income and net income in both comparison periods. Nine-month earnings included a significant debt-extinguishment charge.
| Metric | Q3 2012 | Q3 2011 | Nine months 2012 | Nine months 2011 |
|---|---|---|---|---|
| Net revenue | $306.3 | $296.7 | $877.4 | $845.2 |
| Operating income | $63.5 | $55.4 | $153.8 | $140.5 |
| Operating margin | 20.7% | 18.7% | 17.5% | 16.6% |
| Net income | $11.5 | $4.0 | $2.6 | $2.2 |
| Net income applicable to common stock | $11.4 | $3.9 | $2.3 | $1.9 |
| Basic and diluted EPS | $0.12 | $0.04 | $0.02 | $0.02 |
- Revenue growth: Revenue rose 3.2% in Q3 and 3.8% for the nine months year over year. On management’s acquisition-adjusted comparison, growth was 2.0% in Q3 and 3.2% for the nine months. Billboard, logo and transit revenue all increased.
- Costs and margins: Nine-month operating expenses excluding depreciation, amortization and asset-sale gains rose 3.7%, slower than reported revenue growth. Depreciation and amortization declined $2.2 million to $219.3 million. Q3 operating income increased $8.1 million.
- Interest, taxes and unusual item: Nine-month interest expense fell $12.4 million to $117.1 million, but the company recorded a $32.0 million loss on extinguishment of debt. Approximately $15.0 million of that loss was non-cash. The nine-month effective tax rate was 48.0%; management cited permanent differences, principally non-deductible stock compensation.
- Cash flow: Nine-month operating cash flow was $253.3 million versus $222.7 million. Capital expenditures were $77.7 million, implying operating cash flow less capex of about $175.6 million. Acquisitions used $54.7 million. Cash at September 30 was $38.4 million, up from $33.5 million at year-end 2011.
Balance sheet, debt and liquidity
- Total debt was approximately $2.076 billion at September 30, 2012, down from $2.159 billion at December 31, 2011. Cash was $38.4 million; current maturities were $35.7 million. Total liabilities were $2.532 billion and stockholders’ equity was $860.9 million.
- Current assets were $297.1 million and current liabilities $196.3 million. Lamar reported total liquidity of approximately $265.7 million: $38.4 million cash plus $227.3 million available under its revolving credit facility. The revolver had $15.0 million drawn and $7.7 million of letters of credit outstanding.
- The company reported compliance with applicable debt covenants at September 30 and stated it would remain compliant if it drew the available revolver. Debt agreements restrict additional borrowing, asset dispositions, investments and dividends, among other matters; subsidiary distributions to the parent are also subject to restrictions.
- Variable-rate debt under the senior credit facility was $702.2 million, about 33.8% of debt, at a 3.3% weighted average rate for the nine months. Management estimated that rates 200 basis points higher would have added about $10.4 million to nine-month interest expense and reduced net income by about $6.4 million.
Material changes, outlook and risks
- Refinancing and redemptions: In February 2012, Lamar Media issued $500 million of 5⅞% senior subordinated notes due 2022 and used proceeds, together with term-loan proceeds, in the tender offer for its 6⅝% notes. It also redeemed $122.8 million principal amount of those notes in August. These transactions contributed to lower interest expense but generated the $32.0 million extinguishment loss.
- Subsequent financing and acquisition: On October 30, Lamar Media issued $535 million of 5% senior subordinated notes due 2023. The company said proceeds would fund redemptions of remaining 6⅝% notes, the NextMedia acquisition and potential acquisitions, or otherwise repay senior-facility debt and support general corporate purposes. Lamar acquired NextMedia Outdoor for $145 million cash on October 31. Management reported approximately $200 million of acquisitions during the ten months ended October 31, 2012.
- Outlook: Management anticipated approximately $100 million of total 2012 capital expenditures and expected 2012 operating cash flow to exceed operating and capital expenditure needs, with excess cash intended for debt reduction or acquisitions. It stated that cash, revolver availability and operating cash flow were sufficient for operating needs through fiscal 2012.
- REIT consideration: Lamar was evaluating a possible real estate investment trust election, potentially for tax year 2014, subject to an IRS private letter ruling and board approval. The company cautioned that neither timing nor a decision to elect was certain.
- Principal risks: Results depend on economic conditions and advertising spending, occupancy and pricing, competition, regulation, contract renewals, acquisition integration and the execution of digital billboard deployment. Significant indebtedness, access to financing and variable interest rates create additional risks. Interim results are not necessarily indicative of full-year results.
Investor verification points
- Review the $32.0 million debt-extinguishment charge, including its cash and non-cash components, and assess the full costs and benefits of the refinancing.
- Verify the post-quarter $535 million note proceeds, redemption amounts and funding of the $145 million NextMedia acquisition; assess resulting debt, interest costs and integration performance.
- Track covenant headroom, revolver availability, debt maturities and exposure to variable rates, particularly the 2014 senior notes and 2015 revolver maturity.
- Compare reported revenue growth with management’s non-GAAP acquisition-adjusted growth and monitor whether organic growth and operating margins persist.
- Check the subsequent-event note’s description of the remaining Series C notes: it refers to notes “due 2018,” while other filing disclosures identify the 6⅝% Series C notes as due 2015. Confirm the correct designation and redemption details.
- Monitor the status and potential tax and capital-structure implications of any REIT election; no final decision or quantified impact is provided in this filing.