Business context and reporting period
OUTFRONT Media Inc. filed this Form 10-K for the fiscal year ended December 31, 2019; it reports full-year results, not standalone fourth-quarter results. The company is a REIT that sells out-of-home advertising space on billboards, transit displays and related properties in the U.S. and Canada. U.S. Media is its reportable segment; Other includes international operations and sports marketing.
Financial performance and liquidity
| Metric | 2019 | 2018 | Change |
|---|---|---|---|
| Revenue | $1,782.2 million | $1,606.2 million | +11% |
| Operating income | $309.1 million | $234.8 million | +32% |
| Net income attributable to OUTFRONT | $140.1 million | $107.9 million | +30% |
| Diluted EPS | $0.97 | $0.75 | Up from $0.75 |
| Adjusted OIBDA | $522.4 million | $479.5 million | +9% |
| Adjusted OIBDA margin | 29% | 30% | Down 1 percentage point |
| FFO attributable to OUTFRONT | $295.3 million | $301.0 million | -2% |
| AFFO attributable to OUTFRONT | $334.1 million | $299.7 million | +11% |
| Cash from operating activities | $276.9 million | $214.3 million | +29% |
| Capital expenditures | $89.9 million | $82.3 million | +9% |
Billboard revenue rose 7% to $1,189.9 million; transit and other revenue increased 20% to $592.3 million. Management attributed growth mainly to improved average revenue per display, digital display expansion, and the net effect of transit franchise wins and losses. Digital advertising revenue reached $365.1 million, versus $275.7 million in 2018.
At year-end, cash and cash equivalents were $59.1 million. Net debt on the balance sheet was $2,417.1 million, including $195.0 million of short-term securitization and repurchase borrowings. The company reported a 4.5% weighted average cost of debt, a 1.2x secured leverage ratio and a 4.4x total leverage ratio; it was in compliance with debt covenants. The $500 million revolving facility was undrawn at year-end, while the $125 million accounts-receivable facility had $20 million of remaining capacity and the $90 million repurchase facility had none.
Working capital was negative $214.2 million, compared with positive $26.9 million in 2018. The company said the deficit was primarily related to adoption of the new lease-accounting standard, which added operating lease assets and liabilities to the balance sheet. It recognized $1.457 billion of operating lease assets and $1.453 billion of operating lease liabilities at December 31, 2019.
Material changes versus the prior comparable period
- Revenue growth accelerated in transit and other, supported by digital transit expansion; U.S. Media revenue rose 11%, while its Adjusted OIBDA margin held at 34%.
- Operating income and net income improved partly because 2018 included a $42.9 million impairment charge for the Canadian reporting unit. The 2019 result included a $28.5 million loss on extinguishment of debt and higher net interest expense ($134.9 million versus $125.7 million).
- FFO declined 2% despite higher net income; AFFO increased 11%. These are non-GAAP measures and should be considered alongside GAAP results.
- Operating cash flow increased, while investing cash use rose to $176.3 million, reflecting higher acquisitions, capital spending and MTA-related costs.
- Debt was refinanced and maturities extended: the company issued $650 million of 5.000% notes due 2027 and $500 million of 4.625% notes due 2030, redeeming its 2022 and 2025 notes. The credit amendment extended the revolver to 2024 and term loan to 2026 and reduced certain borrowing margins.
- The 2019 lease-accounting adoption materially increased reported assets and liabilities; it also produced a $24.8 million cumulative adjustment to beginning equity.
Outlook, commentary, risks and unusual items
- Management expects 2020 capital expenditures of approximately $90 million, excluding MTA equipment deployment costs, and MTA deployment costs of approximately $175 million. No formal full-year earnings or revenue guidance is provided in the filing.
- The MTA agreement requires a multiyear deployment of digital advertising and communications screens. At year-end, 4,577 digital displays had been installed; cumulative deployment costs were $247.6 million, of which $33.9 million had been recouped. The company warns that costs may not be fully recovered if incremental advertising revenue is insufficient. The $171.5 million prepaid MTA equipment deployment asset was identified by the auditor as a critical audit matter for recoverability.
- Digital expansion is a central growth strategy but entails significant installation costs, execution and supply risks, and exposure to regulatory limits on digital displays. Management says digital billboards generate higher revenue and profits per display on average than static billboards.
- Key risks include economic or advertising-spend weakness, intense media competition, municipal transit contract renewals, billboard regulation and site leases, substantial indebtedness and variable interest rates, REIT qualification and distribution requirements, cybersecurity and privacy, and possible asset impairments. The filing also cited disease outbreaks, including the novel coronavirus, as a potential external risk; it did not quantify an impact.
- Other notable items: the 2019 tax provision was $10.9 million and included a $3.0 million settlement related to a 2016 IRS audit. Dividends declared were $1.44 per share; a $0.38 quarterly dividend was approved in February 2020. The auditor issued an unqualified opinion and reported effective internal control over financial reporting.
Important facts for investors to verify
- Track whether transit and digital revenue growth converts into margin and cash flow, particularly given the 29% company-wide Adjusted OIBDA margin and rising operating costs.
- Monitor MTA installation progress, the expected 2020 deployment spend, and recovery of the $171.5 million prepaid deployment balance; review any changes in revenue assumptions or impairment indicators.
- Review debt maturities, refinancing needs, covenant headroom, interest-rate exposure, and the June 2020 expiration of the uncommitted repurchase facility.
- Assess cash available for dividends and investment after operating leases, contractual minimum payments, capital expenditures and debt service. The filing lists $1.904 billion in future guaranteed minimum payments and $2.029 billion in operating lease payments.
- Distinguish GAAP earnings and cash flows from Adjusted OIBDA, FFO and AFFO, and account for the lease-standard change when comparing balance-sheet and working-capital figures.