Lamar Advertising Company — Q1 2018 Form 10-Q
Reporting period: Three months ended March 31, 2018; comparisons are with Q1 2017 unless noted. Lamar Media Corp. is the wholly owned operating subsidiary and borrower; its results are substantially similar to the consolidated company’s.
Business and financial performance
- Business: Outdoor advertising, principally billboard space, with logo and transit advertising also contributing.
- Revenue: $361.0 million, up 4.2%. Billboard revenue rose 3.9% to $312.8 million, transit rose 11.1% to $27.6 million, and logo rose 1.5% to $20.6 million. On an acquisition-adjusted basis, revenue grew 1.1% to $361.0 million from $357.0 million; management attributed the increase primarily to digital revenue.
- Profit and margins: Operating income was $65.9 million, down 12.7%; operating margin was approximately 18.2%, compared with 21.8%. Net income was $15.1 million, down 64.0%, and diluted EPS was $0.15 versus $0.42. Net margin was approximately 4.2%, versus 12.1%.
- Non-GAAP measures: Adjusted EBITDA increased 8.3% to $138.9 million. FFO declined 12.2% to $78.7 million, while AFFO increased 11.5% to $96.3 million. These measures are not substitutes for GAAP results or operating cash flow.
- Cash flow: Operating cash flow was $40.8 million, versus $34.5 million. Capital expenditures were $23.3 million, versus $19.2 million; operating cash flow less capital expenditures was approximately $17.5 million, versus $15.3 million. Cash fell to $10.0 million from $115.5 million at year-end, primarily reflecting financing and distributions.
- Debt and liquidity: Debt was approximately $2.63 billion at March 31, versus $2.56 billion at December 31, 2017, before considering cash. Total liquidity was approximately $272.1 million: $10.0 million cash and $262.1 million of revolving-facility availability. The company reported $175.0 million drawn on its revolver and $12.95 million of letters of credit; it was in compliance with its debt covenants.
- Distributions: Common dividends declared were $0.91 per share, compared with $0.83 a year earlier. Cash distributions paid in the quarter totaled $171.1 million, or $1.74 per share, including a distribution accrued in 2017.
Material changes and unusual items
- Operating expenses excluding depreciation, asset-disposition gains or losses, and stock-based compensation rose 1.9%. Depreciation and amortization increased $5.4 million to $56.8 million, which management attributed mainly to acquired assets and prior-year capital expenditures.
- A $15.4 million debt-extinguishment loss followed the March redemption of all $500 million of 5⅞% senior subordinated notes due 2022. The loss included a $9.8 million cash premium and approximately $5.6 million of noncash financing-cost write-offs. The redemption was funded with a new $600 million Term B loan and cash on hand; the Term B loan matures in 2025.
- An $8.7 million asset-disposition loss primarily reflected a write-down of Puerto Rico billboard assets held for sale. The sale was completed on April 16, 2018.
- The company adopted ASC 606 on January 1, 2018 using the cumulative-effect method, with no opening retained-earnings adjustment. Most advertising-space contracts remained accounted for as leases under prior guidance during the quarter.
Outlook, risks and contingencies
- Management estimated 2018 capital expenditures of approximately $110 million and stated that cash on hand, revolving availability and expected operating cash flows should meet operating needs through fiscal 2018. It expected 2018 operating cash flow to exceed operating needs, capital expenditures and dividends.
- Management reported expected 2018 common distributions of $3.65 per share on the basis described in the filing; future distributions remain at the board’s discretion and depend on cash flows, REIT requirements, debt restrictions and other factors.
- On May 1, 2018, after quarter-end, the company entered an at-the-market equity distribution agreement allowing it to sell up to $400 million of Class A shares. Sales are optional; proceeds, if any, may be used for general corporate purposes, including debt repayment, capital expenditures and acquisitions.
- The company expects adoption of ASC 842 in 2019 to put discounted operating-lease commitments on the balance sheet as right-of-use assets and lease liabilities. Disclosed billboard-site and other operating-lease payments totaled approximately $1.50 billion.
- Key risks include advertising demand and economic conditions, significant debt and variable interest rates, competition, regulation, renewal terms for site contracts, acquisitions, digital deployment, severe weather, and maintaining REIT status. Approximately 45.9% of debt was variable-rate; management estimated a 200-basis-point increase in rates would add $3.7 million to quarterly interest expense at the stated debt level.
- The filing reported no material changes to the risk factors in the 2017 Form 10-K, no material change in internal control over financial reporting, and effective disclosure controls.
Investor verification priorities
- Assess whether underlying growth is consistent with the 1.1% acquisition-adjusted revenue increase, and how digital advertising contributes.
- Reconcile the decline in GAAP earnings with higher Adjusted EBITDA and AFFO, including the Puerto Rico write-down, debt-redemption costs, and stock-based compensation.
- Review debt maturities, floating-rate exposure, covenant headroom and the effect of the Term B refinancing on interest costs and leverage.
- Monitor cash generation against planned capital spending, REIT distributions and the potential for share dilution under the $400 million equity program.
- Confirm the completed Puerto Rico sale’s final proceeds and effects, and evaluate the balance-sheet impact of lease accounting adoption in 2019.