Lamar Advertising Company — 2017 Form 10-K
Reporting period: Fiscal year ended December 31, 2017. This combined filing covers Lamar Advertising Company and its wholly owned operating subsidiary, Lamar Media Corp.; financial figures below are primarily for Lamar Advertising on a consolidated basis. This is an annual report, not a standalone fourth-quarter filing.
Business context
Lamar is a single-segment outdoor advertising company operating billboards, highway logo signs and transit displays in the United States, Canada and Puerto Rico. At year-end it reported approximately 149,900 billboard displays, more than 2,800 digital billboards, approximately 145,000 logo displays and over 53,300 transit displays. Lamar Advertising operates as a REIT; certain transit, advertising-services and foreign operations are held in taxable REIT subsidiaries.
Financial performance and liquidity
| Metric | FY 2017 | FY 2016 | Change |
|---|---|---|---|
| Net revenue | $1,541.3 million | $1,500.3 million | Up 2.7% |
| Operating income | $455.4 million | $439.0 million | Up $16.3 million |
| Operating margin | 29.5% | 29.3% | Up 0.2 percentage points |
| Net income | $317.7 million | $298.8 million | Up 6.3% |
| Diluted EPS | $3.23 | $3.05 | Up 5.9% |
| Adjusted EBITDA | $671.4 million | $657.5 million | Up 2.1% |
| FFO / AFFO | $513.0 million / $496.3 million | $475.6 million / $488.9 million | FFO up 7.9%; AFFO up 1.5% |
| Cash from operations | $507.0 million | $521.8 million | Down $14.8 million |
| Capital expenditures | $109.3 million | $107.6 million | Up $1.7 million |
| Cash and cash equivalents | $115.5 million | $35.5 million | Up $79.9 million |
| Debt, net of deferred financing costs | $2,556.7 million | $2,349.2 million | Up $207.5 million |
Net income margin was 20.6% in 2017 versus 19.9% in 2016. Net revenue less direct advertising expenses was $1,000.4 million, approximately 64.9% of revenue. These figures reflect reported results; management also reported that 2017 revenue was up 1.0% against 2016 acquisition-adjusted revenue.
Revenue growth included $28.6 million in billboard revenue, $2.4 million in logo revenue and $10.0 million in transit revenue. Acquisitions and added digital displays contributed to billboard growth; new transit and airport markets supported transit growth. More than 2,700 billboard displays were acquired during 2017 as part of approximately 50 acquisitions, for $297.3 million in cash.
Year-end working capital was $94.5 million. Total liquidity was approximately $354.6 million, comprising cash and $239.1 million of unused revolving-credit capacity. Management stated that cash, revolver availability and expected operating cash flows were sufficient for operating needs through fiscal 2018. The company reported compliance with applicable debt covenants.
Changes, outlook and notable items
- Operating income and net income increased, while operating cash flow declined. Management attributed lower operating cash flow primarily to higher operating expenses and a net increase in operating assets and liabilities.
- Interest expense rose to $128.4 million from $123.7 million, mainly due to higher debt after the 2017 credit-facility refinancing. The company had approximately $629.1 million of variable-rate debt; management estimated that a 200-basis-point rate increase would have added about $10.2 million to 2017 interest expense.
- Digital billboards generated approximately 22% of billboard advertising net revenue. Digital capital spending was $40.2 million in 2017, and the company expected 2018 capital expenditures to approximate 2017’s $109.3 million.
- Management expected 2018 common distributions to total $3.65 per share, excluding the $0.83 distribution paid January 2, 2018. A $0.91 quarterly dividend was declared in February 2018. Future distributions remain subject to board discretion, cash needs and debt restrictions.
- In February 2018, Lamar Media announced plans to redeem $500 million of 5⅞% senior subordinated notes on March 19, 2018 at 101.958% of principal plus accrued interest, funded through a new term loan under its credit facility.
- Hurricanes Harvey and Irma caused little damage and minimal operating impact. Hurricane Maria severely disrupted Puerto Rico operations: fourth-quarter revenue there was $0.3 million versus $2.9 million a year earlier. Management did not expect a material consolidated impact in 2018.
- The Tax Cuts and Jobs Act was enacted in December 2017. The company recorded tax effects, including a $4.1 million benefit related to refundable minimum-tax credits, and had not decided whether to elect treatment as a real-property trade or business for interest-deduction purposes.
- Goodwill impairment testing found no impairment. Routine litigation was disclosed; management said no pending matter was likely to have a material adverse effect. KPMG issued unqualified opinions on the financial statements and internal control; management and the auditor reported effective internal control at year-end.
Key risks and contingencies
- Substantial debt, variable interest rates, refinancing needs and restrictive covenants may constrain investment, distributions and financial flexibility; covenant failure could lead to acceleration of debt.
- Advertising demand is sensitive to economic conditions and competition from other media. Billboard regulation, permit requirements and possible restrictions on digital displays may limit operations or expansion.
- Site leases are a significant cost: annualized lease expense for outdoor sites was approximately $258.9 million, and about 62% of billboard leases expire or are subject to renewal within five years.
- REIT qualification and required distributions depend on complex tax rules. Losing REIT status could result in substantial corporate taxes; debt restrictions could also affect distributions.
- The Reilly family and affiliates held approximately 64% of voting power at year-end, creating concentrated voting control. The company also disclosed that it does not consider hurricane and other natural-disaster losses economical to insure against.
Investor verification points
- Reconcile reported revenue growth of 2.7% with acquisition-adjusted growth of 1.0%, and assess the portion attributable to acquisitions versus existing operations.
- Review debt maturities, the May 2022 credit-facility maturity, covenant headroom and financing terms for the planned $500 million note redemption.
- Compare operating cash flow and AFFO with capital spending, acquisitions and declared distributions; note that FFO and AFFO are non-GAAP measures and are not substitutes for operating cash flow.
- Track 2018 capital spending, distribution levels, digital-display returns and recovery of Puerto Rico revenue.
- Assess lease renewal exposure, logo-contract renewals (three contracts were subject to renewal in 2018), digital billboard regulation and the effects of the new lease and tax accounting rules.