Lamar Advertising Company — Q2 2016 Form 10-Q
Business context and period. The filing covers the three and six months ended June 30, 2016, compared with the same periods in 2015. Lamar earns most revenue by renting outdoor advertising space; Lamar Media Corp. is its wholly owned operating and borrowing subsidiary. Financial amounts below are in U.S. dollars; amounts converted from thousands are rounded to millions.
Key financial results
| Metric | Q2 2016 | Q2 2015 | First half 2016 | First half 2015 |
|---|---|---|---|---|
| Revenue | $387.5 million | $344.2 million | $726.1 million | $646.7 million |
| Operating income | $117.1 million | $99.3 million | $203.9 million | $166.6 million |
| Net income | $81.9 million | $59.4 million | $133.2 million | $100.1 million |
| Net income applicable to common stock | $81.8 million | $59.3 million | $133.0 million | $99.9 million |
| Diluted EPS | $0.84 | $0.61 | $1.36 | $1.04 |
| Operating margin | 30.2% | 28.9% | 28.1% | 25.8% |
Operating margins are calculated as operating income divided by revenue. For the first half, company-reported non-GAAP Adjusted EBITDA was $306.6 million, up 11.9%; AFFO was $226.0 million, up 14.8%. These non-GAAP measures are not substitutes for GAAP results or cash flow.
Cash flow and liquidity. First-half operating cash flow was $211.0 million, versus $188.2 million a year earlier. Investing activities used $550.9 million, including $506.1 million for acquisitions and $51.5 million of capital expenditures. Financing activities provided $358.1 million; cash increased $19.4 million to $41.7 million at June 30. The company reported total liquidity of approximately $218.6 million, including $176.9 million of revolver availability after letters of credit.
Debt. Debt at June 30 was $2.424 billion before deferred financing costs ($2.393 billion net of those costs), compared with $1.919 billion before costs at year-end 2015. The increase principally reflects acquisition financing. Lamar Media issued $400 million of 5.75% senior notes due 2026 and used proceeds to repay its $300 million Term A-1 loan and reduce revolver borrowings. It had $214 million outstanding on the revolver and $264.4 million in Term A loans; the filing reports covenant compliance. Interest expense rose to $61.4 million for the first half from $49.2 million.
Material changes and drivers
- Revenue grew 12.3% in the first half and 12.6% in Q2, substantially reflecting acquired assets, including five U.S. markets purchased from Clear Channel for approximately $458.5 million and the 2015 Alliance Airports acquisition.
- On an acquisition-adjusted basis, revenue increased 3.1% for the first half and 3.5% for Q2 versus comparable 2015 revenue. Management attributed organic growth to billboard, transit, and logo-sign revenue.
- First-half net income rose 33.1%; management cited higher operating income and a lower income-tax expense, partly offset by increased interest expense and a $3.2 million debt-extinguishment loss. The 2016 effective tax rate was approximately 4.4%, primarily reflecting REIT status and foreign items.
- Direct advertising and general and administrative costs increased with the expanded asset base. Depreciation and amortization also rose, primarily due to acquired assets.
Outlook, risks, and unusual items
- Management expected 2016 operating cash flow to exceed cash needs for operations, capital expenditures, and dividends, and stated current cash, revolver availability, and expected operating cash flow were sufficient for operating needs through fiscal 2016.
- Management anticipated approximately $110 million of total 2016 capital expenditures. The company expected 2016 aggregate quarterly common distributions to total $3.02 per share; future distributions remain subject to board discretion, REIT requirements, cash flows, and debt restrictions.
- Notable items include a $12.0 million first-half gain on disposition of assets and the $3.2 million debt-extinguishment loss. Acquisitions totaled $515.1 million, including noncash consideration.
- Key risks include advertising demand and economic conditions, substantial indebtedness and variable interest rates, competition, regulation and contract renewals, acquisition integration, digital deployment, severe weather, and maintaining REIT qualification. A 200-basis-point increase in the weighted-average rate on variable-rate debt was estimated to increase first-half interest expense by $5.6 million.
- The filing reported no material change in commitments and contingencies or risk factors since the prior annual report. Management concluded disclosure controls were effective and reported no material change in internal control over financial reporting.
Important facts for investors to verify
- How much of reported growth and future performance comes from acquired assets versus continued acquisition-adjusted growth.
- Whether acquisition integration, operating costs, and the higher interest burden sustain the reported EBITDA and AFFO growth.
- Debt maturities, covenant headroom, revolver availability, and exposure to variable interest rates; actual leverage ratios are not clearly stated in the filing text.
- Whether forecast capital spending and the expected $3.02-per-share 2016 distribution are supported by cash generation and debt terms.
- How the asset-disposal gain and unusually low effective tax rate affect comparability of reported earnings.