OUTFRONT Media Inc. — Q2 2015 Form 10-Q
Reporting period: Quarter and six months ended June 30, 2015. OUTFRONT sells out-of-home advertising across the U.S., Canada and Latin America and reports U.S. and International segments. The company began operating to qualify as a REIT in July 2014.
Financial performance
| Metric | Q2 2015 | Q2 2014 | Six months 2015 | Six months 2014 |
|---|---|---|---|---|
| Revenue | $384.7 million | $334.4 million | $728.6 million | $622.3 million |
| Operating income | $54.6 million | $58.3 million | $81.2 million | $85.0 million |
| Net income | $22.2 million | $22.4 million | $23.3 million | $30.8 million |
| Diluted EPS | $0.16 | $0.19 | $0.17 | $0.28 |
| Adjusted OIBDA, non-GAAP | $119.1 million | $110.3 million | $206.1 million | $185.9 million |
| Operating cash flow | Not presented quarterly | Not presented quarterly | $74.1 million | $75.0 million |
- Revenue rose 15% in Q2 and 17% in the first half. Organic revenue growth was 3% and 4%, respectively; much of the reported growth reflected the Van Wagner acquisition, which contributed $48.4 million of Q2 revenue and $95.0 million for the first half.
- Adjusted OIBDA increased 8% in Q2 and 11% in the first half, while GAAP operating income and net income declined. Adjusted OIBDA margin was approximately 31.0% in Q2 versus 33.0% a year earlier, and 28.3% for the first half versus 29.9%.
- Q2 net income was broadly flat year over year; first-half net income fell 24%. Higher interest expense, acquisition-related costs, stand-alone public-company costs and strategic business development spending weighed on results. Lower taxes following the REIT conversion partly offset these items.
- U.S. revenue grew 19% in Q2 and 21% in the first half; U.S. Adjusted OIBDA rose 14% and 15%. International revenue fell 11% and 10% in reported dollars, but grew 2% and 3% in constant dollars; International Adjusted OIBDA declined 21% and 28%.
Cash, debt and liquidity
- Cash was $68.4 million at June 30, up from $28.5 million at year-end. Working capital was $202.9 million, versus $100.1 million at December 31, 2014.
- First-half operating cash flow was $74.1 million; investing cash use was $29.1 million and financing cash use was $3.9 million. Capital expenditures were $27.7 million, and the company completed small acquisitions for $10.2 million.
- Long-term debt was $2.302 billion, up from $2.198 billion at year-end; weighted average debt cost was 4.7%. The company issued an additional $100 million of 5.625% notes due 2024 and had no revolver borrowings at quarter-end. Its $425 million revolver had approximately $30.6 million of letters of credit outstanding.
- Pro forma total leverage was 5.1x and secured leverage 1.6x; the company reported compliance with debt covenants. The filing reports $115.7 million of outstanding letters of credit and surety bonds that are not recorded on the balance sheet.
Material changes, outlook and risks
- Acquisition-related revenue and expenses materially affected year-over-year comparisons. Billboard organic revenue was flat for the first half and declined 1% in Q2, with lower average revenue per display partly offset by digital billboard conversions. Organic U.S. transit revenue grew 14% in both periods.
- Management expects 2015 capital expenditures of approximately $70 million, mainly for digital billboard growth, billboard quality and useful-life improvements, and office renovations. No broader earnings or revenue guidance is stated in the filing.
- The board approved a $0.34-per-share quarterly dividend, payable September 30, 2015. First-half cash dividends were $102.0 million, including a special $8.2 million payment.
- On July 22, 2015, the company extended its New York City subway advertising contract through December 31, 2016, subject to MTA termination rights beginning July 1, 2016. The MTA bus and commuter rail contract also remains subject to termination rights from that date. The subway contract represented 17% of Q2 U.S. revenue.
- Key risks include advertising-market and economic weakness, competition, foreign exchange exposure, obtaining and renewing municipal concessions, substantial debt and interest-rate exposure, and maintaining REIT qualification. The company cites seasonal advertising patterns, with revenue and profit typically highest in Q4 and lowest in Q1. It reported that current litigation was not expected to have a material adverse effect and that there were no material changes to previously disclosed risk factors.
- The filing revised the prior-year cash-flow classification for $10.2 million of non-cash property and equipment purchases, increasing reported operating cash flow and investing cash use by that amount; management said the misclassification was not material. Prior-year revenue category reclassifications were also made.
Important facts for investors to verify
- How much of reported growth reflects the acquisition versus sustainable organic growth, particularly given weak organic billboard performance and lower billboard yields.
- Whether operating cash flow and AFFO adequately support capital spending and dividends; the filing’s cash flow shows operating cash flow of $74.1 million against $102.0 million of dividends in the first half.
- Debt-service capacity and covenant headroom, including the 5.1x total leverage ratio, variable-rate term loan exposure and future maturities.
- The status and renewal or termination terms of the MTA contracts, especially the subway agreement’s 2016 termination provision and material share of U.S. revenue.
- Execution of the $70 million capital-spending plan and registration of the additional 2024 notes by the agreed deadline; failure to register or exchange those notes could require additional interest in certain circumstances.