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LAMR > SEC Filings for LAMR > Form 10-Q on 8-Nov-2012All Recent SEC Filings

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Form 10-Q for LAMAR ADVERTISING CO/NEW


8-Nov-2012

Quarterly Report


ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

This discussion contains forward-looking statements. Actual results could differ materially from those anticipated by the forward-looking statements due to risks and uncertainties described in the section of this combined quarterly report on Form 10-Q entitled "Note Regarding Forward-Looking Statements" and in Item 1A to the 2011 Combined Form 10-K filed on February 27, 2012, as supplemented by any risk factors contained in our combined Quarterly Reports on Form 10-Q. You should carefully consider each of these risks and uncertainties in evaluating the Company's and Lamar Media's financial condition and results of operations. Investors are cautioned not to place undue reliance on the forward-looking statements contained in this document. These statements speak only as of the date of this document, and the Company undertakes no obligation to update or revise the statements, except as may be required by law.

Lamar Advertising Company

The following is a discussion of the consolidated financial condition and results of operations of the Company for the three and nine months ended September 30, 2012 and 2011. This discussion should be read in conjunction with the consolidated financial statements of the Company and the related notes thereto.

OVERVIEW

The Company's net revenues are derived primarily from the sale of advertising on outdoor advertising displays owned and operated by the Company. The Company relies on sales of advertising space for its revenues. Revenue growth is based on many factors that include the Company's ability to increase occupancy of its existing advertising displays; raise advertising rates; and acquire new advertising displays. The Company's operating results are therefore affected by general economic conditions, as well as trends in the advertising industry. Advertising spending is particularly sensitive to changes in general economic conditions which affect the rates the Company is able to charge for advertising on its displays and its ability to maximize advertising sales or occupancy on its displays.

Historically, the Company made strategic acquisitions of outdoor advertising assets to increase the number of outdoor advertising displays it operates in existing and new markets. While the Company has significantly reduced its acquisition activity over the last three years, it will continue to evaluate and pursue strategic acquisition opportunities as they arise. The Company has financed its historical acquisitions and intends to finance any future acquisition activity from available cash, borrowings under its senior credit facility or the issuance of debt or equity securities. See "Liquidity and Capital Resources" below. During the ten months ended October 31, 2012, the Company completed acquisitions for a total purchase price of approximately $200 million, which included the purchase of NextMedia Outdoor, Inc. that closed October 31, 2012.

The Company's business requires expenditures for maintenance and capitalized costs associated with the construction of new billboard displays, the entrance into and renewal of logo sign and transit contracts, and the purchase of real estate and operating equipment. The following table presents a breakdown of capitalized expenditures for the three months and nine months ended September 30, 2012 and 2011:

                                      Three months ended          Nine months ended
                                         September 30,              September 30,
                                        (in thousands)              (in thousands)
                                       2012          2011         2012          2011
       Billboard - traditional      $    5,917     $  7,609     $  20,938     $ 24,911
       Billboard - digital              12,272       11,983        32,334       32,081
       Logos                             2,267        2,777         5,547        7,457
       Transit                              26          168           110          640
       Land and buildings                4,486        3,026         9,401        3,838
       Operating equipment               3,237        2,966         9,417       14,255

       Total capital expenditures   $   28,205     $ 28,529     $  77,747     $ 83,182

RESULTS OF OPERATIONS

Nine Months ended September 30, 2012 compared to Nine Months ended September 30, 2011

Net revenues increased $32.1 million or 3.8% to $877.4 million for the nine months ended September 30, 2012 from $845.2 million for the same period in 2011. This increase was attributable primarily to an increase in billboard net revenues of $24.9 million or 3.3% over the prior period, an increase in logo sign revenue of $2.8 million, which represents an increase of 6.6% over the prior period, and a $4.4 million increase in transit revenue, which represents an increase of 10.0% over the prior period.


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For the nine months ended September 30, 2012, there was a $27.1 million increase in net revenues as compared to acquisition-adjusted net revenue for the nine months ended September 30, 2011. The $27.1 million increase in revenue primarily consists of a $21.2 million increase in billboard revenue, a $1.9 million increase in logo revenue and a $4.0 million increase in transit revenue over the acquisition-adjusted net revenue for the comparable period in 2011. This increase in revenue represents an increase of 3.2% over the comparable period in 2011. See "Reconciliations" below.

Operating expenses, exclusive of depreciation and amortization and gain on sale of assets, increased $18.3 million or 3.7% to $509.7 million for the nine months ended September 30, 2012 from $491.3 million for the same period in 2011. There was a $12.3 million increase in operating expenses related to the operations of our outdoor advertising assets and a $6.0 million increase in corporate expenses.

Depreciation and amortization expense decreased $2.2 million for the nine months ended September 30, 2012 as compared to the nine months ended September 30, 2011, primarily due to a reduction in the number of non-performing structures that were dismantled during the period as compared to the nine months ended September 30, 2011.

The Company recorded a gain on disposition of assets of $5.3 million for the nine months ended September 30, 2012.

Due to the above factors, operating income increased $13.3 million to $153.8 million for the nine months ended September 30, 2012 compared to $140.5 million for the same period in 2011.

During the nine months ended September 30, 2012, the Company recognized a $32.0 million loss on debt extinguishment related to the settlement of the tender offer for Lamar Media's 6 5/8% Notes. Approximately $15.0 million of the loss is a non-cash expense attributable to the write off of unamortized debt issuance fees and unamortized discounts associated with the tendered notes. See - "Uses of Cash - Tender Offers" for more information.

Interest expense decreased approximately $12.4 million from $129.5 million for the nine months ended September 30, 2011 to $117.1 million for the nine months ended September 30, 2012, due to the reduction in total debt outstanding as well as a decrease in interest rates resulting from the Company's recent refinancing transactions. See - "Uses of Cash Tender Offers" for more information.

The increase in operating income and decrease in interest expense offset by the loss on extinguishment of debt discussed above resulted in a $6.0 million decrease in net income before income taxes. The Company recorded income tax expense of $2.4 million for the nine months ended September 30, 2012. The effective tax rate for the nine months ended September 30, 2012 was 48.0%, which is higher than the statutory rate due to permanent differences resulting from non-deductible expenses and amortization, primarily non-deductible compensation expense related to stock based compensation calculated in accordance with ASC718.

As a result of the above factors, the Company recognized net income for the nine months ended September 30, 2012 of $2.6 million, as compared to net income of $2.2 million for the same period in 2011.

Three Months ended September 30, 2012 compared to Three Months ended September 30, 2011

Net revenues increased $9.6 million or 3.2% to $306.3 million for the three months ended September 30, 2012 from $296.7 million for the same period in 2011. This increase was attributable primarily to an increase in billboard net revenues of $6.9 million or 2.6% over the prior period, an increase in logo revenue of $0.7 million or a 5.0% increase over the prior period and a $2.0 million increase in transit revenue over the prior period, which represents an increase of 12.0% over the prior period.

For the three months ended September 30, 2012, there was a $6.0 million increase in net revenues as compared to acquisition-adjusted net revenue for the three months ended September 30, 2011. The $6.0 million increase in revenue primarily consists of a $4.4 million increase in billboard revenue, a $0.3 million increase in logo revenue and a $1.3 million increase in transit revenue over the acquisition-adjusted net revenue for the comparable periods in 2011. This increase in revenue represents an increase of 2.0% over the comparable period in 2011. See "Reconciliations" below.

Operating expenses, exclusive of depreciation and amortization and gain on sale of assets, increased $2.9 million or 1.7% to $169.6 million for the three months ended September 30, 2012 from $166.7 million for the same period in 2011. There was a $0.9 million increase in operating expenses related to the operations of our outdoor advertising assets and a $1.9 million increase in corporate expenses.

Depreciation and amortization expense decreased $1.3 million for the three months ended September 30, 2012, as compared to the three months ended September 30, 2011, primarily due to the reduction in the number of non performing structures that were dismantled as compared to the same period ended in 2011.


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Due to the above factors, operating income increased $8.1 million to $63.5 million for the three months ended September 30, 2012 compared to $55.4 million for the same period in 2011.

Interest expense decreased $4.0 million from $42.5 million for the three months ended September 30, 2011, to $38.5 million for the three months ended September 30, 2012, primarily due to a reduction in overall indebtedness over the comparable period in 2011.

The increase in operating income and decrease in interest expense described above resulted in a $10.3 million increase in net income before income taxes. This increase in net income resulted in an increase in income tax expense of $2.8 million for the three months ended September 30, 2012 over the same period in 2011. The effective tax rate for the three months ended September 30, 2012 was 50.3%, which is higher than the statutory rate due to permanent differences resulting from non-deductible expenses, primarily non-deductible compensation expense related to stock based compensation calculated in accordance with ASC718.

As a result of the above factors, the Company recognized net income for the three months ended September 30, 2012 of $11.5 million, as compared to net income of $4.0 million for the same period in 2011.

Reconciliations:

Because acquisitions occurring after December 31, 2010 (the "acquired assets") have contributed to our net revenue results for the periods presented, we provide 2011 acquisition-adjusted net revenue, which adjusts our 2011 net revenue for the three and nine months ended September 30, 2011 by adding to it the net revenue generated by the acquired assets prior to our acquisition of these assets for the same time frame that those assets were owned in the three and nine months ended September 30, 2012. We provide this information as a supplement to net revenues to enable investors to compare periods in 2012 and 2011 on a more consistent basis without the effects of acquisitions. Management uses this comparison to assess how well we are performing within our existing assets.

Acquisition-adjusted net revenue is not determined in accordance with GAAP. For this adjustment, we measure the amount of pre-acquisition revenue generated by the assets during the period in 2011 that corresponds with the actual period we have owned the assets in 2012 (to the extent within the period to which this report relates). We refer to this adjustment as "acquisition net revenue."

Reconciliations of 2011 reported net revenue to 2011 acquisition-adjusted net revenue for each of the three and nine month periods ended September 30, as well as a comparison of 2011 acquisition-adjusted net revenue to 2012 reported net revenue for each of the three and nine month periods ended September 30, are provided below:

Reconciliation of Reported Net Revenue to Acquisition-Adjusted Net Revenue



                                      Three months  ended       Nine months  ended
                                      September 30, 2011        September 30, 2011
                                        (in thousands)            (in thousands)
  Reported net revenue               $             296,701     $            845,248
  Acquisition net revenue                            3,633                    5,026

  Acquisition-adjusted net revenue   $             300,334     $            850,274

Comparison of 2012 Reported Net Revenue to 2011 Acquisition-Adjusted Net Revenue



                                    Three months ended           Nine months ended
                                       September 30,               September 30,
                                    2012          2011          2012          2011
                                      (in thousands)              (in thousands)
        Reported net revenue      $ 306,286     $ 296,701     $ 877,396     $ 845,248
        Acquisition net revenue          -          3,633            -          5,026

        Adjusted totals           $ 306,286     $ 300,334     $ 877,396     $ 850,274


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LIQUIDITY AND CAPITAL RESOURCES

Overview

The Company has historically satisfied its working capital requirements with cash from operations and borrowings under the senior credit facility. The Company's wholly owned subsidiary, Lamar Media Corp., is the principal borrower under the senior credit facility and maintains all corporate operating cash balances. Any cash requirements of the Company, therefore, must be funded by distributions from Lamar Media.

Sources of Cash

Total Liquidity at September 30, 2012. As of September 30, 2012 we had approximately $265.7 million of total liquidity, which is comprised of approximately $38.4 million in cash and cash equivalents and the ability to draw approximately $227.3 million under the revolving portion of Lamar Media's senior credit facility. We are currently in compliance with all applicable restrictive covenants under the senior credit facility and we would remain in compliance after giving effect to borrowing the full amount available to us under the revolving portion of the senior credit facility.

Cash Generated by Operations. For the nine months ended September 30, 2012 and 2011 our cash provided by operating activities was $253.3 million and $222.7 million, respectively. While our net income was approximately $2.6 million for the nine months ended September 30, 2012, we generated cash from operating activities of $253.3 million during that same period, primarily due to adjustments needed to reconcile net income to cash provided by operating activities of $275.3 million, which primarily consisted of depreciation and amortization of $219.3 million and loss on debt extinguishment of $32.0 million. In addition, there was an increase in working capital of $24.6 million. We expect to generate cash flows from operations during 2012 in excess of our cash needs for operations and capital expenditures as described herein. We expect to use this excess cash to reduce outstanding indebtedness or for funding potential acquisitions.

Credit Facilities. On February 9, 2012, Lamar Media entered into a restatement agreement with respect to its existing senior credit facility in order to fund a new $100 million Term loan A facility and to make certain covenant changes to the senior credit facility, which was entered into on April 28, 2010, as amended on June 11, 2010, November 18, 2010 and February 9, 2012 (the "senior credit facility"), for which JPMorgan Chase Bank, N.A. serves as administrative agent. The senior credit facility consists of a $250 million revolving credit facility, a $270 million term loan A-1 facility, a $30 million term loan A-2 facility, a $100 million term loan A-3 facility, a $575 million term loan B facility and a $300 million incremental facility, which may be increased by up to an additional $200 million, based upon our satisfaction of a senior debt ratio test (as described below), of less than or equal to 3.25 to 1. Lamar Media is the borrower under the senior credit facility, except with respect to the $30 million term loan A-2 facility for which Lamar Media's wholly owned subsidiary, Lamar Advertising of Puerto Rico, Inc. is the borrower. We may also from time to time designate additional wholly owned subsidiaries as subsidiary borrowers under the incremental loan facility that can borrow up to $110 million of the incremental facility. Incremental loans may be in the form of additional term loan tranches or increases in the revolving credit facility. Our lenders have no obligation to make additional loans to us, or any designated subsidiary borrower, under the incremental facility, but may enter into such commitments in their sole discretion.

As of September 30, 2012, Lamar Media had approximately $227.3 million of unused capacity under the revolving credit facility included in the senior credit facility and the aggregate balance outstanding under the senior credit facility was $702.2 million.

Note Offerings. On February 9, 2012, Lamar Media completed an institutional private placement of $500 million aggregate principal amount of 5 7/8% Senior Subordinated Notes, due 2022. The institutional private placement resulted in net proceeds to Lamar Media of approximately $489 million. The Company used the proceeds of this offering, after the payment of fees and expenses together with approximately $99 million of net proceeds from its term loan A-3 facility to repurchase $583.1 million of its outstanding 6 5/8% Notes, as described below under the heading " - Uses of Cash - Tender Offers".

In addition, on October 30, 2012, Lamar Media completed an institutional private placement of $535 million aggregate principal amount of 5% Senior Subordinated Notes due 2023. The institutional private placement resulted in net proceeds to Lamar Media, after the payment fees and expenses, of approximately $527.1 million. Lamar Media intends to use the proceeds of this offering to
(i) repurchase in full its remaining 6 5/8% Senior Subordinated Notes due 2015 - Series B and remaining 6 5/8% Senior Subordinated Notes due 2015 - Series C and
(ii) to fund the acquisition of NextMedia Outdoor, Inc., which closed on October 31, 2012 and other potential acquisitions that are currently being evaluated or that we may pursue in the future or to the extent not used to fund potential future acquisitions, to repay a portion of the indebtedness under our senior credit facility and (iii) for general corporate expenses.

Factors Affecting Sources of Liquidity

Internally Generated Funds. The key factors affecting internally generated cash flow are general economic conditions, specific economic conditions in the markets where the Company conducts its business and overall spending on advertising by advertisers.


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Credit Facilities and Other Debt Securities. Lamar must comply with certain covenants and restrictions related to the senior credit facility and its outstanding debt securities.

Restrictions Under Debt Securities. Lamar must comply with certain covenants and restrictions related to its outstanding debt securities. Currently Lamar Media has outstanding, in aggregate principal amount, approximately $36.1 million 6 5/8% Senior Subordinated Notes due 2015 - Series B issued in August 2006 (the "6 5/8% Series B Notes") and $101.1 million 6 5/8% Senior Subordinated Notes due 2015 - Series C issued in October 2007 (the "6 5/8% Series C Notes"), $350 million 9 3/4% Senior Notes due 2014 issued in March 2009 (the "9 3/4% Notes), $400 million 7 7/8% Senior Subordinated Notes due 2018 issued in April 2010 (the "7 7/8% Notes"), $500 million 5 7/8% Senior Subordinated Notes due 2022 issued in February 2012 (the "5 7/8% Notes") and $535 million 5% Senior Subordinated Notes due 2023 issued in October 2012 (the "5% Notes"). The indentures relating to Lamar Media's outstanding notes restrict its ability to incur additional indebtedness but permit the incurrence of indebtedness (including indebtedness under the senior credit facility), (i) if no default or event of default would result from such incurrence and (ii) if after giving effect to any such incurrence, the leverage ratio (defined as total consolidated debt to trailing four fiscal quarter EBITDA (as defined in the indentures)) would be less than
(a) 6.5 to 1, pursuant to the 9 3/4% Notes indenture, and (b) 7.0 to 1, pursuant to the indentures related to the 6 5/8% Series B Notes, 6 5/8% Series C Notes, 7 7/8% Notes, 5 7/8% Notes and 5% Notes. Currently, Lamar Media is in compliance with these tests.

In addition to debt incurred under the provisions described in the preceding sentence, the indentures relating to Lamar Media's outstanding notes permit Lamar Media to incur indebtedness pursuant to the following baskets:

up to $1.3 billion of indebtedness under the senior credit facility allowable under the indentures related to the 6 5/8% Series B Notes and 6 5/8% Series C Notes, up to $1.4 billion of indebtedness under the senior credit facility allowable under the 9 3/4% Notes indenture and $1.5 billion of indebtedness under the senior credit facility allowable under the indentures related to the 7 7/8% Notes, 5 7/8% Notes and 5% Notes;

currently outstanding indebtedness or debt incurred to refinance outstanding debt;

inter-company debt between Lamar Media and its subsidiaries or between subsidiaries;

certain purchase money indebtedness and capitalized lease obligations to acquire or lease property in the ordinary course of business that cannot exceed the greater of $50 million or 5% of Lamar Media's net tangible assets; and

additional debt not to exceed $50 million ($75 million under the indentures related to the 7 7/8% Notes, 5 7/8% Notes and 5% Notes).

Restrictions under Senior Credit Facility. Lamar Media is required to comply with certain covenants and restrictions under the senior credit facility. If the Company fails to comply with these tests, the long term debt payments may be accelerated. At September 30, 2012 and currently, Lamar Media was in compliance with all such tests. We must be in compliance with the following financial ratios under our senior credit facility:

a total holdings debt ratio, defined as total consolidated debt of Lamar Advertising Company and its restricted subsidiaries as of any date to EBITDA, as defined below, for the most recent four fiscal quarters then ended as set forth below:

       Period                                                    Ratio
       March 31, 2012 through and including March 30, 2013     6.25 to 1.00
       From and after March 31, 2013                           6.00 to 1.00

a senior debt ratio, defined as total consolidated senior debt of Lamar Media and its restricted subsidiaries to EBITDA, as defined below, for the most recent four fiscal quarters then ended of less than or equal to 3.25 to 1.00 and

a fixed charges coverage ratio, defined as the ratio of EBITDA, as defined below, for the most recent four fiscal quarters to the sum of (1) the total payments of principal and interest on debt for such period, plus
(2) capital expenditures made during such period, plus (3) income and franchise tax payments made during such period, plus (4) dividends, of greater than 1.05 to 1.

The definition of "EBITDA" under the senior credit facility is as follows:
"EBITDA" means, for any period, operating income for the Company and its restricted subsidiaries (determined on a consolidated basis without duplication in accordance with GAAP) for such period (calculated before taxes, interest expense, depreciation, amortization and any other non-cash income or charges accrued for such period, one-time cash restructuring and cash severance changes in the fiscal year ending December 31, 2009 of up to $2,500,000 aggregate amount, charges and expenses in connection with the credit facility transactions and the repurchase or redemption of our 7 1/4% Senior Subordinated Notes due 2013 and (except to the extent received or paid in cash by us or any of our restricted subsidiaries) income or loss attributable to equity in affiliates for such period) excluding any extraordinary and unusual gains or losses during such period and excluding the proceeds of any casualty events whereby insurance or other proceeds are received and certain dispositions not in the ordinary course. For purposes of calculating EBITDA, the effect on such calculation of any adjustments required under Statement of Accounting Standards No. 141R is excluded.


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Excess Cash Flow Payments. Lamar Media may be required to make certain mandatory prepayments on loans outstanding under the senior credit facility that would be applied first to any outstanding term loans, commencing with the year ended December 31, 2010. These payments, if any, are determined annually and are calculated based on a percentage of Consolidated Excess Cash Flow (as defined in the senior credit facility) at the end of each fiscal year. The percentage of Consolidated Excess Cash Flow that must be applied to repay outstanding loans was set at 50% for the fiscal year ended December 31, 2010. For fiscal years ending on or after December 31, 2012, this percentage is subject to reduction to 0% if the total holdings debt ratio, as described above, is less than or equal to 5.00 to 1.00 as of the last day of such fiscal year. At December 31, 2011, the Company was not required to make a mandatory prepayment since there was a consolidated cash flow deficit, in accordance with the calculation as defined in the senior credit facility and the total holdings debt ratio was less than 5.00 to 1.00.

The Company believes that its current level of cash on hand, availability under its senior credit facility and future cash flows from operations are sufficient to meet its operating needs through fiscal 2012. All debt obligations are reflected on the Company's balance sheet.

Uses of Cash

Capital Expenditures. Capital expenditures excluding acquisitions were approximately $77.7 million for the nine months ended September 30, 2012. We anticipate our 2012 total capital expenditures will be approximately $100 million.

Acquisitions. During the nine months ended September 30, 2012, the Company . . .

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