OUTFRONT Media Inc. - Quarter Report: 2017 March (Form 10-Q)
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
(Mark One)
x | QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 |
For the quarterly period ended March 31, 2017
or
o | TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 | |||
For the transition period from | to | |||
Commission File Number: 001-36367
OUTFRONT Media Inc.
(Exact name of registrant as specified in its charter)
Maryland | 46-4494703 | |
(State or other jurisdiction of incorporation or organization) | (I.R.S. Employer Identification No.) | |
405 Lexington Avenue, 17th Floor New York, NY | 10174 | |
(Address of principal executive offices) | (Zip Code) | |
(212) 297-6400
(Registrant’s telephone number, including area code)
Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. x Yes o No
Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Website, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files). x Yes o No
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company. See the definitions of “large accelerated filer,” “accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Exchange Act.
Large accelerated filer | x | Accelerated filer | o | |
Non-accelerated filer | o (Do not check if a smaller reporting company) | Smaller reporting company | o | |
Emerging growth company | o | |||
If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act. o
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Act). o Yes x No
As of May 3, 2017, the number of shares outstanding of the registrant’s common stock was 138,587,346.
OUTFRONT MEDIA INC.
QUARTERLY REPORT ON FORM 10-Q FOR THE QUARTER ENDED MARCH 31, 2017
TABLE OF CONTENTS
PART 1
Item 1. Financial Statements.
OUTFRONT Media Inc.
Consolidated Statements of Financial Position
(Unaudited)
As of | ||||||||
(in millions) | March 31, 2017 | December 31, 2016 | ||||||
Assets: | ||||||||
Current assets: | ||||||||
Cash and cash equivalents | $ | 26.3 | $ | 65.2 | ||||
Receivables, less allowance ($9.2 in 2017 and $9.2 in 2016) | 181.9 | 222.0 | ||||||
Prepaid lease and transit franchise costs | 74.1 | 67.4 | ||||||
Other prepaid expenses | 18.1 | 15.8 | ||||||
Other current assets | 11.1 | 7.8 | ||||||
Total current assets | 311.5 | 378.2 | ||||||
Property and equipment, net (Note 3) | 658.4 | 665.0 | ||||||
Goodwill | 2,089.7 | 2,089.4 | ||||||
Intangible assets (Note 4) | 534.8 | 545.3 | ||||||
Other assets | 62.1 | 60.6 | ||||||
Total assets | $ | 3,656.5 | $ | 3,738.5 | ||||
Liabilities: | ||||||||
Current liabilities: | ||||||||
Accounts payable | $ | 50.5 | $ | 85.6 | ||||
Accrued compensation | 17.1 | 33.9 | ||||||
Accrued interest | 23.7 | 15.7 | ||||||
Accrued lease costs | 21.3 | 26.7 | ||||||
Other accrued expenses | 49.0 | 54.8 | ||||||
Deferred revenues | 33.1 | 20.2 | ||||||
Other current liabilities | 16.0 | 14.6 | ||||||
Total current liabilities | 210.7 | 251.5 | ||||||
Long-term debt, net (Note 7) | 2,142.5 | 2,136.8 | ||||||
Deferred income tax liabilities, net | 6.7 | 8.5 | ||||||
Asset retirement obligation (Note 5) | 34.6 | 34.1 | ||||||
Other liabilities | 76.7 | 74.6 | ||||||
Total liabilities | 2,471.2 | 2,505.5 | ||||||
Commitments and contingencies (Note 14) | ||||||||
Stockholders’ equity (Note 8): | ||||||||
Common stock (2017 - 450.0 shares authorized, and 138.6 shares issued | ||||||||
and outstanding; 2016 - 450.0 shares authorized, and 138.0 issued and outstanding) | 1.4 | 1.4 | ||||||
Additional paid-in capital | 1,948.6 | 1,949.5 | ||||||
Distribution in excess of earnings | (747.4 | ) | (699.5 | ) | ||||
Accumulated other comprehensive loss | (17.4 | ) | (18.5 | ) | ||||
Total stockholders’ equity | 1,185.2 | 1,232.9 | ||||||
Non-controlling interests | 0.1 | 0.1 | ||||||
Total equity | 1,185.3 | 1,233.0 | ||||||
Total liabilities and equity | $ | 3,656.5 | $ | 3,738.5 | ||||
See accompanying notes to unaudited consolidated financial statements.
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OUTFRONT Media Inc.
Consolidated Statements of Operations
(Unaudited)
Three Months Ended | ||||||||
March 31, | ||||||||
(in millions, except per share amounts) | 2017 | 2016 | ||||||
Revenues: | ||||||||
Billboard | $ | 236.0 | $ | 250.4 | ||||
Transit and other | 94.6 | 98.0 | ||||||
Total revenues | 330.6 | 348.4 | ||||||
Expenses: | ||||||||
Operating | 191.9 | 199.8 | ||||||
Selling, general and administrative | 63.9 | 65.3 | ||||||
Restructuring charges | 1.8 | — | ||||||
Loss on real estate assets held for sale | — | 1.3 | ||||||
Net loss on dispositions | 0.4 | 0.4 | ||||||
Depreciation | 22.9 | 29.1 | ||||||
Amortization | 23.7 | 28.3 | ||||||
Total expenses | 304.6 | 324.2 | ||||||
Operating income | 26.0 | 24.2 | ||||||
Interest expense, net | (28.1 | ) | (28.6 | ) | ||||
Other expense, net | — | (0.2 | ) | |||||
Loss before benefit for income taxes and equity in earnings of investee companies | (2.1 | ) | (4.6 | ) | ||||
Benefit for income taxes | 3.7 | 1.3 | ||||||
Equity in earnings of investee companies, net of tax | 0.9 | 1.0 | ||||||
Net income (loss) | $ | 2.5 | $ | (2.3 | ) | |||
Net income (loss) per common share: | ||||||||
Basic | $ | 0.02 | $ | (0.02 | ) | |||
Diluted | $ | 0.02 | $ | (0.02 | ) | |||
Weighted average shares outstanding: | ||||||||
Basic | 138.3 | 137.6 | ||||||
Diluted | 138.9 | 137.6 | ||||||
Dividends declared per common share | $ | 0.36 | $ | 0.34 | ||||
See accompanying notes to unaudited consolidated financial statements.
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OUTFRONT Media Inc.
Consolidated Statements of Comprehensive Income
(Unaudited)
Three Months Ended | ||||||||
March 31, | ||||||||
(in millions) | 2017 | 2016 | ||||||
Net income (loss) | $ | 2.5 | $ | (2.3 | ) | |||
Other comprehensive income, net of tax: | ||||||||
Cumulative translation adjustments | 1.1 | 6.5 | ||||||
Net actuarial loss | — | (0.5 | ) | |||||
Total other comprehensive income, net of tax | 1.1 | 6.0 | ||||||
Total comprehensive income | $ | 3.6 | $ | 3.7 | ||||
See accompanying notes to unaudited consolidated financial statements.
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OUTFRONT Media Inc.
Consolidated Statements of Equity
(Unaudited)
(in millions, except per share amounts) | Shares of Common Stock | Common Stock ($0.01 per share par value) | Additional Paid-In Capital | Distribution in Excess of Earnings | Accumulated Other Comprehensive Loss | Total Stockholders’ Equity | Non-Controlling Interests | Total Equity | |||||||||||||||||||||||
Balance as of December 31, 2015 | 137.6 | $ | 1.4 | $ | 1,934.3 | $ | (602.2 | ) | $ | (120.9 | ) | $ | 1,212.6 | $ | — | $ | 1,212.6 | ||||||||||||||
Net loss | — | — | — | (2.3 | ) | — | (2.3 | ) | — | (2.3 | ) | ||||||||||||||||||||
Other comprehensive loss | — | — | — | — | 6.0 | 6.0 | — | 6.0 | |||||||||||||||||||||||
Stock-based payments: | — | — | |||||||||||||||||||||||||||||
Vested | 0.5 | — | — | — | — | — | — | — | |||||||||||||||||||||||
Amortization | — | — | 4.8 | — | — | 4.8 | — | 4.8 | |||||||||||||||||||||||
Shares paid for tax withholding for stock-based payments | (0.2 | ) | — | (4.1 | ) | — | — | (4.1 | ) | — | (4.1 | ) | |||||||||||||||||||
Dividends ($0.34 per share) | — | — | — | (46.8 | ) | — | (46.8 | ) | — | (46.8 | ) | ||||||||||||||||||||
Balance as of March 31, 2016 | 137.9 | $ | 1.4 | $ | 1,935.0 | $ | (651.3 | ) | $ | (114.9 | ) | $ | 1,170.2 | $ | — | $ | 1,170.2 | ||||||||||||||
Balance as of December 31, 2016 | 138.0 | $ | 1.4 | $ | 1,949.5 | $ | (699.5 | ) | $ | (18.5 | ) | $ | 1,232.9 | $ | 0.1 | $ | 1,233.0 | ||||||||||||||
Net income | — | — | — | 2.5 | — | 2.5 | — | 2.5 | |||||||||||||||||||||||
Other comprehensive income | — | — | — | — | 1.1 | 1.1 | — | 1.1 | |||||||||||||||||||||||
Stock-based payments: | |||||||||||||||||||||||||||||||
Cumulative prior period adjustment to amortization of estimated forfeitures | — | — | 0.5 | (0.5 | ) | — | — | — | — | ||||||||||||||||||||||
Vested | 0.7 | — | — | — | — | — | — | — | |||||||||||||||||||||||
Exercise of stock options | 0.2 | — | 1.2 | — | — | 1.2 | — | 1.2 | |||||||||||||||||||||||
Amortization | — | — | 5.4 | — | — | 5.4 | — | 5.4 | |||||||||||||||||||||||
Shares paid for tax withholding for stock-based payments | (0.3 | ) | — | (8.0 | ) | — | — | (8.0 | ) | — | (8.0 | ) | |||||||||||||||||||
Dividends ($0.36 per share) | — | — | — | (49.9 | ) | — | (49.9 | ) | — | (49.9 | ) | ||||||||||||||||||||
Balance as of March 31, 2017 | 138.6 | $ | 1.4 | $ | 1,948.6 | $ | (747.4 | ) | $ | (17.4 | ) | $ | 1,185.2 | $ | 0.1 | $ | 1,185.3 | ||||||||||||||
See accompanying notes to unaudited consolidated financial statements.
6
OUTFRONT Media Inc.
Condensed Consolidated Statements of Cash Flows
(Unaudited)
Three Months Ended | ||||||||
March 31, | ||||||||
(in millions) | 2017 | 2016 | ||||||
Operating activities: | ||||||||
Net income (loss) | $ | 2.5 | $ | (2.3 | ) | |||
Adjustments to reconcile net income (loss) to net cash flow provided by operating activities: | ||||||||
Depreciation and amortization | 46.6 | 57.4 | ||||||
Deferred tax benefit | (1.8 | ) | (0.5 | ) | ||||
Stock-based compensation | 5.4 | 4.8 | ||||||
Provision for doubtful accounts | 0.1 | 0.8 | ||||||
Accretion expense | 0.6 | 0.6 | ||||||
Loss on real estate assets held for sale | — | 1.3 | ||||||
Net loss on dispositions | 0.4 | 0.4 | ||||||
Equity in earnings of investee companies, net of tax | (0.9 | ) | (1.0 | ) | ||||
Distributions from investee companies | 1.6 | — | ||||||
Amortization of deferred financing costs and debt discount and premium | 1.9 | 1.4 | ||||||
Cash paid for direct lease acquisition costs | (11.7 | ) | (10.6 | ) | ||||
Change in assets and liabilities, net of investing and financing activities | (12.5 | ) | (18.5 | ) | ||||
Net cash flow provided by operating activities | 32.2 | 33.8 | ||||||
Investing activities: | ||||||||
Capital expenditures | (16.6 | ) | (14.4 | ) | ||||
Acquisitions | (0.9 | ) | (60.5 | ) | ||||
Net proceeds from dispositions | 0.1 | 0.3 | ||||||
Net cash flow used for investing activities | (17.4 | ) | (74.6 | ) | ||||
Financing activities: | ||||||||
Proceeds from long-term debt borrowings - term loan | 8.3 | — | ||||||
Proceeds from borrowings under revolving credit facility | — | 35.0 | ||||||
Deferred financing costs | (7.0 | ) | (0.4 | ) | ||||
Proceeds from stock option exercises | 1.2 | — | ||||||
Taxes withheld for stock-based compensation | (6.0 | ) | (5.1 | ) | ||||
Dividends | (50.2 | ) | (47.1 | ) | ||||
Other | (0.2 | ) | (0.2 | ) | ||||
Net cash flow used for financing activities | (53.9 | ) | (17.8 | ) | ||||
Effect of exchange rate changes on cash and cash equivalents | 0.2 | 0.2 | ||||||
Net decrease in cash and cash equivalents | (38.9 | ) | (58.4 | ) | ||||
Cash and cash equivalents at beginning of period | 65.2 | 101.6 | ||||||
Cash and cash equivalents at end of period | $ | 26.3 | $ | 43.2 | ||||
Supplemental disclosure of cash flow information: | ||||||||
Cash paid for income taxes | $ | 0.6 | $ | 2.0 | ||||
Cash paid for interest | 18.3 | 19.5 | ||||||
Non-cash investing and financing activities: | ||||||||
Accrued purchases of property and equipment | $ | 10.5 | $ | 5.4 | ||||
Taxes withheld for stock-based compensation | — | 1.5 | ||||||
See accompanying notes to unaudited consolidated financial statements.
7
Note 1. Description of Business and Basis of Presentation
Description of Business
OUTFRONT Media Inc. (the “Company”) and its subsidiaries (collectively, “we,” “us” or “our”) is a real estate investment trust (“REIT”), which provides advertising space (“displays”) on out-of-home advertising structures and sites in the United States (the “U.S.”) and Canada. Our inventory consists of billboard displays, which are primarily located on the most heavily traveled highways and roadways in top Nielsen Designated Market Areas (“DMAs”), and transit advertising displays operated under exclusive multi-year contracts with municipalities in large cities across the U.S. and Canada. We also have marketing and multimedia rights agreements with colleges, universities and other educational institutions, which entitle us to operate on-campus advertising displays, as well as manage marketing opportunities, media rights and experiential entertainment at sports events. In total, we have displays in all of the 25 largest markets in the U.S. and over 150 markets across the U.S. and Canada. We manage our operations through three operating segments—(1) U.S. Billboard and Transit, which is included in our U.S. Media reportable segment, (2) International and (3) Sports Marketing.
On April 1, 2016, we sold all of our equity interests in certain of our subsidiaries (the “Disposition”), which held all of the assets of our outdoor advertising business in Latin America (see Note 9. Acquisitions and Dispositions: Dispositions to the Consolidated Financial Statements). The operating results of our outdoor advertising business in Latin America through April 1, 2016, are included in our Consolidated Financial Statements for the three months ended March 31, 2016.
Basis of Presentation and Use of Estimates
The accompanying unaudited consolidated financial statements have been prepared pursuant to the rules of the Securities and Exchange Commission (the “SEC”). In the opinion of our management, the accompanying unaudited consolidated financial statements reflect all adjustments, consisting of normal and recurring adjustments, necessary for a fair statement of our financial position, results of operations and cash flows for the periods presented. Certain reclassifications of prior year’s data have been made to conform to the current period’s presentation. These financial statements should be read in conjunction with the more detailed financial statements and notes thereto, included in our Annual Report on Form 10-K for the year ended December 31, 2016, filed with the SEC on February 23, 2017.
The preparation of our financial statements in conformity with accounting principles generally accepted in the United States of America (“GAAP”) requires management to make estimates, judgments and assumptions that affect the reported amounts of assets and liabilities, disclosure of contingent assets and liabilities as of the date of the financial statements, and the reported amount of revenues and expenses during the reporting period. We base our estimates on historical experience and on various other assumptions that are believed to be reasonable under the circumstances, the results of which form the basis for making judgments about the carrying values of assets and liabilities that are not readily apparent from other sources. Actual results may differ from these estimates under different assumptions or conditions.
Note 2. New Accounting Standards
Adoption of New Accounting Standards
Stock Compensation
During the first quarter of 2017, we adopted the Financial Accounting Standards Board’s (the “FASB’s”) guidance that simplifies the accounting for employee share-based payment transactions, including the accounting for income taxes, forfeitures and statutory tax withholding requirements, as well as the classification in the statement of cash flows. We have elected to account for forfeitures as they occur, which we adopted on a modified retrospective basis and resulted in an increase of $0.5 million to Additional paid in capital, offset by a decrease of $0.5 million to Distribution in excess of earnings on our Consolidated Statement of Financial Position and Consolidated Statement of Equity as of March 31, 2017.
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Business Combinations
During the first quarter of 2017, we adopted the FASB’s guidance clarifying the definition of a business for acquisitions and dispositions. The guidance is being applied on a prospective basis. Adoption of this guidance did not have a material effect on our consolidated financial statements.
Recent Pronouncements
Goodwill
In January 2017, the FASB issued guidance simplifying the test for goodwill impairment by eliminating Step 2 from the goodwill impairment test. Step 2 measures a goodwill impairment loss by comparing the implied fair value of a reporting unit’s goodwill with the carrying amount of that goodwill. An entity should recognize an impairment charge for the amount by which the carrying amount exceeds the reporting unit’s fair value, however, the loss recognized should not exceed the total amount of goodwill allocated to that reporting unit. The guidance is to be applied on a prospective basis and is effective for interim and annual periods beginning after December 15, 2019. Early adoption is permitted for interim and annual impairment tests performed on testing dates after January 1, 2017. We do not expect this guidance to have a material effect on our consolidated financial statements.
Statement of Cash Flows
In August 2016, the FASB issued guidance which clarifies presentation of certain cash receipts and cash payments in the Statement of Cash Flows. The guidance is to be applied on a retrospective basis and is effective for interim and annual periods beginning after December 15, 2017. Early adoption is permitted and must be reflected as of the beginning of the fiscal year that includes the interim period. We are currently evaluating the impact of this guidance on our consolidated financial statements.
Leases
In February 2016, the FASB issued guidance addressing the recognition, measurement, presentation and disclosure of leases for both lessees and lessors. The new standard requires lessees to apply a dual approach, classifying leases as either finance or operating based on the principle of whether or not the lease is effectively a financed purchase by the lessee. This classification will determine whether lease expense is recognized based on an effective interest method or on a straight line basis over the term of the lease, respectively. A lessee is also required to record a right-of-use asset and a lease liability for all leases with a term of greater than 12 months regardless of their classification. Leases with a term of 12 months or less will be accounted for similar to existing guidance for operating leases today. Lessors will account for leases using an approach that is substantially equivalent to existing guidance for sales-type leases, direct financing leases and operating leases. This guidance is to be applied on a modified retrospective basis and is effective for interim and annual periods beginning after December 15, 2018. Early adoption is permitted for financial statements that have not been previously issued.
As of December 31, 2016, we had approximately 22,600 lease agreements in the U.S. and approximately 3,200 lease agreements in Canada, the majority of which will be classified as operating leases under the new guidance. We are currently evaluating our lease contracts and planning for the implementation of this standard. This standard will require us to recognize a right-of-use asset and lease liability for the present value of minimum lease payments for operating leases with a term greater than 12 months and will have a significant impact on our consolidated financial statements. Our billboard lease revenues will continue to be recognized on a straight-line basis over their respective lease terms.
Revenue from Contracts with Customers
In May 2014 (updated in August 2015, March 2016, April 2016 and May 2016), the FASB issued principles-based guidance addressing revenue recognition issues. The guidance will be applied to all contracts with customers regardless of industry-specific or transaction-specific fact patterns. The guidance requires that the amount of revenue a company should recognize reflect the consideration it expects to be entitled to in exchange for goods and services. This guidance is to be applied retrospectively and is effective for interim and annual periods beginning after December 15, 2017. Our billboard lease revenues will be recognized under the new lease standard. The revenue recognition guidance will be primarily applicable to our multi-year transit advertising contracts with municipalities in the U.S. and Canada, and marketing and multimedia rights agreements with colleges, universities and other educational institutions. We are currently evaluating the impact of this guidance on our
9
consolidated financial statements.
Note 3. Property and Equipment
The table below presents the balances of major classes of assets and accumulated depreciation.
As of | ||||||||||
(in millions) | Estimated Useful Lives | March 31, 2017 | December 31, 2016 | |||||||
Land | $ | 90.8 | $ | 90.7 | ||||||
Buildings | 20 to 40 years | 48.6 | 48.2 | |||||||
Advertising structures | 5 to 20 years | 1,709.6 | 1,696.6 | |||||||
Furniture, equipment and other | 3 to 10 years | 90.8 | 88.5 | |||||||
Construction in progress | 40.0 | 37.2 | ||||||||
1,979.8 | 1,961.2 | |||||||||
Less: accumulated depreciation | 1,321.4 | 1,296.2 | ||||||||
Property and equipment, net | $ | 658.4 | $ | 665.0 | ||||||
Depreciation expense was $22.9 million in the three months ended March 31, 2017, and $29.1 million in the three months ended March 31, 2016.
Note 4. Intangible Assets
Our identifiable intangible assets primarily consist of acquired permits and leasehold agreements and franchise agreements which grant us the right to operate out-of-home structures in specified locations and the right to provide advertising space on railroad and municipal transit properties. Identifiable intangible assets are amortized on a straight-line basis over their estimated useful life, which is the respective life of the agreement that in some cases includes historical experience of renewals.
Our identifiable intangible assets consist of the following:
(in millions) | Gross | Accumulated Amortization | Net | |||||||||
As of March 31, 2017: | ||||||||||||
Permits and leasehold agreements | $ | 1,042.0 | $ | (646.8 | ) | $ | 395.2 | |||||
Franchise agreements | 452.1 | (338.9 | ) | 113.2 | ||||||||
Other intangible assets | 45.4 | (19.0 | ) | 26.4 | ||||||||
Total intangible assets | $ | 1,539.5 | $ | (1,004.7 | ) | $ | 534.8 | |||||
As of December 31, 2016: | ||||||||||||
Permits and leasehold agreements | $ | 1,038.0 | $ | (636.1 | ) | $ | 401.9 | |||||
Franchise agreements | 451.6 | (336.6 | ) | 115.0 | ||||||||
Other intangible assets | 45.4 | (17.0 | ) | 28.4 | ||||||||
Total intangible assets | $ | 1,535.0 | $ | (989.7 | ) | $ | 545.3 | |||||
All of our identifiable intangible assets, except goodwill, are subject to amortization. Amortization expense was $23.7 million in the three months ended March 31, 2017, and $28.3 million in the three months ended March 31, 2016, which includes the amortization of direct lease acquisition costs of $8.7 million in the three months ended March 31, 2017, and $8.9 million in the three months ended March 31, 2016. Direct lease acquisition costs are amortized on a straight-line basis over the related customer lease term, which generally ranges from four weeks to one year.
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Note 5. Asset Retirement Obligation
The following table sets forth the change in the asset retirement obligations associated with our advertising structures located on leased properties. The obligation is calculated based on the assumption that all of our advertising structures will be removed within the next 50 years. The estimated annual costs to dismantle and remove the structures upon the termination or non-renewal of our leases are consistent with our historical experience.
(in millions) | ||||
As of December 31, 2016 | $ | 34.1 | ||
Accretion expense | 0.6 | |||
Additions | 0.1 | |||
Liabilities settled | (0.2 | ) | ||
As of March 31, 2017 | $ | 34.6 | ||
Note 6. Related Party Transactions
We have a 50% ownership interest in two joint ventures that operate transit shelters in the greater Los Angeles area and Vancouver, and three joint ventures which operate a total of 15 billboard displays in New York and Boston. All of these ventures are accounted for as equity investments. These investments totaled $21.0 million as of March 31, 2017, and $21.7 million as of December 31, 2016, and are included in Other assets on the Consolidated Statements of Financial Position. We provided sales and management services to these joint ventures and recorded management fees in Revenues on the Consolidated Statement of Operations of $1.5 million in the three months ended March 31, 2017, and $1.7 million in the three months ended March 31, 2016.
Note 7. Debt
Long-term debt, net, consists of the following:
As of | ||||||||
(in millions, except percentages) | March 31, 2017 | December 31, 2016 | ||||||
Term loan | $ | 667.5 | $ | 659.0 | ||||
Senior unsecured notes: | ||||||||
5.250% senior unsecured notes, due 2022 | 549.5 | 549.5 | ||||||
5.625% senior unsecured notes, due 2024 | 502.9 | 503.0 | ||||||
5.875% senior unsecured notes, due 2025 | 450.0 | 450.0 | ||||||
Total senior unsecured notes | 1,502.4 | 1,502.5 | ||||||
Debt issuance costs | (27.4 | ) | (24.7 | ) | ||||
Total long-term debt, net | $ | 2,142.5 | $ | 2,136.8 | ||||
Weighted average cost of debt | 4.8 | % | 4.8 | % | ||||
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On March 16, 2017, the Company, along with its wholly owned subsidiaries, Outfront Media Capital LLC (“Finance LLC”) and Outfront Media Capital Corporation (together with Finance LLC, the “Borrowers”), and other guarantor subsidiaries party thereto, entered into an amendment (the “Amendment”) to its credit agreement and its related security agreement, each dated January 31, 2014 (together, and as amended, supplemented or otherwise modified, the “Credit Agreement”).
The Amendment provides for (i) the extension of the maturity date of the Borrower’s existing revolving credit facility (the “Revolving Credit Facility”) from January 31, 2019, to March 16, 2022, (ii) the extension of the maturity date of the Borrower’s existing term loan (the “Term Loan”) from January 31, 2021, to March 16, 2024, (iii) an increase to the Revolving Credit Facility by $5.0 million to $430.0 million, (iv) the incurrence of a $10.0 million incremental term loan primarily to cover transaction fees and expenses, which increases the outstanding principal balance of the Term Loan to $670.0 million, and (v) revisions to certain provisions of the Credit Agreement to, among other things, lower the interest rate floor for all loans to 0.0% and update covenants for greater operational and financial flexibility to the Company (including incurrence of additional indebtedness), as well as include other ministerial changes to the Credit Agreement. The remaining terms of the Credit Agreement, as amended by the Amendment, are substantially the same as the terms under the existing Credit Agreement, including with respect to events of default and loan acceleration.
Term Loan
The interest rate on the Term Loan was 3.2% per annum as of March 31, 2017. As of March 31, 2017, a discount of $2.5 million on the Term Loan remains unamortized. The discount is being amortized through Interest expense, net, on the Consolidated Statement of Operations.
Senior Unsecured Notes
As of March 31, 2017, a discount of $0.5 million on $150.0 million aggregate principal amount of the 5.250% Senior Unsecured Notes due 2022, remains unamortized. The discount is being amortized through Interest expense, net, on the Consolidated Statement of Operations.
As of March 31, 2017, a premium of $2.9 million on $100.0 million aggregate principal amount of the 5.625% Senior Unsecured Notes due 2024, remains unamortized. The premium is being amortized through Interest expense, net, on the Consolidated Statement of Operations.
Revolving Credit Facility
As of March 31, 2017, there were no outstanding borrowings under the Revolving Credit Facility. On April 3, 2017, we borrowed $15.0 million against the Revolving Credit Facility.
The commitment fee based on the amount of unused commitments under the Revolving Credit Facility was $0.2 million in the three months ended March 31, 2017, and $0.5 million in the three months ended March 31, 2016. As of March 31, 2017, we had issued letters of credit totaling approximately $31.7 million against the Revolving Credit Facility.
Debt Covenants
The Credit Agreement governing the Term Loan and the Revolving Credit Facility, and the indentures governing our senior unsecured notes contain customary affirmative and negative covenants, subject to certain exceptions, including but not limited to those that limit the Company’s and our subsidiaries’ abilities to (i) pay dividends on, repurchase or make distributions in respect to the Company’s or its wholly-owned subsidiary, Finance LLC’s capital stock or make other restricted payments other than dividends or distributions necessary for us to maintain our REIT status, subject to certain conditions, and (ii) enter into agreements restricting certain subsidiaries’ ability to pay dividends or make other intercompany transfers.
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The terms of the Credit Agreement require that, as long as any commitments remain outstanding under the Revolving Credit Facility, we maintain a Consolidated Net Secured Leverage Ratio, which is the ratio of (i) our consolidated secured debt (less up to $150.0 million of unrestricted cash) to (ii) our Consolidated EBITDA (as defined in the Credit Agreement) for the trailing four consecutive quarters, of no greater than 4.0 to 1.0. As of March 31, 2017, our Consolidated Net Secured Leverage Ratio was 1.4 to 1.0. The Credit Agreement also requires that, in connection with the incurrence of certain indebtedness, we maintain a Consolidated Total Leverage Ratio, which is the ratio of our consolidated total debt to our Consolidated EBITDA for the trailing four consecutive quarters, of no greater than 6.0 to 1.0. As of March 31, 2017, our Consolidated Total Leverage Ratio was 4.8 to 1.0. As of March 31, 2017, we are in compliance with our debt covenants.
Letter of Credit Facilities
As of March 31, 2017, we issued letters of credit totaling approximately $66.9 million under our aggregate $80.0 million letter of credit facilities. The total fees under the letter of credit facilities were immaterial in each of the three months ended March 31, 2017 and 2016.
Deferred Financing Costs
As of March 31, 2017, we had deferred $32.5 million in fees and expenses associated with the Term Loan, Revolving Credit Facility and our senior unsecured notes. We are amortizing the deferred fees through Interest expense, net, on the Consolidated Statement of Operations over the respective terms of the Term Loan, Revolving Credit Facility and our senior unsecured notes.
Fair Value
Under the fair value hierarchy, observable inputs such as unadjusted quoted prices in active markets for identical assets or liabilities are defined as Level 1; observable inputs other than quoted prices included within Level 1 that are either directly or indirectly observable for the asset or liability are defined as Level 2; and unobservable inputs for the asset or liability are defined as Level 3. The aggregate fair value of our debt, which is estimated based on quoted market prices of similar liabilities, was approximately $2.3 billion as of March 31, 2017, and $2.2 billion as of December 31, 2016. The fair value of our debt as of both March 31, 2017, and December 31, 2016, is classified as Level 2.
Note 8. Equity
As of March 31, 2017, 450,000,000 shares of our common stock, par value $0.01 per share, were authorized; 138,575,870 shares were issued and outstanding; and 50,000,000 shares of our preferred stock, par value $0.01 per share, were authorized with no shares issued and outstanding.
On April 25, 2017, we announced that our board of directors approved a quarterly cash dividend of $0.36 per share on our common stock, payable on June 30, 2017, to stockholders of record at the close of business on June 9, 2017.
Note 9. Acquisitions and Dispositions
Acquisitions
We completed several acquisitions for a total purchase price of approximately $0.9 million in the three months ended March 31, 2017, and $60.5 million in the three months ended March 31, 2016.
Dispositions
On April 1, 2016, we completed the Disposition and received $82.0 million in cash plus working capital, which was subject to post-closing adjustments.
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Note 10. Stock-Based Compensation
The following table summarizes our stock-based compensation expense for the three months ended March 31, 2017 and 2016.
Three Months Ended | ||||||||
March 31, | ||||||||
(in millions) | 2017 | 2016 | ||||||
Restricted share units (“RSUs”) and performance-based RSUs (“PRSUs”) | $ | 5.3 | $ | 4.7 | ||||
Stock options | 0.1 | 0.1 | ||||||
Stock-based compensation expense, before income taxes | 5.4 | 4.8 | ||||||
Tax benefit | (0.5 | ) | (0.5 | ) | ||||
Stock-based compensation expense, net of tax | $ | 4.9 | $ | 4.3 | ||||
As of March 31, 2017, total unrecognized compensation cost related to non-vested RSUs and PRSUs was $33.5 million, which is expected to be recognized over a weighted average period of 2.2 years, and total unrecognized compensation cost related to non-vested stock options was $0.1 million, which is expected to be recognized over a weighted average period of 0.5 years.
RSUs and PRSUs
The following table summarizes activity for the three months ended March 31, 2017, of RSUs and PRSUs issued to our employees.
Activity | Weighted Average Per Share Grant Date Fair Market Value | ||||||
Non-vested as of December 31, 2016 | 1,637,141 | $ | 22.71 | ||||
Granted: | |||||||
RSUs | 485,621 | 27.21 | |||||
PRSUs | 248,030 | 27.20 | |||||
Vested: | |||||||
RSUs | (470,473 | ) | 23.30 | ||||
PRSUs | (197,341 | ) | 24.18 | ||||
Forfeitures: | |||||||
RSUs | (5,507 | ) | 22.87 | ||||
PRSUs | (22,350 | ) | 19.01 | ||||
Non-vested as of March 31, 2017 | 1,675,121 | 24.39 | |||||
Stock Options
The following table summarizes activity for the three months ended March 31, 2017, of stock options issued to our employees.
Activity | Weighted Average Exercise Price | ||||||
Outstanding as of December 31, 2016 | 294,897 | $ | 15.72 | ||||
Exercised | (129,604 | ) | 9.37 | ||||
Outstanding as of March 31, 2017 | 165,293 | 20.69 | |||||
Exercisable as of March 31, 2017 | 139,439 | 19.64 | |||||
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Note 11. Retirement Benefits
The following table presents the components of net periodic pension cost and amounts recognized in other comprehensive income (loss) for our pension plans:
Three Months Ended | ||||||||
March 31, | ||||||||
(in millions) | 2017 | 2016 | ||||||
Components of net periodic pension cost: | ||||||||
Service cost | $ | 0.3 | $ | 0.4 | ||||
Interest cost | 0.5 | 0.4 | ||||||
Expected return on plan assets | (0.5 | ) | (0.5 | ) | ||||
Amortization of net actuarial losses(a) | 0.1 | 0.1 | ||||||
Net periodic pension cost | $ | 0.4 | $ | 0.4 | ||||
(a) | Reflects amounts reclassified from accumulated other comprehensive income (loss) to net income (loss). |
In the three months ended March 31, 2017, we contributed $0.5 million to our pension plans. In 2017, we expect to contribute approximately $2.1 million to our pension plans.
Note 12. Income Taxes
We are organized in conformity with the requirements for qualification and taxation as a REIT under the Internal Revenue Code of 1986, as amended (the “Code”) and, accordingly, we have not provided for U.S. federal income tax on our REIT taxable income that we distributed to our stockholders. We have elected to treat our subsidiaries that participate in certain non-REIT qualifying activities, and our foreign subsidiaries, as taxable REIT subsidiaries (“TRSs”). As such, we have provided for their federal, state and foreign income taxes.
Our effective income tax rate represents a combined annual effective tax rate for federal, state, local and foreign taxes applied to interim operating results.
In the three months ended March 31, 2017 and 2016, our effective tax rate differed from the U.S. federal statutory income tax rate primarily due to our REIT status, including the dividends paid deduction, the impact of state and local taxes, and the effect of foreign operations.
Note 13. Earnings Per Share (“EPS”)
Three Months Ended | ||||||||
March 31, | ||||||||
(in millions) | 2017 | 2016 | ||||||
Net income (loss) | $ | 2.5 | $ | (2.3 | ) | |||
Weighted average shares for basic EPS | 138.3 | 137.6 | ||||||
Dilutive potential shares from grants of RSUs, PRSUs and stock options(a) | 0.6 | — | ||||||
Weighted average shares for diluted EPS | 138.9 | 137.6 | ||||||
(a) | The potential impact of an aggregate 0.3 million granted RSUs, PRSUs and stock options in the three months ended March 31, 2017, and 1.0 million granted RSUs, PRSUs and stock options in the three months ended March 31, 2016, were antidilutive. |
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Note 14. Commitments and Contingencies
Off-Balance Sheet Arrangements
Our off-balance sheet commitments primarily consist of operating lease arrangements and guaranteed minimum annual payments. These arrangements result from our normal course of business and represent obligations that are payable over several years.
Contractual Obligations
We have long-term operating leases for office space, billboard sites and equipment, which expire at various dates. Certain leases contain renewal and escalation clauses.
We have agreements with municipalities and transit operators which entitle us to operate advertising displays within their transit systems, including on the interior and exterior of rail and subway cars and buses, as well as on benches, transit shelters, street kiosks, and transit platforms. Under most of these franchise agreements, the franchisor is entitled to receive the greater of a percentage of the relevant revenues, net of agency fees, or a specified guaranteed minimum annual payment.
We also have marketing and multimedia rights agreements with colleges, universities and other educational institutions, which entitle us to operate on-campus advertising displays, as well as manage marketing opportunities, media rights and experiential entertainment at sports events. Under most of these agreements, the school is entitled to receive the greater of a percentage of the relevant revenue, net of agency commissions, or a specified guaranteed minimum annual payment.
The New York Metropolitan Transportation Authority (the “MTA”) has issued a “Request for Proposals” to prospective operators for the subway, bus and commuter rail (Metro-North and Long Island Railroad) concessions, in any combination, each for a ten-year contract, with an additional potential five-year renewal period. On May 18, 2016, we submitted a response to the MTA. In mid-October, the MTA issued a follow-up request that refined its timeline and bid requirements, particularly relating to digital deployment and the communications platform and we submitted our response on December 12, 2016. On November 7, 2016, we entered into an agreement with the MTA to extend the expiration of our existing contracts for transit advertising services from December 31, 2016, to June 30, 2017.
Letters of Credit
We have indemnification obligations with respect to letters of credit and surety bonds primarily used as security against non-performance in the normal course of business. The outstanding letters of credit and surety bonds approximated $126.1 million as of March 31, 2017, and were not recorded on the Consolidated Statements of Financial Position.
Legal Matters
On an ongoing basis, we are engaged in lawsuits and governmental proceedings and respond to various investigations, inquiries, notices and claims from national, state and local governmental and other authorities (collectively, “litigation”). Litigation is inherently uncertain and always difficult to predict. Although it is not possible to predict with certainty the eventual outcome of any litigation, in our opinion, none of our current litigation is expected to have a material adverse effect on our results of operations, financial position or cash flows.
Note 15. Segment Information
As of April 1, 2016, we manage our operations through three operating segments—(1) U.S. Billboard and Transit, which is included in our U.S. Media reportable segment, (2) International and (3) Sports Marketing. International and Sports Marketing do not meet the criteria to be a reportable segment and accordingly, are both included in Other.
The following tables set forth our financial performance by segment. Historical financial information by reportable segment has been recast to reflect the current period’s presentation. On April 1, 2016, we completed the Disposition. Historical operating
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results for our advertising business in Latin America are included in Other.
Three Months Ended | ||||||||
March 31, | ||||||||
(in millions) | 2017 | 2016 | ||||||
Revenues: | ||||||||
U.S. Media | $ | 307.1 | $ | 312.6 | ||||
Other | 23.5 | 35.8 | ||||||
Total revenues | $ | 330.6 | $ | 348.4 | ||||
We present Operating income before Depreciation, Amortization, Net loss on dispositions, Stock-based compensation, Restructuring charges and Loss on real estate assets held for sale (“Adjusted OIBDA”) as the primary measure of profit and loss for our operating segments in accordance with the FASB guidance for segment reporting.
Three Months Ended | ||||||||
March 31, | ||||||||
(in millions) | 2017 | 2016 | ||||||
Net income (loss) | $ | 2.5 | $ | (2.3 | ) | |||
Benefit for income taxes | (3.7 | ) | (1.3 | ) | ||||
Equity in earnings of investee companies, net of tax | (0.9 | ) | (1.0 | ) | ||||
Interest expense, net | 28.1 | 28.6 | ||||||
Other expense, net | — | 0.2 | ||||||
Operating income | 26.0 | 24.2 | ||||||
Restructuring charges | 1.8 | — | ||||||
Loss on real estate assets held for sale | — | 1.3 | ||||||
Net loss on dispositions | 0.4 | 0.4 | ||||||
Depreciation and amortization | 46.6 | 57.4 | ||||||
Stock-based compensation | 5.4 | 4.8 | ||||||
Total Adjusted OIBDA | $ | 80.2 | $ | 88.1 | ||||
Adjusted OIBDA: | ||||||||
U.S. Media | $ | 92.4 | $ | 94.9 | ||||
Other | (1.1 | ) | 2.2 | |||||
Corporate | (11.1 | ) | (9.0 | ) | ||||
Total Adjusted OIBDA | $ | 80.2 | $ | 88.1 | ||||
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Three Months Ended | ||||||||
March 31, | ||||||||
(in millions) | 2017 | 2016 | ||||||
Operating income (loss): | ||||||||
U.S. Media | $ | 47.5 | $ | 43.1 | ||||
Other | (5.0 | ) | (5.1 | ) | ||||
Corporate | (16.5 | ) | (13.8 | ) | ||||
Total operating income | $ | 26.0 | $ | 24.2 | ||||
Net loss on dispositions: | ||||||||
U.S. Media | $ | 0.4 | $ | 0.4 | ||||
Total loss on dispositions | $ | 0.4 | $ | 0.4 | ||||
Depreciation and amortization: | ||||||||
U.S. Media | $ | 42.7 | $ | 51.4 | ||||
Other | 3.9 | 6.0 | ||||||
Total depreciation and amortization | $ | 46.6 | $ | 57.4 | ||||
Capital expenditures: | ||||||||
U.S. Media | $ | 15.8 | $ | 13.5 | ||||
Other | 0.8 | 0.9 | ||||||
Total capital expenditures | $ | 16.6 | $ | 14.4 | ||||
As of | ||||||||
(in millions) | March 31, 2017 | December 31, 2016 | ||||||
Assets: | ||||||||
U.S. Media | $ | 3,508.9 | $ | 3,578.8 | ||||
Other | 125.4 | 145.5 | ||||||
Corporate | 22.2 | 14.2 | ||||||
Total assets | $ | 3,656.5 | $ | 3,738.5 | ||||
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Note 16. Condensed Consolidating Financial Information
We and our material existing and future direct and indirect 100% owned domestic subsidiaries (except Finance LLC and Outfront Media Capital Corporation, the borrowers under the Term Loan and the Revolving Credit Facility) guarantee the obligations under the Term Loan and the Revolving Credit Facility. Our senior unsecured notes are fully and unconditionally, and jointly and severally guaranteed on a senior unsecured basis by us and each of our direct and indirect wholly owned domestic subsidiaries that guarantees the Term Loan and the Revolving Credit Facility (see Note 7. Debt). The following condensed consolidating schedules present financial information on a combined basis in conformity with the SEC’s Regulation S-X, Rule 3-10 for: (i) OUTFRONT Media Inc. (the “Parent Company”); (ii) Finance LLC (the “Subsidiary Issuer”); (iii) the guarantor subsidiaries; (iv) the non-guarantor subsidiaries; (v) elimination entries necessary to consolidate the Parent Company and the Subsidiary Issuer, the guarantor subsidiaries and non-guarantor subsidiaries; and (vi) the Parent Company on a consolidated basis. Outfront Media Capital Corporation is a co-issuer finance subsidiary with no assets or liabilities, and therefore has not been included in the tables below.
As of March 31, 2017 | ||||||||||||||||||||||||
(in millions) | Parent Company | Subsidiary Issuer | Guarantor Subsidiaries | Non-Guarantor Subsidiaries | Eliminations | Consolidated | ||||||||||||||||||
Current assets: | ||||||||||||||||||||||||
Cash and cash equivalents | $ | — | $ | 16.2 | $ | 3.2 | $ | 6.9 | $ | — | $ | 26.3 | ||||||||||||
Receivables, less allowance | — | — | 170.7 | 11.2 | — | 181.9 | ||||||||||||||||||
Other current assets | — | 1.3 | 89.1 | 25.1 | (12.2 | ) | 103.3 | |||||||||||||||||
Total current assets | — | 17.5 | 263.0 | 43.2 | (12.2 | ) | 311.5 | |||||||||||||||||
Property and equipment, net | — | — | 616.1 | 42.3 | — | 658.4 | ||||||||||||||||||
Goodwill | — | — | 2,059.9 | 29.8 | — | 2,089.7 | ||||||||||||||||||
Intangible assets | — | — | 534.8 | — | — | 534.8 | ||||||||||||||||||
Investment in subsidiaries | 1,185.3 | 3,343.1 | 112.3 | — | (4,640.7 | ) | — | |||||||||||||||||
Other assets | — | 4.1 | 55.4 | 2.6 | — | 62.1 | ||||||||||||||||||
Intercompany | — | — | 42.7 | 67.2 | (109.9 | ) | — | |||||||||||||||||
Total assets | $ | 1,185.3 | $ | 3,364.7 | $ | 3,684.2 | $ | 185.1 | $ | (4,762.8 | ) | $ | 3,656.5 | |||||||||||
Total current liabilities | $ | — | $ | 36.9 | $ | 171.4 | $ | 14.6 | $ | (12.2 | ) | $ | 210.7 | |||||||||||
Long-term debt, net | — | 2,142.5 | — | — | — | 2,142.5 | ||||||||||||||||||
Deferred income tax liabilities, net | — | — | — | 6.7 | — | 6.7 | ||||||||||||||||||
Asset retirement obligation | — | — | 30.1 | 4.5 | — | 34.6 | ||||||||||||||||||
Deficit in excess of investment of subsidiaries | — | — | 2,157.8 | — | (2,157.8 | ) | — | |||||||||||||||||
Other liabilities | — | — | 72.4 | 4.3 | — | 76.7 | ||||||||||||||||||
Intercompany | — | — | 67.2 | 42.7 | (109.9 | ) | — | |||||||||||||||||
Total liabilities | — | 2,179.4 | 2,498.9 | 72.8 | (2,279.9 | ) | 2,471.2 | |||||||||||||||||
Total stockholders’ equity | 1,185.2 | 1,185.2 | 1,185.2 | 112.3 | (2,482.7 | ) | 1,185.2 | |||||||||||||||||
Non-controlling interests | 0.1 | 0.1 | 0.1 | — | (0.2 | ) | 0.1 | |||||||||||||||||
Total equity | 1,185.3 | 1,185.3 | 1,185.3 | 112.3 | (2,482.9 | ) | 1,185.3 | |||||||||||||||||
Total liabilities and equity | $ | 1,185.3 | $ | 3,364.7 | $ | 3,684.2 | $ | 185.1 | $ | (4,762.8 | ) | $ | 3,656.5 | |||||||||||
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As of December 31, 2016 | ||||||||||||||||||||||||
(in millions) | Parent Company | Subsidiary Issuer | Guarantor Subsidiaries | Non-Guarantor Subsidiaries | Eliminations | Consolidated | ||||||||||||||||||
Current assets: | ||||||||||||||||||||||||
Cash and cash equivalents | $ | — | $ | 11.4 | $ | 35.8 | $ | 18.0 | $ | — | $ | 65.2 | ||||||||||||
Receivables, less allowances | — | — | 207.9 | 14.1 | — | 222.0 | ||||||||||||||||||
Other current assets | — | 1.1 | 77.9 | 12.0 | — | 91.0 | ||||||||||||||||||
Total current assets | — | 12.5 | 321.6 | 44.1 | — | 378.2 | ||||||||||||||||||
Property and equipment, net | — | — | 621.4 | 43.6 | — | 665.0 | ||||||||||||||||||
Goodwill | — | — | 2,059.9 | 29.5 | — | 2,089.4 | ||||||||||||||||||
Intangible assets | — | — | 545.3 | — | — | 545.3 | ||||||||||||||||||
Investment in subsidiaries | 1,233.0 | 3,371.9 | 114.4 | — | (4,719.3 | ) | — | |||||||||||||||||
Other assets | — | 1.1 | 56.9 | 2.6 | — | 60.6 | ||||||||||||||||||
Intercompany | — | — | 42.7 | 67.0 | (109.7 | ) | — | |||||||||||||||||
Total assets | $ | 1,233.0 | $ | 3,385.5 | $ | 3,762.2 | $ | 186.8 | $ | (4,829.0 | ) | $ | 3,738.5 | |||||||||||
Total current liabilities | $ | — | $ | 15.7 | $ | 223.4 | $ | 12.4 | $ | — | $ | 251.5 | ||||||||||||
Long-term debt, net | — | 2,136.8 | — | — | — | 2,136.8 | ||||||||||||||||||
Deferred income tax liabilities, net | — | — | — | 8.5 | — | 8.5 | ||||||||||||||||||
Asset retirement obligation | — | — | 29.7 | 4.4 | — | 34.1 | ||||||||||||||||||
Deficit in excess of investment of subsidiaries | — | — | 2,138.9 | — | (2,138.9 | ) | — | |||||||||||||||||
Other liabilities | — | — | 70.2 | 4.4 | — | 74.6 | ||||||||||||||||||
Intercompany | — | — | 67.0 | 42.7 | (109.7 | ) | — | |||||||||||||||||
Total liabilities | — | 2,152.5 | 2,529.2 | 72.4 | (2,248.6 | ) | 2,505.5 | |||||||||||||||||
Total stockholders’ equity | 1,232.9 | 1,232.9 | 1,232.9 | 114.4 | (2,580.2 | ) | 1,232.9 | |||||||||||||||||
Non-controlling interests | 0.1 | 0.1 | 0.1 | — | (0.2 | ) | 0.1 | |||||||||||||||||
Total equity | 1,233.0 | 1,233.0 | 1,233.0 | 114.4 | (2,580.4 | ) | 1,233.0 | |||||||||||||||||
Total liabilities and equity | $ | 1,233.0 | $ | 3,385.5 | $ | 3,762.2 | $ | 186.8 | $ | (4,829.0 | ) | $ | 3,738.5 | |||||||||||
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Three Months Ended March 31, 2017 | ||||||||||||||||||||||||
(in millions) | Parent Company | Subsidiary Issuer | Guarantor Subsidiaries | Non-Guarantor Subsidiaries | Eliminations | Consolidated | ||||||||||||||||||
Revenues: | ||||||||||||||||||||||||
Billboard | $ | — | $ | — | $ | 225.1 | $ | 10.9 | $ | — | $ | 236.0 | ||||||||||||
Transit and other | — | — | 92.3 | 2.3 | — | 94.6 | ||||||||||||||||||
Total revenues | — | — | 317.4 | 13.2 | — | 330.6 | ||||||||||||||||||
Expenses: | ||||||||||||||||||||||||
Operating | — | — | 180.4 | 11.5 | — | 191.9 | ||||||||||||||||||
Selling, general and administrative | 0.4 | 0.7 | 59.3 | 3.5 | — | 63.9 | ||||||||||||||||||
Restructuring charges | — | — | 1.8 | — | — | 1.8 | ||||||||||||||||||
Net gain on dispositions | — | — | 0.4 | — | — | 0.4 | ||||||||||||||||||
Depreciation | — | — | 20.0 | 2.9 | — | 22.9 | ||||||||||||||||||
Amortization | — | — | 23.2 | 0.5 | — | 23.7 | ||||||||||||||||||
Total expenses | 0.4 | 0.7 | 285.1 | 18.4 | — | 304.6 | ||||||||||||||||||
Operating income (loss) | (0.4 | ) | (0.7 | ) | 32.3 | (5.2 | ) | — | 26.0 | |||||||||||||||
Interest expense, net | — | (28.0 | ) | (0.1 | ) | — | — | (28.1 | ) | |||||||||||||||
Income (loss) before benefit (provision) for income taxes and equity in earnings of investee companies | (0.4 | ) | (28.7 | ) | 32.2 | (5.2 | ) | — | (2.1 | ) | ||||||||||||||
Benefit for income taxes | — | — | 1.9 | 1.8 | — | 3.7 | ||||||||||||||||||
Equity in earnings of investee companies, net of tax | 2.9 | 31.6 | (31.2 | ) | 0.1 | (2.5 | ) | 0.9 | ||||||||||||||||
Net income (loss) | $ | 2.5 | $ | 2.9 | $ | 2.9 | $ | (3.3 | ) | $ | (2.5 | ) | $ | 2.5 | ||||||||||
Net income (loss) | $ | 2.5 | $ | 2.9 | $ | 2.9 | $ | (3.3 | ) | $ | (2.5 | ) | $ | 2.5 | ||||||||||
Total other comprehensive income, net of tax | 1.1 | 1.1 | 1.1 | 1.1 | (3.3 | ) | 1.1 | |||||||||||||||||
Total comprehensive income (loss) | $ | 3.6 | $ | 4.0 | $ | 4.0 | $ | (2.2 | ) | $ | (5.8 | ) | $ | 3.6 | ||||||||||
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Three Months Ended March 31, 2016 | ||||||||||||||||||||||||
(in millions) | Parent Company | Subsidiary Issuer | Guarantor Subsidiaries | Non-Guarantor Subsidiaries | Eliminations | Consolidated | ||||||||||||||||||
Revenues: | ||||||||||||||||||||||||
Billboard | $ | — | $ | — | $ | 228.3 | $ | 22.1 | $ | — | $ | 250.4 | ||||||||||||
Transit and other | — | — | 94.6 | 3.4 | — | 98.0 | ||||||||||||||||||
Total revenues | — | — | 322.9 | 25.5 | — | 348.4 | ||||||||||||||||||
Expenses: | ||||||||||||||||||||||||
Operating | — | — | 180.1 | 19.7 | — | 199.8 | ||||||||||||||||||
Selling, general and administrative | 0.4 | 0.1 | 58.4 | 6.4 | — | 65.3 | ||||||||||||||||||
Restructuring charges | — | — | — | — | — | — | ||||||||||||||||||
Loss on real estate assets held for sale | — | — | — | 1.3 | — | 1.3 | ||||||||||||||||||
Net loss on dispositions | — | — | 0.4 | — | — | 0.4 | ||||||||||||||||||
Depreciation | — | — | 24.6 | 4.5 | — | 29.1 | ||||||||||||||||||
Amortization | — | — | 27.4 | 0.9 | — | 28.3 | ||||||||||||||||||
Total expenses | 0.4 | 0.1 | 290.9 | 32.8 | — | 324.2 | ||||||||||||||||||
Operating income (loss) | (0.4 | ) | (0.1 | ) | 32.0 | (7.3 | ) | — | 24.2 | |||||||||||||||
Interest income (expense), net | — | (28.5 | ) | (0.1 | ) | — | — | (28.6 | ) | |||||||||||||||
Other expense, net | — | — | — | (0.2 | ) | — | (0.2 | ) | ||||||||||||||||
Income (loss) before benefit for income taxes and equity in earnings of investee companies | (0.4 | ) | (28.6 | ) | 31.9 | (7.5 | ) | — | (4.6 | ) | ||||||||||||||
Benefit for income taxes | — | — | 1.3 | — | — | 1.3 | ||||||||||||||||||
Equity in earnings of investee companies, net of tax | (1.9 | ) | 26.7 | (35.1 | ) | 0.1 | 11.2 | 1.0 | ||||||||||||||||
Net loss | $ | (2.3 | ) | $ | (1.9 | ) | $ | (1.9 | ) | $ | (7.4 | ) | $ | 11.2 | $ | (2.3 | ) | |||||||
Net loss | $ | (2.3 | ) | $ | (1.9 | ) | $ | (1.9 | ) | $ | (7.4 | ) | $ | 11.2 | $ | (2.3 | ) | |||||||
Total other comprehensive loss, net of tax | 6.0 | 6.0 | 6.0 | 6.0 | (18.0 | ) | 6.0 | |||||||||||||||||
Total comprehensive income (loss) | $ | 3.7 | $ | 4.1 | $ | 4.1 | $ | (1.4 | ) | $ | (6.8 | ) | $ | 3.7 | ||||||||||
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Three Months Ended March 31, 2017 | ||||||||||||||||||||||||
(in millions) | Parent Company | Subsidiary Issuer | Guarantor Subsidiaries | Non-Guarantor Subsidiaries | Eliminations | Consolidated | ||||||||||||||||||
Net cash flow provided by (used for) operating activities | $ | (0.4 | ) | $ | (18.9 | ) | $ | 49.6 | $ | 1.9 | $ | — | $ | 32.2 | ||||||||||
Investing activities: | ||||||||||||||||||||||||
Capital expenditures | — | — | (15.8 | ) | (0.8 | ) | — | (16.6 | ) | |||||||||||||||
Acquisitions | — | — | (0.9 | ) | — | — | (0.9 | ) | ||||||||||||||||
Net proceeds from dispositions | — | — | 0.1 | — | — | 0.1 | ||||||||||||||||||
Net cash flow used for investing activities | — | — | (16.6 | ) | (0.8 | ) | — | (17.4 | ) | |||||||||||||||
Financing activities: | ||||||||||||||||||||||||
Proceeds from long-term borrowings - term loan | — | 8.3 | — | — | — | 8.3 | ||||||||||||||||||
Deferred financing costs | — | (7.0 | ) | — | — | — | (7.0 | ) | ||||||||||||||||
Proceeds from stock option exercises | 1.2 | — | — | — | — | 1.2 | ||||||||||||||||||
Taxes withheld for stock-based compensation | — | — | (6.0 | ) | — | — | (6.0 | ) | ||||||||||||||||
Dividends | (50.2 | ) | — | — | — | — | (50.2 | ) | ||||||||||||||||
Intercompany | 49.4 | 22.4 | (59.4 | ) | (12.4 | ) | — | — | ||||||||||||||||
Other | — | — | (0.2 | ) | — | — | (0.2 | ) | ||||||||||||||||
Net cash flow provided by (used for) financing activities | 0.4 | 23.7 | (65.6 | ) | (12.4 | ) | — | (53.9 | ) | |||||||||||||||
Effect of exchange rate changes on cash and cash equivalents | — | — | — | 0.2 | — | 0.2 | ||||||||||||||||||
Net increase (decrease) in cash and cash equivalents | — | 4.8 | (32.6 | ) | (11.1 | ) | — | (38.9 | ) | |||||||||||||||
Cash and cash equivalents at beginning of period | — | 11.4 | 35.8 | 18.0 | — | 65.2 | ||||||||||||||||||
Cash and cash equivalents at end of period | $ | — | $ | 16.2 | $ | 3.2 | $ | 6.9 | $ | — | $ | 26.3 | ||||||||||||
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Three Months Ended March 31, 2016 | ||||||||||||||||||||||||
(in millions) | Parent Company | Subsidiary Issuer | Guarantor Subsidiaries | Non-Guarantor Subsidiaries | Eliminations | Consolidated | ||||||||||||||||||
Net cash flow provided by (used for) operating activities | $ | (0.4 | ) | $ | (19.6 | ) | $ | 57.2 | $ | (3.4 | ) | $ | — | $ | 33.8 | |||||||||
Investing activities: | ||||||||||||||||||||||||
Capital expenditures | — | — | (13.5 | ) | (0.9 | ) | — | (14.4 | ) | |||||||||||||||
Acquisitions | — | — | (60.5 | ) | — | — | (60.5 | ) | ||||||||||||||||
Net proceeds from dispositions | — | — | 0.3 | — | — | 0.3 | ||||||||||||||||||
Net cash flow used for investing activities | — | — | (73.7 | ) | (0.9 | ) | — | (74.6 | ) | |||||||||||||||
Financing activities: | ||||||||||||||||||||||||
Proceeds from borrowings under revolving credit facility | — | 35.0 | — | — | — | 35.0 | ||||||||||||||||||
Deferred financing costs | — | (0.4 | ) | — | — | — | (0.4 | ) | ||||||||||||||||
Taxes withheld for stock-based compensation | — | — | (5.1 | ) | — | — | (5.1 | ) | ||||||||||||||||
Dividends | (47.1 | ) | — | — | — | — | (47.1 | ) | ||||||||||||||||
Intercompany | 47.5 | (86.8 | ) | 35.2 | 4.1 | — | — | |||||||||||||||||
Other | — | — | (0.2 | ) | — | — | (0.2 | ) | ||||||||||||||||
Net cash flow provided by (used for) financing activities | 0.4 | (52.2 | ) | 29.9 | 4.1 | — | (17.8 | ) | ||||||||||||||||
Effect of exchange rate changes on cash and cash equivalents | — | — | — | 0.2 | — | 0.2 | ||||||||||||||||||
Net increase (decrease) in cash and cash equivalents | — | (71.8 | ) | 13.4 | — | — | (58.4 | ) | ||||||||||||||||
Cash and cash equivalents at beginning of period | — | 81.6 | 8.5 | 11.5 | — | 101.6 | ||||||||||||||||||
Cash and cash equivalents at end of period | $ | — | $ | 9.8 | $ | 21.9 | $ | 11.5 | $ | — | $ | 43.2 | ||||||||||||
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Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations.
The following Management’s Discussion and Analysis of Financial Condition and Results of Operations (“MD&A”) should be read in conjunction with our historical consolidated financial statements and the notes thereto appearing in our Annual Report on Form 10-K for the year ended December 31, 2016, filed with the Securities and Exchange Commission (the “SEC”) on February 23, 2017, and the unaudited consolidated financial statements and the notes thereto included in this Quarterly Report on Form 10-Q. This MD&A contains forward-looking statements that involve numerous risks and uncertainties. The forward-looking statements are subject to a number of important factors, including, but not limited to, those factors discussed in the sections entitled “Risk Factors” in this Quarterly Report on Form 10-Q and in our Annual Report on Form 10-K for the year ended December 31, 2016, filed with the SEC on February 23, 2017, and the section entitled “Cautionary Statement Regarding Forward-Looking Statements” in this Quarterly Report on Form 10-Q, that could cause our actual results to differ materially from the results described herein or implied by such forward-looking statements. Except as otherwise indicated or unless the context otherwise requires, all references in this Quarterly Report on Form 10-Q to (i) “OUTFRONT Media,” “the Company,” “we,” “our,” “us” and “our company” mean OUTFRONT Media Inc., a Maryland corporation, and unless the context requires otherwise, its consolidated subsidiaries, and (ii) the “25 largest markets in the U.S.,” “over 150 markets in the U.S. and Canada” and “Nielsen Designated Market Areas” are based, in whole or in part, on Nielsen Media Research’s Designated Market Area rankings as of January 1, 2017.
Overview
OUTFRONT Media is a real estate investment trust (“REIT”), which provides advertising space (“displays”) on out-of-home advertising structures and sites in the United States (the “U.S.”) and Canada. We currently manage our operations through three operating segments—(1) U.S. Billboard and Transit, which is included in our U.S. Media reportable segment, (2) International and (3) Sports Marketing. International and Sports Marketing do not meet the criteria to be a reportable segment and accordingly, are both included in Other (see Note 15. Segment Information to the Consolidated Financial Statements). Prior to April 1, 2016, our International segment included our advertising businesses in Canada and Latin America.
On April 1, 2016, we sold all of our equity interests in certain of our subsidiaries (the “Disposition”), which held all of the assets of our outdoor advertising business in Latin America. (See Note 9. Acquisitions and Dispositions: Dispositions to the Consolidated Financial Statements.) The operating results of our outdoor advertising business in Latin America through April 1, 2016, are included in our Consolidated Financial Statements for the three months ended March 31, 2016, and are included in Other in our segment reporting.
Business
We are one of the largest providers of advertising space on out-of-home advertising structures and sites across the U.S. and Canada. Our inventory consists of billboard displays, which are primarily located on the most heavily traveled highways and roadways in top Nielsen Designated Market Areas (“DMAs”), and transit advertising displays operated under exclusive multi-year contracts with municipalities in large cities across the U.S. and Canada. We also have marketing and multimedia rights agreements with colleges, universities and other educational institutions, which entitle us to operate on-campus advertising displays, as well as manage marketing opportunities, media rights and experiential entertainment at sports events. In total, we have displays in all of the 25 largest markets in the U.S. and over 150 markets in the U.S. and Canada. Our top market, high profile location focused portfolio includes sites such as the Bay Bridge in San Francisco, various locations along Sunset Boulevard in Los Angeles, and sites in and around both Grand Central Station and Times Square in New York. The breadth and depth of our portfolio provides our customers with a range of options to address their marketing objectives, from national, brand-building campaigns to hyper-local campaigns that drive customers to the advertiser’s website or retail location “one mile down the road.”
Using Geopath Out of Home Ratings, the out-of-home advertising industry’s audience measurement system, we provide advertisers with the size and demographic composition of the audience that is exposed to individual displays or a complete campaign. As part of our ON Smart Media technology development initiative, we are developing hardware and software solutions for enhanced demographic and location targeting, and engaging ways to connect with consumers on-the-go. Additionally, our OUTFRONT Mobile Network allows our customers to further leverage location targeting with interactive mobile advertising that uses geofence technology to push mobile ads to consumers within a pre-defined radius around a corresponding billboard display or other designated advertising location.
We believe out-of-home advertising continues to be an attractive form of advertising, as our displays are ALWAYS ON™, are always viewable and cannot be turned off, skipped, blocked or fast-forwarded. Further, out-of-home advertising can be an
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effective “stand-alone” medium, as well as an integral part of a campaign to reach audiences using multiple forms of media, including television, radio, print, online, mobile and social media advertising platforms. We provide our customers with a differentiated advertising solution at an attractive price point relative to other forms of advertising. In addition to leasing displays, we provide other value-added services to our customers, such as pre-campaign category research, consumer insights, creative design support, print production and post-campaign tracking and analytics, as well as use of a real-time mobile operations reporting system that facilitates proof of performance to customers for substantially all of our business.
U.S. Media. Our U.S. Media segment generated 22% of its revenues in the New York City metropolitan area in the three months ended March 31, 2017, and 26% in the three months ended March 31, 2016, and generated 17% in the Los Angeles metropolitan area in the three months ended March 31, 2017, and 16% in the three months ended March 31, 2016. In the three months ended March 31, 2017, our U.S. Media segment generated $307.1 million of Revenues and $92.4 million of Operating income before Depreciation, Amortization, Net loss on dispositions, Stock-based compensation, Restructuring charges and Loss on real estate assets held for sale (“Adjusted OIBDA”). In the three months ended March 31, 2016, our U.S. Media segment generated $312.6 million of Revenues and $94.9 million of Adjusted OIBDA. (See the “Segment Results of Operations” section of this MD&A.)
Other (includes International and Sports Marketing). In the three months ended March 31, 2017, Other generated $23.5 million of Revenues and a $1.1 million loss for Adjusted OIBDA. In the three months ended March 31, 2016, Other generated $35.8 million of Revenues and $2.2 million of Adjusted OIBDA.
Economic Environment
Our revenues and operating results are sensitive to fluctuations in advertising expenditures, general economic conditions and other external events beyond our control.
Business Environment
The outdoor advertising industry is fragmented, consisting of several companies operating on a national basis, as well as hundreds of smaller regional and local companies operating a limited number of displays in a single or a few local geographic markets. We compete with these companies for customers, structures and display locations. We also compete with other media, including online, mobile and social media advertising platforms and traditional platforms such as, broadcast and cable television, radio, print media and direct mail marketers. Increasing the number of digital billboard displays in our most heavily trafficked locations is an important element of our organic growth strategy, as digital billboard displays have the potential to attract additional business from both new and existing customers. We believe digital billboard displays are attractive to our customers because they allow for the development of richer and more visually engaging messages, provide our customers with the flexibility both to target audiences by time of day and to quickly launch new advertising campaigns, and eliminate or greatly reduce production costs. In addition, digital billboard displays enable us to run multiple advertisements on each display (up to eight per minute). As a result, digital billboard displays generate approximately four times more revenue per display on average than traditional static billboard displays, and digital billboard displays generate higher profits and cash flows than traditional static billboard displays.
Our revenues and profits may fluctuate due to seasonal advertising patterns and influences on advertising markets. Typically, our revenues and profits are highest in the fourth quarter, during the holiday shopping season, and lowest in the first quarter, as advertisers cut back on spending following the holiday shopping season.
We have a diversified base of customers across various industries. During the three months ended March 31, 2017, our largest categories of advertisers were healthcare/pharmaceuticals, retail and television, each of which represented approximately 8% of our total U.S. Media segment revenues. During the three months ended March 31, 2016, our largest categories of advertisers were healthcare/pharmaceuticals, retail and television, which represented 7%, 8% and 8% of our total U.S. Media segment revenues, respectively.
Our large-scale portfolio allows our customers to reach a national audience and also provides the flexibility to tailor campaigns to specific regions or markets. In the three months ended March 31, 2017, we generated approximately 41% of our U.S. Media segment revenues from national advertising campaigns compared to approximately 44% in the three months ended March 31, 2016.
Our transit businesses require us to obtain and renew contracts with municipalities and other governmental entities. When these contracts expire, we generally must participate in highly competitive bidding processes in order to obtain or renew contracts.
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Our transit contract with the New York Metropolitan Transportation Authority (the “MTA”) represents 54% of our U.S. Media segment transit and other revenues, or 16% of our total U.S. Media segment revenues, in the three months ended March 31, 2017. The MTA has issued a “Request for Proposals” to prospective operators for the subway, bus and commuter rail (Metro-North and Long Island Railroad) concessions, in any combination, each for a ten-year contract, with an additional potential five-year renewal period. On May 18, 2016, we submitted a response to the MTA. In mid-October, the MTA issued a follow-up request that refined its timeline and bid requirements, particularly relating to digital deployment and the communications platform and we submitted our response on December 12, 2016. On November 7, 2016, we entered into an agreement with the MTA to extend the expiration of our existing contracts for transit advertising services from December 31, 2016, to June 30, 2017.
Key Performance Indicators
Our management reviews our performance by focusing on the indicators described below.
Several of our key performance indicators are not prepared in conformity with Generally Accepted Accounting Principles in the United States of America (“GAAP”). We believe these non-GAAP performance indicators are meaningful supplemental measures of our operating performance and should not be considered in isolation of, or as a substitute for, their most directly comparable GAAP financial measures.
Three Months Ended March 31, | |||||||||||
(in millions, except percentages) | 2017 | 2016 | % Change | ||||||||
Revenues | $ | 330.6 | $ | 348.4 | (5 | )% | |||||
Organic revenues(a)(b) | 328.5 | 335.8 | (2 | ) | |||||||
Operating income | 26.0 | 24.2 | 7 | ||||||||
Adjusted OIBDA(b) | 80.2 | 88.1 | (9 | ) | |||||||
Funds from operations (“FFO”)(b) | 43.9 | 48.5 | (9 | ) | |||||||
Adjusted FFO (“AFFO”)(b) | 38.5 | 46.2 | (17 | ) | |||||||
Net income (loss) | 2.5 | (2.3 | ) | * | |||||||
(a) | Organic revenues exclude revenues associated with significant acquisitions and divestitures, and the impact of foreign currency exchange rates (“non-organic revenues”). We provide organic revenues to understand the underlying growth rate of revenue excluding the impact of non-organic revenue items. Our management believes organic revenues are useful to users of our financial data because it enables them to better understand the level of growth of our business period to period. Since organic revenues are not calculated in accordance with GAAP, it should not be considered in isolation of, or as a substitute for, revenues as an indicator of operating performance. Organic revenues, as we calculate it, may not be comparable to similarly titled measures employed by other companies. |
(b) | See the “Reconciliation of Non-GAAP Financial Measures” and “Revenues” sections of this MD&A for reconciliations of Operating income to Adjusted OIBDA, Net income (loss) to FFO and AFFO, and Revenues to organic revenues. |
Adjusted OIBDA
We calculate Adjusted OIBDA as operating income (loss) before depreciation, amortization, net (gain) loss on dispositions, stock-based compensation, restructuring charges and loss on real estate assets held for sale. We calculate Adjusted OIBDA margin by dividing Adjusted OIBDA by total revenues. Adjusted OIBDA and Adjusted OIBDA margin are among the primary measures we use for managing our business, evaluating our operating performance and planning and forecasting future periods, as each is an important indicator of our operational strength and business performance. Our management believes users of our financial data are best served if the information that is made available to them allows them to align their analysis and evaluation of our operating results along the same lines that our management uses in managing, planning and executing our business strategy. Our management also believes that the presentations of Adjusted OIBDA and Adjusted OIBDA margin, as supplemental measures, are useful in evaluating our business because eliminating certain non-comparable items highlight operational trends in our business that may not otherwise be apparent when relying solely on GAAP financial measures. It is management’s opinion that these supplemental measures provide users of our financial data with an important perspective on our operating performance and also make it easier for users of our financial data to compare our results with other companies that have different financing and capital structures or tax rates.
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FFO and AFFO
We calculate FFO in accordance with the definition established by the National Association of Real Estate Investment Trusts (“NAREIT”). FFO reflects net income (loss) adjusted to exclude gains and losses from the sale of real estate assets, depreciation and amortization of real estate assets, amortization of direct lease acquisition costs, the non-cash effect of loss on real estate assets held for sale and the same adjustments for our equity-based investments, as well as the related income tax effect of adjustments, as applicable. We calculate AFFO as FFO adjusted to include cash paid for direct lease acquisition costs as such costs are generally amortized over a period ranging from four weeks to one year and therefore are incurred on a regular basis. AFFO also includes cash paid for maintenance capital expenditures since these are routine uses of cash that are necessary for our operations. In addition, AFFO excludes costs related to restructuring charges, as well as certain non-cash items, including non-real estate depreciation and amortization, stock-based compensation expense, accretion expense, the non-cash effect of straight-line rent and amortization of deferred financing costs, and the non-cash portion of income taxes, as well as the related income tax effect of adjustments, as applicable. Our calculation of AFFO was revised to adjust for the non-cash portion of income taxes instead of adjusting for current or deferred income taxes, as management believes that this calculation of AFFO is more consistent with AFFO presented by other REITs and analyzed by users of our financial data. This change is reflected in the calculation of AFFO for 2016. We use FFO and AFFO measures for managing our business and for planning and forecasting future periods, and each is an important indicator of our operational strength and business performance, especially compared to other REITs. Our management believes users of our financial data are best served if the information that is made available to them allows them to align their analysis and evaluation of our operating results along the same lines that our management uses in managing, planning and executing our business strategy. Our management also believes that the presentations of FFO, AFFO, and related per weighted average share amounts, as supplemental measures, are useful in evaluating our business because adjusting results to reflect items that have more bearing on the operating performance of REITs highlight trends in our business that may not otherwise be apparent when relying solely on GAAP financial measures. It is management’s opinion that these supplemental measures provide users of our financial data with an important perspective on our operating performance and also make it easier to compare our results to other companies in our industry, as well as to REITs.
Since Adjusted OIBDA, Adjusted OIBDA margin, FFO and AFFO and, as applicable, related per weighted average share amounts, are not measures calculated in accordance with GAAP, they should not be considered in isolation of, or as a substitute for, operating income (loss), net income (loss), revenues and net income (loss) per common share for basic and diluted earnings per share, the most directly comparable GAAP financial measures, as indicators of operating performance. These measures, as we calculate them, may not be comparable to similarly titled measures employed by other companies. In addition, these measures do not necessarily represent funds available for discretionary use and are not necessarily a measure of our ability to fund our cash needs.
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Reconciliation of Non-GAAP Financial Measures
The following table reconciles Operating income to Adjusted OIBDA, and Net income (loss) to FFO and AFFO.
Three Months Ended | ||||||||
March 31, | ||||||||
(in millions, except per share amounts) | 2017 | 2016 | ||||||
Operating income | $ | 26.0 | $ | 24.2 | ||||
Restructuring charges | 1.8 | — | ||||||
Loss on real estate assets held for sale | — | 1.3 | ||||||
Net loss on dispositions | 0.4 | 0.4 | ||||||
Depreciation | 22.9 | 29.1 | ||||||
Amortization | 23.7 | 28.3 | ||||||
Stock-based compensation | 5.4 | 4.8 | ||||||
Adjusted OIBDA | $ | 80.2 | $ | 88.1 | ||||
Net income (loss) | $ | 2.5 | $ | (2.3 | ) | |||
Depreciation of billboard advertising structures | 20.0 | 26.6 | ||||||
Amortization of real estate-related intangible assets | 12.2 | 13.4 | ||||||
Amortization of direct lease acquisition costs | 8.7 | 8.9 | ||||||
Loss on real estate assets held for sale | — | 1.3 | ||||||
Net loss on disposition of billboard advertising structures | 0.4 | 0.4 | ||||||
Adjustment related to equity-based investments | 0.1 | 0.2 | ||||||
FFO | $ | 43.9 | $ | 48.5 | ||||
FFO per weighted average shares outstanding: | ||||||||
Basic | $ | 0.32 | $ | 0.35 | ||||
Diluted | $ | 0.32 | $ | 0.35 | ||||
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Three Months Ended | ||||||||
March 31, | ||||||||
(in millions, except per share amounts) | 2017 | 2016 | ||||||
FFO | $ | 43.9 | $ | 48.5 | ||||
Non-cash portion of income taxes | (4.3 | ) | (3.3 | ) | ||||
Cash paid for direct lease acquisition costs | (11.7 | ) | (10.6 | ) | ||||
Maintenance capital expenditures | (5.1 | ) | (4.0 | ) | ||||
Restructuring charges | 1.8 | — | ||||||
Other depreciation | 2.9 | 2.5 | ||||||
Other amortization | 2.8 | 6.0 | ||||||
Stock-based compensation | 5.4 | 4.8 | ||||||
Non-cash effect of straight-line rent | 0.3 | 0.3 | ||||||
Accretion expense | 0.6 | 0.6 | ||||||
Amortization of deferred financing costs | 1.9 | 1.4 | ||||||
AFFO | $ | 38.5 | $ | 46.2 | ||||
AFFO per weighted average shares outstanding: | ||||||||
Basic | $ | 0.28 | $ | 0.34 | ||||
Diluted | $ | 0.28 | $ | 0.34 | ||||
Net income (loss) per common share: | ||||||||
Basic | $ | 0.02 | $ | (0.02 | ) | |||
Diluted | $ | 0.02 | $ | (0.02 | ) | |||
Weighted average shares outstanding: | ||||||||
Basic | 138.3 | 137.6 | ||||||
Diluted | 138.9 | 137.6 | ||||||
FFO in the three months ended March 31, 2017, of $43.9 million decreased 9% compared to the same prior-year period, primarily due to lower depreciation of billboard advertising structures and lower amortization of real estate-related intangible assets, partially offset by the impact of the Disposition. AFFO in the three months ended March 31, 2017, was $38.5 million, a decrease of 17% compared to the same prior-year period, primarily due to lower depreciation and amortization, higher maintenance capital expenditures, partially offset by restructuring charges in 2017 and higher stock-based compensation.
Analysis of Results of Operations
Revenues
We derive Revenues primarily from providing advertising space to customers on our advertising structures and sites. Our contracts with customers generally cover periods ranging from four weeks to one year. Revenues from billboard displays are recognized as rental income on a straight-line basis over the contract term. Transit and other revenues are recognized as earned over the contract period. For space provided to advertisers through the use of an advertising agency whose commission is calculated based on a stated percentage of gross advertising spending, our Revenues are reported net of agency commissions.
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(in constant dollars)(b) | ||||||||||||||||||
Three Months Ended March 31, | % | Three Months Ended March 31, | % | |||||||||||||||
(in millions, except percentages) | 2017 | 2016 | Change | 2016 | Change | |||||||||||||
Revenues: | ||||||||||||||||||
Billboard | $ | 236.0 | $ | 250.4 | (6 | )% | $ | 250.8 | (6 | )% | ||||||||
Transit and other | 94.6 | 98.0 | (3 | ) | 98.0 | (3 | ) | |||||||||||
Total revenues | 330.6 | 348.4 | (5 | ) | $ | 348.8 | (5 | ) | ||||||||||
Foreign currency exchange impact | — | 0.4 | ||||||||||||||||
Constant dollar revenues(b) | $ | 330.6 | $ | 348.8 | ||||||||||||||
Organic revenues(a): | ||||||||||||||||||
Billboard | $ | 235.3 | $ | 240.0 | (2 | ) | $ | 240.0 | (2 | ) | ||||||||
Transit and other | 93.2 | 95.8 | (3 | ) | 95.8 | (3 | ) | |||||||||||
Total organic revenues(a) | 328.5 | 335.8 | (2 | ) | 335.8 | (2 | ) | |||||||||||
Non-organic revenues: | ||||||||||||||||||
Billboard | 0.7 | 10.4 | (93 | ) | 10.8 | (94 | ) | |||||||||||
Transit and other | 1.4 | 2.2 | (36 | ) | 2.2 | (36 | ) | |||||||||||
Total non-organic revenues | 2.1 | 12.6 | (83 | ) | 13.0 | (84 | ) | |||||||||||
Total revenues | $ | 330.6 | $ | 348.4 | (5 | ) | $ | 348.8 | (5 | ) | ||||||||
(a) | Organic revenues exclude revenues associated with significant acquisitions and divestitures, and the impact of foreign currency exchange rates (“non-organic revenues”). |
(b) | Revenues on a constant dollar basis are calculated as reported revenues excluding the impact of foreign currency exchange rates between periods. We provide constant dollar revenues to understand the underlying growth rate of revenue excluding the impact of changes in foreign currency exchange rates between periods, which are not under management’s direct control. Our management believes constant dollar revenues are useful to users of our financial data because it enables them to better understand the level of growth of our business period to period. Since constant dollar revenues are not calculated in accordance with GAAP, they should not be considered in isolation of, or as a substitute for, revenues as an indicator of operating performance. Constant dollar revenues, as we calculate them, may not be comparable to similarly titled measures employed by other companies. |
Total revenues decreased $17.8 million, or 5%, and organic revenues decreased $7.3 million, or 2%, in the three months ended March 31, 2017, compared to the same prior-year period. In constant dollars, revenues decreased $18.2 million, or 5%, and organic revenues decreased $7.3 million, or 2%, for the three months ended March 31, 2017, compared to the same prior-year period.
Non-organic revenues primarily reflects acquisitions and dispositions.
Total billboard revenues decreased $14.4 million, or 6%, in the three months ended March 31, 2017, compared to the same prior-year period, principally driven by the impact of the Disposition, a decrease in average revenue per display (yield), the net effect of new and lost billboards in the period and lower performance in Canada, partially offset by higher proceeds from condemnations and the conversion of traditional static billboard displays to digital billboard displays. The decrease in average revenue per display (yield) is primarily due to a reduction in national advertising revenues. In constant dollars, billboard revenues decreased $14.8 million in the three months ended March 31, 2017, compared to the same prior-year period.
The decrease in organic billboard revenues in the three months ended March 31, 2017, compared to the same prior-year period, is due to a decrease in average revenue per display (yield), as discussed above, the net effect of new and lost billboards in the period and lower performance in Canada, partially offset by higher proceeds from condemnations and the conversion of traditional static billboard displays to digital billboard displays.
Total transit and other revenues decreased $3.4 million, or 3%, in the three months ended March 31, 2017, compared to the same prior-year period, driven by a decrease in average revenue per display (yield) and the impact of the Disposition, partially offset by the net effect of won and lost franchises in the period. The decrease in average revenue per display (yield) is primarily due to a reduction in national advertising revenues, partially offset by an increase in local advertising revenues.
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The decrease in organic transit and other revenues in the three months ended March 31, 2017, compared to the same prior-year period, is due to a decrease in average revenue per display (yield), as discussed above, partially offset by the net effect of won and lost franchises in the period.
Expenses
Three Months Ended | |||||||||||
March 31, | % | ||||||||||
(in millions, except percentages) | 2017 | 2016 | Change | ||||||||
Expenses: | |||||||||||
Operating | $ | 191.9 | $ | 199.8 | (4 | )% | |||||
Selling, general and administrative | 63.9 | 65.3 | (2 | ) | |||||||
Restructuring charges | 1.8 | — | * | ||||||||
Loss on real estate assets held for sale | — | 1.3 | * | ||||||||
Net loss on dispositions | 0.4 | 0.4 | — | ||||||||
Depreciation | 22.9 | 29.1 | (21 | ) | |||||||
Amortization | 23.7 | 28.3 | (16 | ) | |||||||
Total expenses | $ | 304.6 | $ | 324.2 | (6 | ) | |||||
* | Calculation is not meaningful. |
Operating Expenses
Three Months Ended | |||||||||||
March 31, | % | ||||||||||
(in millions, except percentages) | 2017 | 2016 | Change | ||||||||
Operating expenses: | |||||||||||
Billboard property lease | $ | 87.5 | $ | 90.4 | (3 | )% | |||||
Transit franchise | 49.8 | 52.1 | (4 | ) | |||||||
Posting, maintenance and other | 54.6 | 57.3 | (5 | ) | |||||||
Total operating expenses | $ | 191.9 | $ | 199.8 | (4 | ) | |||||
Billboard property lease expenses represented 37% of billboard revenues in the three months ended March 31, 2017 and 36% in the three months ended March 31, 2016. Transit franchise expenses represented 65% of transit revenues in each of the three months ended March 31, 2017 and 2016. Billboard property lease and transit franchise expenses decreased by $5.2 million in the three months ended March 31, 2017, compared to the same prior-year period. The decrease in billboard property lease costs in the three months ended March 31, 2017, was primarily due to the impact of the Disposition (a decrease of $3.0 million). The decrease in transit franchise expenses in the three months ended March 31, 2017, compared to the same prior-year period, was primarily due to the decrease in transit revenues and the impact of the Disposition (a decrease $0.8 million).
Posting, maintenance and other expenses decreased $2.7 million, or 5%, in the three months ended March 31, 2017, compared to the same prior-year period. The decrease in posting, maintenance and other expenses in the three months ended March 31, 2017, compared to the same prior year period, was primarily due to the impact of the Disposition (a decrease of $5.0 million), partially offset by higher expenses related to our sports marketing operating segment.
Selling, General and Administrative Expenses (“SG&A”)
SG&A expenses represented 19% of Revenues in each of the three months ended March 31, 2017 and 2016. SG&A expenses decreased $1.4 million, or 2%, in the three months ended March 31, 2017, compared to the same prior-year period, primarily due to the impact of the Disposition (a decrease of $3.1 million) partially offset by higher compensation-related costs.
Net Loss on Dispositions
Net loss on dispositions was $0.4 million for the each of the three months ended March 31, 2017 and 2016.
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Depreciation
Depreciation decreased $6.2 million, or 21%, in the three months ended March 31, 2017, compared to the same prior-year period, due primarily to the increase in fully-depreciated advertising billboards and the impact of the Disposition, partially offset by higher depreciation associated with the increased number of digital billboards.
Amortization
Amortization decreased $4.6 million, or 16% in the three months ended March 31, 2017, compared to the same prior-year period, principally driven by lower amortization of intangible assets. Direct lease acquisition costs were $8.7 million in the three months ended March 31, 2017, compared to $8.9 million in the same prior-year period. Capitalized direct lease acquisition costs were $8.7 million in the three months ended March 31, 2017, and $9.1 million in the same prior-year period.
Interest Expense, Net
Interest expense, net, was $28.1 million (including $1.9 million of deferred financing costs) in the three months ended March 31, 2017, and $28.6 million (including $1.4 million of deferred financing costs) in the same prior-year period. (See the “Liquidity and Capital Resources” section of this MD&A.)
Benefit for Income Taxes
The benefit for income taxes was $3.7 million in the three months ended March 31, 2017, compared to $1.3 million in the same prior-year period. The increase in benefit for income taxes relates primarily to an increase in our estimated annual effective tax rate, based on our estimated 2017 taxable REIT subsidiaries’ taxable income.
Net Income (Loss)
Net income was $2.5 million in the three months ended March 31, 2017, compared to a Net loss of $2.3 million in the same prior-year period.
Segment Results of Operations
We present Adjusted OIBDA as the primary measure of profit and loss for our reportable segments in accordance with Financial Accounting Standards Board guidance for segment reporting. (See the “Key Performance Indicators” section of this MD&A and Note 16. Segment Information to the Consolidated Financial Statements.)
As of April 1, 2016, we manage our operations through three operating segments—(1) U.S. Billboard and Transit, which is included in our U.S. Media reportable segment, (2) International and (3) Sports Marketing. International and Sports Marketing do not meet the criteria to be a reportable segment and accordingly, are both included in Other. Our segment reporting therefore includes U.S. Media and Other.
The following table presents our Revenues, Adjusted OIBDA, Operating income (loss) and Depreciation and Amortization by segment in the three months ended March 31, 2017 and 2016. Historical financial information by reportable segment has been recast to reflect the current period’s presentation. On April 1, 2016, we completed the Disposition. Historical operating results for our advertising business in Latin America are included in Other.
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Three Months Ended | ||||||||
March 31, | ||||||||
(in millions) | 2017 | 2016 | ||||||
Revenues: | ||||||||
U.S. Media | $ | 307.1 | $ | 312.6 | ||||
Other | 23.5 | 35.8 | ||||||
Total revenues | 330.6 | 348.4 | ||||||
Foreign currency exchange impact | — | 0.4 | ||||||
Constant dollar revenues(a) | $ | 330.6 | $ | 348.8 | ||||
(a) | Revenues on a constant dollar basis are calculated as reported revenues excluding the impact of foreign currency exchange rates between periods. |
Three Months Ended | ||||||||
March 31, | ||||||||
(in millions) | 2017 | 2016 | ||||||
Operating income | $ | 26.0 | $ | 24.2 | ||||
Restructuring charges | 1.8 | — | ||||||
Loss on real estate assets held for sale | — | 1.3 | ||||||
Net loss on dispositions | 0.4 | 0.4 | ||||||
Depreciation | 22.9 | 29.1 | ||||||
Amortization | 23.7 | 28.3 | ||||||
Stock-based compensation | 5.4 | 4.8 | ||||||
Total Adjusted OIBDA | $ | 80.2 | $ | 88.1 | ||||
Adjusted OIBDA: | ||||||||
U.S. Media | $ | 92.4 | $ | 94.9 | ||||
Other | (1.1 | ) | 2.2 | |||||
Corporate | (11.1 | ) | (9.0 | ) | ||||
Total Adjusted OIBDA | $ | 80.2 | $ | 88.1 | ||||
Operating income (loss): | ||||||||
U.S. Media | $ | 47.5 | $ | 43.1 | ||||
Other | (5.0 | ) | (5.1 | ) | ||||
Corporate | (16.5 | ) | (13.8 | ) | ||||
Total operating income | $ | 26.0 | $ | 24.2 | ||||
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U.S. Media
Three Months Ended | |||||||||||
March 31, | % | ||||||||||
(in millions, except percentages) | 2017 | 2016 | Change | ||||||||
Revenues: | |||||||||||
Billboard | $ | 225.1 | $ | 228.3 | (1 | )% | |||||
Transit and other | 82.0 | 84.3 | (3 | ) | |||||||
Total revenues | $ | 307.1 | $ | 312.6 | (2 | ) | |||||
Organic revenues(a): | |||||||||||
Billboard | $ | 224.4 | $ | 227.7 | (1 | ) | |||||
Transit and other | 80.6 | 83.3 | (3 | ) | |||||||
Total organic revenues | 305.0 | 311.0 | (2 | ) | |||||||
Non-organic revenues: | |||||||||||
Billboard | 0.7 | 0.6 | 17 | ||||||||
Transit and other | 1.4 | 1.0 | 40 | ||||||||
Total non-organic revenues | 2.1 | 1.6 | 31 | ||||||||
Total revenues | 307.1 | 312.6 | (2 | ) | |||||||
Operating expenses | (173.1 | ) | (174.4 | ) | (1 | ) | |||||
SG&A expenses | (41.6 | ) | (43.3 | ) | (4 | ) | |||||
Adjusted OIBDA | $ | 92.4 | $ | 94.9 | (3 | ) | |||||
Operating income | $ | 47.5 | $ | 43.1 | 10 | ||||||
Restructuring charges | 1.8 | — | * | ||||||||
Net loss on dispositions | 0.4 | 0.4 | — | ||||||||
Depreciation and amortization | 42.7 | 51.4 | (17 | ) | |||||||
Adjusted OIBDA | $ | 92.4 | $ | 94.9 | (3 | ) | |||||
* | Calculation is not meaningful. |
(a) | Organic revenues exclude revenues associated with significant acquisitions and divestitures (“non-organic revenues”). |
Total U.S. Media segment revenues decreased $5.5 million, or 2%, and U.S. Media segment organic revenues decreased $6.0 million, or 2%, in the three months ended March 31, 2017, compared to the same prior-year period. Non-organic revenues primarily reflect acquisitions and dispositions.
The total U.S. Media segment revenue decline in the three months ended March 31, 2017, reflects a decrease in average revenue per display (yield) in billboards and transit and the net effect of new and lost billboards in the period, partially offset by higher proceeds from condemnations, the net effect of won and lost franchises in the period and the conversion of traditional static billboard displays to digital billboard displays. In the three months ended March 31, 2017, we generated approximately 41% of our U.S. Media segment revenues from national advertising campaigns compared to approximately 44% in the three months ended March 31, 2016. We have seen a softening of advertising revenues from national accounts across a variety of industry categories, primarily automotive and financial services.
Revenues from U.S. Media segment billboards decreased $3.2 million, or 1%, in the three months ended March 31, 2017, compared to the same prior-year period, reflecting a decrease in average revenue per display (yield) and the net effect of new and lost billboards in the period, partially offset by higher proceeds from condemnations and the conversion of traditional static billboard displays to digital billboard displays. The decrease in average revenue per display (yield) is primarily due to a reduction in national advertising revenues.
Organic revenues from U.S. Media segment billboards decreased $3.3 million, or 1%, in the three months ended March 31, 2017, compared to the same prior-year period, primarily due to a decrease in average revenue per display (yield), as discussed above, and the net effect of new and lost billboards in the period, partially offset by higher proceeds from condemnations and the conversion of traditional static billboard displays to digital billboard displays.
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Transit and other revenues in the U.S. Media segment decreased $2.3 million, or 3%, in the three months ended March 31, 2017, compared to the same prior-year period, reflecting a decrease in average revenue per display (yield), partially offset by the net effect of won and lost franchises in the period. The decrease in average revenue per display (yield) is primarily due to a reduction in national advertising revenues, partially offset by an increase in local advertising revenues.
Organic transit and other revenues in the U.S. Media segment decreased $2.7 million, or 3%, in the three months ended March 31, 2017, compared to the same prior-year period, reflecting a decrease in average revenue per display (yield), as discussed above, partially offset by the net effect of won and lost franchises in the period.
U.S. Media segment operating and SG&A expenses decreased $1.3 million and $1.7 million, or 1% and 4%, respectively, in the three months ended March 31, 2017, compared to the same prior-year period, primarily due to decreased transit franchise expenses resulting from a decrease in transit revenues and decreased sales and other compensation-related expenses.
U.S. Media segment Adjusted OIBDA decreased $2.5 million, or 3%, in the three months ended March 31, 2017, compared to the same prior-year period. Adjusted OIBDA margin was 30% in each of the three months ended March 31, 2017 and 2016.
Other
(in constant dollars)(a) | ||||||||||||||||||
Three Months Ended March 31, | % | Three Months Ended March 31, | % | |||||||||||||||
(in millions, except percentages) | 2017 | 2016 | Change | 2016 | Change | |||||||||||||
Total revenues | $ | 23.5 | $ | 35.8 | (34 | )% | $ | 36.2 | (35 | )% | ||||||||
Operating expenses | (18.8 | ) | (25.4 | ) | (26 | ) | (25.7 | ) | (27 | ) | ||||||||
SG&A expenses | (5.8 | ) | (8.2 | ) | (29 | ) | (8.4 | ) | (31 | ) | ||||||||
Adjusted OIBDA | $ | (1.1 | ) | $ | 2.2 | (150 | ) | $ | 2.1 | (152 | ) | |||||||
Operating loss | $ | (5.0 | ) | $ | (5.1 | ) | (2 | ) | ||||||||||
Loss on real estate assets held for sale | — | 1.3 | * | |||||||||||||||
Depreciation and amortization | 3.9 | 6.0 | (35 | ) | ||||||||||||||
Adjusted OIBDA | $ | (1.1 | ) | $ | 2.2 | (150 | ) | |||||||||||
* | Calculation is not meaningful. |
(a) | Revenues on a constant dollar basis are calculated as reported revenues excluding the impact of foreign currency exchange rates between periods. |
Total Other revenues decreased $12.3 million, or 34%, in the three months ended March 31, 2017, compared to the same prior-year period, reflecting the impact of the Disposition (a decrease of $11.4 million) and lower performance in Canada, partially offset by the impact of foreign currency exchange rates and a slight increase in our Sports Marketing operating segment. In constant dollars, total Other revenues decreased 35% in the three months ended March 31, 2017, compared to the same prior-year period, driven by the impact of the Disposition (a decrease of $11.4 million) and lower performance in Canada of 10%, partially offset by a slight increase in our Sports Marketing operating segment.
Other operating expenses decreased $6.6 million, or 26%, in the three months ended March 31, 2017, compared to the same prior-year period, driven by the impact of the Disposition (a decrease of $8.8 million) and foreign currency exchange rates, partially offset by higher expenses related to our Sports Marketing operating segment. Other SG&A expenses decreased $2.4 million, or 29%, in the three months ended March 31, 2017, compared to the prior-year period, primarily driven by the impact of the Disposition (a decrease of $3.1 million) and foreign currency exchange rates, partially offset by higher expenses related to our Sports Marketing operating segment.
Other Adjusted OIBDA was a loss of $1.1 million in the three months ended March 31, 2017, compared to Adjusted OIBDA of $2.2 million in the same prior-year period, primarily driven by lower performance in both our Sports Marketing operating segment and in Canada, partially offset by the impact of the Disposition.
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Corporate
Corporate expenses primarily include expenses associated with employees who provide centralized services. Corporate expenses, excluding stock-based compensation, were $11.1 million in the three months ended March 31, 2017 and $9.0 million in the same prior-year period. The increase was driven by increased compensation-related expenses and costs incurred in connection with the Amendment (as defined in the “Liquidity and Capital Resources” section of this MD&A).
Liquidity and Capital Resources
As of | |||||||||||
(in millions, except percentages) | March 31, 2017 | December 31, 2016 | % Change | ||||||||
Assets: | |||||||||||
Cash and cash equivalents | $ | 26.3 | $ | 65.2 | (60 | )% | |||||
Receivables, less allowance ($9.2 in 2017 and $9.2 in 2016) | 181.9 | 222.0 | (18 | ) | |||||||
Prepaid lease and transit franchise costs | 74.1 | 67.4 | 10 | ||||||||
Other prepaid expenses | 18.1 | 15.8 | 15 | ||||||||
Other current assets | 11.1 | 7.8 | 42 | ||||||||
Total current assets | 311.5 | 378.2 | (18 | ) | |||||||
Liabilities: | |||||||||||
Accounts payable | 50.5 | 85.6 | (41 | ) | |||||||
Accrued compensation | 17.1 | 33.9 | (50 | ) | |||||||
Accrued interest | 23.7 | 15.7 | 51 | ||||||||
Accrued lease costs | 21.3 | 26.7 | (20 | ) | |||||||
Other accrued expenses | 49.0 | 54.8 | (11 | ) | |||||||
Deferred revenues | 33.1 | 20.2 | 64 | ||||||||
Other current liabilities | 16.0 | 14.6 | 10 | ||||||||
Total current liabilities | 210.7 | 251.5 | (16 | ) | |||||||
Working capital | $ | 100.8 | $ | 126.7 | (20 | ) | |||||
We continually project anticipated cash requirements for our operating, investing and financing needs as well as cash flows generated from operating activities available to meet these needs. Due to seasonal advertising patterns and influences on advertising markets, our revenues and operating income are typically highest in the fourth quarter, during the holiday shopping season, and lowest in the first quarter, as advertisers cut back on spending following the holiday shopping season. Further, some of our municipal transit contracts, as well as our marketing and multimedia rights agreements with colleges and universities, require guaranteed minimum annual payments to be paid at the beginning of the year.
Our short-term cash requirements primarily include payments for operating leases, guaranteed minimum annual payments, capital expenditures, interest and dividends. Funding for short-term cash needs will come primarily from our cash on hand, operating cash flows and borrowing capacity under our Revolving Credit Facility (as defined below) or other secured credit facilities that we may establish.
In addition, as part of our growth strategy, we frequently evaluate strategic opportunities to acquire new businesses, assets or digital technology. Consistent with this strategy, we regularly evaluate potential acquisitions, ranging from small transactions to larger acquisitions, which transactions could be funded through cash on hand, additional borrowings, equity or other securities, or some combination thereof.
Our long-term cash needs include principal payments on outstanding indebtedness. Funding for long-term cash needs will come from our cash on hand, operating cash flows, our ability to issue debt and equity securities, and borrowing capacity under our Revolving Credit Facility or other secured credit facilities that we may establish.
As of March 31, 2017, we had total indebtedness of $2.2 billion.
On April 25, 2017, we announced that our board of directors approved a quarterly cash dividend of $0.36 per share on our common stock, payable on June 30, 2017, to stockholders of record at the close of business on June 9, 2017.
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Debt
Long-term debt, net, consists of the following:
As of | ||||||||
(in millions, except percentages) | March 31, 2017 | December 31, 2016 | ||||||
Term loan | $ | 667.5 | $ | 659.0 | ||||
Senior unsecured notes: | ||||||||
5.250% senior unsecured notes, due 2022 | 549.5 | 549.5 | ||||||
5.625% senior unsecured notes, due 2024 | 502.9 | 503.0 | ||||||
5.875% senior unsecured notes, due 2025 | 450.0 | 450.0 | ||||||
Total senior unsecured notes | 1,502.4 | 1,502.5 | ||||||
Debt issuance costs | (27.4 | ) | (24.7 | ) | ||||
Total long-term debt, net | $ | 2,142.5 | $ | 2,136.8 | ||||
Weighted average cost of debt | 4.8 | % | 4.8 | % | ||||
Payments Due by Period | ||||||||||||||||||||
(in millions) | Total | 2017 | 2018-2019 | 2020-2021 | 2022 and thereafter | |||||||||||||||
Long-term debt | $ | 2,170.0 | $ | — | $ | — | $ | — | $ | 2,170.0 | ||||||||||
Interest | 738.3 | 104.9 | 211.0 | 211.0 | 211.4 | |||||||||||||||
Total | $ | 2,908.3 | $ | 104.9 | $ | 211.0 | $ | 211.0 | $ | 2,381.4 | ||||||||||
On March 16, 2017, the Company, along with its wholly owned subsidiaries, Outfront Media Capital LLC (“Finance LLC”) and Outfront Media Capital Corporation (together with Finance LLC, the “Borrowers”), and the other guarantor subsidiaries party thereto, entered into an amendment (the “Amendment”) to its credit agreement and its related security agreement, each dated January 31, 2014 (together, and as amended, supplemented or otherwise modified, the “Credit Agreement”).
The Amendment provides for (i) the extension of the maturity date of the Borrower’s existing revolving credit facility (the “Revolving Credit Facility”) from January 31, 2019, to March 16, 2022, (ii) the extension of the maturity date of the Borrower’s existing term loan (the “Term Loan”) from January 31, 2021, to March 16, 2024, (iii) an increase to the Revolving Credit Facility by $5.0 million to $430.0 million, (iv) the incurrence of a $10.0 million incremental term loan primarily to cover transaction fees and expenses, which increases the outstanding principal balance of the Term Loan to $670.0 million, and (v) revisions to certain provisions of the Credit Agreement to, among other things, lower the interest rate floor for all loans to 0.0% and update covenants for greater operational and financial flexibility to the Company (including incurrence of additional indebtedness), as well as include other clarifying, conforming and ministerial changes to the Credit Agreement. The remaining terms of the Credit Agreement, as amended by the Amendment, are substantially the same as the terms under the existing Credit Agreement, including with respect to events of default and loan acceleration.
Term Loan
The interest rate on the Term Loan was 3.2% per annum as of March 31, 2017. As of March 31, 2017, a discount of $2.5 million on the Term Loan remains unamortized. The discount is being amortized through Interest expense, net, on the Consolidated Statement of Operations.
Senior Unsecured Notes
As of March 31, 2017, a discount of $0.5 million on $150.0 million aggregate principal amount of the 5.250% Senior Unsecured Notes due 2022, remains unamortized. The discount is being amortized through Interest expense, net, on the Consolidated Statement of Operations.
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As of March 31, 2017, a premium of $2.9 million on $100.0 million aggregate principal amount of the 5.625% Senior Unsecured Notes due 2024, remains unamortized. The premium is being amortized through Interest expense, net, on the Consolidated Statement of Operations.
Revolving Credit Facility
As of March 31, 2017, there were no outstanding borrowings under the Revolving Credit Facility. On April 3, 2017, we borrowed $15.0 million against the Revolving Credit Facility.
The commitment fee based on the amount of unused commitments under the Revolving Credit Facility was $0.2 million in the three months ended March 31, 2017, and $0.5 million in the three months ended March 31, 2016. As of March 31, 2017, we had issued letters of credit totaling approximately $31.7 million against the Revolving Credit Facility.
Debt Covenants
The Credit Agreement governing the Term Loan and the Revolving Credit Facility, and the indentures governing our senior unsecured notes contain customary affirmative and negative covenants, subject to certain exceptions, including but not limited to those that limit the Company’s and our subsidiaries’ abilities to (i) pay dividends on, repurchase or make distributions in respect to the Company’s or its wholly-owned subsidiary, Finance LLC’s capital stock or make other restricted payments other than dividends or distributions necessary for us to maintain our REIT status, subject to certain conditions, and (ii) enter into agreements restricting certain subsidiaries’ ability to pay dividends or make other intercompany transfers.
The terms of the Credit Agreement require that, as long as any commitments remain outstanding under the Revolving Credit Facility, we maintain a Consolidated Net Secured Leverage Ratio, which is the ratio of (i) our consolidated secured debt (less up to $150.0 million of unrestricted cash) to (ii) our Consolidated EBITDA (as defined in the Credit Agreement) for the trailing four consecutive quarters, of no greater than 4.0 to 1.0. As of March 31, 2017, our Consolidated Net Secured Leverage Ratio was 1.4 to 1.0. The Credit Agreement also requires that, in connection with the incurrence of certain indebtedness, we maintain a Consolidated Total Leverage Ratio, which is the ratio of our consolidated total debt to our Consolidated EBITDA for the trailing four consecutive quarters, of no greater than 6.0 to 1.0. As of March 31, 2017, our Consolidated Total Leverage Ratio was 4.8 to 1.0. As of March 31, 2017, we are in compliance with our debt covenants.
Letter of Credit Facilities
As of March 31, 2017, we issued letters of credit totaling approximately $66.9 million under our aggregate $80.0 million letter of credit facilities. The total fees under the letter of credit facilities were immaterial in each of the three months ended March 31, 2017 and 2016.
Deferred Financing Costs
As of March 31, 2017, we had deferred $32.5 million in fees and expenses associated with the Term Loan, Revolving Credit Facility and our senior unsecured notes. We are amortizing the deferred fees through Interest expense, net, on the Consolidated Statement of Operations over the respective terms of the Term Loan, Revolving Credit Facility and our senior unsecured notes.
Cash Flows
The following table sets forth our cash flows in the three months ended March 31, 2017 and 2016.
Three Months Ended | |||||||||||
March 31, | % | ||||||||||
(in millions, except percentages) | 2017 | 2016 | Change | ||||||||
Cash provided by operating activities | $ | 32.2 | $ | 33.8 | (5 | )% | |||||
Cash used for investing activities | (17.4 | ) | (74.6 | ) | (77 | ) | |||||
Cash used for financing activities | (53.9 | ) | (17.8 | ) | * | ||||||
Effect of exchange rate changes on cash and cash equivalents | 0.2 | 0.2 | — | ||||||||
Net decrease to cash and cash equivalents | $ | (38.9 | ) | $ | (58.4 | ) | (33 | ) | |||
* | Calculation is not meaningful. |
39
Cash provided by operating activities decreased $1.6 million in the three months ended March 31, 2017, compared to the same prior-year period, principally as a result of increased use of working capital driven by an increase in accounts receivable and decreases in accounts payables and accrued expenses, and lower net income, as adjusted for non-cash items.
Cash used for investing activities decreased $57.2 million in the three months ended March 31, 2017, compared to the same prior-year period. In the three months ended March 31, 2017, we incurred $16.6 million in capital expenditures, completed several acquisitions for a total purchase price of approximately $0.9 million and received $0.1 million in net proceeds from dispositions. In the three months ended March 31, 2016, we incurred $14.4 million in capital expenditures, completed several acquisitions for a total purchase price of approximately $60.5 million and received $0.3 million in proceeds from dispositions.
The following table presents our capital expenditures in the three months ended March 31, 2017 and 2016.
Three Months Ended | |||||||||||
March 31, | % | ||||||||||
(in millions, except percentages) | 2017 | 2016 | Change | ||||||||
Growth | $ | 11.5 | $ | 10.4 | 11 | % | |||||
Maintenance | 5.1 | 4.0 | 28 | ||||||||
Total capital expenditures | $ | 16.6 | $ | 14.4 | 15 | ||||||
Capital expenditures increased $2.2 million, or 15%, in the three months ended March 31, 2017, compared to the same prior-year period, driven by installation of the most current LED lighting technology to improve the quality and extend the life of our static billboards and an increase in digital billboard display spending, partially offset by decreased expenditures to renovate certain office facilities.
For the full year of 2017, we expect our capital expenditures to be approximately $65.0 million to $70.0 million, which will be used primarily for maintenance, growth in digital displays, installation of the most current LED lighting technology to improve the quality and extend the life of our static billboards, and to renovate certain office facilities.
Cash used for financing activities increased $36.1 million in the three months ended March 31, 2017, compared to the same prior-year period. In the three months ended March 31, 2017, we received proceeds from an incremental borrowing on our Term Loan of $8.3 million, incurred additional deferred financing costs of $7.0 million and paid cash dividends of $50.2 million. In the three months ended March 31, 2016, we drew $35.0 million on our Revolving Credit Facility and paid cash dividends of $47.1 million.
Off-Balance Sheet Arrangements
Our off-balance sheet commitments primarily consist of operating lease arrangements and guaranteed minimum annual payments. (See Note 14. Commitments and Contingencies to the Consolidated Financial Statements for information about our off-balance sheet commitments.)
Accounting Standards
See Note 2. New Accounting Standards to the Consolidated Financial Statements for information about adoption of new accounting standards and recent accounting pronouncements.
CAUTIONARY STATEMENT REGARDING FORWARD-LOOKING STATEMENTS
We have made statements in this MD&A and other sections of this Quarterly Report on Form 10-Q that are forward-looking statements within the meaning of the federal securities laws, including the Private Securities Litigation Reform Act of 1995. You can identify forward-looking statements by the use of forward-looking terminology such as “believes,” “expects,” “could,” “would,” “may,” “might,” “will,” “should,” “seeks,” “likely,” “intends,” “plans,” “projects,” “predicts,” “estimates,” “forecast” or “anticipates” or the negative of these words and phrases or similar words or phrases that are predictions of or indicate future events or trends and that do not relate solely to historical matters. You can also identify forward-looking statements by discussions of strategy, plans or intentions related to our capital resources, portfolio performance and results of operations.
Forward-looking statements involve numerous risks and uncertainties and you should not rely on them as predictions of future events. Forward-looking statements depend on assumptions, data or methods that may be incorrect or imprecise and may not be
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able to be realized. We do not guarantee that the transactions and events described will happen as described (or that they will happen at all). The following factors, among others, could cause actual results and future events to differ materially from those set forth or contemplated in the forward-looking statements:
• | Declines in advertising and general economic conditions; |
• | Competition; |
• | Government regulation; |
• | Our inability to increase the number of digital advertising displays in our portfolio or provide digital advertising displays to our customers; |
• | Taxes, fees and registration requirements; |
• | Our ability to obtain and renew key municipal contracts on favorable terms; |
• | Decreased government compensation for the removal of lawful billboards; |
• | Content-based restrictions on outdoor advertising; |
• | Environmental, health and safety laws and regulations; |
• | Seasonal variations; |
• | Acquisitions and other strategic transactions that we may pursue could have a negative effect on our results of operations; |
• | Dependence on our management team and other key employees; |
• | The ability of our board of directors to cause us to issue additional shares of stock without stockholder approval; |
• | Certain provisions of Maryland law may limit the ability of a third party to acquire control of us; |
• | Our rights and the rights of our stockholders to take action against our directors and officers are limited; |
• | Our substantial indebtedness; |
• | Restrictions in the agreements governing our indebtedness; |
• | Incurrence of additional debt; |
• | Interest rate risk exposure from our variable-rate indebtedness; |
• | Our ability to generate cash to service our indebtedness; |
• | Cash available for distributions; |
• | Hedging transactions; |
• | Diverse risks in our Canadian business; |
• | A breach of our security measures; |
• | Changes in regulations and consumer concerns regarding privacy, information security and data, or any failure or perceived failure to comply with these regulations or our internal policies; |
• | Asset impairment charges for goodwill; |
• | Our failure to remain qualified to be taxed as a REIT; |
• | REIT distribution requirements; |
• | Availability of external sources of capital; |
• | We may face other tax liabilities even if we remain qualified to be taxed as a REIT; |
• | Complying with REIT requirements may cause us to liquidate investments or forgo otherwise attractive opportunities; |
• | Our ability to contribute certain contracts to a taxable REIT subsidiary (“TRS”); |
• | Our planned use of TRSs may cause us to fail to remain qualified to be taxed as a REIT; |
• | REIT ownership limits; |
• | Complying with REIT requirements may limit our ability to hedge effectively; |
• | Failure to meet the REIT income tests as a result of receiving non-qualifying income; |
• | Even if we remain qualified to be taxed as a REIT, and we sell assets, we could be subject to tax on any unrealized net built-in gains in the assets held before electing to be treated as a REIT; |
• | The Internal Revenue Service (the “IRS”) may deem the gains from sales of our outdoor advertising assets to be subject to a 100% prohibited transaction tax; and |
• | Establishing an operating partnership as part of our REIT structure. |
While forward-looking statements reflect our good-faith beliefs, they are not guarantees of future performance. All forward-looking statements in this Quarterly Report on Form 10-Q apply as of the date of this report or as of the date they were made and, except as required by applicable law, we disclaim any obligation to publicly update or revise any forward-looking statement to reflect changes in underlying assumptions or factors of new information, data or methods, future events or other changes. For a further discussion of these and other factors that could impact our future results, performance or transactions, see the section entitled “Risk Factors” in our Annual Report on Form 10-K for the year ended December 31, 2016, filed with the SEC on February 23, 2017. You should understand that it is not possible to predict or identify all such factors. Consequently, you should not consider any such list to be a complete set of all potential risks or uncertainties.
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Item 3. Quantitative and Qualitative Disclosures About Market Risk.
We are exposed to market risk related to commodity prices and foreign currency exchange rates, and to a limited extent, interest rates and credit risks.
Commodity Price Risk
We incur various operating costs that are subject to price risk caused by volatility in underlying commodity values. Commodity price risk is present in electricity costs associated with powering our digital billboard displays and lighting our traditional static billboard displays at night.
We do not currently use derivatives or other financial instruments to mitigate our exposure to commodity price risk. However, we do enter into contracts with commodity providers to limit our exposure to commodity price fluctuations. For the year ended December 31, 2016, such contracts accounted for 8.9% of our total utility costs. As of March 31, 2017, we had active electricity purchase agreements with fixed contract rates for locations throughout Connecticut, Illinois, New Jersey, New York, Pennsylvania, Ohio and Texas, which expire at various dates in July 2018.
Foreign Exchange Risk
Foreign currency translation risk is the risk that exchange rate gains or losses arise from translating foreign entities’ statements of earnings and statements of financial position from functional currency to our reporting currency (the U.S. Dollar) for consolidation purposes. Any gain or loss on translation is included within comprehensive income and Accumulated other comprehensive income on our Consolidated Statement of Financial Position. The functional currency of our international subsidiaries is their respective local currency. As of March 31, 2017, we have $8.9 million of unrecognized foreign currency translation losses included within Accumulated other comprehensive income on our Consolidated Statement of Financial Position.
Substantially all of our transactions at our foreign subsidiaries are denominated in their local functional currency, thereby reducing our risk of foreign currency transaction gains or losses.
We do not currently use derivatives or other financial instruments to mitigate foreign currency risk, although we may do so in the future.
Interest Rate Risk
We are subject to interest rate risk to the extent we have variable-rate debt outstanding including under our Senior Credit Facilities. As of March 31, 2017, we had a $670.0 million variable-rate Term Loan due 2024 outstanding, which has an interest rate of 3.2% per year. An increase or decrease of 1/4% in our interest rate on the Term Loan will change our annualized interest expense by approximately $1.7 million. We do not currently use derivatives or other financial instruments to mitigate interest rate risk, although we may do so in the future.
Credit Risk
In the opinion of our management, credit risk is limited due to the large number of customers and advertising agencies utilized. We perform credit evaluations on our customers and agencies and believe that the allowances for doubtful accounts are adequate. We do not currently use derivatives or other financial instruments to mitigate credit risk.
Item 4. Controls and Procedures.
Evaluation of Disclosure Controls and Procedures
As required by Rule 13a-15(b) of the Securities Exchange Act of 1934, as amended (the “Exchange Act”), our management has carried out an evaluation, under the supervision of and with the participation of our Chief Executive Officer and Chief Financial Officer, of the effectiveness of the design and operation of our disclosure controls and procedures, as defined in Rule 13a-15(e) of the Exchange Act, as of the end of the period covered by this report. Based on the foregoing, our Chief Executive Officer and Chief Financial Officer concluded that our disclosure controls and procedures as of the end of the period covered by this Quarterly Report on Form 10-Q, were effective to provide reasonable assurance that information required to be disclosed by us in reports that we file or submit under the Exchange Act is recorded, processed, summarized and reported within the time
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periods specified in the Securities and Exchange Commission’s rules and forms and is accumulated and communicated to our management, including our Chief Executive Officer and Chief Financial Officer, as appropriate to allow timely decisions regarding required disclosure.
Changes in Internal Control Over Financial Reporting
There have been no changes in our internal control over financial reporting, as defined in Rule 13a-15(f) under the Exchange Act, during the period covered by this Quarterly Report on Form 10-Q that have materially affected, or that are reasonably likely to materially affect, our internal control over financial reporting.
Limitations on Effectiveness of Disclosure Controls and Procedures and Internal Control Over Financial Reporting
In designing and evaluating our disclosure controls and procedures and internal control over financial reporting, management recognizes that any controls and procedures, no matter how well designed and operated, can provide only reasonable assurance of achieving the desired control objectives. In addition, the design of disclosure controls and procedures and internal control over financial reporting must reflect the fact that there are resource constraints and that management is required to apply its judgment in evaluating the benefits of possible controls and procedures relative to their costs.
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PART II
Item 1. Legal Proceedings.
On an ongoing basis, we are engaged in lawsuits and governmental proceedings and respond to various investigations, inquiries, notices and claims from national, state and local governmental and other authorities (collectively, “litigation”). Litigation is inherently uncertain and always difficult to predict. Although it is not possible to predict with certainty the eventual outcome of any litigation, in our opinion, none of our current litigation is expected to have a material adverse effect on our results of operations, financial position or cash flows.
Item 1A. Risk Factors.
We have disclosed the risk factors affecting our business, results of operations and financial condition in the section entitled “Risk Factors” in our Annual Report on Form 10-K for the year ended December 31, 2016, filed with the SEC on February 23, 2017. There have been no material changes from the risk factors previously disclosed.
Item 2. Unregistered Sales of Equity Securities and Use of Proceeds.
Unregistered Sales of Equity Securities
None.
Purchases of Equity Securities by the Issuer
Total Number of Shares Purchased(a) | Average Price Paid Per Share | Total Number of Shares Purchased as Part of Publicly Announced Programs | Remaining Authorizations | ||||||||||
January 1, 2017 through January 31, 2017 | — | $ | — | — | — | ||||||||
February 1, 2017 through February 28, 2017 | 6,704 | 24.98 | — | — | |||||||||
March 1, 2017 through March 31, 2017 | — | — | — | — | |||||||||
Total | 6,704 | — | — | — | |||||||||
(a) | Reflects shares deemed to be surrendered to the Company in connection with tax withholding payments upon exercise of employee stock options at the related exercise prices. |
Item 3. Defaults Upon Senior Securities.
None.
Item 4. Mine Safety Disclosures.
None.
Item 5. Other Information.
None.
Item 6. Exhibits.
See Exhibit Index immediately following the signature page hereto, which is incorporated herein by reference.
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SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized.
OUTFRONT MEDIA INC. | ||||
By: | /s/ Donald R. Shassian | |||
Name: | Donald R. Shassian | |||
Title: | Executive Vice President and | |||
Chief Financial Officer | ||||
(Principal Financial Officer and Principal Accounting Officer) | ||||
Date: May 4, 2017
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EXHIBIT INDEX
Exhibit Number | Description | |
10.1 | ||
10.2 | ||
31.1 | ||
31.2 | ||
32.1 | ||
32.2 | ||
101.INS | XBRL Instance Document - the instance document does not appear in the Interactive Data File because its XBRL tags are embedded within the Inline XBRL document. | |
101.SCH | XBRL Taxonomy Extension Schema | |
101.CAL | XBRL Taxonomy Calculation Linkbase | |
101.DEF | XBRL Taxonomy Definition Document | |
101.LAB | XBRL Taxonomy Label Linkbase | |
101.PRE | XBRL Taxonomy Presentation Linkbase | |
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