Boston Omaha Corporation — FY2018 Form 10-K
Reporting period: Fiscal year ended December 31, 2018; filed March 18, 2019. The filing reports annual results and selected fourth-quarter revenue data, rather than a standalone quarterly income statement.
Business context
Boston Omaha operates outdoor billboard advertising and surety insurance and brokerage businesses, and holds minority investments in commercial real estate services, homebuilding, and banking. Its strategy is to reinvest capital and pursue acquisitions it believes offer durable earnings and attractive returns. Three major billboard acquisitions closed in July and August 2018; by March 2019, the company reported approximately 2,900 structures and 5,400 advertising faces.
Key financial results
| Metric | FY2018 | FY2017 |
|---|---|---|
| Revenue | $20.02 million | $9.01 million |
| Gross profit | $12.43 million | $5.58 million |
| Operating loss | $12.26 million | $6.77 million |
| Net loss attributable to common stockholders | $9.11 million; $0.46 per share | $6.47 million; $0.60 per share |
| Operating cash flow | $38,325 | $(3.19) million |
| Cash used in investing activities | $(164.76) million | $(110.86) million |
| Cash provided by financing activities | $175.63 million | $91.43 million |
Gross profit was about 62% of revenue in FY2018. The operating loss was 61.2% of revenue, compared with 75.1% in FY2017. Revenue rose 122%, driven chiefly by acquired billboard operations and growth in surety premiums and commissions. Comparisons are affected by acquisition timing and are not fully comparable.
- Billboards: Net rental revenue increased 167% to $14.07 million. Segment gross profit was $8.43 million; segment operating loss was $4.08 million.
- Insurance: Premiums earned rose 56.7% to $3.18 million and commissions rose 64.3% to $2.61 million. Segment gross profit was $4.01 million; segment operating loss was $4.70 million.
- Fourth quarter: Revenue was $8.82 million, up 63.4% from Q3. Billboard revenue was $7.06 million, up 88.1%; earned premiums were $1.39 million, up 70.0%. Insurance commissions fell 62.8% to $295,229, which management attributed partly to more bonds being sold directly through UCS.
Financial position and material changes
- At December 31, 2018, cash and cash equivalents were $17.11 million and U.S. Treasury securities available for sale were $86.85 million. The company reported approximately $103.95 million of unrestricted cash and Treasury securities in total.
- Current assets were $118.56 million and current liabilities $12.44 million. Total assets were $332.19 million; total liabilities were $15.63 million. The filing reports no significant debt financing to date; interest expense was $1,804 in FY2018.
- The company spent $134.80 million in cash on the three 2018 billboard acquisitions and raised $150 million through a private placement and $27.25 million gross through its at-the-market offering during FY2018. Shares issued increased the weighted-average share count to 19.93 million from 10.82 million.
- Goodwill increased to $98.69 million from $24.69 million, and intangible assets to $37.03 million from $9.35 million, substantially reflecting acquisitions. Acquisition purchase-price allocations were provisional and remained subject to review.
- Operating cash flow turned slightly positive, but was small relative to the company’s acquisition and investment spending. Financing, principally equity issuance, funded most of that spending.
Outlook, risks and unusual items
- Management expects to continue pursuing billboard, insurance, and other investments when considered attractive. It stated that available cash should fund current operations and anticipated capital expenditures for at least 12 months, but significant acquisitions could require additional equity or debt financing. The company does not publish earnings guidance.
- Management expects adoption of the new lease standard in 2019 to add more than $37 million of operating lease liabilities and corresponding right-of-use assets. Minimum future rents disclosed at year-end totaled $38.21 million.
- The company reported continuing net losses and expects acquisition-related depreciation, amortization, and integration costs. It recorded $6.04 million of amortization and $2.04 million of depreciation in FY2018.
- Internal control over financial reporting was deemed ineffective at year-end because of material weaknesses in journal-entry review and approval, and in expenditure authorization and segregation of duties. The independent auditor issued an adverse opinion on internal control, while issuing an unqualified opinion on the financial statements. The company said remediation was underway.
- Key risks include acquisition integration and valuation, future funding and dilution, billboard and insurance regulation, insurance loss-reserve uncertainty and reinsurance availability, and conflicts of interest and voting control involving affiliated investors. UCS held an A.M. Best A- rating; a downgrade could impair its ability to write business.
- The company recorded no goodwill impairment in its 2018 annual test. It had approximately $21.8 million of tax net operating loss carryforwards, whose use could be limited by an ownership change. Routine litigation was described as not expected to have a material adverse effect.
Important facts for investors to verify
- Whether acquired billboard assets deliver sustained revenue, cash flow, and returns sufficient to justify acquisition prices and substantial goodwill and intangible balances.
- Progress in remediating the two material weaknesses, and the outcome of subsequent control testing and auditor assessments.
- Cash generation after acquisition spending, and whether further equity issuance or borrowing is needed to fund growth.
- The impact of lease-standard adoption on reported liabilities and future expenses, and the terms and duration of billboard site leases.
- Insurance claims development, reserve adequacy, reinsurance protection, regulatory capital, and maintenance of UCS’s A.M. Best rating.
- Potential dilution and governance implications of related-party financing, dual-class voting rights, and affiliated investors’ influence.