Business context and reporting period
Boston Omaha Corporation’s unaudited Form 10-Q covers the quarter and nine months ended September 30, 2020. The company operates outdoor advertising, surety insurance and brokerage, and broadband businesses, and holds minority investments in other businesses. The March 2020 acquisition of broadband provider FibAire makes comparisons with 2019 less directly comparable.
Financial performance and position
| Metric | Q3 2020 | Q3 2019 | Nine months 2020 | Nine months 2019 |
|---|---|---|---|---|
| Revenue | $11.61 million | $10.82 million | $34.51 million | $30.07 million |
| Operating income (loss) | $(0.72) million | $(3.79) million | $(2.77) million | $(11.78) million |
| Net income (loss) attributable to common stockholders | $3.46 million | $0.63 million | $(17.87) million | $(5.56) million |
| Basic and diluted EPS | $0.13 | $0.03 | $(0.71) | $(0.25) |
| Operating margin | (6.2%) | (35.0%) | (8.0%) | (39.2%) |
- Q3 revenue increased 7.2%; nine-month revenue increased 14.8%. Broadband contributed $1.14 million and $2.58 million, respectively, after its acquisition.
- Q3 net income benefited from $2.03 million in realized investment gains, $1.34 million in equity-method income, and $0.82 million in unrealized securities gains. Nine-month results instead included $24.41 million in unrealized securities losses and $5.70 million in realized gains.
- Cash from operations was $3.49 million for nine months, versus $5.04 million in 2019. Investing used $38.89 million; financing provided $61.67 million. Cash, cash equivalents, and restricted cash ended at $42.65 million.
- At September 30, cash and cash equivalents were $42.27 million; available-for-sale U.S. Treasury securities were $76.67 million; marketable equity securities were $63.79 million. Current assets totaled $202.32 million and current liabilities $24.55 million.
- Long-term debt was $23.35 million, including $1.28 million current; no revolving credit was drawn. Link’s term loans bear fixed rates of 4.25% and 3.375%, mature in August 2026, and were reported in covenant compliance. Lease liabilities totaled $49.09 million.
- Segment gross margins in Q3 were 61.0% for billboards, 47.4% for insurance, and 88.7% for broadband. Nine-month segment operating income was $0.28 million for billboards, $0.01 million for insurance, and $0.42 million for broadband.
Material changes versus prior periods
- Q3 billboard revenue declined 0.8%; nine-month billboard revenue declined 0.6%, with management citing reduced occupancy and rental rates amid COVID-19.
- Insurance premiums earned rose 28.3% for nine months, reflecting expanded licensing and prior growth in rental-guarantee bonds. Q3 premiums fell 6.0%; commissions declined 13.6%. The company suspended most new rental-guarantee bond issuance, which it expects to reduce future UCS revenue.
- Operating losses narrowed substantially, partly because billboard customer-relationship amortization declined after the company extended the estimated amortization period from three to ten years in late 2019. This change reduced nine-month amortization expense by $6.35 million.
- Class A shares outstanding rose from 22.46 million at year-end 2019 to 26.18 million at September 30, 2020, principally following the June public offering.
Outlook, commentary, risks and unusual items
- Management provided no quantified earnings or revenue guidance. It expects existing cash, short-term investments, potential ATM proceeds, available credit, and operating cash flows to cover working capital and anticipated capital expenditures for the next 12 months.
- COVID-19 could affect billboard demand and customer collections, surety sales and claim losses, broadband customer payments, and the company’s investees. Management stated that the duration and financial impact remain uncertain. UCS increased rental-bond loss reserves; the filing cautions that reserves may prove inadequate.
- Marketable equity securities were carried at $63.79 million, against cost of $81.82 million, and remain subject to price volatility. Goodwill was $113.42 million; a severe downturn could lead to impairment charges.
- On October 2, 2020, the company made an unsecured $20 million loan to Dream Finders Holdings at an effective rate of approximately 14%, maturing May 1, 2021. On October 26, its sponsored SPAC completed a $125 million IPO; the filing describes possible redemption of public shares if it does not complete a business combination within 15 months.
- The company raised approximately $58.9 million gross in a June 2020 Class A offering for broadband expansion, billboard acquisitions, and general purposes. A $20 million share-repurchase authorization remained unused at quarter-end. Additional equity issuance, acquisitions, investment losses, debt covenants, and cybersecurity exposure from remote work are relevant risks.
- Management said disclosure controls were effective as of September 30, 2020 and reported no material change in internal control over financial reporting during the quarter. Routine litigation was not expected to have a material adverse effect.
Important facts for investors to verify
- How much of reported earnings and equity value depends on volatile realized and unrealized investment results, and what the current portfolio composition and concentration are.
- Whether UCS’s rental-bond loss reserves adequately reflect claims exposure, and how the suspension of new bonds affects future earned premiums and cash flow.
- The final FibAire purchase-price allocation, broadband expansion spending, customer growth, and the terms and potential settlement of the minority-owner put/call options.
- Liquidity after the subsequent $20 million DFH loan, future acquisition or capital-spending commitments, and any further share issuance or repurchases.
- Compliance with Link’s debt covenants and the effect of its amortizing debt and long-duration operating lease obligations on cash requirements.