Boston Omaha Corporation — Q2 2020 Form 10-Q
Reporting period: Three and six months ended June 30, 2020. Unaudited consolidated results. Boston Omaha operates billboard advertising, surety insurance and brokerage, broadband services, and minority investments. Broadband operations began with the March 2020 acquisition of FibAire.
Financial performance
| Metric | Q2 2020 | Q2 2019 | First half 2020 | First half 2019 |
|---|---|---|---|---|
| Revenue | $11.49 million | $10.14 million | $22.90 million | $19.25 million |
| Operating loss | $0.87 million | $3.20 million | $2.05 million | $7.99 million |
| Net income (loss) attributable to common stockholders | $3.40 million | $(2.11) million | $(21.33) million | $(6.19) million |
| Basic and diluted EPS | $0.14 | $(0.09) | $(0.89) | $(0.28) |
| Cash from operating activities | Not separately stated for the quarter | $1.26 million | $2.90 million |
Q2 revenue increased 13.3% year over year; first-half revenue increased 19.0%. Operating losses narrowed, while total costs and expenses were 107.5% of revenue in Q2 and 108.9% for the first half, versus 131.6% and 141.5%, respectively, in the comparable periods. Lower amortization materially contributed: the company extended the estimated amortization period for billboard customer relationships from three to ten years in Q4 2019. This accounting estimate change does not by itself demonstrate improved underlying cash economics.
Q2 net income included $3.64 million of realized investment gains and was partly offset by $0.49 million of unrealized losses. First-half results included $25.23 million of unrealized securities losses, partly offset by $3.67 million of realized investment gains, $1.06 million of equity-method income, and $0.86 million of dividend income. Management attributes the first-half net loss increase primarily to market-value changes in public securities.
Segments and material changes
- Billboards: Q2 net billboard rentals declined 6.9% year over year, reflecting lower rental and occupancy rates associated with COVID-19; first-half revenue was down 0.4%. Q2 segment gross margin was 58.8%, compared with 61.3%. The company reported approximately 3,000 billboards and 5,600 advertising faces as of July 31, 2020.
- Insurance: Q2 premiums earned rose 28.8%; first-half premiums rose 52.4%, reflecting prior-period rental guarantee bond growth and broader UCS licensing. Higher rental-bond loss reserves contributed to increased insurance costs; first-half loss and loss-adjustment expense rose to 18.8% of segment revenue from 14.7%.
- Broadband: Acquired FibAire in March for a stated purchase price of $13.71 million, including cash and a 10% AireBeam equity interest. Q2 revenue was $1.16 million and segment operating income was $0.33 million. Broadband results are not comparable with 2019.
- Investments: Publicly traded marketable equity securities were valued at $50.53 million at June 30, down from $55.91 million at year-end. The company reported no impairment to the carrying values of its reviewed investments.
Cash, liquidity, debt, and capital
- At June 30, cash and cash equivalents were $40.39 million; restricted cash was $0.55 million. The company also held $78.65 million of U.S. Treasury securities available for sale and $50.53 million of marketable equity securities.
- First-half operating cash flow was $1.26 million, investing cash outflow $32.98 million, and financing cash inflow $56.29 million. Financing inflows principally included the June public stock offering; investing activity included the broadband acquisition, securities purchases, and other investments.
- Link, the billboard subsidiary, had $18.06 million of term debt outstanding at 4.25% fixed interest, with principal payments beginning July 2020 and final maturity in August 2026. No amounts were drawn on its $5 million revolver or available second term loan at June 30. The company stated that it was in compliance with debt covenants. Boston Omaha and its non-billboard businesses do not guarantee this facility.
- Operating lease liabilities totaled $49.92 million, including $3.74 million current. Total liabilities were $86.93 million. Management said existing resources were expected to cover working capital and anticipated capital expenditures for the next 12 months.
- The June public offering of 3.68 million Class A shares at $16 per share generated approximately $58.9 million gross proceeds. The company also sold 40,455 shares through its at-the-market program for $0.67 million gross proceeds in Q2. A $20 million share repurchase authorization had resulted in no repurchases through the filing date.
Outlook, risks, and unusual items
- No quantified earnings or revenue guidance was provided. Management expects to pursue billboard acquisitions and expand broadband, while noting that acquisition availability and returns may be affected by market conditions.
- COVID-19 impacts are uncertain. Management cited weaker billboard demand and customer payment risk, reduced surety-bond demand, and possible broadband payment pressure. It temporarily suspended most new rental guarantee bond issuance; these bonds represented 33% of first-half 2020 written premium. UCS increased reserves, which may prove inadequate if defaults exceed historical experience. Reinsurance costs could rise, and availability or terms could change.
- Public securities remain exposed to market volatility; the filing notes potential adverse impacts to minority investments and possible goodwill impairment in a severe downturn. Goodwill was $113.69 million, about 24.2% of total assets.
- Management reported remote-work and cybersecurity risks but said operations and internal controls had not been materially impaired. Disclosure controls were deemed effective at quarter-end.
- After quarter-end, Dream Finders Holdings redeemed the remaining $6 million of preferred units. Management said routine litigation and claims were not expected to have a material adverse effect. No other material legal contingency value is specified in the filing text.
Important facts for investors to verify
- Whether billboard occupancy, advertising rates, and customer collections recover from pandemic-related weakness.
- UCS rental guarantee bond exposure, the adequacy of loss reserves, and the effect of suspending new bond issuance.
- How much of the first-half loss reflects unrealized securities marks versus operating performance, and the subsequent performance or sale of those holdings.
- The effect of the longer customer-relationship amortization estimate on reported operating losses and future expense.
- Broadband acquisition integration, capital needs, expansion plans, and the valuation and terms associated with FibAire’s 10% ownership and put/call options.
- Link’s post-June scheduled debt amortization, covenant headroom, and any decision to draw the second term loan or revolver.
- Use of public-offering proceeds, future share issuance or repurchases, and potential dilution from Class A shares.