Boston Omaha Corporation — Q3 2019 Form 10-Q
Reporting period: Quarter and nine months ended September 30, 2019. The company operates billboard advertising and surety insurance businesses and holds minority investments. Comparisons are affected by the large billboard acquisitions completed in 2018.
Financial performance
| Metric | Three months ended Sept. 30 | Nine months ended Sept. 30 |
|---|---|---|
| Revenue | $10.82 million, up 100.7% year over year | $30.07 million, up 168.4% |
| Operating loss | $3.79 million, versus $2.91 million loss | $11.78 million, versus $8.15 million loss |
| Net income (loss) attributable to common stockholders | $635,000, versus $1.93 million loss; $0.03 per share | ($5.56) million, versus ($5.60) million; ($0.25) per share |
| Operating cash flow | Not presented separately for the quarter | $5.04 million provided, versus $1.75 million used |
- Q3 revenue growth reflected billboard acquisitions and higher insurance premiums. Billboard rentals rose 91.3% to $7.18 million; premiums earned rose 276.2% to $3.07 million. Insurance commissions fell 44.2% as more business was placed through the company’s own insurer, UCS.
- Nine-month billboard rentals were $21.11 million and premiums earned were $7.44 million. Segment gross profit was $12.78 million for billboards and $4.22 million for insurance; both segments continued to report operating losses.
- Q3 net income included $2.81 million of unrealized gains on marketable securities, $315,897 of dividend income, and $1.27 million of interest income. Nine-month other income included $2.86 million of unrealized securities gains and $432,409 of realized investment gains. These investment items helped offset operating losses and may fluctuate.
- Nine-month investing cash outflow was $59.52 million, including a $12 million purchase of DFH preferred units and $6.52 million for acquisitions, net of cash acquired. Financing cash inflow was $46.36 million, principally from stock issuance and new debt.
Balance sheet, debt and liquidity
- At September 30, total assets were $426.11 million, compared with $332.19 million at year-end 2018. Stockholders’ equity was $338.19 million.
- Cash and cash equivalents were $9.62 million; U.S. Treasury securities available for sale were $75.10 million. Management cited approximately $85 million of unrestricted cash and Treasury securities available. Marketable equity securities totaled $52.87 million.
- Long-term debt was $18.06 million, including $287,139 current maturities. The billboard subsidiary’s credit facility permits up to $40 million of aggregate borrowing; its $5 million revolver and incremental term loan were undrawn at quarter-end. Term Loan 1 bears fixed interest of 4.25%, with interest-only payments through July 2020 and maturity in August 2026.
- Operating lease liabilities totaled $48.70 million, with a 16.98-year weighted-average remaining term. The company adopted the new lease accounting standard in 2019, adding lease assets and liabilities to the balance sheet.
Changes, outlook and risks
- Revenue and operating scale expanded substantially following 2018 billboard acquisitions; the company reported approximately 3,000 billboards and 5,600 advertising faces as of November 1, 2019. A 61-structure West Virginia acquisition closed in August 2019 for cash and stock; its purchase-price allocation remained provisional.
- Management said existing cash, investments, available credit and expected operating cash flow should fund working capital and anticipated capital expenditures for the next 12 months. It expects to pursue billboard, insurance and other investment opportunities, potentially using cash, debt, seller financing or equity. No specific earnings or revenue guidance was provided.
- Management cautioned that acquisitions may not deliver expected benefits and that additional financing may not be available on favorable terms. Credit-facility covenants restrict Link’s activities; covenant testing was scheduled to begin December 31, 2019. The facility is secured by Link and subsidiary assets, not by the parent or its non-billboard businesses.
- The company identified material weaknesses in internal controls over journal entries and expenditures; controls were still being implemented and management concluded disclosure controls were not effective at quarter-end. Waitt and Key were excluded from the control assessment as recently acquired businesses. Management stated it believed the financial statements fairly presented the company’s position and results.
- The company added a risk disclosure that investments in a relatively small number of corporate securities could increase volatility in reported results. It reported approximately $6.6 million in bank deposits above federally insured limits.
- Routine litigation was described as not expected to have a material adverse effect. Subsequent events included an October billboard asset acquisition in Missouri for $1.34 million and additional at-the-market stock sales.
Important facts for investors to verify
- Whether billboard and insurance growth translates into sustained operating profitability, given continued operating losses and acquisition-related amortization.
- The composition, concentration and subsequent performance of marketable securities, and how much reported earnings depend on unrealized or realized investment gains.
- Progress in remediating material weaknesses and the timing of any assessment that controls are operating effectively.
- Debt covenant headroom, potential use of the remaining credit facility, and the cash demands of long-dated operating leases.
- Final purchase accounting for the 2019 Image acquisition and the returns and terms associated with the DFH preferred investment.
- Share dilution and proceeds from ongoing at-the-market offerings, alongside the company’s acquisition and capital-allocation plans.