Saga Communications, Inc. — Q3 2019 Form 10-Q
Business context and reporting period. This unaudited quarterly report covers the three and nine months ended September 30, 2019. Saga operates 113 AM and FM radio stations across 27 markets; broadcast advertising is its primary revenue source.
Financial performance
| Metric | Q3 2019 | Q3 2018 | Nine months 2019 | Nine months 2018 |
|---|---|---|---|---|
| Net revenue | $31.274m | $31.648m | $91.281m | $91.891m |
| Operating income | $4.801m | $5.321m | $13.374m | $13.673m |
| Operating margin | 15.3% | 16.8% | 14.6% | 14.9% |
| Net income | $3.334m | $3.695m | $9.438m | $9.395m |
| Diluted EPS | $0.56 | $0.62 | $1.59 | $1.58 |
| Operating cash flow | Not separately reported | Not separately reported | $18.968m | $18.167m |
Dollar amounts are in U.S. dollars. The filing reports income and cash flow in thousands.
Balance sheet, debt and liquidity
- At September 30, cash was $41.072m, total current assets $63.440m and current liabilities $17.206m.
- Total debt was $10.0m, down from $20.0m at December 31, 2018; the company made two voluntary $5.0m repayments during 2019. It had approximately $60m of unused capacity on its $70m revolving facility, which matures June 27, 2023.
- All financial covenants were met. The facility is secured by substantially all company and subsidiary assets, with FCC licenses and certain other assets excluded.
- For the nine months, investing cash outflow was $5.180m, including $4.667m of capital expenditures and $0.763m for broadcast properties. Financing cash outflow was $17.445m, including $6.842m of dividends and $10.0m of debt repayments. Cash declined $3.657m to $41.072m.
- Stockholders’ equity was $190.403m. The company declared regular quarterly dividends of $0.30 per share; the Q3 dividend of approximately $1.8m was paid October 11, 2019.
Changes versus prior comparable periods
- Q3 revenue fell 1.2%, operating income fell 9.8%, and net income fell 9.7% year over year. Station operating expenses rose 0.7%, while corporate G&A edged down.
- Nine-month revenue declined 0.7% and operating income declined 2.2%, but net income increased 0.5% and diluted EPS rose from $1.58 to $1.59. Lower interest expense and income tax expense helped offset lower operating income.
- Same-station revenue weakened: management attributed the nine-month decline mainly to lower local, national and political advertising, partly offset by stronger non-spot revenue and lower agency commissions. Stations not owned or operated for the full comparison period added revenue but did not fully offset same-station declines.
- Broadcast advertising represented $28.562m of Q3 revenue and $83.245m for the nine months. Digital advertising revenue was $0.879m and $2.769m, respectively.
Outlook, commentary and risks
- Management expected lower political advertising in 2019 because fewer national, state and local elections were anticipated in most markets than in 2018.
- Expected 2019 capital expenditures were approximately $5.5m–$6.0m, to be funded from operating cash flow. No earnings or revenue guidance was provided.
- Management said operating cash flow should be sufficient for scheduled debt service, but cautioned that insufficient cash flow could require equity issuance, refinancing or asset sales, with no assurance such options would be available on favorable terms.
- Key disclosed risks include economic and advertising conditions, audience and market competition, dependence on key stations and personnel, acquisition integration, financial leverage, regulation, new media technologies, and natural disasters or terrorist attacks. Five largest markets accounted for about 38% of nine-month revenue and 44% of station operating income.
- Ordinary-course claims and other legal proceedings were disclosed; management did not expect potential liabilities to materially affect the financial statements.
- The company adopted the new lease standard in 2019. At September 30, right-of-use assets were $6.0m and lease liabilities were $6.1m. The adoption added approximately $6.7m of assets and liabilities at January 1, 2019, with no retained-earnings or cash-flow impact.
- A January 2019 acquisition of two stations in Greenfield, Massachusetts, cost $0.210m. The company continued to seek acquisition opportunities. The stock repurchase program had $19.8m of authorization remaining at quarter-end.
Important facts for investors to verify
- Whether local and national advertising trends, and the expected decline in political advertising, continue to affect same-station revenue and margins.
- Whether operating cash flow can sustain capital spending, dividends, debt service and any future acquisitions or repurchases.
- Revolving-credit availability, interest-rate exposure, covenant compliance and the terms of the secured credit facility.
- Performance and revenue contribution of recently acquired stations, alongside continued concentration in the five largest markets.
- Potential developments in ordinary-course litigation and the timing and valuation assumptions used in annual broadcast-license and goodwill impairment testing.