Saga Communications, Inc. — 2019 Form 10-K
Reporting period: Fiscal year ended December 31, 2019. This is an annual filing; fourth-quarter figures are included in the quarterly-results table. Unless noted, amounts are in millions of dollars.
Business context
Saga operates radio stations and derives most revenue from advertising. At year-end it owned or operated 79 FM and 34 AM stations, serving 27 markets. The television segment was sold in 2017 and is reported as discontinued operations; 2019 results are from continuing radio operations.
Financial performance and liquidity
| Metric | 2019 | 2018 |
|---|---|---|
| Net operating revenue | $123.072 | $124.829 |
| Operating income | $18.808 | $19.682 |
| Operating margin | 15.3% | 15.8% |
| Net income | $13.279 | $13.690 |
| Diluted earnings per share | $2.23 | $2.30 |
| Cash from continuing operating activities | $25.335 | $25.559 |
| Capital expenditures | $5.732 | $5.922 |
| Cash and cash equivalents at year-end | $44.034 | $44.729 |
| Long-term debt at year-end | $10.000 | $20.000 |
| Working capital at year-end | $49.219 | $45.430 |
Net margin was approximately 10.8% in 2019, compared with 11.0% in 2018. Year-end debt was due in 2023; Saga reported about $60 million of unused capacity on its $70 million revolving facility and compliance with its financial covenants. The company declared $1.20 per share in dividends for 2019, down from $1.45 in 2018.
Fourth quarter: Revenue was $31.791 million versus $32.938 million in Q4 2018; operating income was $5.434 million versus $6.009 million; net income was $3.841 million versus $4.295 million; diluted EPS was $0.64 versus $0.72.
Material changes versus prior period
- Full-year revenue declined 1.4%, operating income declined 4.4%, and net income declined 3.0% from 2018.
- Management attributed the same-station revenue decline chiefly to lower local, political, and national advertising, partly offset by growth in non-spot revenue and lower agency commissions. Fewer elections reduced political revenue.
- Station operating expenses fell 1.1%; lower healthcare, compensation, commission, amortization, trade, and music-license costs contributed.
- Debt declined by $10 million following $10 million in voluntary repayments funded by operations. Operating cash flow was broadly stable.
- 2017 comparisons include a $50.8 million pretax gain from the television-station sale and a $11.5 million tax benefit from federal tax reform; those items make comparisons of reported net income with 2017 less representative of ongoing results.
Outlook, risks, and unusual items
- No specific revenue or earnings guidance is provided. Saga estimated 2020 capital expenditures of $5.0 million to $5.5 million, expected to be funded from operations, and said it expects operating cash flow to cover scheduled debt service.
- Key risks include advertising sensitivity to economic conditions, competition from other media and digital platforms, market concentration, dependence on key personnel and stations, acquisition integration, FCC regulation and license renewal, cybersecurity, and variable interest rates. The five largest markets generated 39% of 2019 revenue.
- FCC licenses and goodwill are significant assets: broadcast licenses were $95.3 million and goodwill $19.0 million at year-end. No impairment was recorded in 2019; management cautioned that weaker market conditions or changed assumptions could prompt future impairment.
- The credit facility is secured by substantially all company and subsidiary assets other than FCC licenses and certain other assets, and contains restrictions on debt, dividends, investments, and other activities. Saga also identified the expected LIBOR phase-out as a potential source of uncertainty.
- Arkansas station-license renewals were pending; two AM renewal applications had been designated for hearing in 2018 over extended periods of silence. Management reported ordinary-course legal claims and did not expect potential liability to materially affect the financial statements.
- Lease accounting adoption added approximately $6.7 million of right-of-use assets and lease liabilities at January 1, 2019, with no retained-earnings or cash-flow impact. Management disclosed no 2019 broadcast-license impairment.
- The 2020 dividend of $0.32 per share was declared after year-end. Saga reported effective financial-reporting controls, and the auditor issued unqualified opinions on the financial statements and internal controls.
Important facts for investors to verify
- Whether advertising revenue and operating margins stabilize, particularly in the largest markets, and whether local and national ad trends improve.
- Cash generation after dividends, capital spending, and any acquisitions; confirm the company’s ability to maintain its dividend and debt-service capacity.
- Credit-facility terms, covenant headroom, floating-rate exposure, and the transition from LIBOR to a replacement benchmark.
- Status and outcome of pending FCC license renewals and any developments affecting broadcast-license valuations or impairment assumptions.
- Related-party arrangements, executive employment and change-in-control commitments, and the effect of concentrated voting control.