Saga Communications, Inc. — Q2 2018 Form 10-Q
Reporting period: Three and six months ended June 30, 2018. Unaudited results. Saga operated 75 FM and 33 AM radio stations in 26 markets and reported one continuing operating segment. Its Joplin, Missouri and Victoria, Texas television stations were sold in September 2017; their prior-period results are classified as discontinued operations.
Financial performance
| Metric | Q2 2018 | Q2 2017 | First half 2018 | First half 2017 |
|---|---|---|---|---|
| Net operating revenue | $32.234m | $30.261m | $60.243m | $56.416m |
| Operating income, continuing operations | $6.033m | $5.876m | $8.352m | $7.849m |
| Income from continuing operations, net of tax | $4.171m | $3.375m | $5.700m | $4.422m |
| Net income | $4.171m | $4.534m | $5.700m | $6.472m |
| Diluted EPS | $0.70 | $0.77 | $0.96 | $1.10 |
| Cash from operating activities | Not stated for quarter | Not stated for quarter | $13.193m | $13.203m |
- Q2 revenue rose 6.5%, while operating income increased 2.7%. Operating margin was approximately 18.7%, versus 19.4% a year earlier.
- First-half revenue rose 6.8% and operating income rose 6.4%; first-half operating margin was approximately 13.9%, broadly unchanged year over year.
- Q2 continuing-operations income increased 23.6%; first-half continuing-operations income increased 28.9%. Lower income tax expense, reflecting the federal corporate tax rate reduction from 35% to 21%, and higher interest and dividend income contributed to the increases.
- Reported net income declined year over year because 2017 included income from the television stations: $1.159m in Q2 and $2.050m for the first half. Continuing-operations earnings improved in both periods.
- Revenue mix: broadcast advertising was $29.798m in Q2 and $55.556m for the first half; digital advertising was $1.001m and $1.951m, respectively. Local advertising generated about 87% of radio gross revenue in the first half, compared with 89% in 2017.
Cash, debt and liquidity
- At June 30, cash and cash equivalents were $52.911m, compared with $53.030m at year-end 2017. Total current assets were $75.120m and current liabilities were $14.924m.
- Long-term debt was $25.0m, unchanged from December 31, 2017. The $100m revolving credit facility had approximately $75m of unused capacity. The facility maturity was extended to June 27, 2023; the company reported compliance with its financial covenants.
- First-half investing cash use was $2.599m, including $2.906m of property and equipment purchases. Financing cash use was $10.713m, including $10.091m of dividends and $0.547m of treasury-share purchases. Cash decreased by $0.119m over the period.
- The company paid two regular dividends of $0.30 per share during the first half. It had $21.9m remaining under its share repurchase authorization at June 30.
Changes, outlook and risks
- Reported revenue growth included approximately $2.156m in Q2 and $3.947m for the first half from stations not owned or operated for the entire comparable 2017 periods. Same-station revenue declined approximately $0.183m in Q2 and $0.120m for the first half. Same-station local revenue weakened, partly offset by national and political advertising growth.
- Station operating expenses increased 8.0% in Q2 and 8.8% for the first half, in each case faster than revenue; management attributed most of the increase to stations not owned or operated for the full comparison period. First-half corporate G&A declined 6.1%, including lower legal and key-man life insurance expenses.
- Management expected higher 2018 political advertising due to a greater number of national, state and local elections. It described seasonality, economic conditions, audience ratings, competition and advertising demand as important performance drivers. The filing provides no specific full-year revenue or earnings guidance.
- Management stated operating cash flow was expected to cover scheduled debt service, but noted that insufficient cash flow could require refinancing, equity issuance or asset sales. It continues to explore acquisitions. Radio faces competition from new technologies and other media; results are also exposed to local and national economic conditions, key markets and personnel, acquisition integration, regulation, natural disasters and other risks.
- Ordinary-course legal claims were disclosed; management did not expect potential liabilities to materially affect the financial statements. The company said disclosure controls were effective and reported no material change in internal control over financial reporting during the quarter.
Important facts to verify
- The MD&A states first-half 2017 net income was $6.742m, but the income statement reports $6.472m. The stated $0.772m year-over-year decline corresponds to $6.472m; confirm the MD&A figure is a typographical error.
- The capital expenditure outlook says anticipated expenditures “in 2017” of $5.0m–$6.0m, despite this being a 2018 filing. Confirm whether the intended forecast year is 2018.
- Assess the extent to which reported growth reflects acquired-station comparisons versus underlying same-station performance, particularly local advertising trends and expense growth.
- Review facility pricing, covenant headroom, and the sustainability of dividends and repurchases alongside cash generation and planned acquisition spending.
- Consider the concentration of revenue: the five largest markets represented approximately 41% of continuing-operations revenue and 49% of station operating income in the first half.