Saga Communications, Inc. — Q2 2017 Form 10-Q
Reporting period: Quarter and six months ended June 30, 2017. Unless noted, figures are in millions of dollars. Saga operates radio stations and, pending a sale, television stations. The television operations are reported as discontinued operations; continuing operations primarily reflect radio.
Financial performance
| Metric | Q2 2017 | Q2 2016 | Six months 2017 | Six months 2016 |
|---|---|---|---|---|
| Continuing revenue | $30.261 | $30.866 | $56.416 | $58.330 |
| Continuing operating income | $5.876 | $6.396 | $7.849 | $10.006 |
| Continuing net income | $3.375 | $3.645 | $4.422 | $5.658 |
| Net income, including discontinued operations | $4.534 | $4.811 | $6.472 | $7.835 |
| Diluted EPS, including discontinued operations | $0.77 | $0.81 | $1.10 | $1.33 |
- Continuing operating margin was approximately 19.4% in Q2 versus 20.7% a year earlier; for the first half it was 13.9% versus 17.2%.
- Operating cash flow for the first half was $13.203, compared with $12.740 in 2016. Investing used $6.131, including $3.425 of capital expenditures and $1.650 for broadcast properties. Dividends paid were $3.541; cash increased $3.531 to $30.228.
- At June 30, cash was $30.228 and revolving-facility debt was $35.287. The company reported approximately $65 million of unused capacity on its $100 million revolver, maturing August 2020. A further $1.078 million affiliate debt was included in discontinued operations. The company said it was in compliance with credit covenants.
Changes versus prior year
- Q2 continuing revenue decreased 2.0%; first-half revenue decreased 3.3%. Management attributed the first-half decline mainly to lower political advertising, down $1.090 million on a same-station basis, as well as lower local and national revenue.
- Q2 operating income fell 8.1%; first-half operating income fell 21.6%. Lower station expenses partly offset revenue declines, while corporate general and administrative costs rose 9.9% in Q2 and 7.6% for the first half. Management cited higher legal and key-person life-insurance costs and restricted-stock compensation.
- First-half discontinued-operations income was $2.050 million, down 5.8%. The television stations generated $10.942 million of first-half revenue, up 0.8%, but station expenses increased 3.3%.
Outlook, transactions and risks
- Saga agreed to sell its Joplin, Missouri and Victoria, Texas television stations for approximately $66.6 million, subject to adjustments, and expected the sale to close in Q3 2017. The stations’ historical results are presented as discontinued operations. Depreciation ceased on those assets after they were classified as held for sale on May 9.
- Saga also agreed to acquire substantially all assets of specified South Carolina radio stations for approximately $23 million, subject to adjustments. It expected the acquisition to close in Q3, concurrently with the television sale, subject to conditions including FCC approval; the sale proceeds were intended to fund the acquisition.
- Management estimated 2017 capital expenditures of $5 million to $5.5 million, funded from operations. It expected reduced political advertising in 2017 compared with 2016. No earnings or revenue guidance was provided.
- Management said operating cash flow was expected to cover scheduled debt service, but noted that insufficient cash flow could require financing or asset sales. Risks cited include economic and advertising conditions, reliance on key personnel and stations, financial leverage, acquisition integration, regulation, new technologies and natural disasters. Five radio markets generated about 43% of continuing revenue and 49% of continuing station operating income in the first half.
- Regular quarterly dividends were $0.30 per share in Q1 and Q2 2017. Ordinary-course legal claims were not expected by management to materially affect the financial statements.
Important facts for investors to verify
- Whether the television sale and South Carolina station acquisition closed as expected, at what final prices, and with what net proceeds or adjustments.
- Subsequent advertising trends, particularly local and national revenue and political-advertising comparisons.
- Cash generation, capital spending, dividend funding, debt costs and covenant headroom; the revolver’s interest spread varies with leverage.
- The continuing impact of corporate cost increases and the concentration of revenue and station operating income in a handful of markets.
- The filing’s MD&A contains a percentage-sign inconsistency for the Q2 net-income change: the reported amounts show a decrease of approximately 5.8% year over year.