Saga Communications, Inc. — Q3 2015 Form 10-Q
Business context and reporting period. This unaudited quarterly report covers the three and nine months ended September 30, 2015, compared with the corresponding 2014 periods. Saga operates radio and television broadcasting businesses. Amounts below are in millions unless otherwise noted.
Financial performance and liquidity
| Metric | Q3 2015 | Q3 2014 | Nine months 2015 | Nine months 2014 |
|---|---|---|---|---|
| Net operating revenue | $33.831 | $34.373 | $97.250 | $97.627 |
| Operating income | $6.497 | $5.700 | $17.761 | $18.235 |
| Operating margin | 19.2% | 16.6% | 18.3% | 18.7% |
| Net income | $3.112 | $3.245 | $9.717 | $10.461 |
| Diluted EPS | $0.53 | $0.56 | $1.67 | $1.80 |
| Operating cash flow | Not provided for quarter | Not provided for quarter | $19.348 | $20.971 |
Q3 station operating expense fell 7.7% to $24.324 million, while corporate general and administrative expense rose 11.7% to $2.577 million. For the nine-month period, station operating expense decreased 1.9% to $71.400 million; corporate expense increased 16.1% to $7.642 million.
At September 30, cash was $18.866 million, current assets were $46.385 million, and current liabilities were $16.475 million. Long-term debt was $36.365 million, including $35.287 million drawn on the revolving facility and $1.078 million of affiliate-secured debt. The company reported approximately $64 million of unused capacity under its new $100 million revolving credit facility, maturing August 18, 2020, and compliance with its financial covenants.
Nine-month investing cash use was $15.282 million, including $4.427 million for property and equipment and $11.632 million for broadcast-property acquisitions. Financing cash use was $3.107 million. Cash increased by $0.959 million to $18.866 million.
Material changes versus comparable periods
- Q3 revenue decreased 1.6%; nine-month revenue decreased 0.4%. Lower political advertising was a key drag, with management attributing the decline to fewer elections in its markets.
- Q3 operating income increased 14.0% despite lower revenue, mainly because station expenses declined, including lower ratings-licensing costs. Nine-month operating income declined 2.6%, as higher corporate costs and other operating expense offset station-cost savings.
- Net income declined 4.1% in Q3 and 7.1% for the nine-month period. Nine-month diluted EPS fell from $1.80 to $1.67.
- Radio revenue declined 2.9% in Q3 and 1.6% for nine months; television revenue increased 6.5% and 6.7%, respectively. Television growth was primarily attributed to higher retransmission revenue.
- Dividends declared were $0.20 per share in each 2015 quarter through September, versus $0.20 per share in each of the first three 2014 quarters; nine-month dividends declared rose to $0.60 from $0.40 per share.
Outlook, management commentary, risks and unusual items
- Management anticipated 2015 capital expenditures of approximately $5.5–$6.0 million, funded from operating cash flow. It believed operating cash flow would cover scheduled debt service, while cautioning that insufficient cash flow could require equity issuance, refinancing, or asset sales.
- After quarter-end, Saga agreed to acquire WLVQ-FM in Columbus, Ohio, for $13 million, subject to FCC approval, with an expected first-quarter 2016 closing. It planned to operate the station under a local marketing agreement beginning on or before November 16, 2015; financing could come from operations, facility borrowings, or other financing.
- In August 2015, Saga replaced its prior credit agreement with a five-year $100 million revolving facility. The refinancing resulted in a $0.557 million pre-tax write-off of old debt issuance costs. Substantially all assets other than FCC licenses and certain other assets secure the facility; covenants restrict, among other things, debt, dividends, investments, and liens.
- Q3 other operating expense included a $0.400 million loss from donating WBOP-FM to Liberty University to comply with FCC ownership rules. Nine-month other income included a $0.417 million insurance gain following lightning damage to transmitters; insurance proceeds were $0.777 million.
- Management identified advertising demand and local economic conditions, political-advertising variability, audience ratings and competition, technological change, regulation, leverage and debt service, and integration of acquired stations as risks. It also highlighted uncertainty around the FCC television spectrum incentive auction and repacking, scheduled to commence March 29, 2016.
- Ordinary-course claims and legal proceedings were disclosed; management did not expect potential liabilities to materially affect the financial statements. Disclosure controls were assessed as effective, with no material quarterly change in internal control over financial reporting.
Important facts for investors to verify
- Whether radio advertising trends and lower political revenue persisted, and whether retransmission and digital revenue growth continued.
- The effects of the Harrisonburg acquisitions and planned WLVQ acquisition on revenue, operating costs, goodwill, and liquidity; the 2015 acquisition purchase-price allocation remained preliminary.
- Current borrowing, interest-rate spreads, covenant headroom, and availability under the revolving facility after acquisition spending, dividends, and capital expenditures.
- The sustainability of the $0.20 quarterly dividend and the extent to which future dividends and acquisitions can be funded from operating cash flow.
- The outcome and potential business impact of the FCC spectrum auction and repacking process.