Saga Communications, Inc. — Q2 2013 Form 10-Q
Business context and period. Saga operates radio and television stations and networks, generating most revenue from advertising. This filing covers the quarter and six months ended June 30, 2013, compared with the same periods in 2012. Financial amounts below are in millions unless stated otherwise.
Financial performance
| Metric | Q2 2013 | Q2 2012 | Six months 2013 | Six months 2012 |
|---|---|---|---|---|
| Net operating revenue | $33.832 | $32.986 | $62.789 | $62.309 |
| Operating income from continuing operations | $8.357 | $9.087 | $13.278 | $14.101 |
| Operating margin | 24.7% | 27.5% | 21.1% | 22.6% |
| Net income | $4.804 | $5.132 | $7.753 | $7.837 |
| Diluted earnings per share | $0.84 | $0.91 | $1.35 | $1.38 |
| Cash provided by operating activities | Not reported separately | Not reported separately | $11.046 | $14.756 |
- Revenue and segment trends: Q2 revenue increased 2.6%, while six-month revenue rose 0.8%. Radio revenue was nearly flat in Q2 and down 1.0% for the half; radio operating income fell 11.5% and 9.7%, respectively. Television revenue increased 14.5% in Q2 and 11.9% for the half; segment operating income increased 28.2% and 27.5%.
- Profitability: Q2 operating income decreased 8.0%; six-month operating income decreased 5.8%. Station operating expense rose 7.0% in Q2 and 2.8% for the half. Lower interest expense partly offset operating declines. Six-month net income includes a $0.223 million after-tax gain from the sale of WXVT; Q2 net income was entirely from continuing operations.
- Cash flow and capital spending: First-half operating cash flow declined $3.710 million year over year. Capital expenditures were $2.465 million versus $2.502 million in the prior-year half. Investing cash flow was positive $0.322 million, including $2.960 million from the television station sale; financing cash outflow was $7.980 million, including $7.750 million of debt repayments and $0.289 million of debt amendment fees. Cash increased to $19.303 million from $15.915 million at year-end 2012.
- Liquidity and debt: At June 30, cash was $19.303 million, total current assets were $44.395 million and current liabilities were $13.410 million. Debt was $51.078 million, including $50.000 million classified as long-term and $1.078 million as current. The company had $70 million of unused capacity on its $120 million credit facility. All financial covenants were met.
Material changes, outlook and risks
- On May 31, 2013, Saga amended and extended its credit facility to May 31, 2018, changed the term-loan/revolver allocation to $30 million/$90 million, and revised interest-rate spreads and certain covenants. Borrowings are floating-rate; substantially all assets other than FCC licenses and certain other assets are pledged.
- Q2 revenue gains reflected local advertising and television retransmission-consent revenue, while political advertising declined as expected in a non-election year. Management cited stronger markets including Columbus, Norfolk and Victoria, offset by softness in Milwaukee and Portland. The filing says five radio markets accounted for about 34% of consolidated revenue in the first half; Milwaukee’s decline was attributed to competition, pricing and ratings changes, and weaker category spending.
- The prior-year quarter and first half included $0.851 million of non-recurring credits from performance-rights organizations, contributing to the year-over-year expense increase in 2013.
- Management expected 2013 capital expenditures of approximately $5.5 million, to be funded from operating cash flow. It stated operating cash flow was expected to cover quarterly debt service, but warned that insufficient cash flow could require equity issuance, refinancing or property sales; availability and terms are not assured. No specific revenue or earnings guidance is provided.
- Key risks include advertising and economic conditions, concentration in important markets and stations, leverage and debt service, competition, regulation, technology changes, and the ability to integrate acquisitions. Results are seasonal and the company cautions that interim results are not necessarily indicative of full-year results. Management reported no material market-risk changes, no litigation expected to materially affect results, and effective disclosure controls.
Important facts for investors to verify
- Whether radio-market weakness, particularly in Milwaukee, persists and how it affects station operating income.
- Whether revenue and expense trends improve after the prior-year $0.851 million credit comparison and ongoing political-advertising decline.
- Cash-flow generation, the planned $5.5 million capital spending level, and the pace of debt repayment or revolver use.
- Compliance with credit-facility covenants and the impact of floating interest rates, pledged assets and amended borrowing terms.
- The continuing contribution of television growth and retransmission-consent revenue, alongside the completed WXVT sale and its reported gain.