Saga Communications, Inc. — Q3 2011 Form 10-Q
Reporting period: Quarter and nine months ended September 30, 2011. Financial statements are unaudited; amounts below are in millions unless stated otherwise.
Business context
Saga operates radio and television stations, earning primarily advertising revenue. Its Radio segment includes 91 stations and five information networks across 23 markets; Television includes five stations and four low-power stations across three markets.
Financial performance and liquidity
| Metric | Q3 2011 | Q3 2010 | Nine months 2011 | Nine months 2010 |
|---|---|---|---|---|
| Net operating revenue | $32.494 | $32.810 | $94.385 | $93.684 |
| Operating income | $6.976 | $7.440 | $18.619 | $18.818 |
| Net income | $3.694 | $3.557 | $8.526 | $10.569 |
| Diluted EPS | $0.87 | $0.84 | $2.01 | $2.50 |
- Q3 revenue fell 1.0% and operating income fell 6.2%; net income rose 3.9%, mainly as interest expense declined $0.729 million.
- Nine-month revenue increased 0.8%, while operating income declined 1.1% and net income declined 19.3%. The comparison includes a $1.326 million debt-issuance-cost write-off in 2011 and $3.398 million of other income in 2010, principally related to a prior FCC license downgrade.
- Derived operating margins were approximately 21.5% for Q3 2011 versus 22.7% in Q3 2010, and 19.7% for the first nine months of 2011 versus 20.1% in 2010.
- Operating cash flow was $19.421 million for the first nine months, compared with $19.229 million in 2010. Capital expenditures were $4.140 million; cash ended the period at $7.547 million, down from $12.197 million at year-end 2010.
- Total debt was $76.328 million at September 30, 2011, versus $96.078 million at December 31, 2010. The June 2011 refinancing established a $60 million term loan and $60 million revolving facility, maturing June 13, 2016. Approximately $44 million of revolver capacity remained unused; the company reported compliance with financial covenants.
- Current assets were $31.304 million and current liabilities $16.556 million at September 30. The company made two additional $1 million debt payments on October 19 and November 4, 2011.
Changes and management commentary
- Q3 revenue declines reflected lower political advertising in a non-election year and softer local radio advertising, partly offset by higher national revenue. Radio operating income decreased 1.3%; Television operating income decreased 11.5%.
- For the first nine months, national advertising increased, including from financial services and automotive advertisers. Joplin local advertising also increased after a May 2011 tornado; Saga reported its Joplin stations were not damaged. Television revenue rose 4.6% and segment operating income rose 5.9%; radio revenue was nearly flat.
- Management cited higher healthcare costs and restored salary increases as contributors to higher station expenses. Political revenue had declined in 2011 and management expected that trend to continue in Q4.
- Management anticipated 2011 capital expenditures of $5.5 million to $6.0 million, funded from operating cash flow, and stated it expected operating cash flow to cover scheduled debt service. This is not a broader earnings or revenue forecast.
Risks, contingencies and unusual items
- Risks cited include leverage and debt service, economic conditions, reliance on key personnel and stations, regulation, new media and technology competition, natural disasters, and market concentration. Four radio markets together accounted for approximately 29% of nine-month 2011 revenue.
- The credit facility is secured by substantially all company and subsidiary assets other than FCC licenses and certain other assets, and restricts matters including additional debt, investments, dividends and distributions.
- A new CEO employment agreement effective June 1, 2011 runs through March 31, 2018, with $860,000 annual base salary subject to specified increases and change-in-control provisions, among other benefits.
- The company said it was involved in litigation incidental to its business, but management did not believe any current proceeding was likely to have a material adverse effect. Management reported effective disclosure controls and no material change in internal control over financial reporting during the quarter.
Investor verification priorities
- Assess the drivers and persistence of advertising trends, particularly political revenue comparisons, local-market softness, and the Joplin-related uplift.
- Reconcile nine-month earnings against the debt-cost write-off and prior-year license-related income; evaluate underlying operating performance separately.
- Verify debt balances, borrowing availability, covenant compliance, interest-rate exposure, and the effect of post-quarter debt payments.
- Compare actual 2011 capital spending with management’s $5.5 million to $6.0 million estimate and monitor cash generation against debt service.
- Review the CEO agreement’s compensation, benefits, and change-in-control obligations, along with the concentration and other risks identified in the filing.