Saga Communications, Inc. — Q2 2011 Form 10-Q
Business and period. Saga operates radio and television stations. This unaudited report covers the quarter and six months ended June 30, 2011, compared with the same periods in 2010. Amounts below are in millions except per-share data.
Financial performance
| Metric | Q2 2011 | Q2 2010 | Six months 2011 | Six months 2010 |
|---|---|---|---|---|
| Net operating revenue | $33.183 | $32.887 | $61.891 | $60.874 |
| Operating income | $7.611 | $7.833 | $11.643 | $11.378 |
| Net income | $3.170 | $3.695 | $4.832 | $7.012 |
| Diluted EPS | $0.75 | $0.87 | $1.14 | $1.66 |
| Cash from operations | Not provided | Not provided | $11.556 | $12.826 |
- Q2 revenue grew 0.9%, while operating income fell 2.8% and net income fell 14.2%. Operating margin was approximately 22.9%, versus 23.8% a year earlier.
- First-half revenue increased 1.7% and operating income rose 2.3%; net income declined 31.1%. First-half operating margin was approximately 18.8%, versus 18.7%.
- Radio Q2 revenue was nearly flat at $28.611 million, and operating income declined 2.6% to $8.607 million. Television revenue rose 8.2% to $4.572 million and operating income increased 6.4% to $0.953 million. First-half television operating income grew 21.0%; radio operating income was nearly unchanged.
- For the six months, capital expenditures were $2.522 million. Cash increased $0.666 million to $12.863 million from year-end 2010; short-term investments were $1.014 million.
- At June 30, total debt was $89.078 million, including $3.000 million current and $86.078 million long-term. Total liabilities were $116.593 million and stockholders’ equity was $85.030 million. Current assets of $40.146 million exceeded current liabilities of $17.621 million.
Changes, outlook and notable items
- Revenue gains were concentrated in television, particularly local advertising in Joplin following the May 2011 tornado; Saga reported its Joplin stations were undamaged. Automotive and financial-services advertising also supported national sales. Political revenue declined against the 2010 election-year comparison.
- Operating costs rose, including healthcare costs (attributed primarily to Health Care Reform) and salary expense after a 2.5% restoration of prior salary reductions in April 2011. Corporate G&A also increased, partly due to IT spending.
- In June, Saga refinanced its prior debt with a $120 million facility maturing June 13, 2016: a $60 million term loan and a $60 million revolver. It had $32 million of unused revolver capacity at quarter-end and was in compliance with financial covenants. Substantially all assets other than FCC licenses and certain other assets secure the facility; subsidiaries guarantee it. Rates are variable, with margins tied to leverage.
- The refinancing caused a $1.326 million pretax write-off of old debt issuance costs. Lower interest expense partly offset this charge. First-half 2010 results included $3.561 million of nonrecurring income from an FCC license downgrade, contributing to the year-over-year net-income decline.
- Management expected 2011 capital expenditures of approximately $5.5 million, funded from operating cash flow, and stated operating cash flow was expected to cover scheduled debt service. No earnings or revenue guidance was provided. The filing cautions results are seasonal and first-half results are not necessarily indicative of full-year performance.
- Risks cited include economic and advertising conditions, concentration in key markets and stations, leverage and debt service, competition from new media, regulation, key personnel, acquisitions, and natural disasters. Four radio markets accounted for about 29% of first-half consolidated revenue. Management reported effective disclosure controls; it identified no litigation expected to have a material adverse effect.
- A new CEO employment agreement runs through March 2018, provides a $860,000 annual base salary with specified increases, and includes significant change-in-control and termination benefits.
Investor verification points
- Review the credit agreement’s variable-rate exposure, covenant tests, amortization terms, collateral and restrictions on distributions, acquisitions and additional debt.
- Assess whether revenue gains tied to Joplin recovery and broader local advertising can persist, and how the absence of 2010 election-year political revenue affects comparisons.
- Reconcile the year-over-year earnings decline, especially the prior-period license-downgrade gain and current refinancing charge.
- Track healthcare and other operating-cost growth against revenue, and verify delivery of the stated $5.5 million 2011 capital-expenditure plan.
- Evaluate the concentration in major markets and the financial commitments in the CEO employment agreement.