Saga Communications Inc. 2005 10-K Summary
Business Context and Reporting Period
This Form 10-K covers the fiscal year ended December 31, 2005. Saga Communications, Inc. is a broadcast company operating 87 radio stations, 5 television stations, 4 low-power television stations, and 5 radio information networks across 26 U.S. markets. The company's strategy focuses on acquiring and operating top-rated stations in mid-sized markets (ranked 20-200). As of December 31, 2005, the company owned or operated stations in markets including Columbus, Ohio; Milwaukee, Wisconsin; and Norfolk, Virginia.
Key Financial Metrics
| Metric (in thousands) | 2005 | 2004 |
|---|---|---|
| Net Operating Revenue | $140,790 | $134,644 |
| Operating Income | $27,037 | $31,387 |
| Net Income | $10,566 | $15,842 |
| Diluted EPS | $0.51 | $0.75 |
| Operating Cash Flow | $26,617 | $30,004 |
| Total Assets | $318,865 | $280,154 |
| Long-Term Debt (incl. current) | $148,911 | $121,161 |
| Working Capital | $22,618 | $21,778 |
Segment Performance: The Radio segment generated $125.6 million in revenue and $33.7 million in operating income. The Television segment generated $15.2 million in revenue and $1.5 million in operating income.
Material Changes vs. Prior Period
- Revenue Growth: Net operating revenue increased 4.6% to $140.8 million. Approximately $7.3 million of this increase was attributable to new acquisitions not owned in the prior year. On a "same station" basis, revenue decreased by approximately 1% due to an 87% drop in political advertising revenue and a 5% decline in national revenue.
- Profitability Decline: Operating income decreased 13.9% to $27.0 million, and Net Income decreased 33.3% to $10.6 million. This decline was driven by higher station operating expenses (up 10%), increased interest expense (up 67.8%), and a $1.2 million impairment charge on intangible assets.
- Acquisitions: The company completed several acquisitions in 2005, including stations in Ithaca, NY ($13.6M), Charlottesville, VA ($22.5M), Asheville, NC ($2.2M), and Victoria, TX ($0.3M). These were financed through operations, debt, and stock issuance.
- Impairment Charges: The company recorded a $1.2 million impairment charge related to goodwill and broadcast licenses in the Jonesboro, Arkansas (Radio) and Greenville, Mississippi (Television) markets.
Guidance, Outlook, Risks, and Unusual Items
- Debt and Liquidity: The company has a $200 million reducing revolving credit facility maturing in 2010. As of Dec 31, 2005, $148.9 million was outstanding with $52.2 million unused. The company expects cash flow from operations to meet debt service requirements, though the credit agreement requires quarterly reductions in revolving commitments starting March 2006.
- Accounting Changes: The company will adopt SFAS 123(R) regarding share-based payments effective January 1, 2006. This is expected to result in a pretax expense of approximately $300,000 in 2006 related to outstanding options.
- Key Risks:
- Debt Service: Substantial indebtedness requires significant cash flow for debt service; failure to meet covenants could lead to acceleration of debt.
- Regulatory: Operations are subject to FCC regulations regarding license renewals, ownership limits, and digital television conversion (deadline Feb 17, 2009).
- Competition: Competition from other media (satellite radio, internet, cable) and new technologies could adversely affect audience ratings and revenue.
- Key Personnel: The company is dependent on President and CEO Edward K. Christian, who controls approximately 57% of the voting power.
- Unusual Items: A $2.7 million "Other expense" was recorded in 2005, primarily due to losses on the disposition of assets, including a television tower made obsolete by DTV conversion ($1.3M) and land sales ($0.5M).
Investor Verification Checklist
- Debt Covenants: Verify compliance with financial ratios in the Credit Agreement, specifically regarding leverage and interest coverage, given the 67.8% increase in interest expense.
- Same-Station Revenue Trends: Investigate the 1% decline in same-station revenue and the 87% drop in political advertising to assess the sustainability of core operations absent acquisitions.
- Impairment Testing: Review the methodology used for the $1.2 million impairment charge to determine if further write-downs are likely in other markets.
- Pending Acquisition: Monitor the status of the contested $8 million acquisition of WOXL-FM in Asheville, NC, which is subject to FCC approval.
- Stock-Based Compensation Impact: Assess the full impact of the SFAS 123(R) adoption on 2006 earnings beyond the estimated $300,000 expense.