SAGA COMMUNICATIONS INC annual report, FY2013

Saga Communications, Inc. — 2013 Form 10-K

Business context and reporting period. This annual report covers the fiscal year ended December 31, 2013; it is not a standalone fourth-quarter filing. Saga operates radio and television broadcasting businesses, deriving most revenue from advertising. At year-end, it reported 91 radio stations, four television stations, four low-power television stations, and five radio information networks. Results are presented in Radio and Television segments.

Financial performance and position

Metric	2013	2012
Net operating revenue	$129.478 million	$130.259 million
Operating income from continuing operations	$26.296 million	$32.011 million
Net income	$15.273 million	$17.925 million
Diluted earnings per share	$2.64	$3.16
Cash from operating activities	$26.712 million	$30.955 million
Interest expense	$1.305 million	$1.733 million

Revenue declined 0.6%; operating income fell 17.9%, and net income declined 14.8%. Operating margin was approximately 20.3%, compared with 24.6% in 2012; net margin was approximately 11.8%, compared with 13.8%.
Radio revenue was $109.818 million, down 1.7%, and segment operating income was $27.852 million, down 17.5%. Television revenue increased 6.3% to $19.660 million, while segment operating income rose 6.7% to $6.616 million.
Cash and cash equivalents were $17.628 million. Working capital was $28.079 million; current assets were $42.081 million and current liabilities $14.002 million.
Debt, including the current portion and the Surtsey-related debt guarantee, totaled $46.078 million, down from $58.828 million. The company had $75 million of unused revolving borrowing capacity and reported compliance with its credit facility covenants. The facility matures May 31, 2018.
Capital expenditures were $5.152 million. Management expected 2014 capital expenditures of approximately $5.5 million, to be funded from operating cash flow. The company paid a special dividend of $1.80 per share, totaling $10.3 million.

Material changes versus the prior comparable period

Political advertising revenue fell $5.928 million year over year, following the 2012 election cycle. This was a major offset to higher local, national, and retransmission-consent revenue.
Station operating expenses rose 3.0% to $92.977 million. The comparison benefited from $851,000 of non-recurring music-rights credits in 2012; 2013 also had higher sales costs, programming salaries, and health-care costs.
A fourth-quarter, non-cash impairment charge of $2.033 million reduced the carrying value of radio broadcast licenses in Asheville, North Carolina; Keene, New Hampshire/Brattleboro, Vermont; and Mitchell, South Dakota. No impairment was recorded in 2012.
Operating cash flow decreased by $4.243 million. Debt payments were $12.750 million, and the company received $2.960 million from the sale of WXVT-TV, completed in January 2013.
Fourth-quarter 2013 revenue was $33.760 million, compared with $35.541 million in fourth-quarter 2012. Fourth-quarter operating income from continuing operations was $5.738 million versus $9.790 million, including the 2013 impairment charge.

Outlook, commentary, risks, and unusual items

No formal revenue or earnings guidance was provided. Management said operating cash flow was expected to cover interest and scheduled principal payments, while noting that insufficient cash flow could require refinancing, asset sales, or equity issuance.
Management cited economic uncertainty and advertising sensitivity as risks. Advertising is seasonal and generally weakest in the first quarter; most revenue comes from local advertising. The five largest markets accounted for approximately 34% of consolidated revenue in 2013, and Milwaukee had experienced a multiyear revenue decline amid competitive pricing, ratings changes, and weaker category spending.
Broadcast licenses represented 45.8% of total assets. Their fair values depend on estimates including market revenue, share, margins, growth, and discount rates; management warned that less favorable conditions could result in further impairment.
Other significant risks include competition from traditional and digital media, FCC regulation and license renewals, interest-rate exposure, acquisition and integration risks, and reliance on key personnel and stations. A 1 percentage-point increase in average interest rates, holding the debt structure constant, would have increased 2013 interest expense by an estimated $534,000.
The company guaranteed up to $1.25 million of Surtsey Media debt; $1.078 million was outstanding at year-end, with no recourse provision. Surtsey is owned by the CEO’s daughter and has operating arrangements with Saga for stations in Victoria, Texas, and the Joplin market. FCC rule changes could affect these arrangements.
The company sold WXVT-TV for approximately $3 million and recorded a $223,000 after-tax gain in discontinued operations. Subsequent to year-end, it acquired an Ithaca, New York FM station and three translators for approximately $715,000.
Management reported effective disclosure controls and internal control over financial reporting. Ernst & Young issued unqualified opinions on the financial statements and internal controls. Management said no litigation was likely to have a material adverse effect.

Important facts for investors to verify

Whether core advertising trends recover after the non-election-year decline in political revenue, particularly in Milwaukee and other major markets.
Whether operating expenses remain elevated and whether cash generation can sustain debt service, planned capital spending, acquisitions, and shareholder distributions.
The assumptions and market-level sensitivity behind the $2.033 million license impairment, and the risk of additional write-downs.
Credit-facility covenant headroom, floating-rate exposure, the 2018 maturity, and the treatment of the Surtsey debt guarantee.
The financial and regulatory terms of the related-party Surtsey arrangements, including exposure to FCC rule changes and the company’s options over the stations.