Saga Communications, Inc. — Q2 2012 Form 10-Q
Reporting period: Three and six months ended June 30, 2012; amounts are in millions of dollars unless otherwise stated. Saga operates 91 radio stations and five radio information networks across 23 markets, plus television stations and low-power stations in two markets. Greenville, Mississippi station WXVT is classified as discontinued operations and held for sale.
Financial performance and liquidity
| Metric | Q2 2012 | Q2 2011 | First half 2012 | First half 2011 |
|---|---|---|---|---|
| Net operating revenue | $32.986 | $32.764 | $62.309 | $61.012 |
| Operating income, continuing operations | $9.087 | $7.799 | $14.101 | $11.973 |
| Operating margin, calculated | 27.5% | 23.8% | 22.6% | 19.6% |
| Income from continuing operations, after tax | $5.199 | $3.283 | $7.902 | $5.031 |
| Net income | $5.132 | $3.170 | $7.837 | $4.832 |
| Diluted earnings per share | $1.21 | $0.75 | $1.84 | $1.14 |
- Cash flow: First-half operating cash flow was $14.756, versus $11.556 a year earlier. Capital expenditures were $2.502; investing cash use was $2.576. Financing cash use was $10.330, primarily reflecting $10.250 of debt payments. Cash increased $1.850 to $8.841.
- Debt and liquidity: Long-term debt was $58.828 at June 30, down from $69.078 at year-end 2011; no current portion was reported. The $117.8 credit facility includes a $57.8 term loan and $60.0 revolver, with all $60.0 of revolving capacity unused. The facility matures June 13, 2016; the company reported compliance with its financial covenants and no required term-loan amortization at quarter-end.
- Balance sheet: Total assets were $191.844 and stockholders’ equity was $100.815. Current assets of $33.667 exceeded current liabilities of $13.936 (approximately 2.4x current ratio).
Changes versus the prior comparable period
- Second-quarter revenue rose 0.7%, while first-half revenue rose 2.1%. First-half radio revenue increased 1.1%; television revenue increased 9.3%.
- Operating income increased 16.5% in Q2 and 17.8% in the first half, with lower station expenses more than offsetting modest revenue growth. Radio operating income increased 11.1% in Q2 and 11.4% year to date; television operating income increased 28.5% and 27.5%, respectively.
- Political advertising and retransmission-consent revenue supported growth; national advertising declined. For the first half, gross political revenue increased $0.882 and retransmission-consent revenue increased $0.628, while gross national revenue fell $1.056.
- Station expenses fell 4.6% in Q2 and 1.8% year to date. Management cited lower music licensing fees, including credits from performance-rights organizations, and lower health-care costs; higher salaries partly offset these savings.
- Interest expense declined to $0.458 in Q2 and $0.986 in the first half. Net income growth also benefited from the absence of the prior-year $1.326 debt-issuance-cost write-off.
Outlook, commentary, and risks
- Management expected 2012 political advertising to increase with the presidential and other elections. It anticipated approximately $1.8 of 2012 retransmission-consent revenue, with approximately $0.570 payable to network partners under affiliation agreements.
- Expected 2012 capital expenditures were $4.5–$5.0, funded from operating cash flow. Management believed operating cash flow would cover quarterly debt service, while warning that insufficient cash could require equity issuance, refinancing, or asset sales.
- WXVT was under a definitive $3.0 sale agreement, subject to adjustments and FCC approval, with closing expected in 2012. The company said it did not expect a material effect on its consolidated financial statements; the station generated discontinued-operations losses of $0.067 in Q2 and $0.065 in the first half.
- Management identified advertising demand and local economic conditions as important operating drivers. Milwaukee revenue had declined amid aggressive competitive pricing, changed rating methodology, demand shifts toward 30-second spots, and weakness in certain advertising categories. Four radio markets together accounted for about 28% of first-half consolidated revenue.
- Other disclosed risks include financial leverage and debt service, dependence on key personnel and stations, competition, regulation, new technologies, and natural disasters or terrorist attacks. The filing states that interim results are not necessarily indicative of full-year results. No material change in market-risk disclosures was reported.
- A one-time benefit to expense comparisons came from lower music-licensing rates and credits for past fees. The prior-year comparison also included a $1.326 debt-cost write-off and $0.105 of non-recurring other income. The filing does not provide full-year earnings or revenue guidance.
Important facts for investors to verify
- Whether political advertising and retransmission-consent growth persist after the 2012 election cycle, and how national-advertising weakness develops.
- Completion, timing, final proceeds, and FCC approval for the WXVT sale, along with its impact on ongoing results.
- Whether first-half expense reductions—particularly licensing credits and lower health-care costs—are recurring, and the effect of salary restoration and retransmission fees.
- Future debt repayment, interest-rate exposure, covenant headroom, and the availability of the $60.0 revolver; the facility is secured by substantially all assets other than specified exclusions.
- Execution of the $4.5–$5.0 capital-spending plan and cash generation sufficient to fund operations and debt service.
- Performance in Milwaukee and other major markets, given market concentration and the company’s sensitivity to local advertising conditions.