Saga Communications, Inc. — Q2 2020 Form 10-Q
Reporting period: Three and six months ended June 30, 2020. Saga operates radio broadcast properties in 27 markets, with 79 FM and 34 AM stations. The unaudited interim results reflect the severe business disruption from COVID-19.
Key financial results
Amounts below are in millions, except per-share data and percentages.
| Metric | Q2 2020 | Q2 2019 | Six months 2020 | Six months 2019 |
|---|---|---|---|---|
| Net operating revenue | $16.866 | $32.191 | $42.917 | $60.007 |
| Operating income (loss) | $(8.659) | $6.608 | $(6.492) | $8.573 |
| Net income (loss) | $(4.911) | $4.734 | $(3.231) | $6.104 |
| Diluted earnings (loss) per share | $(0.82) | $0.80 | $(0.54) | $1.03 |
| Operating margin | (51.3)% | 20.5% | (15.1)% | 14.3% |
Q2 revenue declined 47.6% year over year; first-half revenue fell 28.5%. Q2 broadcast advertising revenue was $15.241 million, digital advertising $0.709 million, and other revenue $0.916 million. First-half operating cash flow was $8.319 million, versus $12.830 million in 2019. Capital expenditures were $1.379 million for the first half, compared with $3.162 million a year earlier.
Balance sheet, debt and liquidity
- At June 30, 2020, cash and cash equivalents were $48.909 million; total current assets were $63.680 million and current liabilities $14.710 million.
- Long-term debt was $10.000 million, unchanged from December 31, 2019. Saga reported approximately $60 million of unused capacity on its $70 million revolving credit facility, maturing June 27, 2023. The company was in compliance with its financial covenants at quarter-end.
- Total assets were $243.053 million and stockholders’ equity was $188.593 million. Cash exceeded reported debt by approximately $38.9 million.
- Cash increased $4.875 million during the first half. Operating cash flow and $1.669 million in proceeds from asset sales were partly offset by $3.716 million of cash dividends and other financing uses.
Material changes and unusual items
- COVID-19-related shutdowns, advertiser cancellations and reduced business activity drove the revenue decline. Local and national advertising, events and barter revenue were affected; political advertising increased year over year.
- Station operating expenses fell 18.5% in Q2 and 11.3% in the first half, but not enough to offset lower revenue. Corporate general and administrative expense increased 13.5% in Q2 and 12.9% in the first half.
- Saga recorded a $3.757 million non-cash impairment charge on broadcast licenses in eight markets. The impairment reflected lower projected revenue, a higher discount rate and lower mature margins in some smaller markets. No goodwill or other long-lived asset impairment was identified. Further impairment is possible if market conditions worsen.
- First-half other operating income included an approximately $1.4 million gain on the sale of a tower-site property. Other income included a $0.208 million insurance gain related to tower damage.
- The board suspended the quarterly cash dividend on June 18, 2020, citing COVID-19 uncertainty. The $0.32-per-share dividend declared in March was paid in April. The company also halted further share repurchases under its buyback plan.
Outlook, commentary and risks
Management expected Q3 2020 revenue to be 25% to 30% below Q3 2019. It anticipated 2020 capital expenditures of approximately $2.0 million to $2.5 million, subject to its cost-control efforts and business conditions. Management said operating cash flow was expected to cover quarterly debt service, but cautioned that prolonged economic weakness could materially affect financial position, results and cash flows.
Management described actions to preserve liquidity, including delaying practical capital spending, reducing costs, closely managing receivables and collections, suspending dividends and buybacks, and adapting employee and customer operations to health restrictions. Key uncertainties include the duration and severity of the pandemic, further government restrictions, advertiser demand and the accuracy of forecasts under volatile conditions. The filing also identifies dependence on key markets and stations, competition from new media, regulatory requirements, and the company’s ability to meet debt obligations as risks.
Broadcast licenses and goodwill together represented approximately 45.5% of total assets. Management’s impairment estimates depend on market growth, revenue, margins, competition and discount rates; it disclosed that a 10% lower license fair value would have produced approximately $4.8 million of additional impairment. The filing does not provide a clear numerical forecast for full-year revenue or earnings.
Most important facts for investors to verify
- Whether Q3 revenue fell within or outside management’s projected 25%–30% year-over-year decline, and how advertising demand subsequently developed.
- Whether cash generation, receivable collections and unused credit capacity remained adequate as the downturn continued, and whether covenant compliance was maintained.
- Whether further broadcast-license impairments were recorded as market forecasts and valuation assumptions changed.
- Whether the dividend remained suspended and when, if at all, the board reinstated distributions or share repurchases.
- Whether actual capital spending stayed within management’s $2.0 million–$2.5 million estimate and whether cost reductions offset any continued revenue weakness.