Saga Communications, Inc. — Q3 2018 Form 10-Q
Business and reporting period: Unaudited results for the three and nine months ended September 30, 2018. Saga operated 75 FM and 33 AM radio stations in 26 markets and reported one segment. Its television stations were sold in September 2017; their results are presented as discontinued operations.
Financial performance
| Metric | Q3 2018 | Q3 2017 | Nine months 2018 | Nine months 2017 |
|---|---|---|---|---|
| Net operating revenue | $31.648 million | $30.269 million | $91.891 million | $86.685 million |
| Operating income | $5.321 million | $5.509 million | $13.673 million | $13.358 million |
| Continuing-operations income, net of tax | $3.695 million | $2.965 million | $9.395 million | $7.387 million |
| Net income | $3.695 million | $33.416 million | $9.395 million | $39.888 million |
| Diluted EPS from continuing operations | $0.62 | $0.50 | $1.58 | $1.25 |
- Revenue increased 4.6% in Q3 and 6.0% year to date. Management attributed most of the increase to stations not owned or operated for the entire prior-year comparison; same-station revenue decreased $26,000 in Q3 and $151,000 year to date.
- Operating income rose 2.4% year to date but fell 3.4% in Q3 as station operating expenses grew faster than revenue. Operating margin, calculated as operating income divided by revenue, was about 16.8% in Q3 versus 18.2% a year earlier, and 14.9% for the first nine months versus 15.4%.
- Same-station local gross revenue declined $576,000 in Q3 and $2.172 million year to date. Increases in political, national, non-spot and digital revenue partly offset the declines; management linked political growth to the greater number of 2018 elections.
- Station operating expenses increased 7.7% in Q3 and 8.4% year to date. Management cited higher healthcare costs and music licensing fees; Q3 also included higher bad-debt expense. Lower corporate G&A partly offset these pressures.
- Lower income-tax expense, reflecting the federal corporate tax rate reduction from 35% to 21%, and higher interest income contributed to stronger continuing-operations earnings. Net income fell sharply versus 2017 because the prior-year periods included the television-station sale gain and discontinued-operations income: $30.451 million in Q3 and $32.501 million year to date, net of tax.
Cash, debt and liquidity
- Cash and cash equivalents were $48.794 million at September 30, 2018, down from $53.030 million at December 31, 2017. Current assets were $71.561 million and current liabilities $13.733 million.
- Operating cash flow for the first nine months was $18.167 million, compared with $18.677 million in 2017. Capital expenditures were $4.450 million; management anticipated approximately $6.0 million for full-year 2018.
- Long-term debt was $20.0 million, down from $25.0 million at year-end; the company paid down $5.0 million in September. The $100 million revolving facility was extended to June 27, 2023, with approximately $80 million of unused borrowing capacity. Saga reported compliance with its financial covenants.
- Financing cash outflows included $11.864 million of dividends and $1.295 million of share repurchases. Dividends declared were $0.30 per share in each of the first three quarters.
Outlook, risks and other notable items
- No specific revenue or earnings guidance was provided. Management said operating cash flow was expected to meet scheduled debt service and projected 2018 capital expenditures of approximately $6.0 million.
- On October 29, 2018, Saga agreed to acquire four Florida radio-station assets for $9.3 million, subject to adjustments, funded from operating cash flow. The company expected closing in late Q4 2018 or early Q1 2019.
- Management cited exposure to local and national economic conditions, advertising demand, technology and new media competition, key personnel and stations, acquisition integration, regulation, leverage and debt service, and natural disasters or terrorist attacks. Five largest markets contributed about 41% of revenue and 49% of station operating income year to date.
- Ordinary-course legal claims were not expected by management to materially affect the financial statements. Disclosure controls were reported effective, with no material quarterly change in internal controls over financial reporting.
- The 2018 adoption of the new revenue standard had no material financial-statement impact. Management was evaluating future lease, credit-loss and goodwill-impairment accounting standards.
Important facts for investors to verify
- Whether same-station local advertising weakness persists and whether political-advertising strength is temporary.
- How station expense growth, particularly healthcare and music licensing costs, affects operating margins.
- The closing, financing and expected contribution of the proposed $9.3 million Florida acquisition.
- Cash generation relative to dividends, repurchases, capital spending and debt repayment, including the company’s ability to retain liquidity.
- That year-over-year net-income comparisons are materially affected by the 2017 television-station sale; continuing-operations results are more comparable.