Saga Communications, Inc. — Q1 2017 Form 10-Q
Business and period: The company operates radio stations in 24 markets and television stations in two markets. This unaudited report covers the three months ended March 31, 2017, compared with Q1 2016. Amounts below are in millions except per-share data.
Financial results
| Metric | Q1 2017 | Q1 2016 | Change |
|---|---|---|---|
| Net operating revenue | $31.410 | $32.745 | -4.1% |
| Operating income | $3.485 | $5.343 | -34.8% |
| Operating margin | 11.1% | 16.3% | -5.2 percentage points |
| Net income | $1.938 | $3.024 | -35.9% |
| Diluted EPS | $0.32 | $0.52 | -38.5% |
| Cash provided by operations | $5.455 | $7.190 | -24.1% |
| Capital expenditures | $1.439 | $1.010 | +$0.429 |
Net income margin was 6.2%, compared with 9.2% a year earlier. The board declared dividends of $0.30 per share in Q1, versus $0.25 in Q1 2016. The Q1 dividend, totaling approximately $1.8 million, was paid April 14.
Liquidity, debt and balance sheet
At March 31, cash and equivalents were $30.580 million, up from $26.640 million at year-end 2016. Current assets were $54.517 million and current liabilities $15.066 million. Long-term debt was $36.365 million, unchanged from year-end in total; the $1.078 million affiliate loan was reclassified from current to long-term after its maturity was extended in April 2017 to May 1, 2020. The company had approximately $65 million of unused capacity under its $100 million revolving facility, which matures August 18, 2020. It reported compliance with all facility covenants.
Operating cash flow less capital expenditures was approximately $4.016 million, compared with $6.180 million in Q1 2016. Investing activities used $1.515 million in Q1 2017, including no acquisition spending reported in the quarter; cash increased by $3.940 million. The company stated that operating cash flow should cover scheduled debt service, but warned that other financing or asset sales could be needed if cash flow proves insufficient.
Comparative performance and drivers
- Radio: Revenue declined 4.8% to $26.155 million; segment operating income fell 23.6% to $4.836 million. Lower political revenue (down $1.190 million) and local revenue (down $0.178 million) drove the revenue decline. Higher health care and music licensing costs contributed to expense growth.
- Television: Revenue edged down 0.5% to $5.255 million, while segment operating income declined 12.8% to $1.512 million. Higher retransmission revenue was largely offset by lower political revenue; health care and program rental costs increased.
- Consolidated costs: Station operating expenses rose 1.5% and corporate general and administrative expenses rose 5.4%. Management cited higher health care costs and key-person life insurance costs. Interest expense increased 14.8%, primarily due to higher interest rates.
- Consolidated revenue fell $1.335 million, primarily because Q1 2016 had more political advertising associated with elections. Same-station revenue declined 4.2%.
Outlook, risks and other developments
Management expects lower political advertising in 2017 because fewer national, state and local elections are scheduled in most markets than in the prior year. It anticipates 2017 capital expenditures of approximately $5 million to $5.5 million, funded from operations. No earnings or revenue guidance was provided. The company continues to pursue broadcast acquisitions and expects future acquisitions and dividends to be funded through operations, borrowings, or additional debt or equity, with no assurance financing will be available on acceptable terms.
The company agreed to acquire Charlottesville FM station WCVL for approximately $1.65 million, began operating it under a time brokerage agreement in February, and completed the acquisition on April 18, after quarter-end. It also declared a further $0.30-per-share quarterly dividend on May 3, payable June 9.
Key risks cited include economic and advertising-market conditions, reliance on key personnel and stations, concentration in certain markets, financial leverage and debt service, acquisition integration, regulatory requirements, new technologies, and natural disasters or terrorist attacks. Five radio markets represented approximately 33% of Q1 2017 consolidated revenue; Joplin, Missouri represented approximately 11%. Ordinary-course litigation was not expected by management to materially affect the financial statements. Management reported effective disclosure controls and no material changes in internal control over financial reporting.
Important facts for investors to verify
- Whether revenue and operating margins recover after the year-over-year decline in political advertising and the rise in station expenses.
- How the WCVL acquisition performs and whether future acquisitions require additional borrowing or equity financing.
- Available revolver capacity, covenant headroom, interest-rate exposure, and the impact of the affiliate loan extension.
- Whether the planned $5 million to $5.5 million of capital expenditures and quarterly dividends remain supportable by operating cash flow.
- How advertising demand, technology competition, and concentration in key markets affect future results; Q1 results are not necessarily indicative of full-year performance.