Saga Communications, Inc. — 2018 Form 10-K
Reporting period: Fiscal year ended December 31, 2018. The filing also reports fourth-quarter results. Saga is a U.S. radio broadcaster; after selling its Joplin, Missouri and Victoria, Texas television stations on September 1, 2017, radio is its sole reportable segment. As of February 28, 2019, it owned 79 FM and 34 AM stations in 27 markets.
Financial performance and liquidity
| Metric | 2018 | 2017 |
|---|---|---|
| Net operating revenue | $124.829 million | $118.149 million |
| Station operating expense | $93.727 million | $87.759 million |
| Operating income from continuing operations | $19.682 million | $17.229 million |
| Operating margin | 15.8% | 14.6% |
| Income from continuing operations, net of tax | $13.690 million | $22.246 million |
| Net income | $13.690 million | $54.717 million |
| Diluted EPS | $2.30 | $9.27 |
| Cash from continuing operating activities | $25.559 million | $23.912 million |
- Revenue rose 5.7%; approximately $5.44 million came from stations not owned or operated throughout the comparable period, and $1.24 million from same-station growth.
- Cash and cash equivalents were $44.729 million at year-end, versus $53.030 million in 2017. Working capital was $45.430 million.
- Debt was $20.0 million, including $5.0 million classified as current. Approximately $80 million of the $100 million revolving facility was unused; the facility matures June 27, 2023. The company reported covenant compliance.
- Capital expenditures were $5.922 million, excluding acquisitions. Cash dividends paid were $11.864 million; declared dividends totaled $1.45 per share for 2018.
- At year-end, total assets were $248.477 million and stockholders’ equity was $184.999 million.
Fourth-quarter results
For Q4 2018, revenue was $32.938 million, operating income from continuing operations was $6.009 million, and net income was $4.295 million ($0.72 per diluted share). Q4 2017 comparables were $31.464 million, $3.871 million, and $14.829 million ($2.51 per diluted share), respectively. The prior-year quarter included a substantial tax benefit; its quarterly discontinued-operations figure also reflects the television sale.
Material changes versus the prior period
- Same-station revenue increased $1.24 million, with higher national, political, and non-spot revenue partly offset by a $1.811 million decline in local revenue. Political advertising benefited from more elections in 2018.
- Station operating expense increased 6.8%, faster than total revenue, partly due to healthcare costs and music licensing fees.
- Operating income rose 14.2%, helped by revenue growth and the absence of the $1.449 million 2017 broadcast-license impairment.
- Net income fell sharply from 2017 because 2017 included $32.471 million of after-tax discontinued-operations income, including the television-sale gain, and an approximately $11.5 million Tax Act-related deferred tax benefit. Continuing-operations income also declined as the one-time 2017 tax benefit did not recur, despite higher 2018 operating income.
- In December 2018, Saga acquired four Ocala, Florida FM stations for approximately $9.84 million using operating funds. The acquisition closed on December 31, so its contribution to 2018 operating results was limited.
Outlook, risks, contingencies, and unusual items
- Management anticipated 2019 capital expenditures of approximately $5.0–$5.5 million, funded from operating cash flow. The filing provides no specific revenue or earnings guidance.
- Management said operating cash flow should be sufficient for scheduled debt service, but noted that inadequate cash generation could require refinancing, equity issuance, or asset sales. Debt is floating-rate; management estimated a 1-percentage-point increase in average rates would have reduced 2018 pretax income by approximately $234,000.
- Advertising is economically sensitive and seasonal, typically weakest in the first quarter. Competition from other media and digital platforms, changing audience preferences, and dependence on key personnel and markets are material business risks. The top five markets generated 41% of 2018 net operating revenue.
- Broadcast licenses and goodwill together represented 45.9% of total assets. No broadcast-license impairment was recorded in 2018; the 2017 impairment was $1.449 million. Future impairment depends on estimates of market revenue, share, margins, growth, and discount rates.
- The FCC designated renewal applications for two AM stations for hearing in January 2018 over extended periods of silence. The filing notes that a station silent for 12 consecutive months may lose its license; Saga said all its licenses had been renewed for their regular terms to date.
- FCC regulation, renewals and ownership limits, music-licensing costs, cyber and technology failures, and possible economic downturns could affect results. The 2018 Music Modernization Act could add costs, although the company said the impact was uncertain.
- Ordinary-course legal claims were outstanding; management did not expect potential liability to materially affect the financial statements. The filing identifies an additional payment of up to $1 million tied to FCC approval of a city-of-license change as a contingency.
- Auditors gave an unqualified opinion on the financial statements and internal controls; management also concluded disclosure controls and internal control over financial reporting were effective.
Important facts for investors to verify
- Assess how much of the 2018 revenue growth is sustainable same-station growth versus acquired-station contribution, and whether local-advertising weakness persists.
- Review cash generation after dividends, share repurchases, capital expenditures, and acquisitions; verify the current debt classification and post-year-end $5 million debt repayment.
- Track renewal-hearing outcomes for the two AM stations and the status of other upcoming FCC license renewals.
- Evaluate impairment sensitivity for broadcast licenses and goodwill against actual market trends and management’s assumptions.
- Reconcile the MD&A’s stated 2017 comparison revenue of $118.949 million with the audited financial statements and results table, which report $118.149 million; the filing text does not provide a clear explanation for this discrepancy.
- Confirm whether future dividends, acquisitions, and buybacks remain consistent with credit-facility covenants and operating cash flow.