Saga Communications, Inc. — 2017 Form 10-K
Reporting period: Fiscal year ended December 31, 2017. The filing is an annual report, not a standalone fourth-quarter filing. Saga is principally a radio broadcaster; after selling its television operations, radio was its sole reportable segment at year-end.
Business context and significant transactions
- At February 2018, Saga reported 75 FM and 33 AM stations serving 26 markets. Advertising, especially local advertising, is its primary revenue source.
- Saga sold its Joplin, Missouri and Victoria, Texas television stations effective September 1, 2017, ending its television operations. Net sale proceeds were $69.5 million, and the sale generated a pretax gain of $50.8 million.
- On the same date, Saga acquired South Carolina-area radio stations for approximately $24.2 million, including acquired receivables and transaction adjustments. It also acquired Charlottesville station WCVL in April for approximately $1.7 million.
Financial performance and liquidity
| Metric | 2017 | 2016 |
|---|---|---|
| Continuing-operations revenue | $118.1 million | $119.0 million |
| Operating income from continuing operations | $17.2 million | $22.5 million |
| Operating margin from continuing operations | 14.6% | 18.9% |
| Continuing-operations net income | $22.2 million | $12.9 million |
| Income from discontinued operations, net | $32.5 million | $5.3 million |
| Net income | $54.7 million | $18.2 million |
| Diluted earnings per share | $9.27 | $3.09 |
| Cash and cash equivalents at year-end | $53.0 million | $26.7 million |
| Long-term debt at year-end | $25.0 million | $35.3 million |
- Continuing revenue declined 0.7%. Same-station revenue fell $3.7 million, partly offset by $2.9 million from stations not operated for the full comparable period. Lower political advertising and local revenue contributed to the decline.
- Continuing operating income declined 23.5%, reflecting lower revenue, higher station and corporate costs, a $1.4 million broadcast-license impairment, and the absence of a $1.4 million tower-sale gain recorded in 2016.
- Continuing-operations net income included an approximately $11.5 million provisional tax benefit from the Tax Cuts and Jobs Act, chiefly from remeasuring deferred taxes. Total 2017 net income also included the television-sale gain; it is not a measure of recurring radio earnings.
- Cash provided by continuing operating activities was $23.9 million, compared with $21.8 million in 2016. Total operating cash flow, including discontinued operations, was $5.4 million; investing cash flow included $69.2 million of net proceeds from discontinued-operation investing activities.
- Working capital was $55.3 million. The $100 million revolving credit facility had $25.0 million drawn and approximately $75 million of unused capacity at year-end. The facility matures August 18, 2020; Saga reported compliance with its financial covenants.
- Capital expenditures for continuing operations were $6.2 million. The board declared dividends totaling $2.00 per share for 2017, including a special dividend; a $6.5 million dividend declared in December was payable in January 2018.
Outlook, risks, and unusual items
- Saga forecast 2018 capital expenditures of approximately $5 million to $6 million, expected to be funded from operations. It gave no specific earnings or revenue guidance.
- Management said operating cash flow was expected to cover debt service. Debt is variable-rate and secured by substantially all assets other than FCC licenses and certain other assets; covenants restrict financial flexibility. A 1% increase in average interest rates was estimated to increase annual interest expense by $332,000, all else equal.
- In January 2018, the FCC designated two AM station license-renewal applications for hearing over extended periods of silence. License loss or renewal conditions could affect operations.
- Broadcast licenses and goodwill are significant assets subject to impairment estimates. Saga recorded a $1.449 million non-cash license impairment in 2017; management noted that less favorable market assumptions could lead to further charges.
- Other key risks include dependence on advertising and economic conditions, concentration in major markets, competition from other media and digital platforms, regulatory changes, acquisition integration, cybersecurity and information-technology disruption, and dependence on key personnel. CEO Edward Christian held approximately 64% of combined voting power as of March 2, 2018.
- Management described ordinary-course legal claims as not expected to materially affect the financial statements. The filing also identifies performance-rights licensing matters, including an interim license with Global Music Rights, and a contingent payment of up to $1 million tied to FCC approval of a station license change.
- The independent auditor gave unqualified opinions on the financial statements and internal control over financial reporting.
Investor verification priorities
- Separate recurring radio results from the television-sale gain and the tax-reform benefit; verify their treatment in evaluating earnings and cash generation.
- Review same-station revenue trends, political-advertising comparisons, and performance in Saga’s concentrated major markets.
- Confirm the status and outcome of the two FCC renewal hearings, and assess any potential effect on licenses or station operations.
- Verify revolving-facility availability, covenant headroom, interest-rate exposure, and the timing of the 2020 maturity.
- Assess the assumptions supporting broadcast-license valuations and the sensitivity to further impairment.
- Reconcile declared versus paid dividends and evaluate ongoing dividend and capital-spending capacity after the television divestiture and radio acquisitions.