Saga Communications, Inc. — 2014 Form 10-K
Reporting period: Fiscal year ended December 31, 2014. The filing also reports unaudited fourth-quarter results. Saga operates radio and television broadcasting businesses, with advertising as its primary revenue source.
Business context and financial performance
At year-end, Saga reported 92 radio stations, four television stations, five low-power television stations and one radio information network across 25 markets. Its two reportable segments are Radio and Television. Approximately 87% of 2014 gross revenue came from local advertising.
| Metric | 2014 | 2013 | Change |
|---|---|---|---|
| Net operating revenue | $134.0 million | $129.5 million | +3.5% |
| Operating income, continuing operations | $25.9 million | $26.3 million | -1.3% |
| Net income | $14.9 million | $15.3 million | -2.4% |
| Diluted EPS | $2.55 | $2.64 | -3.4% |
| Operating cash flow | $25.4 million | $26.7 million | Lower by $1.3 million |
Consolidated operating margin was approximately 19.4%, down from 20.3% in 2013; net margin was approximately 11.1%, versus 11.8%. Radio revenue rose 3.5% to $113.6 million, while segment operating income declined 0.4% to $27.7 million. Television revenue increased 3.6% to $20.4 million and operating income increased 7.5% to $7.1 million.
Fourth-quarter revenue was $36.4 million, up from $33.8 million a year earlier. Operating income was $7.7 million versus $5.7 million, and net income was $4.4 million versus $3.2 million; diluted EPS was $0.76 versus $0.56. Fourth-quarter comparisons include a $1.21 million gain from selling four radio information networks and a $1.94 million non-cash broadcast-license impairment charge in 2014; the 2013 quarter included a $2.03 million impairment charge.
Cash, debt and liquidity
- Cash and cash equivalents were $17.9 million at December 31, 2014, compared with $17.6 million a year earlier. Working capital was $30.6 million; current assets were $43.6 million and current liabilities were $13.0 million.
- Long-term debt, including the Surtsey-related guarantee, was $36.1 million, down from $46.1 million. The balance included $30.0 million under the term loan, $5.0 million drawn on the revolver and $1.1 million of guaranteed affiliate debt.
- The $120 million credit facility matures May 31, 2018. Saga reported $85 million of unused revolving capacity and compliance with its financial covenants at year-end. Substantially all assets other than FCC licenses and certain other assets secure the facility.
- Operating cash flow was $25.4 million; capital expenditures were $5.5 million; cash dividends paid were $10.4 million; and debt repayments were $10.0 million. Total contractual cash obligations were $88.6 million, including purchase obligations and leases.
Material changes and unusual items
- Revenue growth was primarily driven by election-related political advertising, which increased $3.9 million, and higher local advertising. Interactive revenue declined $0.4 million.
- Station operating expenses rose 5.9% to $98.4 million, including costs for historical Nielsen data licenses and higher health insurance, commissions, programming salaries and insurance. Corporate G&A increased 8.9% to $8.9 million.
- Political advertising is cyclical: 2014 benefited from elections, while 2013 revenue had declined partly because it was a non-election year. Management identifies first-quarter advertising as typically seasonally weak.
- Saga sold four information networks for $1.64 million and recorded a $1.21 million gain. It also acquired radio translators and an FM station during 2014.
- The annual impairment review resulted in a $1.94 million non-cash impairment of radio broadcast licenses, primarily in Columbus, Ohio. Broadcast licenses represented about 45% of total assets, making valuation assumptions significant.
- The Nielsen copyright lawsuit was dismissed after Saga entered into agreements to license historical data and future reports; the historical-data license fee was expensed in 2014. Management said other ordinary-course claims were not expected to materially affect the financial statements.
Outlook, risks and contingencies
No revenue or earnings guidance is provided. Management anticipated 2015 capital expenditures of approximately $4.5–$5.0 million, expected to be funded from operations, and stated that operating cash flow should cover scheduled debt service. These are expectations, not assurances.
- Results depend on local and national economic conditions, advertiser spending, audience ratings, competition and the ability to retain key personnel. The five largest markets generated about 34% of consolidated revenue; the top six generated 43%.
- Debt service, variable interest rates and credit-facility covenants may constrain financial flexibility. A 1% increase in average market interest rates was estimated to increase annual interest expense by $429,000, before potential mitigating actions.
- FCC licensing and ownership rules create operating and acquisition risks. The company disclosed pending license-renewal proceedings for certain Ithaca stations and potential changes affecting its Surtsey time-brokerage and joint-sales arrangements, with a stated compliance deadline of December 19, 2016.
- Surtsey Media is wholly owned by the CEO’s daughter. Saga operates Victoria station KVCT under a time brokerage agreement and has agreements involving Joplin-market station KFJX; Saga guaranteed up to $1.25 million of related debt, with $1.078 million outstanding at year-end and no recourse under the guarantee.
- Other risks include future broadcast-license impairments, new media and technology competition, regulatory costs, natural disasters, and technology or data-security failures. CEO Edward K. Christian held approximately 63% of combined voting power as of March 3, 2015.
The board declared $1.80 per share in 2014 dividends, including a $1.20 special dividend. The filing does not provide forward dividend guidance.
Investor facts to verify
- Assess whether revenue growth excluding election-related political advertising is durable, and track local and interactive advertising trends.
- Review station expense growth and the sustainability of segment operating income, particularly in Radio.
- Confirm the credit facility’s covenant headroom, variable-rate exposure, maturity and the treatment of the Surtsey guarantee.
- Evaluate the Columbus license impairment, remaining license valuation assumptions and the concentration of assets in broadcast licenses.
- Track FCC actions and required changes, if any, to the Surtsey arrangements before the disclosed 2016 deadline.
- Consider the size and recurrence of special dividends alongside operating cash flow, capital spending and debt reduction.