Saga Communications, Inc. — 2011 Form 10-K
Business context and reporting period. This 10-K covers the fiscal year ended December 31, 2011; fourth-quarter figures are included as unaudited supplementary data. Saga operates radio and television broadcasting businesses, with advertising as its primary revenue source. At year-end it reported 91 radio stations, five television stations, four low-power television stations and five radio information networks. Its reportable segments are Radio and Television.
Financial performance and position
| Metric | 2011 | 2010 |
|---|---|---|
| Net operating revenue | $127.3 million | $127.8 million |
| Operating income | $26.3 million | $27.8 million |
| Net income | $12.6 million | $15.1 million |
| Diluted earnings per share | $2.98 | $3.58 |
| Cash from operating activities | $27.2 million | $27.5 million |
| Capital expenditures | $5.6 million | $4.3 million |
- Radio revenue was $108.9 million, down 0.9%; segment operating income was $29.8 million, down 3.5%. Television revenue was $18.4 million, up 2.4%; segment operating income was $4.1 million, down 1.4%.
- At December 31, cash was $7.0 million, working capital was $16.3 million and total assets were $190.3 million. Total debt, including the current portion and Surtsey-related debt, was $69.1 million, down from $96.1 million; stockholders’ equity was $93.0 million.
- The company reported $50.5 million of unused revolving credit capacity. It said operating cash flow should cover scheduled debt service, while noting that weaker cash flow could require refinancing, asset sales or equity issuance.
- The company paid no cash dividends in the three most recent fiscal years.
Material changes versus comparable periods
- Revenue declined 0.4% year over year. National and local gross revenue increased, but political revenue fell $2.7 million as 2011 was a non-election year, versus 2010’s substantial election-related advertising.
- Operating income declined 5.2%, reflecting slightly lower revenue, higher station expenses and higher corporate costs. Net income fell 16.5%; lower interest and income tax expense partly offset lower operating income, while 2011 included a $1.3 million debt-issuance-cost write-off. 2010 included $3.6 million of non-recurring income from an FCC license downgrade.
- Radio revenue was pressured in Milwaukee by competitive pricing, changed ratings methodology, demand for 30-second spots and weaker spending in some categories. Television revenue benefited from increased local advertising in Joplin after a May 2011 tornado; Saga’s Joplin stations were not damaged.
- Fourth-quarter 2011 revenue was $32.9 million versus $34.1 million in fourth-quarter 2010; operating income was $7.7 million versus $9.0 million, and net income was $4.1 million versus $4.6 million.
- Cash decreased to $7.0 million from $12.2 million. Debt declined following scheduled repayments and the June 2011 refinancing.
Outlook, commentary, risks and unusual items
- Outlook: Management expected a considerable increase in political advertising in 2012, a presidential election year. It anticipated approximately $5.0 million in 2012 capital expenditures, funded from operations, and approximately $2.1 million in 2012 retransmission-consent revenue, of which about $580,000 was expected to go to network partners. No broader earnings or revenue guidance was provided.
- Debt and interest-rate exposure: The new $120 million credit facility matures June 13, 2016 and is secured by substantially all company and subsidiary assets, excluding FCC licenses and certain other assets. Covenants restrict financial and operating flexibility; the company reported compliance at year-end. Debt bears variable interest, and management estimated a 1-percentage-point increase in 2011 average rates would have raised interest expense by $886,000.
- Revenue and operating risks: Advertising is sensitive to local and national economic conditions, audience ratings, competition and seasonality. The top six markets generated 44% of 2011 net operating revenue; management also highlighted concentration in key markets and dependence on key stations and personnel. Digital and other media competition may affect audiences and advertising.
- Regulatory and licensing risks: FCC license renewals, ownership rules and pending proceedings may affect station operations and acquisition flexibility. The company disclosed existing indecency-related FCC inquiries and/or proposed fines, without quantifying potential outcomes. Required emergency-alert-system equipment investment was also identified as significant, with a June 2012 compliance deadline.
- Contingencies and related parties: The company guaranteed up to $1.25 million of debt for Surtsey Media, an entity owned by the CEO’s daughter; $1.078 million remained outstanding at year-end, with no recourse to recover amounts paid. January 2012 amendments extended station agreements and added purchase options. BMI music-license fees remained unresolved and could be retroactive to January 2010; an ASCAP settlement was approved in January 2012.
- Intangible-asset estimates: Broadcast licenses were $90.6 million, or 47.6% of total assets. The 2011 impairment test found fair value above carrying value and no impairment was recorded; management cautioned that less favorable market conditions could lead to future write-downs.
- Ernst & Young issued unqualified opinions on the financial statements and internal control over financial reporting. Management also concluded disclosure controls and internal controls were effective at year-end.
Important facts for investors to verify
- Whether 2012 political and retransmission-consent revenue developed as management expected, and whether political demand offset underlying advertising softness.
- Current debt, covenant headroom, variable-rate exposure and remaining revolving availability after subsequent-period activity.
- Resolution and financial impact of BMI fees, FCC inquiries, license renewals and proposed regulatory changes.
- Assumptions supporting the $90.6 million broadcast-license valuation, given its material share of total assets.
- Terms, economics and governance implications of the Surtsey guarantee, extended operating agreements and purchase options.
- Effects of market concentration and Milwaukee’s competitive and ratings-related challenges on operating performance.