SAGA COMMUNICATIONS INC annual report, FY2017

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

Metric20172016
Continuing-operations revenue$118.1 million$119.0 million
Operating income from continuing operations$17.2 million$22.5 million
Operating margin from continuing operations14.6%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.