Saga Communications, Inc. — FY 2012 Form 10-K
Reporting period: Fiscal year ended December 31, 2012. Amounts are in U.S. dollars; financial statement amounts below are in millions unless noted. The filing also reports fourth-quarter results. Saga operated radio and television broadcasting businesses, with advertising as its primary revenue source.
Business context and financial results
At year-end, Saga reported 91 radio stations, four television stations, four low-power television stations and five radio information networks. Operations were reported in Radio and Television segments.
| Metric | FY 2012 | FY 2011 | Change |
|---|---|---|---|
| Net operating revenue | $130.259 | $125.273 | +4.0% |
| Operating income from continuing operations | $32.011 | $26.754 | +19.7% |
| Net income | $17.925 | $12.631 | +41.9% |
| Diluted EPS | $3.16 | $2.23 | +41.7% |
| Cash flow from operations | $30.955 | $27.178 | +$3.777 |
| Cash and cash equivalents, year-end | $15.915 | $6.991 | +$8.924 |
| Long-term debt, including current portion | $58.828 | $69.078 | -$10.250 |
Operating margin was approximately 24.6% versus 21.4% in 2011; net margin was approximately 13.8% versus 10.1%. Working capital was $27.066 million, compared with $16.322 million. Year-end total assets were $197.330 million and stockholders’ equity was $104.209 million.
Radio revenue rose 2.6% to $111.763 million and segment operating income increased 13.3% to $33.771 million. Television revenue increased 13.2% to $18.496 million and segment operating income increased 36.7% to $6.200 million.
Fourth-quarter results
Q4 2012 revenue was $35.541 million, compared with $32.234 million in Q4 2011. Operating income from continuing operations was $9.790 million versus $7.658 million; net income was $5.760 million versus $4.105 million; diluted EPS was $1.01 versus $0.72.
Material changes and drivers
- Revenue growth reflected higher political advertising and retransmission-consent revenue. Gross political revenue increased $5.472 million and gross retransmission-consent revenue increased $1.314 million year over year.
- Local advertising increased $1.624 million, while national advertising declined $3.204 million. Milwaukee continued to face competitive pricing, changed ratings methodology and weakness in key advertising categories.
- Station operating expense fell 0.7%, including lower music licensing costs and bad-debt expense, partly offset by higher salaries after reinstatement of prior salary reductions and increased programming costs.
- Interest expense declined 49.3% to $1.733 million, reflecting lower average debt and interest rates. FY 2011 included a $1.326 million write-off of debt issuance costs; FY 2010 included $3.561 million of non-recurring license-downgrade income.
- The Greenville, Mississippi television station, WXVT, was classified as discontinued operations and sold on January 31, 2013 for $3 million, subject to adjustments. Saga reported a first-quarter 2013 after-tax gain of approximately $0.2 million.
Cash, debt and capital allocation
- Operating cash flow was $30.955 million; capital expenditures were $4.809 million. Management expected 2013 capital expenditures of approximately $5 million, to be funded from operations.
- Debt at December 31, 2012 was $58.828 million, including $57.750 million under the term loan and $1.078 million of guaranteed Surtsey affiliate debt. The $60 million revolving facility was undrawn; the credit facility matures June 13, 2016.
- The company reported compliance with credit-facility covenants. Substantially all assets other than FCC licenses and certain other assets secure the facility; subsidiaries also guarantee it. Management stated operating cash flow should cover scheduled debt service, while warning that insufficient cash flow could require refinancing, asset sales or equity issuance.
- A $7.0 million special dividend, or $1.24 per share, was paid in December 2012. In March 2013, the board increased the stock repurchase authorization to $75.8 million. No formal 2013 revenue or earnings guidance was provided.
Outlook, risks and unusual items
- Management expected political revenue to decline significantly in 2013 because it would be a non-election year. Advertising is seasonal and generally weakest in the first quarter.
- Revenue remains exposed to economic conditions, local-market advertising demand, audience ratings, competition from other media and digital technologies. The top six markets generated 44% of 2012 net operating revenue.
- Debt service, variable interest rates and covenant restrictions pose financial risks. A 1 percentage-point increase in average interest rates, under the filing’s sensitivity assumptions, would have increased 2012 interest expense and reduced pretax income by approximately $0.621 million.
- Broadcast licenses were $90.361 million, or 45.8% of total assets. The annual 2012 impairment test found fair value above carrying value and recorded no impairment; valuations depend on management estimates and future market performance.
- Other risks include dependence on CEO Edward Christian and key on-air talent, FCC regulation and license renewals, and FCC indecency-related inquiries or proposed fines. The filing notes related-party arrangements with Surtsey Media, owned by the CEO’s daughter, including station operating agreements and a debt guarantee. Management said no litigation was likely to have a material adverse effect.
- Ernst & Young issued unqualified opinions on the financial statements and internal control over financial reporting; management reported controls were effective at year-end.
Important facts for investors to verify
- Whether 2013 operating performance can withstand the expected political-advertising decline and continued softness in national advertising.
- Debt balances, interest-rate exposure, covenant headroom and the terms and use of the $60 million undrawn revolver.
- Actual post-year-end proceeds and gain from the WXVT sale, and any related adjustments.
- Future retransmission-consent revenue and affiliate fees, including the durability of the renegotiated agreements.
- FCC outcomes affecting license renewals, indecency matters, television operating agreements and related-party Surtsey arrangements.
- Assumptions supporting the $90.361 million broadcast-license carrying value and any indicators of impairment.