Saga Communications, Inc. — Q1 2020 Form 10-Q
Reporting period: Three months ended March 31, 2020; comparative period is Q1 2019. Saga operates 113 AM/FM radio stations and 78 metro signals in 27 markets. Unless noted, financial amounts are in U.S. dollars.
Financial performance
| Metric | Q1 2020 | Q1 2019 | Change |
|---|---|---|---|
| Net operating revenue | $26.1 million | $27.8 million | Down 6.4% |
| Operating income | $2.2 million | $2.0 million | Up 10.3% |
| Net income | $1.7 million | $1.4 million | Up 22.6% |
| Diluted EPS | $0.28 | $0.23 | Up $0.05 |
| Cash from operating activities | $5.1 million | $6.3 million | Down $1.2 million |
Broadcast advertising revenue was $23.8 million versus $25.2 million; digital advertising was $0.9 million versus $0.9 million; other revenue was $1.4 million versus $1.8 million. Political revenue increased by $963,000, partly offsetting lower local, barter, and non-spot revenue. Local advertising represented approximately 87% of gross station revenue, compared with 90% a year earlier.
Station operating expenses fell 4.2% to $22.2 million, while corporate general and administrative expense rose 12.3% to $3.0 million. Operating margin, calculated as operating income divided by revenue, was approximately 8.3% versus 7.1%; net margin was approximately 6.4% versus 4.9%. These reported margins include material gains described below.
Balance sheet, debt and liquidity
- At March 31, cash and cash equivalents were $46.3 million, compared with $44.0 million at year-end 2019; current assets were $66.8 million and current liabilities $16.1 million.
- Long-term debt was $10.0 million, unchanged from December 31. The company reported approximately $60 million of unused capacity on its $70 million revolving facility, which matures June 27, 2023. It was in compliance with financial covenants.
- Cash from operations was $5.1 million; investing activities used $1.0 million and financing activities used $1.8 million. Cash increased $2.3 million during the quarter.
- Operating cash flow was below net income in both periods and fell from $6.3 million in Q1 2019. Capital expenditures were $1.0 million, excluding acquisitions.
- The board declared a $0.32-per-share quarterly dividend, totaling approximately $1.9 million, paid April 10, 2020. The company halted further share repurchases amid COVID-19 uncertainty.
Changes, outlook and risks
- Q1 results reflect only the early phase of the pandemic’s effect. Management said advertising cancellations and reduced customer spending intensified in late March and continued into May, particularly among event, sports, healthcare, automotive and other affected advertisers.
- Management expected Q2 2020 revenue to be 40%–50% below Q2 2019. It warned that cost reductions would not fully offset revenue declines and that the duration and severity of the downturn could materially affect results, cash flows and financial position.
- Management’s liquidity measures included delaying capital spending where practical, suspending buybacks, reducing or controlling costs, closely managing receivables and collections, and supporting local advertisers with new sales approaches and some free advertising.
- Q1 operating income benefited from an approximately $1.4 million gain on the sale of land and a building at a tower site. Net income also included approximately $213,000 of other income, primarily a $208,000 insurance gain related to tower damage. These unusual items lifted reported earnings despite lower revenue.
- Bad-debt expense increased by $491,000, reflecting additional reserves for possible customer collection issues related to COVID-19. The company said it could not reasonably estimate the pandemic’s duration or severity; a prolonged slowdown could have a material adverse effect.
- The company acquired a Manchester, New Hampshire translator for $200,000. Management performed a qualitative assessment of goodwill and broadcast licenses and concluded that an impairment test was not then necessary, while continuing to monitor for impairment indicators.
- Management stated that operating cash flow was expected to cover quarterly debt service, while noting that insufficient cash flow could require financing or asset sales. Ordinary-course legal claims were not expected to materially affect the financial statements.
- The filing’s capital-spending discussion says it anticipated approximately $3.0–$3.5 million of 2019 capital expenditures, although this is a Q1 2020 report; the text does not clarify whether this is a stale reference or the intended forecast period.
Important facts for investors to verify
- Whether the forecast Q2 revenue decline of 40%–50% materialized, and how advertising demand recovered or deteriorated after the filing date.
- How much of reported Q1 operating income and net income was attributable to the property-sale and insurance gains, and the trend in underlying operating performance.
- Receivables aging, bad-debt reserves and subsequent customer collections as pandemic-related payment risk developed.
- Cash burn, access to the $60 million of reported undrawn facility capacity, covenant headroom, and the sustainability of dividends amid reduced revenue.
- The intended period for the filing’s stated $3.0–$3.5 million capital-expenditure outlook, and the effect of deferred capital spending on operations.
- Whether deterioration in advertising markets or prolonged economic weakness triggered impairment indicators for broadcast licenses or goodwill.