Saga Communications, Inc. — Q3 2017 Form 10-Q
Reporting period: Quarter and nine months ended September 30, 2017. Saga operated radio stations in 26 markets, with 75 FM and 33 AM stations. The Joplin, Missouri and Victoria, Texas television stations were sold effective September 1, 2017; their results are presented as discontinued operations.
Financial performance
| Metric | Q3 2017 | Q3 2016 | Nine months 2017 | Nine months 2016 |
|---|---|---|---|---|
| Continuing-operations revenue | $30.3 million | $29.9 million | $86.7 million | $88.2 million |
| Operating income, continuing operations | $5.5 million | $6.8 million | $13.4 million | $16.8 million |
| Continuing-operations income, net of tax | $3.0 million | $3.9 million | $7.4 million | $9.6 million |
| Discontinued-operations income, net of tax | $30.5 million | $1.5 million | $32.5 million | $3.7 million |
| Net income | $33.4 million | $5.4 million | $39.9 million | $13.2 million |
| Diluted EPS | $5.66 | $0.92 | $6.76 | $2.25 |
Continuing-operations operating margin was approximately 18.2% in Q3 versus 22.7% a year earlier, and 15.4% for the first nine months versus 19.0%. Reported net income and EPS were substantially boosted by the television sale, including a $50.8 million pretax disposal gain ($29.9 million after tax).
- Cash flow: Operating cash flow was $18.7 million for the first nine months, down from $21.0 million. Investing cash flow was positive $39.2 million, including $69.5 million net proceeds from the television sale and $25.9 million spent on broadcast acquisitions. Cash increased by $54.3 million to $81.0 million.
- Liquidity and debt: At September 30, cash was $81.0 million and total debt was $35.3 million, including $10.3 million classified as current. The $100 million revolving facility had approximately $65 million of unused capacity; the company reported compliance with its covenants. After quarter-end, it repaid $5.287 million on October 5 and $5.0 million on November 3 from sale proceeds.
- Dividends and repurchases: Dividends declared were $0.30 per share each quarter in 2017, or $0.90 for the first nine months. Remaining stock-repurchase authorization was $23.3 million at September 30; the filing reports 916 shares repurchased in Q3 for cashless option exercise and tax withholding.
Changes versus the prior comparable periods
- Q3 continuing revenue rose 1.3%, but operating income declined 18.6% and continuing income after tax fell 24.0%. Revenue gains from stations not owned for the full comparison period were offset by weaker same-station revenue.
- For the first nine months, continuing revenue declined 1.7% and operating income fell 20.4%; continuing income after tax decreased 22.7%. Management cited weaker political, local and national advertising, higher corporate costs, and the absence of a $1.4 million tower-sale gain recorded in 2016.
- Corporate general and administrative expense increased 14.8% in Q3 and 10.0% year to date. Interest expense also rose, which management attributed to higher interest rates.
- Television-sale proceeds funded the $24.2 million South Carolina radio-station acquisition, including related receivables and transaction adjustments. The acquired stations principally serve the Charleston and Hilton Head markets. A separate Charlottesville radio acquisition closed in April.
Outlook, commentary and risks
- No specific earnings or revenue guidance was provided. Saga expected 2017 capital expenditures of approximately $6.5 million, including about $750,000 related to the Charleston/Hilton Head acquisition, funded from operations.
- Management expected lower political advertising in 2017 because of fewer elections. Advertising is seasonal, generally weakest in the winter, and depends on local and national economic conditions, audience ratings, competition and pricing.
- Management said operating cash flow should cover scheduled debt service, while noting that insufficient cash flow could require equity issuance, refinancing or property sales. Future acquisitions and dividends may depend on operating cash, credit-facility borrowing or other financing; availability on acceptable terms is not assured.
- Key stated risks include economic conditions, reliance on key personnel and stations, leverage and debt service, integrating acquisitions, regulation, new technologies, and natural disasters or terrorist attacks. Five largest markets represented approximately 43% of nine-month revenue and 48% of station operating income.
- Ordinary-course legal claims were not expected by management to materially affect the financial statements. Disclosure controls were assessed as effective, with no material change in internal control over financial reporting reported for the quarter.
Important facts for investors to verify
- How continuing radio revenue and margins perform after the television divestiture, separating same-station trends from acquired-station contributions.
- The sustainability of earnings excluding the one-time television-sale gain and the effect of the South Carolina acquisition on future results.
- Cash and debt balances after the two disclosed post-quarter repayments, and compliance with credit-facility covenants and debt-service requirements.
- Whether weaker political and same-station advertising trends, higher corporate costs and market concentration persist.
- The related-party connection disclosed for the South Carolina station seller: a company board member was president of the selling entities.