Saga Communications, Inc. — 2016 Form 10-K
Reporting period: Fiscal year ended December 31, 2016. The filing is an annual report and also presents unaudited quarterly results, including fourth-quarter figures. Saga operates radio and television stations, deriving most revenue from advertising.
Business context and reporting period
At year-end, the company reported 99 radio stations across 24 markets and four television plus five low-power television stations across two markets. Its strategy centers on locally managed stations in small and midsize markets. Results are materially affected by advertising demand, audience ratings, local economic conditions and election cycles.
Financial performance and liquidity
| Metric | 2016 | 2015 |
|---|---|---|
| Net operating revenue | $142.6 million | $132.9 million |
| Operating income | $31.5 million | $24.1 million |
| Net income | $18.2 million | $13.4 million |
| Diluted earnings per share | $3.09 | $2.29 |
| Cash provided by operating activities | $29.3 million | $28.5 million |
| Capital expenditures | $4.9 million | $5.5 million |
| Cash and cash equivalents at year-end | $26.6 million | $21.6 million |
| Long-term debt, including current portion and Surtsey guarantee | $36.4 million | $36.4 million |
| Working capital at year-end | $37.7 million | $33.6 million |
Operating margin was approximately 22.1% and net margin approximately 12.8% in 2016, calculated from reported revenue and income. The $100 million revolving credit facility matures August 18, 2020; approximately $65 million was unused at year-end. The company reported compliance with its financial covenants. The $1.078 million Surtsey-related guaranteed debt was current and due in 2017; the affiliate was seeking to renew it.
Radio revenue was $119.0 million, up 6.4%, and segment operating income was $33.5 million, up 23.0%. Television revenue was $23.6 million, up 12.2%, and segment operating income was $8.9 million, up 28.5%. Segment operating income is a company-defined measure and is not GAAP operating income.
Fourth-quarter 2016 revenue was $37.3 million versus $35.6 million in fourth-quarter 2015; net income was $4.9 million versus $3.7 million.
Material changes versus the prior comparable period
- Full-year revenue increased 7.3%. About $5.8 million of the increase came from stations not owned or operated for the full comparable period; same-station revenue increased $3.9 million.
- Same-station growth was led by a $5.3 million increase in gross political revenue, partly offset by a $1.7 million decline in gross local revenue. Management attributed political growth to more national, state and local elections; 55% of the political increase came from the Joplin television market.
- Operating income rose 30.6% and net income rose 35.6%. The comparison benefited from higher revenue, no 2016 impairment charge versus a $0.9 million non-cash impairment in 2015, and a $1.4 million gain on a Norfolk tower sale.
- The company acquired Columbus FM station WLVQ in February 2016 for approximately $13.8 million, funded from operations. Broadcast licenses and goodwill increased, in part reflecting acquisitions.
- Cash dividends declared were $1.30 per share in 2016, versus $1.10 in 2015; approximately $7.6 million was paid in 2016.
Outlook, commentary, risks and unusual items
- No specific revenue or earnings guidance is provided. Management expects 2017 capital expenditures of approximately $5.0–$5.5 million, expected to be funded from operating cash flow.
- In January 2017, Saga agreed to acquire Charlottesville FM station WUVA for approximately $1.65 million, began operating it under a TBA in February, and expected to close in second-quarter 2017 subject to FCC approval.
- Management said operating cash flow should cover scheduled debt service, but warned that insufficient cash flow could require equity issuance, refinancing or asset sales. The credit facility is secured by substantially all company and subsidiary assets, excluding FCC licenses and certain other assets.
- Advertising is cyclical and seasonal, with first-quarter spending generally lowest. Political advertising contributed significantly to 2016 growth and is not necessarily repeatable. The top six markets generated 46% of net operating revenue.
- FCC regulation, license renewals, ownership limits and retransmission-consent negotiations may affect operations. Saga’s Victoria, Texas TBA and Joplin-area service arrangements involve Surtsey Media, a related party owned by the CEO’s daughter; the company guarantees up to $1.25 million of Surtsey debt and had $1.078 million recorded at year-end.
- FCC license renewal applications have historically been renewed for regular terms. No broadcast-license impairment was recorded in 2016, but licenses and goodwill are significant assets and impairment estimates depend on market growth, margins and discount rates. Management’s sensitivity analysis states a 20% lower license fair value would have implied approximately $3.8 million of additional impairment.
- The Norfolk tower sale was accounted for as a sale-leaseback: Saga received approximately $1.6 million, recognized a $1.4 million gain and entered a 10-year lease. The company was not a winning bidder in the FCC spectrum auction; one TV station must change channels, with some or all costs expected to be reimbursed.
- Ordinary-course legal claims were not expected by management to materially affect the financial statements. Music licensing fee disputes and negotiations, including with BMI and Global Music Rights, remain potential cost uncertainties.
- The company reported audited financial statements with an unqualified opinion and effective internal control over financial reporting as of year-end. Edward K. Christian held approximately 64% of combined voting power as of March 2, 2017.
Important facts for investors to verify
- How much 2016 revenue and operating improvement is sustainable absent the election-driven political advertising increase and acquisition contribution.
- Current revolver borrowings, covenant headroom, interest-rate exposure, and renewal or repayment of the $1.078 million Surtsey-related obligation due in 2017.
- Status and economics of the WUVA acquisition, FCC approval, and expected 2017 capital spending.
- Terms, related-party safeguards and regulatory status of the Surtsey agreements, including the company’s guarantee and station operating arrangements.
- Retransmission-consent renewals, music-licensing outcomes, FCC channel-repacking costs and reimbursement, and future license impairment assumptions.
- Whether dividends and other cash uses remain supportable alongside acquisitions, capital expenditures, debt service and the company’s stated liquidity needs.