Saga Communications, Inc. — Q2 2015 Form 10-Q
Business context and reporting period. Unaudited results for the quarter and six months ended June 30, 2015, compared with the corresponding 2014 periods. Saga operates radio stations and television stations, earning primarily advertising revenue. Amounts below are in millions of dollars except per-share data.
Financial performance
| Metric | Q2 2015 | Q2 2014 | Six months 2015 | Six months 2014 |
|---|---|---|---|---|
| Net operating revenue | $34.358 | $33.831 | $63.419 | $63.254 |
| Operating income | $7.450 | $8.212 | $11.264 | $12.535 |
| Net income | $4.474 | $4.777 | $6.605 | $7.216 |
| Diluted EPS | $0.77 | $0.82 | $1.13 | $1.24 |
| Operating margin | 21.7% | 24.3% | 17.8% | 19.8% |
Revenue and segments. Q2 revenue increased 1.6%; radio revenue rose 0.6% while radio operating income fell 5.4%. Television revenue increased 7.3% and operating income rose 10.0%, mainly from higher retransmission revenue. For the first half, revenue was nearly flat (+0.3%): radio revenue declined 0.9% and operating income declined 5.8%; television revenue rose 6.8% and operating income rose 10.8%.
Cash flow and liquidity. Operating cash flow for the first half was $12.833, versus $11.811 in 2014. Capital expenditures were $2.254, compared with $2.914; net cash increased $9.471 to $27.378 at June 30. Current assets were $52.779 and current liabilities $14.606. Long-term debt was $36.078, unchanged from year-end 2014: $30.000 term loan, $5.000 revolver borrowings and $1.078 affiliate debt. The credit facility had $85.000 of unused revolving capacity and matures May 31, 2018. The company reported compliance with its financial covenants and no required term-loan amortization at quarter-end.
Dividends. The company declared $0.20 per share in March and again in June. The March dividend was paid in April; the June dividend, totaling approximately $1.2, was paid July 10 and was accrued at June 30. First-half cash dividends paid were $1.161.
Material changes and drivers
- Despite slightly higher first-half revenue, operating income declined 10.1% and net income declined 8.5%. Station operating expense rose 1.4%; corporate general and administrative expense increased 18.5% to $5.065.
- Management attributed higher expenses in part to ratings-licensing costs, up $1.260 for the first half, and higher restricted-stock compensation, consulting and other corporate costs. Lower political advertising reflected fewer elections in the company’s markets.
- Radio comparisons were affected by the 2014 sale of the Michigan and Minnesota radio networks, which reduced certain revenue and expenses in 2015. Higher interactive and television retransmission revenue partly offset weakness in local, national and political advertising.
- Cash-flow and earnings comparisons benefited from a $0.417 insurance-settlement gain in Q2 after lightning damaged two transmitters in Victoria, Texas; the company received $0.777 in insurance proceeds.
Outlook, risks and contingencies
- Management expected 2015 capital expenditures of approximately $5–$5.5 million, funded from operating cash flow. It stated operating cash flow was expected to cover quarterly debt service, while warning that shortfalls could require refinancing, asset sales or equity issuance.
- A purchase agreement for two Harrisonburg, Virginia FM stations, for approximately $1.335 million, was pending FCC approval; management expected a third-quarter closing and intended to donate one station because of FCC ownership rules. Separately, on August 1, 2015, after quarter-end, Saga acquired six Harrisonburg-area stations/translators for approximately $9.640 million, funded with cash.
- Management cited dependence on advertising and key stations, economic conditions, financial leverage and debt service, key personnel, acquisition integration, regulation, new technologies, natural disasters and terrorist attacks as risks. Five largest radio markets generated about 35% of consolidated revenue for the first half.
- Ordinary-course claims and other legal proceedings were disclosed; management did not expect potential liabilities to materially affect the financial statements. Substantially all assets other than FCC licenses and certain other assets secure the credit facility; subsidiaries guarantee it. The company also had $1.078 million outstanding under an affiliate-related debt guarantee, due May 1, 2017.
- No formal financial guidance was provided. Management noted political advertising was expected to be lower in 2015 than in the prior year. Results are seasonal, and interim results are not necessarily indicative of full-year performance.
Important facts for investors to verify
- Whether revenue stabilization can translate into operating-income recovery, given lower radio income and higher corporate and ratings-licensing costs.
- Actual 2015 capital spending versus the $5–$5.5 million estimate, and cash and debt levels after the August acquisition and July dividend payment.
- FCC approval, completion and terms of the pending $1.335 million station purchase, as well as the operating and financial impact of the August 1 acquisition.
- Performance of television retransmission revenue and the sustainability of the $0.417 million insurance gain, which is an unusual, nonrecurring item.
- The share-repurchase disclosure: the monthly table lists 21,519 shares in May as purchased, but the total row reports no shares purchased; the filing says the shares related to cashless option exercises and withholding taxes. Clarify the table’s presentation and treatment.