Saga Communications, Inc. — Q1 2014 Form 10-Q
Business context and period: Unaudited results for the three months ended March 31, 2014, compared with Q1 2013. Saga operates radio stations and networks across 23 markets and television stations across two markets, primarily earning revenue from advertising.
Key financial results
| Metric | Q1 2014 | Q1 2013 | Change |
|---|---|---|---|
| Net operating revenue | $29.423 million | $28.957 million | +1.6% |
| Operating income from continuing operations | $4.323 million | $4.921 million | -12.1% |
| Income from continuing operations, net of tax | $2.439 million | $2.726 million | -10.5% |
| Net income | $2.439 million | $2.949 million | -17.3% |
| Diluted EPS | $0.42 | $0.51 | -17.6% |
| Cash provided by operating activities | $7.838 million | $7.726 million | +$0.112 million |
Amounts are in U.S. dollars. Revenue increased modestly, but operating costs grew faster, reducing operating margin to approximately 14.7% from 17.0%. Station operating expenses rose 3.9%; corporate general and administrative expense increased 10.5%. The filing does not report a consolidated net-profit margin.
- Segments: Radio revenue was $24.925 million (+1.9%) and operating income was $5.186 million (-4.9%). Television revenue was $4.498 million (approximately flat) and operating income was $1.290 million (-8.8%).
- Cash and investment: Cash and cash equivalents were $23.327 million at March 31, up from $17.628 million at year-end. Investing activities used $2.139 million, including $1.459 million of capital expenditures and $0.682 million for broadcast-property acquisitions. Cash increased $5.699 million during the quarter.
- Debt and liquidity: Total debt was $46.078 million, versus $46.078 million at year-end; the balance-sheet presentation reclassified $1.078 million of affiliate debt from current to long-term following an April amendment. The revolving facility had $75 million of unused capacity within a $90 million commitment; the credit facility matures May 31, 2018. Saga reported compliance with all financial covenants and no required term-loan amortization at quarter-end.
Changes, outlook, and risks
- Gross national, political, and retransmission-consent revenue increased, while gross local revenue declined $336,000. Political revenue rose with the 2014 election cycle. Management expected political advertising to increase significantly during 2014.
- Health-care costs were a major expense driver: they increased $482,000 across the company, including $464,000 in radio, with management attributing fluctuations to self-insured claims. Corporate expense also rose partly because of non-cash restricted-stock compensation.
- Q1 2013 included $223,000 of after-tax discontinued-operation income from the sale of the Greenville, Mississippi television station; there was no comparable discontinued-operation income in Q1 2014. This contributes to the decline in reported net income.
- Saga acquired an FM station and three translators in the Ithaca market for approximately $720,000 and an FM translator in Jonesboro for approximately $35,000, funded from operations. Purchase-price allocations remained preliminary.
- Management estimated 2014 capital expenditures of approximately $5.5 million, expected to be funded from operating cash flow. It said operating cash flow should cover scheduled debt service, while noting that a shortfall could require equity issuance, refinancing, or asset sales.
- Risks cited include advertising sensitivity to economic and local-market conditions, competition and new media, regulatory requirements, acquisition integration, financial leverage, and dependence on key personnel and stations. Five major radio markets contributed about 34% of Q1 revenue; Milwaukee had experienced a multiyear revenue decline, although its Q1 2014 revenue was relatively flat year over year. The filing identifies no litigation management expects to materially adversely affect the company.
Important facts for investors to verify
- Whether political advertising gains persist beyond the 2014 election cycle and offset weaker local advertising.
- Whether station expenses, especially health-care costs, moderate enough to restore operating margins.
- Performance and competitive position in Milwaukee and other concentrated markets.
- Cash generation, planned capital spending, acquisition costs, debt levels, and continued compliance with credit-facility covenants.
- Final purchase-price allocations for the 2014 acquisitions and the terms and repayment obligations of the extended affiliate loan, due May 1, 2017.