Saga Communications, Inc. — FY2015 Form 10-K
Reporting period: Fiscal year ended December 31, 2015. This annual filing includes fourth-quarter results, but is not a standalone quarterly report. Amounts below are in U.S. dollars; financial statement amounts are in millions unless noted.
Business context
Saga operates radio and television broadcasting businesses, with advertising as its primary revenue source. At year-end it owned or operated 99 radio stations, four television stations and five low-power television stations across 26 markets. It reports Radio and Television segments. In 2015, approximately 89% of gross revenue came from local advertising. Advertising is seasonal, typically weakest in the first quarter, and political revenue varies with election cycles.
Key financial metrics
| Metric | FY2015 | FY2014 | Change |
|---|---|---|---|
| Net operating revenue | $132.856 | $133.998 | Down 0.9% |
| Operating income from continuing operations | $24.082 | $25.947 | Down 7.2% |
| Net income | $13.414 | $14.904 | Down 10.0% |
| Diluted EPS | $2.29 | $2.55 | Down 10.2% |
| Cash from operating activities | $28.535 | $25.416 | Up $3.119 |
Operating margin was approximately 18.1% and net margin approximately 10.1%, calculated from reported revenue and income. Radio revenue was $111.792 million and segment operating income $27.231 million; television revenue was $21.064 million and segment operating income $6.952 million. Segment operating income is a company-defined measure and is not GAAP operating income.
Fourth-quarter revenue was $35.606 million versus $36.371 million a year earlier; net income was $3.697 million versus $4.443 million, and diluted EPS was $0.63 versus $0.76.
At December 31, cash and cash equivalents were $21.614 million, working capital was $33.557 million, total assets were $204.571 million and stockholders’ equity was $122.816 million. Long-term debt, including the Surtsey debt guarantee, was $36.365 million. The company reported approximately $65 million of unused capacity under its $100 million revolving facility. Operating cash flow was $28.535 million; capital expenditures were $5.543 million. The filing does not provide a clear standalone free-cash-flow measure.
Material changes versus prior period
- Revenue declined modestly as lower political and national advertising outweighed growth in retransmission, interactive, non-spot and local revenue. Political revenue was lower in the 2015 non-election year than in 2014.
- Operating income and earnings fell more than revenue. Corporate G&A increased 13.4%, including higher restricted-stock compensation and consulting costs; station operating expenses declined 1.2%.
- Radio revenue fell 1.6%, while television revenue rose 3.4%, principally on higher retransmission revenue. Television segment operating income nevertheless declined 2.3% as expenses rose.
- 2014 included a $1.210 million gain from selling four radio information networks; 2015 included a $0.400 million loss on donating WBOP-FM. These items affect year-over-year comparability.
- Cash increased to $21.614 million from $17.907 million. Debt was broadly stable year over year, while the company replaced its prior credit agreement with a new facility maturing August 18, 2020.
Outlook, risks and unusual items
- Management estimated 2016 capital expenditures of $5.0 million to $5.5 million, expected to be funded from operations. It gave no specific revenue or earnings guidance.
- The company said operating cash flow should cover interest and scheduled principal payments, but warned that insufficient cash flow could require refinancing, asset sales or equity issuance. Credit-facility covenants restrict dividends, additional debt and other activities; the company reported compliance at year-end. Substantially all assets other than FCC licenses and certain other assets secure the facility.
- The fourth-quarter broadcast-license impairment charge was $0.874 million, relating to the Columbus, Ohio radio market. Broadcast licenses were $88.106 million, about 43% of total assets; further impairment could materially affect results. Management’s valuation depends on estimates of market revenue, margins, growth and discount rates.
- Other 2015 items included a $0.557 million write-off of old debt issuance costs and a $0.417 million insurance gain after lightning damaged two transmitters. The company acquired stations in Harrisonburg, Virginia, for approximately $11.7 million, and completed its $13 million WLVQ acquisition in February 2016 after operating the station under an LMA.
- Risks include sensitivity to local and national advertising markets, competition from other media and digital platforms, concentration in key markets, dependence on key personnel, FCC regulation and license renewals, retransmission-consent negotiations, variable interest rates, and acquisition integration. The company also disclosed a related-party relationship with Surtsey Media, including station operating agreements and a $1.078 million guaranteed debt balance.
- Edward K. Christian held approximately 63% of combined voting power as of March 3, 2016. The filing states that he can generally control votes on most stockholder matters. The board declared a $0.25-per-share regular dividend in March 2016, payable in April.
Most important facts for investors to verify
- Whether advertising and retransmission revenue trends improved after the 2015 non-election-year comparison, and whether radio weakness persists.
- The composition and terms of debt, covenant headroom, interest-rate exposure and the $1.078 million Surtsey guarantee.
- Assumptions supporting broadcast-license values, particularly for Columbus, and the potential for further impairment.
- Post-year-end results and integration of WLVQ, acquired for $13 million, and performance of the 2015 Harrisonburg acquisitions.
- Terms and durability of retransmission-consent arrangements, FCC developments affecting the Surtsey agreements, and the implications of concentrated voting control.
The company reported effective internal controls over financial reporting, and its independent auditor issued unqualified opinions on the 2015 financial statements and internal controls.