Saga Communications, Inc. — Q2 2016 Form 10-Q
Business context and period: Unaudited results for the three and six months ended June 30, 2016, compared with the same 2015 periods. Saga operates radio stations in 24 markets and television stations in two markets; revenue is primarily from advertising.
Financial performance
Amounts are in millions of dollars, except per-share data. Margins are calculated from reported figures.
| Metric | Q2 2016 | Q2 2015 | Six months 2016 | Six months 2015 |
|---|---|---|---|---|
| Revenue | $36.438 | $34.358 | $69.183 | $63.419 |
| Operating income | $8.390 | $7.450 | $13.733 | $11.264 |
| Operating margin | 23.0% | 21.7% | 19.9% | 17.8% |
| Net income | $4.811 | $4.474 | $7.835 | $6.605 |
| Diluted EPS | $0.82 | $0.77 | $1.33 | $1.13 |
- Revenue and earnings: Q2 revenue increased 6.1%, operating income 12.6%, and net income 7.5%. For the first half, revenue rose 9.1%, operating income 22.0%, and net income 18.6%. Q2 diluted EPS increased 6.5%; first-half diluted EPS increased 17.7%.
- Segments: Q2 radio revenue was $30.866 million, up 6.4%, with operating income of $9.016 million, up 10.2%. Television revenue was $5.572 million, up 4.3%, and operating income was $1.994 million, up 7.8%. First-half radio revenue and operating income rose 9.5% and 17.7%; television revenue and operating income rose 7.2% and 13.2%.
- Cash flow: First-half operating cash flow was $12.740 million, versus $12.833 million in 2015. Capital expenditures were $2.550 million; broadcast-property acquisitions used $12.638 million. Dividends paid were $1.465 million. Cash declined $3.879 million to $17.735 million.
- Liquidity and debt: At June 30, cash was $17.735 million and current assets were $45.427 million, against current liabilities of $16.637 million. Debt totaled $36.365 million, including $35.287 million drawn on the revolver and $1.078 million of affiliate-guaranteed debt classified as current. Approximately $65 million remained available under the $100 million revolving facility, maturing August 2020. The company reported compliance with its financial covenants.
- Dividends: Declared dividends were $0.25 per share in each 2016 quarter, compared with $0.20 per share in each comparable 2015 quarter. The Q2 dividend, totaling about $1.5 million, was paid July 8, 2016.
Material changes versus prior period
- Acquisitions contributed materially to reported growth: stations not owned or operated for the entire comparable period accounted for about 87% of Q2 revenue growth and 60% of first-half growth. The principal 2016 acquisition was Columbus FM station WLVQ, completed in February for approximately $13.791 million and funded from operations.
- First-half same-station revenue benefited from political advertising (+$1.353 million), local advertising (+$0.472 million), and television retransmission revenue (+$0.417 million). In Q2, same-station growth was modest; political and retransmission revenue increased, while local TV revenue declined.
- Operating costs increased, including first-half same-station healthcare costs and compensation-related expenses. Corporate general and administrative expense rose 5.4% for the first half, partly due to higher restricted-stock compensation.
- Interest expense fell in both periods, which management attributed to lower average debt outstanding and amortization of bank fees. The prior-year comparisons included a $0.417 million insurance gain related to lightning damage to transmitters; no corresponding gain was reported in 2016.
- On July 22, 2016, Saga sold a Norfolk-market tower for approximately $1.612 million and entered into a 10-year lease for tower space from the buyer.
Outlook, commentary, and risks
- Management expected higher 2016 political advertising in most radio markets due to the election cycle and anticipated 2016 capital expenditures of approximately $5–$5.5 million, funded from operating cash flow. The filing provides no formal earnings or revenue guidance.
- Management said operating cash flow should cover scheduled debt service, but cautioned that insufficient cash flow could require equity issuance, refinancing, or property sales; availability and terms are not assured. Future acquisitions and dividends may be funded from operations, borrowings, or new financing.
- Key risks identified include advertising and economic conditions, reliance on key personnel and stations, concentration in major markets, successful integration of acquired stations, regulation, new technologies, natural disasters, and debt-service requirements. The five largest radio markets generated about 37% of consolidated revenue in the first half; those markets and Joplin also represent meaningful station operating income.
- Ordinary-course litigation was not expected by management to materially affect the financial statements. Disclosure controls were assessed as effective, with no material quarterly change in internal control over financial reporting.
Important facts for investors to verify
- How much reported revenue and earnings growth persists on a same-station basis after acquisition contributions and election-related advertising.
- Whether political, local, national, and retransmission revenue trends continue, especially given market-level concentration and the reported decline in local TV revenue in Q2.
- Cash generation relative to acquisition spending, planned capital expenditures, dividends, and debt service; confirm remaining revolver availability and covenant headroom.
- The acquired WLVQ station’s contribution to results and the final purchase-price allocation, which the filing described as preliminary.
- The financial effect of the Norfolk tower sale and lease, and whether any material developments arise from outstanding legal claims.