Saga Communications Inc. - 10-Q Summary (Period Ended Sep 30, 2006)
Business Context and Reporting Period
This is a Quarterly Report (Form 10-Q) for Saga Communications, Inc., a broadcast company operating radio and television stations. The report covers the three and nine-month periods ended September 30, 2006. The company operates in two primary segments: Radio (89 stations in 23 markets) and Television (5 stations and 4 LPTV stations in 3 markets).
Key Financial Metrics
| Metric (Nine Months Ended Sep 30) | 2006 (in thousands) | 2005 (in thousands) |
|---|---|---|
| Net Operating Revenue | $104,727 | $105,345 |
| Operating Income | $21,189 | $21,821 |
| Net Income | $8,777 | $8,677 |
| Earnings Per Share (Diluted) | $0.43 | $0.42 |
| Cash Flow from Operations | $19,600 | $19,012 |
| Long-Term Debt | $136,911 | $141,911 |
| Cash and Equivalents | $8,972 | $15,168 |
Segment Performance (Nine Months 2006):
- Radio: Revenue $92.1M; Operating Income $25.4M.
- Television: Revenue $12.6M; Operating Income $2.5M.
Material Changes vs. Prior Period
- Revenue: Consolidated revenue decreased 0.6% year-over-year. Same-station revenue declined 2% due to decreases in local and national advertising, partially offset by a $973,000 increase in political revenue.
- Expenses: Station operating expenses decreased 0.8% due to cost-cutting measures and an 84% reduction in amortization expense from fully amortized intangibles. Corporate G&A expenses increased 10.6% primarily due to the adoption of SFAS 123R (stock-based compensation).
- Profitability: Operating income decreased 2.9% to $21.2M. However, Net Income increased 1.2% to $8.8M, driven by a $2.1M improvement in "Other (income) expense" (including a $500k gain on signal alteration and $315k insurance proceeds) which offset higher interest expenses ($1.5M increase) and lower operating income.
- Debt: Long-term debt decreased by $5M due to principal payments. The company amended its Credit Agreement in May 2006 to increase total revolving commitments to $200M and extend maturity to 2012.
Guidance, Outlook, and Risks
- Acquisitions: The company is actively pursuing expansion. Pending acquisitions include stations in Asheville, NC (WOXL-FM, contested); Charlottesville, VA (WCNR-FM); and Ithaca, NY (WKRT-AM/WIII-FM). A recent acquisition of WCTU-FM (Tazwell, TN) included a contingent payment of $3.35M upon tower relocation.
- Capital Allocation: Capital expenditures for 2006 are projected at approximately $9.5M. The company continues its Stock Buy-Back Program, having repurchased 164,200 shares in Q3 2006.
- Risks: Key risks include dependence on four major radio markets (Columbus, Manchester, Milwaukee, Norfolk) which represented ~70% of consolidated operating income. The company noted "ratings softness" in Columbus, Des Moines, and Norfolk. Other risks include financial leverage, regulatory changes, and economic conditions affecting advertising spend.
- Accounting Changes: The company adopted SFAS 123R effective Jan 1, 2006, resulting in increased stock-based compensation expenses recognized in the current period.
Investor Verification Checklist
- Market Concentration: Verify the impact of "ratings softness" in the Columbus, Des Moines, and Norfolk markets, which collectively drive a significant portion of operating income.
- Debt Covenants: Review the specific financial covenants in the amended Credit Agreement, particularly regarding leverage ratios and mandatory principal reductions starting March 2008.
- Acquisition Contingencies: Monitor the status of the contested WOXL-FM acquisition and the contingent $3.35M payment for the WCTU-FM tower relocation.
- Stock-Based Compensation: Assess the ongoing impact of SFAS 123R adoption on future corporate G&A expenses and net income.
- Political Revenue Volatility: Note that political advertising provided a significant offset to declines in commercial revenue; evaluate the sustainability of this revenue stream for future periods.