Saga Communications, Inc. — Q3 2013 Form 10-Q
Business context and reporting period. This unaudited filing covers the quarter and nine months ended September 30, 2013, compared with the same periods in 2012. Saga operates 91 radio stations and five radio information networks in 23 markets, plus four television stations and four low-power stations in two markets. Results are primarily driven by advertising sales.
Financial performance
| Metric | Q3 2013 | Q3 2012 | Nine months 2013 | Nine months 2012 |
|---|---|---|---|---|
| Net operating revenue | $32.929m | $32.409m | $95.718m | $94.718m |
| Operating income, continuing operations | $7.280m | $8.120m | $20.558m | $22.221m |
| Net income | $4.296m | $4.328m | $12.049m | $12.165m |
| Diluted EPS | $0.75 | $0.76 | $2.10 | $2.15 |
| Operating cash flow | Not provided by quarter | $19.470m | $21.521m |
Margins. Calculated operating margin was approximately 22.1% in Q3 2013 versus 25.1% a year earlier, and 21.5% for the first nine months versus 23.5%. Net margin was approximately 13.0% in Q3 versus 13.4%, and 12.6% for nine months versus 12.8%.
Cash flow and capital spending. Nine-month investing cash flow was a net use of $0.034m, including $3.472m of property and equipment spending and $2.960m in proceeds from the WXVT television station sale. Approximate operating cash flow less capital expenditures was $15.998m, versus $17.617m in 2012. Cash increased to $27.454m from $15.915m at year-end 2012.
Debt and liquidity. At September 30, 2013, debt was $51.078m, including a $30m term loan, $20m drawn on the revolving facility and $1.078m of affiliate debt. The filing reports $50m of long-term debt and $1.078m current debt. Unused revolving capacity was $70m; current assets were $51.597m and current liabilities $13.926m. Cash less reported debt was approximately negative $23.6m. The company reported compliance with all credit-facility financial covenants.
Changes and management commentary
- Revenue rose 1.6% in Q3 and 1.1% for the nine months, while operating income fell 10.4% and 7.5%, respectively, as operating expenses increased faster than revenue.
- Q3 radio revenue increased 2.2%, but segment operating income declined 4.5%. Nine-month radio revenue was essentially flat and operating income declined 7.9%.
- Television Q3 revenue declined 1.8% and operating income fell 17.4%; for nine months, revenue increased 6.9% and operating income rose 8.5%.
- Political advertising declined compared with 2012, an election year: gross political revenue fell $1.279m in Q3 and $2.262m for the nine-month period. Management expected political revenue to remain lower in Q4.
- For nine months, station operating expense increased $2.481m. The comparison includes $0.851m of nonrecurring credits from performance rights organizations received in 2012, as well as higher commissions, programming salaries and health-care costs.
- Management attributed Milwaukee radio-market pressure to aggressive pricing in a soft economy, changed ratings methodology, demand for 30-second spots and reduced spending in certain categories. The five largest radio markets together generated about 35% of consolidated revenue.
Outlook, significant items and risks
- Management expected 2013 capital expenditures of approximately $5.5m, financed from operating cash flow. It stated operating cash flow was expected to cover quarterly debt service, but warned that insufficient cash flow could require asset sales, refinancing or equity issuance.
- A May 2013 amendment extended the $120m credit facility maturity to May 31, 2018, revised pricing and covenants, and changed the facility allocation to a $30m term loan and $90m revolver. No term-loan amortization payment was required as of September 30. Substantially all assets other than FCC licenses and certain other assets secure the facility.
- On November 6, 2013, Saga agreed to acquire WFIZ-FM and three translators in Ithaca, New York, for approximately $715,000, subject to Bankruptcy Court and FCC approval; closing was expected in Q1 2014 and funding from operations.
- Unusual items included a $0.146m gain on the sale of Maine real property in Q3 and a $0.223m after-tax gain from the January 2013 sale of WXVT, reported as discontinued operations. The sale generated $2.960m of cash proceeds during the nine months.
- Key stated risks include leverage and debt service, economic and local advertising conditions, dependence on key stations and personnel, acquisition integration, regulation, technology changes, natural disasters and terrorism. The company reported no litigation expected by management to have a material adverse effect and no material change in market-risk disclosures.
Investor verification priorities
- Track advertising trends, especially political revenue normalization and performance in Milwaukee and other major markets.
- Monitor operating expenses and segment margins, including the impact of prior-year nonrecurring credits and rising compensation and health-care costs.
- Verify operating cash generation, planned capital expenditures and ability to service debt while maintaining liquidity.
- Review credit-facility covenant headroom, variable-rate exposure, restrictions on distributions and buybacks, and the use of available revolver capacity.
- Confirm regulatory and court approvals, financing and completion of the proposed Ithaca acquisition.