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SGA > SEC Filings for SGA > Form 10-K on 15-Mar-2013All Recent SEC Filings

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Form 10-K for SAGA COMMUNICATIONS INC


15-Mar-2013

Annual Report


Item 7. Management's Discussion and Analysis of Financial Condition and Results of Operations

The following discussion should be read in conjunction with Item 1. Business, Item 6. Selected Financial Data and the consolidated financial statements and notes thereto of Saga Communications, Inc. and its subsidiaries contained elsewhere herein. The following discussion is presented on both a consolidated and segment basis. Corporate general and administrative expenses, interest expense, other (income) expense, and income tax provision are managed on a consolidated basis and are reflected only in our discussion of consolidated results.

For purposes of business segment reporting, we have aligned operations with similar characteristics into two business segments: Radio and Television. The Radio segment includes twenty-three markets, which includes all ninety-one of our radio stations and five radio information networks. The Television segment includes two markets and consists of four television stations and four low power television ("LPTV") stations. The discussion of our operating performance focuses on segment operating income because we manage our segments primarily on operating income. Operating performance is evaluated for each individual market.

General

We are a broadcast company primarily engaged in acquiring, developing and operating broadcast properties. We actively seek and explore opportunities for expansion through the acquisition of additional broadcast properties. We review acquisition opportunities on an ongoing basis.

Radio Segment

Our radio segment's primary source of revenue is from the sale of advertising for broadcast on our stations. Depending on the format of a particular radio station, there are a predetermined number of advertisements available to be broadcast each hour.

Most advertising contracts are short-term and generally run for a few weeks only. The majority of our revenue is generated from local advertising, which is sold primarily by each radio markets' sales staff. For the years ended December 31, 2012, 2011 and 2010, approximately 88%, 85% and 86%, respectively, of our radio segment's gross revenue was from local advertising. To generate national advertising sales, we engage independent advertising sales representative firms that specialize in national sales for each of our broadcast markets.

Our revenue varies throughout the year. Advertising expenditures, our primary source of revenue, generally have been lowest during the winter months, which include the first quarter of each year. In 2012, we had a significant increase in political advertising due to both the presidential election and a number of congressional, senatorial, gubernatorial and local elections in most of our markets. Because 2013 is a non-election year, we expect political revenue to significantly decline in 2013.

Our net operating revenue, station operating expense and operating income vary from market to market based upon the market's rank or size which is based upon population and the available radio advertising revenue in that particular market.

The broadcasting industry and advertising in general, is influenced by the state of the overall economy, including unemployment rates, inflation, energy prices and consumer interest rates. Our stations broadcast primarily in small to midsize markets. Historically, these markets have been more stable than major metropolitan markets during downturns in advertising spending, but may not experience increases in such spending as significant as those in major metropolitan markets in periods of economic improvement.

Our financial results are dependent on a number of factors, the most significant of which is our ability to generate advertising revenue through rates charged to advertisers. The rates a station is able to charge are, in large part, based on a station's ability to attract audiences in the demographic groups targeted by its advertisers. In a number of our markets, this is measured by periodic reports generated by independent national rating services. In the remainder of our markets it is measured by the results advertisers obtain through the actual running of an advertising schedule. Advertisers measure these results based on increased demand for their goods or services and/or actual revenues generated from such demand. Various factors affect the rate a station can charge, including the general strength of the local and national economies, population growth, ability to provide popular programming, local market competition, target marketing capability of radio compared to other advertising media, and signal strength.

When we acquire and/or begin to operate a station or group of stations we generally increase programming and advertising and promotion expenses to increase our share of our target demographic audience. Our strategy sometimes requires levels of spending commensurate with the revenue levels we plan on achieving in two to five years. During periods of economic downturns, or when the level of advertising spending is flat or down across the industry, this strategy may result in the appearance that our cost of operations are increasing at a faster rate than our growth in revenues, until such time as we achieve our targeted levels of revenue for the acquired station or group of stations.

The number of advertisements that can be broadcast without jeopardizing listening levels (and the resulting ratings) is limited in part by the format of a particular radio station. Our stations strive to maximize revenue by constantly managing the number of commercials available for sale and by adjusting prices based upon local market conditions and ratings. While there may be shifts from time to time in the number of advertisements broadcast during a particular time of the day, the total number of advertisements broadcast on a particular station generally does not vary significantly from year to year. Any change in our revenue, with the exception of those instances where stations are acquired or sold, is generally the result of inventory sell out ratios and pricing adjustments, which are made to ensure that the station efficiently utilizes available inventory.

Our radio stations employ a variety of programming formats. We periodically perform market research, including music evaluations, focus groups and strategic vulnerability studies. Because reaching a large and demographically attractive audience is crucial to a station's financial success, we endeavor to develop strong listener loyalty. Our stations also employ audience promotions to further develop and secure a loyal following. We believe that the diversification of formats on our radio stations helps to insulate us from the effects of changes in musical tastes of the public on any particular format.

The primary operating expenses involved in owning and operating radio stations are employee salaries, sales commissions, programming expenses, depreciation, and advertising and promotion expenses.

The radio broadcasting industry is subject to rapid technological change, evolving industry standards and the emergence of new media technologies and services. These new technologies and media are gaining advertising share against radio and other traditional media.

We are continuing to expand our digital initiative to provide a seamless experience across numerous platforms to allow our listeners and viewers to connect with our products where and when they want. Over the past year, we have embarked on a project to bring all of our websites in house while making them fully accessible on mobile devices. The net result will provide new avenues for revenue and improve our overall digital reach.

In addition, we continue the rollout of HD RadioTM. HD RadioTM utilizes digital technology that provides improved sound quality over standard analog broadcasts and also allows for the delivery of additional channels of diversified programming or data streams in each radio market.

During the years ended December 31, 2012, 2011 and 2010, our Columbus, Ohio; Des Moines, Iowa; Manchester, New Hampshire; and Milwaukee, Wisconsin markets, when combined, represented approximately 30% of our consolidated net operating revenue. An adverse change in any of these radio markets or relative market position in those markets could have a significant impact on our operating results as a whole.

The following tables describe the percentage of our consolidated net operating revenue represented by each of these markets:

                                Percentage of Consolidated
                                   Net Operating Revenue
                                       for the Years
                                    Ended December 31,
                              2012           2011         2010

Market:
Columbus, Ohio                    7%             6%          5%
Des Moines, Iowa                  6%             7%          6%
Manchester, New Hampshire         6%             5%          6%
Milwaukee, Wisconsin             11%            12%         13%

We have experienced a significant decline in our net operating revenue for the years ended December 31, 2011 and 2012 as compared to the corresponding period of 2010 in our Milwaukee, Wisconsin market. This decline in net operating revenue has directly affected the operating income of our radio stations in this market. These reductions are attributable to a combination of aggressive competitive pricing due to a soft economy and new ratings methodology that has changed the competitive pricing landscape in the market; an increase in the demand for 30 second spots that has caused a reduction in both our rates and inventory available as we control the number of units per hour to provide more entertainment for our listeners; and a decline in certain key category spending in the market.

We use certain financial measures that are not calculated in accordance with generally accepted accounting principles in the United States of America (GAAP) to assess our financial performance. For example, we evaluate the performance of our markets based on "station operating income" (operating income plus corporate general and administrative expenses, depreciation and amortization). Station operating income is generally recognized by the broadcasting industry as a measure of performance, is used by analysts who report on the performance of the broadcasting industry and it serves as an indicator of the market value of a group of stations. In addition, we use it to evaluate individual stations, market-level performance, overall operations and as a primary measure for incentive based compensation of executives and other members of management. Station operating income is not necessarily indicative of amounts that may be available to us for debt service requirements, other commitments, reinvestment or other discretionary uses. Station operating income is not a measure of liquidity or of performance in accordance with GAAP, and should be viewed as a supplement to, and not a substitute for our results of operations presented on a GAAP basis.

During the years ended December 31, 2012, 2011 and 2010, the radio stations in our four largest markets when combined, represented approximately 34%, 33% and 32%, respectively, of our consolidated station operating income. The following tables describe the percentage of our consolidated station operating income represented by each of these markets:

                                    Percentage of
                                Consolidated Station
                                Operating Income (*)
                                    for the Years
                                 Ended December 31,
                             2012         2011      2010

Market:
Columbus, Ohio                   8%          6%        3%
Des Moines, Iowa                 5%          5%        4%
Manchester, New Hampshire        8%          7%        8%
Milwaukee, Wisconsin            13%         15%       17%


_______________

(*) Operating income plus corporate general and administrative expenses, depreciation and amortization.

Television Segment

Our television segment's primary source of revenue is from the sale of advertising for broadcast on our stations. The number of advertisements available for broadcast on our television stations is limited by network affiliation and syndicated programming agreements and, with respect to children's programs, federal regulation. Our television stations' local market managers determine the number of advertisements to be broadcast in locally produced programs only, which are primarily news programming and occasionally local sports or information shows.

Our net operating revenue, station operating expense and operating income vary from market to market based upon the market's rank or size, which is based upon population, available television advertising revenue in that particular market, and the popularity of programming being broadcast.

Our financial results are dependent on a number of factors, the most significant of which is our ability to generate advertising revenue through rates charged to advertisers. The rates a station is able to charge are, in large part, based on a station's ability to attract audiences in the demographic groups targeted by its advertisers, as measured principally by periodic reports by independent national rating services. Various factors affect the rate a station can charge, including the general strength of the local and national economies, population growth, ability to provide popular programming through locally produced news, sports and weather and as a result of syndication and network affiliation agreements, local market competition, the ability of television broadcasting to reach a mass appeal market compared to other advertising media, and signal strength including cable/satellite coverage, and government regulation and policies.

Our stations strive to maximize revenue by constantly adjusting prices for our commercial spots based upon local market conditions, advertising demands and ratings. While there may be shifts from time to time in the number of advertisements broadcast during a particular time of day, the total number of advertisements broadcast on a station generally does not vary significantly from year to year. Any change in our revenue, with the exception of those instances where stations are acquired or sold, is generally the result of pricing adjustments, which are made to ensure that the station efficiently utilizes available inventory.

Because audience ratings in the local market are crucial to a station's financial success, we endeavor to develop strong viewer loyalty by providing locally produced news, weather and sports programming. We believe that this emphasis on the local market provides us with the viewer loyalty we are trying to achieve.

Most of our revenue is generated from local advertising, which is sold primarily by each television markets' sales staff. For the years ended December 31, 2012, 2011 and 2010, approximately 85%, 81% and 80%, respectively, of our television segment's gross revenue was from local advertising. To generate national advertising sales, we engage independent advertising sales representatives that specialize in national sales for each of our television markets.

Our revenue varies throughout the year. Advertising expenditures, our primary source of revenue, generally have been lowest during the winter months, which include the first quarter of each year. In 2012, we had a significant increase in political advertising due to both the presidential election and a number of congressional, senatorial, gubernatorial and local elections in our markets. Because 2013 is a non-election year, we expect political revenue to significantly decline in 2013.

In 2009 we entered into retransmission consent agreements with certain cable and satellite providers as to the terms of their carriage of our television stations, and the compensation we would receive for granting such carriage rights. In 2011 we renegotiated new retransmission consent agreements with these and other providers that resulted in a significant increase in our retransmission consent revenue for fiscal 2012 -2014. We recognized revenue of $1.8 million in 2012 and, per the terms of our network affiliation agreements, we remitted $435,000 of this revenue to our network partners as their share of our retransmission consent revenue.

The primary operating expenses involved in owning and operating television stations are employee salaries, sales commissions, programming expenses, including news production and the cost of acquiring certain syndicated programming, depreciation, and advertising and promotion expenses.

Our television market in Joplin, Missouri represented approximately 9%, 9% and 8% of our net operating revenues, and approximately 11%, 10% and 10% of our consolidated station operating income (operating income plus corporate general and administrative expenses, depreciation and amortization) for the years ended December 31, 2012, 2011 and 2010, respectively.

Results of Operations

The following tables summarize our results of operations for the three years ended December 31, 2012, 2011 and 2010.

                       Consolidated Results of Operations



                                                                                 2012 vs. 2011                     2011 vs. 2010
                                     Years Ended December 31,             $ Increase       % Increase       $ Increase       % Increase
                                 2012          2011          2010         (Decrease)       (Decrease)       (Decrease)       (Decrease)
                                                         (In thousands, except %'s and per share information)
Net operating revenue          $ 130,259     $ 125,273     $ 125,833     $      4,986             4.0%     $       (560 )         (0.4)%
Station operating expense         90,288        90,929        90,335             (641 )         (0.7)%              594             0.7%
Corporate G&A                      7,960         7,590         7,274              370             4.9%              316             4.3%
Operating income from
continuing operations             32,011        26,754        28,224            5,257            19.7%           (1,470 )         (5.2)%
Interest expense                   1,733         3,420         5,622           (1,687 )        (49.3)%           (2,202 )        (39.2)%
Write-off debt issuance
costs                                  -         1,326             -           (1,326 )            N/M            1,326              N/M
Other (income) expense, net          279           519        (3,481 )           (240 )        (46.2)%            4,000              N/M
Income from continuing
operations before income tax      29,999        21,489        26,083            8,510            39.6%           (4,594 )        (17.6)%
Income tax provision              11,939         8,604        10,619            3,335            38.8%           (2,015 )        (19.0)%
Income from continuing
operations, net of income
tax                               18,060        12,885        15,464            5,175            40.2%           (2,579 )        (16.7)%
Loss from discontinued
operations, net of income
tax                                 (135 )        (254 )        (328 )           (119 )        (46.9)%              (74 )        (22.6)%
Net income                     $  17,925     $  12,631     $  15,136     $      5,294            41.9%     $     (2,505 )        (16.5)%
Earnings (loss) per share:
From continuing operations     $    3.18     $    2.28     $    2.74     $       0.90            39.5%     $      (0.46 )        (16.8)%
From discontinued operations       (0.02 )       (0.05 )       (0.06 )           0.03            60.0%             0.01            16.7%
Earnings per share (fully
diluted)                       $    3.16     $    2.23     $    2.68     $       0.93            41.7%     $      (0.45 )        (16.8)%

                           Radio Broadcasting Segment



                                                                                2012 vs. 2011                     2011 vs. 2010
                                    Years Ended December 31,             $ Increase       % Increase       $ Increase       % Increase
                                2012          2011          2010         (Decrease)       (Decrease)       (Decrease)       (Decrease)
                                                                     (In thousands, except %'s)
Net operating revenue         $ 111,763     $ 108,938     $ 109,891     $      2,825             2.6%     $       (953 )         (0.9)%
Station operating expense        77,992        79,130        79,012           (1,138 )         (1.4)%              118             0.1%
Operating income              $  33,771     $  29,808     $  30,879     $      3,963            13.3%     $     (1,071 )         (3.5)%

                        Television Broadcasting Segment



                                                                            2012 vs. 2011                     2011 vs. 2010
                                  Years Ended December 31,           % Increase       % Increase       % Increase       % Increase
                               2012         2011         2010        (Decrease)       (Decrease)       (Decrease)       (Decrease)
                                                                   (In thousands, except %'s)
Net operating revenue        $ 18,496     $ 16,335     $ 15,942     $      2,161            13.2%     $        393             2.5%
Station operating expense      12,296       11,799       11,323              497             4.2%              476             4.2%
Operating income             $  6,200     $  4,536     $  4,619     $      1,664            36.7%     $        (83 )         (1.8)%


N/M=Not meaningful

Reconciliation of segment operating income to consolidated operating income from continuing operations:

                                                                               Corporate
Year Ended December 31, 2012:                    Radio        Television       and Other       Consolidated
                                                                      (In thousands)
Net operating revenue                          $ 111,763     $     18,496     $         -     $      130,259
Station operating expense                         77,992           12,296               -             90,288
Corporate general and administrative                   -                -           7,960              7,960
Operating income (loss) from continuing
operations                                     $  33,771     $      6,200     $    (7,960 )   $       32,011




                                                                               Corporate
Year Ended December 31, 2011:                    Radio        Television       and Other       Consolidated
                                                                      (In thousands)
Net operating revenue                          $ 108,938     $     16,335     $         -     $      125,273
Station operating expense                         79,130           11,799               -             90,929
Corporate general and administrative                   -                -           7,590              7,590
Operating income (loss) from continuing
operations                                     $  29,808     $      4,536     $    (7,590 )   $       26,754




                                                                               Corporate
Year Ended December 31, 2010:                    Radio        Television       and Other       Consolidated
                                                                      (In thousands)
Net operating revenue                          $ 109,891     $     15,942     $         -     $      125,833
Station operating expense                         79,012           11,323               -             90,335
Corporate general and administrative                   -                -           7,274              7,274
Operating income (loss) from continuing
operations                                     $  30,879     $      4,619     $    (7,274 )   $       28,224

Year Ended December 31, 2012 Compared to Year Ended December 31, 2011

Consolidated

For the year ended December 31, 2012, consolidated net operating revenue was $130,259,000 compared with $125,273,000 for year ended December 31, 2011, an increase of $4,986,000 or 4%. Gross political revenue and gross retransmission consent revenue increased $5,472,000 and $1,314,000, respectively, in 2012. Gross local revenue increased $1,624,000 and gross national revenue decreased $3,204,000 compared to the prior year. The increase in gross local revenue was primarily attributable to improvements in our Charlottesville, VA, Columbus, OH and Norfolk, VA markets, partially offset by a decline in gross local revenue in our Milwaukee, WI market and our Networks. The increase in gross political revenue was a result of the 2012 election campaigns, and the increase in gross retransmission consent revenue was due to our renegotiated contracts for the carriage rights of our television stations. The decrease in national revenue is due to a reduction of national advertising in 2012.

Station operating expense was $90,288,000 for the year ended December 31, 2012, compared with $90,929,000 for the year ended December 31, 2011, a decrease of $641,000 or less than 1%. Music licensing fees decreased $1,771,000 in the current year as a result of lower royalty rates and credits received from two of our performance rights organizations for fees previously paid. We also had decreases during the year ended December 31, 2012 of $494,000 in advertising and promotions expense, $377,000 in bad debt expense and $236,000 in depreciation and amortization expense. The decrease in advertising and promotions was primarily attributable to reductions in TV and billboard advertising, and the reduction in bad debt expense was a result of enhanced collection efforts in many of our markets. These decreases in expenses were partially offset by an increase in salaries of $1,728,000, as a result of the reinstatement of the 5% salary reductions implemented in March 2009 and programming contractual agreement increases. Retransmission fees were $435,000, which is a new expense in 2012 for our television stations. Retransmission fees are the amount that we pay our network affiliates as a result of our renegotiated carriage rights agreements.

Operating income from continuing operations for the year ended December 31, 2012 was $32,011,000 compared to $26,754,000 for the year ended December 31, 2011, an increase of $5,257,000, or 20%. The increase was a result of the improvement in net operating revenue and the reduction in station operating expense described in detail above. Additionally, our corporate general and administrative charges increased $370,000 in the current year. The increase in corporate general and administrative charges was primarily from an increase in 401(k) expenses of $230,000 as a result of the reinstatement of Company contributions in 2012, and a $100,000 increase in interactive expense to bring all of our websites in-house. The Company did not make any matching contributions to the 401(k) plan in 2011.

The loss from discontinued operations was related to our Greenville, Mississippi TV station held for sale and is presented net of income taxes. Please refer to Note 3 - Discontinued Operations, in the accompanying notes to the consolidated financial statements for more information on our discontinued operations.

We generated net income of $17,925,000 ($3.16 per share on a fully diluted basis) for the year ended December 31, 2012, compared with $12,631,000 ($2.23 per share on a fully diluted basis) for the year ended December 31, 2011, an increase of $5,294,000 or 42%. In the current year we had an increase in operating income from continuing operations of $5,257,000, as described above, and a decrease in interest expense of $1,687,000. Additionally, in 2011 we recognized a charge of $1,326,000 for the write-off of unamortized debt issuance . . .

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