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SGA > SEC Filings for SGA > Form 10-K on 17-Mar-2014All Recent SEC Filings

Show all filings for SAGA COMMUNICATIONS INC

Form 10-K for SAGA COMMUNICATIONS INC


17-Mar-2014

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.

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.

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, 2013, 2012 and 2011, approximately 88%, 88% and 85%, 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 revenue due to political advertising. Political revenue significantly decreased in 2013 as it was a non-election year.

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 completed a project to bring all of our websites in house while making them fully accessible on mobile devices. This change 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, 2013, 2012 and 2011, our Columbus, Ohio; Des
Moines, Iowa; Manchester, New Hampshire; Milwaukee, Wisconsin and Norfolk,
Virginia markets, when combined, represented approximately 34%, 35%, and 34%,
respectively, 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,
                              2013        2012        2011

Market:
Columbus, Ohio                     7 %         7 %         6 %
Des Moines, Iowa                   7 %         6 %         7 %
Manchester, New Hampshire          5 %         6 %         5 %
Milwaukee, Wisconsin              10 %        11 %        12 %
Norfolk, Virginia                  5 %         5 %         4 %

We have experienced a significant decline in our net operating revenue in our Milwaukee, Wisconsin market for the past three years. 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.

During the years ended December 31, 2013, 2012 and 2011, the radio stations in our five largest markets when combined, represented approximately 39%, 40% and 36%, 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,
                             2013      2012     2011

Market:
Columbus, Ohio                   8 %       8 %     6 %
Des Moines, Iowa                 5 %       5 %     5 %
Manchester, New Hampshire        8 %       8 %     7 %
Milwaukee, Wisconsin            11 %      13 %    15 %
Norfolk, Virginia                7 %       6 %     3 %

(*) 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, 2013, 2012 and 2011, approximately 82%, 85% and 81%, 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 revenue due to political advertising. Political revenue significantly decreased in 2013 as it was a non-election year.

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 9% of our net operating revenues, and approximately 12%, 11% 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, 2013, 2012 and 2011, respectively.

Results of Operations

The following tables summarize our results of operations for the three years ended December 31, 2013, 2012 and 2011.

                       Consolidated Results of Operations

                                                                         2013 vs. 2012                 2012 vs. 2011
                                   Years Ended December 31,         $ Increase    % Increase      $ Increase    % Increase
                                 2013        2012        2011       (Decrease)    (Decrease)      (Decrease)    (Decrease)
                                                  (In thousands, except %'s and per share information)
Net operating revenue          $ 129,478   $ 130,259   $ 125,273   $      (781)        (0.6) %   $      4,986          4.0 %
Station operating expense         92,977      90,288      90,929          2,689          3.0 %          (641)        (0.7) %
Corporate G&A                      8,172       7,960       7,590            212          2.7 %            370          4.9 %
Impairment of intangible
assets                             2,033           -           -          2,033          N/M                -            - %
Operating income from
continuing operations             26,296      32,011      26,754        (5,715)       (17.9) %          5,257         19.7 %
Interest expense                   1,305       1,733       3,420          (428)       (24.7) %        (1,687)       (49.3) %
Write-off debt issuance
costs                                 55           -       1,326             55          N/M          (1,326)          N/M
Other (income) expense, net        (106)         279         519          (385)          N/M            (240)       (46.2) %
Income from continuing
operations before
  income tax                      25,042      29,999      21,489        (4,957)       (16.5) %          8,510         39.6 %
Income tax provision               9,992      11,939       8,604        (1,947)       (16.3) %          3,335         38.8 %
Income from continuing
operations, net of
  income tax                      15,050      18,060      12,885        (3,010)       (16.7) %          5,175         40.2 %
Income (loss) from
discontinued operations,
  net of income tax                  223       (135)       (254)            358          N/M            (119)       (46.9) %
Net income                     $  15,273   $  17,925   $  12,631   $    (2,652)       (14.8) %   $      5,294         41.9 %
Earnings (loss) per share:
From continuing operations     $    2.60   $    3.18   $    2.28   $     (0.58)       (18.3) %   $       0.90         39.5 %
From discontinued operations        0.04      (0.02)      (0.05)           0.06          N/M             0.03         60.0 %
Earnings per share (fully
diluted)                       $    2.64   $    3.16   $    2.23   $     (0.52)       (16.5) %   $       0.93         41.7 %



                           Radio Broadcasting Segment

                                                                            2013 vs. 2012                 2012 vs. 2011
                                      Years Ended December 31,         $ Increase    % Increase      $ Increase    % Increase
                                    2013        2012        2011       (Decrease)    (Decrease)      (Decrease)    (Decrease)
                                                                   (In thousands, except %'s)
Net operating revenue             $ 109,818   $ 111,763   $ 108,938   $    (1,945)        (1.7) %   $      2,825          2.6 %
Station operating expense            79,933      77,992      79,130          1,941          2.5 %        (1,138)        (1.4) %
Impairment of intangible assets       2,033           -           -          2,033          N/M                -            - %
Operating income                  $  27,852   $  33,771   $  29,808   $    (5,919)       (17.5) %   $      3,963         13.3 %

                        Television Broadcasting Segment

                                                                     2013 vs. 2012                 2012 vs. 2011
                               Years Ended December 31,        $ Increase     % Increase      $ Increase     % Increase
                              2013        2012       2011      (Decrease)     (Decrease)      (Decrease)     (Decrease)
                                                            (In thousands, except %'s)
Net operating revenue       $  19,660   $ 18,496   $ 16,335   $       1,164          6.3 %   $       2,161         13.2 %
Station operating expense      13,044     12,296     11,799             748          6.1 %             497          4.2 %
Operating income            $   6,616   $  6,200   $  4,536   $         416          6.7 %   $       1,664         36.7 %

N/M=Not meaningful

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

Year Ended December 31, 2013:                                          Corporate
                                            Radio       Television     and Other     Consolidated
                                                               (In thousands)
Net operating revenue                     $  109,818   $     19,660   $         -   $      129,478
Station operating expense                     79,933         13,044             -           92,977
Corporate general and administrative               -              -         8,172            8,172
Impairment of intangible assets                2,033              -             -            2,033
Operating income (loss) from continuing
operations                                $   27,852   $      6,616   $   (8,172)   $       26,296



Year Ended December 31, 2012:                                          Corporate
                                            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



Year Ended December 31, 2011:                                          Corporate
                                            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

Year Ended December 31, 2013 Compared to Year Ended December 31, 2012

Consolidated

For the year ended December 31, 2013, consolidated net operating revenue was $129,478,000 compared with $130,259,000 for year ended December 31, 2012, a decrease of $781,000 or less than 1%. Gross local revenue, gross national revenue and gross retransmission consent revenue increased $3,221,000, $821,000 and $438,000, respectively, from 2012. The increase in gross local revenue was primarily attributable to improvements in our Columbus, OH, Norfolk, VA and Victoria, TX markets, partially offset by a decline in gross local revenue in our Portland, ME market. National advertising was up significantly in our Joplin, MO market, but down in our radio segment. Gross political revenue decreased $5,928,000 for the year ended December 31, 2013 as compared to 2012. The decrease in gross political revenue was attributable to reduced political advertising in 2013, as compared to 2012, which was an election year.

Station operating expense was $92,977,000 for the year ended December 31, 2013, compared with $90,288,000 for the year ended December 31, 2012, an increase of $2,689,000 or 3%. The increase was primarily a result of $851,000 in non-recurring credits received in 2012 from two of our performance rights organizations for fees previously paid. Sales commission and selling expenses increased $497,000 in 2013 as a result of increased local revenue. Programming salaries increased $445,000 in 2013 as a result of programming contractual agreements and health care cost increased $527,000.

Operating income from continuing operations for the year ended December 31, 2013 was $26,296,000 compared to $32,011,000 for the year ended December 31, 2012, a decrease of $5,715,000, or 18%. The decrease was primarily a result of the increase in station operating expense combined with the decline in net operating revenue, described above, and a $212,000, or 3%, increase in corporate general and administrative expense. Operating income for 2013 also includes a non-cash impairment charge of $2,033,000 in connection with our review of broadcast licenses during the fourth quarter of 2013 (see Note 2 in the accompanying notes to the consolidated financial statements).

We recognized income from discontinued operations of $223,000 net of tax from the sale of our Greenville, Mississippi TV station in January 2013. 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 $15,273,000 ($2.64 per share on a fully diluted basis) for the year ended December 31, 2013, compared with $17,925,000 ($3.16 per share on a fully diluted basis) for the year ended December 31, 2012, a decrease of $2,652,000 or 15%. In 2013 we had a decrease in operating income from continuing operations of $5,715,000, as described above, and a decrease in interest expense of $428,000. The decrease in interest expense was attributable to an average decrease in market interest rates of 0.356% and a decrease in average debt outstanding. Income tax expense decreased $1,947,000 in 2013 as a result of current year operating performance and the fourth quarter non-cash impairment charge.

Radio Segment

For the year ended December 31, 2013, net operating revenue of the radio segment was $109,818,000 compared with $111,763,000 for the year ended December 31, 2012, a decrease of $1,945,000 or 2%. Gross local revenue increased $1,829,000 in 2013. The increase in gross local revenue was primarily attributable to improvements in our Columbus, OH and Norfolk, VA markets, partially offset by a decline in gross local revenue in our Portland, ME market. Gross political revenue decreased $4,438,000 for the year ended December 31, 2013 as compared to 2012. The decrease in gross political revenue was attributable to reduced political advertising in 2013, as compared to 2012, which was an election year.

Station operating expense for the radio segment was $79,933,000 for the year ended December 31, 2013, compared with $77,992,000 for the year ended December 31, 2012, an increase of $1,941,000 or 2%. The increase was primarily a result of $851,000 in non-recurring credits received in 2012 from two of our performance rights organizations for fees previously paid. Sales commission and selling expenses increased $183,000 in 2013 as a result of increased local revenue. Programming salaries increased $443,000 as a result of programming contractual agreements and health care cost increased $440,000 in 2013.

Operating income for the radio segment decreased $5,919,000 or 18% to $27,852,000 for the year ended December 31, 2013, from $33,771,000 for the year ended December 31, 2012. The decrease was a primarily a result of the decline in net operating revenue combined with the increase in station operating expense, described above. Operating income for 2013 also includes a non-cash impairment charge of $2,033,000 in connection with our review of broadcast licenses during the fourth quarter of 2013 (see Note 2 in the accompanying notes to the consolidated financial statements).

Television Segment . . .

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