Saga munications(SGA) - 2018 Q4 - Annual Report

Part I Business Saga Communications operates 79 FM and 34 AM radio stations across 27 mid-sized markets, primarily generating revenue from local advertising and subject to FCC regulation - As of February 28, 2019, the company owned 79 FM and 34 AM radio stations across 27 markets, with its television segment sold in 2017 now reported as discontinued operations[17] - The company's strategy focuses on operating top-billing radio stations in mid-sized markets (ranked 20 to 200)[23] Revenue Source Breakdown (2016-2018) | Revenue Source | 2018 | 2017 | 2016 | | :--- | :--- | :--- | :--- | | Local Advertising | 87% | 87% | 85% | | National Advertising | 13% | 13% | 15% | Strategy, Operations, and Competition The company employs decentralized local management and diverse programming to achieve top ratings, with revenue from short-term advertising contracts in a highly competitive and seasonal market - The company utilizes diverse programming formats like Classic Hits and News/Talk, supported by extensive market research[25] - Competition extends beyond other radio stations to include cable television, newspapers, direct mail, the Internet, and new technologies like satellite and streaming radio[33][34][35] - As of December 31, 2018, the company employed approximately 687 full-time and 344 part-time individuals, none unionized[38] Federal Regulation of Radio Broadcasting FCC heavily regulates the company's operations, covering license renewals, ownership limits, foreign ownership, EEO rules, and music royalties, with potential new burdens from the Music Modernization Act - Radio broadcasting licenses are granted for maximum terms of eight years and require FCC renewal[43] - The Communications Act restricts foreign ownership, generally prohibiting more than 25% alien control of broadcast licenses without an FCC waiver[50] - The 2018 Music Modernization Act, improving songwriter compensation and digital radio royalties, may impose additional financial burdens on the company[77] Executive Officers The company's executive team includes President and CEO Edward K Christian, along with key leaders in finance, corporate affairs, and operations Executive Officers | Name | Age | Position | | :--- | :--- | :--- | | Edward K. Christian | 74 | President, Chief Executive Officer and Chairman; Director | | Samuel D. Bush | 61 | Senior Vice President, Treasurer and Chief Financial Officer | | Marcia K. Lobaito | 70 | Senior Vice President, Corporate Secretary, and Director of Business Affairs | | Catherine A. Bobinski | 59 | Senior Vice President/Finance, Chief Accounting Officer and Corporate Controller | | Christopher S. Forgy | 58 | Senior Vice President of Operations | Risk Factors Key risks include cyclical advertising revenue, substantial debt, dependence on CEO Edward K Christian, intense competition, potential FCC license impairment, and cybersecurity threats - Advertising revenues are cyclical and sensitive to economic conditions; a downturn could decrease expenditures and adversely affect business[87] - As of December 31, 2018, the company had approximately $20 million in long-term debt with restrictive financial covenants[89][90] - The business is dependent on key personnel, particularly CEO Edward K. Christian, who controlled approximately 65% of the combined voting power as of March 2, 2019[92][106] - FCC broadcasting licenses, representing 38.3% of total assets as of December 31, 2018, are subject to annual impairment testing[99] - The company is vulnerable to IT failures, cybersecurity attacks, and data breaches that could disrupt operations and damage reputation[108][109] Unresolved Staff Comments No unresolved staff comments were reported Properties The company owns facilities for 25 of its 28 operating locations, with the remainder and transmitter sites leased, and no single property is material - As of December 31, 2018, the company owned studios and offices for 25 of its 28 operating locations, with remaining facilities leased[113] Legal Proceedings The company faces ordinary course legal claims, but management anticipates no material impact on financial statements Mine Safety Disclosures This disclosure item is not applicable to the company's operations Part II Market for Registrant's Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities The company's Class A Common Stock trades on NASDAQ, with 2018 dividends of $1.45 per share and $20.4 million remaining for share repurchases Class A Common Stock Price (2018) | Quarter | High | Low | | :--- | :--- | :--- | | First Quarter | $42.60 | $36.10 | | Second Quarter | $40.10 | $36.50 | | Third Quarter | $39.00 | $35.00 | | Fourth Quarter | $37.89 | $30.05 | - The company declared total cash dividends of $1.45 per share in 2018, $2.00 in 2017, and $1.30 in 2016[121][122][123] - As of December 31, 2018, approximately $20.4 million remained available for share repurchases under the Stock Buy-Back Program[129] Selected Financial Data This section provides a five-year financial overview, highlighting 2018 net operating revenue of $124.8 million and net income of $13.7 million from continuing operations Selected Financial Data (Continuing Operations) | (In thousands) | 2018 | 2017 | 2016 | | :--- | :--- | :--- | :--- | | Net Operating Revenue | $124,829 | $118,149 | $118,955 | | Operating Income | $19,682 | $17,229 | $22,527 | | Net Income from Continuing Operations | $13,690 | $22,246 | $12,910 | | Total Assets | $248,477 | $248,769 | $219,998 | | Long-term Debt | $20,000 | $25,000 | $35,287 | Management's Discussion and Analysis of Financial Condition and Results of Operations MD&A covers the radio segment, noting 2018 revenue growth driven by acquisitions, a decline in net income due to a prior-year tax benefit, strong liquidity, and critical accounting estimates for broadcast licenses and goodwill Results of Operations Consolidated net operating revenue increased by 5.7% in 2018, while net income from continuing operations decreased by 38.5% due to a prior-year tax benefit and discontinued operations gain Consolidated Results of Operations (2018 vs. 2017) | (In thousands) | 2018 | 2017 | Change ($) | Change (%) | | :--- | :--- | :--- | :--- | :--- | | Net operating revenue | $124,829 | $118,149 | $6,680 | 5.7% | | Station operating expense | $93,727 | $87,759 | $5,968 | 6.8% | | Operating income from continuing operations | $19,682 | $17,229 | $2,453 | 14.2% | | Income from continuing operations, net of tax | $13,690 | $22,246 | ($8,556) | (38.5)% | | Income from discontinued operations, net of tax | $0 | $32,471 | ($32,471) | N/M | | Net income | $13,690 | $54,717 | ($41,027) | N/M | - The 2018 decrease in net income from continuing operations was primarily due to a $11.5 million one-time income tax benefit recorded in 2017 from the Tax Cuts and Jobs Act[177] Liquidity and Capital Resources The company maintains strong liquidity with an $80 million unused credit facility capacity and $25.6 million in net cash from operations in 2018, funding capital expenditures, dividends, and acquisitions - The company has a $100 million revolving credit facility maturing in June 2023, with $80 million of unused borrowing capacity as of December 31, 2018[186][190] - Net cash provided by continuing operating activities totaled $25.6 million for the year ended December 31, 2018[194] - In 2018, the company incurred $5.9 million in capital expenditures, paid $8.6 million in dividends, and repurchased $1.3 million of its stock[195][196][121] Contractual Cash Obligations as of Dec 31, 2018 | (In thousands) | Total | Less Than 1 Year | 1 to 3 Years | 4 to 5 Years | More Than 5 Years | | :--- | :--- | :--- | :--- | :--- | :--- | | Long-Term Debt Obligations | $20,000 | $5,000 | $0 | $15,000 | $0 | | Operating Leases | $7,963 | $1,562 | $2,604 | $1,774 | $2,023 | | Purchase Obligations | $29,535 | $14,597 | $9,886 | $3,555 | $1,497 | | Total | $60,730 | $21,888 | $13,927 | $21,395 | $3,520 | Critical Accounting Policies and Estimates Critical accounting policies include the valuation and impairment testing of broadcast licenses and goodwill, which comprised 45.9% of total assets in 2018, with a $1.4 million impairment recorded in 2017 - Broadcast licenses and goodwill, representing approximately 45.9% of total assets as of December 31, 2018, are subject to annual impairment testing[216] - A $1,449,000 impairment charge for broadcast licenses was recognized in Q4 2017 due to market declines in Springfield, Illinois, with no impairment in 2018[217][218] - A hypothetical 10% decrease in broadcast license fair value as of December 31, 2018, would have resulted in an additional $1.3 million impairment charge[221] Quantitative and Qualitative Disclosures About Market Risk The company's primary market risk is interest rate exposure on variable-rate debt; a hypothetical 1% rate increase would decrease pre-tax income by $234,000 - A hypothetical 1% increase in average market interest rates in 2018 would have decreased pre-tax income by $234,000[225] Financial Statements and Supplementary Data This section presents the consolidated financial statements and supplementary data included in the annual report Consolidated Financial Statements Audited consolidated financial statements show $248.5 million in total assets and $13.7 million in net income for 2018, with an unqualified opinion from UHY LLP Consolidated Balance Sheet Highlights (As of Dec 31, 2018) | (In thousands) | Amount | | :--- | :--- | | Cash and cash equivalents | $44,729 | | Total current assets | $68,595 | | Net property and equipment | $59,103 | | Broadcast licenses, net | $95,250 | | Goodwill | $18,839 | | Total Assets | $248,477 | | Total current liabilities | $23,165 | | Long-term debt | $15,000 | | Total Liabilities | $63,478 | | Total Stockholders' Equity | $184,999 | Consolidated Income Statement Highlights (Year Ended Dec 31, 2018) | (In thousands, except per share data) | Amount | | :--- | :--- | | Net operating revenue | $124,829 | | Operating income from continuing operations | $19,682 | | Net income | $13,690 | | Diluted earnings per share | $2.30 | Notes to Consolidated Financial Statements Notes detail accounting policies, the 2017 television segment sale, debt, acquisitions, related party transactions, broadcast license impairment, and revenue disaggregation - The company adopted ASC 606 in 2018 with no material impact, disaggregating revenue into $114.9 million Broadcast Advertising, $3.9 million Digital Advertising, and $6.0 million Other[326][327] - The 2017 sale of television stations for $66.6 million generated $69.5 million in net proceeds and a $50.8 million pretax gain, reported as discontinued operations[354] - The company acquired radio stations in Ocala, FL for $9.3 million in 2018 and in South Carolina for $23 million in 2017[406][409] - The company operates with a dual-class stock structure, where Class A shares have one vote and Class B shares (held by CEO Edward K. Christian) have ten votes[434][388] Changes in and Disagreements with Accountants on Accounting and Financial Disclosure No changes in or disagreements with accountants on accounting and financial disclosure were reported Controls and Procedures Management concluded that disclosure controls and internal controls over financial reporting were effective as of December 31, 2018, with an unqualified audit opinion from UHY LLP - The CEO and CFO concluded that the company's disclosure controls and procedures were effective as of the reporting period end[231] - Management concluded internal control over financial reporting was effective as of December 31, 2018, with UHY LLP issuing an unqualified opinion[235][238] Other Information No other information was reported Part III Directors, Executive Officers, Corporate Governance, Executive Compensation, Security Ownership, and Principal Accountant Fees Information for Items 10-14, covering directors, executive compensation, security ownership, and accountant fees, is incorporated by reference from the 2019 Proxy Statement - Information for Items 10, 11, 12, 13, and 14 is incorporated by reference from the 2019 Proxy Statement[247][248][249] Part IV Exhibits and Financial Statement Schedules This section includes consolidated financial statements, notes, the independent auditor's report, and a list of all exhibits filed with the 10-K report Consolidated Financial Statements Audited consolidated financial statements show $248.5 million in total assets and $13.7 million in net income for 2018, with an unqualified opinion from UHY LLP Consolidated Balance Sheet Highlights (As of Dec 31, 2018) | (In thousands) | Amount | | :--- | :--- | | Cash and cash equivalents | $44,729 | | Total current assets | $68,595 | | Net property and equipment | $59,103 | | Broadcast licenses, net | $95,250 | | Goodwill | $18,839 | | Total Assets | $248,477 | | Total current liabilities | $23,165 | | Long-term debt | $15,000 | | Total Liabilities | $63,478 | | Total Stockholders' Equity | $184,999 | Consolidated Income Statement Highlights (Year Ended Dec 31, 2018) | (In thousands, except per share data) | Amount | | :--- | :--- | | Net operating revenue | $124,829 | | Operating income from continuing operations | $19,682 | | Net income | $13,690 | | Diluted earnings per share | $2.30 | Notes to Consolidated Financial Statements Notes detail accounting policies, the 2017 television segment sale, debt, acquisitions, related party transactions, broadcast license impairment, and revenue disaggregation - The company adopted ASC 606 in 2018 with no material impact, disaggregating revenue into $114.9 million Broadcast Advertising, $3.9 million Digital Advertising, and $6.0 million Other[326][327] - The 2017 sale of television stations for $66.6 million generated $69.5 million in net proceeds and a $50.8 million pretax gain, reported as discontinued operations[354] - The company acquired radio stations in Ocala, FL for $9.3 million in 2018 and in South Carolina for $23 million in 2017[406][409] - The company operates with a dual-class stock structure, where Class A shares have one vote and Class B shares (held by CEO Edward K. Christian) have ten votes[434][388]