Saga munications(SGA) - 2019 Q4 - Annual Report

PART I This part provides a comprehensive overview of the company's business, including its radio station portfolio, operational strategies, advertising sales, competitive landscape, and federal regulatory environment Item 1. Business The company primarily acquires and operates radio stations in mid-sized markets, focusing on local management and diverse programming after divesting its television segment - Primarily engaged in acquiring, developing, and operating broadcast properties, specifically radio stations after selling the television segment in 2017[19] Asset Holdings (as of Feb 29, 2020) | Asset Type | Quantity | | :--------- | :------- | | FM Radio Stations | 79 | | AM Radio Stations | 34 | | Metro Signals | 77 | | Markets Served | 27 | - Strategy focuses on operating top-billing radio stations in mid-sized markets (ranked 20-200), emphasizing programming, marketing, and strong decentralized local management[27][28][31] 1.1. Radio Station Portfolio and Market Presence Saga operates a diverse portfolio of FM and AM radio stations across 27 markets, utilizing various formats to target specific demographics for advertising revenue - Key Markets include Milwaukee, Columbus, Norfolk, Des Moines, Portland, Charleston, Springfield, Ocala-Gainesville, Manchester, Asheville, Harrisonburg, Yankton, Bellingham, Brattleboro, Bucyrus, Champaign, Charlottesville, Clarksville/Hopkinsville, Greenfield, Hilton Head, Ithaca, Jonesboro, Keene, Mitchell, Northampton, Spencer, and Springfield, IL[19][20][22][24][25] - Diverse programming formats include Classic Hits, Adult Hits, Top 40, Country, Country Legends, Mainstream/Hot/Soft Adult Contemporary, Pure Oldies, Classic Rock, News/Talk, Alternative Rock, Sports, Christian, Adult Standards, and Gospel[20][22][24][25][29] - Stations target specific demographics (e.g., Adults 40-64, Men 18-49, Women 25-54) to attract advertisers[20][22][24][25] 1.2. Business Strategy and Operations The strategy focuses on achieving top ratings in mid-sized markets through effective programming, market research, and decentralized local management, while seeking growth-oriented acquisitions - Programming and marketing are key to achieving top ratings, involving extensive market research (music evaluations, focus groups, strategic vulnerability studies) and audience promotions[28][29] - Employs strong decentralized local management responsible for day-to-day operations, compensated based on financial performance; corporate management handles long-range planning, policies, resource allocation, and monitoring[31] - Seeks to acquire reasonably priced broadcast properties with significant growth potential in markets with well-established and relatively stable economies, often supported by state/federal government or major universities[32] 1.3. Advertising Sales and Revenue Advertising sales, primarily local (88% in 2019), are the main revenue source, with rates influenced by audience demographics and market competition - Primary source of revenue is from the sale of advertising for broadcast on stations[33] - Advertising rates are based primarily on a station's ability to attract target demographic audiences, market competition, supply and demand for advertising time, and other qualitative factors[34] Revenue Breakdown (Gross Revenue) | Revenue Type | 2019 | 2018 | 2017 | | :----------- | :--- | :--- | :--- | | Local Advertising | 88% | 87% | 87% | | National Advertising | 12% | 13% | 13% | - Maintains a local sales force generally larger than competitors to develop long-standing customer relationships and provides incentives for new client acquisition[35] 1.4. Competition and Industry Trends The broadcasting industry is highly competitive, with stations vying for listeners and advertising revenue against traditional and new media technologies - Competes for listeners/viewers and advertising revenues directly with other radio and/or television stations within their markets[37] - Faces competition for advertising revenues from other media, including broadcast television/radio, cable television, newspapers, magazines, direct mail, the Internet, coupons, and billboard advertising[38] - Subject to competition from new media technologies, such as audio programming delivery by cable and satellite television systems, satellite radio systems, direct reception from satellites, and Internet streaming[39] 1.5. Operational Aspects Revenue is seasonal, with Q1 being the lowest; the company maintains environmental compliance and manages a workforce of 663 full-time and 339 part-time employees - Revenue varies throughout the year, with advertising expenditures generally lowest in the first quarter[40] - Compliance with federal, state, and local environmental laws and regulations has not had a material adverse effect on the business historically[41] Employee Count (as of Dec 31, 2019) | Employee Type | Count | | :------------ | :---- | | Full-time | 663 | | Part-time | 339 | - Employs several high-profile personalities and has employment and non-competition agreements with its President, most on-air personalities, and commissioned sales representatives[43] 1.6. Federal Regulation of Radio Broadcasting Radio operations are extensively regulated by the FCC, covering licensing, ownership limits, programming, and technical standards, with ongoing reviews of media ownership rules and new technologies - The ownership, operation, and sale of radio stations are subject to the jurisdiction of the FCC, which acts under authority granted by the Communications Act[45] - Radio broadcasting licenses are granted for maximum terms of eight years and are subject to renewal upon application to the FCC, based on public interest service and compliance[47] - Broadcast licenses may not be granted to any corporation with more than one-fifth (20%) of its stock owned or voted by aliens, or if controlled by a corporation with more than 25% alien ownership, without FCC waiver[54] Local Ownership Rule (Reinstated) | Stations in Radio Market | Number of Stations We Can Own | Not More Than (Same Service AM or FM) | | :----------------------- | :---------------------------- | :------------------------------------ | | 14 or Fewer | Total of 5 (cannot own > 50% of market) | 3 | | 15-29 | Total of 6 | 4 | | 30-44 | Total of 7 | 4 | | 45 or More | Total of 8 | 5 | - The Prometheus Radio Project v. FCC decision (2019) vacated recent rule changes, reinstating prior media ownership rules regarding newspaper/broadcast cross-ownership, radio/television cross-ownership, local television ownership, and television joint sales agreements[62] - FCC is reviewing the Local Radio Ownership Rule, Local Television Ownership Rule, and the dual network rule[62] - Broadcasters are required to serve the 'public interest' by presenting programming responsive to community needs, and must comply with rules on political advertising, sponsorship identification, indecency, and technical operations[67] - Equal Employment Opportunity (EEO) rules prohibit discrimination and require outreach measures for job vacancies; the FCC is reviewing these rules[69] - Time Brokerage Agreements (TBAs) where a station purchases more than 15% of another local station's broadcast time are considered an attributable ownership interest; simulcasting is limited to 25%[71] - New technologies like Low Power FM (LPFM) radio, 'Franken FM' stations, Digital Audio Radio Satellite Service (DARS), Internet radio, In-Band On-Channel 'Hybrid Digital' (HD) radio, and FM translators for AM stations are subject to FCC rules and may impact operations[72][73][74][75][77][78] - Pays for music broadcast licenses through performing rights societies (BMI, Global Music Rights, SoundExchange); the Music Modernization Act (2018) improves songwriter compensation and digital radio royalties[81] 1.7. Executive Officers The executive team comprises key leaders including the President, CEO, and CFO, who are elected annually and serve at the Board's discretion Key Executive Team | Name | Age | Position | | :---------------- | :-- | :---------------------------------------------------------------- | | Edward K. Christian | 75 | President, CEO, Chairman; Director | | Samuel D. Bush | 62 | Senior Vice President, Treasurer and Chief Financial Officer | | Marcia K. Lobaito | 71 | Senior Vice President, Corporate Secretary, and Director of Business Affairs (retiring March 2020 as SVP/Director of Business Affairs) | | Catherine A. Bobinski | 60 | Senior Vice President/Finance, Chief Accounting Officer and Corporate Controller | | Christopher S. Forgy | 59 | Senior Vice President of Operations | Item 1A. Risk Factors The company faces risks from cyclical advertising revenue, substantial debt, restrictive covenants, intense competition, regulatory changes, and concentrated ownership - Advertising revenues are cyclical and highly dependent on global, U.S., and local economic conditions, making the company vulnerable to economic downturns[91][99] - Substantial indebtedness ($10 million long-term debt at Dec 31, 2019) and debt service requirements, with potential unpredictable impacts from the expected LIBOR phase-out after 2021[93][94] - Credit facility contains financial covenants that restrict financial and operational flexibility; failure to meet these could lead to immediate debt repayment[96] - Dependence on key personnel, particularly the President and CEO, and key on-air personalities; loss of popularity or departure could adversely affect revenue[97] - Reliance on top five markets (39% of net operating revenue in 2019) increases exposure to adverse events or conditions in those specific economies[98] - Highly competitive business environment, competing for listeners and advertising revenue with other radio/TV stations and diverse media (cable, satellite, internet, print, billboards)[100] - Challenges in identifying, consummating, and integrating acquired stations, including regulatory approvals, competition from other buyers, and potential unprofitability[101][102][103] - FCC broadcasting licenses (37.8% of total assets) are subject to annual impairment testing, which may result in future impairment losses[104] - Extensive federal regulation by the FCC; non-compliance could lead to license denial/revocation, shortened renewal terms, monetary forfeitures, or other penalties[105] - Potential for new federal regulations or fees (e.g., spectrum fees, music royalties) could impose additional financial burdens[107] - FCC's vigorous enforcement of indecency rules could lead to fines, license revocation, or opposition to license renewal applications[108] - New technologies in broadcasting (e.g., digital audio, satellite) may require substantial capital expenditures and could affect broadcasting operations[109] - Edward K. Christian, President, CEO, and Chairman, controls approximately 65% of the combined voting power, influencing most stockholder matters and potential change of control transactions[111] - Market price of common stock may experience volatility due to lower trading volume and concentrated ownership[112] - Information technology and cybersecurity failures or data security breaches could harm business operations, customer service, and reputation[113][114] Item 1B. Unresolved Staff Comments No unresolved staff comments exist - No unresolved staff comments[116] Item 2. Properties The company owns most of its studio and office properties, leases others, and owns substantially all broadcasting equipment, with all properties in good operational condition - Corporate headquarters located in Grosse Pointe Farms, Michigan[117] - Owns studios and offices for 25 of 28 operating locations; remaining studios and offices are in leased facilities (2.5 to 5-year terms)[118] - Owns or leases transmitter and antenna sites, with lease terms expiring in 6 months to 71 years[118] - Properties are in good condition and suitable for operations; substantially all broadcasting equipment is owned[119][120] Item 3. Legal Proceedings The company is involved in ordinary course legal proceedings, with management expecting no material financial statement impact - Subject to various outstanding claims and legal proceedings arising in the ordinary course of business[121] - Management anticipates that any potential liability will not materially affect the Company's financial statements[121] Item 4. Mine Safety Disclosures This item is not applicable to the company's operations - Not applicable[122] PART II This part covers the market for the company's common equity, selected financial data, management's discussion and analysis of financial condition and results of operations, and controls and procedures Item 5. Market for Registrant's Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities Class A Common Stock trades on NASDAQ, with dividends declared and share repurchases made under an authorized buy-back program - Class A Common Stock (SGA) trades on NASDAQ; Class B Common Stock has no public trading market[125] Shareholders (as of March 4, 2020) | Class | Holders of Record | | :---- | :---------------- | | Class A | ~170 | | Class B | 1 | Cash Dividends Declared Per Common Share | Year | Amount | | :--- | :----- | | 2019 | $1.20 | | 2018 | $1.45 | | 2017 | $2.00 | Equity Compensation Plan Information (as of Dec 31, 2019) | Plan Category | Shares to be Issued Upon Exercise of Outstanding Options | Weighted-Average Exercise Price | Shares Available for Future Issuance | | :------------------------------------------ | :------------------------------------------------- | :-------------------------------- | :---------------------------------- | | Employees' 401(k) Savings and Investment Plan | — | — | 520,665 | | 2005 Incentive Compensation Plan | 128,224 (restricted stock) | $0.00 | 326,650 | | Total | 128,224 | | 847,315 | Issuer Purchases of Equity Securities (Q4 2019) | Period | Total Number of Shares Purchased | Average Price Paid per Share | Approximate Dollar Value of Shares that May Yet be Purchased Under the Program | | :------------------------- | :----------------------------- | :--------------------------- | :-------------------------------------------------------------------------- | | October 1 – October 31, 2019 | 138 | $29.840 | $19,799,944 | | November 1 – November 30, 2019 | 18,676 | $30.290 | $19,234,248 | | December 1 – December 31, 2019 | — | — | $19,234,248 | | Total | 18,814 | $30.287 | $19,234,248 | - Stock Buy-Back Program authorized up to $75.8 million, with $19.2 million remaining authorization as of December 31, 2019[135][198] Performance Graph (Cumulative Total Return, $100 invested on Dec 31, 2014) | Item | 12/14 | 12/15 | 12/16 | 12/17 | 12/18 | 12/19 | | :-------------------------- | :---- | :---- | :---- | :---- | :---- | :---- | | Saga Communications Inc. | 100.00 | 90.93 | 122.57 | 103.08 | 88.08 | 83.72 | | CRSP Nasdaq Stock Market US | 100.00 | 107.71 | 118.26 | 152.91 | 150.41 | 204.71 | | Peer Group | 100.00 | 106.77 | 109.50 | 117.51 | 106.26 | 124.23 | Item 6. Selected Financial Data Selected financial data shows a slight decrease in 2019 net operating revenue and net income, alongside a significant reduction in long-term debt since 2015 Operating Data (in thousands, except per share amounts) | Metric | 2019 | 2018 | 2017 | 2016 | 2015 | | :---------------------------------- | :----- | :----- | :----- | :----- | :----- | | Net Operating Revenue | $123,072 | $124,829 | $118,149 | $118,955 | $111,792 | | Operating Income From Continuing Operations | $18,808 | $19,682 | $17,229 | $22,527 | $17,130 | | Net Income | $13,279 | $13,690 | $54,717 | $18,186 | $13,414 | | Basic Earnings Per Share | $2.23 | $2.30 | $9.27 | $3.10 | $2.31 | | Diluted Earnings Per Share | $2.23 | $2.30 | $9.27 | $3.09 | $2.29 | | Cash Dividends Declared Per Common Share | $1.20 | $1.45 | $2.00 | $1.30 | $1.10 | Balance Sheet Data (in thousands) | Metric | 2019 | 2018 | 2017 | 2016 | 2015 | | :-------------------------------- | :----- | :----- | :----- | :----- | :----- | | Total Assets | $252,394 | $248,477 | $248,769 | $219,998 | $203,464 | | Long-term Debt Including Current Portion | $10,000 | $20,000 | $25,000 | $35,287 | $35,287 | | Stockholders' Equity | $192,352 | $184,999 | $179,465 | $134,982 | $122,816 | - The historical results of operations for the Joplin, Missouri and Victoria, Texas television stations are presented as discontinued operations for all periods presented, following their sale on September 1, 2017[139][140] Item 7. Management's Discussion and Analysis of Financial Condition and Results of Operations This section analyzes the company's financial performance, noting a slight revenue and net income decrease in 2019, strong liquidity, reduced debt, and plans for future acquisitions - Following the sale of television stations in 2017, the company has only one reportable segment: radio[143] - Performance is evaluated using 'station operating income' (operating income plus corporate general and administrative expenses, depreciation and amortization, other operating (income) expenses, and impairment of intangible assets)[144] - Actively seeks and explores opportunities for expansion through the acquisition of additional broadcast properties[145] 7.1. Overview of Operations Radio stations generate revenue primarily from seasonal local advertising, with performance influenced by market conditions and supported by investments in programming and digital initiatives - Radio stations' primary revenue source is from the sale of advertising, with approximately 88% of gross revenue from local advertising in 2019[146][147] - Most advertising contracts are short-term, generally running for only a few weeks[147] - Revenue varies throughout the year, with advertising expenditures generally lowest during the first quarter[148] - Financial results are dependent on factors such as local and national economic conditions, population growth, popular programming, local market competition, and signal strength[151][152] - Strategy involves increasing programming and advertising/promotion expenses for acquired stations to boost target demographic audience share, with targeted revenue levels expected in two to five years[153] - Expanding digital initiatives to provide a seamless experience across multiple platforms, including targeted digital advertising, online promotions, mobile messaging, and email marketing[157] 7.2. Segment Performance The top five markets consistently contribute a significant portion of consolidated net operating revenue and station operating income, highlighting their critical financial impact Top 5 Markets' Contribution to Consolidated Net Operating Revenue | Market | 2019 | 2018 | 2017 | | :--------------- | :--- | :--- | :--- | | Columbus, Ohio | 11% | 11% | 11% | | Des Moines, Iowa | 6% | 7% | 7% | | Manchester, New Hampshire | 5% | 5% | 5% | | Milwaukee, Wisconsin | 11% | 12% | 12% | | Norfolk, Virginia | 6% | 6% | 6% | | Total | 39% | 41% | 41% | Top 5 Markets' Contribution to Consolidated Station Operating Income | Market | 2019 | 2018 | 2017 | | :--------------- | :--- | :--- | :--- | | Columbus, Ohio | 15% | 16% | 15% | | Des Moines, Iowa | 6% | 6% | 7% | | Manchester, New Hampshire | 6% | 6% | 6% | | Milwaukee, Wisconsin | 12% | 14% | 14% | | Norfolk, Virginia | 6% | 6% | 6% | | Total | 45% | 48% | 48% | 7.3. Discontinued Operations - Television Stations The company sold its television stations in 2017, with all historical results reported as discontinued operations, previously generating revenue from local advertising - Sold Joplin, Missouri and Victoria, Texas television stations on September 1, 2017; all historical results are reported as discontinued operations[161] - Prior to sale, primary revenue source was local advertising (approximately 83% of gross revenue for the 8 months ended August 31, 2017)[167] - Revenue and operating income varied by market rank/size, available advertising revenue, programming popularity, and network affiliation agreements[163][164] - Primary operating expenses included employee salaries, sales commissions, programming expenses (including news production and syndicated programming), depreciation, and advertising/promotion[169] 7.4. Consolidated Results of Operations Consolidated net operating revenue and net income decreased in 2019 due to lower advertising revenue and operating income, despite reduced expenses Consolidated Financial Performance (in thousands, except %'s and per share information) | Metric | 2019 | 2018 | 2017 | $ Increase (Decrease) 2019 vs. 2018 | % Increase (Decrease) 2019 vs. 2018 | $ Increase (Decrease) 2018 vs. 2017 | % Increase (Decrease) 2018 vs. 2017 | | :---------------------------------- | :----- | :----- | :----- | :---------------------------------- | :------------------------------------ | :---------------------------------- | :------------------------------------ | | Net operating revenue | $123,072 | $124,829 | $118,149 | $(1,757) | (1.4)% | $6,680 | 5.7% | | Station operating expense | $92,692 | $93,727 | $87,759 | $(1,035) | (1.1)% | $5,968 | 6.8% | | Corporate G&A | $11,460 | $11,359 | $11,657 | $101 | 0.9% | $(298) | (2.6)% | | Operating income from continuing operations | $18,808 | $19,682 | $17,229 | $(874) | (4.4)% | $2,453 | 14.2% | | Net income | $13,279 | $13,690 | $54,717 | $(411) | (3.0)% | $(41,027) | N/M | | Earnings per share (diluted) | $2.23 | $2.30 | $9.27 | $(0.07) | (3.0)% | $(6.97) | N/M | - Decrease in 2019 net operating revenue primarily due to a $5,967,000 decrease in same-station revenue, driven by decreases in gross local revenue ($3,373,000), gross political revenue ($1,987,000), and gross national revenue ($1,321,000), partially offset by increases in gross non-spot revenue ($649,000) and decreased agency commissions ($645,000)[178] - Decrease in 2019 station operating expense primarily due to lower healthcare costs ($1,358,000), compensation-related costs ($1,121,000), local commission expense ($758,000), amortization expenses ($402,000), national rep commissions ($267,000), trade expense ($266,000), and music license fees ($201,000)[179] - Net income decrease in 2019 was due to lower operating income, partially offset by a decrease in interest expense ($211,000) and income taxes ($280,000)[181] - Net income decreased significantly in 2018 compared to 2017, primarily due to a large income tax benefit in 2017 (approximately $11.5 million from the Tax Cuts and Jobs Act) and the gain recognized on the sale of television stations in 2017 ($32,471,000 net of tax)[186][187] 7.5. Liquidity and Capital Resources Liquidity is strong with a $70 million credit facility and $60 million unused capacity, long-term debt reduced to $10 million, and operating cash flows funding capital expenditures and acquisitions - Credit Facility is a $70 million Revolving Credit Facility (reduced from $100 million on July 1, 2019), maturing on June 27, 2023[189] - Approximately $60 million of unused borrowing capacity under the Revolving Credit Facility at December 31, 2019[195] - Long-term debt was $10,000,000 at December 31, 2019, down from $20,000,000 at December 31, 2018, due to voluntary paydowns of $5,000,000 in February 2019 and $5,000,000 in June 2019[93][193][194] Net Cash Flows from Operating Activities (Continuing Operations) | Year | Amount (in thousands) | | :--- | :-------------------- | | 2019 | $25,335 | | 2018 | $25,559 | | 2017 | $23,912 | - Capital expenditures for 2019 were $5,732,000; anticipated capital expenditures for 2020 are $5.0 million to $5.5 million, expected to be financed through funds generated from operations[199] - Repurchased 2.1 million shares of Class A Common Stock for $56.5 million under the Stock Buy-Back Program from inception (1998) through December 31, 2019, with $19.2 million remaining authorization[198] - Acquired WPVQ-AM and W222CH for $210,000 in January 2019[200] - Acquired WOGK-FM, WNDT-FM, WNDD-FM, and WNDN-FM for $9.3 million in December 2018[201] - Sold Joplin, Missouri and Victoria, Texas television stations on September 1, 2017, for approximately $66.6 million, generating net proceeds of $69.5 million and a pretax gain of $50.8 million[202] - Acquired South Carolina radio stations for approximately $23 million and WCVL-FM for $1,650,000 in 2017[203][204] - Declared four quarterly cash dividends of $0.30 per share in 2019, totaling $1.20 per share[206][207][208][209] - Future acquisitions and dividend payments are anticipated to be financed through funds generated from operations, borrowings under the Credit Agreement, or additional debt/equity financing[211] 7.6. Critical Accounting Policies and Estimates Critical accounting policies involve estimates for revenue, doubtful accounts, acquisitions, and annual impairment testing for broadcast licenses ($95.3 million) and goodwill ($19.0 million), which represent 45.3% of total assets - Revenue from commercial broadcast time is recognized when commercials are broadcast, net of advertising agency commissions[217] - Allowance for doubtful accounts is based on specific customer inability and past loss history, ranging from 50% for amounts 90 days outstanding to 100% for amounts over 120 days outstanding; historical estimates average 2-4% of outstanding receivables[218] - Acquisitions are accounted for under the purchase method, allocating total cost to net assets based on estimated fair values, with any excess recorded as goodwill[219] Broadcast Licenses and Goodwill (as of Dec 31, 2019) | Asset Type | Amount (in thousands) | % of Total Assets | | :---------------- | :-------------------- | :---------------- | | Broadcast Licenses | $95,311 | 37.8% | | Goodwill | $18,963 | 7.5% | | Total | $114,274 | 45.3% | - Annual impairment test performed on October 1 for broadcast licenses and goodwill; no impairment recorded in 2019 or 2018[220][221] - A $1,449,000 impairment charge for broadcast licenses was recognized in the fourth quarter of 2017, primarily due to declines in available market revenue, market revenue share, profit margins, and estimated long-term growth rates in the Springfield, Illinois market[222] Key Estimates and Assumptions for Broadcast License Impairment Test (Fourth Quarter 2019) | Metric | Range | | :-------------------------- | :------------ | | Discount rates | 12.2% - 12.2% | | Operating profit margin ranges | 19.0% - 36.4% | | Market long-term revenue growth rates | 0.0% - 2.9% | - Stock-based compensation for stock options is estimated using a Black-Scholes valuation model, and for restricted stock awards, it is determined based on the closing market price of Class A Common Stock on the grant date[224][225] 7.7. Market Risk and Risk Management Policies Earnings are sensitive to short-term interest rate changes due to long-term debt, with a hypothetical 1% increase impacting income before taxes by $126,000 - Earnings are affected by changes in short-term interest rates due to long-term debt arrangements[227] - A hypothetical 1% increase in market interest rates in 2019 would have decreased income before taxes by $126,000[227] 7.8. Inflation Inflation has not significantly impacted operations to date, but future high inflation could have an adverse effect - The impact of inflation on operations has not been significant to date, but future high inflation could have an adverse effect[228] 7.9. Recent Accounting Pronouncements The company adopted ASU 2016-02 on January 1, 2019, recognizing $6.7 million in lease assets and liabilities, and is evaluating other pronouncements with no expected material impact - Adopted ASU 2016-02, "Leases (Topic 842)" on January 1, 2019, using the modified retrospective method, resulting in the recognition of approximately $6.7 million in right-of-use assets and lease liabilities, with no impact on retained earnings or cash flows[323] - Currently evaluating ASU 2019-12, "Income Taxes," and ASU 2016-13, "Financial Instruments – Credit Losses," and does not expect a material impact from ASU 2017-04, "Intangibles – Goodwill and Other"[324][325][326] Item 7A. Quantitative and Qualitative Disclosures About Market Risk This item incorporates by reference the market risk disclosures from Item 7, detailing exposure to interest rate changes and their potential earnings impact - Information is incorporated by reference from the "Market Risk and Risk Management Policies" section in Item 7[231] Item 8. Financial Statements and Supplementary Data The financial statements are attached and filed as part of this annual report - The financial statements are attached and filed as part of this annual report[232] Item 9. Changes in and Disagreements with Accountants on Accounting and Financial Disclosure No changes in or disagreements with accountants on accounting and financial disclosure have occurred - No changes in and disagreements with accountants on accounting and financial disclosure[233] Item 9A. Controls and Procedures Management concluded that disclosure controls and internal controls over financial reporting were effective as of December 31, 2019, with an unqualified opinion from UHY LLP - Disclosure controls and procedures over financial reporting were effective as of December 31, 2019[234] - No material changes in internal controls over financial reporting during the quarter ended December 31, 2019[235] - Management concluded that internal control over financial reporting was effective as of December 31, 2019, based on the COSO framework[236][238] - UHY LLP, an independent registered public accounting firm, issued an unqualified opinion on the effectiveness of the company's internal control over financial reporting as of December 31, 2019[241][242] Item 9B. Other Information No other information is reported under this item - No other information to report[248] PART III This part incorporates by reference information regarding directors, executive officers, corporate governance, executive compensation, security ownership, related party transactions, and principal accountant fees Item 10. Directors, Executive Officers and Corporate Governance Information on directors, executive officers, and corporate governance is incorporated by reference from the 2020 Proxy Statement - Information incorporated by reference from the Proxy Statement for the 2020 Annual Meeting of Stockholders[250] Item 11. Executive Compensation Executive compensation information is incorporated by reference from the 2020 Proxy Statement - Information incorporated by reference from the Proxy Statement for the 2020 Annual Meeting of Stockholders[251] Item 12. Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters Security ownership details for beneficial owners and management are incorporated by reference from the 2020 Proxy Statement and Item 5 - Information incorporated by reference from the Proxy Statement for the 2020 Annual Meeting of Stockholders and the "Securities Authorized for Issuance Under Equity Compensation Plan Information" subheading under Item 5[252] Item 13. Certain Relationships and Related Transactions, and Director Independence Information on certain relationships, related transactions, and director independence is incorporated by reference from the 2020 Proxy Statement - Information incorporated by reference from the Proxy Statement for the 2020 Annual Meeting of Stockholders[253] Item 14. Principal Accountant Fees and Services Principal accountant fees and services information is incorporated by reference from the 2020 Proxy Statement - Information incorporated by reference from the Proxy Statement for the 2020 Annual Meeting of Stockholders[254] PART IV This part details the exhibits and financial statement schedules included in the annual report, providing a comprehensive list of financial disclosures Item 15. Exhibits and Financial Statement Schedules This item lists consolidated financial statements, schedules, and exhibits filed as part of the annual report, including balance sheets and cash flow statements - Includes the Report of Independent Registered Public Accounting Firm, Consolidated Balance Sheets, Consolidated Statements of Income, Consolidated Statements of Stockholders' Equity, Consolidated Statements of Cash Flows, and Notes to Consolidated Financial Statements[257] - Financial Statement Schedules include Schedule II Valuation and Qualifying Accounts[258] - Exhibits filed in response to Item 601 of Regulation S-K are listed in the Exhibit Index[259] Notes to Consolidated Financial Statements These notes provide detailed information on accounting policies, financial instruments, asset valuation, debt, stock-based compensation, acquisitions, and related party transactions, crucial for understanding financial statements Note 1. Summary of Significant Accounting Policies This note outlines fundamental accounting policies, including revenue recognition, asset impairment, leases, and stock-based compensation, and details the impact of recent accounting pronouncements - Saga Communications, Inc. is a broadcasting company primarily engaged in acquiring, developing, and operating radio stations, with television stations reported as discontinued operations since September 1, 2017[278] - Consolidated financial statements include Saga Communications, Inc. and its wholly-owned subsidiaries, with all significant intercompany balances and transactions eliminated[279] - The preparation of financial statements requires management to make estimates and assumptions that affect reported amounts[280] - Concentration of risk includes certain cash deposits exceeding FDIC insurance limits and the top five markets representing 39% of net operating revenue in 2019[281] - Cash and cash equivalents consist of cash on hand and time deposits with original maturities of three months or less[283] - The carrying value of financial instruments (cash, receivables, payables, long-term debt) approximates fair value[284] Allowance for Doubtful Accounts Activity (in thousands) | Year Ended | Balance at Beginning of Period | Charged to Costs and Expenses | Allowance From Acquisitions | Write Off of Uncollectible Accounts, Net of Recoveries | Balance at End of Period | | :----------------- | :----------------------------- | :---------------------------- | :-------------------------- | :--------------------------------------------------- | :----------------------- | | December 31, 2019 | $759 | $578 | $— | $(666) | $671 | | December 31, 2018 | $727 | $444 | $25 | $(437) | $759 | | December 31, 2017 | $518 | $333 | $181 | $(305) | $727 | - Barter transactions involve trading air time for goods and services, recorded at fair market value as both an asset and a liability[287] Property and Equipment (in thousands) | Asset Type | Estimated Useful Life | 2019 | 2018 | | :-------------------------------- | :------------ | :----- | :----- | | Land and land improvements | — | $14,693 | $14,402 | | Buildings | 31.5 years | $37,984 | $35,812 | | Towers and antennae | 7-15 years | $24,762 | $25,959 | | Equipment | 3-15 years | $54,321 | $53,752 | | Furniture, fixtures and leasehold improvements | 7-20 years | $7,169 | $6,740 | | Vehicles | 5 years | $3,474 | $3,555 | | Total Cost | | $142,403 | $140,220 | | Accumulated depreciation | | $(83,692) | $(81,117) | | Net property and equipment | | $58,711 | $59,103 | - Intangible assets with indefinite useful lives (broadcast licenses and goodwill) are not amortized but are subject to annual impairment tests[291] - Costs related to debt issuance are capitalized and amortized to interest expense over the life of the debt[294] - Lease liabilities and right-of-use assets are recorded on the balance sheet for leases with terms over one year, based on the present value of lease payments[296] - Treasury stock repurchases reduce stockholders' equity; as of December 31, 2019, $19.2 million remained authorized for future repurchases[297] - Revenue from advertising is recognized when commercials are broadcast, net of advertising agency commissions, in accordance with ASC Topic 606[300] - Local Marketing Agreements (LMAs) involve one station selling blocks of air time to another party for programming and advertising sales; related revenue and expenses are included in consolidated statements[301] - Advertising and promotion costs are expensed as incurred[302] - Income taxes are calculated using the asset and liability method, with deferred tax assets and liabilities determined based on temporary differences[303] - Dividends declared on Class A and B shares are detailed, with four quarterly cash dividends of $0.30 per share declared in 2019[304][305][306][307] - Stock-based compensation expense for stock options is estimated using a Black-Scholes model, and for restricted stock awards, it is based on the closing market price of Class A Common Stock[317] - Earnings per share is calculated using the two-class method, allocating earnings to both common shares and participating securities (restricted stock units)[320] - Adopted ASU 2016-02 "Leases (Topic 842)" on January 1, 2019, recognizing $6.7 million in right-of-use assets and lease liabilities; currently evaluating ASU 2019-12 "Income Taxes," ASU 2017-04 "Intangibles – Goodwill and Other," and ASU 2016-13 "Financial Instruments – Credit Losses"[323][324][325][326] Note 2. Revenue Revenue is disaggregated into broadcast, digital, and other sources, recognized upon airing or completion of performance obligations, with no material impact from Topic 606 adoption - Adopted Topic 606 on January 1, 2018, using the modified retrospective method, with no impact on the opening balance of retained earnings[329] Revenues Disaggregated by Source (in thousands) | Types of Revenue | 2019 | 2018 | 2017 | | :-------------------------- | :----- | :----- | :----- | | Broadcast Advertising Revenue, net | $112,278 | $114,929 | $109,175 | | Digital Advertising Revenue | $3,783 | $3,900 | $3,610 | | Other Revenue | $7,011 | $6,000 | $5,364 | | Net Revenue | $123,072 | $124,829 | $118,149 | - Broadcast Advertising Revenue is recognized when commercials are broadcast, net of advertising agency commissions[331] - Digital Advertising Revenue from targeted digital advertising, online promotions, websites, mobile messaging, and email marketing is recorded when each specific performance obligation takes place, typically within a one-month period[332] - Other Revenue (concerts, promotional events, tower rent) is generally recognized when the event is completed or performance obligation is satisfied[333] - Contract liabilities for prepayments from advertisers are expected to be recognized within one year and are included in accounts payable[335] Note 3. Broadcast Licenses, Goodwill and Other Intangible Assets This note details accounting for indefinite-lived broadcast licenses and goodwill, tested annually for impairment, and amortizable finite-lived intangible assets, with a $1.449 million impairment in 2017 - Broadcast licenses and goodwill are deemed indefinite-lived intangible assets, not amortized, and subject to annual impairment tests (as of October 1)[291] - Fair value of broadcast licenses is determined using a discounted cash flow approach assuming a start-up scenario, incorporating market growth rates, operating profit margins, discount rates, and competition[337] - No impairment of broadcast licenses was recorded in 2019 or 2018[344][349] - A non-cash impairment charge of $1,449,000 for broadcast licenses was recorded in the fourth quarter of 2017, primarily due to declines in available market revenue, market revenue share, profit margins, and estimated long-term growth rates in the Springfield, Illinois market[350] Broadcast Licenses (in thousands) | Item | Total | | :---------------------- | :----- | | Balance at January 1, 2018 | $93,259 | | Acquisitions | $1,991 | | Balance at December 31, 2018 | $95,250 | | Acquisitions | $61 | | Balance at December 31, 2019 | $95,311 | Key Estimates and Assumptions for Impairment Test (Fourth Quarter) | Metric | 2019 | 2018 | 2017 | | :-------------------------- | :----------- | :----------- | :----------- | | Discount rates | 12.2% - 12.2% | 12.0% - 12.0% | 12.4% - 12.5% | | Operating profit margin ranges | 19.0% - 36.4% | 19.0% - 36.4% | 19.0% - 36.4% | | Market long-term revenue growth rates | 0.0% - 2.9% | 0.5% - 2.9% | 1.1% - 3.5 % | - No goodwill impairment was recorded in the fourth quarter of 2019[351] Goodwill (in thousands) | Item | Total | | :---------------------- | :----- | | Balance at January 1, 2018 | $15,558 | | Acquisitions | $3,281 | | Balance at December 31, 2018 | $18,839 | | Acquisitions | $124 | | Balance at December 31, 2019 | $18,963 | Amortizable Intangible Assets (Net Amount, in thousands) | Asset Type | 2019 | 2018 | | :-------------------------- | :----- | :----- | | Non-competition agreements | $— | $— | | Favorable lease agreements | $426 | $461 | | Customer relationships | $1,076 | $2,026 | | Other intangibles | $107 | $260 | | Total amortizable intangible assets | $1,609 | $2,747 | - Aggregate amortization expense for these intangible assets was $1,029,000 in 2019, $1,094,000 in 2018, and $860,000 in 2017[354] Note 4. Discontinued Operations The company sold its television stations in 2017 for $66.6 million, generating a $50.8 million pretax gain, with historical results reported as discontinued operations - Sold Joplin, Missouri and Victoria, Texas television stations on September 1, 2017, for approximately $66.6 million[356] - Received net proceeds of $69.5 million and recognized a pretax gain of $50.8 million ($29.9 million net of tax) from the Television Sale[356] - Historical results of these television stations are reported as discontinued operations for all periods presented[357] Components of Discontinued Operations (in thousands) | Metric | 2019 | 2018 | 2017 | | :------------------------------------------ | :--- | :--- | :----- | | Net operating revenue | $— | $— | $14,238 | | Station operating expense | $— | $— | $9,757 | | Operating income | $— | $— | $4,450 | | Pretax gain on the disposal of discontinued operations | $— | $— | $50,842 | | Income tax expense | $— | $— | $22,800 | | Income from discontinued operations, net of tax | $— | $— | $32,471 | - Proceeds from the Television Sale were used to finance acquisitions of radio stations in South Carolina ($24.2 million) and to pay down the Revolving Credit Facility ($10.287 million)[356] Note 5. Long-Term Debt Long-term debt comprises a $70 million Revolving Credit Facility, with $10 million outstanding at year-end 2019, secured by company assets and subject to financial covenants Long-Term Debt (in thousands) | Item | December 31, 2019 | December 31, 2018 | | :------------------------ | :---------------- | :---------------- | | Revolving Credit Facility | $10,000 | $20,000 | | Amounts payable within one year | $— | $(5,000) | | Total Long-Term Debt | $10,000 | $15,000 | Future Maturities of Long-Term Debt (in thousands) | Year Ending December 31, | Amount | | :----------------------- | :----- | | 2020 | $— | | 2021 | $— | | 2022 | $— | | 2023 | $10,000 | | 2024 | $— | | Thereafter | $— | | Total | $10,000 | - The Credit Facility is a $70 million five-year revolving facility, reduced from $100 million on July 1, 2019, and matures on June 27, 2023[366] - Substantially all company assets (excluding FCC licenses) are pledged in support of the Credit Facility, and subsidiaries have guaranteed it[367] - Interest rates are variable, based on LIBOR (1.75% at Dec 31, 2019) plus 1% to 2%, or the base rate plus 0% to 1%, varying with financial leverage[370] - The Credit Facility contains financial covenants (all in compliance at Dec 31, 2019) regarding financial ratios, investments, indebtedness, dividends, distributions, guarantees, liens, and encumbrances[371] - Voluntary paydowns of $5,000,000 were made on the Revolving Credit Facility in February and June 2019[371][372] - Approximately $60 million of unused borrowing capacity under the Revolving Credit Facility at December 31, 2019[373] Note 6. Supplemental Cash Flow Information This note provides supplemental cash flow details, including cash paid for interest and taxes, and non-cash transactions like barter and property acquisitions Supplemental Cash Flow Information (in thousands) | Item | 2019 | 2018 | 2017 | | :------------------------------------------------- | :----- | :----- | :----- | | Cash paid during the period for: | | | | | Interest | $635 | $884 | $850 | | Income taxes | $3,893 | $2,864 | $2,420 | | Non-cash transactions: | | | | | Barter revenue | $3,560 | $3,570 | $3,618 | | Barter expense | $3,370 | $3,677 | $3,367 | | Purchase of treasury shares in connection with exercise of stock options | $— | $— | $826 | | Acquisition of property and equipment | $28 | $11 | $8 | | Use of treasury shares for 401(k) match | $262 | $252 | $274 | Note 7. Income Taxes This note details income tax provisions, including the $11.5 million tax benefit from the 2017 Tax Act, deferred taxes, and the effective tax rate - The Tax Cuts and Jobs Act (2017) reduced the U.S. federal corporate income tax rate from 35% to 21%[376] - Recorded a provisional net tax benefit of $11.5 million in 2017 related to the remeasurement of deferred tax balance due to the Tax Act[378] Net Deferred Tax Liabilities (in thousands) | Item | December 31, 2019 | December 31, 2018 | | :-------------------------------- | :---------------- | :---------------- | | Deferred tax liabilities: | | | | Property and equipment | $5,181 | $5,145 | | Intangible assets | $20,765 | $19,324 | | Prepaid expenses | $376 | $350 | | Total deferred tax liabilities | $26,322 | $24,819 | | Deferred tax assets: | | | | Allowance for doubtful accounts | $64 | $118 | | Compensation | $1,011 | $906 | | Other accrued liabilities | $95 | $63 | | Total net deferred tax assets | $1,170 | $1,087 | | Net deferred tax liabilities | $25,152 | $23,732 | - No valuation allowance for net deferred tax assets at December 31, 2019 and 2018[381] Provision for Income Taxes (in thousands) | Item | 2019 | 2018 | 2017 | | :-------------------------- | :----- | :----- | :----- | | Current: | | | | | Federal | $2,900 | $2,205 | $2,545 | | State | $1,100 | $835 | $(255) | | Total current | $4,000 | $3,040 | $2,290 | | Total deferred | $1,420 | $2,660 | $(8,210) | | Total Income Tax Provision | $5,420 | $5,700 | $(5,920) | Reconciliation of Income Tax at U.S. Federal Statutory Tax Rates (in thousands) | Item | 2019 | 2018 | 2017 | | :---------------------------------- | :----- | :----- | :----- | | Tax expense at U.S. statutory rates | $3,976 | $4,017 | $5,716 | | State tax expense (benefit), net of federal benefit | $1,079 | $1,134 | $(769) | | Other, net | $365 | $549 | $633 | | Federal tax reform - deferred tax rate change | $— | $— | $(11,500) | | Total | $5,420 | $5,700 | $(5,920) | - The 2019 and 2018 effective tax rates exceed the federal statutory rate primarily due to state income taxes; the 2017 rate differs due to the Tax Act and state income tax benefit[385] - No accrued balances recorded related to uncertain tax positions as of December 31, 2019 and 2018[387] Note 8. Stock-Based Compensation This note details stock-based compensation plans, primarily restricted stock awards valued at market price, with 128,224 shares outstanding and $4.195 million in unrecognized cost at year-end 2019 - The Second Amended and Restated 2005 Incentive Compensation Plan allows for granting restricted stock, restricted stock units, incentive stock options, nonqualified stock options, and performance awards[389] - No stock options were outstanding or granted during the years ended December 31, 2019, 2018, and 2017[395] - Stock-based compensation expense is measured at the grant date fair value and recognized on a straight-line basis over the vesting period, adjusted for estimated forfeitures[391] Restricted Stock Transactions (Shares and Weighted Average Grant Date Fair Value) | Item | Shares | Weighted Average Grant Date Fair Value | | :---------------------------------- | :------- | :------------------------------------- | | Outstanding at January 1, 2017 | 103,262 | $43.73 | | Granted | 48,780 | $44.20 | | Vested | (54,598) | $42.13 | | Forfeited/canceled/expired | (805) | $46.23 | | Outstanding at December 31, 2017 | 96,639 | $44.85 | | Granted | 63,811 | $37.37 | | Vested | (49,493) | $43.98 | | Forfeited/canceled/expired | (1,781) | $45.39 | | Outstanding at December 31, 2018 | 109,176 | $40.87 | | Granted | 72,985 | $31.18 | | Vested | (51,021) | $42.66 | | Forfeited/canceled/expired | (2,916) | $40.30 | | Non-vested and outstanding at December 31, 2019 | 128,224 | $34.66 | - Unrecognized compensation cost related to unvested restricted stock awards aggregated $4,195,000 at December 31, 2019[398] - Total compensation expense related to restricted stock-based arrangements was $2,129,000 in 2019, $2,201,000 in 2018, and $2,279,000 in 2017[399] Note 9. Employee Benefit Plans The company offers a 401(k) plan and a Nonqualified Deferred Compensation Plan, funded by company-owned life insurance, and provides split dollar insurance benefits - Operates a defined contribution 401(k) Plan covering substantially all employees, with discretionary company contributions of approximately $250,000 in 2019[400] - Established a Nonqualified Deferred Compensation Plan in 1999, allowing officers and certain management employees to defer compensation on a pre-tax basis; deferred compensation expense was $135,000 in 2019[403] - Invests in company-owned life insurance policies to assist in funding deferred compensation programs, with cash surrender values recorded as assets in a rabbi trust[403] - Provides split dollar insurance benefits to certain executive officers, recording an asset equal to cumulative premiums paid[404] Note 10. Acquisitions and Dispositions The company actively acquires broadcast properties, including $210,000 in 2019 and $9.3 million in 2018, recognizing goodwill for brand power and growth opportunities - Actively seeks and explores opportunities for expansion through the acquisition of additional broadcast properties, accounted for under the purchase method[405] - Acquired WPVQ-AM and W222CH for an aggregate purchase price of $210,000 on January 9, 2019[407] - Acquired WOGK-FM, WNDT-FM, WNDD-FM, and WNDN-FM for an aggregate purchase price of $9.3 million on December 31, 2018[410] - Goodwill recognized in acquisitions is attributed to the power of existing brands, synergies, and expected growth opportunities[407][410] Condensed Consolidated Balance Sheet of 2019 and 2018 Acquisitions (in thousands) | Item | 2019 Acquisitions | 2018 Acquisitions | | :------------------------------------------ | :---------------- | :---------------- | | Assets Acquired: | | | | Current assets | $— | $559 | | Property and equipment | $25 | $3,007 | | Other assets: | | | | Broadcast licenses | $61 | $1,991 | | Goodwill | $124 | $3,281 | | Other intangibles, deferred costs and investments | $— | $1,123 | | Total other assets | $185 | $6,395 | | Total assets acquired | $210 | $9,961 | | Liabilities Assumed: | | | | Current liabilities | $— | $120 | | Total liabilities assumed | $— | $120 | | Net assets acquired | $210 | $9,841 | Pro Forma Consolidated Results of Operations for Acquisitions (Unaudited, in thousands, except per share data) | Metric | 2019 | 2018 | | :---------------------------------- | :----- | :----- | | Net operating revenue | $123,072 | $129,228 | | Station operating expense | $92,692 | $97,314 | | Corporate general and administrative | $11,460 | $11,359 | | Other operating expenses | $112 | $61 | | Operating income | $18,808 | $20,494 | | Interest expense | $735 | $946 | | Interest income | $(610) | $(631) | | Other income | $(16) | $(23) | | Income before income tax expense | $18,699 | $20,202 | | Income tax expense (benefit) expense | $5,420 | $5,944 | | Net income | $13,279 | $14,258 | | Basic earnings per share | $2.23 | $2.40 | | Diluted earnings per share | $2.23 | $2.40 | Note 11. Related Party Transactions This note details related party transactions, including the CEO's employment agreement, executive change in control agreements, historical agreements with a related entity, and transactions with a director - Employment agreement with Edward K. Christian (Chairman, President, and CEO) extends to March 31, 2025, and includes annual salary increases, discretionary and performance bonuses, stock options/grants, and various benefits[418] - Mr. Christian's average annual compensation, as defined by the employment agreement, was approximately $1,889,000 for the three years ended December 31, 2019[419] - Change in Control Agreements for key executives (Samuel D. Bush, Marcia K. Lobaito, Catherine Bobinski, Christopher S. Forgy) provide lump sum payments (1.5 times average of last three years' base salary and cash bonus) upon a change in control[424][425] - Historically, the company had Time Brokerage Agreements (TBAs) and Shared Services Agreements with Surtsey Media, a company 100%-owned by Mr. Christian's daughter, for television stations KVCT and KFJX, which were terminated upon the Television Sale in 2017[428][429] - Transactions with G. Dean Pearce (a director) include an asset purchase agreement for radio and translator stations in South Carolina for $23 million in 2017, and monthly rent payments for Hilton Head studio and office space[431] - Employed Eric Christian, son of Edward K. Christian, as Director of Solution Architecture effective June 19, 2019, with Audit Committee approval[432] Note 12. Common Stock This note outlines the rights of Class A and Class B Common Stock, including identical dividends, differing voting rights (Class B has ten votes per share), and conversion provisions - Stockholders are entitled to receive identical dividends (cash, property, or stock) on Class A and Class B Common Stock[434] - Voting Rights: Class A Common Stock has one vote per share, and Class B Common Stock has ten votes per share on most matters[435] - In director elections, Class A holders, as a separate class, elect 25% (two) of the directors; remaining directors are elected by both classes voting as a single class (Class A: one vote, Class B: ten votes)[436](i