Our management is responsible for establishing and maintaining adequate internal control over financial reporting and for the assessment of the effectiveness of internal control over financial reporting. As defined by the United States Securities and Exchange Commission (the “SEC”), internal control over financial reporting is a process designed by, or under the supervision of, our principal executive and principal financial officers and effected by our Board of Directors, management and other personnel, to provide reasonable assurance regarding the reliability of financial reporting and the preparation of the consolidated financial statements for external purposes in accordance with accounting principles generally accepted in the United States of America.
Our internal control over financial reporting includes those policies and procedures that (i) pertain to the maintenance of records that, in reasonable detail, accurately and fairly reflect our transactions and dispositions of our assets; (ii) provide reasonable assurance that transactions are recorded as necessary to permit preparation of the consolidated financial statements in accordance with generally accepted accounting principles, and that our receipts and expenditures are being made only in accordance with authorizations of our management and directors; and (iii) provide reasonable assurance regarding prevention or timely detection of unauthorized acquisition, use or disposition of our assets that could have a material effect on the consolidated financial statements.
Because of its inherent limitations, internal control over financial reporting may not prevent or detect all misstatements. Also, projections of any evaluation of effectiveness to future periods are subject to the risk that controls may become inadequate because of changes in conditions, or that the degree of compliance with the policies or procedures may deteriorate.
In connection with the preparation of our annual consolidated financial statements, management has undertaken an assessment of the effectiveness of our internal control over financial reporting as of December 31, 2022, based on criteria established in Internal Control – Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission (“COSO 2013 framework”). Management’s assessment included an evaluation of the design of our internal control over financial reporting and testing of the operational effectiveness of those controls. Based on this evaluation, management has concluded that our internal control over financial reporting was effective as of December 31, 2022.
In the evaluation of internal control over financial reporting, management excluded the operations of WKTB-TV from the assessment of internal control over financial reporting as of December 31, 2022. These operations were excluded in accordance with the SEC’s general guidance because they were acquired in purchase business combinations in 2022. Collectively, these operations accounted for less than 1% of our total assets and total revenues, as reported in our consolidated financial statements as of and for the year ended December 31, 2022.
The effectiveness of our internal control over financial reporting as of December 31, 2022 has been audited by RSM US LLP, an independent registered public accounting firm, as stated in their report, which is included herein.
See accompanying notes.
See accompanying notes.
See accompanying notes.
See accompanying notes.
See accompanying notes.
See accompanying notes.
See accompanying notes.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
1. | Description of Business and Summary of Significant Accounting Policies |
Overview. We are a multimedia company headquartered in Atlanta, Georgia. We are the nation’s largest owner of top-rated local television stations and digital assets in the United States. Our television stations serve 113 television markets that collectively reach approximately 36 percent of US television households. This portfolio includes 79 markets with the top-rated television station and 101 markets with the first and/or second highest rated television station. We also own video program companies Raycom Sports, Tupelo Media Group, PowerNation Studios, as well as the studio production facilities Assembly Atlanta and Third Rail Studios.
Investments in Broadcasting, Production and Technology Companies. We have investments in several television, production and technology companies. We account for all material investments in which we have significant influence over the investee under the equity method of accounting. Upon initial investment, we record equity method investments at cost. The amounts initially recognized are subsequently adjusted for our appropriate share of the net earnings or losses of the investee. We record any investee losses up to the carrying amount of the investment plus advances and loans made to the investee, and any financial guarantees made on behalf of the investee. We recognize our share in earnings and losses of the investee as miscellaneous (expense) income, net in our consolidated statements of operations. Investments are also increased by contributions made to and decreased by the distributions from the investee. The Company evaluates equity method investments for impairment whenever events or changes in circumstances indicate that the carrying amounts of such investments may be impaired.
Investments in non-public businesses that do not have readily determinable pricing, and for which the Company does not have control or does not exert significant influence, are carried at cost less impairments, if any, plus or minus changes in observable prices for those investments. During the year ended December 31, 2022, we determined that one of our investments was impaired and we recorded an impairment expense of $18 million. No impairments were recorded in the years ended December 31, 2021 and 2020. Gains or losses resulting from changes in the carrying value of these investments are included as miscellaneous expense, net in our consolidated statements of operations. These investments are reported together as a non-current asset on our consolidated balance sheets.
Use of Estimates. The preparation of financial statements in conformity with U.S. GAAP requires management to make estimates and assumptions that affect the amounts reported in the financial statements and accompanying notes. Our actual results could differ materially from these estimated amounts. Our most significant estimates are our allowance for credit losses in receivables, valuation of goodwill and intangible assets, amortization of program rights and intangible assets, pension costs, income taxes, employee medical insurance claims, useful lives of property and equipment and contingencies.
Allowance for Credit Losses. We are exposed to credit risk primarily through sales of broadcast and digital advertising with a variety of direct and agency-based advertising customers, retransmission consent agreements with multichannel video program distributors and program production sales and services. We recorded expenses for this allowance of $1 million, $4 million and $2 million for the years ended December 31, 2022, 2021 and 2020, respectively.
Our allowance for credit losses is an estimate of expected losses over the remaining contractual life of our receivables based on an ongoing analysis of collectability, historical collection experience, current economic and industry conditions and reasonable and supportable forecasts. The allowance is calculated using a historical loss rate applied to the current aging analysis. We may also apply an additional allowance when warranted by specific facts and circumstances. We generally write off account receivable balances when the customer files for bankruptcy or when all commonly used methods of collection have been exhausted.
The following table provides a roll-forward of the allowance for credit losses. The allowance is deducted from the amortized cost basis of accounts receivable in our consolidated balance sheets (in millions):
| | Year Ended December 31, | |
| | 2022 | | | 2021 | |
Beginning balance | | $ | 16 | | | $ | 10 | |
Allowance obtained through acquisition | | | - | | | | 3 | |
Provision for credit losses | | | 1 | | | | 4 | |
Amounts written off | | | (1 | ) | | | (1 | ) |
Ending balance | | $ | 16 | | | $ | 16 | |
Program Broadcast Rights. We have two types of syndicated television program contracts: first run programs and off network reruns. First run programs are programs such as Wheel of Fortune and off network reruns are programs such as The Big Bang Theory. First run programs have not been produced at the time the contract to air such programming is signed, and off network rerun programs have already been produced. We record an asset and corresponding liability for payments to be made only for the current year of first run programming and for the entire contract period for off network programming. Only an estimate of the payments anticipated to be made in the year following the balance sheet date of first run program contracts are recorded on the current balance sheet, because the programs for the later years of the contract period have not been produced or delivered.
The total license fee payable under a program license agreement allowing us to broadcast programs is recorded at the beginning of the license period and is charged to operating expense over the period that the programs are broadcast. The portion of the unamortized balance expected to be charged to operating expense in the succeeding year is classified as a current asset, with the remainder classified as a non-current asset. The liability for license fees payable under program license agreements is classified as current or long-term, in accordance with the payment terms of the various license agreements.
Property and Equipment. Property and equipment are recorded at cost, or in the case of acquired businesses, at fair value. Depreciation is computed principally by the straight-line method. The following table lists the components of property and equipment by major category (dollars in millions):
| | | | | | | | | | Estimated | |
| | December 31, | | | Useful Lives | |
| | 2022 | | | 2021 | | | (in years) | |
Property and equipment, net: | | | | | | | | | | | | |
Land | | $ | 290 | | | $ | 277 | | | | | |
Buildings and improvements | | | 477 | | | | 453 | | | 7 | to | 40 | |
Equipment | | | 1,027 | | | | 961 | | | 3 | to | 20 | |
Construction in progress | | | 362 | | | | 63 | | | | | |
| | | 2,156 | | | | 1,754 | | | | | |
Accumulated depreciation | | | (690 | ) | | | (589 | ) | | | | |
Total | | $ | 1,466 | | | $ | 1,165 | | | | | |
Maintenance, repairs and minor replacements are charged to operations as incurred; major replacements and betterments are capitalized. The cost of any assets divested, sold or retired and the related accumulated depreciation are removed from the accounts at the time of disposition, and any resulting gain or loss is reflected in income or expense for the period.
The following tables provide additional information related to gain on disposal of assets, net included in our consolidated statements of operations and purchases of property and equipment included in our consolidated statements of cash flows (in millions):
| | Year ended December 31, | |
| | 2022 | | | 2021 | | | 2020 | |
Gain (loss) on disposal of assets, net: | | | | | | | | | | | | |
Proceeds from sale of assets | | $ | 4 | | | $ | 478 | | | $ | 9 | |
Proceeds from Repack | | | 7 | | | | 11 | | | | 29 | |
Net book value of assets disposed | | | (9 | ) | | | (531 | ) | | | (9 | ) |
Total | | $ | 2 | | | $ | (42 | ) | | $ | 29 | |
| | | | | | | | | | | | |
Purchase of property and equipment: | | | | | | | | | | | | |
Recurring purchases - operations | | $ | 170 | | | $ | 90 | | | $ | 87 | |
Assembly Atlanta development | | | 264 | | | | 109 | | | | - | |
Repack | | | 2 | | | | 8 | | | | 23 | |
Total | | $ | 436 | | | $ | 207 | | | $ | 110 | |
Deferred Loan Costs. Loan acquisition costs are amortized over the life of the applicable indebtedness using a straight-line method that approximates the effective interest method. These debt issuance costs related to a recognized debt liability are presented in our balance sheets as a direct deduction from the carrying amount of that debt liability, consistent with debt discounts. Debt issuance costs associated with line-of-credit arrangements are included in other assets on our balance sheets, and amortized over the life of the line-of-credit arrangement.
Asset Retirement Obligations. We own office equipment, broadcasting equipment, leasehold improvements and transmission towers, some of which are located on, or are housed in, leased property or facilities. At the conclusion of several of these leases we are obligated to dismantle, remove and otherwise properly dispose of and remediate the facility or property. We estimate our asset retirement obligations based upon the net present value of the cash flows of the costs expected to be incurred. Asset retirement obligations are recognized as a non-current liability and as a component of the cost of the related asset. Changes to our asset retirement obligations resulting from revisions to the timing or the amount of the original undiscounted cash flow estimates are recognized as an increase or decrease in the carrying amount of the asset retirement obligation and the related asset retirement cost is capitalized as part of the related property, plant or equipment. Changes in asset retirement obligations resulting from accretion of the net present value of the estimated cash flows are recognized as operating expenses. We recognize depreciation expense of the capitalized cost over the estimated life of the lease. Our estimated obligations are due at varying times through 2062. The liability recognized for our asset retirement obligations was approximately $4 million and $3 million at December 31, 2022 and 2021, respectively, and included in other liabilities on our balance sheets. During the years ended December 31, 2022, 2021 and 2020, expenses related to our asset retirement obligations were not material.
Concentration of Credit Risk. We sell advertising airtime on our broadcasts and advertising space on our websites to national and local advertisers within the geographic areas in which we operate. Credit is extended based on an evaluation of the customer’s financial condition, and generally advance payment is not required, except for political advertising. Credit losses are provided for in the financial statements and consistently have been within our expectations that are based upon our prior experience.
We derived a material portion of our non-political broadcast advertising revenue from advertisers in a limited number of industries, particularly the services sector, comprising financial, legal and medical advertisers, and the automotive industry. The services sector has become an increasingly important source of advertising revenue over the past few years. During the years ended December 31, 2022, 2021 and 2020 approximately 28%, 29% and 28%, respectively, of our broadcast advertising revenue (excluding political advertising revenue) was obtained from advertising sales to the services sector. During the years ended December 31, 2022, 2021 and 2020 approximately 17%, 17% and 21%, respectively, of our broadcast advertising revenue (excluding political advertising revenue) was obtained from advertising sales to automotive customers. Although our revenues can be affected by changes within our customer base, we believe this risk is in part mitigated due to the fact that no one customer accounted for in excess of 5% of our broadcast advertising revenue in any of these periods. Furthermore, we believe that our large geographic operating area partially mitigates the potential effect of regional economic impacts.
Earnings Per Share. We compute basic earnings per share by dividing net income available to common stockholders by the weighted-average number of common shares outstanding during the relevant period. The weighted-average number of common shares outstanding does not include restricted shares. These shares, although classified as issued and outstanding, are considered contingently returnable until the restrictions lapse and, in accordance with GAAP, are not included in the basic earnings per share calculation until the shares vest. Diluted earnings per share is computed by including all potentially dilutive common shares, including restricted shares and shares underlying stock options, in the diluted weighted-average shares outstanding calculation, unless their inclusion would be antidilutive.
The following table reconciles basic weighted-average shares outstanding to diluted weighted-average shares outstanding for the years ended December 31, 2022, 2021 and 2020 (in millions):
| | Year Ended December 31, | |
| | 2022 | | | 2021 | | | 2020 | |
Weighted average shares outstanding, basic | | | 92 | | | | 95 | | | | 96 | |
Weighted average shares underlying stock options and restricted shares | | | 1 | | | | - | | | | 1 | |
Weighted average shares outstanding, diluted | | | 93 | | | | 95 | | | | 97 | |
Valuation of Broadcast Licenses, Goodwill and Other Intangible Assets. We have acquired a significant portion of our assets in acquisition transactions. Among the assets acquired in these transactions were broadcast licenses issued by the FCC, goodwill and other intangible assets.
For broadcast licenses acquired prior to January 1, 2002, we recorded their respective values using a residual method (analogous to “goodwill”) where the excess of the purchase price paid in the acquisition over the fair value of all identified tangible and intangible assets acquired was attributed to the broadcast license. This residual basis approach generally produces higher valuations of broadcast licenses when compared to applying an income method as discussed below.
For broadcast licenses acquired after December 31, 2001, we record their respective values using an income approach. Under this approach, a broadcast license is valued based on analyzing the estimated after-tax discounted future cash flows of the acquired station, assuming an initial hypothetical start-up operation maturing into an average performing station in a specific television market and giving consideration to other relevant factors such as the technical qualities of the broadcast license and the number of competing broadcast licenses within that market. For television stations acquired after December 31, 2001, we allocate the residual value of the station to goodwill.
When renewing broadcast licenses, we incur regulatory filing fees and legal fees. We expense these fees as they are incurred.
Goodwill represents the excess of acquisition cost over the fair value of assets acquired, identifiable intangible assets, less liabilities assumed in business combination transactions. Goodwill is tested for impairment on an annual basis (at year end) or between annual tests if events or changes in circumstances indicate that the fair value of a reporting unit may be below its carrying amount.
Other intangible assets that we have acquired include network affiliation agreements, retransmission agreements, advertising contracts, client lists, talent contracts and leases. Although each of our stations is affiliated with at least one broadcast network, we believe that the value of a television station is derived primarily from the attributes of its broadcast license rather than its network affiliation agreement. As a result, we allocate only minimal values to our network affiliation agreements. We classify our other intangible assets as finite-lived intangible assets. The amortization period of our other intangible assets is equal to the shorter of their estimated useful life or contract period, including expected extensions thereof. When renewing other intangible asset contracts, we incur legal fees that are expensed as incurred.
Impairment Testing of Indefinite-Lived Intangible Assets. We test for impairment of our indefinite-lived intangible assets on an annual basis on December 31. However, if certain triggering events occur, we test for impairment when such events occur.
For purposes of testing goodwill for impairment, our broadcast television stations as a whole, and each of our production companies, is considered a separate reporting unit. In the performance of our annual assessment of goodwill for impairment, we have the option to qualitatively assess whether it is more likely than not a reporting unit has been impaired. As part of this qualitative assessment we evaluate the relative impact of factors that are specific to the reporting units as well as industry, regulatory, and macroeconomic factors that could affect the significant inputs used to determine the fair value of the assets. We also consider the significance of the excess fair value over the carrying value reflected in prior quantitative assessments and the changes to each reporting unit’s carrying value since the last impairment test.
If we conclude that it is more likely than not that a reporting unit is impaired, or if we elect not to perform the optional qualitative assessment, we will determine the fair value of the reporting unit and compare that to the net book value of the reporting unit. If the fair value is less than the net book value, we will record an impairment to goodwill for the amount of the difference.
To estimate the fair value of our reporting units for a quantitative assessment, we utilize a discounted cash flow model supported by a market multiple approach. We believe that a discounted cash flow analysis is the most appropriate methodology to test the recorded value of long-term assets with a demonstrated long-lived/enduring franchise value. We believe the results of the discounted cash flow and market multiple approaches provide reasonable estimates of the fair value of our reporting units because these approaches are based on our actual results and reasonable estimates of future performance, and also take into consideration a number of other factors deemed relevant by us including, but not limited to, expected future market revenue growth, market revenue shares and operating profit margins. We have historically used these approaches in determining the value of our reporting units. We also consider a market multiple approach to corroborate our discounted cash flow analysis. We believe that this methodology is consistent with the approach that a strategic market participant would utilize if they were to value one of our reporting units.
In the performance of our annual assessment of broadcast licenses for impairment we have the option to qualitatively assess whether it is more likely than not that these assets are impaired. When evaluating our broadcast licenses for impairment, the qualitative assessment is done at the individual television station level. If we conclude that it is more likely than not that one of our broadcast licenses is impaired, we will perform a quantitative assessment by comparing the fair value of the broadcast license to its carrying value. If the fair value is greater than the asset’s recorded value, no impairment expense is recorded. If the fair value does not exceed the asset’s recorded value, we record an impairment expense equal to the amount that the asset’s recorded value exceeded the asset’s fair value. We use the income method to estimate the fair value of all broadcast licenses irrespective of whether they were initially recorded using the residual or income methods.
For further discussion of our goodwill, broadcast licenses and other intangible assets, see Note 13 “Goodwill and Intangible Assets.”
Accumulated Other Comprehensive Loss. Our accumulated other comprehensive loss balances as of December 31, 2022 and 2021 consist of adjustments to our pension liabilities net of related income tax benefits as follows (in millions):
| | December 31, | |
| | 2022 | | | 2021 | |
Items included in accumulated other comprehensive loss: | | | | | | | | |
Decrease in pension liability | | $ | (16 | ) | | $ | (36 | ) |
Income tax on decrease in pension liability | | | (4 | ) | | | (9 | ) |
Accumulated other comprehensive loss | | $ | (12 | ) | | $ | (27 | ) |
Recent Accounting Pronouncements. In March 2020, the Financial Accounting Standards Board (“FASB”) issued Accounting Standards Update (“ASU”) 2020-04, Reference Rate Reform (Topic 848). In January 2021, the FASB issued an amendment to ASU 2020-04, ASU 2021-01, Reference Rate Reform (Topic 848), in response to concerns about structural risks of interbank offered rates, and, particularly, the risk of cessation of the London Interbank Offered Rate (“LIBOR”). The amendments in this ASU apply to all entities that elect to apply the optional guidance in Topic 848. An entity may elect to apply the amendments in this ASU on a full retrospective basis as of any date from the beginning of an interim period that includes or is subsequent to March 12, 2020, or on a prospective basis to new modifications from any date within an interim period that includes or is subsequent to the date of the issuance of a final standard, up to the date that financial statements are available to be issued. In December 2022, the FASB issued ASU 2022-06, Reference Rate Reform (Topic 848), Deferral of the Sunset Date of Topic 848. The purpose of this amendment was to defer the sunset date of Topic 848 until June 30, 2023. Currently we do not expect that the implementation of these changes will have a material effect on our financial statements.
In addition to the accounting standards described above, certain amounts in the consolidated statements of cash flows have also been reclassified to conform to the current presentation.
Revenue Recognition. We recognize revenue when we have completed a specified service and effectively transferred the control of that service to a customer in return for an amount of consideration we expect to be entitled to receive. The amount of revenue recognized is determined by the amount of consideration specified in a contract with our customers. We have elected to exclude taxes assessed by a governmental authority on transactions with our customers from our revenue. Any unremitted balance is included in current liabilities on our balance sheets.
Advertising Revenue. Broadcast advertising revenue is generated primarily from the broadcast of television advertising time to local, national and political advertisers. Most advertising contracts are short-term, and generally run only for a few weeks. Our performance obligation is satisfied when the advertisement is broadcast or appears on our stations’ websites or mobile applications. Advertising revenue is recognized when the performance obligation is satisfied and then billed to the customer in the period the revenue is recognized. We have an unconditional right to receive payment of the amount billed generally within 30 days of the invoice date. Payment terms are expressly stated in our standard terms and conditions. The invoiced amount to be received is recorded in accounts receivable on our balance sheets.
We broadcast the customer’s advertisement either preceding or following a television station’s network programming and within local and syndicated programming. Broadcast advertising is sold in time increments and is priced primarily on the basis of a program’s popularity among the specific audience an advertiser desires to reach. In addition, broadcast advertising rates are affected by the number of advertisers competing for the available time, the size and demographic makeup of the market served by the station and the availability of alternative advertising media in the market area. Broadcast advertising rates are generally the highest during the most desirable viewing hours, with corresponding reductions during other hours. The ratings of a local station affiliated with a major network can be affected by ratings of network programming. Internet advertising is placed on our stations’ websites and mobile applications. These advertisements may be in the form of banner advertisements, pre-roll advertisements or video and other types of advertisements or sponsorships.
We generate advertising revenue either by the efforts of our direct sales employees or through third party advertising agency intermediaries. Third party advertising intermediaries represent the customer and contract with us to deliver broadcast or internet advertising for the customer.
Retransmission Consent Revenue. We enter into license agreements with cable, satellite, multichannel video programming distributors and digital delivery system (or “OTT”) customers (collectively “MVPD”) that provide them the right to use our broadcast signal for retransmission across the MVPD system for an agreed period of time. These agreements represent a sales and usage based functional intellectual property license based on the number of subscribers to the licensee’s delivery systems. Our performance obligation is to provide the licensee with access to our intellectual property when it is broadcast. The duration of the typical retransmission consent contract is three years. Retransmission consent revenue is recognized continuously during the period of the contract as we transmit our broadcast signal to the MVPD. The amount of revenue recognized is determined based upon a fixed rate per subscriber multiplied by the number of active subscribers to our MVPD customer systems for the given month. We bill our MVPD customers monthly over the life of the retransmission consent contract. We have an unconditional right to receive payment of the amount billed generally within 30 days from the invoice date. Payment terms are expressly stated in our retransmission consent contracts as well as in the standard terms and conditions. The invoiced amount to be received is recorded in accounts receivable on our balance sheets.
Subscriber data necessary to calculate the amount of retransmission consent revenue to be recognized for the current month is not received until subsequent to that month. We estimate the current month retransmission consent revenue based upon the subscriber data from the most recent subscriber report by the MVPD. We record the estimate in the current month as retransmission consent revenue and then adjust the amount recorded in that month when we receive the actual subscriber data. We typically have monthly adjustments to our revenue to account for changes in MVPD subscribers on a monthly basis, however, the number of MVPD subscribers does not change materially on a monthly basis and this adjustment does not materially impact our recorded retransmission consent revenue on a quarterly or annual basis.
Production Company Revenue. Our production company revenues include sports marketing, production and event management, sports and entertainment production services and automotive programming production and marketing solutions. We recognize revenue of marketing, production and events at the time the events are aired or delivered. We recognize advertising revenues related to the events when the advertisements are aired. Sponsorship revenue is recognized ratably over the contractual period of the sponsorship.
Other Revenues. Other revenues consist of production, tower rental and other miscellaneous items. Production revenue is derived from the production of programming. Production revenue is recognized as the programming is produced. Tower rental income is recognized monthly over the life of the lease. All of our leases under which we are lessor are considered operating leases. Other revenue is comprised of one-time or infrequently occurring special projects, dubbing, fees and other miscellaneous items. Other revenue is recognized as the services are performed. Other revenue is generated by our direct sales employees.
Expedients. We expense direct and agency commissions when incurred because our advertising contracts are one year or less in duration and the amortization period for capitalized expenses would be less than one year. Direct commissions are included in broadcast operating expense and agency commissions are netted against gross revenue in our consolidated statements of operations.
The nature of our contracts with advertising customers is such that our performance obligations arise and are satisfied concurrent with the broadcast or web placement of the advertisement. We did not have material incomplete or unsatisfied performance obligations at the end of any period presented.
We record a deposit liability for cash deposits received from our customers that are to be applied as payment once the performance obligation arises and is satisfied in the manner stated above. These deposits are recorded as deposit liabilities on our balance sheet. When we invoice our customers for completed performance obligations, we are unconditionally entitled to receive payment of the invoiced amounts. Therefore, we record invoiced amounts in accounts receivable on our balance sheet. We require amounts payable under advertising contracts with our political advertising customers to be paid for in advance. We record the receipt of this cash as a deposit liability. Once the advertisement has been broadcast, the revenue is earned, and we record the revenue and reduce the balance in this deposit liability account. We recorded $13 million of revenue in the year ended December 31, 2022 that was included in the deposit liability balance as of December 31, 2021. The deposit liability balance is included in deferred revenue on our consolidated balance sheets. The deposit liability balance was $12 million and $13 million as of December 31, 2022 and 2021, respectively.
Disaggregation of Revenue. Revenue from our broadcast segment is generated through both our direct and advertising agency intermediary sales channels. Revenue from our production companies segment is generated through our direct sales channel. The following table presents our revenue from contracts with customers disaggregated by type of service and sales channel (in millions):
|
|
Year Ended December 31, |
|
|
|
2022 |
|
|
2021 |
|
|
2020 |
|
Market and service type: |
|
|
|
|
|
|
|
|
|
|
|
|
Advertising: |
|
|
|
|
|
|
|
|
|
|
|
|
Core |
|
$ |
1,496 |
|
|
$ |
1,190 |
|
|
$ |
969 |
|
Political |
|
|
515 |
|
|
|
44 |
|
|
|
430 |
|
Total advertising |
|
|
2,011 |
|
|
|
1,234 |
|
|
|
1,399 |
|
Retransmission consent |
|
|
1,496 |
|
|
|
1,049 |
|
|
|
867 |
|
Production companies |
|
|
93 |
|
|
|
73 |
|
|
|
61 |
|
Other |
|
|
76 |
|
|
|
57 |
|
|
|
54 |
|
Total revenue |
|
$ |
3,676 |
|
|
$ |
2,413 |
|
|
$ |
2,381 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Sales channel: |
|
|
|
|
|
|
|
|
|
|
|
|
Direct |
|
$ |
2,163 |
|
|
$ |
1,579 |
|
|
$ |
1,302 |
|
Advertising agency intermediary |
|
|
1,513 |
|
|
|
834 |
|
|
|
1,079 |
|
Total revenue |
|
$ |
3,676 |
|
|
$ |
2,413 |
|
|
$ |
2,381 |
|
3. |
Acquisitions and Divestitures |
During 2022, 2021 and 2020, we completed a number of acquisition and divestiture transactions. The acquisition transactions were and are expected to, among other things, increase our revenues and cash flows from operating activities, and allow us to operate more efficiently and effectively by increasing our scale and providing us, among other things, with the ability to negotiate more favorable terms in our agreements with third parties. For each television station described, the DMA rank presented is the DMA rank at the time of acquisition.
2022 Acquisition
On April 1, 2022, we acquired television station WKTB-TV the Telemundo Network Group, LLC affiliate in the Atlanta, Georgia market (DMA 6), as well as certain digital media assets, for a combined purchase price of $31 million, using cash on hand (the “Telemundo Atlanta Transaction”).
The following table summarizes the values of the assets acquired and resulting goodwill of the Telemundo Atlanta Transaction (in millions):
Accounts receivable, net |
|
$ |
1 |
|
Property and equipment |
|
|
1 |
|
Goodwill |
|
|
10 |
|
Broadcast licenses |
|
|
1 |
|
Network affiliation |
|
|
14 |
|
Other intangible assets |
|
|
4 |
|
Total |
|
$ |
31 |
|
These amounts are based upon management’s estimate of the fair values using valuation techniques including income, cost and market approaches. In determining the fair value of the acquired assets and assumed liabilities, the fair values were determined based on, among other factors, expected future revenue and cash flows, expected future growth rates, and estimated discount rates.
Property and equipment are recorded at their fair value and are being depreciated over their estimated useful lives ranging from 3 to 40 years.
Amounts related to network affiliation and other intangible assets are being amortized over their estimated useful lives of approximately 1 to 4 years.
Goodwill is calculated as the excess of the consideration transferred over the fair value of the identifiable net assets acquired and liabilities assumed, and represents the future economic benefits expected to arise from other intangible assets acquired that do not qualify for separate recognition, as well as future synergies that we expect to generate from each acquisition. The goodwill recognized related to this acquisition is deductible for income tax purposes.
In addition, we acquired broadcast licenses totaling approximately $27 million that did not qualify as acquisitions of businesses.
2021 Acquisitions.
Meredith Transaction. On December 1, 2021, we completed the acquisition of all the equity interests of Meredith, immediately after the spinoff of Meredith’s National Media Group to the current Meredith shareholders, for an adjusted purchase price of $2.8 billion in total enterprise value. Meredith owned and operated television stations in 12 markets. To facilitate regulatory approvals for the Meredith Transaction, on September 23, 2021, we divested our existing television station WJRT (ABC) in the Flint-Saginaw, Michigan market (DMA 66), to Allen for an adjusted purchase price of $72 million in cash, including working capital (the “Flint Divestiture”). The Flint Divestiture resulted in a non-cash loss of $4 million. We refer to the acquisition of Meredith and the WJRT Divestiture collectively as the Meredith Transaction.
The following table lists the 17 television stations in 12 local markets that were acquired, adding 11 new markets to our operations:
Then-Current |
|
|
|
Station Call |
|
Network |
DMA Rank |
|
DMA |
|
Letters |
|
Affiliations |
|
|
|
|
|
|
|
10 |
|
Atlanta, GA |
|
WCGL/WPCH |
|
CBS/Ind. |
12 |
|
Phoenix, AZ |
|
KPHO/KTVK |
|
CBS/Ind. |
23 |
|
St. Louis, MO |
|
KMOV |
|
CBS |
26 |
|
Portland, OR |
|
KPTV/KPDX |
|
FOX/MY |
28 |
|
Nashville, TN |
|
WSMV |
|
NBC |
29 |
|
Hartford - New Haven, CT |
|
WFSB |
|
CBS |
32 |
|
Kansas City, MO |
|
KCTV/KSMO |
|
CBS/MY |
38 |
|
Greenville - Spartanburg, SC |
|
WHNS |
|
FOX |
41 |
|
Las Vegas, NV |
|
KVVU |
|
FOX |
60 |
|
Mobile, AL - Pensacola, FL |
|
WALA |
|
FOX |
66 |
|
Flint - Saginaw, MI |
|
WNEM |
|
CBS |
113 |
|
Springfield, MA |
|
WGGB/WSHM |
|
ABC/FOX/CBS |
Quincy Transaction. On August 2, 2021, we completed the acquisition of all the equity interests of Quincy for an adjusted purchase price of $936 million, which amount includes an additional $6 million for working capital. Also on August 2, 2021, and concurrently with the acquisition of Quincy, we completed the divestiture to Allen of television stations in seven markets previously owned by Quincy and located in our existing television markets, for an adjusted divestiture price of $401 million, which amount includes $21 million for working capital. Consistent with the acquisition of equity interests, for tax purposes the divested stations recorded values included a deferred tax liability. Upon the subsequent sale, a tax gain was recognized and the deferred tax libility was relieved resulting in a book loss. The Quincy Divestiture resulted in a non-cash loss of $45 million, which is included in loss on disposal of assets, net in our consolidated statement of operations in the year ended December 31, 2021. We refer to the acquisition of Quincy and the Quincy Divestiture collectively as the “Quincy Transaction.”
The following table lists the stations acquired and retained, net of divestitures:
Then-Current |
|
|
|
Station Call |
|
Network |
DMA Rank |
|
DMA |
|
Letters |
|
Affiliations |
|
|
|
|
|
|
|
103 |
|
Fort Wayne, IN |
|
WPTA/WISE |
|
ABC/NBC/CW |
119 |
|
Peoria, IL |
|
WEEK |
|
NBC/ABC/CW |
134 |
|
Duluth, MN, Superior, WI |
|
KBJR/KDLH |
|
NBC/CBS/CW |
147 |
|
Sioux City, IA |
|
KTIV |
|
NBC/CW |
152 |
|
Binghamton, NY |
|
WBNG |
|
CBS/CW |
153 |
|
Rochester, MN - Mason City, IA |
|
KTTC |
|
NBC/CW |
161 |
|
Bluefield-Beckley, WV |
|
WVVA |
|
NBC/CW |
174 |
|
Quincy, IL |
|
WGEM |
|
NBC/FOX/CW |
The following stations were acquired and divested in the Quincy Transaction:
Then-Current |
|
|
|
Station Call |
|
Network |
DMA Rank |
|
DMA |
|
Letters |
|
Affiliations |
|
|
|
|
|
|
|
76 |
|
Madison, WI |
|
WKOW |
|
ABC |
80 |
|
Tucson, AZ |
|
KVOA |
|
NBC |
92 |
|
Paducah, KY - Harrisburg, IL |
|
WSIL |
|
ABC |
94 |
|
Cedar Rapids, IA |
|
KWWL |
|
NBC |
128 |
|
La Crosse-Eau Claire, WI |
|
WXOW |
|
ABC |
135 |
|
Wausau-Stevens Point, WI |
|
WAOW |
|
ABC |
136 |
|
Rockford, IL |
|
WREX |
|
NBC |
The following table summarizes the allocation of consideration paid in the Quincy Transaction (in millions):
Adjusted purchase price |
|
$ |
936 |
|
Less - consideration allocated to assets acquired and liabilities assumed for the Quincy overlap markets that were divested on August 2, 2021 |
|
|
383 |
|
Purchase consideration for assets acquired and liabilities assumed, net of divestitures |
|
$ |
553 |
|
Third Rail Acquisition. On September 13, 2021, we acquired the studio, production and office facilities as well as the related production and administrative assets and liabilities of Third Rail Studios (“Third Rail”) from Third Rail Studios, LLC and Studio Sixty, LLC for an adjusted purchase price of $27 million of cash. We refer to this transaction as the “Third Rail Acquisition”. This transaction represents an initial step in the broader development of our planned studio production facilities.
Purchase Price Allocations. The following table summarizes the values of the assets acquired, liabilities assumed and resulting goodwill of the Meredith Transaction, Quincy Transaction and the Third Rail Acquisition (together, the “2021 Acquisitions”), in millions:
|
|
Meredith |
|
|
Quincy |
|
|
Third Rail |
|
|
Total |
|
Cash |
|
$ |
1 |
|
|
$ |
4 |
|
|
$ |
- |
|
|
$ |
5 |
|
Accounts receivable, net |
|
|
146 |
|
|
|
23 |
|
|
|
- |
|
|
|
169 |
|
Other current assets |
|
|
15 |
|
|
|
5 |
|
|
|
- |
|
|
|
20 |
|
Property and equipment |
|
|
235 |
|
|
|
74 |
|
|
|
24 |
|
|
|
333 |
|
Operating lease right of use asset |
|
|
15 |
|
|
|
1 |
|
|
|
- |
|
|
|
16 |
|
Goodwill |
|
|
1,016 |
|
|
|
190 |
|
|
|
4 |
|
|
|
1,210 |
|
Broadcast licenses |
|
|
1,516 |
|
|
|
245 |
|
|
|
- |
|
|
|
1,761 |
|
Other intangible assets |
|
|
455 |
|
|
|
85 |
|
|
|
- |
|
|
|
540 |
|
Other non-current assets |
|
|
3 |
|
|
|
- |
|
|
|
- |
|
|
|
3 |
|
Other current liabilities |
|
|
(104 |
) |
|
|
(7 |
) |
|
|
(1 |
) |
|
|
(112 |
) |
Deferred income taxes |
|
|
(477 |
) |
|
|
(66 |
) |
|
|
- |
|
|
|
(543 |
) |
Operating lease liabilities |
|
|
(15 |
) |
|
|
(1 |
) |
|
|
- |
|
|
|
(16 |
) |
Other non-current liabilities |
|
|
(3 |
) |
|
|
- |
|
|
|
- |
|
|
|
(3 |
) |
Total |
|
$ |
2,803 |
|
|
$ |
553 |
|
|
$ |
27 |
|
|
$ |
3,383 |
|
These amounts are based upon management’s estimate of the fair values using valuation techniques including income, cost and market approaches. In determining the fair value of the acquired assets and assumed liabilities, the fair values were estimated based on, among other factors, expected future revenue and cash flows, expected future growth rates, and estimated discount rates.
Accounts receivable are recorded at their fair value representing the amount we expect to collect. Gross contractual amounts receivable were approximately $3 million more than their recorded fair value. Property and equipment are recorded at their fair value and are being depreciated over their estimated useful lives ranging from three years to 40 years. Amounts related to other intangible assets represent primarily the estimated fair values of retransmission agreements of $374 million, network affiliation agreements of $136 million. These intangible assets are each being amortized over their estimated useful lives of approximately 5 years. Amounts related to other intangible assets are being amortized over their estimated useful lives of approximately 1 to 10 years.
Goodwill is calculated as the excess of the consideration transferred over the fair value of the identifiable net assets acquired and liabilities assumed, and represents the future economic benefits expected to arise from other intangible assets acquired that do not qualify for separate recognition, as well as future synergies that we expect to generate from each acquisition. A portion of the goodwill acquired in the Meredith and Quincy Transactions, in the amount of $89 million, will be deductible by us for income tax purposes.
In addition, we acquired broadcast licenses totaling approximately $4 million that did not qualify as acquisitions of businesses.
The Company’s consolidated results of operations for the year ended December 31, 2021 included the results of the Meredith Transaction beginning on December 1, 2021, the Quincy Transaction beginning on August 2, 2021 and the Third Rail Acquisition beginning on September 13, 2021. Revenues attributable to the 2021 Acquisitions included in our consolidated statements of operations for the year ended December 31, 2021 were $128 million.
The following table summarizes the approximate “Transaction Related Expenses” incurred in connection with the 2021 Acquisitions and the Flint Divestiture, during the year ended December 31, 2021, by type and by financial statement line item (in millions):
|
|
Year Ended |
|
|
|
December 31, |
|
|
|
2021 |
|
Transaction Related Expenses by type: |
|
|
|
|
Legal, consulting and other professional fees |
|
$ |
80 |
|
Termination of sales representation and other agreements |
|
|
1 |
|
Total Transaction Related Expenses |
|
$ |
81 |
|
|
|
|
|
|
Transaction Related Expenses by financial statement line item: |
|
|
|
|
Operating expenses before depreciation, amortization and loss (gain) on disposal of assets, net: |
|
|
|
|
Broadcasting |
|
$ |
3 |
|
Corporate and administrative |
|
|
71 |
|
Miscellaneous Expense |
|
|
7 |
|
Total Transaction Related Expenses |
|
$ |
81 |
|
Unaudited Pro Forma Financial Information – 2021 Acquisitions. The following table sets forth certain unaudited pro forma information for the year December 31, 2021, assuming that the 2021 Acquisitions and the Flint Divestiture occurred on January 1, 2021 (in millions, except per share data):
|
|
Year Ended |
|
|
|
December 31, |
|
|
|
2021 |
|
|
|
|
|
|
Revenue (less agency commissions) |
|
$ |
3,153 |
|
|
|
|
|
|
Net income |
|
$ |
199 |
|
|
|
|
|
|
Net income attributable to common stockholders |
|
$ |
147 |
|
|
|
|
|
|
Basic net income attributable to common stockholders, per share |
|
$ |
1.55 |
|
|
|
|
|
|
Diluted net income attributable to common stockholders, per share |
|
$ |
1.55 |
|
This pro forma financial information is based on our historical results of operations and the historical results of operations of the businesses acquired, net of divestitures, included in the 2021 Acquisitions and the Flint Divestiture, adjusted for the effects of fair value estimates and other acquisition accounting adjustments, and is not necessarily indicative of what our results would have been had we completed the 2021 Acquisitions and the Flint Divestiture, on January 1, 2021, or on any other historical date, nor is it reflective of our expected results of operations for any future period. The pro forma adjustments for the year ended December 31, 2021 reflect depreciation expense and amortization of finite-lived intangible assets related to the fair value of the assets acquired, Transaction Related Expenses and related tax effects of the adjustments. This pro forma financial information has been prepared based on estimates and assumptions that we believe are reasonable as of the date hereof, and are subject to change based on, among other things, changes in the fair value estimates or underlying assumptions.
2020 Acquisitions.
Alaska Transactions. On July 31, 2020, we completed the acquisition of television station operations in the Anchorage and Juneau, Alaska television market (DMA 148 and 207, respectively), for $19 million, using cash on hand (the “Alaska Transactions”).
Columbus Transactions. On September 1, 2020, we acquired certain non-license assets of WLTZ-TV (NBC), in the Columbus, Georgia market (DMA 129) and entered into shared services and other related agreements with SagamoreHill of Columbus GA, LLC (“SagamoreHill”) to provide news and back-office services to WLTZ-TV (the “Columbus Transactions”). We paid $22 million to SagamoreHill, using cash on hand (the “Columbus Transactions”).
Sioux Falls Transactions. On November 2, 2020, Gray entered into a new network affiliation agreement with the FOX Broadcasting Network for one of its television stations in the Sioux Falls, South Dakota television market (DMA 115) that utilize certain non-license assets that Gray acquired at the same time from Independent Communications, Inc., for $22 million using cash on hand, for the former FOX affiliate for the market.
Lubbock Transactions. On December 31, 2020, we acquired television station KLCW-TV (CW) and certain low power television stations in the Lubbock, Texas market (DMA 142), as well as certain non-license assets of KJTV-TV (FOX) and two additional low power stations and certain real estate, for a combined purchase price of $24 million, using cash on hand. On that date, we also entered into a shared services agreement with SagamoreHill to provide news and back-office services to KJTV-TV and its associated low power stations using cash on hand (the “Lubbock Transactions”).
In addition, we acquired broadcast licenses totaling approximately $5 million that did not qualify as acquisitions of businesses.
The following table summarizes the preliminary values of the assets acquired and resulting goodwill of the Lubbock Transactions, Alaska Transactions, Columbus Transactions and the Sioux Falls Transactions (in millions):
|
|
2020 Acquisitions |
|
|
|
Lubbock |
|
|
Alaska |
|
|
Columbus |
|
|
Sioux Falls |
|
|
Total |
|
Accounts receivable and other current assets |
|
$ |
- |
|
|
$ |
1 |
|
|
$ |
- |
|
|
$ |
- |
|
|
$ |
1 |
|
Property and equipment |
|
|
6 |
|
|
|
5 |
|
|
|
2 |
|
|
|
- |
|
|
|
13 |
|
Operating lease right of use asset |
|
|
1 |
|
|
|
- |
|
|
|
- |
|
|
|
- |
|
|
|
1 |
|
Goodwill |
|
|
6 |
|
|
|
2 |
|
|
|
1 |
|
|
|
11 |
|
|
|
20 |
|
Broadcast licenses |
|
|
5 |
|
|
|
2 |
|
|
|
- |
|
|
|
- |
|
|
|
7 |
|
Other intangible assets |
|
|
7 |
|
|
|
9 |
|
|
|
19 |
|
|
|
11 |
|
|
|
46 |
|
Other current liabilities |
|
|
(1 |
) |
|
|
- |
|
|
|
- |
|
|
|
- |
|
|
|
(1 |
) |
Total |
|
$ |
24 |
|
|
$ |
19 |
|
|
$ |
22 |
|
|
$ |
22 |
|
|
$ |
87 |
|
These amounts are based upon management’s estimate of the fair values using valuation techniques including income, cost and market approaches. In determining the fair value of the acquired assets and assumed liabilities, the fair values were determined based on, among other factors, expected future revenue and cash flows, expected future growth rates, and estimated discount rates.
Property and equipment are recorded at their fair value and are being depreciated over their estimated useful lives ranging from three years to 40 years.
Amounts related to other intangible assets are being amortized over their estimated useful lives of approximately 1 to 4 years.
Goodwill is calculated as the excess of the consideration transferred over the fair value of the identifiable net assets acquired and liabilities assumed, and represents the future economic benefits expected to arise from other intangible assets acquired that do not qualify for separate recognition, as well as future synergies that we expect to generate from each acquisition. The goodwill recognized related to this acquisition is deductible for income tax purposes.
The Company’s consolidated results of operations for year ended December 31, 2020 include the results of the 2020 Acquisitions beginning on each transaction’s date of acquisition, but these amounts were not material.
Transaction Related Expenses incurred in connection with the 2020 Acquisitions, during the year ended December 31, 2020, were approximately $1 million.
As of December 31, 2022 and 2021, long-term debt consisted of obligations under our 2019 Senior Credit Facility (as defined below), our 5.875% senior notes due 2026 (the “2026 Notes”), our 7.0% senior notes due 2027 (the “2027 Notes”) our 4.75% senior notes due 2030 (the “2030 Notes”) and our 5.375% senior notes due 2031 (the “2031 Notes”) as follows (in millions):
| | December 31, | |
| | 2022 | | | 2021 | |
Long-term debt: | | | | | | | | |
2019 Senior Credit Facility: | | | | | | | | |
2017 Term Loan (matures February 7, 2024) | | $ | 295 | | | $ | 595 | |
2019 Term Loan (matures January 2, 2026) | | | 1,190 | | | | 1,190 | |
2021 Term Loan (matures December 1, 2028) | | | 1,485 | | | | 1,500 | |
2026 Notes (matures July 15, 2026) | | | 700 | | | | 700 | |
2027 Notes (matures May 15, 2027) | | | 750 | | | | 750 | |
2030 Notes (matures October 15, 2030) | | | 800 | | | | 800 | |
2031 Notes (matures November 15, 2031) | | | 1,300 | | | | 1,300 | |
Total outstanding principal | | | 6,520 | | | | 6,835 | |
Unamortized deferred loan costs - 2017 Term Loan | | | (4 | ) | | | (7 | ) |
Unamortized deferred loan costs - 2019 Term Loan | | | (21 | ) | | | (27 | ) |
Unamortized deferred loan costs - 2021 Term Loan | | | (4 | ) | | | (5 | ) |
Unamortized deferred loan costs - 2026 Notes | | | (4 | ) | | | (5 | ) |
Unamortized deferred loan costs - 2027 Notes | | | (7 | ) | | | (8 | ) |
Unamortized deferred loan costs - 2030 Notes | | | (11 | ) | | | (13 | ) |
Unamortized deferred loan costs - 2031 Notes | | | (16 | ) | | | (18 | ) |
Unamortized premium - 2026 Notes | | | 2 | | | | 3 | |
Less current portion | | | (15 | ) | | | (15 | ) |
Long-term debt, less deferred financing costs | | $ | 6,440 | | | $ | 6,740 | |
| | | | | | | | |
Borrowing availability under Revolving Credit Facility | | $ | 496 | | | $ | 497 | |
Borrowings under the the 2021 Term Loan, 2019 Term Loan 2017 Term Loan and the Revolving Credit Facility bear interest, at our option, at either the London Interbank Offered Rate (“LIBOR”) or the Base Rate, in each case, plus an applicable margin. As of December 31, 2022, the interest rate on the balance outstanding under the 2021 Term Loan, 2019 Term Loan and the 2017 Term Loan were 7.1%, 6.6% and 6.6%, respectively. A portion of the Revolving Credit Facility matures on January 2, 2026, with the remainder maturing on December 1, 2026.
As of December 31, 2022, the aggregate minimum principal maturities of our long-term debt were as follows (in millions):
| | Minimum Principal Maturities | |
| | 2019 Senior | | | 2026 | | | 2027 | | | 2030 | | | 2031 | | | | | |
Year | | Credit Facility | | | Notes | | | Notes | | | Notes | | | Notes | | | Total | |
2023 | | $ | 15 | | | $ | - | | | $ | - | | | $ | - | | | $ | - | | | $ | 15 | |
2024 | | | 310 | | | | - | | | | - | | | | - | | | | - | | | | 310 | |
2025 | | | 15 | | | | - | | | | - | | | | - | | | | - | | | | 15 | |
2026 | | | 1,205 | | | | 700 | | | | - | | | | - | | | | - | | | | 1,905 | |
2027 | | | 15 | | | | - | | | | 750 | | | | - | | | | - | | | | 765 | |
Thereafter | | | 1,410 | | | | - | | | | - | | | | 800 | | | | 1,300 | | | | 3,510 | |
Total | | $ | 2,970 | | | $ | 700 | | | $ | 750 | | | $ | 800 | | | $ | 1,300 | | | $ | 6,520 | |
Collateral, Covenants and Restrictions. Our obligations under the 2019 Senior Credit Facility are secured by substantially all of our consolidated assets, excluding real estate. In addition, substantially all of our subsidiaries are joint and several guarantors of, and our ownership interests in those subsidiaries are pledged to collateralize, our obligations under the 2019 Senior Credit Facility. Gray Television, Inc. is a holding company, and has no material independent assets or operations. For all applicable periods, the 2026 Notes, 2027 Notes, 2030 Notes and 2031 Notes have been fully and unconditionally guaranteed, on a joint and several, senior unsecured basis, by substantially all of Gray Television, Inc.’s subsidiaries. Any subsidiaries of Gray Television, Inc. that do not guarantee the 2026 Notes, 2027 Notes, 2030 Notes and 2031 Notes are not material or are designated as unrestricted under the Senior Credit Facility. As of December 31, 2022, there were no significant restrictions on the ability of Gray Television, Inc.'s subsidiaries to distribute cash to Gray or to the guarantor subsidiaries.
The 2019 Senior Credit Facility contains affirmative and restrictive covenants with which we must comply, including: (a) limitations on additional indebtedness, (b) limitations on liens, (c) limitations on the sale of assets, (d) limitations on guarantees, (e) limitations on investments and acquisitions, (f) limitations on the payment of dividends and share repurchases, (g) limitations on mergers and (h) maintenance of the First Lien Leverage Ratio while any amount is outstanding under the revolving credit facility, as well as other customary covenants for credit facilities of this type. The 2026 Notes, 2027 Notes, 2030 Notes and 2031 Notes include covenants with which we must comply which are typical for borrowing transactions of their nature. As of December 31, 2022 and 2021, we were in compliance with all required covenants under all our debt obligations.
Interest Payments. For all of our interest-bearing obligations, we made interest payments of approximately $339 million, $178 million and $179 million during 2022, 2021 and 2020, respectively. During the year ended December 31, 2022 we capitalized $9 million of interest payments related to our Assembly Atlanta project. We did not capitalize any interest payments during the years ended December 31, 2021 and 2020.
5. | Fair Value Measurement |
We measure certain assets and liabilities at fair value, which are classified by the FASB Codification within the fair value hierarchy as level 1, 2, or 3, on the basis of whether the measurement employs observable or unobservable inputs. Observable inputs reflect market data obtained from independent sources, while unobservable inputs reflect the Company’s own assumptions and consider information about readily available market participant assumptions.
● | Level 1: Quoted prices for identical instruments in active markets |
● | Level 2: Quoted prices for similar instruments in active markets; quoted prices for identical or similar instruments in markets that are not active; and model-derived valuations in which all significant inputs and significant value drivers are observable in active markets |
● | Level 3: Valuations derived from valuation techniques in which one or more significant inputs or significant value drivers are unobservable |
Fair value is defined as the price that would be received to sell an asset, or paid to transfer a liability, in an orderly transaction between market participants at the measurement date. The use of different market assumptions or methodologies could have a material effect on the fair value measurement.
The carrying amounts of accounts receivable, prepaid and other current assets, accounts payable, employee compensation and benefits, accrued interest, other accrued expenses, and deferred revenue approximate fair value at both December 31, 2022 and 2021.
The value of our investments in broadcasting and technology companies are classified as Level 3.
As of December 31, 2022, the carrying amount of our long-term debt was $6.5 billion and the fair value was $5.7 billion. As of December 31, 2021, the carrying amount of our long-term debt was $6.8 billion and the fair value was $6.9 billion. Fair value of our long-term debt is based on observable estimates provided by third-party financial service providers and is classified as Level 2.
We are authorized to issue 245 million shares in total of all classes of stock consisting of 25 million shares of class A common stock, 200 million shares of common stock, and 20 million shares of “blank check” preferred stock for which our Board of Directors has the authority to determine the rights, powers, limitations and restrictions. The rights of our common stock and class A common stock are identical, except that our class A common stock has 10 votes per share and our common stock has one vote per share.
Our common stock and Class A common stock are entitled to receive cash dividends if declared, on an equal per-share basis. During the years ended December 31, 2022 and 2021, we declared and paid quarterly cash dividends totaling $0.32 per share of our common stock and Class A common stock. For the year ended December 31, 2020, we did not declare or pay common stock or Class A common stock dividends.
On May 5, 2022, our shareholders approved, and our Board of Directors adopted, our 2022 Equity and Incentive Compensation Plan (the “2022 EICP”). The 2022 EICP replaced our 2017 Equity and Incentive Compensation Plan. Under 2022 EICP, we may, at our discretion, issue authorized and unissued shares, or previously issued shares held in treasury, of our Class A common stock or common stock. As of December 31, 2022, we had reserved 7.2 million shares and 2.8 million shares of our common stock and Class A common stock, respectively, for future issuance under our 2022 EICP. As of December 31, 2022, we also have 2.8 million shares of our common stock reserved for issuance under The Gray Television, Inc. Capital Accumulation Plan (the “401(k) Plan”).
During the year ended December 31, 2022, we repurchased 2.6 million shares of our common stock under our share repurchase programs for $50 million. As of December 31, 2022, approximately $124 million was available to repurchase shares of our common stock and/or Class A common stock under these programs.
At December 31, 2022 and 2021 there were 650,000 shares of our Series A Perpetual Preferred Stock outstanding with a stated face value and liquidation value of $1,000 per share (the “Series A Preferred Stock”). Holders of shares of the Series A Preferred Stock are entitled to receive mandatory and cumulative dividends paid quarterly in cash or, at the Company’s option, paid quarterly in kind by issuance of additional shares of Series A Preferred Stock. The per-share amount of such quarterly mandatory and cumulative dividends will be calculated by multiplying the face value by 8% per annum if the dividends are to be paid in cash or 8.5% per annum if such dividends are to be paid in additional shares of Series A Preferred Stock (“PIK Election Dividends”). If the Company elects to pay any portion of accrued dividends with PIK Election Dividends, it will be prohibited from repurchasing, redeeming or paying dividends on any stock that is junior to the Series A Preferred Stock through the end of that quarter and the subsequent two quarters, subject to certain exceptions.
With respect to the payment of dividends, the Series A Preferred Stock will rank senior to all classes and series of our common stock and all other equity securities designated as ranking junior to the Series A Preferred Stock, and no new issuances of common or preferred stock will rank on a parity with, nor senior to, the Series A Preferred Stock.
All or any portion of the outstanding Series A Preferred Stock may be redeemed at the Company’s option at any time, upon written notice to the holders of Series A Preferred Stock at least 30 and not more than 60 days prior to the date of such optional redemption. The per-share redemption price for Series A Preferred Stock will be equal to the sum of the liquidation value and the per-share amount of any unpaid dividends for the current quarterly dividend period, up to and including the date of redemption. Holders of shares of Series A Preferred Stock redeemed will be paid in cash.
The Series A Preferred Stock is also subject to mandatory redemption upon the occurrence of certain change of control transactions or upon the sale or other disposition of all or substantially all of our assets. The holders of Series A Preferred Stock do not have any right to exchange or convert the shares into any other securities.
In general, the holders of the Series A Preferred Stock do not have any voting rights except as set forth in the terms of the Series A Preferred Stock or as otherwise required by law, in which case, each share of Series A Preferred Stock will be entitled to one vote.
The approval of the holders of the Series A Preferred Stock, voting separately as a class, is required in order to authorize, create or issue new shares of Series A Perpetual Preferred stock (other than to pay dividends), or alter the rights of any other shares that are or would be equal to or senior to the Series A Preferred Stock, or to amend, alter or repeal the Company’s Restated Articles of Incorporation as amended from time to time if such amendment, alteration or repeal adversely affects the powers, preferences or special rights of the Series A Preferred Stock.
The Series A Preferred Stock does not have preemptive rights as to any of our other securities, or any warrants, rights, or options to acquire any of our securities.
In the event that the Company voluntarily or involuntarily liquidates, dissolves or winds up its affairs, holders of Series A Preferred Stock will be entitled to receive for each share of Series A Preferred Stock, out of the Company’s assets or proceeds thereof available for distribution to shareholders, subject to the rights of any creditors, payment in full in an amount equal to the liquidation value and the per-share amount of any unpaid dividends for the current quarterly dividend period. Holders of Series A Preferred Stock would be entitled to receive this amount before any distribution of assets or proceeds to holders of our common stock and any other stock whose rights are junior to the Series A Preferred Stock. If in any distribution described above, our assets are not sufficient to pay in full the amounts payable with respect to the outstanding shares of Series A Preferred Stock or any stock whose rights are equal to the Series A Preferred Stock, holders of the Series A Preferred Stock would share ratably in any such distribution in proportion to the full respective distributions to which they are entitled. Shareholders are not subject to further assessments on their shares of the New Preferred Stock.
8. |
Stock-Based Compensation |
We recognize compensation expense for stock-based payment awards made to our employees, consultants and directors. Our active stock-based compensation plans include the 2022 Equity and Incentive Compensation Plan (“2022 EICP”). The following table presents our stock-based compensation expense and the related income tax benefits for the years ended December 31, 2022, 2021 and 2020 (in millions):
|
|
Year Ended December 31, |
|
|
|
2022 |
|
|
2021 |
|
|
2020 |
|
Stock-based compensation expense, gross |
|
$ |
22 |
|
|
$ |
14 |
|
|
$ |
16 |
|
Income tax benefit at our statutory rate associated with stock-based compensation |
|
|
(6 |
) |
|
|
(4 |
) |
|
|
(4 |
) |
Stock-based compensation expense, net |
|
$ |
16 |
|
|
$ |
10 |
|
|
$ |
12 |
|
Currently, the 2022 EICP provides for the grant of incentive stock options, nonqualified stock options, restricted stock awards, restricted stock unit awards, stock appreciation rights, and performance awards to acquire shares of our Class A common stock or common stock, or other awards based on our performance. All shares of common stock and Class A common stock underlying outstanding options (if any), restricted stock units and performance awards are counted as issued under the 2022 EICP for purposes of determining the number of shares available for future issuance.
As of December 31, 2022, we had $16 million of total unrecognized compensation expense related to all non-vested stock-based compensation arrangements. This expense is expected to be recognized over a period of 3.2 years.
A summary of activity for the years ended December 31, 2022, 2021 and 2020 under our stock based compensation plans is as follows:
|
|
Year Ended December 31, |
|
|
|
2022 |
|
|
2021 |
|
|
2020 |
|
|
|
|
|
|
|
Weighted- |
|
|
|
|
|
|
Weighted- |
|
|
|
|
|
|
Weighted- |
|
|
|
|
|
|
|
Average |
|
|
|
|
|
|
Average |
|
|
|
|
|
|
Average |
|
|
|
Number |
|
|
Grant Date |
|
|
Number |
|
|
Grant Date |
|
|
Number |
|
|
Grant Date |
|
|
|
of |
|
|
Fair Value |
|
|
of |
|
|
Fair Value |
|
|
of |
|
|
Fair Value |
|
|
|
Shares |
|
|
Per Share |
|
|
Shares |
|
|
Per Share |
|
|
Shares |
|
|
Per Share |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Restricted stock - common: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Outstanding - beginning of period |
|
|
1,035,728 |
|
|
$ |
19.69 |
|
|
|
917,533 |
|
|
$ |
16.84 |
|
|
|
977,547 |
|
|
$ |
15.45 |
|
Granted |
|
|
400,927 |
|
|
|
21.68 |
|
|
|
731,374 |
|
|
|
19.73 |
|
|
|
359,481 |
|
|
|
18.92 |
|
Vested |
|
|
(438,910 |
) |
|
|
19.38 |
|
|
|
(613,179 |
) |
|
|
15.48 |
|
|
|
(333,865 |
) |
|
|
15.35 |
|
Forfeited |
|
|
- |
|
|
|
- |
|
|
|
- |
|
|
|
- |
|
|
|
(85,630 |
) |
|
|
15.53 |
|
Outstanding - end of period |
|
|
997,745 |
|
|
$ |
20.62 |
|
|
|
1,035,728 |
|
|
$ |
19.69 |
|
|
|
917,533 |
|
|
$ |
16.84 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Restricted stock - Class A common: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Outstanding - beginning of period |
|
|
720,421 |
|
|
$ |
18.22 |
|
|
|
480,042 |
|
|
$ |
16.10 |
|
|
|
449,284 |
|
|
$ |
13.55 |
|
Granted |
|
|
250,448 |
|
|
|
20.52 |
|
|
|
488,918 |
|
|
|
18.66 |
|
|
|
166,814 |
|
|
|
19.87 |
|
Vested |
|
|
(293,631 |
) |
|
|
17.55 |
|
|
|
(248,539 |
) |
|
|
15.00 |
|
|
|
(136,056 |
) |
|
|
12.32 |
|
Outstanding - end of period |
|
|
677,238 |
|
|
$ |
19.36 |
|
|
|
720,421 |
|
|
$ |
18.22 |
|
|
|
480,042 |
|
|
$ |
16.10 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Restricted stock units - common: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Outstanding - beginning of period |
|
|
125,247 |
|
|
$ |
19.02 |
|
|
|
90,184 |
|
|
$ |
18.92 |
|
|
|
398,000 |
|
|
$ |
18.21 |
|
Granted |
|
|
259,079 |
|
|
|
23.87 |
|
|
|
95,115 |
|
|
|
19.05 |
|
|
|
93,184 |
|
|
|
18.77 |
|
Vested |
|
|
(108,921 |
) |
|
|
19.03 |
|
|
|
(60,052 |
) |
|
|
18.92 |
|
|
|
(374,500 |
) |
|
|
18.18 |
|
Forfeited |
|
|
(1,260 |
) |
|
|
19.05 |
|
|
|
- |
|
|
|
- |
|
|
|
(26,500 |
) |
|
|
18.21 |
|
Outstanding - end of period |
|
|
274,145 |
|
|
$ |
23.60 |
|
|
|
125,247 |
|
|
$ |
19.02 |
|
|
|
90,184 |
|
|
$ |
18.92 |
|
Operating Leases. We lease various assets with non-cancellable lease terms that range between one and 99 years. Many of these leases have optional renewal periods ranging between one and 20 years. We define the lease term as the original lease base period plus optional renewal periods that we reasonably expect to exercise. We do not include renewal periods exercisable more than 10 years from the commencement date in the lease term as we cannot reasonably expect to exercise an option that far into the future. Some of our leases have free rent periods, tenant allowances and/or fixed or variable rent escalators. We record operating lease expense on a straight-line basis over the lease term. Operating lease expense is included in operating expenses in our consolidated statements of operations.
We lease land, buildings, transmission towers, right of way easements, and equipment through operating leases. We generally lease land for the purpose of erecting transmission towers for our broadcast operations. Our building leases consist of office space and broadcast studios. For transmission towers we do not own, we lease space for our transmission equipment on third-party towers. We lease right-of-ways for various purposes, including ingress and egress for tower locations and guyed wire space. Our equipment leases consist of office, transmission and production equipment.
We allocate consideration paid in the contract to lease and non-lease components based upon the contract or associated invoice received if applicable. Lease components include base rent, fixed rate escalators and in-substance fixed payments associated with the leased asset. Non-lease components include common area maintenance and operating expenses associated with the leased asset. We have not elected the practical expedient to combine lease and non-lease components. As such, we only include the lease component in the calculation of right of use (“ROU”) asset and lease liability. The incremental borrowing rate we use for the calculation is the rate of interest that we would pay to borrow on a collateralized basis over a similar term based upon our borrower risk profile.
Variable lease payments are not material and are included in operating lease expense as a component of operating expenses in our consolidated statement of operations. Variable lease payments are generally associated with usage-based leases and variable payment escalators such as consumer price index increases (“CPI”). Some of our land leases require us to pay a percentage of the revenue earned from leasing space on the towers we erect on the leased land. We included the payment level of CPI and percentage rent amounts in the base rent for calculating the ROU asset and lease liability. CPI adjustments and percentage rent amounts that differ from the amount included in ROU asset and liability calculations are included in variable lease payments.
We recognize leases with an initial term of 12 months or less as short-term leases and generally consist of rentals of production or broadcast equipment for short periods of time. Lease payments associated with short-term leases are expensed as incurred.
Our operating lease expenses, including variable leases, were $17 million and $12 million for the years ended December 31, 2022 and 2021, respectively. Our short-term lease expenses for the years ended December 31, 2022 and 2021 were not material. Cash flows from operations included cash paid for operating leases of $17 million and $12 million for during the years ended December 31, 2022 and 2021, respectively. Additional ROU assets recognized in the year ended December 31, 2022 and 2021 were $16 million and $21 million, respectively. As of December 31, 2022, the weighted average remaining term of our operating leases was 9.7 years. The weighted average discount rate used to calculate the values associated with our operating leases was 6.6%.
The maturities of operating lease liabilities were as follows (in millions):
Year: |
|
|
|
|
2023 |
|
$ |
14 |
|
2024 |
|
|
13 |
|
2025 |
|
|
11 |
|
2026 |
|
|
10 |
|
2027 |
|
|
9 |
|
Thereafter |
|
|
48 |
|
Total lease payments |
|
|
105 |
|
Less: Imputed interest |
|
|
(27 |
) |
Present value of lease liabilities |
|
$ |
78 |
|
We recognize deferred tax assets and liabilities for future tax consequences attributable to differences between our financial statement carrying amounts of existing assets and liabilities and their respective tax bases. We measure deferred tax assets and liabilities using enacted tax rates expected to apply to taxable income in the years in which those temporary differences are expected to reverse. We recognize the effect on deferred tax assets and liabilities resulting from a change in tax rates in income in the period that includes the date of the change.
Under certain circumstances, we recognize liabilities in our financial statements for positions taken on uncertain tax issues. When tax returns are filed, it is highly certain that some positions taken would be sustained upon examination by the taxing authorities, while others may be subject to uncertainty about the merits of the position taken or the amount of the position that would be ultimately sustained. The benefit of a tax position is recognized in the financial statements in the period during which, based on all available evidence, we believe it is more likely than not that the position will be sustained upon examination, including the resolution of appeals or litigation processes, if any. Tax positions taken are not offset or aggregated with other positions. Tax positions that meet the more-likely-than-not recognition threshold are measured as the largest amount of tax benefit that is more than 50% likely of being realized upon settlement with the applicable taxing authority. The portion of the benefits associated with tax positions taken that exceeds the amount measured as described above is reflected as a liability for unrecognized tax benefits on the balance sheets along with any associated interest and penalties that would be payable to the taxing authorities upon examination. Interest and penalties associated with unrecognized tax benefits are classified as income tax expense in the statement of operations.
Federal and state and local income tax expense is summarized as follows (in millions):
| | Year Ended December 31, | |
| | 2022 | | | 2021 | | | 2020 | |
Current: | | | | | | | | | | | | |
Federal | | $ | 148 | | | $ | 74 | | | $ | 39 | |
State and local | | | 31 | | | | 26 | | | | 20 | |
Current income tax expense | | | 179 | | | | 100 | | | | 59 | |
Deferred: | | | | | | | | | | | | |
Federal | | | (21 | ) | | | (12 | ) | | | 64 | |
State and local | | | 1 | | | | (10 | ) | | | 11 | |
Deferred income tax (benefit) expense | | | (20 | ) | | | (22 | ) | | | 75 | |
Total income tax expense | | $ | 159 | | | $ | 78 | | | $ | 134 | |
82
Significant components of our deferred tax liabilities and assets are as follows (in millions):
| | December 31, | |
| | 2022 | | | 2021 | |
Deferred tax liabilities: | | | | | | | | |
Net book value of property and equipment | | $ | 143 | | | $ | 146 | |
Broadcast licenses, goodwill and other intangible assets | | | 1,363 | | | | 1,373 | |
Other | | | 5 | | | | - | |
Total deferred tax liabilities | | | 1,511 | | | | 1,519 | |
| | | | | | | | |
Deferred tax assets: | | | | | | | | |
Liability for accrued bonus | | | 11 | | | | 9 | |
State and local operating loss carryforwards | | | 10 | | | | 24 | |
Interest expense limitation | | | 17 | | | | 4 | |
Other | | | 29 | | | | 33 | |
Total deferred tax assets | | | 67 | | | | 70 | |
Valuation allowance for deferred tax assets | | | (10 | ) | | | (22 | ) |
Net deferred tax assets | | | 57 | | | | 48 | |
| | | | | | | | |
Deferred tax liabilities, net of deferred tax assets | | $ | 1,454 | | | $ | 1,471 | |
As of December 31, 2022, we have an aggregate of approximately $344 million of various state operating loss carryforwards, of which we expect that approximately one-third will be utilized. We expect that approximately $226 million of these state net operating loss carryforwards will not be utilized due to section 382 limitations and those that will expire prior to utilization. After applying our state effective tax rate, this amount is included in our valuation allowance for deferred tax assets.
A reconciliation of income tax expense at the statutory federal income tax rate and income taxes as reflected in the consolidated financial statements for the years ended December 31, 2022, 2021 and 2020 is as follows (in millions):
| | Year Ended December 31, | |
| | 2022 | | | 2021 | | | 2020 | |
Statutory federal rate applied to income before income tax expense | | $ | 129 | | | $ | 35 | | | $ | 114 | |
Current year permanent items | | | 5 | | | | 33 | | | | 3 | |
State and local taxes, net of federal tax benefit | | | 26 | | | | 10 | | | | 27 | |
Change in valuation allowance | | | - | | | | - | | | | 1 | |
Net operating loss carryback | | | - | | | | - | | | | (7 | ) |
Other items, net | | | (1 | ) | | | - | | | | (4 | ) |
Income tax expense as recorded | | $ | 159 | | | $ | 78 | | | $ | 134 | |
| | | | | | | | | | | | |
Effective income tax rate | | | 26 | % | | | 46 | % | | | 25 | % |
As of each year end, we are required to adjust our pension liability to an amount equal to the funded status of our pension plans with a corresponding adjustment to other comprehensive income on a net of tax basis. During 2022, we decreased our recorded non-current pension liability by $20 million and recognized other comprehensive income of $15 million, net of a $5 million tax provision. During 2021, we decreased our recorded non-current pension liability by $16 million and recognized other comprehensive income of $12 million, net of a $4 million tax provision. During 2020, we increased our recorded non-current pension liability by $10 million and recognized other comprehensive loss of $8 million, net of a $2 million tax benefit.
We made income tax payments (net of refunds) of $180 million, $149 million and $70 million, during the years ended December 31, 2022, 2021 and 2020, respectively.
We prescribe a recognition threshold and measurement attribution for the financial statement recognition and measurement of a tax position taken or expected to be taken in a tax return. For benefits to be recognized, a tax position must be more likely than not to be sustained upon examination by taxing authorities.
As of December 31, 2022, we had approximately $15 million of unrecognized tax benefits. All these unrecognized tax benefits would impact our effective tax rate if recognized. The liability for unrecognized tax benefits is recorded net of any federal tax benefit that would result from payment.
We file a federal consolidated income tax return in the United States and state or local consolidated income tax returns in various state or local jurisdictions. Certain of our subsidiaries file separate tax returns in other various state and local jurisdictions. With few exceptions, we are no longer subject to federal, state and local tax examinations by tax authorities for years before 2003.
The following table summarizes the activity related to our reserve for uncertain tax positions (in millions):
| | Year Ended December 31, | |
| | 2022 | | | 2021 | | | 2020 | |
Balance at beginning of period | | $ | 15 | | | $ | 14 | | | $ | 14 | |
Additions based on tax positions related to prior years | | | - | | | | 3 | | | | - | |
Statute expirations | | | - | | | | (2 | ) | | | - | |
Balance at end of period | | $ | 15 | | | $ | 15 | | | $ | 14 | |
If our reserve for unrecognized tax positions, as presented above, were to be recognized, there would be a favorable impact on the Company’s reported income tax expense in the period recognized.
We recognize accrued interest and penalties related to uncertain tax positions in income tax expense in the accompanying Consolidated Statements of Operations and Consolidated Statements of Comprehensive Income. During the years ended December 31, 2022, 2021, and 2020, our penalty and interest expense related to uncertain tax positions was not material. At December 31, 2022 and 2021, the total accrual for interest and penalties related to uncertain tax positions was $1 million.
On March 27, 2020, the CARES Act was enacted in response to the COVID-19 global pandemic. The CARES Act, among other things, contains modifications on the limitation of business interest for tax years beginning in 2019 and 2020, and permits net operating loss carryovers and carrybacks to offset 100% of taxable income for taxable years beginning before 2021. In addition, the CARES Act allows NOLs incurred in 2018, 2019, and 2020 to be carried back to each of the five preceding taxable years to generate a refund of previously paid income taxes. During 2020, we carried back certain NOLs resulting in a refund of $21 million, that is currently outstanding.
We sponsor and contribute to defined benefit and defined contribution retirement plans. The Gray Television, Inc. Retirement Plan (“Gray Pension Plan”) is a defined benefit pension plan. Benefits under the Gray Pension Plan are frozen and can no longer increase, and no new participants can be added to the Gray Pension Plan.
The Gray Pension Plan’s funding policy is consistent with the funding requirements of existing federal laws and regulations under the Employee Retirement Income Security Act of 1974. The measurement dates used to determine the benefit information for the Gray Pension Plan were December 31, 2022 and 2021, respectively. The following summarizes the Gray Pension Plan’s funded status and amounts recognized on our consolidated balance sheets at December 31, 2022 and 2021, respectively (in millions):
|
|
December 31, |
|
|
|
2022 |
|
|
2021 |
|
Change in projected benefit obligation: |
|
|
|
|
|
|
|
|
Projected benefit obligation at beginning of year |
|
$ |
140 |
|
|
$ |
151 |
|
Interest cost |
|
|
4 |
|
|
|
4 |
|
Actuarial (gain) loss |
|
|
(38 |
) |
|
|
(11 |
) |
Benefits paid |
|
|
(4 |
) |
|
|
(4 |
) |
Projected benefit obligation at end of year |
|
$ |
102 |
|
|
$ |
140 |
|
|
|
|
|
|
|
|
|
|
Change in plan assets: |
|
|
|
|
|
|
|
|
Fair value of pension plan assets at beginning of year |
|
$ |
119 |
|
|
$ |
108 |
|
Actual return on plan assets |
|
|
(14 |
) |
|
|
12 |
|
Company contributions |
|
|
4 |
|
|
|
4 |
|
Benefits paid |
|
|
(5 |
) |
|
|
(5 |
) |
Fair value of pension plan assets at end of year |
|
|
104 |
|
|
|
119 |
|
Funded status of pension plan |
|
$ |
2 |
|
|
$ |
(21 |
) |
|
|
|
|
|
|
|
|
|
Amounts recognized on our balance sheets consist of: |
|
|
|
|
|
|
|
|
Accrued benefit cost |
|
$ |
21 |
|
|
$ |
15 |
|
Accumulated other comprehensive loss |
|
|
(19 |
) |
|
|
(36 |
) |
Net asset (liability) recognized |
|
$ |
2 |
|
|
$ |
(21 |
) |
85
Because the Gray Pension Plan is a frozen plan, the projected benefit obligation and the accumulated benefit obligation are the same. The accumulated benefit obligation was $102 million and $140 million at December 31, 2022 and 2021, respectively. The long-term rate of return on assets assumption was chosen from a best estimate range based upon the anticipated long-term returns for asset categories in which the Gray Pension Plan is invested. An estimate of the rate of increase in compensation levels used to calculate the net periodic benefit cost is not required because of the Plan’s frozen status:
|
|
Year Ended December 31, |
|
|
|
2022 |
|
|
2021 |
|
Weighted-average assumptions used to determine net periodic benefit cost for the Gray Pension Plan: |
|
|
|
|
|
|
|
|
Discount rate |
|
|
2.73 |
% |
|
|
2.38 |
% |
Expected long-term rate of return on pension plan assets |
|
|
6.25 |
% |
|
|
6.25 |
% |
Estimated rate of increase in compensation levels |
|
|
N/A |
|
|
|
N/A |
|
|
|
As of December 31, |
|
|
|
2022 |
|
|
2021 |
|
Weighted-average assumptions used to determine benefit obligations: |
|
|
|
|
|
|
|
|
Discount rate |
|
|
4.99 |
% |
|
|
2.73 |
% |
Pension expense is computed using the projected unit credit actuarial cost method. The net periodic pension cost for the Gray Pension Plan includes the following components (in millions):
|
|
Year Ended December 31, |
|
|
|
2022 |
|
|
2021 |
|
|
2020 |
|
Components of net periodic pension cost: |
|
|
|
|
|
|
|
|
|
|
|
|
Interest cost |
|
$ |
4 |
|
|
$ |
4 |
|
|
$ |
4 |
|
Expected return on plan assets |
|
|
(8 |
) |
|
|
(7 |
) |
|
|
(6 |
) |
Recognized net actuarial loss |
|
|
1 |
|
|
|
1 |
|
|
|
1 |
|
Net periodic pension benefit |
|
$ |
(3 |
) |
|
$ |
(2 |
) |
|
$ |
(1 |
) |
For the Gray Pension Plan, the estimated future benefit payments are as follows (in millions):
Years |
|
|
Amount |
|
2023 |
|
|
$ |
5 |
|
2024 |
|
|
|
5 |
|
2025 |
|
|
|
5 |
|
2026 |
|
|
|
6 |
|
2027 |
|
|
|
6 |
|
2028 |
- |
2032 |
|
|
|
32 |
|
The Gray Pension Plan’s weighted-average asset allocations by asset category were as follows:
|
|
As of December 31, |
|
|
|
2022 |
|
|
2021 |
|
Asset category: |
|
|
|
|
|
|
|
|
Insurance general account |
|
|
14 |
% |
|
|
13 |
% |
Cash management accounts |
|
|
4 |
% |
|
|
2 |
% |
Equity accounts |
|
|
51 |
% |
|
|
50 |
% |
Fixed income accounts |
|
|
28 |
% |
|
|
33 |
% |
Real estate accounts |
|
|
3 |
% |
|
|
2 |
% |
Total |
|
|
100 |
% |
|
|
100 |
% |
The investment objective is to achieve a consistent total rate of return (income, appreciation, and reinvested funds) that will equal or exceed the actuarial assumption with aversion to significant volatility. The following is the target asset allocation:
|
|
Target Range |
|
Asset class: |
|
Strategic Allocation |
|
|
Lower Limit |
|
|
Upper Limit |
|
Equities: |
|
|
|
|
|
|
|
|
|
|
|
|
Large Cap Blend |
|
|
27.0 |
% |
|
|
0.0 |
% |
|
|
50.0 |
% |
Mid Cap Blend |
|
|
10.0 |
% |
|
|
0.0 |
% |
|
|
40.0 |
% |
Small Cap Blend |
|
|
6.0 |
% |
|
|
0.0 |
% |
|
|
25.0 |
% |
Foreign Large Blend |
|
|
11.0 |
% |
|
|
0.0 |
% |
|
|
40.0 |
% |
Emerging Markets |
|
|
3.0 |
% |
|
|
0.0 |
% |
|
|
25.0 |
% |
Real Estate |
|
|
3.0 |
% |
|
|
0.0 |
% |
|
|
20.0 |
% |
Fixed Income: |
|
|
|
|
|
|
|
|
|
|
|
|
U.S. Treasury Inflation Protected |
|
|
3.5 |
% |
|
|
0.0 |
% |
|
|
25.0 |
% |
Intermediate Core Plus Bond |
|
|
25.0 |
% |
|
|
0.0 |
% |
|
|
50.0 |
% |
Short-Term Bond |
|
|
3.0 |
% |
|
|
0.0 |
% |
|
|
25.0 |
% |
Bank Loan |
|
|
0.0 |
% |
|
|
0.0 |
% |
|
|
25.0 |
% |
High Yield Bond |
|
|
4.0 |
% |
|
|
0.0 |
% |
|
|
25.0 |
% |
Emerging Markets Bond |
|
|
3.0 |
% |
|
|
0.0 |
% |
|
|
20.0 |
% |
Money Market Taxable |
|
|
1.5 |
% |
|
|
0.0 |
% |
|
|
100.0 |
% |
Our equity portfolio contains securities of companies necessary to build a diversified portfolio, and that we believe are financially sound. Our fixed income portfolio contains obligations generally rated A or better with no maturity restrictions and an actively managed duration. The cash equivalents strategy uses securities of the highest credit quality.
Fair Value of Gray Pension Plan Assets. We calculate the fair value of the Gray Pension Plan’s assets based upon the observable and unobservable net asset value of its underlying investments. We utilize valuation techniques that maximize the use of observable inputs and minimize the use of unobservable inputs. These inputs are prioritized by the fair value hierarchy proscribed by ASU Topic 820, described in Note 5 “Fair Value Measurement.”
The following table presents the fair value of the Gray Pension Plan’s assets and classifies them by level within the fair value hierarchy as of December 31, 2022 and 2021 (in millions):
|
|
As of December 31, 2022 |
|
|
|
Level 1 |
|
|
Level 2 |
|
|
Level 3 |
|
|
Total |
|
Assets: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Insurance general account |
|
$ |
- |
|
|
$ |
15 |
|
|
$ |
- |
|
|
$ |
15 |
|
Cash management accounts |
|
|
4 |
|
|
|
- |
|
|
|
- |
|
|
|
4 |
|
Equity accounts |
|
|
53 |
|
|
|
- |
|
|
|
- |
|
|
|
53 |
|
Fixed income accounts |
|
|
29 |
|
|
|
- |
|
|
|
- |
|
|
|
29 |
|
Real estate accounts |
|
|
3 |
|
|
|
- |
|
|
|
- |
|
|
|
3 |
|
Total |
|
$ |
89 |
|
|
$ |
15 |
|
|
$ |
- |
|
|
$ |
104 |
|
|
|
As of December 31, 2021 |
|
|
|
Level 1 |
|
|
Level 2 |
|
|
Level 3 |
|
|
Total |
|
Assets: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Insurance general account |
|
$ |
- |
|
|
$ |
15 |
|
|
$ |
- |
|
|
$ |
15 |
|
Cash management accounts |
|
|
3 |
|
|
|
- |
|
|
|
- |
|
|
|
3 |
|
Equity accounts |
|
|
59 |
|
|
|
- |
|
|
|
- |
|
|
|
59 |
|
Fixed income account |
|
|
39 |
|
|
|
- |
|
|
|
- |
|
|
|
39 |
|
Real estate accounts |
|
|
3 |
|
|
|
- |
|
|
|
- |
|
|
|
3 |
|
Total |
|
$ |
104 |
|
|
$ |
15 |
|
|
$ |
- |
|
|
$ |
119 |
|
Expected Pension Contributions. We expect to contribute a combined total of approximately $4 million to our frozen defined benefit pension plan during the year ending December 31, 2023.
Capital Accumulation Plan. The Gray Television, Inc. Capital Accumulation Plan (the “Capital Accumulation Plan”) is a defined contribution plan intended to meet the requirements of Section 401(k) of the Internal Revenue Code. In 2022, employer contributions under the Capital Accumulation Plan include matching cash contributions at a rate of 100% of the first 1% of each employee’s salary deferral, and 50% of the next 5% of each employee’s salary deferral. For the years ended December 31, 2022, 2021 and 2020, our matching contributions to our Capital Accumulation Plan were approximately $17 million, $15 million and $13 million, respectively. We estimate that our matching cash contributions to the Capital Accumulation Plan for 2023 will be approximately $25 million.
In addition, the Company, at its discretion, may make an additional profit-sharing contribution, based on annual Company performance, to those employees who meet certain criteria. For the years ended December 31, 2022, 2021 and 2020, we accrued contributions of approximately $9 million, $7 million and $6 million, respectively, as discretionary profit sharing contributions. Each of these discretionary profit-sharing contributions was subsequently made in the form of shares of our common stock. We may also make matching and discretionary contributions of our common stock under the Capital Accumulation Plan. As of December 31, 2022, we had 2.8 million shares of common stock reserved for issuance under this plan.
Meredith Plan. In connection with the Meredith Transaction, On December 1, 2021, we assumed a defined benefit pension plan covering certain legacy Meredith bargaining class employees. At December 31, 2022, this plan has combined plan assets of $14 million and combined projected benefit obligations of $11 million. The net asset for this plan is recorded as an asset in our financial statements as of December 31, 2022.
12. |
Commitments and Contingencies |
From time to time we may have various contractual and other commitments requiring future payments. These commitments may include amounts required to be paid for: the acquisition of television stations; the purchase of property and equipment; service and other agreements; commitments for various syndicated television programs; and commitments under affiliation agreements with networks. Certain network affiliation agreements include variable fee components such as percentage of revenue or rate per subscriber. Future estimated minimum payments for these commitments, in addition to the liabilities accrued for on our consolidated balance sheets as of December 31, 2022, were as follows (in millions):
|
|
Service and |
|
|
|
|
|
|
Syndicated |
|
|
Network |
|
|
|
|
|
|
|
Other |
|
|
Assembly |
|
|
Television |
|
|
Affiliation |
|
|
|
|
|
Year |
|
Agreements |
|
|
Development |
|
|
Programming |
|
|
Agreements |
|
|
Total |
|
2023 |
|
$ |
56 |
|
|
$ |
156 |
|
|
$ |
8 |
|
|
$ |
967 |
|
|
$ |
1,187 |
|
2024 |
|
|
39 |
|
|
|
- |
|
|
|
25 |
|
|
|
716 |
|
|
|
780 |
|
2025 |
|
|
19 |
|
|
|
- |
|
|
|
15 |
|
|
|
177 |
|
|
|
211 |
|
2026 |
|
|
7 |
|
|
|
- |
|
|
|
- |
|
|
|
- |
|
|
|
7 |
|
2027 |
|
|
2 |
|
|
|
- |
|
|
|
- |
|
|
|
- |
|
|
|
2 |
|
Total |
|
$ |
123 |
|
|
$ |
156 |
|
|
$ |
48 |
|
|
$ |
1,860 |
|
|
$ |
2,187 |
|
Legal Proceedings and Claims. We are and expect to continue to be subject to legal actions, proceedings and claims that arise in the normal course of our business. In the opinion of management, the amount of ultimate liability, if any, with respect to these known actions, proceedings and claims will not materially affect our financial condition, results of operations or cash flows, although legal proceedings are subject to inherent uncertainties, and unfavorable rulings or events could result in materially adverse outcomes.
Local TV Advertising Antitrust Litigation. In 2018, several broadcasting companies, including Raycom Media (which the Company subsequently acquired in January 2019) and Meredith Corporation (which the Company acquired in December 2021) agreed to enter into substantially identical consent decrees with the Department of Justice (the “DOJ”). This consent decree provided for the settlement of a confidential investigation by the DOJ into the alleged exchange of certain competitively sensitive information relating to advertising sales among certain stations in some local markets. The consent decree and related settlement were finalized on May 22, 2019. The consent decree is not an admission of any wrongdoing by the parties and does not subject the parties to any monetary damages or penalties. The consent decree requires the parties to adopt certain antitrust compliance measures, including the appointment of an Antitrust Compliance Officer, consistent with what the DOJ has required in previous consent decrees in other industries. The consent decree also requires the parties’ stations not exchange pacing and certain other information with other stations in their local markets, which aligns with Gray’s current policy. Gray Television, Inc. was not a subject of or party to any consent decree or settlement thereof, although certain of the Company’s operations that we later acquired from Raycom and Meredith do remain subject to the terms of such settlement.
Following published reports of the DOJ investigation and settlement, various putative class action lawsuits were filed against a number of owners of television stations. The cases have been consolidated in a single multidistrict litigation in the District Court for the Northern District of Illinois under the caption In re Local TV Advertising Litigation and the Plaintiffs’ operative complaint alleges price fixing and unlawful information exchange among the defendants’ advertisement sales teams. Gray is a defendant solely due to its acquisition of Raycom and Meredith, who were named defendants. The consolidated action seeks damages, attorneys’ fees, costs and interest, as well as injunctions against adopting practices or plans that would restrain competition in the ways the plaintiffs have alleged. The Company believes the lawsuits are without merit and intends to vigorously defend itself against all such claims.
13. |
Goodwill and Intangible Assets |
During the years ended December 31, 2022 and 2021, we acquired, adjusted and disposed of various television broadcast stations and broadcast licenses. As a result of these transactions, our goodwill and intangible balances changed during each of these years. See Note 3 “Acquisitions and Divestitures” for more information regarding these transactions. The following table presents a summary of changes in our goodwill and other intangible assets, on a net basis (in millions):
|
|
Net Balance at |
|
|
Acquisitions |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net Balance at |
|
|
|
December 31, |
|
|
and |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
December 31, |
|
|
|
2021 |
|
|
Adjustments |
|
|
Dispositions |
|
|
Impairment |
|
|
Amortization |
|
|
2022 |
|
Goodwill |
|
$ |
2,649 |
|
|
$ |
14 |
|
|
$ |
- |
|
|
$ |
- |
|
|
$ |
- |
|
|
$ |
2,663 |
|
Broadcast licenses |
|
|
5,303 |
|
|
|
28 |
|
|
|
- |
|
|
|
- |
|
|
|
- |
|
|
|
5,331 |
|
Finite-lived intangible assets |
|
|
825 |
|
|
|
18 |
|
|
|
- |
|
|
|
- |
|
|
|
(207 |
) |
|
|
636 |
|
Total intangible assets net of accumulated amortization |
|
$ |
8,777 |
|
|
$ |
60 |
|
|
$ |
- |
|
|
$ |
- |
|
|
$ |
(207 |
) |
|
$ |
8,630 |
|
|
|
Net Balance at |
|
|
Acquisitions |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net Balance at |
|
|
|
December 31, |
|
|
and |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
December 31, |
|
|
|
2020 |
|
|
Adjustments |
|
|
Dispositions |
|
|
Impairment |
|
|
Amortization |
|
|
2021 |
|
Goodwill |
|
$ |
1,460 |
|
|
$ |
1,211 |
|
|
$ |
(22 |
) |
|
$ |
- |
|
|
$ |
- |
|
|
$ |
2,649 |
|
Broadcast licenses |
|
|
3,579 |
|
|
|
1,771 |
|
|
|
(47 |
) |
|
|
- |
|
|
|
- |
|
|
|
5,303 |
|
Finite-lived intangible assets |
|
|
395 |
|
|
|
547 |
|
|
|
- |
|
|
|
- |
|
|
|
(117 |
) |
|
|
825 |
|
Total intangible assets net of accumulated amortization |
|
$ |
5,434 |
|
|
$ |
3,529 |
|
|
$ |
(69 |
) |
|
$ |
- |
|
|
$ |
(117 |
) |
|
$ |
8,777 |
|
90
The following table presents a summary of changes in our goodwill, on a gross basis (in millions):
|
|
|
|
|
|
Acquisitions |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
As of |
|
|
and |
|
|
|
|
|
|
|
|
|
|
As of |
|
|
|
December 31, 2021 |
|
|
Adjustments |
|
|
Dispositions |
|
|
Impairment |
|
|
December 31, 2022 |
|
Goodwill, gross |
|
$ |
2,748 |
|
|
$ |
14 |
|
|
$ |
- |
|
|
$ |
- |
|
|
$ |
2,762 |
|
Accumulated goodwill impairment |
|
|
(99 |
) |
|
|
- |
|
|
|
- |
|
|
|
- |
|
|
|
(99 |
) |
Goodwill, net |
|
$ |
2,649 |
|
|
$ |
14 |
|
|
$ |
- |
|
|
$ |
- |
|
|
$ |
2,663 |
|
|
|
|
|
|
|
Acquisitions |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
As of |
|
|
and |
|
|
|
|
|
|
|
|
|
|
As of |
|
|
|
December 31, 2020 |
|
|
Adjustments |
|
|
Dispositions |
|
|
Impairment |
|
|
December 31, 2021 |
|
Goodwill, gross |
|
$ |
1,559 |
|
|
$ |
1,211 |
|
|
$ |
(22 |
) |
|
$ |
- |
|
|
$ |
2,748 |
|
Accumulated goodwill impairment |
|
|
(99 |
) |
|
|
- |
|
|
|
- |
|
|
|
- |
|
|
|
(99 |
) |
Goodwill, net |
|
$ |
1,460 |
|
|
$ |
1,211 |
|
|
$ |
(22 |
) |
|
$ |
- |
|
|
$ |
2,649 |
|
The following table presents a summary of our intangible assets and related accumulated amortization (in millions):
|
|
As of December 31, 2022 |
|
|
As of December 31, 2021 |
|
|
|
|
|
|
|
Accumulated |
|
|
|
|
|
|
|
|
|
|
Accumulated |
|
|
|
|
|
|
|
Gross |
|
|
Amortization |
|
|
Net |
|
|
Gross |
|
|
Amortization |
|
|
Net |
|
Intangible assets not currently subject to amortization: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Broadcast licenses |
|
$ |
5,385 |
|
|
$ |
(54 |
) |
|
$ |
5,331 |
|
|
$ |
5,356 |
|
|
$ |
(53 |
) |
|
$ |
5,303 |
|
Goodwill |
|
|
2,663 |
|
|
|
- |
|
|
|
2,663 |
|
|
|
2,649 |
|
|
|
- |
|
|
|
2,649 |
|
|
|
$ |
8,048 |
|
|
$ |
(54 |
) |
|
$ |
7,994 |
|
|
$ |
8,005 |
|
|
$ |
(53 |
) |
|
$ |
7,952 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Intangible assets subject to amortization: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Network affiliation agreements |
|
$ |
218 |
|
|
$ |
(88 |
) |
|
$ |
130 |
|
|
$ |
204 |
|
|
$ |
(44 |
) |
|
$ |
160 |
|
Other finite-lived intangible assets |
|
|
1,055 |
|
|
|
(549 |
) |
|
|
506 |
|
|
|
1,051 |
|
|
|
(386 |
) |
|
|
665 |
|
|
|
$ |
1,273 |
|
|
$ |
(637 |
) |
|
$ |
636 |
|
|
$ |
1,255 |
|
|
$ |
(430 |
) |
|
$ |
825 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total intangible assets |
|
$ |
9,321 |
|
|
$ |
(691 |
) |
|
$ |
8,630 |
|
|
$ |
9,260 |
|
|
$ |
(483 |
) |
|
$ |
8,777 |
|
Based on our intangible assets subject to amortization as of December 31, 2022, we expect that amortization of intangible assets for the succeeding five years will be as follows: 2023, $197 million; 2024, $132 million; 2025, $121 million; 2026, $91 million; and 2027, $49 million. If and when acquisitions and dispositions occur in the future, actual amounts may vary from these estimates.
Impairment of goodwill and broadcast licenses. We evaluate broadcast licenses and goodwill for impairment on an annual basis, or more often when certain triggering events occur. Goodwill is evaluated at the reporting unit level.
Our broadcasting operating segment is comprised of a single reporting unit. Each of the distinct businesses within our production companies operating segment represent a reporting unit. Therefore, we evaluate our goodwill for impairment for five reporting units. One reporting unit for all of our broadcast television operations and four for each of the distinct businesses within our production companies. The Company has considered the requirements as stipulated within ASC 350. Management has identified the applicable assets and liabilities for each of the reporting units in accordance with ASC 350.
In the performance of our annual broadcast license and reporting unit impairment assessments, we have the option of performing a qualitative assessment to determine if it is more likely than not that the respective asset has been impaired. In 2022, we performed a qualitative assessment for 57 of our broadcast licenses and one of our reporting units. In 2021, we performed a qualitative assessment for 59 of our broadcast licenses and one of our reporting units.
As part of this qualitative assessment we evaluate the relative impact of factors that are specific to the reporting units as well as industry, regulatory, and macroeconomic factors that could affect the significant inputs used to determine the fair value of the assets. We also consider the significance of the excess fair value over the carrying value reflected in prior quantitative assessments and the changes to the reporting units’ carrying value since the last impairment test.
If we conclude that it is more likely than not that a broadcast license or reporting unit is impaired, or if we elect not to perform the optional qualitative assessment, we perform the quantitative assessment which involves comparing the estimated fair value of the broadcast license or reporting unit to its respective carrying value.
For our annual broadcast licenses impairment test in 2022 and 2021, we concluded that it was more likely than not that all of our broadcast licenses that were evaluated were not impaired based upon our qualitative assessments. We elected to perform a quantitative assessment for our remaining broadcast licenses and concluded that their fair values exceeded their carrying values. To estimate the fair value of our broadcast licenses, we utilize a discounted cash flow model assuming an initial hypothetical start-up operation maturing into an average performing station in a specific television market and giving consideration to other relevant factors such as the technical qualities of the broadcast license and the number of competing broadcast licenses within that market.
For our annual goodwill impairment test in 2022 and 2021, we concluded that it was more likely than not that goodwill was not impaired based upon our qualitative assessments for one of our production company reporting units. We elected to perform a quantitative assessment for our broadcasting and remaining production company reporting units and concluded that their fair values exceeded their carrying values. To estimate the fair value of our reporting units, we utilize a discounted cash flow model supported by a market multiple approach. We believe that a discounted cash flow analysis is the most appropriate methodology to test the recorded value of long-term assets with a demonstrated long-lived/enduring franchise value. We believe the results of the discounted cash flow and market multiple approaches provide reasonable estimates of the fair value of our reporting units because these approaches are based on our actual results and reasonable estimates of future performance, and also take into consideration a number of other factors deemed relevant by us including, but not limited to, expected future market revenue growth, market revenue shares and operating profit margins. We have historically used these approaches in determining the value of our reporting units. We also consider a market multiple approach to corroborate our discounted cash flow analysis. We believe that this methodology is consistent with the approach that a strategic market participant would utilize if they were to value our television stations.
We believe we have made reasonable estimates and utilized appropriate assumptions to evaluate whether the fair values of our broadcast licenses and reporting units were less than their carrying values. If future results are not consistent with our assumptions and estimates, including future events such as a deterioration of market conditions or significant increases in discount rates, we could be exposed to impairment charges in the future. Any resulting impairment loss could have a material adverse impact on our consolidated balance sheets, consolidated statements of operations and consolidated statements of cash flows.
See Note 1 “Description of Business and Summary of Significant Accounting Policies” for further discussion of our accounting policies regarding goodwill, broadcast licenses and other intangible assets.
During the years ended December 31, 2022, 2021 and 2020, we operated in two business segments, broadcasting and production companies. The broadcasting segment operates television stations in local markets in the United States. The production companies segment includes the production of television and event content. Costs identified as other are primarily corporate and administrative expenses. The following tables present our business segment information (in millions):
|
|
|
|
|
|
Production |
|
|
|
|
|
|
|
|
|
As of and for the Year ended December 31, 2022: |
|
Broadcasting |
|
|
Companies |
|
|
Other |
|
|
Consolidated |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Revenue (less agency commissions) |
|
$ |
3,583 |
|
|
$ |
93 |
|
|
$ |
- |
|
|
$ |
3,676 |
|
Operating expenses before depreciation, amortization and loss on disposal of assets, net: |
|
|
2,165 |
|
|
|
83 |
|
|
|
104 |
|
|
|
2,352 |
|
Depreciation and amortization |
|
|
321 |
|
|
|
12 |
|
|
|
3 |
|
|
|
336 |
|
Gain on disposal of assets, net |
|
|
(2 |
) |
|
|
- |
|
|
|
- |
|
|
|
(2 |
) |
Total operating expenses |
|
|
2,484 |
|
|
|
95 |
|
|
|
107 |
|
|
|
2,686 |
|
Operating income (loss) |
|
$ |
1,099 |
|
|
$ |
(2 |
) |
|
$ |
(107 |
) |
|
$ |
990 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest expense |
|
$ |
- |
|
|
$ |
- |
|
|
$ |
354 |
|
|
$ |
354 |
|
Capital expenditures (excluding business combinations) |
|
$ |
163 |
|
|
$ |
267 |
|
|
$ |
6 |
|
|
$ |
436 |
|
Goodwill |
|
$ |
2,618 |
|
|
$ |
45 |
|
|
$ |
- |
|
|
$ |
2,663 |
|
Total assets |
|
$ |
10,444 |
|
|
$ |
535 |
|
|
$ |
173 |
|
|
$ |
11,152 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
As of and for the Year ended December 31, 2021: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Revenue (less agency commissions) |
|
$ |
2,340 |
|
|
$ |
73 |
|
|
$ |
- |
|
|
$ |
2,413 |
|
Operating expenses before depreciation, amortization and (gain) loss on disposal of assets, net: |
|
|
1,548 |
|
|
|
62 |
|
|
|
159 |
|
|
|
1,769 |
|
Depreciation and amortization |
|
|
206 |
|
|
|
12 |
|
|
|
3 |
|
|
|
221 |
|
Loss on disposal of assets, net |
|
|
41 |
|
|
|
- |
|
|
|
1 |
|
|
|
42 |
|
Total operating expenses |
|
|
1,795 |
|
|
|
74 |
|
|
|
163 |
|
|
|
2,032 |
|
Operating income (loss) |
|
$ |
545 |
|
|
$ |
(1 |
) |
|
$ |
(163 |
) |
|
$ |
381 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest expense |
|
$ |
- |
|
|
$ |
- |
|
|
$ |
205 |
|
|
$ |
205 |
|
Capital expenditures (excluding business combinations) |
|
$ |
94 |
|
|
$ |
110 |
|
|
$ |
3 |
|
|
$ |
207 |
|
Goodwill |
|
$ |
2,604 |
|
|
$ |
45 |
|
|
$ |
- |
|
|
$ |
2,649 |
|
Total assets |
|
$ |
10,592 |
|
|
$ |
269 |
|
|
$ |
247 |
|
|
$ |
11,108 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
As of and for the Year ended December 31, 2020: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Revenue (less agency commissions) |
|
$ |
2,320 |
|
|
$ |
61 |
|
|
$ |
- |
|
|
$ |
2,381 |
|
Operating expenses before depreciation, amortization and gain on disposal of assets, net: |
|
|
1,340 |
|
|
|
52 |
|
|
|
65 |
|
|
|
1,457 |
|
Depreciation and amortization |
|
|
186 |
|
|
|
12 |
|
|
|
3 |
|
|
|
201 |
|
(Gain) loss on disposal of assets, net |
|
|
(31 |
) |
|
|
2 |
|
|
|
- |
|
|
|
(29 |
) |
Operating expenses |
|
|
1,495 |
|
|
|
66 |
|
|
|
68 |
|
|
|
1,629 |
|
Operating income (loss) |
|
$ |
825 |
|
|
$ |
(5 |
) |
|
$ |
(68 |
) |
|
$ |
752 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest expense |
|
$ |
- |
|
|
$ |
- |
|
|
$ |
191 |
|
|
$ |
191 |
|
Capital expenditures (excluding business combinations) |
|
$ |
106 |
|
|
$ |
4 |
|
|
$ |
- |
|
|
$ |
110 |
|
Goodwill |
|
$ |
1,419 |
|
|
$ |
41 |
|
|
$ |
- |
|
|
$ |
1,460 |
|
Total assets |
|
$ |
6,631 |
|
|
$ |
141 |
|
|
$ |
871 |
|
|
$ |
7,643 |
|
Marquee Transaction. On February 15, 2023, we announced that we have reached agreements with Marquee Broadcasting, Inc. (“Marquee”) through which we will sell television station KNIN (FOX) in the Boise, Idaho market (DMA 102) for $6 million, and purchase television station WPGA (MeTV) in the Macon, Georgia market (DMA 126) for $6 million. The completion of the transactions is subject to regulatory and other approvals.
Securitization Facility. On February 23, 2023, we, certain of our subsidiaries and a wholly-owned special purpose subsidiary (the “SPV”), entered into a three-year $300 million revolving accounts receivable securitization facility (the “Securitization Facility”) with Wells Fargo Bank, N.A., as administrative agent, for the purpose of providing additional liquidity in order to repay indebtedness under the Senior Credit Facility. The Securitization Facility permits the SPV to draw up to a total of $300 million, subject to the outstanding amount of the receivables pool and other factors. The Securitization Facility is subject to interest charges, at the one-month Secured Overnight Financing Rate (“SOFR”) plus 100 basis points on the amount of the outstanding facility. The SPV is also required to pay an upfront fee and a commitment fee in connection with the Securitization Facility. On February 23, 2023, we drew $300 million under the Securitization Facility and intend to use the proceeds to pre-pay the outstanding principal balance of $295 million of Term Loan B under our Senior Credit Facility on March 1, 2023.
Under the Securitization Facility, the SPV will sell certain receivables and related rights (“Sold Receivables”) and guarantee the collection of the Sold Receivables and pledge the remaining receivables and related rights that it owns in order to secure such guarantee. We will service the accounts receivables on behalf of the SPV for a fee.
The SPV is a separate legal entity with its own separate creditors who will be entitled to access the SPV’s assets before the assets become available to us. As a result, the SPV’s assets are not available to pay our creditors or any of our subsidiaries, although collections from the receivables in excess of amounts required to repay the purchasers under the Securitization Facility and other creditors of the SPV may be remitted to us.
The sale of receivables from SPV will be accounted for in the Company’s financial statements as a "true-sale" under Accounting Standards Codification ("ASC") Topic 860.
Interest Rate Cap. On February 23, 2023, we entered into interest rate caps pursuant to an International Swaps and Derivatives Association ("ISDA") Master Agreement with Wells Fargo Bank, NA and Truist Bank, respectively. The caps have a combined fixed notional value of approximately $2.6 billion through the last business day in 2024 and then a reduction in notional value to approximately $2.1 billion until maturity on December 31, 2025. The agreement effectively limits the annual interest charged on all of our variable rate debt to a maximum one-month LIBOR rate of 5 percent, plus the Applicable Margin, as specified in our Senior Credit Facility. The Company is also required to pay aggregate fees in connection with the agreement of approximately $32 million that is due and payable on December 31, 2025. The ISDA Master Agreement, together with its related schedules, contain customary representations, warranties and covenants. This hedging agreement was entered into to mitigate the interest rate risk inherent in our variable rate debt and is not for speculative trading purposes.