NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
The accompanying condensed consolidated balance sheet of Gray Television, Inc. (and its consolidated subsidiaries, except as the context otherwise provides,“Gray,” the “Company,” “we,” “us,” and “our”) as of December 31, 2022, which was derived from the Company’s audited financial statements as of December 31, 2022, and our accompanying unaudited condensed consolidated financial statements as of March 31, 2023 and for the three-month periods ended March 31, 2023 and 2022, have been prepared in accordance with accounting principles generally accepted in the United States of America (“U.S. GAAP”) for interim financial information and with the instructions to Form 10-Q and Article 10 of Regulation S-X. Accordingly, certain information and note disclosures normally included in annual financial statements prepared in accordance with U.S. GAAP have been condensed or omitted pursuant to those rules and regulations, although we believe that the disclosures made are adequate to make the information not misleading. In our opinion, all adjustments (consisting only of normal recurring adjustments) considered necessary for a fair presentation have been included. We manage our business on the basis of two operating segments: broadcasting and production companies. Unless otherwise indicated, all station rank, in-market share and television household data herein are derived from reports prepared by The Nielsen Company, LLC (“Nielsen”) and/or Comscore, Inc. (“Comscore”). While we believe this data to be accurate and reliable, we have not independently verified such data nor have we ascertained the underlying assumptions relied upon therein, and cannot guarantee the accuracy or completeness of such data. For further information, refer to the consolidated financial statements and footnotes thereto included in our Annual Report on Form 10-K for the year ended December 31, 2022 (the “2022 Form 10-K”). Our financial condition as of, and operating results for the three-months ended March 31, 2023, are not necessarily indicative of the financial condition or results that may be expected for any future interim period or for the year ending December 31, 2023.
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 80 markets with the top-rated television station and 102 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. Gains or losses resulting from changes in the carrying value of these investments are included as miscellaneous (expense) income, 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.
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 U.S. 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, in the diluted weighted-average shares outstanding calculation, unless their inclusion would be antidilutive.
The following table reconciles basic weighted-average common shares outstanding to diluted weighted-average common shares outstanding for the three-months ended March 31, 2023 and 2022, respectively (in millions):
| | Three Months Ended | |
| | March 31, | |
| | 2023 | | | 2022 | |
| | | | | | | | |
Weighted-average common shares outstanding-basic | | | 92 | | | | 93 | |
Common stock equivalents for stock options and restricted stock | | | - | | | | 1 | |
Weighted-average common shares outstanding-diluted | | | 92 | | | | 94 | |
Accumulated Other Comprehensive Loss. Our accumulated other comprehensive loss balances as of March 31, 2023 and December 31, 2022, consist of adjustments to our pension liability and changes in the fair value of our interest rate cap, each net of tax. Our comprehensive income for the three-months ended March 31, 2023 and 2022 consisted of our net income and recognition of the initial fair value adjustment related to our interest rate cap, and the related income tax benefit. As of March 31, 2023 and December 31, 2022 the balances were as follows (in millions):
| | March 31, | | | December 31, | |
| | 2023 | | | 2022 | |
Items included in accumulated other comprehensive loss: | | | | | | | | |
Adjustment to pension liability | | $ | (16 | ) | | $ | (16 | ) |
Adjustment to fair value of interest rate caps | | | (15 | ) | | | - | |
Income tax benefit | | | (8 | ) | | | (4 | ) |
Accumulated other comprehensive loss | | $ | (23 | ) | | $ | (12 | ) |
Property and Equipment. Property and equipment are carried 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 | |
| | March 31, | | | December 31, | | | Useful Lives | |
| | 2023 | | | 2022 | | | (in years) | |
Property and equipment: | | | | | | | | | | | | | |
Land | | $ | 289 | | | $ | 290 | | | | | | |
Buildings and improvements | | | 480 | | | | 477 | | | 7 | to | 40 | |
Equipment | | | 1,035 | | | | 1,027 | | | 3 | to | 20 | |
Construction in progress | | | 431 | | | | 362 | | | | | | |
| | | 2,235 | | | | 2,156 | | | | | | |
Accumulated depreciation | | | (714 | ) | | | (690 | ) | | | | | |
Total property and equipment, net | | $ | 1,521 | | | $ | 1,466 | | | | | | |
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.
We incurred costs to build public infrastructure within the Assembly Atlanta project. Pursuant to the Purchase and Sale Agreement between us and the Doraville Community Improvement District (the “CID”), we receive cash reimbursements for the transfer of specific infrastructure projects to the CID and for other construction costs previously incurred. During the first quarter of 2023, we received a total of $26 million in cash proceeds from the CID. We received $15 million for the infrastructure assets constructed and for which ownership has or will be transferred to the CID, and $11 million in proceeds for construction costs incurred but where no transfer of ownership occurred. These proceeds were recognized in our Condensed Consolidated Statement of Cash Flows as follows: $9 million was included in the line item for change in deferred revenue, as a component of our net cash provided by operating activities; $6 million was included in the line item for proceeds from asset sales and $11 million was included in the line item for reimbursement of development costs, each as a component of our net cash used by investment activities.
In April 2017, the Federal Communications Commission (“FCC”) began the process of requiring certain television stations to change channels and/or modify their transmission facilities (“Repack”). The majority of our costs associated with Repack qualify for capitalization, rather than expense. Upon receipt of funds reimbursing us for our Repack costs, we record those proceeds as a component of our (gain) loss on disposal of assets, net.
The following tables provide additional information related to gain on disposal of assets, net included in our condensed consolidated statements of operations and purchases of property and equipment included in our condensed consolidated statements of cash flows (in millions):
| | Three Months Ended | |
| | March 31, | |
| | 2023 | | | 2022 | |
Loss (gain) on disposal of assets, net: | | | | | | | | |
Proceeds from sale of fixed assets | | $ | (8 | ) | | $ | - | |
Proceeds from Repack | | | - | | | | (5 | ) |
Net book value of fixed assets disposed | | | 9 | | | | - | |
Discount - Securitization Facility | | | 9 | | | | - | |
Total | | $ | 10 | | | $ | (5 | ) |
| | | | | | | | |
Purchase of property and equipment: | | | | | | | | |
Recurring purchases - operations | | $ | 19 | | | $ | 17 | |
Assembly Atlanta development | | | 91 | | | | 30 | |
Total | | $ | 110 | | | $ | 47 | |
Accounts Receivable and Allowance for Credit Losses. We record accounts receivable from sales and service transactions in our condensed consolidated balance sheets at amortized cost adjusted for any write-offs and net of 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.
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 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.
As of March 31, 2023, our allowance for credit losses includes a reserve of $17 million for the full amount owed to us by Diamond Sports Group, LLC (“Diamond”), as of that date. On March 14, 2023, Diamond, a counterparty to contracts with us, commenced voluntary Chapter 11 bankruptcy proceedings.
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, and certain third-party financial institutions (the “Purchasers”). 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 matures on February 23, 2026, and is subject to customary termination events related to transactions of this type. The sale of receivables from the SPV is accounted for in the Company’s financial statements as a "true-sale" under Accounting Standards Codification ("ASC") Topic 860.
Under the Securitization Facility, the SPV sells to the Purchasers certain receivables, including all rights, title, and interest in the related receivables (“Sold Receivables”). The parties intend that the conveyance of accounts receivables to the Purchasers, for the ratable benefit of the Purchasers will constitute a purchase and sale of receivables and not a pledge for security. The SPV has guaranteed to each Purchaser the prompt payment of Sold Receivables, and to secure the prompt payment and performance of such guaranteed obligations, the SPV has granted a security interest to the Purchasers in all assets of the SPV. In our capacity as servicer under the Securitization Facility, we are responsible for administering and collecting receivables and have made customary representations, warranties, covenants and indemnities. The Company does not record a servicing asset or liability since the estimated fair value of the servicing of the receivables approximates the servicing income. We also provided a performance guarantee for the benefit of the Purchasers.
The Securitization Facility is subject to interest charges, at the one-month Secured Overnight Financing Rate (“SOFR”) plus a margin (100 basis points) on the amount of the outstanding facility. The SPV was required to pay an upfront fee and a commitment fee in connection with the Securitization Facility. Servicing fee income recognized during the quarter ended March 31, 2023 was not material.
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 proceeds of the Securitization Facility are classified as operating activities in our Consolidated Statement of Cash Flows. Cash received from collections of Sold Receivables is used by the SPV to fund additional purchases of receivables on a revolving basis or to return all or any portion of outstanding capital of the Purchasers. Subsequent collections on the pledged receivables, which have not been sold, will be classified as operating cash flows at the time of collection.
The amount sold to the Purchasers was $300 million at March 31, 2023, which was derecognized from the Consolidated Balance Sheets. As collateral against sold receivables, the SPV maintains a certain level of unsold receivables, which was $297 million at March 31, 2023. Total receivables sold under the Securitization Facility were $597 million for the quarter ended March 31, 2023. Upon implementation of the Securitization Facility, we recognized a charge of $9 million in the 2023 three-month period that represents the initial discount on the accounts receivable balance transferred to the SPV. This discount is included in our loss on disposal of assets in our condensed consolidated statements of operations.
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 condensed consolidated balance sheets (in millions):
| | Three Months Ended March 31, | |
| | 2023 | | | 2022 | |
Beginning balance | | $ | 16 | | | $ | 16 | |
Provision for credit losses | | | 15 | | | | (1 | ) |
Ending balance | | $ | 31 | | | $ | 15 | |
Implementation of ASC 848, Reference Rate Reform. On March 17, 2023, we amended the 2019 Senior Credit Facility and transitioned the variable rate on Term Loan C from 1-month LIBOR to 1-month SOFR. The Company elected to apply the optional expedient in ASC 848, in connection with the amendment that enabled it to consider the amendment as a non-significant contract modification of the existing debt agreement. Additionally, for Term Loan D, the Company transitioned to the fallback language within the credit agreement and transitioned from 1-month LIBOR to 1-month SOFR as of March 31, 2023. As a result, the amendment to Term Loan C and fallback to SOFR in Term Loan D did not have a material impact to the Company’s financial statements.
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 sheet.
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. 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 generally 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 $12 million of revenue in the three-months ended March 31, 2023 that was included in the deposit liability balance as of December 31, 2022. The deposit liability balance is included in deferred revenue on our condensed consolidated balance sheets. The deposit liability balance was $14 million and $12 million as of March 31, 2023 and December 31, 2022, respectively.
Disaggregation of Revenue. Revenue from our production companies segment is generated through our direct sales channel. Revenue from our broadcast and other segment is generated through both our direct and advertising agency intermediary sales channels. The following table presents our revenue from contracts with customers disaggregated by type of service and sales channel (in millions):
|
|
Three Months Ended |
|
|
|
March 31, |
|
|
|
2023 |
|
|
2022 |
|
Market and service type: |
|
|
|
|
|
|
|
|
Broadcast advertising: |
|
|
|
|
|
|
|
|
Core advertising |
|
$ |
357 |
|
|
$ |
365 |
|
Political |
|
|
8 |
|
|
|
26 |
|
Total advertising |
|
|
365 |
|
|
|
391 |
|
Retransmission consent |
|
|
395 |
|
|
|
393 |
|
Production companies |
|
|
22 |
|
|
|
23 |
|
Other |
|
|
19 |
|
|
|
20 |
|
Total revenue |
|
$ |
801 |
|
|
$ |
827 |
|
|
|
|
|
|
|
|
|
|
Sales Channel: |
|
|
|
|
|
|
|
|
Direct |
|
$ |
558 |
|
|
$ |
551 |
|
Advertising agency intermediary |
|
|
243 |
|
|
|
276 |
|
Total revenue |
|
$ |
801 |
|
|
$ |
827 |
|
As of March 31, 2023 and December 31, 2022, 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% notes due 2031 (the “2031 Notes”), as follows (in millions):
| | March 31, | | | December 31, | |
| | 2023 | | | 2022 | |
Long-term debt: | | | | | | | | |
2019 Senior Credit Facility: | | | | | | | | |
2017 Term Loan (pre-paid on March 1, 2023) | | $ | - | | | $ | 295 | |
2019 Term Loan (matures January 2, 2026) | | | 1,190 | | | | 1,190 | |
2021 Term Loan (matures December 1, 2028) | | | 1,481 | | | | 1,485 | |
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, including current portion | | | 6,221 | | | | 6,520 | |
Unamortized deferred loan costs - 2017 Term Loan | | | - | | | | (4 | ) |
Unamortized deferred loan costs - 2019 Term Loan | | | (19 | ) | | | (21 | ) |
Unamortized deferred loan costs - 2021 Term Loan | | | (4 | ) | | | (4 | ) |
Unamortized deferred loan costs - 2026 Notes | | | (4 | ) | | | (4 | ) |
Unamortized deferred loan costs - 2027 Notes | | | (7 | ) | | | (7 | ) |
Unamortized deferred loan costs - 2030 Notes | | | (11 | ) | | | (11 | ) |
Unamortized deferred loan costs - 2031 Notes | | | (16 | ) | | | (16 | ) |
Unamortized premium - 2026 Notes | | | 2 | | | | 2 | |
Less current portion | | | (15 | ) | | | (15 | ) |
Long-term debt, less deferred financing costs | | $ | 6,147 | | | $ | 6,440 | |
| | | | | | | | |
Borrowing availability under Revolving Credit Facility | | $ | 494 | | | $ | 496 | |
Borrowings under the Revolving Credit Facility bear interest, at our option, at either the SOFR rate or the Base Rate, in each case, plus an applicable margin. Because of their relationship to the interest rate caps, described below, borrowings under the 2021 Term Loan and 2019 Term Loan bear interest at the 1-month SOFR rate, plus applicable margin. As of March 31, 2023, the interest rate on the balance outstanding under the 2021 Term Loan and the 2019 Term Loan were 7.7% and 7.2%, respectively. A portion of the Revolving Credit Facility matures on January 2, 2026, with the remainder maturing on December 1, 2026.
Interest Rate Cap. On February 23, 2023, we entered into two interest rate caps pursuant to an International Swaps and Derivatives Association ("ISDA") Master Agreement with two counterparties, Wells Fargo Bank, NA and Truist Bank, respectively. At March 31, 2023, the caps have a combined notional value of approximately $2.6 billion and mature on December 31, 2025. At inception, the interest rate caps protect the Company against adverse fluctuations in interest rates by reducing its exposure to variability in cash flows on a portion of the Company’s variable-rate debt. We designated the interest rate caps as cash flow hedges of the Company’s risk of changes in its cash flows attributable to changes in 1-month LIBOR above 5% on our outstanding variable-rate debt in accordance with ASC 815. On March 29, 2023 in conjunction with the amended credit facility, we transitioned the contractually specified rate on the interest rate caps from 1-month LIBOR to 1-month Term SOFR. Effective with the amended interest rate caps, we are hedging variability in cash flows related to future interest payments when SOFR exceeds the caps of 4.97% and 5.015%. We elected to apply the optional expedient in ASC 848, Reference Rate Reform, in connection with transitioning its interest rate caps from LIBOR to Term SOFR that enabled us to consider the new swaps a continuation of the existing contracts. As a result, the transition did not have an impact on our hedge accounting or a material impact to our financial statements.
The interest rate caps, as amended, effectively limit the annual interest charged on our Term Loan D and Term Loan E to a maximum of 1-month Term SOFR of 4.97% and 5.015%. We are required to pay aggregate fees in connection with the interest rate caps of approximately $34 million that is due and payable at maturity on December 31, 2025. On the initial designation date, we recognized an asset and corresponding liability for the deferred premium payable equal to $34 million. The asset is amortized into interest expense straight-line over the term of the hedging relationship. The recorded value of the asset was $33 million, net of accumulated amortization, at March 31, 2023. At March 31, 2023, the fair value of the derivative liability was $11 million, net of tax. We present the deferred premium, the asset, and the fair value of the derivative, net within other non-current liabilities in our condensed consolidated balance sheets.
The ISDA Master Agreement, together with its related schedules, contain customary representations, warranties and covenants. The interest rate caps were not entered into for speculative trading purposes. Changes in the fair value of the interest rate caps are reported as a component of other comprehensive income. Actual gains and losses are reclassified into earnings in the same period or periods during which the hedged transaction affects earnings and are presented in the same income statement line item as the earnings effect of the hedged transaction. Gains and losses on the derivative instrument representing hedge components excluded from the assessment of effectiveness are recognized currently in earnings and are presented in the same line of the income statement for the hedged item. We recognized $1 million of amortization expense for the asset during the three months ended March 31, 2023, which is included as a component of cash flows from operating activities in our condensed consolidated statement of cash flows. Cash flows received from the counterparties pursuant to the interest rate caps are included as components of cash flows from financing activities in our condensed consolidated statements of cash flows. Prior to the amended hedge designation date, LIBOR was less than 5%. Further, SOFR was less than 4.97% and 5.015% from the amended designation date of the hedging relationship through March 31, 2023; therefore, we did not receive any cash payments from the counterparties and, thus, we did not reclassify any amounts into interest expense from the interest rate caps in our condensed consolidated statement of operations.
For all of our interest bearing obligations, we made interest payments of approximately $78 million and $44 million during the three-months ended March 31, 2023 and 2022, respectively. During the three months ended March 31, 2023, we capitalized $6 million of interest payments related to the Assembly Atlanta project. We did not capitalize any interest payments during the three-months ended March 31, 2022.
As of March 31, 2023, the aggregate minimum principal maturities of our long term debt for the remainder of 2023 and the succeeding five years were as follows (in millions):
| | Minimum Principal Maturities | |
Year | | 2019 Senior Credit Facility | | | 2026 Notes | | | 2027 Notes | | | 2030 Notes | | | 2031 Notes | | | Total | |
Remainder of 2023 | | $ | 11 | | | $ | - | | | $ | - | | | $ | - | | | $ | - | | | $ | 11 | |
2024 | | | 15 | | | | - | | | | - | | | | - | | | | - | | | | 15 | |
2025 | | | 15 | | | | - | | | | - | | | | - | | | | - | | | | 15 | |
2026 | | | 1,205 | | | | 700 | | | | - | | | | - | | | | - | | | | 1,905 | |
2027 | | | 15 | | | | - | | | | 750 | | | | - | | | | - | | | | 765 | |
2028 | | | 1,410 | | | | - | | | | - | | | | - | | | | - | | | | 1,410 | |
Thereafter | | | - | | | | - | | | | - | | | | 800 | | | | 1,300 | | | | 2,100 | |
Total | | $ | 2,671 | | | $ | 700 | | | $ | 750 | | | $ | 800 | | | $ | 1,300 | | | $ | 6,221 | |
As of March 31, 2023, there were no significant restrictions on the ability of our subsidiaries to distribute cash to us or to the guarantor subsidiaries. The 2019 Senior Credit Facility contains affirmative and restrictive covenants with which we must comply. The 2026 Notes, the 2027 Notes, the 2030 Notes and the 2031 Notes also include covenants with which we must comply. As of March 31, 2023 and December 31, 2022, we were in compliance with all required covenants under all our debt obligations.
4. | 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 March 31, 2023 and December 31, 2022.
At March 31, 2023 and December 31, 2022 the carrying amount of our long-term debt was $6.2 billion and $6.5 billion, respectively. The fair value of our long-term debt at March 31, 2023 and December 31, 2022 was $5.2 billion and $5.7 billion, respectively. The fair value of our long-term debt is based on observable estimates provided by third party financial professionals as of each date, and as such is classified within Level 2 of the fair value hierarchy.
The fair value of our interest rate caps are based on observable estimates provided by the counterparties and, as such, are classified within Level 2 of the fair value hierarchy. At March 31, 2023, the fair value of the interest caps was a liability of $15 million and is recorded as an other non-current liability in our condensed consolidated balance sheets.
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. The Board of Directors declared a quarterly cash dividend of $0.08 per share on our common stock and Class A common stock to shareholders of record on each of March 15, 2023 and 2022, payable on March 31, 2023 and 2022. The total dividend paid was $7 million and $8 million during the three-month periods ending March 31, 2023 and 2022, respectively.
Under our various employee benefit plans, 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 March 31, 2023, we had reserved 8.9 million shares and 2.8 million shares of our common stock and Class A common stock, respectively, for future issuance under various employee benefit plans. As of December 31, 2022, we had reserved 10.0 million shares and 2.8 million shares of our common stock and Class A common stock, respectively, for future issuance under various employee benefit plans.
During the three-months ended March 31, 2023, we have not repurchased any shares of our common stock or Class A common stock under our share repurchase programs. As of March 31, 2023, approximately $124 million was available to repurchase shares of our common stock and/or Class A common stock under these programs.
The components of our net periodic pension benefit are included in miscellaneous income in our statement of operations. During the three-months ended March 31, 2023, the amount recorded as a benefit was not material, and we did not make a contribution to our defined benefit pension plan. During the remainder of 2023, we expect to contribute $4 million to this plan.
During the three-months ended March 31, 2023, we contributed $8 million in matching cash contributions, and shares of our common stock valued at approximately $9 million for our 2022 discretionary profit-sharing contributions, to the 401(k) plan. The discretionary profit-sharing contribution was recorded as an expense in 2022 and accrued as of December 31, 2022. During the remainder of 2023, we expect to contribute approximately $20 million of matching cash contributions to this plan.
7. |
Stock-based Compensation |
We recognize compensation expense for stock-based payment awards made to our employees, consultants and directors. Our current stock-based compensation plan, is the 2022 Equity and Incentive Compensation Plan (the “2022 EICP”). Our stock-based compensation expense and related income tax benefit for the three-months ended March 31, 2023 and 2022, respectively (in millions).
|
|
Three Months Ended March 31, |
|
|
|
2023 |
|
|
2022 |
|
Stock-based compensation expense, gross |
|
$ |
2 |
|
|
$ |
5 |
|
Income tax benefit at our statutory rate associated with stock-based compensation |
|
|
(1 |
) |
|
|
(1 |
) |
Stock-based compensation expense, net |
|
$ |
1 |
|
|
$ |
4 |
|
All shares of common stock and Class A common stock underlying Restricted stock, restricted stock units and performance awards are counted as issued at target levels under the 2022 EICP for purposes of determining the number of shares available for future issuance.
A summary of restricted common stock and Class A common stock activities for the three-months ended March 31, 2023 and 2022, respectively, is as follows:
|
|
Three Months Ended March 31, |
|
|
|
2023 |
|
|
2022 |
|
|
|
|
|
|
|
Weighted- |
|
|
|
|
|
|
Weighted- |
|
|
|
|
|
|
|
Average |
|
|
|
|
|
|
Average |
|
|
|
Number |
|
|
Grant Date |
|
|
Number |
|
|
Grant Date |
|
|
|
of |
|
|
Fair Value |
|
|
of |
|
|
Fair Value |
|
|
|
Shares |
|
|
Per Share |
|
|
Shares |
|
|
Per Share |
|
Restricted common stock: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Outstanding - beginning of period |
|
|
997,745 |
|
|
$ |
20.62 |
|
|
|
1,035,728 |
|
|
$ |
19.69 |
|
Granted (1) |
|
|
12,227 |
|
|
|
12.04 |
|
|
|
333,382 |
|
|
|
22.16 |
|
Vested |
|
|
(257,355 |
) |
|
|
20.21 |
|
|
|
(294,558 |
) |
|
|
18.56 |
|
Outstanding - end of period |
|
|
752,617 |
|
|
$ |
20.62 |
|
|
|
1,074,552 |
|
|
$ |
20.76 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Restricted Class A common stock: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Outstanding - beginning of period |
|
|
677,238 |
|
|
$ |
19.36 |
|
|
|
720,421 |
|
|
$ |
18.22 |
|
Granted (1) |
|
|
25,022 |
|
|
|
13.30 |
|
|
|
250,448 |
|
|
|
20.52 |
|
Vested |
|
|
(203,986 |
) |
|
|
18.76 |
|
|
|
(229,758 |
) |
|
|
16.99 |
|
Outstanding - end of period |
|
|
498,274 |
|
|
$ |
19.30 |
|
|
|
741,111 |
|
|
$ |
19.38 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Restricted stock units - common stock: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Outstanding - beginning of period |
|
|
274,145 |
|
|
$ |
23.60 |
|
|
|
125,247 |
|
|
$ |
19.02 |
|
Granted |
|
|
587,168 |
|
|
|
11.50 |
|
|
|
259,079 |
|
|
|
23.87 |
|
Vested |
|
|
(247,953 |
) |
|
|
23.64 |
|
|
|
(108,921 |
) |
|
|
19.03 |
|
Forfeited |
|
|
(26,192 |
) |
|
|
23.15 |
|
|
|
(1,260 |
) |
|
|
19.05 |
|
Outstanding - end of period |
|
|
587,168 |
|
|
$ |
11.50 |
|
|
|
274,145 |
|
|
$ |
23.60 |
|
(1) For awards subject to future performance conditions, amounts assume target performance.
We determine if an arrangement is a lease at its inception. Operating lease liabilities are recognized at the lease commencement date based on the present value of lease payments over the lease term. We generally use our incremental borrowing rate based on the information available at the lease commencement date in determining the present value of future payments, because the implicit rate of the lease is generally not known. Right-of-use (“ROU”) assets related to our operating lease liabilities are measured at lease inception based on the initial measurement of the lease liability, plus any prepaid lease payments and less any lease incentives. Our lease terms that are used in determining our operating lease liabilities at lease inception may include options to extend or terminate the leases when it is reasonably certain that we will exercise such options. We amortize our ROU assets as operating lease expense generally on a straight-line basis over the lease term and classify both the lease amortization and imputed interest as operating expenses. We have lease agreements with lease and non-lease components, and in such cases, we generally account for the components separately with only the lease component included in the calculation of the right of use asset and lease liability.
We have operating leases that primarily relate to certain of our land, facilities and equipment. As of March 31, 2023, our operating leases substantially have remaining terms of one year to 99 years, some of which include options to extend and/or terminate the leases. We do not recognize lease assets and lease liabilities for any lease with an original lease term of less than one year.
Cash flow movements related to our lease activities are included in other assets and accounts payable and other liabilities as presented in net cash provided by operating activities in our condensed consolidated statement of cash flows for the three-months ended March 31, 2023.
As of March 31, 2023, the weighted average remaining term of our operating leases was 9 years. The weighted average discount rate used to calculate the values associated with our operating leases was 6.54%. The table below describes the nature of lease expense and classification of operating lease expense recognized in the three-months ended March 31, 2023 and 2022 (in millions):
|
|
Three Months Ended March 31, |
|
|
|
2023 |
|
|
2022 |
|
Lease expense |
|
|
|
|
|
|
|
|
Operating lease expense |
|
$ |
4 |
|
|
$ |
4 |
|
Short-term lease expense |
|
|
1 |
|
|
|
1 |
|
Total lease expense |
|
$ |
5 |
|
|
$ |
5 |
|
The maturities of operating lease liabilities as of March 31, 2023, for the remainder of 2023 and the succeeding five years were as follows (in millions):
Year ending December 31, |
|
Operating Leases |
|
Remainder of 2023 |
|
$ |
12 |
|
2024 |
|
|
15 |
|
2025 |
|
|
13 |
|
2026 |
|
|
12 |
|
2027 |
|
|
11 |
|
Thereafter |
|
|
50 |
|
Total lease payments |
|
$ |
113 |
|
Less: Imputed interest |
|
|
(30 |
) |
Present value of lease liabilities |
|
$ |
83 |
|
9. |
Commitments and Contingencies |
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 actions, proceedings and claims will not materially affect our financial position, results of operations or cash flows, although legal proceedings are subject to inherent uncertainties, and unfavorable rulings or events could have a material adverse impact on our financial position, results of operations or cash flows.
As of March 31, 2023, we recorded an accrual of $18 million to resolve litigation related to our Atlanta Assembly project, which effectively removed any potential restrictions over future development opportunities at the site related to the litigation.
10. |
Goodwill and Intangible Assets |
As of March 31, 2023 and December 31, 2022, our intangible assets and related accumulated amortization consisted of the following (in millions):
|
|
As of March 31, 2023 |
|
|
As of December 31, 2022 |
|
|
|
|
|
|
|
Accumulated |
|
|
|
|
|
|
|
|
|
|
Accumulated |
|
|
|
|
|
|
|
Gross |
|
|
Amortization |
|
|
Net |
|
|
Gross |
|
|
Amortization |
|
|
Net |
|
Intangible assets not currently subject to amortization: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Broadcast licenses |
|
$ |
5,385 |
|
|
$ |
(54 |
) |
|
$ |
5,331 |
|
|
$ |
5,385 |
|
|
$ |
(54 |
) |
|
$ |
5,331 |
|
Goodwill |
|
|
2,663 |
|
|
|
- |
|
|
|
2,663 |
|
|
|
2,663 |
|
|
|
- |
|
|
|
2,663 |
|
|
|
$ |
8,048 |
|
|
$ |
(54 |
) |
|
$ |
7,994 |
|
|
$ |
8,048 |
|
|
$ |
(54 |
) |
|
$ |
7,994 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Intangible assets subject to amortization: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Network affiliation agreements |
|
$ |
218 |
|
|
$ |
(98 |
) |
|
$ |
120 |
|
|
$ |
218 |
|
|
$ |
(88 |
) |
|
$ |
130 |
|
Other finite-lived intangible assets |
|
|
1,055 |
|
|
|
(589 |
) |
|
|
466 |
|
|
|
1,055 |
|
|
|
(549 |
) |
|
|
506 |
|
|
|
$ |
1,273 |
|
|
$ |
(687 |
) |
|
$ |
586 |
|
|
$ |
1,273 |
|
|
$ |
(637 |
) |
|
$ |
636 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total intangible assets |
|
$ |
9,321 |
|
|
$ |
(741 |
) |
|
$ |
8,580 |
|
|
$ |
9,321 |
|
|
$ |
(691 |
) |
|
$ |
8,630 |
|
Amortization expense for the three-months ended March 31, 2023 and 2022 was $49 million and $52 million, respectively. Based on the current amount of intangible assets subject to amortization, we expect that amortization expense for the remainder of 2023 will be approximately $147 million, and, for the succeeding five years, amortization expense will be approximately as follows: 2024, $132 million; 2025, $121 million; 2026, $91 million; 2027, $49 million; and 2028, $13 million. If and when acquisitions and dispositions occur in the future, actual amounts may vary from these estimates.
For the three-months ended March 31, 2023 and 2022, our income tax expense and effective income tax rates were as follows (dollars in millions):
|
|
Three Months Ended March 31, |
|
|
|
2023 |
|
|
2022 |
|
Income tax (benefit) expense |
|
$ |
(11 |
) |
|
$ |
21 |
|
Effective income tax rate |
|
|
26 |
% |
|
|
25 |
% |
We estimate our differences between taxable income or loss and recorded income or loss on an annual basis. Our tax provision for each quarter is based upon these full year projections, which are revised each reporting period. These projections incorporate estimates of permanent differences between U.S. GAAP income or loss and taxable income or loss, state income taxes and adjustments to our liability for unrecognized tax benefits to adjust our statutory Federal income tax rate of 21% to our effective income tax rate. For the three-months ended March 31, 2023, these estimates increased our statutory Federal income tax rate to our effective income tax rate of 26% as a result of state income taxes that added 5%. For the three-months ended March 31, 2022, these estimates increased or decreased our statutory Federal income tax rate to our effective income tax rate of 25% as a result of state income taxes that added 4%.
During the first quarter of 2023, we made no material federal or state income tax payments. During the remainder of 2023, we anticipate making income tax payments of $35 million to $45 million. As of March 31, 2023, 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 $217 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.
On March 27, 2020, the Coronavirus Aid, Relief and Economic Security Act (the “CARES Act”) was enacted in response to the COVID-19 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 (“NOL”) 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 net operating losses resulting in a refund of $21 million, that is currently outstanding.
The Company operates in two business segments: broadcasting and production companies. The broadcasting segment operates television stations in local markets in the U.S. The production companies segment includes the production of television content. Costs identified as other are primarily corporate and administrative expenses. The following tables present certain financial information concerning the Company’s operating segments (in millions):
|
|
|
|
|
|
Production |
|
|
|
|
|
|
|
|
|
As of and for the three months ended March 31, 2023: |
|
Broadcast |
|
|
Companies |
|
|
Other |
|
|
Consolidated |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Revenue (less agency commissions) |
|
$ |
779 |
|
|
$ |
22 |
|
|
$ |
- |
|
|
$ |
801 |
|
Operating expenses before depreciation, amortization and gain on disposal of assets, net |
|
|
555 |
|
|
|
59 |
|
|
|
26 |
|
|
|
640 |
|
Depreciation and amortization |
|
|
80 |
|
|
|
3 |
|
|
|
1 |
|
|
|
84 |
|
Loss on disposal of assets, net |
|
|
9 |
|
|
|
1 |
|
|
|
- |
|
|
|
10 |
|
Operating expenses |
|
|
644 |
|
|
|
63 |
|
|
|
27 |
|
|
|
734 |
|
Operating income (loss) |
|
$ |
135 |
|
|
$ |
(41 |
) |
|
$ |
(27 |
) |
|
$ |
67 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest expense |
|
$ |
- |
|
|
$ |
- |
|
|
$ |
104 |
|
|
$ |
104 |
|
Capital expenditures (excluding business combinations) |
|
$ |
19 |
|
|
$ |
91 |
|
|
$ |
- |
|
|
$ |
110 |
|
Goodwill |
|
$ |
2,618 |
|
|
$ |
45 |
|
|
$ |
- |
|
|
$ |
2,663 |
|
Total Assets |
|
$ |
10,016 |
|
|
$ |
626 |
|
|
$ |
203 |
|
|
$ |
10,845 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
For the three months ended March 31, 2022: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Revenue (less agency commissions) |
|
$ |
804 |
|
|
$ |
23 |
|
|
$ |
- |
|
|
$ |
827 |
|
Operating expenses before depreciation, amortization and gain on disposal of assets, net |
|
|
530 |
|
|
|
26 |
|
|
|
28 |
|
|
|
584 |
|
Depreciation and amortization |
|
|
80 |
|
|
|
3 |
|
|
|
1 |
|
|
|
84 |
|
Gain on disposal of assets, net |
|
|
(5 |
) |
|
|
- |
|
|
|
- |
|
|
|
(5 |
) |
Operating expenses |
|
|
605 |
|
|
|
29 |
|
|
|
29 |
|
|
|
663 |
|
Operating income (loss) |
|
$ |
199 |
|
|
$ |
(6 |
) |
|
$ |
(29 |
) |
|
$ |
164 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest expense |
|
$ |
- |
|
|
$ |
- |
|
|
$ |
79 |
|
|
$ |
79 |
|
Capital expenditures (excluding business combinations) |
|
$ |
17 |
|
|
$ |
30 |
|
|
$ |
- |
|
|
$ |
47 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
As of December 31, 2022: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Goodwill |
|
$ |
2,618 |
|
|
$ |
45 |
|
|
$ |
- |
|
|
$ |
2,663 |
|
Total Assets |
|
$ |
10,444 |
|
|
$ |
535 |
|
|
$ |
173 |
|
|
$ |
11,152 |
|
On May 1, 2023, we and Marquee Broadcasting, Inc. (“Marquee”) completed transactions in which we sold television station KNIN (FOX) in the Boise, Idaho market (DMA 102) for $6 million, and purchased television station WPGA (MeTV) in the Macon, Georgia market (DMA 126) for $6 million. As a result, Gray’s television station portfolio now includes 102 markets (formerly 101 markets) with the first and/or second highest rated television station. Due to the proximity of the closing date of the transaction to the filing date of this report we are unable to present a preliminary purchase price allocation for the acquired business. The fair value estimates of assets acquired, liabilities assumed and resulting goodwill will be based upon management’s estimate of the fair values using valuation techniques including income, cost and market approaches. In estimating the fair value of the acquired assets and liabilities assumed, the fair value estimates will be based on, among other factors, expected future revenue and cash flows, expected future growth rates and estimated discount rates.
21