GRAY TELEVISION, INC. Executive Overview
Introduction. The following discussion and analysis of the financial condition and results of operations ofGray Television, Inc. and its consolidated subsidiaries (except as the context otherwise provides, "Gray," the "Company," "we," "us" or "our") should be read in conjunction with our unaudited condensed consolidated financial statements and notes thereto included elsewhere herein, as well as with our audited consolidated financial statements and notes thereto included in our Annual Report on Form 10-K for the year endedDecember 31, 2019 (the "2019 Form 10-K") filed with theSEC . Business Overview. We are a television broadcast company headquartered inAtlanta, Georgia , that is the largest owner of top-rated local television stations and digital assets in theU.S. We currently own and/or operate television stations and leading digital properties in 94 television markets that collectively reach approximately 24% ofU.S. television households. During calendar year 2019, our stations were ranked first in 69 markets, and first and/or second in 87 markets, as calculated by Comscore's audience measurement service. We also own video program production, marketing, and digital businesses includingRaycom Sports , Tupelo-Raycom, andRTM Studios , the producer of PowerNation programs and content, which we refer to collectively as our "production companies." Impact of the COVID-19 Pandemic and Related Government Restrictions on our Markets and Operations. The impact of the COVID-19 pandemic and measures to prevent the spread of COVID-19 continue to affect our businesses in a number of ways. We have experienced a disruption in creation of content that we broadcast on our television stations and of events and programs we produce at our production companies, including the cancellation of certain sports events and the shutting down of production of certain television content. The extent to which the COVID-19 pandemic continues to impact our business operations, financial results, and liquidity will depend on numerous evolving factors that we may not be able to accurately predict or assess, including the ultimate duration and scope of the COVID-19 pandemic, the negative impact it has on global and regional economies and economic activity, changes in advertising customers and consumer behavior, impact of governmental regulations that have been or will be imposed in response to the pandemic, its short and longer-term impact on the levels of consumer confidence; actions governments, businesses and individuals take in response to the pandemic; and how quickly economies recover after the COVID-19 pandemic subsides. The COVID-19 impact on the capital markets could impact our cost of borrowing. We have continued to actively monitor the global outbreak and spread of COVID-19 and continue to take steps to mitigate the potential risks to us posed by its spread and related circumstances and impacts. We are focused on navigating these recent challenges presented by the COVID-19 pandemic through protecting the safety of our employees, seeking to maintain revenues, reduce expenses and delay capital expenditures. There are certain limitations on our ability to mitigate the adverse financial impact of the pandemic, including the high fixed-cost nature of our businesses. The COVID-19 pandemic, and the related economic disruptions and uncertainty, also makes it more challenging for management to estimate future performance of our businesses, particularly over the near to medium term, and consequently the broader impact that COVID-19 could have on our business, financial condition and results of operations. See Part II, Item 1A. Risk Factors of this Quarterly Report on Form 10-Q. SinceMarch 2020 , most of our employees have been working from home, with only certain essential employees working on site. For employees working on site, we have instituted social distancing protocols, increased the level of cleaning and sanitizing in those sites and undertaken other actions to make these sites safer. We have also substantially reduced employee travel to only essential business needs. We are generally following the requirements and protocols published by theU.S. Centers for Disease Control andthe World Health Organization , and state and local governments. We have recently begun to implement plans to re-open our offices and studios. Many of our employees have continued to work from home. As of the date of this filing, we do not believe those employeeswho continue to work from home have adversely impacted our internal controls, financial reporting systems or our operations. Impact of Coronavirus Aid, Relief, and Economic Security Act. The Coronavirus Aid, Relief and Economic Security Act (the "CARES Act") was enacted inMarch 2020 , in response to the COVID-19 pandemic. The CARES Act and related rules and guidelines include several significant provisions, including delaying certain payroll tax payments, mandatory transition tax payments, and estimated income tax payments that we are deferring to future periods. We do not currently expect the CARES Act to have a material impact on our financial results, including on our annual estimated effective tax rate or on our liquidity. We will continue to monitor and assess the impact the CARES Act may have on our business and financial results. 22
-------------------------------------------------------------------------------- Revenues, Operations, Cyclicality and Seasonality. Broadcast advertising is sold for placement generally 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. Most advertising contracts are short-term, and generally run only for a few weeks. We also sell internet advertising on our stations' websites and mobile apps. These advertisements may be sold as banner advertisements, video advertisements and other types of advertisements or sponsorships.
Our broadcast and internet advertising revenues are affected by several factors that we consider to be seasonal in nature. These factors include:
? Spending by political candidates, political parties and special interest
groups increases during the even-numbered "on-year" of the two-year election
cycle. This political spending typically is heaviest during the fourth quarter
of such years;
? Broadcast advertising revenue is generally highest in the second and fourth
quarters each year. This seasonality results partly from increases in
advertising in the spring and in the period leading up to and including the
holiday season;
? Local and national advertising revenue on our
in certain periods in even numbered years as a result of their broadcasts of
the
non-
pandemic, the 2020 Olympic Games have been postponed until 2021); and
? Because our stations and markets are not evenly divided among the Big Four
broadcast networks, our local and national advertising revenue can fluctuate
between years related to which network broadcasts the Super Bowl .
Automotive advertisers have traditionally accounted for a significant portion of
our revenue. During the six-months ended June 30, 2020 and 2019, we derived
approximately 20% and 24%, respectively, of our total broadcast advertising
revenue from customers in the automotive industry. Strong demand for our
advertising inventory from political advertisers can require significant use of
available inventory, which in turn can lower our advertising revenue from our
non-political advertising revenue categories in the even numbered "on-year" of
the two-year election cycle. These temporary declines are expected to reverse in
the following "off-year" of the two-year election cycle.
Our total revenues have increased in recent years as a result of our
acquisitions and improvements in general economic conditions. Nevertheless,
revenue remains under pressure from the internet as a competitor for advertising
spending. We continue to enhance and market our internet websites in an effort
to generate additional revenue. Our aggregate internet revenue is derived from
both advertising and sponsorship opportunities directly on our websites.
Our primary broadcasting operating expenses are employee compensation, related
benefits and programming costs. In addition, the broadcasting operations incur
overhead expenses, such as maintenance, supplies, insurance, rent and utilities.
A large portion of the operating expenses of our broadcasting operations is
fixed. We continue to monitor our operating expenses and seek opportunities to
reduce them where possible.
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Please see our "Results of Operations" and "Liquidity and Capital Resources" sections below for further discussion of our operating results.
Revenue
Set forth below are the principal types of revenue, less agency commissions,
earned by us for the periods indicated and the percentage contribution of each
type of revenue to our total revenue (dollars in millions):
Three Months Ended June 30, Six Months Ended June 30,
2020 2019 2020 2019
Percent Percent Percent Percent
Amount of Total Amount of Total Amount of Total Amount of Total
Revenue:
Local (including
internet/
digital/mobile) $ 162 35.9 % $ 226 44.5 % $ 361 36.6 % $ 437 42.6 %
National 36 8.0 % 56 11.0 % 87 8.8 % 106 10.3 %
Political 21 4.7 % 5 1.0 % 57 5.8 % 8 0.8 %
Retransmission
consent 220 48.8 % 201 39.6 % 433 44.0 % 405 39.5 %
Production
companies 2 0.4 % 9 1.8 % 21 2.1 % 46 4.5 %
Other 10 2.2 % 11 2.1 % 26 2.7 % 24 2.3 %
Total $ 451 100.0 % $ 508 100.0 % $ 985 100.0 % $ 1,026 100.0 %
Results of Operations
Three-Months Ended
Revenue. Total revenue decreased$57 million , or 11%, to$451 million in the 2020 three-month period. Total political advertising revenue that increased by$16 million , resulting primarily from 2020 being the "on-year" of the two-year election cycle. Retransmission consent revenue increased by$19 million primarily as a result of increased rates in 2020. Combined, local and national revenue decreased by$84 million in the 2020 three-month period and production company revenue decreased by$7 million . We attribute the decreases primarily to the effects of the COVID-19 pandemic, that has affected our customers and our sports and event programming. Broadcast Expenses. Broadcast expenses (before depreciation, amortization and gain or loss on disposal of assets) increased$10 million , or 3%, to$324 million in the 2020 three-month period. Payroll and related broadcast operating expenses decreased by approximately$4 million in the 2020 three-month period as a result of the elimination of redundant positions. Non-payroll broadcast operating expenses increased by approximately$14 million primarily as a result of retransmission expense that increased by approximately$20 million in the 2020 three-month period consistent with the increased retransmission consent revenue, partially offset by decreases in professional service expenses of$6 million in the current year. Production company expenses. Production company operating expenses (before depreciation, amortization and gain or loss on disposal of assets), were approximately$5 million in the 2020 three-month period, a decrease of$4 million from the 2019 three-month period. Non-compensation expenses decreased by$3 million in the 2020 three-month period to$2 million , compared to$5 million in the 2019 three-month period. These decreases were primarily due to the effects of the COVID-19 pandemic. Corporate and Administrative Expenses. Corporate and administrative expenses (before depreciation, amortization and gain or loss on disposal of assets), decreased by$4 million , or 19%, to$17 million . These decreases were primarily the result of severance compensation in the 2019 three-month period related to the elimination of redundant positions.
Depreciation. Depreciation of property and equipment totaled
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Amortization. Amortization of intangible assets decreased $2 million , or 7%, to
$26 million in the 2020 three-month period compared to the 2019 three-month
period. Amortization expense decreased primarily due to finite-lived intangible
assets becoming fully amortized.
Gain on Disposals of Assets, Net. We reported gains on disposals of assets of $7
million in the 2020 three-month period and $3 million in the 2019 three-month
period. These gains were primarily related to assets disposals from the FCC
Repack process.
Interest Expense. Interest expense decreased $12 million , or 21%, to $46 million
for the 2020 three-month period. This decrease in interest expense is due to
both a decrease in principal and interest rates. Our average debt principal
balance for the three-months ended 2020 and 2019 was $3.8 billion and $4.0
billion , respectively. Our average annualized interest rate, excluding
amortization of deferred financing costs, for the three-months ended 2020 and
2019 was 4.6% and 5.5%, respectively.
Income Tax Expense. We recognized income tax expense of $6 million and $18
million in the 2020 three-month period and the 2019 three-month period,
respectively. For the 2020 three-month period and the 2019 three-month period,
our effective income tax rates were 35% and 29%, respectively. We estimate our
differences between taxable income or loss and recorded income or loss on an
annual basis. Our tax provision for each interim period is based upon these full
year projections that 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. For the 2020 three-month period, these estimates
increased our statutory federal income tax rate of 21% to our effective income
tax rate of 35% as follows: state income taxes added 6%, permanent differences
between our U.S. GAAP income and taxable income added 1% and a discrete item
related to stock-based compensation added 7%.
Six-months Ended
Revenue. Total revenue decreased$41 million , or 4%, to$985 million in the 2020 six-month period. Political advertising revenue increased by$49 million , resulting primarily from 2020 being the "on-year" of the two-year election cycle. Retransmission consent revenue increased by$28 million as a result of increased rates in 2020. Combined, local and national revenue decreased by$95 million in the 2020 six-month period and production company revenue decreased by$25 million . We attribute these decreases primarily to the effects of the COVID-19 pandemic which has affected our customers and our sports and event programming. Local and national revenue from the broadcast of the 2020Super Bowl on ourFOX -affiliated stations was approximately$3 million , compared to$5 million that we earned from the broadcast of the 2019Super Bowl on ourCBS -affiliated stations. Broadcast Expenses. Broadcast expenses (before depreciation, amortization and loss (gain) on disposal of assets) decreased$11 million , or 2%, to$659 million in the 2020 six-month period. Compensation expenses decreased by approximately$13 million in the 2020 six-month period. Non-payroll broadcast operating expenses increased by approximately$2 million which included retransmission expense that increased by$38 million in the 2020 six-month period consistent with the increased retransmission consent revenue. Transaction related expenses decreased by$37 million in the 2020 six-month period compared to the transaction related expenses incurred in 2019 six-month period. Production Company Expenses. Production company expenses (before depreciation, amortization and loss (gain) on disposal of assets) decreased by approximately$20 million in the 2020 six-month period to$24 million , compared to$44 million in the 2019 six-month period. Compensation expenses decreased by$2 million , and non-compensation expenses decreased by$18 million in the 2020 six-month period. These decreases were primarily due to the effects of the COVID-19 pandemic.
Corporate and Administrative Expenses. Corporate and administrative expenses
(before depreciation, amortization and loss (gain) on disposal of assets)
decreased
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Depreciation. Depreciation of property and equipment totaled
Amortization. Amortization of intangible assets decreased$5 million , or 9%, to$52 million in the 2020 six-month period compared to the 2019 six-month period. Amortization expense decreased primarily due to finite-lived intangible assets becoming fully amortized. Gain on Disposals of Assets, Net. We reported gains on disposals of assets of$13 million in each of the 2020 and 2019 six-month periods. These gains were primarily related to asset disposals from theFCC Repack process. Interest Expense. Interest expense decreased$18 million , or 16%, to$98 million for the 2020 six-month period. This decrease in interest expense is due to both a decrease in principal and interest rates. Our average debt principal balance for the six-months ended 2020 and 2019 was$3.8 billion and$4.0 billion , respectively. Our average annualized interest rate, excluding amortization of deferred financing costs, for the 2020 and 2019 six-month periods was 4.9% and 5.5%, respectively. Income Tax Expense. We recognized income tax expense of$24 million and$21 in the 2020 and 2019 six-month periods, respectively. For the 2020 six-month period and the 2019 six-month period, our effective income tax rate was 27% and 45%, respectively. We estimate our differences between taxable income or loss and recorded income or loss on an annual basis. Our tax provision for each interim period is based upon these full year projections that are revised each reporting period. These projections incorporate estimates of permanent differences betweenU.S. GAAP income or loss and taxable income or loss, state income taxes and adjustments to our liability for unrecognized tax benefits. For the 2020 six-month period, these estimates increased or decreased our statutory Federal income tax rate of 21% to our effective income tax rate of 27% as follows: state income taxes added 5% and permanent differences between ourU.S. GAAP income and taxable income resulted in an increase of 1%.
Liquidity and Capital Resources
General. The following table presents data that we believe is helpful in evaluating our liquidity and capital resources (in millions):
Six Months Ended June 30,
2020 2019
Net cash provided by operating activities $ 307 $ 105
Net cash used in investing activities (59 ) (2,599 ) Net cash provided by (used in) financing activities (81 ) 1,326 Increase (decrease) in cash$ 167 $ (1,168 ) As of December 31, June 30, 2020 2019 Cash $ 379 $ 212 Long-term debt, including current portion $ 3,703 $
3,697
Borrowing availability under Revolving Credit Facility $ 200 $
200
Series A Perpetual Preferred Stock $ 650 $ 650 Net Cash Provided By (Used In) Operating, Investing and Financing Activities. Net cash provided by operating activities was$307 million in the 2020 six-month period compared$105 million in the 2019 six-month period, a net increase of$202 million . The increase was primarily the result of an increased net income of$38 million and$13 million net increase in non-cash expenses, primarily depreciation of fixed assets and amortization of definite-lived intangible assets. Approximately$151 million of cash was provided by changes in net working capital. 26
-------------------------------------------------------------------------------- Net cash used in investing activities was$59 million in the 2020 six-month period compared to net cash used in investing activities of$2.6 billion for the 2019 six-month period. The decrease in the amount used was largely due to the acquisition and divestiture activities in the 2019 six-month period, that did not re-occur in the 2020 six-month period. Net cash used in financing activities was$81 million in the 2020 six-month period compared to net cash provided by financing activities of$1.3 billion in the 2019 six-month period. We used approximately$26 million of cash to pay dividends to holders of our preferred stock and approximately$49 million to repurchase shares of our common stock on the open market in the 2020 six-month period. Cash provided by financing activities in the 2019 six-month period was primarily due to the borrowings under our 2019 Term Loan to finance our acquisition activities in the 2019 six-month period.
Liquidity. We estimate that we will make approximately approximately
Although our cash flows from operations are subject to a number of risks and uncertainties, including the recent COVID-19 pandemic and related economic effects, we anticipate that our cash on hand, future cash expected to be generated from operations, borrowings from time to time under the 2019 Senior Credit Facility (or any such other credit facility as may be in place at the appropriate time) and, potentially, external equity or debt financing, will be sufficient to fund any debt service obligations, estimated capital expenditures and acquisition-related obligations. Any potential equity or debt financing would depend upon, among other things, the costs and availability of such financing at the appropriate time. We also believe that our future cash expected to be generated from operations and borrowing availability under the 2019 Senior Credit Facility (or any such other credit facility) will be sufficient to fund our future capital expenditures and long-term debt service obligations until at leastFebruary 7, 2024 , which is the maturity date of the 2017 Term Loan under the 2019 Senior Credit Facility. Capital Expenditures. InApril 2017 , theFederal Communications Commission ("FCC ") began the process of requiring certain television stations to change channels and/or modify their transmission facilities ("Repack"). Capital expenditures, including Repack, for the 2020 and 2019 six-month periods were$51 million and$44 million , respectively. Excluding Repack, our capital expenditures were$37 million and$14 million , respectively. Our Repack associated reimbursements for the 2020 and 2019 six-month periods were$14 million and$17 million , respectively. As ofJune 30, 2020 , the amount requested from theFCC for Repack, but not yet received, was approximately$7 million . Excluding Repack, we expect that our capital expenditures will range between approximately$65 million to$75 million during full-year 2020. In addition, capital expenditures for Repack during full-year 2020 are expected to range between approximately$45 million and$50 million and we anticipate being reimbursed for the majority of these Repack costs. Reimbursement, however, may be received in periods subsequent to those in which they were expended. Other. We file a consolidated federal income tax return and such state and local tax returns as are required. During the 2020 six-month period, we made$1 million of federal and state tax payments (net of refunds). During the remainder of 2020, we anticipate making income tax payments (net of refunds) of approximately$57 million . OnMarch 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 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. The Company is currently evaluating the impact of these provisions of the CARES Act but does not believe it will have a material effect on out estimated effective tax rate. During the 2020 six-month period, we did not make a contribution to our defined benefit pension plan. During the remainder of 2020, we expect to contribute$3 million to this pension plan. 27
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Critical Accounting Policies The preparation of financial statements in conformity withU.S. GAAP requires management to make judgments and estimations that affect the amounts reported in the financial statements and accompanying notes. Actual results could differ from those estimates. We consider our accounting policies relating to intangible assets and income taxes to be critical policies that require judgments or estimations in their application where variances in those judgments or estimations could make a significant difference to future reported results. These critical accounting policies and estimates are more fully discussed in our 2019 Form 10-K.
Cautionary Note Regarding Forward-Looking Statements
This Quarterly Report on Form 10-Q (this "Quarterly Report") contains "forward-looking statements" within the meaning of the Private Securities Litigation Reform Act of 1995, Section 27A of the Securities Act of 1933 and Section 21E of the Securities Exchange Act of 1934 (the "Exchange Act"). Forward-looking statements are all statements other than those of historical fact. When used in this Quarterly Report, the words "believes," "expects," "anticipates," "estimates," "will," "may," "should" and similar words and expressions are generally intended to identify forward-looking statements. Among other things, statements that describe our expectations regarding the evolving and uncertain nature of the COVID-19 pandemic and its impact on the Company, the media industry, and the economy in general, our results of operations, general and industry-specific economic conditions, future pension plan contributions, income tax payments and capital expenditures are forward-looking statements. Readers of this Quarterly Report are cautioned that any forward-looking statements, including those regarding the intent, belief or current expectations of our management, are not guarantees of future performance, results or events and involve risks and uncertainties, and that actual results and events may differ materially from those contained in the forward-looking statements as a result of various factors including, but not limited to, those listed under the heading "Risk Factors" in our 2019 Form 10-K, our Quarterly Report on Form 10-Q for the quarter endedMarch 31, 2020 and as may be described in subsequently filed quarterly reports on Form 10-Q, as well as the other factors described from time to time in our filings with theSecurities and Exchange Commission . Forward-looking statements speak only as of the date they are made. We undertake no obligation to update such forward-looking statements to reflect subsequent events or circumstances.
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