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, 2021 (the "2021 Form 10-K") filed with theSEC . Business Overview. We are a multimedia company headquartered inAtlanta, Georgia , that is the nation's second largest television broadcaster in terms of revenues. We are the nation's largest owner of top-rated local television stations and digital assets inthe 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 100 markets with the first and/or second highest rated television station. We also own video program companiesRaycom Sports ,Tupelo Media Group (formerly Tupelo Honey),PowerNation Studios , as well as the studio production facilities Assembly Atlanta andThird Rail Studios . Our revenues are derived primarily from broadcasting and internet advertising, retransmission consent fees and, to a lesser extent, other sources such as production of television and event programming, television commercials, tower rentals and management fees. For the six-months endedJune 30, 2022 and 2021, we generated revenue of$1.7 billion and$1.1 billion , respectively. Impact of the COVID-19 Global Pandemic and Related Government Restrictions on our Markets and Operations. The impact of the COVID-19 global pandemic and measures to prevent its spread continue to affect our businesses in a number of ways. The extent to which the COVID-19 global pandemic impacts our business, financial condition, results of operations and cash flows will depend on numerous evolving factors that we may not be able to accurately predict or assess, including the duration and scope of the 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 might 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 global pandemic subsides. The COVID-19 global pandemic's impact on the capital markets could impact our cost of borrowing. See "The "COVID-19" global pandemic has had and is expected to continue to have an adverse impact on our business." in Part I, Item 1A. Risk Factors of our 2021 Form 10-K. Impact of Recent Acquisitions and Divestitures. As more fully described in our 2021 Annual Report on Form 10-K, during 2021 we completed several transactions that have, collectively, had a significant impact on our financial condition, results of operations and cash flows. We refer to these transactions collectively as the "2021 Acquisitions". The impact of the 2021 Acquisitions is described in more detail in the following discussion of our operating results. The 2021 Acquisitions included:
? On
for an initial investment of approximately
this property, in part, for the development of studio production facilities,
currently in-progress. We refer to this development as "Assembly Atlanta";
? On
this transaction added 10 television stations in eight local markets. Net of
divestitures the purchase price was
? On
$27 million . The transaction represented an initial step in the broader development of Assembly Atlanta;
? On
Local
? On
? On
Group for
approvals. This transaction added 17 television stations in 12 local markets
to our operations.
22-------------------------------------------------------------------------------- The following table summarizes the "Transaction Related Expenses" incurred in connection with the 2021 Acquisitions during the three and six-months endedJune 30, 2022 and 2021, by type and by financial statement line item (in millions): Three Months Ended June 30, Six Months Ended June 30, 2022 2021 2022 2021 Transaction Related Expenses by type: Legal, consulting and other professional fees $ 1 $ 14 $ 3 $ 15 Incentive compensation and other severance costs 1 - 2 - Total transaction related expenses $ 2 $ 14 $ 5 $ 15 Transaction Related Expenses by financial statement line item: Operating expenses before depreciation, amortization and gain on disposal of assets, net: Broadcasting $ 2 $ - $ 4 $ - Corporate and administrative - 7 1 8 Miscellaneous expense, net - 7 - 7 Total transaction related expenses $ 2 $ 14 $ 5 $ 15 Due to the significant effect that the 2021 Acquisitions have had on our results of operations, and in order to provide more meaningful period over period comparisons, we present herein certain financial information excluding the impact of the 2021 Acquisitions. This financial information does not include any adjustments for other events attributable to the 2021 Acquisitions unless otherwise described. Revenues, Operations, Cyclicality and Seasonality. Broadcasting advertising is sold for placement generally preceding or following a television station's network programming and within local and syndicated programming. Broadcasting 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, broadcasting 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. Broadcasting 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 broadcasting 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;
? Core advertising revenue on our
years as a result of broadcasts of the
? Because our stations and markets are not evenly divided among the Big Four
broadcast networks, our core advertising revenue can fluctuate between years
related to which network broadcasts the Super Bowl .
23-------------------------------------------------------------------------------- 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 each of the six-months endedJune 30, 2022 and 2021 approximately 28% of our broadcast advertising revenue (excluding political advertising revenue) was obtained from advertising sales to the services sector. During the six-months endedJune 30, 2022 and 2021 approximately 15% and 19%, respectively, of our broadcast advertising revenue (excluding political advertising revenue) was obtained from advertising sales to automotive customers. Revenue from these industries may represent a higher percentage of total revenue in odd-numbered years due to, among other things, the increased availability of advertising time, as a result of such years being the "off year" of the two-year election cycle. While our total revenues have increased in recent years as a result of our acquisitions, our revenue remains under pressure from the impact on the advertising market as a result of the COVID-19 global pandemic and from the internet as a competitor for advertising spending. We have been taking steps to mitigate the impacts of COVID-19 and 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. AssemblyAtlanta . OnJune 1, 2022 , we entered into a long-term agreement with NBCU, for NBCU to lease and operate new state-of-the-art studio facilities (Assembly Studios ) at our Assembly Atlanta development that is currently under construction.
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,
2022 2021 2022 2021
Percent Percent Percent Percent
Amount of Total Amount of Total Amount of Total Amount of Total
Revenue:
Core advertising $ 366 42 % $ 279 51 % $ 731 43 % $ 539 49 %
Political 90 10 % 6 1 % 116 7 % 15 1 %
Retransmission consent 382 44 % 242 44 % 775 46 % 489 45 %
Production companies 13 1 % 10 2 % 36 2 % 24 2 %
Other 17 3 % 10 2 % 37 2 % 24 3 %
Total $ 868 100 % $ 547 100 % $ 1,695 100 % $ 1,091 100 %
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Results of Operations
Three-Months Ended
Revenue. Total revenue increased$321 million , or 59%, to$868 million in the 2022 three-month period. Total revenue increased primarily due to our 2021 Acquisitions that contributed$253 million . During the 2022 three-month period, excluding the impact of the 2021 Acquisitions:
? Political advertising revenue increased by
from 2022 being the "on-year" of the two-year election cycle;
? Retransmission consent revenue increased by
rates;
? Core advertising revenue and production company revenue were essentially
unchanged from the second quarter of 2021;
Broadcasting Expenses. Broadcasting expenses (before depreciation, amortization
and gain or loss on disposal of assets) increased $174 million , or 49%, to $528
million in the 2022 three-month period. Total broadcasting expenses increased
primarily due to our 2021 Acquisitions that contributed $153 million . During the
2022 three-month period, excluding the impact of the 2021 Acquisitions:
? Payroll broadcasting expenses increased by approximately
result of routine increases in compensation.
? Non-payroll broadcasting expenses increased by approximately
primarily because retransmission expense increased by
with the increase in retransmission revenue, and
Related Expenses.
? Broadcast non-cash stock-based compensation expense was approximately
million in each of the 2022 and 2021 three-month periods.
Production Company Expenses. Production company operating expenses were
Corporate and Administrative Expenses. Corporate and administrative expenses (before depreciation, amortization and gain or loss on disposal of assets) were$25 million in each of the 2022 and 2021 three-month periods. During the 2022 three-month period compensation expense increased by$5 million and other non-compensation expenses increased by$2 million . These increases were offset by reductions in Transaction Related Expenses of$7 million when compared to the 2021 three-month period. Non-cash stock-based compensation expenses increased to$4 million in the 2022 three-month period compared to$3 million in the 2021 three-month period.
Depreciation. Depreciation of property and equipment totaled
Amortization. Amortization of intangible assets totaled$52 million in the 2022 three-month period and$27 million in the 2021 three-month period. Amortization increased primarily due to the addition of definite-lived intangible assets acquired in the 2021 Acquisitions. Interest Expense. Interest expense increased$34 million to$81 million for the 2022 three-month period compared to$47 million in the 2021 three-month period. This increase was primarily attributable to the addition of debt related to the 2021 Acquisitions. In addition, average interest rates on our outstanding debt increased to 4.6% in the 2022 three-month period compared to 4.4% in the 2021 three-month period. Our average outstanding debt balance was$6.8 billion and$4.0 billion during the 2022 and 2021 three-month periods, respectively. Income tax expense. During the 2022 three-month period, we recognized income tax expense of$38 million . During the 2021 three-month period, we recognized income tax expense of$15 million . For the 2022 three-month period and the 2021 three-month period, our effective income tax rate was 28% in each three month period. 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 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 2022 three-month period, these estimates increased or decreased our statutory Federal income tax rate of 21% as a result of state income taxes that added 5% and permanent differences that added 2%. 25
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Six-months Ended
Revenue. Total revenue increased$604 million , or 55%, to$1.7 billion in the 2022 six-month period. Total revenue increased primarily due to our 2021 Acquisitions that contributed$487 million . During the 2022 six-month period, excluding the impact of the 2021 Acquisitions:
? Political advertising revenue increased by
from 2022 being the "on-year" of the two-year election cycle;
? Retransmission consent revenue increased by
rates;
? Core advertising revenue increased by $8 million primarily due to thelessening effects of the COVID-19 global pandemic which had affected our
customers in prior periods;
? Core advertising revenue from the broadcast of the 2022
that we earned from the broadcast of the 2021
stations and
and
? Production company revenue increased by
period primarily due to the lessening effects of the COVID-19 global pandemic
which had affected our customers in prior periods.
Broadcasting Expenses. Broadcasting expenses (before depreciation, amortization
and gain or loss on disposal of assets) increased $343 million , or 48%, to $1.1
billion in the 2022 six-month period. Total broadcasting expenses increased
primarily due to our 2021 Acquisitions that contributed $303 million . During the
2022 six-month period, excluding the impact of the 2021 Acquisitions:
? Payroll broadcasting expenses increased by approximately
result of routine increases in compensation.
? Non-payroll broadcasting expenses increased by approximately
primarily because retransmission expense increased
with the increase in retransmission revenue, and
Related Expenses.
? Broadcast non-cash stock-based compensation expense was
million in the 2022 and 2021 six-month periods, respectively.
Production Company Expenses. Production company operating expenses were
Corporate and Administrative Expenses. Corporate and administrative expenses (before depreciation, amortization and gain or loss on disposal of assets) increased$10 million , or 23%, to$53 million in the 2022 six-month period. These increases were primarily the result of routine increases in compensation expense of$9 million and increased non-compensation expenses of$1 million in the 2022 six-month period. Non-cash stock-based compensation expenses increased to$9 million in the 2022 six-month period compared to$6 million in the 2021 six-month period.
Depreciation. Depreciation of property and equipment totaled
Amortization. Amortization of intangible assets totaled
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Interest Expense. Interest expense increased $65 million to $160 million for the
2022 six-month period compared to $95 million in the 2021 six-month period. This
increase was primarily attributable to the addition of debt related to the 2021
Acquisitions. In addition, average interest rates on our outstanding debt
increased to 4.5% in the 2022 six-month period compared to 4.4% in the 2021
six-month period. Our average outstanding debt balance was $6.8 billion and $4.0
billion during the 2022 and 2021 six-month periods, respectively.
Income tax expense. During the 2022 six-month period, we recognized income tax
expense of $59 million . During the 2021 six-month period, we recognized income
tax expense of $30 million . For the 2022 six-month period and the 2021 six-month
period, our effective income tax rate was 27% and 28%, respectively. 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. For the 2022 six-month period, these estimates
increased or decreased our statutory Federal income tax rate of 21% to our
effective income tax rate as a result of state income taxes that added 5% and
permanent differences added 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,
2022 2021
Net cash provided by operating activities $ 330
(201 ) (177 )
Net cash used in financing activities (156 ) (49 )
Net (decrease) increase in cash $ (27 ) $ 12
As of
December 31,
June 30, 2022 2021
Cash $ 162 $ 189 Long-term debt, including current portion, less deferred financing costs
$ 6,705 $ 6,755
Series A Perpetual Preferred Stock $ 650 $ 650
Borrowing availability under Revolving Credit Facility $ 496 $ 497
Net Cash Provided By (Used In) Operating, Investing and Financing Activities.
Net cash provided by operating activities was $330 million in the 2022 six-month
period compared to $238 million in the 2021 six-month period, a net increase of
$92 million . The increase was primarily the result of increases in net income of
$83 million and a net increase of $53 million in non-cash expenses, primarily
related to depreciation of fixed assets and amortization of definite-lived
intangible assets. These increases were offset by a $44 million use of cash from
changes in operating assets and liabilities in the 2022 six-month period.
Net cash used in investing activities was $201 million in the 2022 six-month
period compared to net cash used in investing activities of $177 million for the
2021 six-month period. The increase in the amount used was largely due to
construction in progress on the Assembly Atlanta project.
Net cash used in financing activities was $156 million in the 2022 six-month
period compared to net cash used in financing activities of $49 million in the
2021 six-month period. During each period we used $26 million of cash to pay
dividends to holders of our preferred stock. During the 2022 and 2021 six-month
periods we used $16 million and $15 million , respectively, to pay dividends to
holders of our common stock. In the 2022 six-month period, we used we used $58
million to pay down our outstanding indebtedness and $50 million to repurchase
shares of our common stock on the open market.
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Liquidity. Based on our debt outstanding and interest rates as of June 30, 2022 ,
we estimate that we will make approximately $325 million in debt interest
payments over the twelve months immediately following June 30, 2022 . Interest
rates have recently been increasing and may increase further over the remainder
of 2022. Accordingly, our future debt interest payments may exceed our current
estimate but we do not believe that the potential increase will have a material
impact on our operations or liquidity.
Although our cash flows from operations are subject to a number of risks and
uncertainties, including the COVID-19 global 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
least February 7, 2024 , which is the maturity date of the 2017 Term Loan under
the 2019 Senior Credit Facility.
Debt. As of June 30, 2022 , long-term debt consisted of obligations under our
2019 Senior Credit Facility, our 2026 Notes, our 2027 Notes, our 2030 Notes and
our 2031 Notes. As of June 30, 2022 , the 2019 Senior Credit Facility provided
total commitments of $3.7 billion , consisting of our 2017 Term Loan, our 2019
Term Loan, our 2021 Term Loan and $496 million available under our Revolving
Credit Facility. We were in compliance with the covenants in these debt
agreements at June 30, 2022 . In the six-months ended June 30, 2022 , we paid the
required principal reductions of $8 million of our 2021 Term Loan and
voluntarily pre-paid $50 million of the outstanding principal balance of our
2017 Term Loan.
Capital Expenditures. We expect that our capital expenditures will range between
approximately $120 million to $130 million during 2022 for routine purchases of
broadcasting, production company and corporate purposes. In addition, we
currently anticipate capital expenditures of between $130 million to $140
million in 2022, and approximately $80 million to $90 million in 2023 in
connection with development of the Assembly Atlanta project.
Other. We file a consolidated federal income tax return and such state and local
tax returns as are required. During the 2022 six-month period, we made $119
million of federal or state income tax payments. During the remainder of 2022,
we anticipate making income tax payments (net of refunds) within a range of $80
million to $100 million . As of June 30, 2022 , we have an aggregate of
approximately $337 million of various state operating loss carryforwards, of
which we expect that approximately half will be utilized.
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.
During the 2022 six-month period, we did not make a contribution to our defined
benefit pension plan. During the remainder of 2022, we expect to contribute $4
million to this pension plan.
Off-Balance Sheet Arrangements. There have been no material changes with respect to our off-balance sheet arrangements from those presented in our 2021 Form 10-K.
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 2021 Form 10-K. 28
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Cautionary Note Regarding Forward-Looking Statements
This Quarterly Report on Form 10-Q ("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 annual report, the words "believes," "expects,"
"anticipates," "estimates," "will," "may," "should" and similar words and
expressions are generally intended to identify forward-looking statements. These
forward-looking statements reflect our then-current expectations and are based
upon data available to us at the time the statements are made. Forward-looking
statements may relate to, among other things, statements about the evolving and
uncertain nature of the COVID-19 global pandemic and its impact on us, the media
industry, and the economy in general, our strategies, expected results of
operations, general and industry-specific economic conditions, future pension
plan contributions, future capital expenditures, future income tax payments,
future payments of interest and principal on our long-term debt, assumptions
underlying various estimates and estimates of future obligations and
commitments, and should be considered in context with the various other
disclosures made by us about our business. Readers 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 significant 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 in Item 1A. of our Annual Report on Form 10-K and the
other factors described from time to time in our SEC filings. The
forward-looking statements included in this Quarterly Report are made only as of
the date hereof. We undertake no obligation to update such forward-looking
statements to reflect subsequent events or circumstances.
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