NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Unaudited)
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, 2019, which was derived from the Company’s audited financial statements as of December 31, 2019, and our accompanying unaudited condensed consolidated financial statements as of June 30, 2020 and for the periods ended June 30, 2020 and 2019, 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 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, 2019 (the “2019 Form 10-K”). Our financial condition as of, and operating results for the three and six-months ended June 30, 2020, 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, 2020.
Overview. We are a television broadcast company headquartered in Atlanta, Georgia, that is the largest owner of top-rated local television (“television” or “TV”) stations and digital assets in the United States. Gray currently owns and/or operates television stations and leading digital properties in 94 television markets that collectively reach approximately 24% of U.S. television households. Over calendar year 2019, Gray’s 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 including Raycom Sports, Tupelo-Raycom, and RTM Studios, the producer of PowerNation programs and content, which we refer to collectively as our “production companies.”
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. The business and economic uncertainty resulting from the novel coronavirus and its related disease (collectively, “COVID-19”) has made such estimates and assumptions more difficult to calculate. 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.
Investments in Broadcasting, Production and Technology Companies. We have investments in several television, production and technology companies. Each of these equity investments do not have readily determinable fair values. We have applied the measurement alternative as defined in ASC Subtopic 825-10 – Financial Instruments - Overall. These investments are reported together as a non-current asset on our balance sheets.
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 and shares underlying stock options, in the diluted weighted-average shares outstanding calculation, unless their inclusion would be antidilutive.
The following table reconciles basic weighted-average shares outstanding to diluted weighted-average shares outstanding for the three and six-month periods ended June 30, 2020 and 2019, respectively (in millions):
|
|
Three Months Ended
|
|
|
Six Months Ended
|
|
|
|
June 30,
|
|
|
June 30,
|
|
|
|
2020
|
|
|
2019
|
|
|
2020
|
|
|
2019
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted-average shares outstanding-basic
|
|
|
97
|
|
|
|
100
|
|
|
|
98
|
|
|
|
100
|
|
Common stock equivalents for stock options and restricted shares
|
|
|
-
|
|
|
|
1
|
|
|
|
-
|
|
|
|
-
|
|
Weighted-average shares outstanding-diluted
|
|
|
97
|
|
|
|
101
|
|
|
|
98
|
|
|
|
100
|
|
Accumulated Other Comprehensive Loss. Our accumulated other comprehensive loss balances as of June 30, 2020 and December 31, 2019, consist of adjustments to our pension liability and the related income tax effect. Our comprehensive income for the six-month period ended June 30, 2020 consisted of net income. Our comprehensive loss for the six-month period ended June 30, 2019 consisted of net income and an adjustment to the tax effect of our pension liability as a result of our adoption of Accounting Standards Update (“ASU”) 2018-02, Income Statement - Reporting Comprehensive Income (Topic 220) – Reclassification of Certain Tax Effects from Accumulated Other Comprehensive Income. As of June 30, 2020 and December 31, 2019 the balances were as follows (in millions):
|
|
June 30,
|
|
|
December 31,
|
|
|
|
2020
|
|
|
2019
|
|
|
|
|
|
|
|
|
|
|
Accumulated balances of items included in accumulated other comprehensive loss:
|
|
|
|
|
|
|
|
|
Increase in pension liability
|
|
$
|
(42
|
)
|
|
$
|
(42
|
)
|
Income tax benefit
|
|
|
(11
|
)
|
|
|
(11
|
)
|
Accumulated other comprehensive loss
|
|
$
|
(31
|
)
|
|
$
|
(31
|
)
|
Property and Equipment. Property and equipment are carried at cost. 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
|
|
|
|
June 30,
|
|
|
December 31,
|
|
|
Useful Lives
|
|
|
|
2020
|
|
|
2019
|
|
|
(in years)
|
|
Property and equipment:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Land
|
|
$
|
119
|
|
|
$
|
119
|
|
|
|
|
|
|
Buildings and improvements
|
|
|
303
|
|
|
|
291
|
|
|
7
|
to
|
40
|
|
Equipment
|
|
|
795
|
|
|
|
776
|
|
|
3
|
to
|
20
|
|
|
|
|
1,217
|
|
|
|
1,186
|
|
|
|
|
|
|
Accumulated depreciation
|
|
|
(485
|
)
|
|
|
(461
|
)
|
|
|
|
|
|
Total property and equipment, net
|
|
$
|
732
|
|
|
$
|
725
|
|
|
|
|
|
|
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 profit or loss is reflected in income or expense for the period.
In April 2017, the Federal Communications Commission (the “FCC”) began a process of reallocating the broadcast spectrum (the “Repack”). Specifically, the FCC is requiring certain television stations to change channels and/or modify their transmission facilities. The U.S. Congress passed legislation which provides the FCC with a $1.7 billion fund to reimburse all reasonable costs incurred by stations operating under a full power license and a portion of the costs incurred by stations operating under a low power license that are reassigned to new channels. Subsequent legislation in March 2018 appropriated an additional $1.0 billion for the Repack fund, of which up to $750 million may be made available to reimburse the Repack costs of full power, Class A television stations and multichannel video programming distributors. Other funds are earmarked to assist low power television stations and for other transition costs. The sufficiency of the FCC’s fund to reimburse for Repack costs is dependent upon a number of factors including the amounts to be reimbursed to other industry participants for Repack costs. Therefore, we cannot predict whether the fund will be sufficient to reimburse our Repack costs to the extent authorized under the legislation. Forty-seven of our current full power stations and thirty-seven of our current low power stations are affected by the Repack. The Repack process began in the summer of 2017 and we expect that it will conclude for nearly all of our stations by the fall of 2020. The majority of our costs associated with the 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
|
|
|
Six Months Ended
|
|
|
|
June 30,
|
|
|
June 30,
|
|
|
|
2020
|
|
|
2019
|
|
|
2020
|
|
|
2019
|
|
Gain (loss) on disposal of assets, net:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Proceeds from sale of assets
|
|
$
|
-
|
|
|
$
|
1
|
|
|
$
|
1
|
|
|
$
|
3
|
|
Proceeds from FCC - Repack
|
|
|
8
|
|
|
|
5
|
|
|
|
14
|
|
|
|
17
|
|
Net book value of assets disposed
|
|
|
(1
|
)
|
|
|
(2
|
)
|
|
|
(2
|
)
|
|
|
(4
|
)
|
Other
|
|
|
-
|
|
|
|
(1
|
)
|
|
|
-
|
|
|
|
(3
|
)
|
Total
|
|
$
|
7
|
|
|
$
|
3
|
|
|
$
|
13
|
|
|
$
|
13
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Purchase of property and equipment:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Recurring purchases - operations
|
|
|
|
|
|
|
|
|
|
$
|
37
|
|
|
$
|
14
|
|
Repack
|
|
|
|
|
|
|
|
|
|
|
14
|
|
|
|
30
|
|
Total
|
|
|
|
|
|
|
|
|
|
$
|
51
|
|
|
$
|
44
|
|
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 accounts receivable balances when the customer files for bankruptcy or when all commonly used methods of collection have been exhausted.
We are closely monitoring the potential impact from COVID-19 on our business. The extent to which the COVID-19 pandemic impacts the collectability of our receivables will depend on numerous evolving factors. As such, we did not adjust our allowance for credit loss as of June 30, 2020. For further discussion of the potential impact of the COVID-19 pandemic see “Impact of COVID-19 and Related Government Restrictions on our Markets and Operations.” and Part II, Item 1A. Risk Factors of this Quarterly Report on Form 10-Q.
The following table provides a rollforward 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):
|
|
Six Months Ended
|
|
|
|
June 30, 2020
|
|
Beginning balance
|
|
$
|
11
|
|
Provision for credit losses
|
|
|
5
|
|
Amounts written off
|
|
|
(1
|
)
|
Amounts recovered from previous write-offs
|
|
|
-
|
|
Ending balance
|
|
$
|
15
|
|
Recent Accounting Pronouncements. In January 2020, the Financial Accounting Standards Board (FASB) issued ASU 2020-01, Investments—Equity Securities (Topic 321), Investments—Equity Method and Joint Ventures (Topic 323), and Derivatives and Hedging (Topic 815) (ASU 2020-01). ASU 2020-01 clarifies the interaction of the accounting for equity securities under Topic 321, the accounting for equity method investments in Topic 323, and the accounting for certain forward contracts and purchased options in Topic 815. ASU 2020-01 is effective for us beginning in the first quarter of fiscal 2022, and earlier adoption is permitted. We are currently evaluating the impact of our pending adoption of ASU 2020-01 on our consolidated financial statements.
In December 2019, the FASB issued ASU 2019-12, Income Taxes (Topic 740): Simplifying the Accounting for Income Taxes (ASU 2019-12), which is intended to simplify various areas related to the accounting for income taxes and improve consistent application of Topic 740. ASU 2019-12 is effective for us beginning in the first quarter of fiscal 2022, and earlier adoption is permitted. We are currently evaluating the impact of our pending adoption of ASU 2019-12 on our consolidated financial statements.
Adoption of Accounting Standard. On January 1, 2020, we adopted the amendments in ASU 2016-13, Financial Instruments-Credit Losses (Topic 326): Measurement of Credit Losses on a modified-retrospective basis with comparative periods reported in accordance with previous guidance. These amendments require the measurement of credit losses using historical experience, current conditions and reasonable and supportable forecasts. Prior to this adoption, our allowance for doubtful accounts was equal to a portion of our receivable balances that were 120 days old or older. We generally provided allowances for certain receivable balances that were less than 120 days old when warranted by specific facts and circumstances. The adoption of the amendments in ASU 2016-13 did not have a material effect on our financial statements.
In addition to the accounting standards described above, certain amounts in the condensed consolidated balance sheets have also been reclassified to conform to the current presentation.
Revenue Recognition. We recognize revenue when we have completed a specified service and effectively transferred the control of that service to a customer in return for an amount of consideration we expect to be entitled to receive. The amount of revenue recognized is determined by the amount of consideration specified in a contract with our customers. We have elected to exclude taxes assessed by a governmental authority on transactions with our customers from our revenue. Any unremitted balance is included in current liabilities on our balance 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 in the manner stated above. These deposits are recorded as deposit liabilities on our balance sheet. When we invoice our customers for completed performance obligations, we are unconditionally entitled to receive payment of the invoiced amounts. Therefore, we record invoiced amounts in accounts receivable on our balance sheet. We 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 $9 million of revenue in the six months ended June 30, 2020 that was included in the deposit liability balance as of December 31, 2019. The deposit liability balance is included in deferred revenue on our condensed consolidated balance sheets. The deposit liability balance was $8 million and $9 million as of June 30, 2020 and December 31, 2019, 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
|
|
|
Six Months Ended
|
|
|
|
June 30,
|
|
|
June 30,
|
|
|
|
2020
|
|
|
2019
|
|
|
2020
|
|
|
2019
|
|
Market and service type:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Advertising:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Local (including internet/digital/mobile)
|
|
$
|
162
|
|
|
$
|
226
|
|
|
$
|
361
|
|
|
$
|
437
|
|
National
|
|
|
36
|
|
|
|
56
|
|
|
|
87
|
|
|
|
106
|
|
Political
|
|
|
21
|
|
|
|
5
|
|
|
|
57
|
|
|
|
8
|
|
Total advertising
|
|
|
219
|
|
|
|
287
|
|
|
|
505
|
|
|
|
551
|
|
Retransmission consent
|
|
|
220
|
|
|
|
201
|
|
|
|
433
|
|
|
|
405
|
|
Production companies
|
|
|
2
|
|
|
|
9
|
|
|
|
21
|
|
|
|
46
|
|
Other
|
|
|
10
|
|
|
|
11
|
|
|
|
26
|
|
|
|
24
|
|
Total revenue
|
|
$
|
451
|
|
|
$
|
508
|
|
|
$
|
985
|
|
|
$
|
1,026
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Sales channel:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Direct
|
|
$
|
306
|
|
|
$
|
307
|
|
|
$
|
633
|
|
|
$
|
640
|
|
Advertising agency intermediary
|
|
|
145
|
|
|
|
201
|
|
|
|
352
|
|
|
|
386
|
|
Total revenue
|
|
$
|
451
|
|
|
$
|
508
|
|
|
$
|
985
|
|
|
$
|
1,026
|
|
As of June 30, 2020 and December 31, 2019, long-term debt consisted of obligations under our senior credit facility (the “2019 Senior Credit Facility”), our 5.125% senior notes due 2024 (the “2024 Notes”), our 5.875% senior notes due 2026 (the “2026 Notes”) and our 7.0% senior notes due 2027 (the “2027 Notes”) as follows, in millions:
|
|
June 30,
|
|
|
December 31,
|
|
|
|
2020
|
|
|
2019
|
|
Long-term debt :
|
|
|
|
|
|
|
|
|
2017 Term Loan
|
|
$
|
595
|
|
|
$
|
595
|
|
2019 Term Loan
|
|
|
1,190
|
|
|
|
1,190
|
|
2024 Notes
|
|
|
525
|
|
|
|
525
|
|
2026 Notes
|
|
|
700
|
|
|
|
700
|
|
2027 Notes
|
|
|
750
|
|
|
|
750
|
|
Total outstanding principal, including current portion
|
|
|
3,760
|
|
|
|
3,760
|
|
Unamortized deferred loan costs - 2019 Term Loan
|
|
|
(39
|
)
|
|
|
(44
|
)
|
Unamortized deferred loan costs - 2024 Notes
|
|
|
(4
|
)
|
|
|
(5
|
)
|
Unamortized deferred loan costs - 2026 Notes
|
|
|
(7
|
)
|
|
|
(7
|
)
|
Unamortized deferred loan costs - 2027 Notes
|
|
|
(11
|
)
|
|
|
(11
|
)
|
Unamortized premium - 2026 Notes
|
|
|
4
|
|
|
|
4
|
|
Long-term debt, less deferred financing costs
|
|
|
3,703
|
|
|
|
3,697
|
|
Less current portion
|
|
|
-
|
|
|
|
-
|
|
Long-term debt, less current portion and deferred financing costs
|
|
$
|
3,703
|
|
|
$
|
3,697
|
|
|
|
|
|
|
|
|
|
|
Borrowing availability under Revolving Credit Facility
|
|
$
|
200
|
|
|
$
|
200
|
|
As of June 30, 2020, the interest rate on the balance outstanding under the 2019 Term Loan was 2.7%. The 2019 Term Loan matures on January 2, 2026. As of June 30, 2020, the interest rate on the balance outstanding under the 2017 Term Loan was 2.4%. The 2017 Term Loan matures on February 7, 2024.
As of June 30, 2020, the aggregate minimum principal maturities of our long term debt for the remainder of 2020 and the succeeding 5 years were as follows (in millions):
|
|
Minimum Principal Maturities
|
|
Year
|
|
2019 Senior
Credit Facility
|
|
|
2024 Notes
|
|
|
2026 Notes
|
|
|
2027 Notes
|
|
|
Total
|
|
Remainder of 2020
|
|
$
|
-
|
|
|
$
|
-
|
|
|
$
|
-
|
|
|
$
|
-
|
|
|
$
|
-
|
|
2021
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
2022
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
2023
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
2024
|
|
|
595
|
|
|
|
525
|
|
|
|
-
|
|
|
|
-
|
|
|
|
1,120
|
|
2025
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
Thereafter
|
|
|
1,190
|
|
|
|
-
|
|
|
|
700
|
|
|
|
750
|
|
|
|
2,640
|
|
Total
|
|
$
|
1,785
|
|
|
$
|
525
|
|
|
$
|
700
|
|
|
$
|
750
|
|
|
$
|
3,760
|
|
As of June 30, 2020, there were no significant restrictions on the ability of Gray Television, Inc.'s subsidiaries to distribute cash to Gray or to the guarantor subsidiaries. The 2019 Senior Credit Facility contains affirmative and restrictive covenants with which we must comply. The 2024 Notes, the 2026 Notes and the 2027 Notes include covenants with which we must comply. As of June 30, 2020 and December 31, 2019, we were in compliance with all required covenants under all our debt obligations.
For all of our interest bearing obligations, we made interest payments of approximately $95 million and $105 million during the six-months ended June 30, 2020 and 2019, respectively. We did not capitalize any interest payments during the six-months ended June 30, 2020 and 2019.
4.
|
Fair Value Measurement
|
For purposes of determining a fair value measurement, we utilize market data or assumptions that market participants would use in pricing an asset or liability, including assumptions about risk and the risks inherent in the inputs to the valuation technique. These inputs can be readily observable, market corroborated or generally unobservable. We utilize valuation techniques that maximize the use of observable inputs and minimize the use of unobservable inputs. These inputs are prioritized into a hierarchy that gives the highest priority to unadjusted quoted prices in active markets for identical assets or liabilities (“Level 1”) and the lowest priority to unobservable inputs that require assumptions to measure fair value (“Level 3”). Level 2 inputs are those that are other than quoted prices on national exchanges included within Level 1 that are observable for the asset or liability either directly or indirectly (“Level 2”).
Fair Value of Other Financial Instruments. The estimated fair value of other financial instruments is determined using market information and appropriate valuation methodologies. Interpreting market data to develop fair value estimates involves considerable judgment. The use of different market assumptions or methodologies could have a material effect on the estimated fair value amounts. Accordingly, the estimates presented are not necessarily indicative of the amounts that we could realize in a current market exchange, or the value that ultimately will be realized upon maturity or disposition.
The carrying amounts of the following instruments approximate fair value due to their short term to maturity: (i) accounts receivable, (ii) prepaid and other current assets, (iii) accounts payable, (iv) accrued employee compensation and benefits, (v) accrued interest, (vi) other accrued expenses, (vii) acquisition-related liabilities and (viii) deferred revenue.
The carrying amount of our long-term debt was $3.7 billion at each of June 30, 2020 and December 31, 2019. The fair value was $3.7 billion and $3.9 billion as of June 30, 2020 and December 31, 2019, respectively. Fair value of our long-term debt is based on observable estimates provided by third-party financial professionals as of June 30, 2020 and December 31, 2019 and as such is classified within Level 2 of the fair value hierarchy.
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. For the six-months ending June 30, 2020 and 2019, we did not declare or pay any common stock or Class A common stock dividends.
On January 2, 2019, we issued 11.5 million shares of our common stock at a price of $14.74 per share, the closing price for our common stock on the last trading day preceding the transaction, to certain former shareholders of Raycom as part of the total consideration paid for the Raycom Merger.
On November 5, 2019, our Board of Directors authorized the repurchase of up to $150 million of our outstanding common stock or our Class A common stock prior to December 31, 2022 (the “2019 Repurchase Authorization”). The 2019 Repurchase Authorization superseded all prior repurchase authorizations. The 2019 Repurchase Authorization also prohibits the Company from purchasing shares directly from the Company’s officers, directors, or the Gray Television, Inc. Capital Accumulation Plan (the “401k Plan”).
On December 15, 2019, we entered into an Issuer Repurchase Plan (the “2019 IRP”), under Rules 10b-18 and 10b5-1 of the Securities Exchange Act of 1934. The purpose of the 2019 IRP is to facilitate the orderly repurchase of our common stock through the establishment of the parameters for repurchases of our shares. During 2020, we purchased 905,836 shares of our common stock at an average purchase price of $11.02 per share, excluding commissions, under the 2019 IRP, for a total cost of approximately $10 million, after which the 2019 IRP was terminated early in the second quarter of 2020.
Subsequent to the termination of the 2019 IRP we repurchased an additional 2,930,342 shares of our common stock, for a total cost of approximately $39 million at an average purchase price of $13.33 per share, excluding commissions. As of June 30, 2020, approximately $80 million was available to repurchase shares of our common stock and/or Class A common stock under the 2019 Repurchase Authorization.
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 common stock or Class A common stock. As of June 30, 2020, we had reserved 4,809,164 shares and 1,336,440 shares of our common stock and Class A common stock, respectively, for future issuance under various employee benefit plans.
The components of our net periodic pension benefit are included in miscellaneous income in our income statement. During the six-months ended June 30, 2020, 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 2020, we expect to contribute $3 million to this plan.
During the three and six-month periods ended June 30, 2020, we contributed $3 million and $6 million, respectively, in matching cash contributions to the 401(k) plan. In addition, during the three months ended March 31, 2020, we issued 430,899 shares of our common stock valued at approximately $4 million to fund our 2019 discretionary profit-sharing contribution. The 2019 discretionary profit-sharing contribution was recorded as an expense in 2019 and accrued as of December 31, 2019. During the remainder of 2020, we estimate that our matching cash contributions will be approximately $7 million to this plan, excluding discretionary profit-sharing contributions.
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 plans include our 2017 Equity and Incentive Compensation Plan (the “2017 EICP”) and our Directors’ Restricted Stock Plan. The following table provides our stock-based compensation expense and related income tax benefit for the three and six-month periods ended June 30, 2020 and 2019 (in millions):
|
|
Three Months Ended
|
|
|
Six Months Ended
|
|
|
|
June 30,
|
|
|
June 30,
|
|
|
|
2020
|
|
|
2019
|
|
|
2020
|
|
|
2019
|
|
Stock-based compensation expense, gross
|
|
$
|
3
|
|
|
$
|
2
|
|
|
$
|
7
|
|
|
$
|
5
|
|
Income tax benefit at our statutory rate associated with stock-based compensation
|
|
|
(1
|
)
|
|
|
(1
|
)
|
|
|
(2
|
)
|
|
|
(1
|
)
|
Stock-based compensation expense, net
|
|
$
|
2
|
|
|
$
|
1
|
|
|
$
|
5
|
|
|
$
|
4
|
|
All shares of common stock and Class A common stock underlying outstanding restricted stock units and performance awards are counted as issued at target levels under the 2017 EICP and the Directors’ Restricted Stock Plan for purposes of determining the number of shares available for future issuance.
During the six-months ended June 30, 2020, we granted under the 2017 EICP:
|
●
|
78,722 shares of restricted common stock with a grant date fair value of $11.56 to our non-employee directors that will vest on April 30, 2021;
|
|
●
|
83,407 shares of restricted Class A common stock with a grant date fair value per share of $19.87 to an employee, of which 27,802 shares will vest on each of January 31, 2021 and 2022 and 27,803 shares will vest on January 31, 2023;
|
|
●
|
83,407 shares of restricted Class A common stock with a grant date fair value per share of $19.87 to an employee, subject to the achievement of certain performance measures, which will vest on January 31, 2023;
|
|
●
|
207,787 shares of restricted common stock with a grant date fair value per share of $21.69 to certain employees, of which 69,262 shares will vest on each of January 31, 2021 and 2022 and 69,263 shares will vest on January 31, 2023;
|
|
●
|
40,756 shares of restricted common stock with a grant date fair value per share of $21.69 to an employee, subject to the achievement of certain performance measures, which will vest on January 31, 2023;
|
|
●
|
Restricted stock units representing 90,184 shares of our common stock, to certain employees, of which 60,052 shares will vest on March 1, 2021; and 15,066 shares will vest on each of March 1, 2022 and 2023; and
|
|
●
|
Restricted stock units representing 3,000 shares of our common stock to an employee, which vested on June 1, 2020.
|
During the six-months ended June 30, 2019, we granted under the 2017 EICP:
|
●
|
99,905 shares of restricted Class A common stock with a grant date fair value per share of $15.36 to an employee, of which 33,302 shares that vested on January 31, 2020, and 33,302 shares that will vest on January 31, 2021 and 33,301 shares that will vest on January 31, 2022;
|
|
●
|
99,905 shares of restricted Class A common stock with a grant date fair value per share of $15.36 to an employee, subject to the achievement of certain performance measures, that will vest on January 31, 2022;
|
|
●
|
340,993 shares of restricted common stock with a grant date fair value per share of $14.85 to certain employees that will vest on January 2, 2021;
|
|
●
|
277,048 shares of restricted common stock with a grant date fair value of $16.55 to certain employees, of which 92,349 shares that vested on January 31, 2020, and 92,349 shares that will vest on January 31, 2021, and 92,350 shares will vest on January 31, 2022;
|
|
●
|
48,338 shares of restricted common stock with a grant date fair value per share of $16.55 to an employee, subject to the achievement of certain performance measures, which will vest on January 31, 2022;
|
|
●
|
11,223 shares of restricted common stock with a grant date fair value per share of $17.83 to an employee that vested on February 15, 2020;
|
|
●
|
41,181 shares of restricted common stock with a grant date fair value of $22.10 to our non-employee directors that vested on April 30, 2020; and
|
|
●
|
Restricted stock units representing 398,000 shares of our common stock with a grant date fair value of $18.21 that vested on June 1, 2020.
|
A summary of restricted common stock and Class A common stock activity for the six-month periods ended June 30, 2020 and 2019, respectively, is as follows:
|
|
Six Months Ended
|
|
|
|
June 30, 2020
|
|
|
June 30, 2019
|
|
|
|
|
|
|
|
Weighted-
|
|
|
|
|
|
|
Weighted-
|
|
|
|
|
|
|
|
average
|
|
|
|
|
|
|
average
|
|
|
|
|
|
|
|
Grant Date
|
|
|
|
|
|
|
Grant Date
|
|
|
|
Number of
|
|
|
Fair Value
|
|
|
Number of
|
|
|
Fair Value
|
|
|
|
Shares
|
|
|
Per Share
|
|
|
Shares
|
|
|
Per Share
|
|
Restricted stock - common:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Outstanding - beginning of period (1)
|
|
|
977,547
|
|
|
$
|
15.45
|
|
|
|
578,894
|
|
|
$
|
13.14
|
|
Granted (1)
|
|
|
327,265
|
|
|
$
|
19.25
|
|
|
|
718,783
|
|
|
$
|
16.08
|
|
Vested
|
|
|
(301,185
|
)
|
|
$
|
15.28
|
|
|
|
(352,810
|
)
|
|
$
|
12.98
|
|
Forfeited
|
|
|
(85,630
|
)
|
|
$
|
15.53
|
|
|
|
-
|
|
|
$
|
0.00
|
|
Outstanding - end of period (1)
|
|
|
917,997
|
|
|
$
|
16.86
|
|
|
|
944,867
|
|
|
$
|
15.44
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Restricted stock - Class A common:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Outstanding - beginning of period (1)
|
|
|
449,284
|
|
|
$
|
13.55
|
|
|
|
407,786
|
|
|
$
|
11.82
|
|
Granted (1)
|
|
|
166,814
|
|
|
$
|
19.87
|
|
|
|
199,810
|
|
|
$
|
15.36
|
|
Vested
|
|
|
(136,056
|
)
|
|
$
|
12.32
|
|
|
|
(158,312
|
)
|
|
$
|
11.38
|
|
Outstanding - end of period (1)
|
|
|
480,042
|
|
|
$
|
16.10
|
|
|
|
449,284
|
|
|
$
|
13.55
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Restricted stock units - common stock:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Outstanding - beginning of period
|
|
|
398,000
|
|
|
$
|
18.21
|
|
|
|
-
|
|
|
$
|
0.00
|
|
Granted
|
|
|
93,184
|
|
|
$
|
18.77
|
|
|
|
398,000
|
|
|
$
|
18.21
|
|
Vested
|
|
|
(374,500
|
)
|
|
$
|
18.18
|
|
|
|
-
|
|
|
$
|
0.00
|
|
Forfeited
|
|
|
(26,500
|
)
|
|
$
|
18.21
|
|
|
|
-
|
|
|
$
|
0.00
|
|
Outstanding - end of period
|
|
|
90,184
|
|
|
$
|
18.92
|
|
|
|
398,000
|
|
|
$
|
18.21
|
|
(1) For awards subject to future performance conditions, amounts assume target performance.
At December 31, 2019, we had 274,746 options to acquire our common stock outstanding at an exercise price of $1.99 per share, all of which were vested and exercisable, and no options outstanding to acquire our Class A common stock. During the first quarter of 2020, all of the outstanding options were exercised. The aggregate intrinsic value of the exercised options was approximately $3 million at the date they were exercised. As of June 30, 2020, we did not have any options outstanding for our common stock or Class A common stock.
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 facilities, data centers and vehicles. As of June 30, 2020, 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 six-months ended June 30, 2020.
As of June 30, 2020, the weighted-average remaining term of our operating leases was approximately 11 years. The weighted-average discount rate used to calculate the values associated with our operating leases was 6.76%. The table below describes the nature of lease expense and classification of operating lease expense recognized in the three and six-months ended June 30, 2020 and 2019, respectively (in millions):
|
|
Three Months Ended
|
|
|
Six Months Ended
|
|
|
|
June 30,
|
|
|
June 30,
|
|
|
|
2020
|
|
|
2019
|
|
|
2020
|
|
|
2019
|
|
Lease expense
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Operating lease expense
|
|
$
|
3
|
|
|
$
|
3
|
|
|
$
|
6
|
|
|
$
|
6
|
|
Short-term lease expense
|
|
|
-
|
|
|
|
-
|
|
|
|
1
|
|
|
|
1
|
|
Total lease expense
|
|
$
|
3
|
|
|
$
|
3
|
|
|
$
|
7
|
|
|
$
|
7
|
|
The maturities of operating lease liabilities as of June 30, 2020, for the remainder of 2020 and the succeeding five years were as follows (in millions):
Year ending December 31,
|
|
Operating Leases
|
|
Remainder of 2020
|
|
$
|
5
|
|
2021
|
|
|
10
|
|
2022
|
|
|
10
|
|
2023
|
|
|
8
|
|
2024
|
|
|
8
|
|
Thereafter
|
|
|
47
|
|
Total lease payments
|
|
|
88
|
|
Less: Imputed interest
|
|
|
(27
|
)
|
Present value of lease liabilities
|
|
$
|
61
|
|
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.
10.
|
Goodwill and Intangible Assets
|
During the six-months ended June 30, 2020, we acquired FCC licenses to improve and extend the operations of our television stations. A summary of changes in our goodwill and other intangible assets, on a net basis, for the six-months ended June 30, 2020 is as follows (in millions):
|
|
Net Balance at
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net Balance at
|
|
|
|
December 31,
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
June 30,
|
|
|
|
2019
|
|
|
Additions
|
|
|
Impairments
|
|
|
Amortization
|
|
|
2020
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Goodwill
|
|
$
|
1,446
|
|
|
$
|
-
|
|
|
$
|
-
|
|
|
$
|
-
|
|
|
$
|
1,446
|
|
Broadcast licenses
|
|
|
3,573
|
|
|
|
1
|
|
|
|
-
|
|
|
|
-
|
|
|
|
3,574
|
|
Finite-lived intangible assets
|
|
|
460
|
|
|
|
-
|
|
|
|
-
|
|
|
|
(52
|
)
|
|
|
408
|
|
Total intangible assets net of accumulated amortization
|
|
$
|
5,479
|
|
|
$
|
1
|
|
|
$
|
-
|
|
|
$
|
(52
|
)
|
|
$
|
5,428
|
|
As of June 30, 2020 and December 31, 2019, our intangible assets and related accumulated amortization consisted of the following (in millions):
|
|
As of June 30, 2020
|
|
|
As of December 31, 2019
|
|
|
|
|
|
|
|
Accumulated
|
|
|
|
|
|
|
|
|
|
|
Accumulated
|
|
|
|
|
|
|
|
Gross
|
|
|
Amortization
|
|
|
Net
|
|
|
Gross
|
|
|
Amortization
|
|
|
Net
|
|
Intangible assets not currently subject to amortization:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Broadcast licenses
|
|
$
|
3,628
|
|
|
$
|
(54
|
)
|
|
$
|
3,574
|
|
|
$
|
3,627
|
|
|
$
|
(54
|
)
|
|
$
|
3,573
|
|
Goodwill
|
|
|
1,446
|
|
|
|
-
|
|
|
|
1,446
|
|
|
|
1,446
|
|
|
|
-
|
|
|
|
1,446
|
|
|
|
$
|
5,074
|
|
|
$
|
(54
|
)
|
|
$
|
5,020
|
|
|
$
|
5,073
|
|
|
$
|
(54
|
)
|
|
$
|
5,019
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Intangible assets subject to amortization:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Network affiliation agreements
|
|
$
|
56
|
|
|
$
|
(22
|
)
|
|
$
|
34
|
|
|
$
|
56
|
|
|
$
|
(17
|
)
|
|
$
|
39
|
|
Other definite lived intangible assets
|
|
|
615
|
|
|
|
(241
|
)
|
|
|
374
|
|
|
|
615
|
|
|
|
(194
|
)
|
|
|
421
|
|
|
|
$
|
671
|
|
|
$
|
(263
|
)
|
|
$
|
408
|
|
|
$
|
671
|
|
|
$
|
(211
|
)
|
|
$
|
460
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total intangibles
|
|
$
|
5,745
|
|
|
$
|
(317
|
)
|
|
$
|
5,428
|
|
|
$
|
5,744
|
|
|
$
|
(265
|
)
|
|
$
|
5,479
|
|
Amortization expense for the six-months ended June 30, 2020 and 2019 was $52 million and $57 million, respectively. Based on the current amount of intangible assets subject to amortization, we expect that amortization expense for the remainder of 2020 will be approximately $51 million, and, for the succeeding five years, amortization expense will be approximately as follows: 2021, $98 million; 2022, $94 million; 2023, $88 million; 2024, $24 million; and 2025, $15 million. If and when acquisitions and dispositions occur in the future, actual amounts may vary materially from these estimates.
For the three-month and six-month periods ended June 30, 2020 and 2019, our income tax expense and effective income tax rates were as follows (dollars in millions):
|
|
Three Months Ended
|
|
|
Six Months Ended
|
|
|
|
June 30,
|
|
|
June 30,
|
|
|
|
2020
|
|
|
2019
|
|
|
2020
|
|
|
2019
|
|
Income tax expense
|
|
$
|
6
|
|
|
$
|
18
|
|
|
$
|
24
|
|
|
$
|
21
|
|
Effective income tax rate
|
|
|
35
|
%
|
|
|
29
|
%
|
|
|
27
|
%
|
|
|
45
|
%
|
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 six-months ended June 30, 2020, these estimates increased or decreased our statutory Federal income tax rate to our effective income tax rate of 27% as follows: state income taxes added 5% and permanent differences between our U.S. GAAP income and taxable income resulted in an increase of 1%. For the six-months ended June 30, 2019, these estimates increased or decreased our statutory Federal income tax rate to our effective income tax rate of 45% as follows: state income taxes added 5%, permanent differences between our U.S. GAAP income and taxable income resulted in an increase of 3%, restricted stock vesting resulted in a decrease of 1% and divestiture of component 2 goodwill resulted in an increase of 17%.
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. We are currently evaluating the impact of these provisions of the CARES Act but do not believe it will have a material effect on our estimated effective tax rate.
The Company operates in two business segments: broadcasting and production companies. The broadcasting segment currently operates television stations located across 94 local markets in the United States. The production companies segment includes the production of television and event content. Costs identified as other are primarily corporate and administrative expenses. The following tables present certain financial information concerning the Company’s operating segments (in millions):
|
|
|
|
|
|
Production
|
|
|
|
|
|
|
|
|
|
As of and for the six months ended June 30, 2020:
|
|
Broadcast
|
|
|
Companies
|
|
|
Other
|
|
|
Consolidated
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Revenue (less agency commissions)
|
|
$
|
964
|
|
|
$
|
21
|
|
|
$
|
-
|
|
|
$
|
985
|
|
Operating expenses before depreciation, amortization and (gain) loss on disposal of assets, net:
|
|
|
659
|
|
|
|
24
|
|
|
|
32
|
|
|
|
715
|
|
Depreciation and amortization
|
|
|
87
|
|
|
|
6
|
|
|
|
1
|
|
|
|
94
|
|
(Gain) loss on disposal of assets, net
|
|
|
(13
|
)
|
|
|
-
|
|
|
|
-
|
|
|
|
(13
|
)
|
Operating expenses
|
|
|
733
|
|
|
|
30
|
|
|
|
33
|
|
|
|
796
|
|
Operating income (loss)
|
|
$
|
231
|
|
|
$
|
(9
|
)
|
|
$
|
(33
|
)
|
|
$
|
189
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest expense
|
|
$
|
-
|
|
|
$
|
-
|
|
|
$
|
98
|
|
|
$
|
98
|
|
Capital expenditures (excluding business combinations)
|
|
$
|
51
|
|
|
$
|
-
|
|
|
$
|
-
|
|
|
$
|
51
|
|
Goodwill
|
|
$
|
1,405
|
|
|
$
|
41
|
|
|
$
|
-
|
|
|
$
|
1,446
|
|
Total Assets
|
|
$
|
6,414
|
|
|
$
|
130
|
|
|
$
|
496
|
|
|
$
|
7,040
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
For the six months ended June 30, 2019:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Revenue (less agency commissions)
|
|
$
|
980
|
|
|
$
|
46
|
|
|
$
|
-
|
|
|
$
|
1,026
|
|
Operating expenses before depreciation, amortization and (gain) loss on disposal of assets, net:
|
|
|
670
|
|
|
|
44
|
|
|
|
69
|
|
|
|
783
|
|
Depreciation and amortization
|
|
|
90
|
|
|
|
6
|
|
|
|
1
|
|
|
|
97
|
|
(Gain) loss on disposal of assets, net
|
|
|
(13
|
)
|
|
|
-
|
|
|
|
-
|
|
|
|
(13
|
)
|
Operating expenses
|
|
|
747
|
|
|
|
50
|
|
|
|
70
|
|
|
|
867
|
|
Operating income (loss)
|
|
$
|
233
|
|
|
$
|
(4
|
)
|
|
$
|
(70
|
)
|
|
$
|
159
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest expense
|
|
$
|
-
|
|
|
$
|
-
|
|
|
$
|
116
|
|
|
$
|
116
|
|
Capital expenditures (excluding business combinations)
|
|
$
|
39
|
|
|
$
|
-
|
|
|
$
|
5
|
|
|
$
|
44
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
As of December 31, 2019:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Goodwill
|
|
$
|
1,405
|
|
|
$
|
41
|
|
|
$
|
-
|
|
|
$
|
1,446
|
|
Total Assets
|
|
$
|
6,530
|
|
|
$
|
153
|
|
|
$
|
289
|
|
|
$
|
6,972
|
|