Gray Television(GTN_A) - 2021 Q3 - Quarterly Report

PART I. FINANCIAL INFORMATION This section presents Gray Television, Inc.'s unaudited condensed consolidated financial statements, management's discussion and analysis, market risk disclosures, and controls and procedures for the periods ended September 30, 2021 Item 1. Financial Statements This section presents Gray Television, Inc.'s unaudited condensed consolidated financial statements for the periods ended September 30, 2021, and December 31, 2020, including balance sheets, statements of operations, stockholders' equity, and cash flows, along with detailed notes explaining accounting policies, significant transactions, and financial instrument details Condensed Consolidated Balance Sheets This section provides a snapshot of Gray Television, Inc.'s financial position as of September 30, 2021, and December 31, 2020, detailing assets, liabilities, and stockholders' equity Condensed Consolidated Balance Sheets (in millions) | | September 30, 2021 | December 31, 2020 | | :--- | :--- | :--- | | Assets: | | | | Current assets: | | | | Cash | $322 | $773 | | Accounts receivable, net | $440 | $425 | | Program broadcast rights, net | $32 | $24 | | Income tax refund receivable | $21 | $21 | | Prepaid income taxes | $28 | $- | | Prepaid and other current assets | $29 | $61 | | Total current assets | $872 | $1,304 | | Property and equipment, net | $908 | $737 | | Operating leases right of use asset | $56 | $57 | | Broadcast licenses | $3,784 | $3,579 | | Goodwill | $1,633 | $1,460 | | Other intangible assets, net | $407 | $395 | | Investments in broadcasting, production and technology companies | $105 | $72 | | Other | $14 | $39 | | Total assets | $7,779 | $7,643 | | Liabilities and stockholders' equity: | | | | Current liabilities: | | | | Accounts payable | $34 | $10 | | Employee compensation and benefits | $70 | $53 | | Accrued interest | $50 | $37 | | Accrued network programming fees | $35 | $39 | | Other accrued expenses | $26 | $29 | | Federal and state income taxes | $- | $20 | | Program broadcast obligations | $33 | $25 | | Deferred revenue | $11 | $22 | | Dividends payable | $13 | $13 | | Operating lease liabilities | $8 | $7 | | Total current liabilities | $280 | $255 | | Long-term debt, less deferred financing costs | $3,981 | $3,974 | | Program broadcast obligations | $3 | $5 | | Deferred income taxes | $994 | $885 | | Accrued pension costs | $39 | $43 | | Operating lease liabilities | $51 | $51 | | Other | $19 | $27 | | Total liabilities | $5,367 | $5,240 | | Series A Perpetual Preferred Stock | $650 | $650 | | Stockholders' equity: | | | | Common stock | $1,124 | $1,110 | | Class A common stock | $37 | $34 | | Retained earnings | $861 | $862 | | Accumulated other comprehensive loss, net | $(39) | $(39) | | Treasury stock at cost | $(221) | $(214) | | Total stockholders' equity | $1,762 | $1,753 | | Total liabilities and stockholders' equity | $7,779 | $7,643 | Condensed Consolidated Statements of Operations This section presents Gray Television, Inc.'s financial performance for the three and nine months ended September 30, 2021 and 2020, detailing revenues, operating expenses, and net income Condensed Consolidated Statements of Operations (in millions, except per share data) | | Three Months Ended Sep 30, 2021 | Three Months Ended Sep 30, 2020 | Nine Months Ended Sep 30, 2021 | Nine Months Ended Sep 30, 2020 | | :--- | :--- | :--- | :--- | :--- | | Revenue (less agency commissions): | | | | | | Broadcasting | $581 | $593 | $1,648 | $1,557 | | Production companies | $20 | $11 | $44 | $32 | | Total revenue | $601 | $604 | $1,692 | $1,589 | | Operating expenses: | | | | | | Broadcasting | $384 | $326 | $1,099 | $985 | | Production companies | $13 | $8 | $39 | $32 | | Corporate and administrative | $32 | $15 | $75 | $47 | | Depreciation | $26 | $27 | $76 | $69 | | Amortization of intangible assets | $28 | $26 | $81 | $78 | | Loss (gain) on disposal of assets, net | $51 | $(10) | $46 | $(23) | | Total operating expenses | $534 | $392 | $1,416 | $1,188 | | Operating income | $67 | $212 | $276 | $401 | | Other (expense) income: | | | | | | Miscellaneous (expense), net | $(1) | $(2) | $(7) | $(5) | | Interest expense | $(48) | $(45) | $(143) | $(143) | | Income before income taxes | $18 | $165 | $126 | $253 | | Income tax expense | $35 | $43 | $65 | $67 | | Net (loss) income | $(17) | $122 | $61 | $186 | | Preferred stock dividends | $13 | $13 | $39 | $39 | | Net (loss) income attributable to common stockholders | $(30) | $109 | $22 | $147 | | Basic per share information: | | | | | | Net (loss) income attributable to common stockholders | $(0.32) | $1.15 | $0.23 | $1.52 | | Weighted-average shares outstanding | 95 | 95 | 94 | 97 | | Diluted per share information: | | | | | | Net (loss) income attributable to common stockholders | $(0.32) | $1.14 | $0.23 | $1.52 | | Weighted-average shares outstanding | 95 | 96 | 95 | 97 | | Dividends declared per common share | $0.08 | $- | $0.24 | $- | Condensed Consolidated Statements of Stockholders' Equity This section details changes in Gray Television, Inc.'s stockholders' equity for the three-month periods ended March 31, June 30, and September 30, 2021 and 2020 Condensed Consolidated Statements of Stockholders' Equity (Nine Months Ended Sep 30, 2021, in millions, except for number of shares) | | Class A Common Stock Shares | Class A Common Stock Amount | Common Stock Shares | Common Stock Amount | Retained Earnings | Treasury Stock Class A Shares | Treasury Stock Class A Amount | Treasury Stock Common Shares | Treasury Stock Common Amount | Accumulated Other Comprehensive Loss | Total | | :--- | :--- | :--- | :--- | :--- | :--- | :--- | :--- | :--- | :--- | :--- | :--- | | Balance at Dec 31, 2020 | 8,935,773 | $34 | 103,100,856 | $1,110 | $862 | (1,887,767) | $(26) | (14,960,597) | $(188) | $(39) | $1,753 | | Net income | - | - | - | - | 39 | - | - | - | - | - | 39 | | Preferred stock dividends | - | - | - | - | (13) | - | - | - | - | - | (13) | | Common stock dividends | - | - | - | - | (8) | - | - | - | - | - | (8) | | Issuance of common stock: 401(k) Plan | - | - | 390,389 | 7 | - | - | - | - | - | - | 7 | | 2017 Equity and Incentive Compensation Plan: Restricted stock awards | 233,425 | - | 296,042 | - | - | (110,412) | $(2) | (239,597) | $(4) | - | (6) | | Restricted stock unit awards | - | - | 60,050 | - | - | - | - | (18,275) | $(1) | - | (1) | | Stock-based compensation | - | 1 | - | 2 | - | - | - | - | - | - | 3 | | Balance at Mar 31, 2021 | 9,169,198 | $35 | 103,847,337 | $1,119 | $880 | (1,998,179) | $(28) | (15,218,469) | $(193) | $(39) | $1,774 | | Net income | - | - | - | - | 39 | - | - | - | - | - | 39 | | Preferred stock dividends | - | - | - | - | (13) | - | - | - | - | - | (13) | | Common stock dividends | - | - | - | - | (7) | - | - | - | - | - | (7) | | Issuance of common stock: 401(k) Plan | - | - | 3,655 | - | - | - | - | - | - | - | - | | 2017 Equity and Incentive Compensation Plan: Restricted stock awards | - | - | 47,360 | - | - | - | - | (16,991) | - | - | - | | Stock-based compensation | - | 1 | - | 3 | - | - | - | - | - | - | 4 | | Balance at Jun 30, 2021 | 9,169,198 | $36 | 103,898,352 | $1,122 | $899 | (1,998,179) | $(28) | (15,235,460) | $(193) | $(39) | $1,797 | | Net loss | - | - | - | - | (17) | - | - | - | - | - | (17) | | Preferred stock dividends | - | - | - | - | (13) | - | - | - | - | - | (13) | | Common stock dividends | - | - | - | - | (8) | - | - | - | - | - | (8) | | Issuance of common stock: 2017 Equity and Incentive Compensation Plan: Restricted stock awards | - | - | - | - | - | - | - | (10,720) | - | - | - | | Stock-based compensation | - | 1 | - | 2 | - | - | - | - | - | - | 3 | | Balance at Sep 30, 2021 | 9,169,198 | $37 | 103,898,352 | $1,124 | $861 | (1,998,179) | $(28) | (15,246,180) | $(193) | $(39) | $1,762 | Condensed Consolidated Statements of Cash Flows This section outlines Gray Television, Inc.'s cash inflows and outflows from operating, investing, and financing activities for the nine months ended September 30, 2021 and 2020 Condensed Consolidated Statements of Cash Flows (Nine Months Ended Sep 30, in millions) | | 2021 | 2020 | | :--- | :--- | :--- | | Operating activities: | | | | Net income | $61 | $186 | | Depreciation | $76 | $69 | | Amortization of intangible assets | $81 | $78 | | Amortization of deferred loan costs | $9 | $9 | | Amortization of restricted stock awards | $11 | $12 | | Amortization of program broadcast rights | $26 | $28 | | Payments on program broadcast obligations | $(27) | $(29) | | Common stock contributed to 401(k) | $1 | $5 | | Deferred income taxes | $(18) | $41 | | Loss (gain) on disposals of assets, net | $46 | $(23) | | Other | $(7) | $6 | | Changes in operating assets and liabilities: | | | | Accounts receivable | $6 | $28 | | Prepaid income taxes | $(28) | $(13) | | Other current assets | $33 | $2 | | Accounts payable | $23 | $68 | | Employee compensation, benefits and pension cost | $19 | $(9) | | Accrued network fees and other expenses | $(13) | $(1) | | Accrued interest | $13 | $7 | | Income taxes payable | $(17) | $(11) | | Deferred revenue | $(12) | $35 | | Net cash provided by operating activities | $283 | $488 | | Investing activities: | | | | Acquisitions of businesses and licenses, net of cash acquired | $(956) | $(47) | | Proceeds from sale of television stations | $470 | $- | | Purchases of property and equipment | $(154) | $(70) | | Proceeds from Repack reimbursement | $10 | $19 | | Proceeds from asset sales | $3 | $8 | | Investments in broadcast, production and technology companies | $(37) | $(38) | | Other | $- | $(1) | | Net cash used in investing activities | $(664) | $(129) | | Financing activities: | | | | Borrowings of long-term debt | $250 | $- | | Repayments of long-term debt | $(250) | $- | | Repurchase of common stock | $- | $(59) | | Common stock dividends | $(23) | $- | | Preferred stock dividends | $(39) | $(39) | | Deferred and other loan costs | $(1) | $- | | Taxes related to net share settlement of equity awards | $(7) | $(6) | | Net cash used in financing activities | $(70) | $(104) | | Net (decrease) increase in cash | $(451) | $255 | | Cash at beginning of period | $773 | $212 | | Cash at end of period | $322 | $467 | Notes to Condensed Consolidated Financial Statements This section provides detailed explanations and disclosures supporting the condensed consolidated financial statements, covering accounting policies, significant transactions, and financial instrument details Note 1. Basis of Presentation This note describes Gray Television, Inc.'s business, operating segments, and key accounting policies for financial statement preparation - Gray Television, Inc. is a television broadcasting company, the largest owner of top-rated local TV stations and digital assets in the US. Upon completion of the Meredith Transaction, it will become the nation's second-largest TV broadcaster, serving 113 markets and reaching approximately 36% of US TV households[25] - The Company manages its business through two operating segments: broadcasting and production companies[24] Allowance for Credit Losses Roll-Forward (Nine Months Ended Sep 30, 2021, in millions) | Indicator | Amount (in millions) | | :--- | :--- | | Beginning balance | $10 | | Provision for credit losses | $2 | | Amounts written off | $(1) | | Amounts recovered from previous write-offs | $- | | Ending balance | $11 | Property and Equipment, Net (in millions) | Category | Sep 30, 2021 | Dec 31, 2020 | Estimated Useful Lives (in years) | | :--- | :--- | :--- | :--- | | Land | $217 | $123 | | | Buildings and improvements | $332 | $305 | 7 to 40 | | Equipment | $927 | $834 | 3 to 20 | | Total | $1,476 | $1,262 | | | Accumulated depreciation | $(568) | $(525) | | | Total property and equipment, net | $908 | $737 | | - The FCC's Repack process, requiring certain TV stations to change channels or modify facilities, is expected to conclude for most of the Company's stations by the end of 2021. Most associated costs qualify for capitalization, and reimbursements are recorded as a component of loss (gain) on disposal of assets, net[33] Note 2. Revenue This note details Gray Television, Inc.'s revenue recognition policies and disaggregates revenue by market, service type, and sales channel - Revenue is recognized upon completion and transfer of service control to the customer, with the amount determined by contract consideration. Taxes assessed by governmental authorities are excluded from revenue[36] - The Company recorded $21 million of revenue in the nine months ended September 30, 2021, from deposit liabilities as of December 31, 2020. The deposit liability balance decreased from $21 million at December 31, 2020, to $8 million at September 30, 2021[37] Revenue Disaggregation by Market and Service Type (in millions) | Market and Service Type | Three Months Ended Sep 30, 2021 | Three Months Ended Sep 30, 2020 | Nine Months Ended Sep 30, 2021 | Nine Months Ended Sep 30, 2020 | | :--- | :--- | :--- | :--- | :--- | | Local Advertising | $232 | $188 | $657 | $549 | | National Advertising | $60 | $49 | $174 | $136 | | Political Advertising | $9 | $128 | $24 | $185 | | Retransmission Consent | $266 | $217 | $755 | $650 | | Production Companies | $20 | $11 | $44 | $32 | | Other | $14 | $11 | $38 | $37 | | Total Revenue | $601 | $604 | $1,692 | $1,589 | Revenue Disaggregation by Sales Channel (in millions) | Sales Channel | Three Months Ended Sep 30, 2021 | Three Months Ended Sep 30, 2020 | Nine Months Ended Sep 30, 2021 | Nine Months Ended Sep 30, 2020 | | :--- | :--- | :--- | :--- | :--- | | Direct | $402 | $316 | $1,117 | $948 | | Advertising Agency Intermediary | $199 | $288 | $575 | $641 | | Total Revenue | $601 | $604 | $1,692 | $1,589 | Note 3. Acquisitions and Divestitures This note outlines Gray Television, Inc.'s significant acquisition and divestiture activities, including the Quincy Media and Third Rail Studios transactions, and the pending Meredith Corporation acquisition - On August 2, 2021, Gray completed the acquisition of Quincy Media, Inc. for $930 million, and concurrently divested seven Quincy television stations to Allen Media for $398 million, resulting in a non-cash loss of $48 million from the divestiture[39] - On September 13, 2021, Gray acquired Third Rail Studios for $27 million, marking an initial step in developing planned studio production facilities[40] Allocation of Consideration for 2021 Acquisitions (Quincy and Third Rail) (in millions) | Category | Quincy | Third Rail | Total | | :--- | :--- | :--- | :--- | | Cash | $4 | $- | $4 | | Accounts receivable, net | $23 | $- | $23 | | Other current assets | $5 | $- | $5 | | Property and equipment | $73 | $24 | $97 | | Operating lease right of use asset | $1 | $- | $1 | | Goodwill | $184 | $4 | $188 | | Broadcast licenses | $245 | $- | $245 | | Other intangible assets | $86 | $- | $86 | | Other current liabilities | $(7) | $(1) | $(8) | | Deferred income taxes | $(66) | $- | $(66) | | Operating lease liabilities | $(1) | $- | $(1) | | Total | $547 | $27 | $574 | - On September 23, 2021, Gray divested television station WJRT (ABC) in Flint-Saginaw, Michigan, to Allen Media for $72 million to facilitate regulatory approvals for the pending Meredith Transaction, resulting in a non-cash loss of $5 million[46] Transaction Related Expenses (in millions) | Expense Type | Three Months Ended Sep 30, 2021 | Nine Months Ended Sep 30, 2021 | | :--- | :--- | :--- | | Legal, consulting and other professional fees | $11 | $19 | | Incentive compensation and other severance costs | $- | $- | | Termination of financing agreement | $- | $7 | | Total Transaction Related Expenses | $11 | $26 | Unaudited Pro Forma Financial Information – 2021 Acquisitions (Nine Months Ended Sep 30, in millions, except per share data) | Indicator | 2021 | 2020 | | :--- | :--- | :--- | | Revenue (less agency commissions) | $1,751 | $1,678 | | Net income | $126 | $153 | | Net income attributable to common stockholders | $87 | $114 | | Basic net income attributable to common stockholders, per share | $0.93 | $1.18 | | Diluted net income attributable to common stockholders, per share | $0.92 | $1.18 | - On December 31, 2020, Gray acquired television station KLCW-TV and other assets in the Lubbock, Texas market for $24 million, and entered into a shared services agreement with SagamoreHill[50] - Gray entered into an agreement on May 3, 2021 (amended June 2 and October 6, 2021) to acquire Meredith Corporation's Local Media Group for $16.99 per share in cash, or $2.8 billion total enterprise value, adding 17 television stations in 12 markets. The transaction is expected to close in Q4 2021, contingent on Meredith shareholder and regulatory approvals[56] Note 4. Long-term Debt This note provides details on Gray Television, Inc.'s long-term debt, including outstanding principal, deferred financing costs, and future maturity schedules Long-term Debt (in millions) | Debt Type | Sep 30, 2021 | Dec 31, 2020 | | :--- | :--- | :--- | | 2017 Term Loan | $595 | $595 | | 2019 Term Loan | $1,190 | $1,190 | | 2026 Notes | $700 | $700 | | 2027 Notes | $750 | $750 | | 2030 Notes | $800 | $800 | | Total outstanding principal | $4,035 | $4,035 | | Unamortized deferred loan costs | $(57) | $(64) | | Unamortized premium - 2026 Notes | $3 | $3 | | Long-term debt, less deferred financing costs | $3,981 | $3,974 | | Borrowing availability under Revolving Credit Facility | $299 | $200 | Minimum Principal Maturities of Long-term Debt (in millions) | Year | 2019 Senior Credit Facility | 2026 Notes | 2027 Notes | 2030 Notes | Total | | :--- | :--- | :--- | :--- | :--- | :--- | | Remainder of 2021 | $- | $- | $- | $- | $- | | 2022 | $- | $- | $- | $- | $- | | 2023 | $- | $- | $- | $- | $- | | 2024 | $595 | $- | $- | $- | $595 | | 2025 | $- | $- | $- | $- | $- | | 2026 | $1,190 | $700 | $- | $- | $1,890 | | Thereafter | $- | $- | $750 | $800 | $1,550 | | Total | $1,785 | $700 | $750 | $800 | $4,035 | - In connection with the Meredith Transaction, Gray plans to incur a $1.5 billion incremental term loan, increase its revolving credit facility to $500 million, and issue $1.3 billion in 5.375% senior unsecured notes due 2031 to finance a portion of the acquisition[63] Note 5. Fair Value Measurement This note defines fair value and provides information on the fair value of Gray Television, Inc.'s financial instruments, particularly long-term debt - Fair value is defined as the price received to sell an asset or paid to transfer a liability in an orderly transaction between market participants. The carrying amounts of most current assets and liabilities approximate fair value[65][66] - As of September 30, 2021, the carrying amount of long-term debt was $4.0 billion, with a fair value of $4.1 billion, classified as Level 2 in the fair value hierarchy based on observable third-party estimates[67] Note 6. Stockholders' Equity This note details Gray Television, Inc.'s authorized share capital, dividend policies, and share repurchase programs - Gray is authorized to issue 245 million shares across all classes, including 25 million Class A common stock (10 votes/share), 200 million common stock (1 vote/share), and 20 million 'blank check' preferred stock. Both common and Class A common stock are entitled to equal cash dividends per share[68] - On February 24, 2021, the Board initiated a quarterly cash dividend of $0.08 per share, totaling approximately $23 million in dividends declared and paid during the nine months ended September 30, 2021. No dividends were paid in the same period of 2020[69] - As of September 30, 2021, approximately $204 million was available for share repurchases under existing programs; no shares were repurchased during the nine months ended September 30, 2021[71] Note 7. Retirement Plans This note provides information on Gray Television, Inc.'s contributions to its pension and 401(k) retirement plans - During the nine months ended September 30, 2021, Gray contributed $4 million to its net periodic pension benefit plan[74] - For the 401(k) plan, Gray contributed $11 million in matching cash and $7 million in common stock for 2020 discretionary profit-sharing contributions during the nine months ended September 30, 2021. An additional $2 million in matching cash contributions is expected for the remainder of 2021, with this estimate increasing upon completion of the Meredith Transaction[75] Note 8. Stock-based Compensation This note details Gray Television, Inc.'s stock-based compensation expense and activity for restricted stock and restricted stock units Stock-based Compensation Expense (in millions) | Indicator | Three Months Ended Sep 30, 2021 | Three Months Ended Sep 30, 2020 | Nine Months Ended Sep 30, 2021 | Nine Months Ended Sep 30, 2020 | | :--- | :--- | :--- | :--- | :--- | | Stock-based compensation expense, gross | $3 | $5 | $10 | $12 | | Income tax benefit | $(1) | $(1) | $(3) | $(3) | | Stock-based compensation expense, net | $2 | $4 | $7 | $9 | - During the nine months ended September 30, 2021, Gray granted 47,360 shares of restricted common stock to non-employee directors, 96,355 shares of restricted Class A common stock to an employee (time-based), 96,355 shares of restricted Class A common stock to an employee (performance-based), 247,497 shares of restricted common stock to employees (time-based), and 48,545 shares of restricted common stock to an employee (performance-based)[77] Restricted Stock and RSU Activity (Nine Months Ended Sep 30, 2021 vs 2020) | Category | Number of Shares (2021) | Avg. Grant Date Fair Value (2021) | Number of Shares (2020) | Avg. Grant Date Fair Value (2020) | | :--- | :--- | :--- | :--- | :--- | | Restricted stock - class A common: | | | | | | Outstanding - beginning of period | 480,042 | $16.10 | 449,284 | $13.55 | | Granted | 233,425 | $17.67 | 166,814 | $19.87 | | Vested | (248,539) | $15.00 | (136,056) | $12.32 | | Outstanding - end of period | 464,928 | $17.47 | 480,042 | $16.10 | | Restricted stock - common: | | | | | | Outstanding - beginning of period | 917,533 | $16.84 | 977,547 | $15.45 | | Granted | 343,402 | $18.73 | 359,481 | $18.92 | | Vested | (613,179) | $15.48 | (333,865) | $15.35 | | Forfeited | - | $- | (85,630) | $15.53 | | Outstanding - end of period | 647,756 | $19.13 | 917,533 | $16.84 | | Restricted stock units - common stock: | | | | | | Outstanding - beginning of period | 90,184 | $18.92 | 398,000 | $18.21 | | Granted | 95,115 | $19.05 | 93,184 | $18.77 | | Vested | (60,052) | $18.92 | (374,500) | $18.18 | | Forfeited | - | $- | (26,500) | $18.21 | | Outstanding - end of period | 125,247 | $19.02 | 90,184 | $18.92 | Note 9. Leases This note describes Gray Television, Inc.'s accounting for operating leases, including liabilities, right-of-use assets, and maturity schedules - Operating lease liabilities are recognized at lease commencement based on the present value of lease payments, typically using the incremental borrowing rate. Right-of-use (ROU) assets are measured based on the initial lease liability plus prepaid payments and less incentives[80] - As of September 30, 2021, the weighted-average remaining term of operating leases was approximately 10.25 years, with a weighted-average discount rate of 6.74%[83] Lease Expense (in millions) | Lease Type | Three Months Ended Sep 30, 2021 | Three Months Ended Sep 30, 2020 | Nine Months Ended Sep 30, 2021 | Nine Months Ended Sep 30, 2020 | | :--- | :--- | :--- | :--- | :--- | | Operating lease expense | $3 | $3 | $9 | $9 | | Short-term lease expense | $1 | $- | $2 | $1 | | Total lease expense | $4 | $3 | $11 | $10 | Maturities of Operating Lease Liabilities (as of Sep 30, 2021, in millions) | Year ending December 31, | Operating Leases | | :--- | :--- | | Remainder of 2021 | $3 | | 2022 | $11 | | 2023 | $9 | | 2024 | $9 | | 2025 | $8 | | Thereafter | $43 | | Total lease payments | $83 | | Less: Imputed interest | $(24) | | Present value of lease liabilities | $59 | Note 10. Commitments and Contingencies This note addresses Gray Television, Inc.'s legal actions, claims, and commitments, including those related to the pending Meredith Transaction - The Company is subject to legal actions and claims in the normal course of business, but management believes the ultimate liability will not materially affect financial position, results of operations, or cash flows[84] - Commitments related to the pending Meredith Transaction are discussed in Note 3 (Acquisitions and Divestitures) and Note 4 (Long-Term Debt)[85] Note 11. Goodwill and Intangible Assets This note provides a breakdown of Gray Television, Inc.'s goodwill and intangible assets, including changes from acquisitions, impairments, and amortization Changes in Goodwill and Other Intangible Assets (Nine Months Ended Sep 30, 2021, in millions) | Category | Net Balance at Dec 31, 2020 | Acquisitions and Adjustments, Net | Impairments | Amortization | Net Balance at Sep 30, 2021 | | :--- | :--- | :--- | :--- | :--- | :--- | | Goodwill | $1,460 | $173 | $- | $- | $1,633 | | Broadcast licenses | $3,579 | $205 | $- | $- | $3,784 | | Finite-lived intangible assets | $395 | $93 | $- | $(81) | $407 | | Total intangible assets net of accumulated amortization | $5,434 | $471 | $- | $(81) | $5,824 | Intangible Assets and Related Accumulated Amortization (as of Sep 30, 2021 and Dec 31, 2020, in millions) | Category | Gross (Sep 30, 2021) | Accumulated Amortization (Sep 30, 2021) | Net (Sep 30, 2021) | Gross (Dec 31, 2020) | Accumulated Amortization (Dec 31, 2020) | Net (Dec 31, 2020) | | :--- | :--- | :--- | :--- | :--- | :--- | :--- | | Not subject to amortization: | | | | | | | | Broadcast licenses | $3,838 | $(54) | $3,784 | $3,633 | $(54) | $3,579 | | Goodwill | $1,633 | $- | $1,633 | $1,460 | $- | $1,460 | | Subject to amortization: | | | | | | | | Network affiliation agreements | $83 | $(38) | $45 | $67 | $(28) | $39 | | Other definite lived intangible assets | $717 | $(355) | $362 | $644 | $(288) | $356 | | Total intangibles | $6,271 | $(447) | $5,824 | $5,804 | $(370) | $5,434 | - Amortization expense for the nine months ended September 30, 2021, was $81 million, up from $78 million in the prior year. Expected amortization for the remainder of 2021 is $29 million, and for 2022, $112 million[86] Note 12. Income Taxes This note details Gray Television, Inc.'s income tax expense, effective tax rates, tax payments, and net operating loss carryforwards Income Tax Expense and Effective Income Tax Rates (in millions) | Indicator | Three Months Ended Sep 30, 2021 | Three Months Ended Sep 30, 2020 | Nine Months Ended Sep 30, 2021 | Nine Months Ended Sep 30, 2020 | | :--- | :--- | :--- | :--- | :--- | | Income tax expense | $35 | $43 | $65 | $67 | | Effective income tax rate | 194% | 26% | 52% | 26% | - For the nine months ended September 30, 2021, the effective income tax rate was 52%, significantly higher than the statutory federal rate of 21%, primarily due to state income taxes (5%), permanent differences (3%), and a 23% increase from the divestiture of component 2 goodwill[88] - During the nine months ended September 30, 2021, Gray made $129 million in federal and state income tax payments, net of refunds, including $72 million related to the Quincy Divestiture. An additional $18 million in payments is anticipated for the remainder of 2021, including $17 million for the Flint Divestiture[89] - Gray has approximately $204 million in federal operating loss carryforwards (expiring 2023-2037) and $567 million in state operating loss carryforwards, with approximately half expected to be utilized[90] - The CARES Act allowed Gray to carry back certain Net Operating Losses (NOLs) incurred in 2018-2020 to offset 100% of taxable income for prior years, resulting in a $21 million refund in 2020[91] Note 13. Segment Information This note provides financial information disaggregated by Gray Television, Inc.'s broadcasting and production companies segments - Gray operates in two business segments: broadcasting (television stations in 94 U.S. local markets) and production companies (television content production). Corporate and administrative expenses are identified as 'other'[93] Segment Financial Information (Nine Months Ended Sep 30, 2021, in millions) | Indicator | Broadcasting | Production Companies | Other | Consolidated | | :--- | :--- | :--- | :--- | :--- | | Revenue (less agency commissions) | $1,648 | $44 | $- | $1,692 | | Operating expenses before D&A and loss on disposal | $1,099 | $39 | $75 | $1,213 | | Depreciation and amortization | $146 | $9 | $2 | $157 | | Loss on disposal of assets, net | $46 | $- | $- | $46 | | Operating expenses | $1,291 | $48 | $77 | $1,416 | | Operating income (loss) | $357 | $(4) | $(77) | $276 | | Interest expense | $- | $- | $143 | $143 | | Capital expenditures (excluding business combinations) | $63 | $88 | $3 | $154 | | Goodwill | $1,588 | $45 | $- | $1,633 | | Total assets | $7,229 | $134 | $416 | $7,779 | Segment Financial Information (Nine Months Ended Sep 30, 2020, in millions) | Indicator | Broadcasting | Production Companies | Other | Consolidated | | :--- | :--- | :--- | :--- | :--- | | Revenue (less agency commissions) | $1,557 | $32 | $- | $1,589 | | Operating expenses before D&A and (gain) loss on disposal | $985 | $32 | $47 | $1,064 | | Depreciation and amortization | $136 | $9 | $2 | $147 | | (Gain) loss on disposal of assets, net | $(21) | $(2) | $- | $(23) | | Operating expenses | $1,100 | $39 | $49 | $1,188 | | Operating income (loss) | $457 | $(7) | $(49) | $401 | | Interest expense | $- | $- | $143 | $143 | | Capital expenditures (excluding business combinations) | $69 | $1 | $- | $70 | | As of December 31, 2020: | | | | | | Goodwill | $1,419 | $41 | $- | $1,460 | | Total assets | $6,631 | $141 | $871 | $7,643 | Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations This section provides management's perspective on Gray Television, Inc.'s financial condition, results of operations, and cash flows for the three and nine months ended September 30, 2021, compared to the prior year. It covers business overview, the impact of COVID-19, recent acquisitions and divestitures, revenue trends, operating expenses, and liquidity, including debt and capital expenditure plans Executive Overview This overview highlights Gray Television's business strategy, the impact of COVID-19, key acquisitions and divestitures, and seasonal revenue trends - Gray Television is the largest owner of top-rated local television stations and digital assets in the U.S. and expects to become the nation's second-largest broadcaster after acquiring Meredith's Local Media Group, serving 113 markets and reaching 36% of US TV households[95] - Revenues are primarily from broadcasting and internet advertising, retransmission consent fees, and production companies. Total revenue for the nine months ended September 30, 2021, was $1.7 billion, up from $1.6 billion in 2020[95] - The COVID-19 pandemic continues to impact the business, causing disruptions in content creation, event cancellations, and affecting advertising markets. Management is focused on employee safety, revenue maintenance, and expense reduction, but the high fixed-cost nature of the business limits mitigation[96][97] - Key transactions include the Quincy acquisition ($930 million) and divestiture ($398 million) on August 2, 2021, the Third Rail Acquisition ($27 million) on September 13, 2021, and the pending Meredith acquisition ($2.8 billion enterprise value) expected to close in Q4 2021, which will add 17 stations in 12 markets[99][100][103] - Broadcast advertising revenue is seasonal, typically highest in Q2 and Q4, and influenced by political spending (higher in even-numbered 'on-years'), Olympic Games broadcasts, and Super Bowl network affiliations[111] Revenue Analysis This section analyzes Gray Television, Inc.'s revenue disaggregated by type for the three and nine months ended September 30, 2021 and 2020 Revenue by Type (less agency commissions, in millions) | Revenue Type | 3 Months Ended Sep 30, 2021 (Amount) | 3 Months Ended Sep 30, 2021 (%) | 3 Months Ended Sep 30, 2020 (Amount) | 3 Months Ended Sep 30, 2020 (%) | 9 Months Ended Sep 30, 2021 (Amount) | 9 Months Ended Sep 30, 2021 (%) | 9 Months Ended Sep 30, 2020 (Amount) | 9 Months Ended Sep 30, 2020 (%) | | :--- | :--- | :--- | :--- | :--- | :--- | :--- | :--- | :--- | | Local (incl. internet/digital/mobile) | $232 | 39% | $188 | 31% | $657 | 39% | $549 | 34% | | National | $60 | 10% | $49 | 8% | $174 | 10% | $136 | 9% | | Political | $9 | 2% | $128 | 21% | $24 | 1% | $185 | 12% | | Retransmission consent | $266 | 44% | $217 | 36% | $755 | 45% | $650 | 41% | | Production companies | $20 | 3% | $11 | 2% | $44 | 3% | $32 | 2% | | Other | $14 | 2% | $11 | 2% | $38 | 2% | $37 | 2% | | Total | $601 | 100% | $604 | 100% | $1,692 | 100% | $1,589 | 100% | Results of Operations (Three Months Ended September 30, 2021 vs 2020) This section compares Gray Television, Inc.'s financial performance for the three months ended September 30, 2021, against the same period in 2020, highlighting key revenue and expense drivers - Total revenue decreased by $3 million to $601 million in Q3 2021, primarily due to a $119 million decrease in political advertising (off-year election cycle), largely offset by increases in retransmission consent ($49 million), local advertising, and national advertising, and a $14 million contribution from Olympic Games broadcasts[113] - Broadcasting expenses increased by $58 million (18%) to $384 million, driven by higher retransmission expenses and operating costs from the Quincy Acquisition[114] - Corporate and administrative expenses rose by $17 million (113%) to $32 million, mainly due to $11 million in professional fees for acquisition activities and a $2 million increase in incentive compensation[116] - The Company reported a net loss on disposals of assets of $51 million in Q3 2021, compared to a $10 million gain in Q3 2020, primarily due to non-cash losses of $48 million from the Quincy Divestiture and $5 million from the Flint Divestiture[118] - Interest expense increased by $3 million (7%) to $48 million, due to an increase in principal, including a temporary draw on the Revolving Credit Facility. The average outstanding debt principal balance was $4.0 billion in Q3 2021, up from $3.8 billion in Q3 2020[119] - Income tax expense was $35 million with an effective tax rate of 194% in Q3 2021, significantly higher than 26% in Q3 2020, primarily due to a 160% increase from the divestiture of component two goodwill related to the Quincy and Flint Divestitures[120] Results of Operations (Nine Months Ended September 30, 2021 vs 2020) This section compares Gray Television, Inc.'s financial performance for the nine months ended September 30, 2021, against the same period in 2020, detailing revenue growth and expense changes - Total revenue increased by $103 million (6%) to $1.7 billion for the nine months ended September 30, 2021. This was driven by a $146 million increase in combined local and national revenue, a $12 million increase in production company revenue (post-COVID-19 demand), and a $105 million increase in retransmission consent revenue due to higher rates. These gains were partially offset by a $161 million decrease in political advertising revenue (off-year election cycle)[121] - Broadcasting expenses increased by $114 million to $1.1 billion, with compensation expenses up $17 million (due to incentive compensation and Quincy Acquisition personnel) and non-payroll operating expenses up $97 million (including $73 million in retransmission expense and $18 million in professional service expenses for acquisitions)[122] - Corporate and administrative expenses increased by $28 million (60%) to $75 million, primarily due to $19 million in transaction-related expenses and higher incentive compensation[124] - Depreciation increased to $76 million from $69 million, and amortization increased to $81 million from $78 million, both primarily due to business acquisitions and additions of depreciable assets[125][127] - The Company reported a $46 million loss on disposals of assets, compared to a $23 million gain in the prior year, mainly due to non-cash losses of $48 million from the Quincy Divestiture and $5 million from the Flint Divestiture[128] - Interest expense remained flat at $143 million, as an increase in loan principal was offset by decreasing interest rates. The average outstanding debt balance was $4.1 billion in 2021, up from $3.8 billion in 2020, with average interest rates of 4.4% and 4.7%, respectively[129] - Income tax expense was $65 million with an effective tax rate of 52%, compared to $67 million with a 26% rate in the prior year. The higher effective rate was mainly due to a 23% increase from the divestiture of component two goodwill in the Quincy and Flint Divestitures[130] Liquidity and Capital Resources This section discusses Gray Television, Inc.'s cash flow activities, debt obligations, capital expenditure plans, and future liquidity outlook Liquidity and Capital Resources Summary (in millions) | Indicator | Nine Months Ended Sep 30, 2021 | Nine Months Ended Sep 30, 2020 | | :--- | :--- | :--- | | Net cash provided by operating activities | $283 | $488 | | Net cash used in investing activities | $(664) | $(129) | | Net cash used in financing activities | $(70) | $(104) | | Net (decrease) increase in cash | $(451) | $255 | | As of: | Sep 30, 2021 | Dec 31, 2020 | | Cash | $322 | $773 | | Long-term debt, including current portion | $3,981 | $3,974 | | Borrowing availability under Revolving Credit Facility | $299 | $200 | | Series A Perpetual Preferred Stock | $650 | $650 | - Net cash provided by operating activities decreased by $205 million to $283 million, primarily due to a $125 million decrease in net income (driven by loss on asset disposal and lower political advertising) and an $82 million use of cash from changes in net working capital[132] - Net cash used in investing activities increased significantly to $664 million from $129 million, largely due to acquisition activities, net of divestitures, in the 2021 nine-month period[133] - Net cash used in financing activities decreased to $70 million from $104 million. In 2021, cash was used for common stock dividends ($23 million), while in 2020, $59 million was used for common stock repurchases (no repurchases in 2021)[134] - Gray estimates $178 million in debt interest payments over the next 12 months, which will increase significantly upon completion of the Meredith acquisition. The Company expects current cash, future operating cash flows, and potential borrowings/financing to be sufficient for debt service, capital expenditures, and acquisition obligations[135][136] - Capital expenditures for the nine months ended September 30, 2021, were $154 million (including $91 million for Doraville land purchase), up from $70 million in 2020. Full-year 2021 capital expenditures (excluding Repack) are estimated at $185-$190 million, including $110 million for Doraville and $75-$80 million for routine expenditures[138] - The pending Meredith Transaction, valued at $2.8 billion, is expected to close in Q4 2021 and will materially affect operations, liquidity, and capital expenditures, with new debt obligations of approximately $2.8 billion planned for financing[140][141][142] Cautionary Note Regarding Forward-Looking Statements This note advises that the report contains forward-looking statements subject to risks and uncertainties, including those related to COVID-19 and the Meredith acquisition - This report contains forward-looking statements identified by words like 'believes,' 'expects,' 'anticipates,' and 'estimates,' which are not guarantees of future performance and involve risks and uncertainties. These include expectations regarding the COVID-19 pandemic's impact, future financial performance, and the completion and integration of the Meredith acquisition[147] Critical Accounting Policies This note identifies Gray Television, Inc.'s critical accounting policies for intangible assets and income taxes, which involve significant judgments and estimations - Management considers accounting policies related to intangible assets and income taxes as critical, requiring significant judgments and estimations where variances could materially affect future reported results. These policies are further detailed in the 2020 Form 10-K[146] Item 3. Quantitative and Qualitative Disclosures About Market Risk The Company states that its market risk profile for financial instruments as of September 30, 2021, has not materially changed since December 31, 2020, with further details available in the 2020 Form 10-K - The market risk of financial instruments as of September 30, 2021, has not materially changed since December 31, 2020[148] Item 4. Controls and Procedures Management, including the CEO and CFO, concluded that the Company's disclosure controls and procedures were effective as of September 30, 2021, ensuring timely and accurate reporting of information required by the Securities Exchange Act of 1934 - As of September 30, 2021, the CEO and CFO concluded that the Company's disclosure controls and procedures are effective in ensuring timely and accurate reporting of information required by the Securities Exchange Act of 1934[149] PART II. OTHER INFORMATION This section includes disclosures on risk factors, a list of exhibits, and the official signatures for the quarterly report Item 1A. Risk Factors This section refers readers to the risk factors discussed in the Company's Annual Report on Form 10-K for the fiscal year ended December 31, 2020, noting no material changes to these factors as of the current reporting period - No material changes to the risk factors discussed in the Annual Report on Form 10-K for the fiscal year ended December 31, 2020, have occurred[150] Item 6. Exhibits This section lists the exhibits filed as part of the Quarterly Report on Form 10-Q, including an amendment to the merger agreement, CEO and CFO certificates, and Inline XBRL taxonomy documents List of Exhibits | Exhibit Number | Description of Document | | :--- | :--- | | 2.1 | Amendment and Consent to Agreement and Plan of Merger (Oct 6, 2021) | | 31.1 | Rule 13(a) – 14(a) Certificate of Chief Executive Officer | | 31.2 | Rule 13(a) – 14(a) Certificate of Chief Financial Officer | | 32.1 | Section 1350 Certificate of Chief Executive Officer | | 32.2 | Section 1350 Certificate of Chief Financial Officer | | 101.SCH | Inline XBRL Taxonomy Extension Schema Document | | 101.CAL | Inline XBRL Taxonomy Extension Calculation Linkbase Document | | 101.DEF | Inline XBRL Taxonomy Extension Definition Linkbase Document | | 101.LAB | Inline XBRL Taxonomy Extension Label Linkbase Document | | 101.PRE | Inline XBRL Taxonomy Extension Presentation Linkbase Document | | 104 | Cover page formatted in Inline XBRL | SIGNATURES The report is duly signed on behalf of Gray Television, Inc. by James C. Ryan, Executive Vice President and Chief Financial Officer, on November 4, 2021, pursuant to the requirements of the Securities Exchange Act of 1934 - The report was signed by James C. Ryan, Executive Vice President and Chief Financial Officer, on November 4, 2021[154]