SEC Filings

 
gtn20171231_10k.htm
 


UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

FORM 10-K

Annual report pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934 for the fiscal year ended December 31, 2017 or

Transition report pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934 for the transition period from __________ to __________.

 

Commission File Number 1-13796


GRAY TELEVISION, INC.

(Exact Name of Registrant as Specified in its Charter)

 

Georgia

(State or Other Jurisdiction of

Incorporation or Organization)

58-0285030

(I.R.S. Employer

Identification No.)

4370 Peachtree Road, NE Atlanta, GA

(Address of Principal Executive Offices)

30319

(Zip Code)

 

Registrant’s telephone number, including area code: (404) 504-9828

 

Securities registered pursuant to Section 12(b) of the Act:

Title of each class

Name of each exchange on which registered

Class A Common Stock (no par value)

Common Stock (no par value)

New York Stock Exchange

New York Stock Exchange

Securities registered pursuant to Section 12(g) of the Act: NONE

________________________________________

 

Indicate by check mark if the registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities Act. Yes ☐ No ☒

 

Indicate by check mark if the registrant is not required to file reports pursuant to Section 13 or Section 15(d) of the Act. Yes ☐ No ☒

 

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes ☒ No ☐

 

Indicate by check mark whether the registrant has submitted electronically and posted on its corporate web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files). Yes ☒ No ☐

 

Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K is not contained herein, and will not be contained, to the best of the registrant’s knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K. ☒

 

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company. See definition of “large accelerated filer,” “accelerated filer,” “smaller reporting company” and “emerging growth company” in Rule 12b-2 of the Exchange Act. (Check one).

 

Large accelerated filer  
Non-accelerated filer ☐ (do not check if a smaller reporting company) Accelerated filer ☐
Emerging growth company Smaller reporting company ☐

     

If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act.

 

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Act). Yes ☐ No ☒

 

The aggregate market value of the voting stock (based upon the closing sales prices quoted on the New York Stock Exchange) held by non-affiliates of the registrant (solely for purposes of this calculation, all directors, executive officers and 10% or greater stockholders of the registrant are considered to be “affiliates”) as of June 30, 2017: Class A Common Stock and Common Stock; no par value –$874,760,950.

 

The number of shares outstanding of the registrant’s classes of common stock as of February 23, 2018: Class A Common Stock; no par value –6,729,035 shares; Common Stock, no par value –83,591,627 shares.

 

DOCUMENTS INCORPORATED BY REFERENCE

Portions of the registrant’s definitive proxy statement for the annual meeting of stockholders, to be filed within 120 days of the registrant’s fiscal year end, pursuant to Regulation 14A are incorporated by reference into Part III hereof.



 

 

 

 

Gray Television Inc.

 
 

INDEX

 

 

PART OR ITEM

DESCRIPTION                                 

PAGE

     

PART I

Item 1.

Business.

3

Item 1A.

Risk Factors.

16

Item 1B.

Unresolved Staff Comments.

28

Item 2.

Properties.

28

Item 3.

Legal Proceedings.

28

Item 4.

Mine Safety Disclosures.

29

 

Executive Officers of the Registrant.

29

     

PART II

Item 5.

Market for Registrant’s Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities.

30

Item 6.

Selected Financial Data.

33

Item 7.

Management’s Discussion and Analysis of Financial Condition and Results of Operations.

34

Item 7A.

Quantitative and Qualitative Disclosures about Market Risk.

50

Item 8.

Financial Statements and Supplementary Data.

51

Item 9.

Changes in and Disagreements with Accountants on Accounting and Financial Disclosure.

96

Item 9A.

Controls and Procedures.

96

Item 9B.

Other Information.

96

     

PART III

Item 10.

Directors, Executive Officers and Corporate Governance.

97

Item 11.

Executive Compensation.

97

Item 12.

Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters.

97

Item 13.

Certain Relationships and Related Transactions, and Director Independence.

99

Item 14.

Principal Accountant Fees and Services.

99

     

PART IV

Item 15.

Exhibits, Financial Statement Schedules.

99

Item 16.

Form 10-K Summary.

102

     

SIGNATURES

 

103

 

2
 

 

 

 

PART 1

 

Item 1.

Business.

 

In this annual report on Form 10-K (the “Annual Report”), unless otherwise indicated or the context otherwise requires, the words “Gray,” the “Company,” “we,” “us,” and “our” refer to Gray Television, Inc. and its consolidated subsidiaries. For more information on variable interest entities, see Item 8, Note 1 “Description of Business and Summary of Significant Accounting Policies” of our audited consolidated financial statements included elsewhere herein. The discussion herein of the television (or “TV”) stations that we own and operate does not include our interest in the television and radio stations owned by Sarkes Tarzian, Inc.

 

Our common stock and our Class A common stock are listed on The New York Stock Exchange (the “NYSE”) under the symbols “GTN” and “GTN.A.”

 

Unless otherwise indicated, all station rank, in-market share and television household data herein are derived from reports prepared by The Nielsen Company (“Nielsen”). While we believe this data to be accurate and reliable, we have not independently verified such data nor have we ascertained the underlying economic assumptions relied upon therein, and cannot guarantee the accuracy or completeness of such data.

 

General

 

We are a television broadcast company headquartered in Atlanta, Georgia, that owns and operates television stations and leading digital assets in markets throughout the United States. As of February 23, 2018, we owned and operated television stations in 57 television markets broadcasting over 200 separate programming streams, including over 100 affiliates of the CBS Network (“CBS”), the NBC Network (“NBC”), the ABC Network (“ABC”) and the FOX Network (“FOX”). We refer to these major broadcast networks collectively as the “Big Four” networks.

 

In addition to a primary broadcast channel, each of our stations can also broadcast additional secondary digital channels within a market by utilizing the same bandwidth, but with different programming from the primary channel. In addition to affiliations with ABC, CBS and FOX, our secondary channels are affiliated with numerous smaller networks and program services including, among others, the CW Network or the CW Plus Network (collectively, “CW”), MY Network (“MY” or “My Network”), the MeTV Network (“MeTV”), This TV Network (“This TV”), Antenna TV (“Ant.”), Telemundo (“Tel.”), Cozi, Heroes and Icons (“H&I”) and MOVIES! Network (“Movies”). Certain of our secondary digital channels are affiliated with more than one network simultaneously. We also broadcast local news/weather channels in some markets (“News”). Our combined TV station group reaches approximately 10.4% of total United States television households.

 

Our operating revenues are derived primarily from broadcast and internet advertising, retransmission consent fees and, to a lesser extent, other sources such as production of commercials, tower rentals and management fees. For the years ended December 31, 2017, 2016 and 2015 we generated revenue of $882.7 million, $812.5 million, $597.4 million, respectively.

 

Markets and Stations

 

We operate in markets below the top 50 designated market areas (“DMAs”) and have strong, market leading positions in our markets. We believe a key driver for our strong market position is the strength of our local news and information programs. We believe that our market position and our strong local revenue streams have enabled us to maintain more stable revenues compared to many of our peers.

 

3

 

 

We are diversified across our markets and network affiliations. In 2017 and 2016, our largest market by revenue was Springfield, Missouri, which contributed approximately 5% of our revenue in each year. Our top 10 markets by Company revenue contributed approximately 30% and 36% of our revenue for the years ended December 31, 2017 and 2016, respectively. For the years ended December 31, 2017 and 2016, our NBC-affiliated channels accounted for 33% and 36%, respectively, of our revenue; our CBS-affiliated channels accounted for 36% and 35%, respectively, of our revenue; our ABC-affiliated channels accounted for 18% and 18%, respectively, of our revenue; and our FOX-affiliated channels accounted for less than 1% and approximately 1%, respectively, of our revenue.

 

In each of our markets, we own and/or operate at least one station broadcasting a primary channel affiliated with the Big Four networks. We also own additional stations in some markets, some of which also broadcast primary channels affiliated with one of the Big Four networks. Most of our stations also broadcast secondary digital channels that are affiliated with various networks. The terms of our affiliations with these networks are governed by network affiliation agreements. Each network affiliation agreement provides the affiliated station with the right to broadcast all programs transmitted by the affiliated network. Our network affiliation agreements with the Big Four broadcast networks currently expire at various dates through December 2021.

 

Television Industry Background

 

The Federal Communications Commission (the “FCC”) grants broadcast licenses to television stations. There are only a limited number of broadcast licenses available in any one geographic area. Each commercial television station in the United States is assigned by Nielsen to one of 210 DMAs. These markets are ranked in size according to their number of television households, with the market having the largest number of television households ranked number one (New York City). Each DMA is an exclusive geographic area consisting of all counties (and in some cases, portions of counties) in which the home-market commercial television stations receive the greatest percentage of total viewing hours. Nielsen periodically publishes data on estimated audiences for the television stations in each DMA.

 

Television station revenue is derived primarily from local, regional and national advertising and retransmission consent fees. Television station revenue is derived to a much lesser extent from studio and tower space rental fees and commercial production activities. “Advertising” refers primarily to advertisements broadcast by television stations, but it also includes advertisements placed on a television station’s website and sponsorships of television programming and off-line content (such as email messages, mobile applications, and other electronic content distributed by stations). Advertising rates are generally based upon: (i) the size of a station’s market, (ii) a station’s overall ratings, (iii) a program’s popularity among targeted viewers, (iv) the number of advertisers competing for available time, (v) the demographic makeup of the station’s market, (vi) the availability of alternative advertising media in the market, (vii) the presence of effective sales forces and (viii) the development of projects, features and programs that tie advertiser messages to programming and/or digital content on a station’s website or mobile applications.

 

Advertising rates can also be determined in part by a station’s overall ratings and in-market share, as well as the station’s ratings and market share among particular demographic groups that an advertiser may be targeting. Because broadcast stations rely on advertising revenues, they are sensitive to cyclical changes in the economy. The sizes of advertisers’ budgets, which can be affected by broad economic trends, can affect the broadcast industry in general and the revenues of individual broadcast television stations.

 

4

 

 

Strategy

 

Our success is based on the following strategies:

 

Grow by Leveraging our Diverse National Footprint. We serve a diverse and national footprint of television stations in 57 television markets that cover approximately 10.4% of United States television households. We currently operate in DMAs ranked between 61 and 209, of which many are markets with universities and/or state capitals. We believe markets with universities and state capitals provide significant advantages as they generally offer more favorable advertising demographics, more stable economics and a stronger affinity between local stations and university sports teams than other markets. We also seek to operate in markets that we believe have the potential for significant political advertising revenue in periods leading up to elections. We are also diversified across our programming, broadcasting over 200 programming streams, including over 100 affiliates of CBS, NBC, ABC and FOX.

 

Maintain and Grow our Market Leadership Position. Based on the consolidated results of the four Nielsen “sweeps” periods in 2017, our owned and operated television stations achieved the #1 ranking in overall audience in 42 of our 57 markets and the #1 ranking in local news audience in 39 of our markets. In addition, our stations achieved the #1 or #2 ranking in both overall audience and news audience in all 57 of our 57 markets.

 

We believe there are significant advantages in operating the #1 or #2 television broadcasting stations in a local market. Strong audience and market share allows us to enhance our advertising revenue through price discipline and leadership. We believe a top-rated news platform is critical to capturing incremental sponsorship and political advertising revenue. Our high-quality station group allows us to generate higher operating margins, which allows us additional opportunities to reinvest in our business to further strengthen our network and news ratings. Furthermore, we believe operating the top ranked stations in our various markets allows us to attract and retain top talent.

 

We also believe that our local market leadership positions help us in negotiating more beneficial terms in our major network affiliation agreements, which expire at various dates through December 2021, and in our syndicated programming agreements. These leadership positions also give us additional leverage to negotiate retransmission contracts with cable system operators, telephone video distributors, direct broadcast satellite (or “DBS”) operators, and other multichannel video programming distributors (or “MVPDs”).

 

We intend to maintain our market leadership position through continued prudent investment in our news and syndicated programs, as well as continued technological advances and workflow improvements. We expect to continue to invest in technological upgrades in the future. We believe the foregoing will help us maintain and grow our market leadership; thereby enhancing our ability to grow and further diversify our revenues and cash flows.

 

Continue to Pursue Strategic Growth and Accretive Acquisition Opportunities. Over the last several years, the television broadcasting industry has been characterized by a high level of acquisition activity. We believe that there are a number of television stations, and a few station groups, that have attractive operating profiles and characteristics, and that share our commitment to local news coverage in the communities in which they operate and to creating high-quality and locally-driven content. On a highly selective basis, we may pursue opportunities for the acquisition of additional television stations or station groups that fit our strategic and operational objectives, and where we believe that we can improve revenue, efficiencies and cash flow through active management and cost controls. As we consider potential acquisitions, we primarily evaluate potential station audience and revenue shares and the extent to which the acquisition target would positively impact our existing station operations. Consistent with this strategy, from October 31, 2013 through December 31, 2017, we completed 23 acquisition transactions and three divestiture transactions. These transactions added a net total of 51 television stations in 31 television markets, including 26 new television markets, to our operations. For more information on these transactions see Note 2 “Acquisitions and Dispositions” of our audited consolidated financial statements included elsewhere herein. This note also describes the stations we acquired in each of 2017, 2016 and 2015, which we may also refer to collectively as our acquisitions, our recent acquisitions or the acquisitions.

 

5

 

 

Continue to Monetize Digital Spectrum. We currently broadcast over 100 secondary channels. Certain of our secondary channels are affiliated with more than one network simultaneously. Our strategy includes expanding upon our digital offerings and sales. We also evaluate opportunities to use spectrum for future delivery of data to mobile devices using a new transmission standard.

 

Continue to Return Capital to Our Shareholders. In the fourth quarter of 2016, our Board of Directors authorized the repurchase of up to $75.0 million of our outstanding common stock (the “2016 Repurchase Authorization”) through December 31, 2019. As of December 31, 2017, $69.0 million remained available to purchase shares of our common stock under the 2016 Repurchase Authorization. We plan to continue to return additional capital to our shareholders by repurchasing our common stock from time to time for the duration of the authorization, although any future repurchases will depend on general market conditions, regulatory requirements, alternative investment opportunities and other considerations.

 

Continue to Maintain Prudent Cost Management. Historically, we have closely managed our costs to maintain and improve our margins. We believe that our market leadership position provides us additional negotiating leverage to enable us to lower our syndicated programming costs. We have increased the efficiency of our stations by automating video production and back office processes. We believe that we will be able to further benefit from our cost and operational efficiencies as we continue to grow.

 

Further Strengthen our Balance Sheet. During the last several years, we have leveraged our strong cash flow and efficient operating model to grow our diverse national footprint. During 2017 and 2016, we acted to improve the terms of our debt by amending or replacing our long term debt in order to lock in more attractive terms while interest rates are at relatively low levels. Also during 2017, we completed an underwritten public offering of 17.25 million shares of our common stock at a price to the public of $14.50 per share. The net proceeds of the offering were $238.9 million, after deducting underwriting discounts and expenses.

 

6

 

 

Stations

 

The following table provides information about television stations owned by Gray Television, Inc. as of February 23, 2018:

 

 

 

 

 

 

 

 

 

 

Primary

   

 

 

 

 

 

 

 

 

 

Broadcast

 

Primary Channel

 

 

 

 

Station

 

Network

 

License

 

Station

 

News

DMA

 

Designated Market Area

 

Call

 

Affiliation

 

Expiration

 

Rank in

 

Rank in

Rank (a)

 

("DMA")

 

Letters

 

(b)

 

Date (c)

 

DMA (d)

 

DMA (e)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

61

 

Knoxville, TN

 

WVLT

 

 

CBS

 

8/1/2021

 

 

2

 

3

61

 

Knoxville, TN

 

WBXX

 

 

CW

 

8/1/2021

 

 

4

 

5

63

 

Lexington, KY

 

WKYT

 

 

CBS

 

8/1/2021

 

 

1

 

1

(f)

 

Hazard, KY

 

WYMT

 

 

CBS

 

8/1/2021

 

 

2

 

3

67

 

Wichita/Huthcinson, KS

 

KWCH

 

 

CBS

 

6/1/2022

 

 

1

 

1

67

 

Wichita/Huthcinson, KS

 

KSCW

 

 

CW

 

6/1/2022

 

 

5

 

4

67

 

(Ensign, KS)

 

KBSD

(g)

 

CBS

 

6/1/2022

 

 

 

 

 

67

 

(Goodland, KS)

 

KBSL

(g)

 

CBS

 

6/1/2022

 

 

 

 

 

67

 

(Hays, KS)

 

KBSH

(g)

 

CBS

 

6/1/2022

 

 

 

 

 

69

 

Green Bay/Appleton

 

WBAY

 

 

ABC

 

12/1/2021

 

 

1

 

2

70

 

Roanoke/Lynchburg, VA

 

WDBJ

 

 

CBS

 

10/1/2020

 

 

1

 

1

71

 

Flint/Saginaw/Bay City, MI

 

WJRT

 

 

ABC

 

10/1/2021

 

 

2

 

2

73

 

Charleston/Huntington, WV

 

WSAZ

 

 

NBC

 

10/1/2020

 

 

1

 

1

73

 

Charleston/Huntington, WV

 

WQCW

 

 

CW

 

10/1/2021

 

 

7

 

5

74

 

Omaha, NE

 

WOWT

 

 

NBC

 

6/1/2022

 

 

2

 

2

75

 

Springfield, MO

 

KYTV

 

 

NBC

 

2/1/2022

 

 

1

 

1

75

 

Springfield, MO

 

KYCW

 

 

CW

 

2/1/2022

 

 

4

 

4

75

 

Springfield, MO

 

KSPR

 

 

ABC

 

2/1/2022

 

 

3

 

2

78

 

Toledo, OH

 

WTVG

 

 

ABC

 

10/1/2021

 

 

1

 

1

81

 

Madison, WI

 

WMTV

 

 

NBC

 

12/1/2021

 

 

2

 

2

86

 

Waco/Temple/Bryan, TX

 

KWTX

 

 

CBS

 

8/1/2022

 

 

1

 

1

86

 

Waco/Temple/Bryan, TX

 

KBTX

 

 

CBS

 

8/1/2022

 

 

5

 

3

87

 

Colorado Springs/Pueblo, CO

 

KKTV

 

 

CBS

 

4/1/2022

 

 

1

 

2

91

 

Cedar Rapids, IA

 

KCRG

 

 

ABC

 

2/1/2022

 

 

1

 

1

96

 

South Bend/Elkhart, IN

 

WNDU

 

 

NBC

 

8/1/2021

 

 

2

 

2

97

 

Burlington, VT - Plattsburgh, NY

 

WCAX

 

 

CBS

 

4/1/2023

 

 

1

 

1

100

 

Greenville/New Bern/Washington, NC

 

WITN

 

 

NBC

 

12/1/2020

 

 

1

 

1

102

 

Davenport, IA (Quad Cities)

 

KWQC

 

 

NBC

 

2/1/2022

 

 

1

 

1

105

 

Reno, NV

 

KOLO

 

 

ABC

 

10/1/2022

 

 

2

 

1

106

 

Lincoln/Hastings/Kearney, NE

 

KOLN

 

 

CBS

 

6/1/2022

 

 

1

 

1

106

 

(Grand Island, NE)

 

KGIN

(g)

 

CBS

 

6/1/2022

 

 

 

 

 

106

 

Lincoln/Hastings/Kearney, NE

 

KSNB

 

 

NBC

 

6/1/2022

 

 

4

 

4

108

 

Tallahassee, FL/Thomasville, GA

 

WCTV

 

 

CBS

 

4/1/2021

 

 

1

 

1

108

 

Tallahassee, FL/Thomasville, GA

 

WFXU

 

 

MY

 

2/1/2021

 

 

(h)

 

(h)

110

 

Sioux Falls, SD

 

KSFY

 

 

ABC

 

4/1/2022

 

 

2

 

2

110

 

(Pierre, SD)

 

KPRY

(g)

 

ABC

 

4/1/2022

 

 

 

 

 

112

 

Augusta, GA/Aiken, SC

 

WRDW

 

 

CBS

 

4/1/2021

 

 

2

 

2

112

 

Augusta, GA/Aiken, SC

 

WAGT

 

 

NBC

 

4/1/2021

 

 

4

 

4

113

 

Fargo/Valley City, ND

 

KVLY

 

 

NBC/CBS

 

4/1/2022

 

 

1

 

2

113

 

Fargo/Valley City, ND

 

KXJB

 

 

CBS

 

4/1/2022

 

 

3

 

4

115

 

Lansing, MI

 

WILX

 

 

NBC

 

10/1/2021

 

 

2

 

2

129

 

La Crosse/Eau Claire, WI

 

WEAU

 

 

NBC

 

12/1/2021

 

 

1

 

1

134

 

Wausau/Rhinelander, WI

 

WSAW

 

 

CBS

 

12/1/2021

 

 

1

 

2

134

 

Wausau/Rhinelander, WI

 

WZAW

 

 

FOX

 

12/1/2021

 

 

4

 

4

137

 

Monroe/El Dorado, LA

 

KNOE

 

 

CBS/ABC

 

6/1/2021

 

 

1

 

1

138

 

Rockford, IL

 

WIFR

 

 

CBS

 

12/1/2021

 

 

1

 

1

139

 

Topeka, KS

 

WIBW

 

 

CBS

 

6/1/2022

 

 

1

 

1

 

7

 

 

Stations owned by Gray Television, Inc. (continued):

 

 

 

 

 

 

 

 

 

 

Primary

 

 

 

 

 

 

 

 

 

 

 

Broadcast

 

Primary Channel

 

 

 

 

Station

 

Network 

 

License

 

Station

 

News

DMA 

 

Designated Market Area

 

Call

 

Affiliation 

 

Expiration 

 

Rank in

 

Rank in

Rank (a)

 

("DMA")

 

Letters

 

(b)

 

Date (c)

 

DMA (d)

 

DMA (e)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

141

 

Minot/Bismarck/Dickinson, ND

 

KFYR

 

 

NBC

 

4/1/2022

 

 

1

 

1

141

 

(Minot, ND)

 

KMOT

(g)

 

NBC

 

4/1/2022

 

 

 

 

 

141

 

(Williston, ND)

 

KUMV

(g)

 

NBC

 

4/1/2022

 

 

 

 

 

141

 

(Dickinson, ND)

 

KQCD

(g)

 

NBC

 

4/1/2022

 

 

 

 

 

141

 

Minot/Bismarck/Dickinson, ND

 

KNDX

 

 

FOX

 

4/1/2022

 

 

3

 

4

141

 

(Minot, ND)

 

KXND

(g)

 

FOX

 

4/1/2022

 

 

 

 

 

144

 

Odessa/Midland, TX

 

KOSA

 

 

CBS

 

8/1/2022

 

 

1

 

1

147

 

Anchorage, AK

 

KTUU

 

 

NBC

 

2/1/2023

 

 

1

 

1

147

 

Anchorage, AK

 

KYES

 

 

MY

 

2/1/2023

 

 

7

 

(i)

151

 

Panama City, FL

 

WJHG

 

 

NBC

 

2/1/2021

 

 

1

 

2

151

 

Panama City, FL

 

WECP

 

 

CBS

 

2/1/2021

 

 

3

 

3

154

 

Albany, GA

 

WSWG

 

 

CBS

 

4/1/2021

 

 

2

 

(i)

156

 

Bangor, ME

 

WABI

 

 

CBS

 

4/1/2023

 

 

1

 

1

159

 

Gainesville, FL

 

WCJB

 

 

ABC

 

2/1/2021

 

 

1

 

1

160

 

Sherman, TX/Ada, OK

 

KXII

 

 

CBS/FOX

 

8/1/2022

 

 

1

 

1

160

 

(Paris, TX)

 

KXIP

(g)

 

CBS

 

8/1/2022

 

 

 

 

 

169

 

Clarksburg/Weston, WV

 

WDTV

 

 

CBS

 

10/1/2020

 

 

2

 

2

169

 

Clarksburg/Weston, WV

 

WVFX

 

 

FOX

 

10/1/2020

 

 

4

 

4

170

 

Rapid City, SD

 

KOTA

 

 

ABC

 

4/1/2022

 

 

1

 

1

170

 

Rapid City, SD

 

KEVN

 

 

FOX

 

4/1/2022

 

 

4

 

3

170

 

(Lead, SD)

 

KHSD

(g)

 

ABC/FOX

 

4/1/2022

 

 

 

 

 

170

 

(Sheridan, WY)

 

KSGW

(g)

 

ABC

 

10/1/2022

 

 

 

 

 

173

 

Dothan, AL

 

WTVY

 

 

CBS

 

4/1/2021

 

 

1

 

1

173

 

Dothan, AL

 

WRGX

 

 

NBC

 

4/1/2021

 

 

4

 

4

175

 

Harrisonburg, VA

 

WHSV

 

 

ABC

 

10/1/2020

 

 

1

 

1

175

 

Harrisonburg, VA

 

WSVF

 

 

FOX/CBS

 

10/1/2020

 

 

3

 

2

178

 

Alexandria, LA

 

KALB

 

 

NBC/CBS

 

6/1/2021

 

 

1

 

1

180

 

Marquette, MI

 

WLUC

 

 

NBC/FOX

 

10/1/2021

 

 

1

 

1

181

 

Bowling Green, KY

 

WBKO

 

 

ABC/FOX

 

8/1/2021

 

 

1

 

1

183

 

Charlottesville, VA

 

WCAV

 

 

CBS

 

10/1/2020

 

 

2

 

2

183

 

Charlottesville, VA

 

WVAW

 

 

ABC

 

10/1/2020

 

 

3

 

5

183

 

Charlottesville, VA

 

WAHU

 

 

FOX

 

10/1/2020

 

 

4

 

3

184

 

Laredo, TX

 

KGNS

 

 

NBC/ABC

 

8/1/2022

 

 

2

 

1

184

 

Laredo, TX

 

KYLX

 

 

CBS

 

8/1/2022

 

 

6

 

8

187

 

Grand Junction/Montrose, CO

 

KKCO

 

 

NBC

 

4/1/2022

 

 

2

 

1

187

 

Grand Junction/Montrose, CO

 

KJCT

 

 

ABC

 

4/1/2022

 

 

3

 

3

190

 

Twin Falls, ID

 

KMVT

 

 

CBS

 

10/1/2022

 

 

1

 

1

190

 

Twin Falls, ID

 

KSVT

 

 

FOX

 

10/1/2022

 

 

4

 

3

191

 

Meridian, MS

 

WTOK

 

 

ABC

 

6/1/2021

 

 

1

 

1

194

 

Parkersburg, WV

 

WTAP

 

 

NBC

 

10/1/2020

 

 

1

 

1

194

 

Parkersburg, WV

 

WIYE

 

 

CBS

 

10/1/2020

 

 

3

 

(i)

194

 

Parkersburg, WV

 

WOVA

 

 

FOX

 

10/1/2020

 

 

4

 

2

197

 

Cheyenne, WY/Scottsbluff, NE

 

KGWN

 

 

CBS

 

10/1/2022

 

 

1

 

1

197

 

(Scottsbluff, NE)

 

KSTF

(g)

 

CBS

 

6/1/2022

 

 

 

 

 

197

 

Cheyenne, WY/Scottsbluff, NE

 

KCHY

 

 

NBC

 

10/1/2022

 

 

2

 

2

198

 

Casper/Riverton, WY

 

KCWY

 

 

NBC

 

10/1/2022

 

 

1

 

2

202

 

Fairbanks, AK

 

KXDF

 

 

CBS

 

2/1/2023

 

 

2

 

2

202

 

Fairbanks, AK

 

KTVF

 

 

NBC

 

2/1/2023

 

 

1

 

1

202

 

Fairbanks, AK

 

KFXF

 

 

MY

 

2/1/2023

 

 

6

 

(i)

206

 

Presque Isle, ME

 

WAGM

 

 

CBS/FOX

 

4/1/2023

 

 

1

 

1

209

 

North Platte, NE

 

KNOP

 

 

NBC

 

6/1/2022

 

 

1

 

1

209

 

(Scottsbluff, NE)

 

KNEP

(g)

 

ABC/NBC

 

6/1/2022

 

 

 

 

 

209

 

North Platte, NE

 

KNPL

 

 

CBS

 

6/1/2022

 

 

2

 

2

209

 

North Platte, NE

 

KIIT

 

 

FOX

 

6/1/2022

 

 

3

 

3

 

8

 

 

(a)

DMA rank for the 2017-2018 television season based on information published by Nielsen.

 

(b)

Indicates primary network affiliations. All primary channels and nearly all of our secondary channels broadcast by the stations are affiliated with at least one broadcast network.

 

(c)

Indicates expiration dates of FCC broadcast licenses.

 

(d)

Based on Nielsen data for the February, May, July and November 2017 rating periods.

 

(e)

Based on Nielsen data for the February, May, July and November 2017 rating periods for various news programs.

 

(f)

The rankings shown for WYMT are based on Nielsen data for the trading area (an area not defined as a distinct DMA) for the four most recent reporting periods.

 

(g)

This station is a satellite station under FCC rules and simulcasts the programming of our primary channel in its market. This station may offer some locally originated programming, such as local news.

 

(h)

We expect this station to become operational during the second quarter of 2018.

 

(i)

This station does not currently broadcast local news that is specific to its market.

 

Cyclicality, Seasonality and Revenue Concentrations

 

Broadcast stations like ours rely on advertising revenue and are therefore sensitive to cyclical changes in the economy. As a result, our non-political advertising revenue has improved along with the general economic environment since 2010. Our political advertising revenue is generally not as significantly affected by economic slowdowns or recessions as our non-political advertising revenue.

 

Broadcast advertising revenue is generally highest in the second and fourth quarters each year. This seasonality results partly from increases in consumer advertising in the spring and retail advertising in the period leading up to and including the Christmas holiday season. Broadcast advertising revenue is also typically higher in even-numbered years due to spending by political candidates, political parties and special interest groups during the “on year” of the two-year election cycle. This political advertising spending typically is heaviest during the fourth quarter. In addition, the broadcast of Olympic Games by our NBC-affiliated stations during even-numbered years generally leads to increased viewership and revenue during those years.

 

Our broadcast advertising revenue is earned from the sale of advertisements broadcast by our stations. Although no single customer represented more than 5% of our broadcast advertising revenue for the years ended December 31, 2017, 2016 or 2015, we derived a material portion of our non-political broadcast advertising revenue from advertisers in a limited number of industries, particularly the automotive industry. For the years ended December 31, 2017, 2016 and 2015, we derived approximately 25%, 22% and 24%, respectively, of our total broadcast advertising revenue from our customers in the automotive industry. Revenue from this industry represents 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.

 

Station Network Affiliations. The Big Four major broadcast networks dominate broadcast television in terms of the amount of viewership that their original programming attracts. The “Big Three” major broadcast networks of CBS, NBC, and ABC provide their respective network affiliates with a majority of the programming broadcast each day. FOX, CW and My Network provide their affiliates with a smaller portion of each day’s programming compared to the Big Three networks. The CW Plus Network generally provides programming for the entire broadcast day for CW affiliates in markets smaller than the top 100 DMAs.

 

We believe most successful commercial television stations obtain their brand identity from locally produced news programs. Notwithstanding this, however, the affiliation of a station’s channels with one of the Big Four major networks can have a significant impact on the station’s programming, revenues, expenses and operations. A typical network provides an affiliate with network programming in exchange for a substantial majority of the advertising time available for sale during the airing of the network programs. The network then sells this advertising time and retains the revenue. The affiliate sells the remaining advertising time available within the network programming and non-network programming, and the affiliate retains most or all of such revenue from these sales. In seeking to acquire programming to supplement network-supplied programming, which we believe is critical to maximizing affiliate revenue, affiliates compete primarily with other affiliates and independent stations in their markets as well as, in certain cases, various national non-broadcast networks (“cable networks”) that present competitive programming. The Big Four networks and CW charge fees to their affiliates for receiving network programming.

 

A television station may also acquire programming through barter arrangements. Under a programming barter arrangement, a national program distributor retains a fixed amount of advertising time within the program in exchange for the programming it supplies. The television station may pay a fixed fee for such programming.

 

We record revenue and expense for trade transactions involving the exchange of tangible goods or services with our customers. The revenue is recorded at the time the advertisement is broadcast and the expense is recorded at the time the goods or services are used. The revenue and expense associated with these transactions are based on the fair value of the assets or services received.

 

We do not account for barter revenue and related barter expense generated from syndicated programming as such amounts are not material. Furthermore, any such barter revenue recognized would then require the recognition of an equal amount of barter expense. The recognition of these amounts would not have a material effect upon net income.

 

Affiliates of FOX, CW and MY Network must purchase or produce a greater amount of programming for their non-network time periods, generally resulting in higher programming costs. However, affiliates of FOX, CW and My Network retain a larger portion of their advertising time inventory and the related revenues compared to Big Three affiliates.

 

9

 

 

Competition

 

Television stations compete for audiences, certain programming (including news) and advertisers. Cable network programming is a significant competitor of broadcast television programming. However, no single cable network regularly attains audience levels of those of any major broadcast network. Cable networks’ advertising share has increased due to the growth in the number of homes that subscribe to a pay-TV service from MVPDs. Despite increasing competition from cable channels, digital platforms, social media, and internet-delivered video channels, television broadcasting remains the dominant distribution system for mass-market television advertising. Signal coverage and carriage on MVPD systems also materially affect a television station’s competitive position.

 

Audience. Stations compete for audience based on broadcast program popularity, which has a direct effect on advertising rates. Networks supply a substantial portion of our affiliated stations’ daily programming. Affiliated stations depend on the performance of the network programs to attract viewers. There can be no assurance that any such current or future programming created by our affiliated networks will achieve or maintain satisfactory viewership levels. Stations program non-network time periods with a combination of locally produced news, public affairs and entertainment programming, including national news or syndicated programs purchased for cash, cash and barter, or barter only.

 

MVPD systems have significantly altered the competitive landscape for audience in the television industry. Specifically, MVPD systems can increase a broadcasting station’s competition for viewers by bringing into the market both cable networks and distant television station signals not otherwise available to the station’s audience.

 

Other sources of competition for audiences, programming and advertisers include internet websites, mobile applications and wireless carriers, direct-to-consumer video distribution systems, and home entertainment systems.

 

Recent developments by many companies, including internet service providers and internet website operators have expanded, and are continuing to expand, the variety and quality of broadcast and non-broadcast video programming available to consumers via the internet. Internet companies have developed business relationships with companies that have traditionally provided syndicated programming, network television and other content. As a result, additional programming has, and is expected to further become, available through non-traditional methods, which can directly impact the number of TV viewers, and thus indirectly impact station rankings, popularity and revenue possibilities of our stations.

 

Programming. Competition for non-network programming involves negotiating with national program distributors, or syndicators, that sell “first run” and “off network” or rerun programming packages. Each station competes against the other broadcast stations in its market for exclusive access to first run programming (such as Wheel of Fortune) and off network reruns (such as Seinfeld). Broadcast stations also compete for exclusive news stories and features. While cable networks or internet service providers generally do not compete with local stations for programming, some national cable networks or internet service providers from time to time have acquired programs that would have been offered to, or otherwise might have been broadcast by, local television stations.

 

Advertising. Advertising revenues comprise the primary source of revenues for our stations. Our stations compete with other television stations for advertising revenues in their respective markets. Our stations also compete for advertising revenue with other media, such as newspapers, radio stations, magazines, outdoor advertising, transit advertising, yellow page directories, direct mail, internet websites, and local cable and other MVPD systems. In the broadcast industry, advertising revenue competition occurs primarily within individual markets.

 

10

 

 

Federal Regulation of the Television Broadcast Industry 

 

General. Under the Communications Act of 1934 (the “Communications Act”), television broadcast operations such as ours are subject to the jurisdiction of the FCC. Among other things, the Communications Act empowers the FCC to: (i) issue, revoke and modify broadcasting licenses; (ii) regulate stations’ operations and equipment; and (iii) impose penalties for violations of the Communications Act or FCC regulations. The Communications Act prohibits the assignment of a license or the transfer of control of a licensee without prior FCC approval.

 

License Grant and Renewal. The FCC grants broadcast licenses to television stations for terms of up to eight years. Broadcast licenses are of paramount importance to the operations of television stations. The Communications Act requires the FCC to renew a licensee’s broadcast license if the FCC finds that: (i) the station has served the public interest, convenience and necessity; (ii) there have been no serious violations of either the Communications Act or the FCC’s rules and regulations; and (iii) there have been no other violations which, taken together, would constitute a pattern of abuse. Historically the FCC has renewed broadcast licenses in substantially all cases. While we are not currently aware of any facts or circumstances that might prevent the renewal of our stations’ licenses at the end of their respective license terms, we cannot provide any assurances that any license will be renewed. Our failure to renew any licenses upon the expiration of any license term could have a material adverse effect on our business. Under the Communications Act, the term of a broadcast license is automatically extended pending the FCC’s processing of a renewal application. For further information regarding the expiration dates of our stations’ current licenses and renewal application status, see the table under the heading “Markets and Stations.”

 

Media Ownership Restrictions and FCC Proceedings. The FCC’s broadcast ownership rules affect the number, type and location of broadcast properties that we may hold or acquire. The FCC adopted significant changes to its ownership rules which took effect in February 2018. The new rules will continue to limit the common ownership, operation or control of, and “attributable” interests or voting power in, television stations serving the same area. The current rules limit the aggregate national audience reach of television stations that may be under common ownership, operation and control, or in which a single person or entity may hold an official position or have more than a specified interest or percentage of voting power. The FCC’s rules also define the types of positions and interests that are considered attributable for purposes of the ownership limits, and thus also apply to our principals and certain investors.

 

The FCC is required by statute to review all of its broadcast ownership rules every four years to determine if such rules remain necessary in the public interest. In November 2017, the FCC released an Order that eliminated or relaxed several long-standing media ownership rules. Specifically, the Order (i) eliminated the newspaper/broadcast cross-ownership rule, (ii) eliminated the radio/television cross-ownership rule, (iii) loosened the existing rules governing ownership of local television stations as described above and (iv) reversed the FCC’s earlier decision to treat television joint sales agreements as attributable ownership interests.

 

Local TV Ownership Rules. The FCC’s current television ownership rules allow one entity to own two commercial television stations in a DMA as long as the specified service contours of the stations do not overlap or, if they do, at least one of the stations is not ranked among the top four stations in the DMA (the “Top Four Prohibition”). Under its rules adopted in November 2017, the Commission will consider requests for waiver of the Top Four Prohibition on a case-by-case basis.

 

National Television Station Ownership Rule. The maximum percentage of U.S. households that a single owner can reach through commonly owned television stations is 39 percent. This limit was specified by Congress in 2004. The FCC applies a 50 percent “discount” for ultra-high frequency (“UHF”) stations. In December 2017, the Commission issued a notice of proposed rulemaking seeking comment on whether it should modify or eliminate the national cap, including the UHF discount.

 

11

 

 

Conclusion. The FCC’s media ownership proceedings are on-going and, in many cases, are or will be subject to further judicial and potentially Congressional review. We cannot predict the outcome of any of these current or potential proceedings.

 

Attribution Rules. Under the FCC’s ownership rules, a direct or indirect purchaser of certain types of our securities could violate FCC regulations if that purchaser owned or acquired an “attributable” interest in other television properties in the same areas as one or more of our stations. Pursuant to FCC rules, the following relationships and interests are generally considered attributable for purposes of television broadcast ownership restrictions: (i) all officers and directors of a corporate licensee and its direct or indirect parent(s); (ii) voting stock interests of at least five percent; (iii) voting stock interests of at least 20 percent, if the holder is a passive institutional investor (such as an investment company, as defined in 15 U.S.C. 80a-3, bank, or insurance company); (iv) any equity interest in a limited partnership or limited liability company, unless properly “insulated” from management activities; (v) equity and/or debt interests that in the aggregate exceed 33 percent of a licensee’s total assets, if the interest holder supplies more than 15 percent of the station’s total weekly programming or is a same-market television broadcast company; and (vi) time brokerage of a television broadcast station by a same-market television broadcast company providing more than 15 percent of the station’s weekly programming.

 

Management services agreements and other types of shared services arrangements between same-market stations that do not include attributable time brokerage components generally are not deemed attributable under the FCC’s current rules and policies. However, the FCC previously requested comment on whether local news service agreements and/or shared services agreements should be considered attributable for purposes of applying the media ownership rules. The Department of Justice has taken steps under the antitrust laws to block certain transactions involving joint sales or other services agreements.

 

To our knowledge, no officer, director or five percent or greater shareholder currently holds an attributable interest in another television station that is inconsistent with the FCC’s ownership rules and policies or with our ownership of our stations.

 

Alien Ownership Restrictions. The Communications Act restricts the ability of foreign entities or individuals to own or hold interests in broadcast licenses. The Communications Act bars the following from holding broadcast licenses: foreign governments, representatives of foreign governments, non-citizens, representatives of non-citizens, and corporations or partnerships organized under the laws of a foreign nation. Foreign individuals or entities, collectively, may directly or indirectly own or vote no more than 20 percent of the capital stock of a licensee or 25 percent of the capital stock of a corporation that directly or indirectly controls a licensee. The 20 percent limit on foreign ownership of a licensee may not be waived. In September 2016, the Commission adopted an Order that allows broadcast licensees to use streamlined procedures when filing a petition for declaratory ruling seeking FCC approval to exceed the 25 percent foreign ownership benchmark for a parent company. The Commission also clarified the methodology for publicly traded broadcasters to assess compliance with the foreign ownership limits.

 

We serve as a holding company for our subsidiaries, including subsidiaries that hold station licenses. Therefore, absent a grant of a declaratory ruling, we may be restricted from having more than one-fourth of our stock owned or voted directly or indirectly by non-citizens, foreign governments, representatives of non-citizens or foreign governments, or foreign corporations.

 

12

 

 

Programming and Operations. Rules and policies of the FCC and other federal agencies regulate certain programming practices and other areas affecting the business or operations of broadcast stations.

 

The Children’s Television Act of 1990 limits commercial matter in children’s television programs and requires stations to present educational and informational children’s programming. Broadcasters are effectively required through license renewal processing guidelines to provide at least three hours of children’s educational programming per week on their primary channels and on each secondary channel. In October 2009, the FCC issued a Notice of Inquiry (“NOI”) seeking comment on a broad range of issues related to children’s usage of electronic media and the current regulatory landscape that governs the availability of electronic media to children. The NOI remains pending, and we cannot predict what recommendations or further action, if any, will result from it.

 

Over the past several years, the FCC has increased its enforcement efforts regarding broadcast indecency and profanity and the statutory maximum fine for broadcasting indecent material is currently $325,000 per incident. In June 2012, the Supreme Court decided a challenge to the FCC’s indecency enforcement without resolving the scope of the FCC’s ability to regulate broadcast content. In August 2013, the FCC issued a Public Notice seeking comment on whether it should modify its indecency policies. The FCC has not yet issued a decision in this proceeding, and the courts remain free to review the FCC’s current policy or any modifications thereto. The outcomes of these proceedings could affect future FCC policies in this area, and we are unable to predict the outcome of any such judicial proceeding, which could have a material adverse effect on our business.

 

EEO Rules. The FCC’s Equal Employment Opportunity (“EEO”) rules impose job information dissemination, recruitment, documentation and reporting requirements on broadcast station licensees. Broadcasters are subject to random audits to ensure compliance with the EEO rules and may be sanctioned for noncompliance.

 

MVPD Retransmission of Local Television Signals. Under the Communications Act and FCC regulations, each television station generally has a so-called “must-carry” right to carriage of its primary channels on all MVPD systems serving their market. Each commercial television station may elect between invoking its “must carry” right or invoking a right to prevent an MVPD system from retransmitting the station’s signal without its consent (“retransmission consent”). Stations must make this election by October 1 every three years, and stations most recently made such elections by October 1, 2017. Such elections are binding throughout the three-year cycle that commences on the subsequent January 1. The current carriage cycle commenced on January 1, 2018, and ends on December 31, 2020. Our stations have elected retransmission consent and have entered into retransmission consent contracts with virtually all MVPD systems serving their markets.

 

On March 31, 2014, the FCC amended its rules governing “good faith” retransmission consent negotiations to provide that it is a per se violation of the statutory duty to negotiate in good faith for a television broadcast station that is ranked among the top-four stations in a market (as measured by audience share) to negotiate retransmission consent jointly with another top-four station in the same market if the stations are not commonly owned. As part of the STELA Reauthorization Act of 2014 (“STELAR”), Congress further tightened the restriction to prohibit joint negotiation with any television station in the same market unless the stations are under common de jure control. We currently are not a party to any agreements that delegate our authority to negotiate retransmission consent for any of our television stations or grant us authority to negotiate retransmission consent for any other television station. Nevertheless, we cannot predict how this restriction might impact future opportunities.

 

The FCC also has sought comment on whether it should modify or eliminate the network non-duplication and syndicated exclusivity rules. We cannot predict the outcome of this proceeding. If, however, the FCC eliminates or relaxes its rules enforcing our program exclusivity rights, it could affect our ability to negotiate future retransmission consent agreements, and it could harm our ratings and advertising revenue if cable and satellite operators import duplicative programming.

 

13

 

 

In June 2014, the Supreme Court issued a ruling finding that the streaming of broadcast programming over the internet without the consent of the copyright owner of the programming was a public performance that infringed upon the copyright owners’ rights. Broadcasters and other copyright owners had aggressively pursued injunctions against the companies offering these services in multiple jurisdictions. On December 19, 2014, the FCC issued a Notice of Proposed Rulemaking (“NPRM”) seeking comment on its proposal to modernize the term “MVPD” to be technology neutral. If the NPRM proposal is adopted, an entity that uses the internet to distribute multiple streams of linear programming would be considered an MVPD and would have the same retransmission consent rights and obligations as other MVPDs, including the right to negotiate with television stations to carry their broadcast signals. The FCC also asked about the possible copyright implications of this proposal. We cannot predict the outcome of the FCC’s interpretive proceedings.

 

STELAR was signed into law on December 4, 2014. STELAR extends the right of satellite TV operators to retransmit the signal of television broadcast stations for an additional five years and grants an extension of their compulsory copyright license for the carriage of distant TV signals. In accordance with STELAR, the FCC has promulgated rules that (i) grant DBS providers the right to seek market modifications based on factors similar to those used in the cable industry and cable operators the right to delete or reposition channels during “sweeps,” (ii) broadened the FCC’s prohibition against joint retransmission negotiations by directing the FCC to prohibit joint retransmission negotiations by any stations in the same DMA not under common control, (iii) prohibit a television station from limiting the ability of an MVPD to carry into its local market television signals that are deemed significantly viewed, and (iv) eliminated the “sweeps prohibition,” which had precluded cable operators from deleting or repositioning local commercial television stations during “sweeps” ratings periods.

 

In September 2015, the FCC, in accordance with STELAR, issued a notice of proposed rulemaking to review the “totality of the circumstances test” used to evaluate whether broadcast stations and MVPDs are negotiating for retransmission consent in good faith. We cannot predict the outcome of this proceeding. If, however, the FCC revises the totality of the circumstances test, it could affect our ability to negotiate retransmission consent agreements, including the rates that we obtain from MVPDs.

 

Broadcast Spectrum. In February 2012, Congress passed legislation that granted the FCC authority to conduct an auction of certain spectrum currently used by television broadcasters. On May 15, 2014, the FCC adopted a Report and Order (the “2014 Report”) establishing the framework for an incentive auction of broadcast television spectrum. The 2014 Report created a two part incentive auction framework (the “Incentive Auction”); (1) a reverse auction pursuant to which a television broadcaster could volunteer, in return for payment, to relinquish all or a part of its station’s spectrum by (i) surrendering its license, (ii) relinquishing a portion of its spectrum and thereafter sharing spectrum with another station, or (iii) modifying a UHF channel license to a VHF channel license; and (2) a forward auction pursuant to which wireless carriers bid for the relinquished spectrum to offer wireless services. In April 2017, the Commission issued a Public Notice announcing the conclusion of the Incentive Auction, which resulted in 84 MHz of broadcast spectrum being repurposed for wireless use.

 

Now that the Incentive Auction has concluded, the FCC has begun the process of reallocating the 84 MHz of spectrum to new users. Specifically, the FCC is requiring certain television stations that did not sell their spectrum in the reverse auction to change channels and modify their transmission facilities. The FCC is required to use “reasonable efforts” to preserve a station’s coverage area and population served, and cannot require that a station involuntarily move from the UHF band to the VHF band or from the high VHF band to the low VHF band. The underlying legislation authorizes the FCC to reimburse stations for reasonable relocation costs up to a total across all stations of $1.75 billion. Some television stations are required to change channels and modify their facilities or may choose to channel share. These stations could incur conversion costs that may not be fully reimbursed, or our ability to provide high definition programming and additional program streams, including mobile video services, could be constrained.

 

14

 

 

The FCC interpreted the implementing legislation to allow only full power and Class A television stations to participate in the auction and receive contour protection during any post-auction repacking of the broadcast spectrum. In certain markets, our low power television stations may be displaced by this process. Moreover, on June 16, 2015, the FCC issued a notice of proposed rulemaking proposing to reserve one vacant channel in each market for use by unlicensed “white spaces” devices and wireless microphones (the “Vacant Channel NPRM”). The FCC further modified the Vacant Channel NPRM on August 11, 2015 by proposing to reserve up to two channels in certain markets after the Incentive Auction is complete. Under the Vacant Channel NPRM, the FCC would refuse to grant an application to modify the facilities of a low power television station if the applicant could not demonstrate that a sufficient number of vacant channels would remain in the service area of the low power station after the applicant implements the modification – thus, reducing the likelihood that a low power television station would be able to locate a new channel. These stations could incur substantial costs to locate and build a replacement facility on a new channel. If a low power television station is unable to locate a new channel on which to operate, it could lose its license.

 

We cannot predict the likelihood, timing or outcome of any court, Congressional or FCC regulatory action with respect to the repacking of broadcast television spectrum, nor the impact of any such changes upon our business.

 

The foregoing does not purport to be a complete summary of the Communications Act, other applicable statutes, or the FCC’s rules, regulations or policies. Proposals for additional or revised regulations and requirements are pending before, are being considered by, and may in the future be considered by, Congress and federal regulatory agencies from time to time. We cannot predict the effect of any existing or proposed federal legislation, regulations or policies on our business. Also, several of the foregoing matters are now, or may become, the subject of litigation, and we cannot predict the outcome of any such litigation or the effect on our business.

 

Employees

 

As of February 23, 2018, we had 3,715 full-time employees and 223 part-time employees, of which 82 full-time and four part-time employees at four stations were represented by various unions. We consider our relations with our employees to be good.

 

Corporate Information

 

Gray Television, Inc. is a Georgia corporation, incorporated in 1897 initially to publish the Albany Herald in Albany, Georgia. We entered the broadcast industry in 1953. Our executive offices are located at 4370 Peachtree Road, NE, Atlanta, Georgia 30319, and our telephone number at that location is (404) 504-9828. Our website address is http://www.gray.tv. The information on our website is not incorporated by reference or part of this or any other report we file with or furnish to the Securities and Exchange Commission (the “SEC”). We make the following reports filed or furnished, as applicable, with the SEC available, free of charge, on our website under the heading “SEC Filings” as soon as practicable after they are filed with, or furnished to, the SEC: our annual reports on Form 10-K, our quarterly reports on Form 10-Q, our current reports on Form 8-K, and amendments to any of the foregoing.

 

We have adopted a Code of Ethics (the “Code”) that applies to all of our directors, executive officers and employees. The Code is available on our website in the About Us section under the subheading Governance Documents. If any waivers of the Code are granted to an executive officer or director, the waivers will be disclosed in an SEC filing on Form 8-K.

 

15

 

 

Item 1A. Risk Factors.

 

In addition to the other information contained in, incorporated by reference into or otherwise referred to in this annual report on Form 10-K, you should consider carefully the following factors when evaluating our business. Any of these risks, or the occurrence of any of the events described in these risk factors, could materially adversely affect our business, financial condition or results of operations. In addition, other risks or uncertainties not presently known to us or that we currently do not deem material could arise, any of which could also materially adversely affect us. This annual report on Form 10-K also contains and incorporates by reference forward-looking statements that involve risks and uncertainties. Our actual results could differ materially from those anticipated in forward-looking statements as a result of certain factors, including the occurrence of one or more of the following risk factors.

 

Risks Related to Our Indebtedness

 

We have substantial debt and have the ability to incur significant additional debt. The principal and interest payment obligations on such debt may restrict our future operations and impair our ability to meet our long-term obligations.

 

At December 31, 2017, we had approximately $1.8 billion in aggregate principal amount of outstanding indebtedness, excluding intercompany debt and deferred financing costs. Subject to our ability to meet certain borrowing conditions, we have the ability to incur significant additional debt, including secured debt under our un-drawn $100.0 million revolving credit facility under our senior credit facility (the “2017 Senior Credit Facility”). The terms of the indenture (the “2026 Notes Indenture”) governing our outstanding 5.875% senior notes due 2026 (the “2026 Notes”) and the indenture (the “2024 Notes Indenture”) governing our 5.125% senior notes due 2024 (the “2024 Notes”) also permit us to incur additional indebtedness, subject to our ability to meet certain borrowing conditions.

 

Our substantial debt may have important consequences. For instance, it could:

 

 

require us to dedicate a substantial portion of any cash flow from operations to the payment of interest and principal due under our debt, which would reduce funds available for other business purposes, including capital expenditures and acquisitions;

 

 

place us at a competitive disadvantage compared to some of our competitors that may have less debt and better access to capital resources;

 

 

limit our ability to obtain additional financing to fund acquisitions, working capital and capital expenditures and for other general corporate purposes; and

 

 

make it more difficult for us to satisfy our financial obligations.

 

Our ability to service our significant financial obligations depends on our ability to generate significant cash flow. This is partially subject to general economic, financial, competitive, legislative, regulatory, and other factors that are beyond our control. We cannot assure you that our business will generate cash flow from operations, that future borrowings will be available to us under our 2017 Senior Credit Facility or any other credit facilities, or that we will be able to complete any necessary financings, in amounts sufficient to enable us to fund our operations or pay our debts and other obligations, or to fund other liquidity needs. If we are not able to generate sufficient cash flow to service our obligations, we may need to refinance or restructure our debt, sell assets, reduce or delay capital investments, or seek to raise additional capital. Additional debt or equity financing may not be available in sufficient amounts, at times or on terms acceptable to us, or at all. Specifically, volatility in the capital markets may also impact our ability to obtain additional financing, or to refinance our existing debt, on terms or at times favorable to us. If we are unable to implement one or more of these alternatives, we may not be able to service our debt or other obligations, which could result in us being in default thereon, in which circumstances our lenders could cease making loans to us, and lenders or other holders of our debt could accelerate and declare due all outstanding obligations due under the respective agreements, which could have a material adverse effect on us.

 

16

 

 

The agreements governing our various debt obligations impose restrictions on our operations and limit our ability to undertake certain corporate actions.

 

The agreements governing our various debt obligations, including our 2017 Senior Credit Facility, the 2026 Notes Indenture and the 2024 Notes Indenture, include covenants imposing significant restrictions on our operations. These restrictions may affect our ability to operate our business and may limit our ability to take advantage of potential business opportunities as they arise. These covenants place, or will place, restrictions on our ability to, among other things:

 

 

incur additional debt, subject to certain limitations;

 

 

declare or pay dividends, redeem stock or make other distributions to stockholders;

 

 

make investments or acquisitions;

 

 

create liens or use assets as security in other transactions;

 

 

issue guarantees;

 

 

merge or consolidate, or sell, transfer, lease or dispose of substantially all of our assets;

 

 

amend our articles of incorporation or bylaws;

 

 

engage in transactions with affiliates; and

 

 

purchase, sell or transfer certain assets.

 

Any of these restrictions and limitations could make it more difficult for us to execute our business strategy.

 

Our 2017 Senior Credit Facility requires us to comply with certain financial ratios and covenants; our failure to do so would result in a default thereunder, which would have a material adverse effect on us.

 

We are required to comply with certain financial covenants under our 2017 Senior Credit Facility. Our ability to comply with these requirements may be affected by events affecting our business, but beyond our control, including prevailing general economic, financial and industry conditions. These covenants could have an adverse effect on us by limiting our ability to take advantage of financing, investment, acquisition or other corporate opportunities. The breach of any of these covenants or restrictions could result in a default under our 2017 Senior Credit Facility. Upon a default under any of our debt agreements, the lenders or debtholders thereunder could have the right to declare all amounts outstanding, together with accrued and unpaid interest, to be immediately due and payable, which could, in turn, trigger defaults under other debt obligations and could result in the termination of commitments of the lenders to make further extensions of credit under our 2017 Senior Credit Facility. If we were unable to repay our secured debt to our lenders, or were otherwise in default under any provision governing our outstanding secured debt obligations, our secured lenders could proceed against us and our subsidiary guarantors and against the collateral securing that debt. Any default resulting in an acceleration of outstanding indebtedness, a termination of commitments under our financing arrangements or lenders proceeding against the collateral securing such indebtedness would likely result in a material adverse effect on our business, financial condition and results of operations.

 

17

 

 

Our variable rate indebtedness subjects us to interest rate risk, which could cause our annual debt service obligations to increase significantly.

 

Borrowings under our 2017 Senior Credit Facility are at variable rates of interest and expose us to interest rate risk. If the rates on which our borrowings are based were to increase from current levels, our debt service obligations on our variable rate indebtedness would increase even though the amount borrowed remained the same, and our net income and cash available to service our other obligations would decrease.

 

Risks Related to Our Business

 

The success of our business is dependent upon advertising revenues, which are seasonal and cyclical, and also fluctuate as a result of a number of factors, some of which are beyond our control.

 

Our main source of revenue is the sale of advertising time and space. Our ability to sell advertising time and space depends on, among other things:

 

 

economic conditions in the areas where our stations are located and in the nation as a whole;

 

 

the popularity of the programming offered by our television stations;

 

 

changes in the population demographics in the areas where our stations are located;

 

 

local and national advertising price fluctuations, which can be affected by the availability of programming, the popularity of programming, and the relative supply of and demand for commercial advertising;

 

 

our competitors’ activities, including increased competition from other advertising-based mediums, particularly cable networks, MVPDs and the internet;

 

 

the duration and extent of any network preemption of regularly scheduled programming for any reason;

 

 

decisions by advertisers to withdraw or delay planned advertising expenditures for any reason;

 

 

labor disputes or other disruptions at major national advertisers, programming providers or networks; and

 

 

other factors beyond our control.

 

18

 

 

Our results are also subject to seasonal and cyclical fluctuations. Seasonal fluctuations typically result in higher revenue and broadcast operating income in the second and fourth quarters than in the first and third quarters of each year. This seasonality is primarily attributable to advertisers’ increased expenditures in the spring and in anticipation of holiday season spending in the fourth quarter and an increase in television viewership during this period. In addition, we typically experience fluctuations in our revenue and broadcast operating income between even-numbered and odd- numbered years. In years in which there are impending elections for various state and national offices, which primarily occur in even-numbered years, political advertising revenue tends to increase, often significantly, and particularly during presidential election years. We consider political broadcast advertising revenue to be revenue earned from the sale to political candidates, political parties and special interest groups of advertisements broadcast by our stations that contain messages primarily focused on elections and/or public policy issues. In even-numbered years, we typically derive a material portion of our broadcast advertising revenue from political broadcast advertisers. For the years ended December 31, 2017 and 2016, we derived approximately 2% and 11%, respectively, of our total revenue from political broadcast advertisers. If political broadcast advertising revenues declined, especially in an even-numbered year, our results of operations and financial condition could also be materially adversely affected. Also, our stations affiliated with the NBC Network broadcast Olympic Games and typically experience increased viewership and revenue during those broadcasts, which also occur in even-numbered years. As a result of the seasonality and cyclicality of our revenue and broadcast operating income, and the historically significant increase in our revenue and broadcast operating income during even-numbered years, it has been, and is expected to remain, difficult to engage in period-over-period comparisons of our revenue and results of operations.

 

Continued uncertain financial and economic conditions may have an adverse impact on our business, results of operations or financial condition.

 

Financial and economic conditions continue to be uncertain over the longer term and the continuation or worsening of such conditions could reduce consumer confidence and have an adverse effect on our business, results of operations and/or financial condition. If consumer confidence were to decline, this decline could negatively affect our advertising customers’ businesses and their advertising budgets. In addition, volatile economic conditions could have a negative impact on our industry or the industries of our customers who advertise on our stations, resulting in reduced advertising sales. Furthermore, it may be possible that actions taken by any governmental or regulatory body for the purpose of stabilizing the economy or financial markets will not achieve their intended effect. In addition to any negative direct consequences to our business or results of operations arising from these financial and economic developments, some of these actions may adversely affect financial institutions, capital providers, advertisers or other consumers on whom we rely, including for access to future capital or financing arrangements necessary to support our business. Our inability to obtain financing in amounts and at times necessary could make it more difficult or impossible to meet our obligations or otherwise take actions in our best interests.

 

Our dependence upon a limited number of advertising categories could adversely affect our business.

 

We consider broadcast advertising revenue to be revenue earned primarily from the sale of advertisements broadcast by our stations. Although no single customer represented more than 5% of our broadcast advertising revenue for the years ended December 31, 2017 or 2016, we derived a material portion of non-political broadcast advertising revenue from advertisers in a limited number of industries, particularly the automotive industry. For the years ended December 31, 2017 and 2016 we derived approximately 25% and 22% of our total broadcast advertising revenue from our advertisers in the automotive industry. Our results of operations and financial condition could be materially adversely affected if broadcast advertising revenue from the automotive, or certain other industries, such as the medical, restaurant, communications, or furniture and appliances, industries, declined.

 

19

 

 

We intend to continue to evaluate growth opportunities through strategic acquisitions, and there are significant risks associated with an acquisition strategy.

 

We intend to continue to evaluate opportunities for growth through selective acquisitions of television stations or station groups. There can be no assurances that we will be able to identify any suitable acquisition candidates, and we cannot predict whether we will be successful in pursuing or completing any acquisitions, or what the consequences of not completing any acquisitions would be. Consummation of any proposed acquisition at any time may also be subject to various conditions such as compliance with FCC rules and policies. Consummation of acquisitions may also be subject to antitrust or other regulatory requirements.

 

An acquisition strategy involves numerous other risks, including risks associated with:

 

 

identifying suitable acquisition candidates and negotiating definitive purchase agreements on satisfactory terms;

 

 

integrating operations and systems and managing a large and geographically diverse group of stations;

 

 

obtaining financing to complete acquisitions, which financing may not be available to us at times, in amounts, or at rates acceptable to us, if at all, and potentially the related risks associated with increased debt;

 

 

diverting our management’s attention from other business concerns;

 

 

potentially losing key employees; and

 

 

potential changes in the regulatory approval process that may make it materially more expensive, or materially delay our ability, to consummate any proposed acquisitions.

 

Our failure to identify suitable acquisition candidates, or to complete any acquisitions and integrate any acquired business, or to obtain the expected benefits therefrom, could materially adversely affect our business, financial condition and results of operations.

 

We may fail to realize any benefits and incur unanticipated losses related to any acquisition.

 

The success of any strategic acquisition depends, in part, on our ability to successfully combine the acquired business and assets with our business and our ability to successfully manage the assets so acquired. It is possible that the integration process could result in the loss of key employees, the disruption of ongoing business or inconsistencies in standards, controls, procedures and policies that adversely affect our ability to maintain relationships with clients, customers and employees or to achieve the anticipated benefits of the acquisition. Successful integration may also be hampered by any differences between the operations and corporate culture of the two organizations. Additionally, general market and economic conditions may inhibit our successful integration of any business. If we experience difficulties with the integration process, the anticipated benefits of the acquisition may not be realized fully, or at all, or may take longer to realize than expected. Finally, any cost savings that are realized may be offset by losses in revenues from the acquired business, any assets or operations disposed of in connection therewith or otherwise, or charges to earnings in connection with such acquisitions.

 

20

 

 

We must purchase television programming in advance of knowing whether a particular show will be popular enough for us to recoup our costs.

 

One of our most significant costs is for the purchase of television programming. If a particular program is not sufficiently popular among audiences in relation to the cost we pay for such program, we may not be able to sell enough related advertising time for us to recover the costs we pay to broadcast the program. We also must usually purchase programming several years in advance, and we may have to commit to purchase more than one year’s worth of programming, resulting in the incurrence of significant costs in advance of our receipt of any related revenue. We may also replace programs that are performing poorly before we have recaptured any significant portion of the costs we incurred in obtaining such programming or fully expensed the costs for financial reporting purposes. Any of these factors could reduce our revenues, result in the incurrence of impairment charges or otherwise cause our costs to escalate relative to revenues.

 

We are highly dependent upon our network affiliations, and our business and results of operations may be materially affected if a network (i) terminates its affiliation with us, (ii) significantly changes the economic terms and conditions of any future affiliation agreements with us or (iii) significantly changes the type, quality or quantity of programming provided to us under an affiliation agreement.

 

Our business depends in large part on the success of our network affiliations. Nearly all of our stations are directly or indirectly affiliated with at least one of the four major broadcast networks pursuant to a separate affiliation agreement. Each affiliation agreement provides the affiliated station with the right to broadcast all programs transmitted by the affiliated network during the term of the related agreement. Our affiliation agreements generally expire at various dates through December 2021.

 

If we cannot enter into affiliation agreements to replace any agreements in advance of their expiration, we would no longer be able to carry the affiliated network’s programming. This loss of programming would require us to seek to obtain replacement programming. Such replacement programming may involve higher costs and may not be as attractive to our target audiences, thereby reducing our ability to generate advertising revenue. Furthermore, our concentration of CBS and/or NBC affiliates makes us particularly sensitive to adverse changes in our business relationship with, and the general success of, CBS and/or NBC.

 

We can give no assurance that any future affiliation agreements will have economic terms or conditions equivalent to or more advantageous to us than our current agreements. If in the future a network or networks impose more adverse economic terms upon us, such event or events could have a material adverse effect on our business and results of operations.

 

In addition, if we are unable to renew or replace any existing affiliation agreements, we may be unable to satisfy certain obligations under our existing or any future retransmission consent agreements with MVPDs and/or secure payment of retransmission consent fees under such agreements. Furthermore, if in the future a network limited or removed our ability to retransmit network programming to MVPDs, we may be unable to satisfy certain obligations or criteria for fees under any existing or any future retransmission consent agreements. In either case, such an event could have a material adverse effect on our business and results of operations.

 

We are also dependent upon our retransmission consent agreements with MVPDs, and we cannot predict the outcome of potential regulatory changes to the retransmission consent regime.

 

We are also dependent, in significant part, on our retransmission consent agreements. Our current retransmission consent agreements expire at various times over the next several years. No assurances can be provided that we will be able to renegotiate all of such agreements on favorable terms, on a timely basis, or at all. The failure to renegotiate such agreements could have a material adverse effect on our business and results of operations.

 

21

 

 

Our ability to successfully negotiate future retransmission consent agreements may be hindered by potential legislative or regulatory charges to the framework under which these agreements are negotiated.

 

For example, on March 31, 2014, the FCC amended its rules governing “good faith” retransmission consent negotiations to provide that it is a per se violation of the statutory duty to negotiate in good faith for a television broadcast station that is ranked among the top-four stations in a market (as measured by audience share) to negotiate retransmission consent jointly with another top-four station in the same market if the stations are not commonly owned. As part of STELAR, Congress further tightened the restriction to prohibit joint negotiation with any television station in the same market unless the stations are under common de jure control. We currently are not a party to any agreements that delegate our authority to negotiate retransmission consent for any of our television stations or grant us authority to negotiate retransmission consent for any other television station. Nevertheless, we cannot predict how this restriction might impact future opportunities.

 

The FCC also has sought comment on whether it should modify or eliminate the network non- duplication and syndicated exclusivity rules. We cannot predict the outcome of this proceeding. If, however, the FCC eliminates or relaxes its rules enforcing our program exclusivity rights, it could affect our ability to negotiate future retransmission consent agreements, and it could harm our ratings and advertising revenue if cable and satellite operators import duplicative programming.

 

In addition, certain online video distributors (“OVDs”) have explored streaming broadcast programming over the internet without approval from or payments to the broadcaster. The majority of federal courts have issued preliminary injunctions enjoining these OVDs from streaming broadcast programming because the courts have generally concluded that OVDs are unlikely to demonstrate that they are eligible for the statutory copyright license that provides cable operators with the requisite copyrights to retransmit broadcast programming, although in July 2015 a district court concluded that OVDs should be eligible for the statutory copyright license. We cannot predict the outcome of that appeal or whether the courts will continue to issue similar injunctions against future OVDs. Separately, on December 19, 2014, the FCC issued an NPRM proposing to classify certain OVDs as MVPDs for purposes of certain FCC carriage rules. If the FCC adopts its proposal, OVDs would need to negotiate for consent from broadcasters before they retransmit broadcast signals. We cannot predict whether the FCC will adopt its proposal or other modified rules that might weaken our rights to negotiate with OVDs.

 

In September 2015, the FCC, in accordance with STELAR, issued a notice of proposed rulemaking to review the “totality of the circumstances test” used to evaluate whether broadcast stations and MVPDs are negotiating for retransmission consent in good faith. In a July 14, 2016 blog post, the Chairman of the FCC announced that the FCC will not be adopting additional rules governing the retransmission consent process as a part of this proceeding. Instead, the FCC will monitor retransmission consent negotiations and rule on good-faith-negotiation complaints on a case-by-case basis. We cannot predict whether this approach will affect our ability to negotiate retransmission consent agreements, including the rates that we obtain from MVPDs, nor can we predict whether the FCC might reopen this proceeding in the future. The FCC also has taken other actions to implement various provisions of STELAR affecting the carriage of television stations, including (i) adopting rules that allow for the modification of satellite television markets in order to ensure that satellite operators carry the broadcast stations of most interest to their communities, (ii) prohibiting a television station from limiting the ability of an MVPD to carry into its local market television signals that are deemed significantly viewed; and (iii) eliminating the “sweeps prohibition,” which had precluded cable operators from deleting or repositioning local commercial television stations during “sweeps” ratings periods.

 

Congress also continues to consider various changes to the statutory scheme governing retransmission of broadcast programming. Some of the proposed bills would make it more difficult to negotiate retransmission consent agreements with large MVPDs and would weaken our leverage to seek market-based compensation for our programming. We cannot predict whether any of these proposals will become law, and, if any do, we cannot determine the effect that any statutory changes would have on our business.

 

22

 

 

We operate in a highly competitive environment. Competition occurs on multiple levels (for audiences, programming and advertisers) and is based on a variety of factors. If we are not able to successfully compete in all relevant aspects, our revenues will be materially adversely affected.

 

Television stations compete for audiences, certain programming (including news) and advertisers. Signal coverage and carriage on MVPD systems also materially affect a television station’s competitive position. With respect to audiences, stations compete primarily based on broadcast program popularity. We cannot provide any assurances as to the acceptability by audiences of any of the programs we broadcast. Further, because we compete with other broadcast stations for certain programming, we cannot provide any assurances that we will be able to obtain any desired programming at costs that we believe are reasonable. Cable-network programming, combined with increased access to cable and satellite TV, has become a significant competitor for broadcast television programming viewers. Cable networks’ viewership and advertising share have increased due to the growth in MVPD penetration (the percentage of television households that are connected to a MVPD system) and increased investments in programming by cable networks. Further increases in the advertising share of cable networks could materially adversely affect the advertising revenue of our television stations.

 

In addition, technological innovation and the resulting proliferation of programming alternatives, such as internet websites, mobile apps and wireless carriers, direct-to-consumer video distribution systems, and home entertainment systems have further fractionalized television viewing audiences and resulted in additional challenges to revenue generation. New technologies and methods of buying advertising also present an additional competitive challenge, as competitors may offer products and services such as the ability to purchase advertising programmatically or bundled offline and online advertising, aimed at more efficiently capturing advertising spend.

 

Our inability or failure to broadcast popular programs, or otherwise maintain viewership for any reason, including as a result of increases in programming alternatives, or our loss of advertising due to technological changes, could result in a lack of advertisers, or a reduction in the amount advertisers are willing to pay us to advertise, which could have a material adverse effect on our business, financial condition and results of operations.

 

Our defined benefit pension plan obligation is currently underfunded, and, if certain factors worsen, we may have to make significant cash payments, which could reduce the cash available for our business.

 

We have underfunded obligations under our defined benefit pension plan. Notwithstanding that our pension plan is frozen with regard to any future benefit accruals, the funded status of our pension plan is dependent upon many factors, including returns on invested assets, the level of certain market interest rates and the discount rate used to determine pension obligations. Unfavorable returns on the plan’s assets or unfavorable changes in applicable laws or regulations may materially change the timing and amount of required plan funding, which could reduce the cash available for our business. In addition, any future decreases in the discount rate used to determine pension obligations could result in an increase in the valuation of pension obligations, which could affect the reported funding status of our pension plan and future contributions.

 

23

 

 

We may be unable to maintain or increase our internet advertising revenue, which could have a material adverse effect on our business and operating results.

 

We generate a portion of our advertising revenue from the sale of advertisements on our internet sites. Our ability to maintain and increase this advertising revenue is largely dependent upon the number of users actively visiting our internet sites. As a result, we must increase user engagement with our internet sites in order to increase our advertising revenue. Because internet advertising techniques are evolving, if our technology and advertisement serving techniques do not evolve to meet the changing needs of advertisers, our advertising revenue could also decline. Changes in our business model, advertising inventory or initiatives could also cause a decrease in our internet advertising revenue.

 

We do not have long-term agreements with most of our internet advertisers. Any termination, change or decrease in our relationships with our largest advertising clients could have a material adverse effect on our revenue and profitability. If we do not maintain or increase our advertising revenue, our business, results of operations and financial condition could be materially adversely affected.

 

We have, in the past, incurred impairment charges on our goodwill and/or broadcast licenses, and any such future charges may have a material effect on the value of our total assets.

 

As of December 31, 2017, the book value of our broadcast licenses was $1.5 billion and the book value of our goodwill was $611.1 million, in comparison to total assets of $3.3 billion. Not less than annually, and more frequently if necessary, we are required to evaluate our goodwill and broadcast licenses to determine if the estimated fair value of these intangible assets is less than book value. If the estimated fair value of these intangible assets is less than book value, we will be required to record a non-cash expense to write down the book value of the intangible asset to the estimated fair value. We cannot make any assurances that any required impairment charges will not have a material adverse effect on our total assets.

 

Recently enacted changes to the U.S. tax laws may have a material impact on our business or financial condition.

 

On December 22, 2017, U.S. tax reform legislation known as the Tax Cuts and Jobs Act (the “TCJA”) was signed into law. The TCJA makes substantial changes to U.S. tax law, including a reduction in the corporate tax rate, a limitation on deductibility of interest expense, a limitation on the use of net operating losses to offset future taxable income and the allowance of immediate expensing of capital expenditures. The TCJA had, and we expect it to continue to have, significant effects on us, some of which may be adverse. The extent of the impact remains uncertain at this time and is subject to any other regulatory or administrative developments, including any regulations or other guidance yet to be promulgated by the U.S. Internal Revenue Service. The TCJA contains numerous, complex provisions that could affect us, and we continue to review and assess its potential impact on us.

 

Cybersecurity risks could affect our operating effectiveness.

 

We use computers in substantially all aspects of our business operations. Our revenues are increasingly dependent on digital products. Such use exposes us to potential cyber incidents resulting from deliberate attacks or unintentional events. These incidents could include, but are not limited to, unauthorized access to digital systems for purposes of misappropriating assets or sensitive information, data corruption or operational disruption. The results of these incidents could include, but are not limited to, business interruption, disclosure of nonpublic information, decreased advertising revenues, misstated financial data, liability for stolen assets or information, increased cybersecurity protection costs, litigation, financial consequences and reputational damage adversely affecting customer or investor confidence, any or all of which could adversely affect our business. Although we have systems and processes in place to protect against risks associated with cyber incidents, depending on the nature of an incident, these protections may not be fully sufficient.

 

Certain stockholders or groups of stockholders have the ability to exert significant influence over us.

 

Hilton H. Howell, Jr., our Chairman, President and Chief Executive Officer, is the husband of Robin R. Howell, a member of our Board of Directors (collectively with other members of their family, the “Howell-Robinson Family”). As of February 23, 2018, the Howell-Robinson Family directly or indirectly beneficially owned shares representing approximately 39% of the outstanding combined voting power of our common stock and Class A common stock.

 

As a result of these significant stockholdings and positions on the Board of Directors, the Howell-Robinson Family is able to exert significant influence over our policies and management, potentially in a manner which may not be consistent with the interests of our other stockholders.

 

24

 

 

We are a holding company with no material independent assets or operations and we depend on our subsidiaries for cash.

 

We are a holding company with no material independent assets or operations, other than our investments in our subsidiaries. Because we are a holding company, we are dependent upon the payment of dividends, distributions, loans or advances to us by our subsidiaries to fund our obligations. These payments could be or become subject to dividend or other restrictions under applicable laws in the jurisdictions in which our subsidiaries operate. Payments by our subsidiaries are also contingent upon the subsidiaries’ earnings. If we are unable to obtain sufficient funds from our subsidiaries to fund our obligations, our financial condition and ability to meet our obligations may be adversely affected.

 

Risks Related to Regulatory Matters

 

Federal broadcasting industry regulations limit our operating flexibility.

 

The FCC regulates all television broadcasters, including us. We must obtain FCC approval whenever we (i) apply for a new license, (ii) seek to renew, modify or assign a license, (iii) purchase a broadcast station and/or (iv) transfer the control of one of our subsidiaries that holds a license. Our FCC licenses are critical to our operations, and we cannot operate without them. We cannot be certain that the FCC will renew these licenses in the future or approve new acquisitions, mergers, divestitures or other business activities. Our failure to renew any licenses upon the expiration of any license term could have a material adverse effect on our business.

 

Federal legislation and FCC rules have changed significantly in recent years and may continue to change. These changes may limit our ability to conduct our business in ways that we believe would be advantageous and may affect our operating results.

 

The FCC can sanction us for programming broadcast on our stations that it finds to be indecent.

 

Over the past several years, the FCC has increased its enforcement efforts regarding broadcast indecency and profanity and the statutory maximum fine for broadcasting indecent material is currently $325,000 per incident. In June 2012, the Supreme Court decided a challenge to the FCC’s indecency enforcement without resolving the scope of the FCC’s ability to regulate broadcast content. In August 2013, the FCC issued a Public Notice seeking comment on whether it should modify its indecency policies. The FCC has not yet issued a decision in this proceeding and the courts remain free to review the FCC’s current policy or any modifications thereto. The outcomes of these proceedings could affect future FCC policies in this area, and we are unable to predict the outcome of any such judicial proceeding, which could have a material adverse effect on our business.

 

The FCC’s duopoly restrictions limit our ability to own and operate multiple television stations in the same market.

 

The FCC’s ownership rules generally prohibit us from owning or having “attributable interests” in two television stations that are located in the same markets in which our stations are licensed and at least one station is ranked among the top-four stations in the market (the “Top Four Prohibition”). In November 2017, the FCC released an Order that eliminated or relaxed several long-standing media ownership rules. The Order (i) eliminated the newspaper/broadcast cross-ownership rule, (ii) eliminated the radio/television cross-ownership rule, (iii) loosened the existing rules governing ownership of local television stations by agreeing to consider requests for waivers of the Top Four Prohibition on a case-by-case basis, and (iv) reversed the FCC’s earlier decision to treat joint sales agreements (“JSAs”) as attributable ownership interests. The FCC also considers television Local Marketing Agreements (“LMAs”) (which are agreements under which a television station sells or provides more than 15 percent of the programming on another same-market television station) as “attributable interests.” While the ownership rules have been relaxed, these rules still constrain our ability to expand in our present markets through additional station acquisitions or LMAs.

 

25

 

 

The FCC’s National Television Station Ownership Rule limits the maximum number of households we can reach.

 

Under the FCC’s National Television Station Ownership Rule, a single television station owner may not reach more than 39 percent of U.S. households through commonly owned television stations, subject to a 50 percent discount of the number of television households attributable to UHF stations (the “UHF Discount”). In December 2017, the Commission issued a notice of proposed rulemaking seeking comment on whether it should modify or eliminate the national cap, including the UHF Discount. This rule may constrain our ability to expand through additional station acquisitions.

 

Risks Related to the Ownership of Our Equity Securities

 

The price and trading volume of our equity securities may be volatile.

 

The price and trading volume of our equity securities may be volatile and subject to fluctuations. Some of the factors that could cause fluctuation in the stock price or trading volume of our equity securities include:

 

 

general market and economic conditions and market trends, including in the television broadcast industry and the financial markets generally;

 

 

the political, economic and social situation in the United States;

 

 

actual or anticipated variations in operating results, including audience share ratings and financial results;

 

 

inability to meet projections in revenue;

 

 

announcements by us or our competitors of significant acquisitions, strategic partnerships, joint ventures, capital commitments or other business developments;

 

 

technological innovations in the television broadcast industry;

 

 

adoption of new accounting standards affecting our industry;

 

 

operations of competitors and the performance of competitors’ common stock;

 

 

litigation or governmental action involving or affecting us or our subsidiaries;

 

 

changes in financial estimates and recommendations by securities analysts;

 

 

recruitment or departure of key personnel;

 

 

purchases or sales of blocks of our common stock; and

 

 

operating and stock performance of the companies that investors may consider to be comparable.

 

There can be no assurance that the price of our equity securities will not fluctuate or decline significantly. The stock market in recent years has experienced considerable price and volume fluctuations that have often been unrelated or disproportionate to the operating performance of individual companies and that could adversely affect the price of our equity securities, regardless of our operating performance. Stock price volatility might be worse if the trading volume of shares of our equity securities is low. Furthermore, stockholders may initiate securities class action lawsuits if the market price of our equity securities were to decline significantly, which may cause us to incur substantial costs and could divert the time and attention of our management.

 

26

 

 

We do not currently pay cash dividends on our common stock or Class A common stock. To the extent a potential investor ascribes value to a dividend paying stock, the value of our stock may be correspondingly reduced.

 

Our Board of Directors has not declared a cash or stock dividend on either class of our common stock since 2008. The timing and amount of any future dividend is at the discretion of our Board of Directors, and they may be subject to limitations or restrictions in our senior credit facility and other financing agreements we may be, or become, party to. We can provide no assurance when or if any future dividends will be declared on our common stock or Class A common stock.

 

As a result, if and to the extent an investor ascribes value to a dividend-paying stock, the value of our common stock or Class A common stock may be correspondingly reduced.

 

Additional issuances of equity securities would dilute the ownership of our existing stockholders and could reduce our earnings per share.

 

We may issue additional equity securities in the future in connection with capital raises, acquisitions, strategic transactions or for other purposes. To the extent we issue substantial additional equity securities, the ownership of our existing stockholders would be diluted and our earnings per share could be reduced.

 

Anti-takeover provisions contained in our Restated Articles of Incorporation (“Articles”) and our Bylaws, as amended (“Bylaws”), as well as provisions of Georgia law, could impair a takeover attempt.

 

Our Articles and Bylaws may have the effect of delaying, deferring or discouraging a prospective acquirer from making a tender offer for our shares of common stock or otherwise attempting to obtain control of us. To the extent that these provisions discourage takeover attempts, they could deprive stockholders of opportunities to realize takeover premiums for their shares. Moreover, these provisions could discourage accumulations of large blocks of common stock, thus depriving stockholders of any advantages which large accumulations of stock might provide.

 

As a Georgia corporation, we are also subject to provisions of Georgia law, including Section 14-2-1132 of the Georgia Business Corporation Code. Section 14-2-1132 prevents some stockholders holding more than 10% of our outstanding common stock from engaging in certain business combinations unless the business combination was approved in advance by our Board of Directors or results in the stockholder holding more than 90% of our outstanding common stock.

 

Any provision of our Articles, our Bylaws or Georgia law that has the effect of delaying or deterring a change in control could limit the opportunity for our stockholders to receive a premium for their shares of our common stock and could also affect the price that some investors are willing to pay for our common stock.

 

We have the ability to issue preferred stock, which could affect the rights of holders of our common stock and Class A common stock.

 

Our Articles allow our Board of Directors to issue up to 20 million shares of preferred stock and set forth the terms of such preferred stock. The terms of any such preferred stock, if issued, may adversely affect the dividend and liquidation rights of holders of our common stock.

 

27

 

 

Holders of our Class A common stock have the right to 10 votes per share on all matters to be voted on by our stockholders and, consequently, the ability to exert significant influence over us.

 

As a result of the 10 to 1 voting rights of holders of our Class A common stock, these stockholders are expected to be able to exert significant influence over all matters requiring stockholder approval, including mergers and other material transactions, and may be able to cause or prevent a change in the composition of our Board of Directors or a change in control of our Company that could deprive our stockholders of an opportunity to receive a premium for their common stock as part of a sale of the Company and might ultimately affect the market price of our common stock.

 

If securities analysts do not continue to publish research or reports about our business, or if they publish negative evaluations of our stock, the price of our stock could decline.

 

We expect that the trading price of our equity securities may be affected by research or reports that industry or financial analysts publish about our business. If one or more of the analysts who cover us downgrade their evaluations, the price of our equity securities could decline. If one or more of these analysts cease coverage of our Company, we could lose visibility in the market for our equity securities, which in turn could cause our stock prices to decline.

 

Item 1B. Unresolved Staff Comments.

 

None.

 

Item 2. Properties.

 

We lease our principal executive offices in a building located at 4370 Peachtree Road, NE, Atlanta, Georgia, 30319. We also lease various other offices that support our operations. See “Business – Stations” elsewhere in this Annual Report on Form 10-K for a listing of our significant television stations and their locations.

 

The types of properties required to support television stations include offices, studios, transmitter sites and antenna sites. A station’s studios are generally housed within its offices in each respective market. The transmitter sites and antenna sites are generally located in elevated areas to provide optimal signal strength and coverage. We own or lease land, offices, studios, transmitters and antennas in each of our markets necessary to support our operations in that market area. In some market areas, we also own or lease multiple properties, such as towers and/or signal repeaters (translators), to optimize our broadcast capabilities. To the extent that our properties are leased and those leases contain expiration dates, we believe that those leases can be renewed, or that alternative facilities can be leased or acquired, on terms that are comparable, in all material respects, to our existing properties.

 

We generally believe all of our owned and leased properties are in good condition, and suitable for the conduct of our present business.

 

Item 3. Legal Proceedings.

 

We are, from time to time, subject to legal proceedings and claims in the normal course of our business. Based on our current knowledge, we do not believe that any known legal proceedings or claims are likely to have a material adverse effect on our financial position, results of operations or cash flows.

 

28

 

 

Item 4. Mine Safety Disclosures.

 

Not applicable.

 

Executive Officers of the Registrant.

 

Set forth below is certain information with respect to our executive officers as of February 23, 2018:

 

Hilton H. Howell, Jr., age 55, has served as our Chief Executive Officer since August 2008 and has also served as our President since June 2013. Mr. Howell, who is a member of the Executive Committee of the Board, has been a director since 1993 and served as the Vice Chairman of the Board from 2002 until April 2016 when he was appointed as Chairman. He served as our Executive Vice President from September 2002 to August 2008. He has served as President and Chief Executive Officer of Atlantic American Corporation, an insurance holding company, since 1995, and as Chairman of that company since February 2009. He has been Executive Vice President and General Counsel of Delta Life Insurance Company and Delta Fire & Casualty Insurance Company since 1991. Mr. Howell also serves as a director of Atlantic American Corporation and of each of its subsidiaries, American Southern Insurance Company, American Safety Insurance Company and Bankers Fidelity Life Insurance Company, as well as a director of Delta Life Insurance Company and Delta Fire & Casualty Insurance Company. He is the husband of Mrs. Robin R. Howell, who is a member of our Board of Directors.

 

James C. Ryan, age 57, has served as our Chief Financial Officer since October 1998 and as Executive Vice President since February 2016. Before that, he had been our Senior Vice President since September 2002 and our Vice President since October 1998.

 

Kevin P. Latek, age 47, has served as our Executive Vice President and Chief Legal and Development Officer since February 2016. Before that, he served as our Senior Vice President, Business Affairs, since July 2013 and as our Vice President for Law and Development since March 2012. Prior to joining us, Mr. Latek represented television and radio broadcasters as well as financial institutions in FCC regulatory and transactional matters with the law firm of Dow Lohnes, PLLC, in Washington, DC. He is a member of the National Association of Broadcasters Educational Foundation, the CBS Affiliates Board, the American Bar Association and the Federal Communications Bar Association. He is a past member of the FOX Affiliates Board of Governors.

 

29

 

 

PART II

 

Item 5. Market for Registrant’s Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities.

 

Our common stock, no par value, and our Class A common stock, no par value, have been listed and traded on the NYSE since September 24, 1996 and June 30, 1995, respectively.

 

The following table sets forth the high and low sale prices of the common stock and the Class A common stock for the periods indicated, as reported by the NYSE.

 

   

Common Stock

   

Class A Common Stock

   
   

High

   

Low

   

High

   

Low

 
                                     

2017:

                                   

First Quarter

  $ 15.10     $ 10.00       $ 14.00     $ 10.00    

Second Quarter

    15.45       11.70         13.50       10.65    

Third Quarter

    15.75       13.30         13.05       10.75    

Fourth Quarter

    17.50       13.90         14.40       12.10    
                                     

2016:

                                   

First Quarter

  $ 16.26     $ 9.95       $ 13.39     $ 9.22    

Second Quarter

    14.77       10.43         12.42       9.51    

Third Quarter

    11.90       9.15         11.13       8.91    

Fourth Quarter

    11.40       7.00         11.06       7.05    

 

As of February 23, 2018, we had 83,591,627 outstanding shares of common stock held by approximately 12,639 stockholders and 6,729,035 outstanding shares of Class A common stock held by approximately 347 stockholders. The number of stockholders consists of stockholders of record and individual participants in security position listings as furnished to us pursuant to Rule 17Ad-8 under the Securities Exchange Act of 1934 (the “Exchange Act”).

 

Our restated articles of incorporation provide that each share of common stock is entitled to one vote, and each share of Class A common stock is entitled to 10 votes, on each matter submitted to a vote of stockholders. Our restated articles of incorporation require that our common stock and our Class A common stock receive dividends on a pari passu basis when declared.

 

We have not paid dividends on either class of our common stock since October 15, 2008. The 2017 Senior Credit Facility contains covenants that restrict our ability to pay cash dividends on our capital stock.

 

In addition, the declaration and payment of any dividends on our common stock or Class A common stock are subject to the discretion of our Board of Directors. Any future payments of dividends will depend on our earnings and financial position and such other factors as our Board of Directors deems relevant. See Note 3 “Long-term Debt” of our audited consolidated financial statements included elsewhere herein for a further discussion of restrictions on our ability to pay dividends.

 

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Stock Performance Graph

 

The following stock performance graphs and related disclosures do not constitute soliciting material and should not be deemed filed or incorporated by reference into any other filing by us under the Securities Act of 1933 or the Exchange Act, except to the extent we specifically incorporate them by reference therein.

 

The following graphs compare the cumulative total return of the common stock and the Class A common stock from January 1, 2013 to December 31, 2017, as compared to the stock market total return indexes for (i) The New York Stock Exchange Composite Index (the “NYSE Composite Index”) and (ii) The New York Stock Exchange Television Broadcasting Stations Index (the “TV Broadcasting Stations Index”).

 

The graphs assume the investment of $100 in each of our common stock and the Class A common stock, respectively, the NYSE Composite Index and the TV Broadcasting Stations Index on January 1, 2013. Any dividends are assumed to have been reinvested as paid.

 

 

* $100 invested on 1/1/2013 in stock index, including reinvestment of dividends. Year ending December 31.

 

   

As of

 

Company/Index/Market

 

1/1/2013

   

12/31/2013

   

12/31/2014

   

12/31/2015

   

12/31/2016

   

12/31/2017

 

Gray Television, Inc. common stock

  $ 100     $ 676     $ 509     $ 741     $ 493     $ 761  

NYSE Composite Index

  $ 100     $ 126     $ 135     $ 129     $ 145     $ 172  

TV Broadcasting Stations Index

  $ 100     $ 160     $ 183     $ 200     $ 211     $ 219  

 

31

 

 

 

 

* $100 invested on 1/1/2013 in stock index, including reinvestment of dividends. Year ending December 31.

 

   

As of

 

Company/Index/Market

 

1/1/2013

   

12/31/2013

   

12/31/2014

   

12/31/2015

   

12/31/2016

   

12/31/2017

 

Gray Television, Inc. Class A common stock

  $ 100     $ 742     $ 526     $ 786     $ 598     $ 825  

NYSE Composite Index

  $ 100     $ 126     $ 135     $ 129     $ 145     $ 172  

TV Broadcasting Stations Index

  $ 100     $ 160     $ 183     $ 200     $ 211     $ 219  

 

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Item 6. Selected Financial Data.

 

Set forth below is selected historical consolidated financial information for Gray for, and as of the end of, each of the years ended December 31, 2017, 2016, 2015, 2014 and 2013. The selected historical consolidated financial information presented below does not contain all of the information you should consider when evaluating Gray, and should be read in conjunction with “Management’s Discussion and Analysis of Financial Condition and Results of Operations” and our audited consolidated financial statements and related notes included elsewhere herein. Various factors are expected to have an effect on our financial condition and results of operations in the future, including the ongoing integration of any acquired businesses. You should also read this selected historical consolidated financial information in conjunction with the information under “Risk Factors” included elsewhere in this Annual Report on Form 10-K.

 

   

Year Ended December 31,

 
   

2017

   

2016

   

2015

   

2014

   

2013

 
   

(in thousands, except net income per share data)

 

Statements of Operations Data (1):

                                       

Revenue (less agency commissions)

  $ 882,728     $ 812,465     $ 597,356     $ 508,134     $ 346,298  

Operating income

    291,226       234,139       140,057       153,773       83,880  

Loss from early extinguishment of debt (2)

    (2,851 )     (31,987 )     -       (5,086 )     -  

Net income

    261,952       62,273       39,301       48,061       18,288  

Net income per common share:

                                       

Basic

    3.59       0.87       0.58       0.83       0.32  

Diluted

    3.55       0.86       0.57       0.82       0.32  
                                         

Balance Sheet Data (at end of period):

                                       

Total assets (3)

  $ 3,260,857     $ 2,752,505     $ 2,078,018     $ 1,834,074     $ 1,283,018  

Long-term debt (including current portion) (3)

    1,837,428       1,756,747       1,220,084       1,217,750       825,581  

Total stockholders’ equity

    992,897       492,861       429,274       216,192       174,010  

 

(1)

Our operating results fluctuate significantly between years, as a result of, among other things, our acquisition activity, and increased political advertising revenue in even-numbered years.

 

(2)

In 2017, we recorded a loss from early extinguishment of debt related to the amendment and restatement of our 2017 Senior Credit Facility. In 2016, we recorded a loss on early extinguishment of debt related to the repurchase and redemption of our then-outstanding 7½% senior notes due 2020. In 2014, we recorded a loss from early extinguishment of debt related to: (i) the amendment and restatement of our prior senior credit facility and (ii) the write off of unamortized deferred financing costs upon the extinguishment of debt of a variable interest entity and the termination of our guarantee of such debt.

 

(3)

In April 2015, the Financial Accounting Standards Board (“FASB”) issued Accounting Standards Update (“ASU”) No. 2015-03, Interest - Imputation of Interest (Subtopic 835-30) - Simplifying the Presentation of Debt Issuance Costs. ASU 2015-03 amended previous guidance to require that debt issuance costs related to a recognized debt liability be presented on the balance sheet as a direct deduction from the carrying amount of that debt liability, consistent with debt discounts. The recognition and measurement guidance for debt issuance costs were not affected by the amendments in this ASU. In August 2015, the FASB issued ASU No. 2015-15, Interest - Imputation of Interest (Subtopic 835-30) - Presentation and Subsequent Measurement of Debt Issuance Costs Associated with Line-of-Credit Arrangements- Amendments to SEC Paragraphs Pursuant to Staff Announcement at June 18, 2015 EITF Meeting. ASU 2015-15 amended previous guidance to codify the June 18, 2015 Staff Announcement that the SEC staff would not object to the deferral and presentation as an asset, and subsequent amortization of such asset, of deferred debt issuance costs related to line of credit arrangements. We adopted these standards as of January 1, 2016. In accordance with these standards, we have reclassified our deferred loan costs as a reduction in the balance of our long-term debt in our balance sheets at December 31, 2015, 2014 and 2013. Our deferred loan costs were previously presented as a non-current asset.

 

33

 

 

Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations.

 

Executive Overview

 

Introduction. The following discussion and analysis of the financial condition and results of operations of Gray 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 audited consolidated financial statements and notes thereto included elsewhere herein.

 

Business Overview. We are a television broadcast company headquartered in Atlanta, Georgia, that owns and operates television stations and leading digital assets in markets throughout the United States. As of February 23, 2018, we owned and operated television stations in 57 television markets broadcasting over 200 separate programming streams, including over 100 affiliates of the CBS, NBC, ABC and FOX networks.

 

In addition to a primary broadcast channel, each of our stations can also broadcast additional secondary digital channels within a market by utilizing the same bandwidth, but with different programming from the primary channel. In addition to affiliations with ABC, CBS and FOX, our secondary channels are affiliated with numerous smaller networks and program services including, among others, the CW, MY, MeTV, This TV, Ant.,Telemundo, Cozi, Heroes and Icons and MOVIES! Networks. Certain of our secondary digital channels are affiliated with more than one network simultaneously. We also broadcast local news/weather channels in some markets. Our combined TV station group reaches approximately 10.4% of total United States television households.

 

Our operating revenues are derived primarily from broadcast and internet advertising, retransmission consent fees and, to a lesser extent, other sources such as production of commercials, tower rentals and management fees. For the years ended December 31, 2017, 2016 and 2015 we generated revenue of $882.7 million, $812.5 million, $597.4 million, respectively.

 

Based on the consolidated results of the four Nielsen “sweeps” periods in 2017, our television stations achieved the #1 ranking in overall audience in 42 of our 57 markets and the #1 ranking in local news audience in 39 of our markets. In addition, our stations achieved the #1 or #2 ranking in both overall audience and news audience in all 57 of our 57 markets. See “Business – Markets and Stations” elsewhere in the Annual Report for a listing of our television stations and their markets.

 

Recent Acquisitions and Divestitures. Over the last several years, the television broadcasting industry has been characterized by a high level of acquisition activity. We continue to believe that there are a number of television stations, and a few station groups, that have attractive operating profiles and characteristics, and that share our commitment to local news coverage in the communities in which they operate and to creating high-quality and locally-driven content. On a highly selective basis, we may pursue opportunities for the acquisition of additional television stations or station groups that fit our strategic and operational objectives, and where we believe that we can improve revenue, efficiencies and cash flow through active management and cost controls. As we consider potential acquisitions, we primarily evaluate potential station audience and revenue shares and the extent to which the acquisition target would positively impact our existing station operations. Consistent with this strategy, from October 31, 2013 through December 31, 2017, we completed 23 acquisition transactions and three divestiture transactions. These transactions added a net total of 51 television stations in 31 television markets, including 26 new television markets, to our operations including eight stations acquired in 2017 (excluding the stations acquired in the Clarksburg Acquisition, the “2017 Acquisitions”) and the 13 stations acquired in 2016 (including the stations acquired in the Clarksburg Acquisition, the “2016 Acquisitions”). See “Business – Stations” elsewhere in the Annual Report for a listing of our television stations and their markets and Note 2 “Acquisitions and Dispositions” of our audited consolidated financial statements included elsewhere herein for additional information on our acquisitions and dispositions. Our total revenue and our broadcast operating expenses have increased significantly as a result of our recent acquisitions.

 

34

 

 

Recent Financing Transactions. In connection with the consummation of our recent acquisitions and our efforts to strengthen our balance sheet, we have undertaken several recent financing transactions. These transactions have included underwritten offerings of our common stock in March 2015 and December 2017; the repurchase and redemption of certain senior notes and the issuance of additional senior notes in 2016; and the refinancing of our senior credit facilities in 2016 and 2017. For a detailed description of these transactions please see Note 3 “Long-term Debt” and Note 5 “Stockholders’ Equity” of our audited consolidated financial statements included elsewhere herein.

 

Revenues, Operations, Cyclicality and Seasonality. Our operating revenues are derived primarily from broadcast and internet advertising and retransmission consent fees and, to a lesser extent, from other sources such as production of commercials, tower rentals and management fees.

 

Broadcast advertising is sold for placement either preceding or following a television station’s network programming and within local and syndicated programming. Broadcast advertising is sold in time increments and is priced primarily on the basis of a program’s popularity among the specific audience an advertiser desires to reach, as measured by Nielsen. In addition, broadcast advertising rates are affected by the number of advertisers competing for the available time, the size and demographic makeup of the market served by the station and the availability of alternative advertising media in the market area. Broadcast advertising rates are generally the highest during the most desirable viewing hours, with corresponding reductions during other hours. The ratings of a local station affiliated with a major network can be affected by ratings of network programming. Most advertising contracts are short-term, and generally run only for a few weeks.

 

We also sell internet advertising on our stations’ websites. These advertisements may be sold as banner advertisements, pre-roll advertisements or video and other types of advertisements or sponsorships.

 

Our total revenue has increased significantly as a result of our recent acquisitions.

 

Our broadcast and internet advertising revenues are affected by several factors that we consider to be seasonal in nature. These factors include:

 

 

spending by political candidates, political parties and special interest groups increases during the even-numbered “on year” of the two-year election cycle. This political spending typically is heaviest during the fourth quarter of such years;

 

 

broadcast advertising revenue is generally highest in the second and fourth quarters each year. This seasonality results partly from increases in advertising in the spring and in the period leading up to and including the holiday season;

 

 

local and national advertising revenue on our NBC-affiliated stations increases in even numbered years as a result of broadcasts of the Olympic Games; and

 

 

because our stations and markets are not evenly divided among the Big 4 broadcast networks, our local and national advertising revenue can fluctuate between years related to which network broadcasts the Super Bowl.

 

35

 

 

Automotive advertisers have traditionally accounted for a significant portion of our revenue. For the years ended December 31, 2017 and 2016, we derived approximately 25% and 22%, respectively, of our total broadcast advertising revenue from customers in the automotive industry. Strong demand for our advertising inventory from political advertisers can require significant use of available inventory, which in turn can lower our advertising revenue from our non-political advertising revenue categories in the even numbered “on-year” of the two year election cycle. These temporary declines are expected to reverse themselves in the odd numbered “off-year” of the two year election cycle.

 

While our revenues have increased in recent years as a result of our acquisitions, they have also experienced a gradual improvement as a result of improvements in general economic conditions. However, revenue remains under pressure from the internet as a competitor for advertising spending. We continue to enhance and market our internet websites in an effort to generate additional revenue. Our aggregate internet revenue is derived from both advertising and sponsorship opportunities directly on our websites.

 

Our primary broadcasting operating expenses are employee compensation, related benefits and programming costs. In addition, the broadcasting operations incur overhead expenses, such as maintenance, supplies, insurance, rent and utilities. A large portion of the operating expenses of our broadcasting operations is fixed. We continue to monitor our operating expenses and seek opportunities to reduce them where possible.

 

Please see our “Results of Operations” and “Liquidity and Capital Resources” sections below for further discussion of our operating results.

 

Risk Factors. The broadcast television industry is reliant primarily on advertising revenue and faces significant competition. For a discussion of certain other presently known, significant factors that may affect our business, see “Item 1A. Risk Factors” included elsewhere herein.

 

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 to our total revenue (dollars in thousands):

 

   

Year Ended December 31,

 
   

2017

   

2016

   

2015

 
           

Percent

           

Percent

           

Percent

 
   

Amount

   

of Total

   

Amount

   

of Total

   

Amount

   

of Total

 

Revenue:

                                                     

Local (including internet/digital/mobile)

  $ 451,261       51.1%       $ 403,336       49.6%       $ 336,471       56.3%    

National

    118,817       13.5%         98,351       12.1%         81,110       13.6%    

Political

    16,498       1.9%         90,095       11.1%         17,163       2.9%    

Retransmission consent

    276,603       31.3%         200,879       24.7%         151,957       25.4%    

Other

    19,549       2.2%         19,804       2.5%         10,655       1.8%    

Total

  $ 882,728       100.0%       $ 812,465       100.0%       $ 597,356       100.0%    

 

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Results of Operations

 

Year Ended December 31, 2017 (“2017”) Compared to Year Ended December 31, 2016 (“2016”)

 

Revenue. Total revenue increased $70.3 million, or 9%, to $882.7 million for 2017 compared to 2016. Local advertising revenue increased approximately $47.9 million, or 12%, to $451.3 million. National advertising revenue increased approximately $20.5 million, or 21%, to $118.8 million. The 2017 Acquisitions and the 2016 Acquisitions had a significant impact on our revenues, together accounting for approximately $232.2 million of our total revenue in 2017, and with the 2016 Acquisitions accounting for $130.4 million of our revenues in 2016.

 

Excluding the revenue contributed by the 2017 Acquisitions and 2016 Acquisitions, our total revenue decreased by $31.6 million. This was primarily the result of a decrease in political advertising revenue of approximately $63.4 million due to 2017 being the off-year of the two-year election cycle. These decreases were partially offset by an increase in retransmission consent revenue of approximately $36.8 million primarily due to higher retransmission consent rates. Local and national advertising revenue declined as a result of the impact of the broadcast of the 2017 Super Bowl on our FOX-affiliated stations generating approximately $0.6 million of local and national advertising revenue, compared to $1.6 million that we earned from the broadcast of the 2016 Super Bowl on our CBS-affiliated stations. Local and national advertising also declined because the year ended December 31, 2016 included approximately $8.2 million of revenue from the 2016 Olympic Games.

 

Broadcast operating expenses. Broadcast operating expenses (before depreciation, amortization and loss on disposal of assets) increased $82.0 million, or 17%, to $557.1 million for 2017 compared to 2016, due to increases in compensation expense of $29.1 million and non-compensation expense of $52.9 million. The 2017 Acquisitions and the 2016 Acquisitions accounted for approximately $135.6 million of our total broadcast operating expenses in 2017, and with the 2016 Acquisitions accounting for $74.6 million of our broadcast operating expenses in 2016.

 

Compensation expense increased in 2017 compared to 2016, primarily as a result of $28.5 million in additional costs resulting primarily from the addition of employees at the stations acquired in the 2017 Acquisitions and 2016 Acquisitions. Non-cash share based compensation expenses were $3.9 million in 2017 compared to $1.2 million in 2016.

 

The 2017 Acquisitions and 2016 Acquisitions contributed $32.6 million to the increase in non-compensation expense when comparing 2017 to 2016. Excluding the impact of the 2017 Acquisitions and the 2016 Acquisitions, network affiliation fees increased by $19.3 million related to our increased retransmission consent revenue under our affiliation agreements and business and professional services fees increased by $2.7 million, offset by service and other broadcast operating expense decreases of $3.7 million.

 

Corporate and administrative expenses. Corporate and administrative expenses (before depreciation, amortization and loss on disposal of assets) decreased $8.8 million, or 22%, to $31.5 million for 2017 compared to 2016. The decrease was due primarily to decreases of $8.5 million in legal and other professional fees associated with decreases in acquisition activity in 2017. Compensation expenses decreased $1.5 million, or 9%, primarily as a result of decreases in incentive compensation. We recorded non-cash stock-based compensation expense during 2017 and 2016 of $4.4 million and $3.9 million, respectively.

 

Depreciation. Depreciation of property and equipment totaled $52.0 million and $45.9 million for 2017 and 2016, respectively. Depreciation expense increased due to purchases of property and equipment at our existing stations and additional property and equipment placed in service related to the 2017 Acquisitions and the full year impact of the assets acquired in the 2016 Acquisitions.

 

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Amortization of intangible assets. Amortization of intangible assets totaled $25.1 million and $16.6 million for 2017 and 2016, respectively. Amortization expense increased primarily due to the amortization expense associated with the acquired finite-lived intangible assets in the 2017 Acquisitions and the full year impact of the assets acquired in the 2016 Acquisitions.

 

Gain or loss on disposal of assets, net. We reported gains on disposals of assets of $74.2 million and losses on disposals of assets of $0.3 million in the years ended December 31, 2017 and 2016, respectively. On May 30, 2017, we tendered two of our broadcast licenses and made other modifications to our broadcast spectrum related to our participation in the FCC’s reverse auction for broadcast spectrum. Proceeds from this auction, which we received on August 7, 2017, were $90.8 million while the combined cost of the disposed assets was $13.1 million. We have deferred any related income tax obligations on a long-term basis.

 

Interest expense. Interest expense decreased $2.0 million, or 2%, to $95.3 million for 2017 compared to 2016. Interest expense decreased due to a decrease in our average interest rates offset, in part, by an increase in our average principal outstanding. The average interest rate on our debt balances was 4.9% and 5.5% for 2017 and 2016, respectively. Our average debt balance was $1.8 billion and $1.6 billion during 2017 and 2016, respectively. Our average debt balance increased as a result of increased borrowings used to finance our acquisitions.

 

Loss from early extinguishment of debt. In the year ended December 31, 2017, we recorded a loss from early extinguishment of debt of approximately $2.9 million, related to the amendment and restatement of our senior credit facility. In the year ended December 31, 2016, we recorded a loss from early extinguishment of debt of approximately $32.0 million, related to the tender offer and redemption of our 7½% senior notes due 2020.

 

Income tax expense. Our effective income tax rate decreased to a net benefit of 35.5% for 2017 from an expense of 41.1% for 2016. The primary reason for the decrease was the impact of the enactment of the TCJA that was signed into law on December 22, 2017. The TCJA reduced the value of our deferred tax liabilities, with a credit to earnings for a reduction of those liabilities. Accordingly, we recorded an income tax benefit of $68.7 million in the year ended December 31, 2017, compared to a tax provision of $43.4 million in the year ended December 31, 2016. The TCJA will materially affect our income tax obligations in 2018 and subsequent years. Among other things, the new law should result in a positive effect on our net earnings and earnings per share. It will also limit or eliminate certain deductions to which we have been entitled in past years and, in 2017. Our effective income tax rates differed from the statutory rate due to the following items:

 

   

Year Ended December 31,

 
   

2017

   

2016

 

Statutory federal income tax rate

    35.0%         35.0%    

Current year permanent items

    1.2%         1.7%    

State and local taxes, net of federal taxes

    4.1%         4.8%    

Change in valuation allowance

    (0.8% )       (0.1% )  

Reserve for uncertain tax positions

    0.4%         (0.7% )  

Rate change due to enactment of tax reform

    (75.5% )       0.0%    

Other items, net

    0.1%         0.4%    

Effective income tax rate

    (35.5% )       41.1%    

 

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Year Ended December 31, 2016 Compared to Year Ended December 31, 2015 (“2015”)

 

Revenue. Total revenue increased $215.1 million, or 36%, to $812.5 million for 2016 compared to 2015. Local advertising revenue increased approximately $66.9 million, or 20%, to $403.3 million. National advertising revenue increased approximately $17.2 million, or 21%, to $98.4 million. The 2016 Acquisitions and the seven television stations we acquired in 2015 (the “2015 Acquisitions”) had a significant impact on our revenues, together accounting for approximately $187.8 million of our total revenue in 2016 and with the 2015 Acquisitions accounting for approximately $23.2 million of our total revenue in 2015. Local and national advertising revenue in 2016 benefited from approximately $8.2 million earned from the broadcast of the 2016 Summer Olympic Games on our NBC-affiliated stations. There was no corresponding Olympic Games advertising revenue during 2015. In 2016, local and national advertising revenue included approximately $1.6 million of revenue from the broadcast of the 2016 Super Bowl on our CBS-affiliated stations, an increase of approximately $0.1 million from the $1.5 million of revenue from the broadcast of the 2015 Super Bowl on our NBC-affiliated stations.

 

Excluding the impact of the 2016 Acquisitions and the 2015 Acquisitions: local revenue decreased by $6.7 million and national revenue decreased by $6.2 million in 2016 compared to 2015, in part, as a result of inventory displacement resulting from increased political advertising revenue; retransmission consent revenue increased $12.8 million in 2016 compared to 2015, primarily due to increased subscriber rates; and political advertising revenue increased $50.1 million in 2016 compared to 2015, reflecting increased advertising from political candidates and special interest groups during the “on year” of the two-year election cycle.

 

Broadcast operating expenses. Broadcast operating expenses (before depreciation, amortization and loss on disposal of assets) increased $100.9 million, or 27%, to $475.1 million for 2016 compared to 2015, due to increases in compensation expense of $50.4 million and non-compensation expense of $50.5 million. The 2016 Acquisitions and the 2015 Acquisitions accounted for approximately $103.9 million of our total broadcast operating expenses in 2016 and with the 2015 Acquisitions accounting for approximately $12.5 million of our total broadcast operating expenses in 2015.

 

Compensation expense increased by $50.4 million in 2016 compared to 2015, primarily as a result of $49.1 million in additional costs resulting primarily from the addition of employees at the 2016 Acquisitions and 2015 Acquisitions. Non-cash share based compensation expenses were $1.2 million in 2016 compared to $0.9 million in 2015.

 

The 2016 Acquisitions and 2015 Acquisitions contributed $42.3 million to the increase in non-compensation expense in 2016. Excluding the impact of the 2016 Acquisitions and the 2015 Acquisitions: network affiliation fees increased by $12.5 million related to our increased retransmission consent revenue under our affiliation agreements; national sales representation fees decreased $10.2 million as a result of the termination of our national advertising sales representation agreements effective January 1, 2016; business and professional services fees increased by $2.3 million; service, repair and maintenance expenses increased by $1.3 million; syndicated programming expenses increased by $1.2 million; and software licensing fees increased by $1.1 million.

 

Corporate and administrative expenses. Corporate and administrative expenses (before depreciation, amortization and loss on disposal of assets) increased $6.0 million, or 17%, to $40.3 million for 2016 compared to 2015. The increase was due primarily to $5.1 million in increased legal and other professional fees associated with our acquisitions. We recorded non-cash stock-based compensation expense during 2016 and 2015 of $3.9 million and $3.1 million, respectively.

 

Depreciation. Depreciation of property and equipment totaled $45.9 million and $36.7 million for 2016 and 2015, respectively. Depreciation expense increased due to purchases of property and equipment at our existing stations and additional property and equipment placed in service related to the 2016 Acquisitions and the full year impact of the assets acquired in the 2015 Acquisitions.

 

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Amortization of intangible assets. Amortization of intangible assets totaled $16.6 million and $12.0 million for 2016 and 2015, respectively. Amortization expense increased in 2016 compared to 2015 due to the amortization expense associated with the acquired finite-lived intangible assets in the 2016 Acquisitions and the full year impact of the assets acquired in the 2015 Acquisitions.

 

Interest expense. Interest expense increased $22.8 million, or 31%, to $97.2 million for 2016 compared to 2015. Interest expense increased due to an increase in our average principal outstanding, partially offset by a decrease in our average interest rates. Our average debt balance was $1.6 billion and $1.2 billion during 2016 and 2015, respectively. Our average debt balance increased as a result of increased borrowings used to finance our acquisitions. The average interest rate on our debt balances was 5.5% and 5.8% for 2016 and 2015, respectively.

 

Loss from early extinguishment of debt. In connection with the completion of the tender offer and the redemption of our senior notes due 2020, we recorded a loss from early extinguishment of debt of approximately $32.0 million in 2016, consisting of tender offer premiums of $18.2 million, premiums related to the redemption of $9.1 million, the write off of unamortized deferred financing costs of $8.0 million and the payment of approximately $0.2 million in legal and other professional fees; reduced by the recognition of un-accreted net premium of $3.5 million.

 

Income tax expense. Our effective income tax rate increased to 41.1% for 2016 from 40.2% for 2015. Our effective income tax rates differed from the statutory rate due to the following items:

 

   

Year Ended December 31,

 
   

2016

   

2015

 

Statutory federal income tax rate

    35.0 %       35.0 %  

Current year permanent items

    1.7 %       1.8 %  

State and local taxes, net of federal taxes

    4.8 %       4.3 %  

Change in valuation allowance

    (0.1 %)       (0.6 %)  

Reserve for uncertain tax positions

    (0.7 %)       (0.9 %)  

Other items, net

    0.4 %       0.6 %  

Effective income tax rate

    41.1 %       40.2 %  

 

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Liquidity and Capital Resources

 

General. The following tables present data that we believe is helpful in evaluating our liquidity and capital resources (dollars in thousands):

 

   

Year Ended December 31,

 
   

2017

   

2016

   

2015

 

Net cash provided by operating activities

  $ 180,015     $ 210,085     $ 106,719  

Net cash used in investing activities

    (349,799 )     (479,334 )     (206,382 )

Net cash provided by financing activities

    306,994       497,120       166,212  

Net increase in cash

  $ 137,210     $ 227,871     $ 66,549  
                         
   

December 31,

         
   

2017

   

2016

         

Cash

  $ 462,399     $ 325,189          

Long-term debt including current portion

  $ 1,837,428     $ 1,756,747          

Borrowing availability under 2017 Senior Credit Facility

  $ 100,000     $ 60,000          

 

Recent Financing Transactions. We have undertaken several recent financing transactions in order to finance our acquisitions, reduce the interest rates of and extend the maturity dates of our debt, and strengthen our balance sheet. These transactions have included underwritten offerings of our common stock in March 2015 and December 2017; the repurchase and redemption of certain senior notes and issuance of additional senior notes in 2016; and the refinancing of our senior credit facilities in 2016 and 2017. For a detailed description of these transactions please see Note 5 “Stockholders’ Equity” and Note 3 “Long-term Debt” of our audited consolidated financial statements included elsewhere herein. For estimates of future principal and interest payments under our debt obligations, see “Tabular Disclosure of Contractual Obligations as of December 31, 2017” included elsewhere herein.

 

Income Taxes. We file a consolidated federal income tax return and such state or local tax returns as are required based on our current forecasts. We expect to begin paying significant federal and state income taxes in 2018. We estimate that these income tax payments will be within a range of approximately $40.0 million to $44.0 million.

 

Liquidity. We have $6.4 million in debt principal repayments due during 2018. We estimate that we will make approximately $117.5 million in debt interest payments, including accrued interest of $26.6 million as of December 31, 2017, and we will pay approximately $50.0 million for capital expenditures during the twelve months immediately following December 31, 2017. Although our cash flows from operations are subject to a number of risks and uncertainties, we anticipate that our cash on hand, future cash expected to be generated from operations, borrowings from time to time under the 2017 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 these debt service obligations and estimated capital expenditures. 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 presently believe that our future cash expected to be generated from operations and borrowing availabity under the 2017 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 term loan under the 2017 Senior Credit Facility.

 

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Net Cash Provided By (Used In) Operating, Investing and Financing Activities – 2017 Compared to 2016

 

Net cash provided by operating activities decreased $30.1 million to $180.0 million in 2017 compared to net cash provided by operating activities of $210.1 million in 2016. The decrease in cash provided by operating activities was due primarily to the net impact of several factors including; an increase in net income of $199.7 million, and a decrease of $206.5 million in non-cash expenses and a decrease of $23.3 million due to changes in working capital balances. The primary changes in our non-cash expenses included: a decrease in our deferred income taxes due to the impact of the TCJA of approximately $118.7 million; a decrease in the loss on extinguishment of debt of approximately $29.1 million; and a gain on disposal of assets of approximately $74.5 million.

 

Net cash used in investing activities decreased $129.5 million to $349.8 million for 2017 compared to $479.3 million for 2016. The net decrease was due primarily to a net decrease of $32.4 million in cash used to acquire television businesses and licenses and proceeds from the sale of television businesses and licenses, a decrease of $9.1 million in cash used for the purchase of property and equipment and $90.8 million of proceeds received from the FCC Spectrum Auction in 2017.

 

Net cash provided by financing activities was $307.0 million in 2017 compared to $497.1 million in 2016. This decrease of $190.1 million was due primarily to decreased borrowings to finance our acquisition activity in 2017 compared to 2016, partially offset by the impact of cash provided by our underwritten offering of 17.25 million shares of our common stock, at a price to the public of $14.50 per share, which resulted in net proceeds of approximately $238.9 million. Net cash provided by financing activities in 2017 was primarily from our December 2017 underwritten public offering and borrowings of $85.0 million, reduced by $6.2 million of quarterly principal payments under the 2017 Term Loan. We used $5.0 million of cash for deferred financing costs primarily related to the 2017 Senior Credit Facility. Also, in 2017 we used $4.0 million to repurchase shares of our common stock and made $1.8 million in payments for taxes related to net share settlements of equity awards. Cash provided by financing activities in 2016 was provided primarily from: $425.0 million of borrowings under the 2016 Term Loan, net of $8.7 million of deferred loan costs; the issuance of an aggregate of $700.0 million of 2026 Notes, net of $11.1 million of deferred loan costs, a portion of which was used to repay the outstanding balance of the 2016 Term Loan; and the issuance of $525.0 million of 2024 Notes at par, net of $8.1 million of deferred loan costs. A portion of the proceeds from the offering of the 2026 Notes and the 2024 Notes were used to fund the tender offer and redemption of the 2020 Notes, which included $27.5 million in premiums. Also in 2016 we used $2.0 million to repurchase shares of our common stock and made $1.5 million in payments for taxes related to net share settlements of equity awards.

 

Net Cash Provided By (Used In) Operating, Investing and Financing Activities - 2016 Compared to 2015

 

Net cash provided by operating activities increased $103.4 million to $210.1 million in 2016 compared to net cash provided by operating activities of $106.7 million in 2015. The increase in cash provided by operating activities was due primarily to an increase in net income of $23.0 million, an increase of $65.1 million in non-cash expenses and an increase of $15.3 million due to changes in working capital balances.

 

Net cash used in investing activities increased $272.9 million to $479.3 million for 2016 compared to $206.4 million for 2015 due primarily to increased cash used to acquire television businesses and licenses.

 

Net cash provided by financing activities was $497.1 million in 2016 compared to net cash provided by financing activities of $166.2 million in 2015. This change of $330.9 million was due primarily to our refinancing activities in 2016. Cash provided by financing activities in 2016 was primarily from: $425.0 million of borrowings under the 2016 Term Loan, net of $8.7 million of deferred loan costs; the issuance of $500.0 million of 2026 Notes, net of $7.8 million of deferred loan costs, a portion of which was used to repay the outstanding balance of the 2016 Term Loan; the issuance of the additional $200.0 million of 2026 Notes at 103% of par, resulting in net proceeds of $206.0 million, net of $3.3 million of deferred loan costs; and the issuance of $525.0 million of 2024 Notes at par, net of $8.1 million of deferred loan costs. The net proceeds from the offering of the additional 2026 Notes and the 2024 Notes, and cash from operations, were used to fund the tender offer and redemption of the 2020 Notes, which included $27.5 million in premiums. Also, in 2016 we used $2.0 million to repurchase shares of our common stock and made $1.5 million in payments for taxes related to net share settlements of equity awards. During 2015, we completed an underwritten public offering of 13.5 million shares of our common stock at a price to the public of $13.00 per share. The net proceeds of the offering were $167.3 million, after deducting underwriting discounts and expenses. Also, in 2015 we made $1.1 million in payments for taxes related to net share settlements of equity awards.

 

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Retirement Plans

 

We sponsor and contribute to defined benefit and defined contribution retirement plans. Our defined benefit pension plan is the Gray Television, Inc. Retirement Plan (the “Gray Pension Plan). Monthly plan benefits under the Gray Pension Plan are frozen and can no longer increase, and no new participants can be added to the Gray Pension Plan.

 

Our funding policy is consistent with the funding requirements of existing federal laws and regulations under the Employee Retirement Income Security Act of 1974. A discount rate is selected annually to measure the present value of the benefit obligations. In determining the selection of a discount rate, we estimated the timing and amounts of expected future benefit payments and applied a yield curve developed to reflect yields available on high-quality bonds. The yield curve is based on an externally published index specifically designed to meet the criteria of United States Generally Accepted Accounting Principles (“U.S. GAAP”). The discount rate selected for determining benefit obligations as of December 31, 2017 was 3.55%, which reflects the results of this yield curve analysis. The discount rate used for determining benefit obligations as of December 31, 2016 was 4.11%. Our assumptions regarding expected return on plan assets reflects asset allocations, the investment strategy and the views of investment managers, as well as historical experience. We use an assumed rate of return of 7.00% for our assets invested in the Gray Pension Plan. The estimated asset returns for this plan, calculated on a mean market value assuming mid-year contributions and benefit payments, were gains of 9.6% and 7.4%, respectively, in the years ended December 31, 2017 and 2016. Other significant assumptions relate to inflation, retirement and mortality rates. Our inflation assumption is based on an evaluation of external market indicators. Retirement rates are based on actual plan experience and mortality rates are based on the RP-2014 Mortality Table and the MP-2017 mortality improvement scale published by the Society of Actuaries.

 

During the years ended December 31, 2017 and 2016, we contributed an aggregate of $3.1 million and $3.0 million, respectively, to the Gray Pension Plan, and we anticipate making an aggregate contribution of approximately $2.0 million to the Gray Pension Plan in 2018. The use of significantly different assumptions, or if actual experienced results differ significantly from those assumed, could result in our funding obligations being materially different.

 

The Gray Television, Inc. Capital Accumulation Plan (the “Capital Accumulation Plan”) is a defined contribution plan intended to meet the requirements of section 401(k) of the Internal Revenue Code. Employer contributions under the Capital Accumulation Plan include matching cash contributions at a rate of 100% of the first 3% of each employee’s salary deferral, and 50% of the next 2% of each employee’s salary deferral. In addition, the Company, at its discretion, may make an additional profit sharing contribution, based on annual Company performance, to those employees who meet certain criteria. During the years ended December 31, 2017 and 2016, we contributed an aggregate of $10.7 million and $8.8 million, respectively, to the Capital Accumulation Plan.

 

See Note 8 “Retirement Plans” of our audited consolidated financial statements included elsewhere herein for further information concerning the retirement plans.

 

43

 

 

Capital Expenditures

 

After the completion of the FCC’s Incentive Auction, the FCC has begun the 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 FCC is required to reimburse stations for reasonable costs to implement these changes at stations operating pursuant to a full power license. Twenty four of our current full power stations and four of our low power stations are affected by the Repack. Currently, we estimate that our total reimbursable cost for the Repack will be approximately $75.6 million. In addition to the reimbursable costs, we intend to make other changes and improvements to our broadcast equipment and facilities that would have not been economically feasible if we were not also purchasing equipment for the Repack project. We refer to these related but non-reimbursable capital expenditures as “Repack related.” Currently we estimate that the Repack related capital expenditures will be approximately $26.1 million. The process began in the summer of 2017 and will take approximately three years to complete. We anticipate that the majority of our costs associated with Repack will qualify for capitalization, rather than expense. In 2017, our Repack costs and associated reimbursements were $2.8 million and $0.1 million, respectively.

 

Capital expenditures for the years ended December 31, 2017 and 2016 were $34.5 million and $43.6 million, respectively. Excluding Repack, but including Repack related expenditures, we expect that our capital expenditures will be approximately $50.0 million in the year ending December 31, 2018. We expect to fund future capital expenditures with cash from operations, borrowings or other financing proceeds.

 

Off-Balance Sheet Arrangements

 

Operating Commitments. We have various operating lease commitments for equipment, land and office space. We also have commitments for various syndicated television programs.

 

We have two types of syndicated television program contracts: first run programs and off network reruns. First run programs are programs such as Wheel of Fortune and off network reruns are programs such as Seinfeld. First run programs have not been produced at the time the contract to air such programming is signed, and off network reruns have already been produced. For all syndicated television contracts, we record an asset and corresponding liability for payments to be made only for the current year of the first run programming and for the entire contract period for off network programming. Only an estimate of the payments anticipated to be made in the year following the balance sheet date of the first run contracts are recorded on the current balance sheet, because the programs for the later years of the contract period have not been produced or delivered.

 

The total license fee payable under a program license agreement allowing us to broadcast programs is recorded at the beginning of the license period and is charged to operating expense over the period that the programs are broadcast. The portion of the unamortized balance expected to be charged to operating expense in the succeeding year is classified as a current asset, with the remainder classified as a non-current asset. The liability for license fees payable under program license agreements is classified as current or long-term, in accordance with the payment terms of the various license agreements.

 

44

 

 

Tabular Disclosure of Contractual Obligations as of December 31, 2017. The following table aggregates our material expected contractual obligations and commitments as of December 31, 2017 (in thousands):

 

   

Payment Due By Period

 
           

Less than

                   

More than

 

Contractual Obligations

 

Total

   

1 Year

   

1-3 Years

   

3-5 Years

   

5 Years

 
                                         

Contractual obligations recorded on our balance sheet as of December 31, 2017:

                                       

Long-term debt obligations (1)

  $ 1,860,234     $ 6,417     $ 12,834     $ 12,834     $ 1,828,149  

Accrued interest (2)

    26,624       26,624       -       -       -  

Programming obligations currently accrued (3)

    19,513       15,236       4,277       -       -  
                                         

Off-balance sheet arrangements as of December 31, 2017:

                                       

Long term debt obligations (4):

                                       

Cash interest on 2017 Senior

                                       

Credit Facility

    137,038       22,820       44,946       44,019       25,253  

Cash interest on 2026 Notes

    351,276       41,125       82,250       82,250       145,651  

Cash interest on 2024 Notes

    182,738       26,906       53,813       53,813       48,206  

Operating lease obligations (5)

    17,592       3,286       4,935       4,077       5,294  

Purchase obligations not currently accrued (6)

    3,887       3,887       -       -       -  

Programming obligations not currently accrued (7)

    39,767       6,214       30,901       2,201       451  

Network affiliation agreements (8)

    579,836       176,669       270,371       132,796       -  

Service and other agreements (9)

    3,605       2,856       749       -       -  

Total

  $ 3,222,110     $ 332,040     $ 505,076     $ 331,990     $ 2,053,004  

 

(1)

“Long-term debt obligations” represent current and long-term principal payment obligations under the 2017 Senior Credit Facility, the 2026 Notes and the 2024 Notes at December 31, 2017. These amounts are recorded as liabilities as of the balance sheet date net of the $22.8 million of unamortized deferred loan costs and unamortized original issue premium on the 2026 Notes. As of December 31, 2017, the interest rate on the balance outstanding under the 2017 Senior Credit Facility was 3.6%. As of December 31, 2017, the coupon interest rate and the yield on the 2026 Notes were 5.875% and 5.398%, respectively. As of December 31, 2017, the coupon interest rate and the yield on the 2024 Notes were each 5.125%. Under the 2017 Senior Credit Facility the maturity date of the revolving credit facility is February 7, 2022 and the maturity date of the term loan facility is February 7, 2024. See Note 3 “Long-term Debt” to our audited consolidated financial statements included elsewhere herein for more information on the 2017 Senior Credit Facility.

 

(2)

“Accrued interest” represents interest on long-term debt obligations accrued as of December 31, 2017.

 

45

 

 

(3)

“Programming obligations currently accrued” represents obligations for syndicated television programming whose license period has begun and the product is available. These amounts are recorded as liabilities as of the current balance sheet date.

  

(4)

“Cash interest on long-term debt obligations” consists of estimated interest expense on long-term debt excluding interest expense accrued as of December 31, 2017 described in note (2) above. The estimate is based upon debt balances as of December 31, 2017 and required future principal repayments under those obligations. The 2026 Notes and the 2024 Notes mature on July 15, 2026 and October 15, 2024, respectively. The maturity date of the term loan under the 2017 Senior Credit Facility is February 7, 2024. This estimate of cash interest on long-term debt obligations assumes that current interest rates will remain consistent and the principal obligations underlying these interest estimates will not be replaced by other long-term obligations prior to or upon their maturity.

 

(5)

“Operating lease obligations” represent payment obligations under non-cancelable lease agreements classified as operating leases. These amounts are not recorded as liabilities as of the current balance sheet date. Beginning in 2019, the Company will adopt the provisions of ASU 2016-02 – Leases (Topic 842). At that time, our obligations under most of our lease transactions will be recorded as liabilities in our balance sheets.

 

(6)

“Purchase obligations not currently accrued” generally represent payment obligations for property and equipment. It is our policy to accrue for these obligations when the equipment is received and the vendor has completed the work required by the purchase agreement. These amounts are not recorded as liabilities as of the current balance sheet date because we had not yet received the related equipment.

 

(7)

“Programming obligations not currently accrued” represent obligations for syndicated television programming whose license period has not yet begun or the product is not yet available. These amounts are not recorded as liabilities as of the current balance sheet date.

 

(8)

“Network affiliation agreements” represent the fixed obligations under our current agreements with broadcast networks. Our network affiliation agreements expire at various dates primarily through December, 2021.

 

(9)

“Service and other agreements” represents minimum amounts payable for various non-cancelable contractual agreements for maintenance services and other professional services.

 

Estimates of the amount, timing and future funding obligations under our pension plan include assumptions concerning, among other things, actual and projected market performance of plan assets, investment yields, statutory requirements and demographic data for pension plan participants. Pension plan funding estimates are therefore not included in the table above because the timing and amounts of funding obligations for all future periods cannot be reasonably determined. We expect to contribute approximately $2.0 million in total to our defined benefit pension plans during 2018.

 

Inflation

 

The impact of inflation on operations has not been significant to date. However, there can be no assurance that a high rate of inflation in the future would not have an adverse effect on operating results, particularly since amounts outstanding under the 2017 Senior Credit Facility incur interest at a variable rate.

 

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Critical Accounting Policies

 

The preparation of financial statements in conformity with U.S. GAAP requires us to make judgments and estimations that affect the amounts reported in the financial statements and accompanying notes. Actual results could differ materially from those reported amounts. 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. Our policies concerning intangible assets and income taxes are disclosed below.

 

Annual Impairment Testing of Broadcast Licenses and Goodwill. We have determined that our broadcast licenses are indefinite-lived intangible assets in accordance with the accounting guidance for goodwill and other intangible assets, which require such assets to be tested for impairment on an annual basis, or more often when certain triggering events occur. For goodwill, we have elected to bypass the qualitative assessment provisions and to perform the prescribed testing steps for goodwill on an annual basis. Neither of these asset types is amortized.

 

We test for impairment of broadcast licenses and goodwill on an annual basis on the last day of each fiscal year. We also test for impairment during any reporting period if certain triggering events occur. The two most recent impairment testing dates were December 31, 2017 and 2016.

 

Our annual impairment testing of broadcast licenses and goodwill for each individual television station requires an estimation of the fair value of each broadcast license and the fair value of the entire television station, which we consider a reporting unit. Such estimates generally rely on analyses of public and private comparative sales data as well as discounted cash flow analyses that inherently require multiple assumptions relating to the future prospects of each individual television station including, but not limited to (i) expected long-term market growth characteristics; (ii) estimations regarding a station’s future expected viewing audience; (iii) station revenue shares within a market; (iv) future expected operating expenses; (v) costs of capital; and (vi) appropriate discount rates. We believe that the assumptions we utilize in analyzing potential impairment of broadcast licenses and/or goodwill for each of our television stations are reasonable individually and in the aggregate. However, these assumptions are highly subjective and changes in any one assumption, or a combination of assumptions, could produce significant differences in the calculated outcomes.

 

To estimate the fair value of our reporting units, we utilize a discounted cash flow model supported by a market multiple approach. We believe that a discounted cash flow analysis is the most appropriate methodology to test the recorded value of long-term assets with a demonstrated long-lived/enduring franchise value. We believe the results of the discounted cash flow and market multiple approaches provide reasonable estimates of the fair value of our reporting units because these approaches are based on our actual results and reasonable estimates of future performance, and also take into consideration a number of other factors deemed relevant by us including, but not limited to, expected future market revenue growth, market revenue shares and operating profit margins. We have historically used these approaches in determining the fair value of our reporting units. We also consider a market multiple approach to corroborate our discounted cash flow analysis. We believe that this methodology is consistent with the approach that any strategic market participant would utilize if they were to value one of our television stations.

 

As of December 31, 2017 and 2016, the recorded value of our broadcast licenses was $1.5 billion and $1.3 billion, respectively. As of December 31, 2017 and 2016, the recorded value of our goodwill was $611.1 million and $485.3 million, respectively. We did not record an impairment expense related to our broadcast licenses or goodwill during 2017, 2016 or 2015.

 

47

 

 

Prior to January 1, 2002, acquired broadcast licenses were valued at the date of acquisition using a residual method. The recorded value of these broadcast licenses as of December 31, 2017 and 2016 was approximately $341.0 million. Broadcast licenses acquired after December 31, 2001 were valued at the date of acquisition using an income method that assumes an initial hypothetical start-up operation. This change in methodology was due to a change in accounting requirements. The book value of these broadcast licenses as of December 31, 2017 and 2016 was approximately $1.2 billion and $1.0 billion, respectively. Regardless of whether we initially recorded the value of our broadcast licenses using the residual or the income method, for purposes of testing for potential impairment we use the income method to estimate the fair value of our broadcast licenses.

 

Valuation of Network Affiliation Agreements. We believe that the value of a television station is derived primarily from the attributes of its broadcast license rather than its network affiliation agreement. These attributes have a significant impact on the audience for network programming in a local television market compared to the national viewing patterns of the same network programming.

 

Certain other broadcasting companies have valued their stations on the basis that it is the network affiliation and not the other attributes of the station, including its broadcast license, which contributes to the operational performance of that station. As a result, we believe that these broadcasting companies allocate a significant portion of the purchase price for any station that they may acquire to the network affiliation relationship and include in their network affiliation valuation amounts related to attributes which we believe are more appropriately reflected in the value of the broadcast license or reporting units.

 

The methodology we used to value these stations was based on our evaluation of the broadcast licenses acquired and the characteristics of the markets in which they operated. Given our assumptions and the specific attributes of the stations we acquired from 2002 through December 31, 2017, we generally ascribe no incremental value to the incumbent network affiliation relationship in each market beyond the cost of negotiating a new agreement with another network and the value of any terms of the affiliation agreement that were more favorable or unfavorable than those generally prevailing in the market.

 

Some broadcast companies may use methods to value acquired network affiliations different than those that we use. These different methods may result in significant variances in the amount of purchase price allocated to these assets among broadcast companies.

 

If we were to assign higher values to all of our network affiliations and less value to our broadcast licenses or goodwill and if it is further assumed that such higher values of the network affiliations are finite-lived intangible assets, this reallocation of value might have a significant impact on our operating results. There is diversity of practice within the industry, and some broadcast companies have considered such network affiliation intangible assets to have a life ranging from 15 to 40 years depending on the specific assumptions utilized by those broadcast companies.

 

48

 

 

The following table reflects the hypothetical impact of the reassignment of value from broadcast licenses to network affiliations for our historical acquisitions (the first acquisition being in 1994) and the resulting increase in amortization expense assuming a hypothetical 15-year amortization period as of our most recent impairment testing date of December 31, 2017 (in thousands, except per share data):

 

           

Percentage of Total

 
           

Value Reassigned to

 
           

Network

 
   

As

   

Affiliation Agreements

 
   

Reported

   

50%

   

25%

 

Balance Sheet (As of December 31, 2017):

                       

Broadcast licenses

  $ 1,530,703     $ 631,982     $ 1,081,342  

Other intangible assets, net (including network affiliation agreements)

    73,784       406,811       240,297  
                         

Statement of Operations

                       

(For the year ended December 31, 2017):

                       

Amortization of intangible assets

    25,072       65,227       45,150  

Operating income

    291,226       251,071       271,148  

Net income

    261,952       237,457       249,704  

per share - basic

  $ 3.59     $ 3.25     $ 3.42  

per share - diluted

  $ 3.55     $ 3.22     $ 3.38  

 

For future acquisitions, if any, the valuation of the network affiliations may differ from the values of previous acquisitions due to the different characteristics of each station and the market in which it operates.

 

Income Taxes. We have approximately $61.6 million in federal operating loss carryforwards, which will be fully utilized upon the filing of our 2017 tax returns. Additionally, we have an aggregate of approximately $101.7 million of various state operating loss carryforwards. We project to have taxable income in the carryforward periods. Therefore, we believe that it is more likely than not that the state operating loss carryforwards will be fully utilized.

 

A valuation allowance has been provided for a portion of the state net operating loss carryforwards. We believe that we will not meet the more likely than not threshold in certain states due to the uncertainty of generating sufficient income. Therefore, the state valuation allowance at December 31, 2017 and 2016 was $0.1 million and $1.5 million, respectively.

 

The TCJA reduced the value of our deferred tax liabilities resulting in the recognition of a tax benefit of approximately $146.0 million in the fourth quarter of 2017 with a credit to earnings for a reduction of those liabilities. In addition, the TCJA contains significant changes to corporate taxes that will materially affect the taxes owed by us in 2018 and subsequent years. Among other things, the new law reduces the maximum federal corporate income tax rate from 35% to 21%, which should have a positive effect on our net earnings and earnings per share. It also includes an option to claim accelerated depreciation deductions on qualified property but limits or eliminates certain deductions to which we have been entitled in past years.

 

The SEC staff issued Staff Accounting Bulletin No. 118 (“SAB 118”) to address the application of U.S. GAAP in situations when a registrant does not have the necessary information available, prepared, or analyzed (including computations) in reasonable detail to complete the accounting for certain income tax effects of the TCJA. We have recognized the provisional tax impacts related primarily to depreciation deductions and included these amounts in our consolidated financial statements for the year ended December 31, 2017. The ultimate impact may differ from these provisional amounts, possibly materially, due to, among other things, additional analysis, changes in interpretations and assumptions we have made, additional regulatory guidance that may be issued, and actions we may take as a result of the TCJA. The accounting is expected to be complete when the 2017 U.S. corporate income tax return is filed later in 2018.

 

Recent Accounting Pronouncements. See Note 1 “Description of Business and Summary of Significant Accounting Policies” of our audited consolidated financial statements included elsewhere herein for more information.

 

49

 

 

Cautionary Statements for Purposes of the “Safe Harbor” Provisions of the Federal Securities Laws

 

This annual report on Form 10-K contains and incorporates by reference “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. 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 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 this Annual Report and the other factors described from time to time in our SEC filings. The forward-looking statements included in this Annual 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.

 

Item 7A. Quantitative and Qualitative Disclosures About Market Risk.

 

We are exposed to certain risks arising from business operations and economic conditions. We attempt to manage our exposure to a wide variety of business and operational risks principally through management of our core business activities. We attempt to manage economic risk, including interest rate, liquidity, and credit risk, primarily by managing the amount, sources and duration of our debt funding and, at times, the use of interest rate swap agreements. From time to time, we enter into interest rate swap agreements to manage interest rate exposure with the following objectives:

 

 

managing current and forecasted interest rate risk while maintaining financial flexibility and solvency;

 

 

proactively managing our cost of capital to ensure that we can effectively manage operations and execute our business strategy, thereby maintaining a competitive advantage and enhancing shareholder value; and

 

 

complying with covenant requirements in our financing agreements.

 

As of December 31, 2017, we pay interest based on a floating interest rate on balances outstanding under the 2017 Senior Credit Facility. We pay a fixed rate of interest on the 2026 Notes and the 2024 Notes. As of December 31, 2017, the majority of our outstanding debt bore interest at a fixed interest rate, which reduces our risk of potential increases in interest rates, but would not allow us to benefit from any reduction in market interest rates such as LIBOR or the prime rate. Also, as of that date, we were not a party to any interest rate swap agreements. See Note 3 “Long-term Debt” to our audited consolidated financial statements included elsewhere herein for more information on our long-term debt and associated interest rates.

 

Based on our floating rate debt outstanding at December 31, 2017, a 100 basis point increase or decrease in market interest rates would have increased or decreased our interest expense and decreased or increased our income before income taxes for the year ended December 31, 2017 by approximately $6.4 million. The recorded amount of our long-term debt, including current portion, was $1.9 billion and $1.8 billion, respectively, and the fair value of our long-term debt, including current portion, was $1.9 billion and $1.8 billion, respectively, as of December 31, 2017 and 2016. Fair value of our long-term debt is based on estimates provided by third-party financial professionals as of the respective dates.

 

50

 

 

Item 8. Financial Statements and Supplementary Data.

 

 

Page

   

Management’s Report on Internal Control Over Financial Reporting

52

   

Report of Independent Registered Public Accounting Firm

53

   

Consolidated Balance Sheets at December 31, 2017 and 2016

55

   

Consolidated Statements of Operations for the years ended December 31, 2017, 2016 and 2015

57

   

Consolidated Statements of Comprehensive Income for the years ended December 31, 2017, 2016 and 2015

58

   

Consolidated Statements of Stockholders’ Equity for the years ended December 31, 2017, 2016 and 2015

59

   

Consolidated Statements of Cash Flows for the years ended December 31, 2017, 2016 and 2015

61

   

Notes to Consolidated Financial Statements

62

 

51

 

 

Management’s Report on Internal Control Over Financial Reporting

 

Our management is responsible for establishing and maintaining adequate internal control over financial reporting and for the assessment of the effectiveness of internal control over financial reporting. As defined by the U.S. Securities and Exchange Commission (the “SEC”), internal control over financial reporting is a process designed by, or under the supervision of, our principal executive and principal financial officers and effected by our Board of Directors, management and other personnel, to provide reasonable assurance regarding the reliability of financial reporting and the preparation of the consolidated financial statements for external purposes in accordance with accounting principles generally accepted in the United States of America.

 

Our internal control over financial reporting includes those policies and procedures that (i) pertain to the maintenance of records that, in reasonable detail, accurately and fairly reflect our transactions and dispositions of our assets; (ii) provide reasonable assurance that transactions are recorded as necessary to permit preparation of the consolidated financial statements in accordance with generally accepted accounting principles, and that our receipts and expenditures are being made only in accordance with authorizations of our management and directors; and (iii) provide reasonable assurance regarding prevention or timely detection of unauthorized acquisition, use or disposition of our assets that could have a material effect on the consolidated financial statements.

 

In connection with the preparation of our annual consolidated financial statements, management has undertaken an assessment of the effectiveness of our internal control over financial reporting as of December 31, 2017, based on criteria established in Internal Control – Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission (“COSO 2013 framework”). Management’s assessment included an evaluation of the design of our internal control over financial reporting and testing of the operational effectiveness of those controls. Based on this evaluation, management has concluded that our internal control over financial reporting was effective as of December 31, 2017.

 

Because of its inherent limitations, internal control over financial reporting may not prevent or detect all misstatements. Also, projections of any evaluation of effectiveness to future periods are subject to the risk that controls may become inadequate because of changes in conditions, or that the degree of compliance with the policies or procedures may deteriorate.

 

Management excluded the operations of the television stations WBAY-TV in Green Bay, Wisconsin and KWQC-TV in Davenport, Iowa, each purchased from Nexstar Broadcasting, Inc., KTVF-TV in Fairbanks, Alaska, from Tanana Valley Television Company and Tanana Valley Holdings, LLC, WDTV-TV in Clarksburg-Weston, West Virginia, from Withers Broadcasting Company of West Virginia, WABI-TV in Bangor, Maine and WCJB-TV in Gainesville, Florida, each from Community Broadcasting Service and Diversified Broadcasting, Inc., and WCAX-TV in Burlington, Vermont from Mt. Mansfield Television, Inc., from the assessment of internal control over financial reporting as of December 31, 2017. These operations were excluded in accordance with the SEC’s general guidance because they and the related entities were acquired in purchase business combinations in 2017. Collectively, these operations accounted for approximately 14% of our total assets and 9% of our total revenues, as reported in our consolidated financial statements as of and for the year ended December 31, 2017.

 

The effectiveness of our internal control over financial reporting as of December 31, 2017 has been audited by RSM US LLP, an independent registered public accounting firm, as stated in their report, which is included herein.

 

52

 

 

Report of Independent Registered Public Accounting Firm

 

 

To the Stockholders and the Board of Directors of Gray Television, Inc.

 

 

Opinions on the Financial Statements and Internal Control Over Financial Reporting

 

We have audited the accompanying consolidated balance sheets of Gray Television, Inc. and subsidiaries (the Company) as of December 31, 2017 and 2016, and the related consolidated statements of operations, comprehensive income, stockholders' equity and cash flows for each of the three years in the period ended December 31, 2017, and the related notes and schedule (collectively, the financial statements). We also have audited the Company’s internal control over financial reporting as of December 31, 2017, based on criteria established in Internal Control — Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission in 2013.

 

In our opinion, the financial statements referred to above present fairly, in all material respects, the financial position of the Company as of December 31, 2017 and 2016, and the results of their operations and their cash flows for each of the years in the three-year period ended December 31, 2017, in conformity with accounting principles generally accepted in the United States of America. Also in our opinion, the Company maintained, in all material respects, effective internal control over financial reporting as of December 31, 2017, based on criteria established in Internal Control — Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission in 2013.

 

As described in Management’s Report on Internal Control Over Financial Reporting, management excluded the operations of the television stations WBAY-TV in Green Bay, Wisconsin and KWQC-TV in Davenport, Iowa, each purchased from Nexstar Broadcasting, Inc., KTVF-TV in Fairbanks, Alaska, from Tanana Valley Television Company and Tanana Valley Holdings, LLC, WDTV-TV in Clarksburg-Weston, West Virginia, from Withers Broadcasting Company of West Virginia, WABI-TV in Bangor, Maine and WCJB-TV in Gainesville, Florida, each from Community Broadcasting Service and Diversified Broadcasting, Inc., and WCAX-TV in Burlington, Vermont from Mt. Mansfield Television, Inc. (collectively, the Acquired Stations), from its assessment of internal control over financial reporting as of December 31, 2017, because they were acquired by the Company in a purchase business combination in 2017. We have also excluded the Acquired Stations from our audit of internal control over financial reporting. The Acquired Stations total assets and revenues represent approximately 14 percent and 9 percent, respectively, of the related consolidated financial statement amounts as of and for the year ended December 31, 2017.

 

Basis for Opinions

 

The Company's management is responsible for these financial statements, for maintaining effective internal control over financial reporting, and for its assessment of the effectiveness of internal control over financial reporting, included in the accompanying Management’s Report on Internal Control Over Financial Reporting. Our responsibility is to express an opinion on the Company's financial statements and an opinion on the Company's internal control over financial reporting based on our audits. We are a public accounting firm registered with the Public Company Accounting Oversight Board (United States) (PCAOB) and are required to be independent with respect to the Company in accordance with U.S. federal securities laws and the applicable rules and regulations of the Securities and Exchange Commission and the PCAOB.

 

53

 

 

We conducted our audits in accordance with the standards of the PCAOB. Those standards require that we plan and perform the audits to obtain reasonable assurance about whether the financial statements are free of material misstatement, whether due to error or fraud, and whether effective internal control over financial reporting was maintained in all material respects.

 

Our audits of the financial statements included performing procedures to assess the risks of material misstatement of the financial statements, whether due to error or fraud, and performing procedures that respond to those risks. Such procedures included examining, on a test basis, evidence regarding the amounts and disclosures in the financial statements. Our audits also included evaluating the accounting principles used and significant estimates made by management, as well as evaluating the overall presentation of the financial statements. Our audit of internal control over financial reporting included obtaining an understanding of internal control over financial reporting, assessing the risk that a material weakness exists, and testing and evaluating the design and operating effectiveness of internal control based on the assessed risk. Our audits also included performing such other procedures as we considered necessary in the circumstances. We believe that our audits provide a reasonable basis for our opinions.

 

Definition and Limitations of Internal Control Over Financial Reporting

 

A company's internal control over financial reporting is a process designed to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles. A company's internal control over financial reporting includes those policies and procedures that (1) pertain to the maintenance of records that, in reasonable detail, accurately and fairly reflect the transactions and dispositions of the assets of the company; (2) provide reasonable assurance that transactions are recorded as necessary to permit preparation of financial statements in accordance with generally accepted accounting principles, and that receipts and expenditures of the company are being made only in accordance with authorizations of management and directors of the company; and (3) provide reasonable assurance regarding prevention or timely detection of unauthorized acquisition, use or disposition of the company's assets that could have a material effect on the financial statements.

 

Because of its inherent limitations, internal control over financial reporting may not prevent or detect misstatements. Also, projections of any evaluation of effectiveness to future periods are subject to the risk that controls may become inadequate because of changes in conditions, or that the degree of compliance with the policies or procedures may deteriorate.

 

/s/ RSM US LLP

 

We have served as the Company's auditor since 2006.

 

Atlanta, Georgia

February 27, 2018

 

54

 

 

 

GRAY TELEVISION, INC.

 

CONSOLIDATED BALANCE SHEETS

 

(in thousands)

 

 

   

December 31,

 
   

2017

   

2016

 

Assets:

               

Current assets:

               

Cash

  $ 462,399     $ 325,189  

Accounts receivable, less allowance for doubtful accounts of $4,606 and $3,163, respectively

    171,230       146,811  

Current portion of program broadcast rights, net

    14,656       13,735  

Prepaid income taxes

    13,791       14,641  

Prepaid and other current assets

    4,681       5,109  

Total current assets

    666,757       505,485  
                 

Property and equipment, net

    350,658       326,093  

Broadcast licenses

    1,530,703       1,340,305  

Goodwill

    611,100       485,318  

Other intangible assets, net

    73,784       56,250  

Investments in broadcasting and technology companies

    16,599       16,599  

Other

    11,256       22,455  

Total assets

  $ 3,260,857     $ 2,752,505  

 

See accompanying notes.

 

55

 

 

GRAY TELEVISION, INC.

CONSOLIDATED BALANCE SHEETS

(in thousands except for share data)

 

   

December 31,

 
   

2017

   

2016

 

Liabilities and stockholders’ equity:

               

Current liabilities:

               

Accounts payable

  $ 7,840     $ 5,257  

Employee compensation and benefits

    30,144       31,367  

Accrued interest

    26,624       32,453