GRAY TELEVISION INC - Quarter Report: 2019 March (Form 10-Q)

 

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

WASHINGTON, D.C. 20549

 

FORM 10-Q

(Mark one)

[X]	Quarterly report pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934
	For the quarterly period ended March 31, 2019 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		58-0285030
(State or other jurisdiction of incorporation or organization)		(I.R.S. Employer Identification Number)
4370 Peachtree Road, NE, Atlanta, Georgia		30319
(Address of principal executive offices)		(Zip code)

 

(404) 504-9828

(Registrant's telephone number, including area code)

Not Applicable

(Former name, former address and former fiscal year, if changed since last report.)

 

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 periods 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 every Interactive Data File required to be submitted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit such files). Yes ✔      No_____

 

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

 

Large accelerated filer ☒	Accelerated filer ☐
Non-accelerated filer ☐	Smaller reporting company ☐
Emerging growth 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 Exchange Act).      Yes           No    ✔   

 

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

 

Title of each Class	Trading Symbol(s)	Name of each exchange on which registered
Class A common stock (no par value)	GTN.A	New York Stock Exchange
common stock (no par value)	GTN	New York Stock Exchange

 

Indicate the number of shares outstanding of each of the issuer's classes of common stock, as of the latest practical date.

 

Common Stock (No Par Value)		Class A Common Stock (No Par Value)
94,273,389 shares outstanding as of May 1, 2019		6,881,192 shares outstanding as of May 1, 2019

 

 

 

INDEX

 

GRAY TELEVISION, INC.

 

 

				PAGE
PART I.		FINANCIAL INFORMATION
Item 1.		Financial Statements
		Condensed consolidated balance sheets (Unaudited) – March 31, 2019 and December 31, 2018		3
		Condensed consolidated statements of operations (Unaudited) – three-months ended March 31, 2019 and 2018		5
		Condensed consolidated statement of stockholders' equity (Unaudited) –  three-months ended March 31, 2019 and 2018		6
		Condensed consolidated statements of cash flows (Unaudited) – three months-ended March 31, 2019 and 2018		7
		Notes to condensed consolidated financial statements (Unaudited)		8
Item 2.		Management's Discussion and Analysis of Financial Condition and Results of Operations		29
Item 3.		Quantitative and Qualitative Disclosures About Market Risk		35
Item 4.		Controls and Procedures		35
PART II.		OTHER INFORMATION
Item 1A.		Risk Factors		35
Item 2.		Unregistered Sales of Equity Securities and Use of Proceeds		36
Item 6.		Exhibits		36
SIGNATURES				37

 

 

 

		March 31,				December 31,
		2019				2018
Assets:
Current assets:
Cash		$	225			$	667
Accounts receivable, less allowance for doubtful accounts of $9 and $5, respectively			414				184
Current portion of program broadcast rights, net			18				15
Prepaid and other current assets			17				7
Total current assets			674				873
Property and equipment, net			672				363
Operating leases right of use asset			72				-
Broadcast licenses			3,534				1,530
Goodwill			1,434				612
Other intangible assets, net			517				53
Investment in broadcasting and technology companies			17				17
Restricted cash			-				752
Other			75				13
Total assets		$	6,995			$	4,213

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		March 31,				December 31,
		2019				2018
Liabilities and stockholders’ equity:
Current liabilities:
Accounts payable		$	16			$	8
Employee compensation and benefits			44				35
Accrued interest			47				34
Accrued network programming fees			36				22
Other accrued expenses			28				18
Federal and state income taxes			33				14
Current portion of program broadcast obligations			19				15
Deferred revenue			11				4
Dividends payable			13				-
Current portion of operating lease liabilities			6				-
Current portion of finance lease liabilities			1				-
Current portion of long-term debt			14				-
Total current liabilities			268				150
Long-term debt, less current portion and deferred financing costs			3,882				2,549
Program broadcast obligations, less current portion			8				5
Deferred income taxes			743				285
Accrued pension costs			33				33
Operating lease liabilities			66				-
Finance lease liabilites			1				-
Other			15				4
Total liabilities			5,016				3,026
Commitments and contingencies (Note 11)
Series A Perpetual Preferred Stock, no par value; cumulative; redeemable; designated 1,500,000 shares, issued and outstanding 650,000 shares and 0 shares, ($650,000,000 and $0 aggregate liquidation value, respectively)			650				-
Stockholders’ equity:
Common stock, no par value; authorized 200,000,000 shares, issued 101,672,999 shares and 89,298,943 shares, respectively, and outstanding 94,273,389 shares and 82,022,500 shares, respectively			1,083				907
Class A common stock, no par value; authorized 25,000,000 shares, issued 8,768,959 shares and 8,569,149 shares, respectively, and outstanding 6,881,192 shares and 6,729,035 shares, respectively			27				27
Retained earnings			343				372
Accumulated other comprehensive loss, net of income tax benefit			(23	)			(21	)
			1,430				1,285
Treasury stock at cost, common stock, 7,399,610 shares and 7,276,443 shares, respectively			(75	)			(72	)
Treasury stock at cost, Class A common stock, 1,887,767 shares and 1,840,114 shares, respectively			(26	)			(26	)
Total stockholders’ equity			1,329				1,187
Total liabilities and stockholders’ equity		$	6,995			$	4,213

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		Three Months Ended
		March 31,
		2019				2018
Revenue (less agency commissions)
Broadcasting		$	481			$	226
Production companies			37				-
Total revenue (lesss agency commissions)			518				226
Operating expenses before depreciation, amortization and (gain) loss on disposal of assets, net:
Broadcast			356				150
Production companies			35				-
Corporate and administrative			48				8
Depreciation			20				14
Amortization of intangible assets			29				5
(Gain) loss on disposal of assets, net			(10	)			(1	)
Operating expenses			478				176
Operating income			40				50
Other income (expense):
Miscellaneous income, net			3				-
Interest expense			(58	)			(24	)
(Loss) income before income taxes			(15	)			26
Income tax expense			3				6
Net (loss) income			(18	)			20
Preferred stock dividends			13				-
Net (loss) income attributable to common stockholders		$	(31	)		$	20
Basic per common share information:
Net (loss) income per common share		$	(0.31	)		$	0.22
Weighted average shares outstanding			99				89
Diluted per common share information:
Net (loss) income per common share		$	(0.31	)		$	0.22
Weighted average shares outstanding			99				90
Dividends declared per common share		$	-			$	-

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																																						Accumulated
		Class A																				Class A								Common								Other
		Common Stock								Common Stock								Retained				Treasury Stock								Treasury Stock								Comprehensive
		Shares				Amount				Shares				Amount				Earnings				Shares				Amount				Shares				Amount				Loss				Total
Balance at December 31, 2017			8,349,069			$	25				88,788,664			$	902			$	162				(1,750,692	)		$	(24	)			(5,535,076	)		$	(50	)		$	(22	)		$	993
Net income			-				-				-				-				20				-				-				-				-				-				20
Issuance of common stock:
2017 Equity and Incentive Compensation Plan:
Restricted stock awards			220,080				-				318,196				-				-				(89,422	)			(1	)			(107,456	)			(2	)			-				(3	)
Restricted stock unit awards			-				-				209,500				-				-				-				-				(82,201	)			(1	)			-				(1	)
Repurchase of common stock			-				-				-				-				-				-				-				(1,551,710	)			(20	)			-				(20	)
Share-based compensation			-				-				-				2				-				-				-				-				-				-				2
Balance at March 31, 2018			8,569,149			$	25				89,316,360			$	904			$	182				(1,840,114	)		$	(25	)			(7,276,443	)		$	(73	)		$	(22	)		$	991
Balance at December 31, 2018			8,569,149			$	27				89,298,943			$	907			$	372				(1,840,114	)		$	(26	)			(7,276,443	)		$	(72	)		$	(21	)		$	1,187
Net loss			-				-				-				-				(18	)			-				-				-				-				-				(18	)
Preferred stock dividends			-				-				-				-				(13	)			-				-				-				-				-				(13	)
Issuance of common stock:
Acquisitions of television businesses and licenses			-				-				11,499,945				170				-				-				-				-				-				-				170
401(k) Plan			-				-				196,509				4				-				-				-				-				-				-				4
2017 Equity and Incentive Compensation Plan
Restricted stock awards			199,810				-				677,602				-				-				(47,653	)			-				(123,167	)			(3	)			-				(3	)
Restricted stock unit awards			-				-				-				-				-				-				-				-				-				-				-
Share-based compensation			-				-				-				2				-				-				-				-				-				-				2
Adoption of ASU 2018-02			-				-				-				-				2				-				-				-				-				(2	)			-
Balance at March 31, 2019			8,768,959			$	27				101,672,999			$	1,083			$	343				(1,887,767	)		$	(26	)			(7,399,610	)		$	(75	)		$	(23	)		$	1,329

 

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		Three Months Ended
		March 31,
		2019				2018
Operating activities
Net (loss) income		$	(18	)		$	20
Adjustments to reconcile net (loss) income to net cash provided by operating activities:
Depreciation			20				14
Amortization of intangible assets			29				5
Amortization of deferred loan costs			3				1
Amortization of restricted stock and stock option awards			3				2
Amortization of program broadcast rights			10				5
Payments on program broadcast obligations			(14	)			(5	)
Common stock contributed to 401(k)			4				-
Deferred income taxes			3				6
Loss on disposal of assets, net			(10	)			(1	)
Other			(1	)			(1	)
Changes in operating assets and liabilities:
Accounts receivable			12				3
Prepaid income taxes			-				(8	)
Other current assets			11				(1	)
Accounts payable			5				(5	)
Employee compensation, benefits and pension cost			(21	)			(9	)
Accrued network fees and other expenses			(31	)			(10	)
Accrued interest			14				(3	)
Income taxes payable			(1	)			1
Deferred revenue			6				1
Net cash provided by operating activities			24				15
Investing activities
Acquisitions of television businesses and licenses, net of cash acquired			(2,740	)			-
Proceeds from sale of television stations			231				-
Purchases of property and equipment			(18	)			(6	)
Proceeds from asset sales			2				-
Proceeds from FCC Repack (Note 1)			12				1
Acquisition prepayments			(47	)			(3	)
Other			(2	)			-
Net cash used in investing activities			(2,562	)			(8	)
Financing activities
Proceeds from borrowings on long-term debt			1,400				-
Repayments of borrowings on long-term debt			(4	)			(2	)
Payments for the repurchase of common stock			-				(20	)
Deferred and other loan costs			(50	)			-
Payment for taxes related to net share settlement of equity awards			(2	)			(4	)
Net cash provided by (used in) financing activities			1,344				(26	)
Net decrease in cash			(1,194	)			(19	)
Cash and restricted cash at beginning of period			1,419				462
Cash at end of period		$	225			$	443

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1.     Basis of Presentation

 

The accompanying condensed consolidated balance sheet of Gray Television, Inc. (and its consolidated subsidiaries, except as the context otherwise provides,“Gray,” the “Company,” “we,” “us,” and “our”) as of December 31, 2018, which was derived from the Company’s audited financial statements as of December 31, 2018, and our accompanying unaudited condensed consolidated financial statements as of March 31, 2019 and for the periods ended March 31, 2019 and 2018, have been prepared in accordance with accounting principles generally accepted in the United States of America (“U.S. GAAP”) for interim financial information and with the instructions to Form 10-Q and Article 10 of Regulation S-X. Accordingly, certain information and note disclosures normally included in annual financial statements prepared in accordance with U.S. GAAP have been condensed or omitted pursuant to those rules and regulations, although we believe that the disclosures made are adequate to make the information not misleading. In our opinion, all adjustments (consisting only of normal recurring adjustments) considered necessary for a fair presentation have been included. Subsequent to the Raycom Merger (as defined herein) we manage our business on the basis of two operating segments, broadcasting and production companies. For further information, refer to the consolidated financial statements and footnotes thereto included in our Annual Report on Form 10-K for the year ended December 31, 2018 (the “2018 Form 10-K”). Our financial condition as of, and operating results for the three-months ended March 31, 2019, are not necessarily indicative of the financial condition or results that may be expected for any future interim period or for the year ending December 31, 2019. In addition, we have changed our reporting increment for dollars from thousands to millions.

 

Overview

 

We are a television broadcast company headquartered in Atlanta, Georgia. On January 2, 2019, we completed the Raycom Merger (as defined herein), which completed our transformation from a small, regional broadcaster to a leading media company with nationwide scale based on high-quality stations with exceptional talent in attractive markets. Upon the completion of the Raycom Merger on January 2, 2019, we became the largest owner of top-rated local television stations and digital assets in the United States. Currently, we own television stations in 93 television markets broadcasting almost 400 separate program streams including approximately 150 affiliates of the ABC Network (“ABC”), the NBC Network (“NBC”), the CBS Network (“CBS”) and the FOX Network (“FOX”). We refer to these major broadcast networks collectively as the “Big Four” networks. Our television stations ranked first or second among all local television stations in 87 of our 93 markets between December 2017 and November 2018. Our station portfolio reaches approximately 24% of total United States television households. We also own video program production, marketing, and digital businesses including Raycom Sports, Tupelo-Raycom, and RTM Studios, the producer of PowerNation programs and content.

 

Use of Estimates

 

The preparation of financial statements in conformity with U.S. GAAP requires management to make estimates and assumptions that affect the amounts reported in the financial statements and accompanying notes. Our actual results could differ materially from these estimated amounts. Our most significant estimates are of our allowance for doubtful accounts in receivables, valuation of goodwill and intangible assets, amortization of program rights and intangible assets, pension costs, income taxes, employee medical insurance claims, useful lives of property and equipment and contingencies.

 

Earnings Per Share

 

We compute basic earnings per share by dividing net income available to common stockholders by the weighted-average number of common shares outstanding during the relevant period. The weighted-average number of common shares outstanding does not include restricted shares. These shares, although classified as issued and outstanding, are considered contingently returnable until the restrictions lapse and, in accordance with U.S. GAAP, are not included in the basic earnings per share calculation until the shares vest. Diluted earnings per share is computed by including all potentially dilutive common shares, including restricted shares and shares underlying stock options, in the diluted weighted-average shares outstanding calculation, unless their inclusion would be antidilutive.

 

 

The following table reconciles basic weighted-average common shares outstanding to diluted weighted-average common shares outstanding for the three-months ended March 31, 2019 and 2018, respectively (in millions):

 

 

Accumulated Other Comprehensive Loss

 

Our accumulated other comprehensive loss balances as of March 31, 2019 and December 31, 2018, consist of adjustments to our pension liability and the related income tax effect. Our comprehensive (loss) income for the three-months ended March 31, 2019 and 2018 consisted of net (loss) income and an adjustment to the tax effect of our pension liability as a result of our adoption of Accounting Standards Update (“ASU”) 2018-02, Income Statement - Reporting Comprehensive Income (Topic 220) – Reclassification of Certain Tax Effects from Accumulated Other Comprehensive Income. As of March 31, 2019 and December 31, 2018 the balances were as follows (in millions):

 

 

Property and Equipment

 

Property and equipment are carried at cost. Depreciation is computed principally by the straight-line method. The following table lists the components of property and equipment by major category (dollars in millions):

 

 

Maintenance, repairs and minor replacements are charged to operations as incurred; major replacements and betterments are capitalized. The cost of any assets divested, sold or retired and the related accumulated depreciation are removed from the accounts at the time of disposition, and any resulting profit or loss is reflected in income or expense for the period.

 

 

In April 2017, the Federal Communications Commission (the “FCC”) began a process of reallocating the broadcast spectrum (the “Repack”). Specifically, the FCC is requiring certain television stations to change channels and/or modify their transmission facilities. The U.S. Congress passed legislation which provides the FCC with a $1.7 billion fund to reimburse all reasonable costs incurred by stations operating under a full power license and a portion of the costs incurred by stations operating under a low power license that are reassigned to new channels. Subsequent legislation in March 2018 appropriated an additional $1.0 billion for the Repack fund, of which up to $750.0 million may be made available to reimburse the Repack costs of full power, Class A television stations and multichannel video programming distributors. Other funds are earmarked to assist low power television stations and for other transition costs. The sufficiency of the FCC’s fund to reimburse for Repack costs is dependent upon a number of factors including the amounts to be reimbursed to other industry participants for Repack costs. Therefore, we cannot predict whether the fund will be sufficient to reimburse our Repack costs to the extent authorized under the legislation. Forty-seven of our current full power stations and thirty-seven of our current low power stations are affected by the Repack. The Repack process began in the summer of 2017 and will take approximately three years to complete. The majority of our costs associated with the Repack qualify for capitalization, rather than expense. Upon receipt of funds reimbursing us for our Repack costs, we record those proceeds as a component of our (gain) loss on disposal of assets, net.

 

The following tables provide additional information related to (gain) loss on disposal of assets, net included in our condensed consolidated statements of operations and purchases of property and equipment included in our condensed consolidated statements of cash flows (in millions):

 

 

Allowance for Doubtful Accounts

 

Our allowance for doubtful accounts is equal to a portion of our receivable balances that are 120 days old or older. We may provide allowances for certain receivable balances that are less than 120 days old when warranted by specific facts and circumstances. We generally write-off accounts receivable balances when the customer files for bankruptcy or when all commonly used methods of collection have been exhausted.

 

Recent Accounting Pronouncements

 

In January 2017, the Financial Accounting Standards Board (“FASB”) issued issued ASU 2017-04, Intangibles – Goodwill and Other (Topic 350) – Simplifying the Test for Goodwill Impairment. ASU 2017-04 amends the guidance of U.S. GAAP with the intent of simplifying how an entity is required to test goodwill for impairment by eliminating Step 2 from the goodwill impairment test. Step 2 measures a goodwill impairment loss by comparing the implied fair value of a reporting unit’s goodwill with the carrying amount of that goodwill. After adoption of the standard, the annual, or interim, goodwill impairment test will be performed by comparing the fair value of a reporting unit with its carrying amount. An impairment charge would be recognized for the amount by which the carrying amount exceeds the reporting unit’s fair value; however, the loss recognized will not exceed the total amount of goodwill allocated to that reporting unit. The standard is effective for fiscal years beginning after December 15, 2019, including interim periods within those fiscal years. The standard allows for early adoption, but we have not yet made a determination as to whether to early-adopt this standard. We do not expect that the adoption of this standard will have a material impact on our financial statements.

 

 

In August 2018, the FASB issued ASU 2018-14, Compensation Retirement Benefits Defined Benefit Plans General (Subtopic 715-20) - Disclosure Framework Changes to the Disclosure Requirements for Defined Benefit Plans. ASU 2018-14 adds, removes, and modifies disclosure requirements related to defined benefit pension and other postretirement plans. The update amends only annual disclosure requirements. Retrospective adoption of the update is required in fiscal 2022. The standard allows for early adoption, but we have not yet made a determination as to whether to early-adopt this standard. The adoption of this guidance requires a change in disclosures only and is not expected to have a material impact on our financial statements.

 

Adoption of Accounting Standards and Reclassifications

 

In February 2016, the FASB issued ASU 2016-02, Leases Topic 842 (“ASC 842”). ASU 2016-02 superseded Topic 840 (“ASC 840”), Leases, and thus superseded nearly all existing lease guidance by requiring the reclassification of lease assets and lease liabilities on the balance sheet and requiring disclosure of key information about leasing arrangements. In July 2018, the FASB issued ASU 2018-11, Leases (Topic 842) – Targeted Improvements, which provided the option of applying the requirements of the new lease standard in the period of adoption using the modified retrospective approach with no restatement of comparative periods. We adopted the standard effective January 1, 2019, using the modified retrospective approach provided in ASU 2018-11. The transition guidance allowed for the election of a number of practical expedients. We elected the package of practical expedients and the short term lease practical expedient. The package of practical expedients allowed us to carryforward our classification of existing leases. With the election of the short-term practical expedient, we are not required to recognize on our consolidated balance sheet, the present value of leases with an initial term of twelve months or less. We also implemented internal controls and key system functionality to enable the preparation of financial information on adoption. The standard had a material impact in our consolidated balance sheets, but did not have an impact in our consolidated income statements. Upon the adoption of this standard, we recorded a right of use (“ROU”) asset and a lease obligation liability of approximately $21 million. In addition, upon the completion of the Raycom Merger on January 2, 2019, we implemented these standards to the leases acquired in the Raycom Merger and recorded a ROU asset and a lease obligation liability of approximately $52 million and $52 million, respectively. Please refer to Note 3 “Acquisitions and Divestitures” and Note 10 “Leases” for further information.

 

In February 2018, the FASB issued ASU 2018-02, Income Statement - Reporting Comprehensive Income (Topic 220) – Reclassification of Certain Tax Effects from Accumulated Other Comprehensive Income. ASU 2018-02 allows a reclassification from accumulated other comprehensive income to retained earnings for stranded tax effects resulting from the Tax Cuts and Jobs Act of 2017 (“TCJA”). Consequently, the amendments eliminate the stranded tax effects resulting from the TCJA and will improve the usefulness of information reported to financial statement users. However, because the amendments only relate to the reclassification of the income tax effects of the TCJA, the underlying guidance that requires that the effect of a change in tax laws or rates be included in income from continuing operations is not affected. We have adopted this standard effective on January 1, 2019 and have recorded an adjustment of $2 million to increase our retained earnings and accumulated other comprehensive loss.

 

In January 2017, the FASB issued ASU 2017-01, Business Combinations (Topic 805) – Clarifying the Definition of a Business. ASU 2017-01 adds guidance to assist entities in the determination of whether an acquisition (or disposal) represents assets or a business. The update provides a test to determine whether or not an acquisition is a business. If substantially all of the fair value of the assets acquired is concentrated in a single asset or a group of similar identifiable assets, the acquired assets do not represent a business. If this test is not met, the update provides further guidance to evaluate if the acquisition represents a business. The Company adopted the guidance on January 1, 2019. The adoption did not have an impact on our financial statements.

 

In addition to the reclassification of our pension expense (benefit) in our condensed consolidated statement of operations as described above, certain amounts in the condensed consolidated statement of cash flows have also been reclassified to conform to the current presentation.

 

 

 

2.

Revenue

 

Revenue Recognition

 

We recognize revenue when we have completed a specified service and effectively transferred the control of that service to a customer in return for an amount of consideration we expect to be entitled to receive. The amount of revenue recognized is determined by the amount of consideration specified in a contract with our customers. We have elected to exclude taxes assessed by a governmental authority on transactions with our customers from our revenue. Any unremitted balance is included in current liabilities on our balance sheet.

 

We record a deposit liability for cash deposits received from our customers that are to be applied as payment once the performance obligation arises and is satisfied in the manner stated above. These deposits are recorded as deposit liabilities on our balance sheet. When we invoice our customers for completed performance obligations, we are unconditionally entitled to receive payment of the invoiced amounts. Therefore, we record invoiced amounts in accounts receivable on our balance sheet. We generally require amounts payable under advertising contracts with our political advertising customers to be paid for in advance. We record the receipt of this cash as a deposit liability. Once the advertisement has been broadcast, the revenue is earned, and we record the revenue and reduce the balance in this deposit liability account. We recorded $3 million of revenue in the three months ended March 31, 2019 that was included in the deposit liability balance as of December 31, 2018. The deposit liability balance is included in deferred revenue on our condensed consolidated balance sheets. The deposit liability balance was $10 million and $3 million as of March 31, 2019 and December 31, 2018, respectively.

 

Disaggregation of Revenue

 

Revenue from our production companies segment is generated through our direct sales channel. Revenue from our broadcast and other segment is generated through both our direct and advertising agency intermediary sales channels. The following table presents our revenue from contracts with customers disaggregated by type of service and sales channel (in millions):

 

 

 

 

3.	Acquisitions and Divestitures

 

On January 2, 2019, we completed an acquisition of all the equity interests of Raycom Media, Inc. (“Raycom”). In connection with the acquisition of Raycom and on the same date, Gray assumed and completed Raycom’s pending acquisitions of WUPV-DT in the Richmond, VA market and KYOU-TV in the Ottumwa, IA market.  To facilitate regulatory approval of the acquisition of Raycom and to satisfy the conditions placed on the acquisition by the Antitrust Division of the U.S. Department of Justice (the “DOJ”) and the FCC, we completed the divestiture of nine television stations in overlapping markets. We refer to the acquisition of Raycom, WUPV-DT and KYOU-TV and the divestiture of the stations in the nine overlapping markets collectively as the “Raycom Merger.”

 

We believe the completion of the Raycom Merger is a significant step in our pursuit of strategic growth through accretive acquisition opportunities.The Raycom Merger completed our transformation from a small, regional broadcaster to a leading media company with nationwide scale based on high-quality stations with exceptional talent in attractive markets. The following table lists the stations acquired and retained, net of divestitures:

 

DMA		Designated Market Area		Call		Network
Rank		("DMA")		Letters		Affiliation
11		Tampa-St. Petersburg (Sarasota), FL		WWSB		ABC
19		Cleveland-Akron (Canton)		WOIO		CBS
19		Cleveland-Akron (Canton)		WUAB		CW
23		Charlotte, NC		WBTV		CBS
35		Cincinnati, OH		WXIX		FOX
37		West Palm Beach-Ft. Pierce, FL		WFLX		FOX
43		Birmingham (Ann and Tusc)		WBRC		FOX
48		Louisville, KY		WAVE		NBC
50		New Orleans, LA		WVUE		FOX
51		Memphis, TN		WMC		NBC
56		Richmond- Petersburg, VA		WWBT		NBC
56		Richmond- Petersburg, VA		WUPV		CW
66		Honolulu, HI		KHNL		NBC
66		Honolulu, HI		KGMB		CBS
66		Honolulu, HI		KHBC		NBC/CBS
66		Honolulu, HI		KOGG		NBC/CBS
73		Tucson (Nogales), AZ		KOLD		CBS
74		Columbia, SC		WIS		NBC
79		Huntsville- Decatur (Florence), AL		WAFF		NBC
88		Paducah, KY/Cape Girardeau, MO/
		Harrisburg, IL		KFVS		CBS
90		Shreveport, LA		KSLA		CBS
92		Jackson, MS		WLBT		NBC
93		Savannah, GA		WTOC		CBS
94		Charleston, SC		WCSC		CBS
95		Myrtle Beach-Florence		WMBF		NBC
97		Baton Rouge, LA		WAFB		CBS
97		Baton Rouge, LA		WBXH		MY
100		Boise, ID		KNIN		FOX
103		Evansville, IN		WFIE		NBC
114		Tyler-Longview, TX		KLTV		ABC
114		Tyler-Longview, TX		KTRE		ABC
116		Montgomery, AL		WSFA		NBC
127		Columbus, GA (Opelika, AL)		WTVM		ABC
129		Wilmington, NC		WECT		NBC
131		Amarillo, TX		KFDA		CBS
131		Amarillo, TX		KEYU		TEL
142		Odessa/Midland, TX		KCWO		CW
142		Odessa/Midland, TX		KTLE		TEL
143		Lubbock, TX		KCBD		NBC
148		Wichita Falls, TX & Lawton, OK		KSWO		ABC
148		Wichita Falls, TX & Lawton, OK		KKTM		TEL
152		Albany, GA		WALB		NBC/ABC
156		Biloxi-Gulfport, MS		WLOX		ABC/CBS
168		Hattiesburg/Laurel, MS		WDAM		NBC/ABC
180		Jonesboro, AR		KAIT		ABC/NBC
200		Ottumwa, IA/Kirksville, MO		KYOU		FOX/NBC

 

 

The divestiture transactions included one station owned by us. On December 31, 2018, we sold the assets of WSWG-TV (DMA-152) in the Albany, Georgia television market for $8.5 million, excluding transaction related expenses to Marquee Broadcasting, Inc. and Marquee Broadcasting Georgia, Inc. In connection with the divestiture of the assets of WSWG-TV, we recorded a gain of approximately $4.8 million in the fourth quarter of 2018. On January 2, 2019, the following stations were acquired from Raycom and their assets were immediately divested in eight markets as follows (dollars in millions):

 

 

The allocated portion of net consideration paid for the assets and liabilities divested for the stations in these eight overlap markets was approximately $233 million.

 

The net consideration paid to acquire Raycom consisted of $2.84 billion of cash, 11.5 million shares of our common stock, valued at $170 million (a non-cash financing transaction), and $650 million of a new series of preferred stock (a non-cash financing transaction), for a total of $3.66 billion. Please refer to Note 6 “Stockholders Equity” and Note 7 “Preferred Stock” for further information. The cash consideration paid to acquire the two stations that Raycom had previously agreed to acquire (KYOU-TV and WUPV-TV listed above) was $17 million. The following table summarizes the consideration paid related to the Raycom Merger and the amount representing the net assets acquired and liabilities assumed (in millions):

 

 

 

The following table summarizes the preliminary values of the assets acquired, liabilities assumed and resulting goodwill of the Raycom Merger (in millions):

 

 

These amounts are based upon management’s preliminary estimate of the fair values using valuation techniques including income, cost and market approaches. In determining the preliminary fair value of the acquired assets and assumed liabilities, the fair values were determined based on, among other factors, expected future revenue and cash flows, expected future growth rates, and estimated discount rates. Because of the proximity of the closing date of the Raycom Merger to the filing of this quarterly report, the magnitude and complexity of the calculations involved and the inherent issues related to the integration of our operations, the valuation of the assets acquired, liabilities assumed and resulting goodwill is not yet final. However, we expect that any adjustments to these amounts reported in subsequent periods will not be material to our financial statements as a whole.

 

Accounts receivable are recorded at their fair value representing the amount we expect to collect. Gross contractual amounts receivable are approximately $2 million more than their recorded fair value.

 

Property and equipment are recorded at their fair value and are being depreciated over their estimated useful lives ranging from three years to 40 years.

 

Amounts related to other intangible assets represent primarily the estimated fair values of retransmission agreements of $305 million; favorable income leases of $76 million; and network affiliation agreements of $57 million. These intangible assets are being amortized over their estimated useful lives of approximately 4.9 years for retransmission agreements; approximately 9.5 years for favorable income leases; and approximately 4.5 years for network affiliation agreements.

 

Goodwill is calculated as the excess of the consideration transferred over the fair value of the identifiable net assets acquired and liabilities assumed, and represents the future economic benefits expected to arise from other intangible assets acquired that do not qualify for separate recognition, including assembled workforce, as well as future synergies that we expect to generate from each acquisition. We recorded $822 million of goodwill related to stations acquired and retained in the Raycom Merger. A portion of the goodwill acquired, in the amount of approximately $150 million, that was deductable by Raycom, will be deductable by us for income tax purposes.

 

The Company’s consolidated results of operations for three-months ended March 31, 2019 include the results of the Raycom Merger beginning on January 2, 2019. Revenues attributable thereto and included in our consolidated statement of operations for the three-months ended March 31, 2019 were $280 million. Operating loss attributable thereto and included in our consolidated statement of operations for the three-months ended March 31, 2019 was $6 million.

 

In connection with the Raycom Merger, during the three-months ended March 31, 2019, we incurred approximately $68 million of transaction related expenses. These expenses included approximately $22 million of legal, consulting and other professional fees, approximately $18 million of incentive compensation and severance costs and approximately $28 million of expenses related to the termination of Raycom’s national sales representation agreements.

 

 

Unaudited Pro Forma Financial Information.

 

The following table sets forth certain unaudited pro forma information for the three-months ended March 31, 2019 and 2018 assuming that the Raycom Merger occurred on January 1, 2018 (in millions, except per share data):

 

 

This pro forma financial information is based on Gray’s historical results of operations and the historical results of operations of Raycom, adjusted for the effect of fair value estimates and other acquisition accounting adjustments, and is not necessarily indicative of what our results would have been had we completed the Raycom Merger on January 1, 2018 or on any other historical date, nor is it reflective of our expected results of operations for any future period. The pro forma adjustments for the three-months ended March 31, 2019 and 2018 reflect depreciation expense and amortization of finite-lived intangible assets related to the fair value of the assets acquired, transaction expenses, and the related tax effects of the adjustments. This pro forma financial information has been prepared based on estimates and assumptions that we believe are reasonable as of the date hereof, and are subject to change based on, among other things, changes in the fair value estimates or underlying assumptions.

 

 

 

4.      Long-term Debt

 

As of March 31, 2019, long-term debt primarily consisted of obligations under our 2019 Senior Credit Facility (as defined below), our 5.125% Senior Notes due 2024 (the “2024 Notes”), our 5.875% senior notes due 2026 (the “2026 Notes”) and our 7.0% senior notes due 2027 (the “2027 Notes”). As of December 31, 2018, long-term debt primarily consisted of obligations under our 2017 Senior Credit Facility (as defined below), our 2024 Notes, our 2026 Notes and our 2027 Notes as follows (in millions):

 

 

In connection with the Raycom Merger, on January 2, 2019, we amended our senior credit facility (the “2019 Senior Credit Facility”) as follows: (1) we replaced our existing $100 million revolving credit facility under our prior senior credit facility with a new five year revolving credit facility (the “2019 Revolving Credit Facility”), the terms of which provide for up to $200 million in available borrowings and a maturity date of January 1, 2024, and (2) we incurred a $1.4 billion term loan (the “2019 Term Loan”), which matures on January 1, 2026. Since the Raycom Merger was not completed by December 15, 2018, we incurred a ticking fee of $0.8 million at a rate of 1.25% of the 2019 Term Loan amount, from December 16, 2018 to January 1, 2019. In addition, we assumed $750.0 million of the 2027 Notes, which were issued by our special purpose, wholly-owned subsidiary on November 16, 2018. The proceeds of the 2019 Term Loan and the 2027 Notes were used to fund a portion of the cash consideration payable in the Raycom Merger.

 

Borrowings under the 2019 Term Loan bear interest, at our option, at either the London Interbank Offered Rate (“LIBOR”) or the Base Rate, in each case, plus an applicable margin. The applicable margin is 2.5% for LIBOR borrowings and 1.5% for Base Rate borrowings. As of March 31, 2019, the interest rate on the balance outstanding under the 2019 Term Loan was 5.0%. The 2019 Term Loan matures on January 2, 2026.

 

Borrowings under the 2017 Term Loan bear interest, at our option, at either LIBOR or the Base Rate (as defined below), in each case, plus an applicable margin. Currently, the applicable margin is 2.25% for LIBOR borrowings and 1.25% for Base Rate borrowings. The applicable margin is determined quarterly based on our leverage ratio as set forth in the 2019 Senior Credit Facility (the “Leverage Ratio”). If our Leverage Ratio is less than or equal to 5.25 to 1.00, the applicable margin is 2.25% for all LIBOR borrowings and 1.25% for all Base Rate borrowings, and if the Leverage Ratio is greater than 5.25 to 1.00, the applicable margin is 2.5% for all LIBOR borrowings and 1.5% for all Base Rate borrowings. As of March 31, 2019, the interest rate on the balance outstanding under the 2017 Term Loan was 4.7%. The 2017 Term Loan matures on February 7, 2024.

 

 

Borrowings under the 2019 Revolving Credit Facility currently bear interest, at our option, at either LIBOR plus 2.50% or Base Rate plus 1.50%, in each case based on a first lien leverage ratio test as set forth in the 2019 Senior Credit Facility (the “First Lien Leverage Ratio”). Base Rate is defined as the greatest of (i) the administrative agent’s prime rate, (ii) the overnight federal funds rate plus 0.50% or (iii) LIBOR plus 1.50%. We are required to pay a commitment fee on the average daily unused portion of the 2019 Revolving Credit Facility, which may range from 0.375% to 0.50% on an annual basis, based on the First Lien Leverage Ratio. The 2019 Revolving Credit Facility matures on January 2, 2024.

 

We incurred $42.5 million of transaction fees and expenses related to the 2019 Senior Credit Facility. At March 31, 2019 these were recorded as a reduction of the balance of the outstanding debt and are amortized over the life of the 2019 Senior Credit Facility. The amortization of these fees is included in our interest expense.

 

As of March 31, 2019, the aggregate minimum principal maturities of our long term debt for the remainder of 2019 and the succeding 5 years were as follows (in millions):

 

 

Our obligations under the 2019 Senior Credit Facility are secured by substantially all of our consolidated assets, excluding real estate. In addition, substantially all of our subsidiaries are joint and several guarantors of, and our ownership interests in those subsidiaries are pledged to collateralize, our obligations under the 2019 Senior Credit Facility. Gray Television, Inc. is a holding company, and has no material independent assets or operations. For all applicable periods, the 2024 Notes, 2026 Notes and 2027 Notes have been fully and unconditionally guaranteed, on a joint and several, senior unsecured basis, by substantially all of Gray Television, Inc.'s subsidiaries. Any subsidiaries of Gray Television, Inc. that do not guarantee the 2024 Notes, 2026 Notes and 2027 Notes are minor. As of March 31, 2019, there were no significant restrictions on the ability of Gray Television, Inc.'s subsidiaries to distribute cash to Gray or to the guarantor subsidiaries.

 

The 2019 Senior Credit Facility contains affirmative and restrictive covenants with which we must comply, including: (a) limitations on additional indebtedness, (b) limitations on liens, (c) limitations on the sale of assets, (d) limitations on guarantees, (e) limitations on investments and acquisitions, (f) limitations on the payment of dividends and share repurchases, (g) limitations on mergers and (h) maintenance of the First Lien Leverage Ratio while any amount is outstanding under the revolving credit facility, as well as other customary covenants for credit facilities of this type. The 2024 Notes, the 2026 Notes and the 2027 Notes include covenants with which we must comply which are typical for borrowing transactions of their nature. As of March 31, 2019 and December 31, 2018, we were in compliance with all required covenants under all our debt obligations.

 

For all of our interest bearing obligations, we made interest payments of approximately $40.9 million and $26.7 million during the three-months ended March 31, 2019 and 2018, respectively. We did not capitalize any interest payments during the three-months ended March 31, 2019 or 2018.

 

 

 

5.     Fair Value Measurement

 

For purposes of determining a fair value measurement, we utilize market data or assumptions that market participants would use in pricing an asset or liability, including assumptions about risk and the risks inherent in the inputs to the valuation technique. These inputs can be readily observable, market corroborated or generally unobservable. We utilize valuation techniques that maximize the use of observable inputs and minimize the use of unobservable inputs. These inputs are prioritized into a hierarchy that gives the highest priority to unadjusted quoted prices in active markets for identical assets or liabilities (“Level 1”) and the lowest priority to unobservable inputs that require assumptions to measure fair value (“Level 3”). Level 2 inputs are those that are other than quoted prices on national exchanges included within Level 1 that are observable for the asset or liability either directly or indirectly (“Level 2”).

 

Fair Value of Other Financial Instruments

 

The estimated fair value of other financial instruments is determined using market information and appropriate valuation methodologies. Interpreting market data to develop fair value estimates involves considerable judgment. The use of different market assumptions or methodologies could have a material effect on the estimated fair value amounts. Accordingly, the estimates presented are not necessarily indicative of the amounts that we could realize in a current market exchange, or the value that ultimately will be realized upon maturity or disposition.

 

The carrying amounts of the following instruments approximate fair value due to their short term to maturity: (i) accounts receivable, (ii) prepaid and other current assets, (iii) accounts payable, (iv) accrued employee compensation and benefits, (v) accrued interest, (vi) other accrued expenses, (vii) acquisition-related liabilities and (viii) deferred revenue.

 

The carrying amount of our long-term debt was $3.9 billion and $2.5 billion, respectively, and the fair value was $4.0 billion and $2.4 billion, respectively, as of March 31, 2019 and December 31, 2018. The fair value of our long-term debt is based on observable estimates provided by third party financial professionals as of March 31, 2019 and December 31, 2018, and as such is classified within Level 2 of the fair value hierarchy.

 

 

6.     Stockholders’ Equity

 

We are authorized to issue 245 million shares in total of all classes of stock consisting of 25 million shares of Class A common stock, 200 million shares of common stock, and 20 million shares of “blank check” preferred stock for which our Board of Directors has the authority to determine the rights, powers, limitations and restrictions. The rights of our common stock and Class A common stock are identical, except that our Class A common stock has 10 votes per share and our common stock has one vote per share. Our common stock and Class A common stock are entitled to receive cash dividends if declared, on an equal per-share basis. For the three months ending March 31, 2019 and 2018, we did not declare or pay any common stock or Class A common stock dividends.

 

On January 2, 2019, we issued 11.5 million shares of our common stock at a price of $14.74 per share, the closing price for our common stock on the last trading day preceding the transaction, to certain former shareholders of Raycom as part of the total consideration paid for the Raycom Merger. We incurred transaction fees and expenses of approximately $0.1 million related to the issuance of these shares that were recorded as a reduction of the balance outstanding of our common stock in our balance sheets.

 

In each of March and November 2004, the Board of Directors authorized the Company to repurchase up to 2.0 million shares of the Company's common stock and Class A common stock. In March 2006, this authorization was increased to an aggregate of 5.0 million shares (the “2004-2006 Repurchase Authorization”). As of March 31, 2019, 279,200 shares remain available for repurchase under this authorization, which has no expiration date. On November 6, 2016, the Board of Directors authorized the Company to purchase up to an additional $75 million of our outstanding common stock prior to December 31, 2019 (the “2016 Repurchase Authorization”). The 2016 Repurchase Authorization prohibits the Company from purchasing shares directly from the Company’s officers, directors, or the Gray Television, Inc. Capital Accumulation Plan (the “401k Plan”). As of March 31, 2019, $50 million remains available to purchase shares of our common stock under the 2016 Repurchase Authorization.

 

 

The extent to which the Company repurchases any of its shares, the number of shares and the timing of any repurchases will depend on general market conditions, regulatory requirements, alternative investment opportunities and other considerations. The Company is not required to repurchase a minimum number of shares, and the repurchase authorizations may be modified, suspended or terminated at any time without prior notice.

 

Under our various employee benefit plans, we may, at our discretion, issue authorized and unissued shares, or previously issued shares held in treasury, of our common stock or Class A common stock. During the three months ended March 31, 2019, we issued 196,509 shares of our common stock, valued at $4 million, to the qualifying participants in our 401(k) plan for our discretionary profit sharing contribution for the year ended December 31, 2018. As of March 31, 2019, we had reserved 6,204,805 shares and 1,503,254 shares of our common stock and Class A common stock, respectively, for future issuance under various employee benefit plans.

 

 

7.     Preferred Stock

 

In connection with the Raycom Merger, on January 2, 2019, we issued 650,000 shares of our Series A Perpetual Preferred Stock, with a stated face value and liquidation value of $1,000 per share (the “Series A Preferred Stock”). Holders of shares of the Series A Preferred Stock are entitled to receive mandatory and cumulative dividends paid quarterly in cash or, at the Company’s option, paid quarterly in kind by issuance of additional shares of Series A Preferred Stock. The per-share amount of such quarterly mandatory and cumulative dividends will be calculated by multiplying the face value by 8% per annum if the dividends are to be paid in cash or 8.5% per annum if such dividends are to be paid in additional shares of Series A Preferred Stock. If the Company elects to pay any portion of accrued dividends with PIK Election Dividends, it will be prohibited from repurchasing, redeeming or paying dividends on any stock that is junior to the Series A Preferred Stock, through the end of that quarter and the subsequent two quarters, subject to certain exceptions.

 

With respect to the payment of dividends, the Series A Preferred Stock will rank senior to all classes and series of our common stock and all other equity securities designated as ranking junior to the Series A Preferred Stock, and no new issuances of common or preferred stock will rank on a parity with, nor senior to, the Series A Preferred Stock.

 

All or any portion of the outstanding Series A Preferred Stock may be redeemed at the Company’s option at any time, upon written notice to the holders of Series A Preferred Stock at least 30 and not more than 60 days prior to the date of such optional redemption. The per share redemption price for Series A Preferred Stock will be equal to the sum of the liquidation value and the per-share amount of any unpaid dividends for the current quarterly dividend period, up to and including the date of redemption. Holders of shares of Series A Preferred Stock redeemed will be paid in cash.

 

The Series A Preferred Stock is also subject to mandatory redemption upon the occurrence of certain change of control transactions or upon the sale or other disposition of all or substantially all of our assets. The holders of Series A Preferred Stock do not have any right to exchange or convert the shares into any other securities.

 

In general, the holders of the Series A Preferred Stock do not have any voting rights except as set forth in the terms of the Series A Preferred Stock or as otherwise required by law, in which case, each share of Series A Preferred Stock will be entitled to one vote.

 

The approval of the holders of the Series A Preferred Stock, voting separately as a class, is required in order to authorize, create, issue new shares of Series A Perpetual Preferred stock (other than to pay dividends) or alter the rights of any other shares that are or would be equal to or senior to the Series A Preferred Stock, or to amend, alter or repeal the Company’s Restated Articles of Incorporation as amended from time to time if such amendment, alteration or repeal adversely affects the powers, preferences or special rights of the New Preferred Stock.

 

The Series A Preferred Stock does not have preemptive rights as to any of our other securities, or any warrants, rights, or options to acquire any of our securities.

 

 

In the event that the Company voluntarily or involuntarily liquidates, dissolves or winds up its affairs, holders of Series A Preferred Stock will be entitled to receive for each share of Series A Preferred Stock, out of the Company’s assets or proceeds thereof available for distribution to shareholders, subject to the rights of any creditors, payment in full in an amount equal to the liquidation value and the per-share amount of any unpaid dividends for the current quarterly dividend period. Holders of Series A Preferred Stock would be entitled to receive this amount before any distribution of assets or proceeds to holders of our common stock and any other stock whose rights are junior to the Series A Preferred Stock. If in any distribution described above, our assets are not sufficient to pay in full the amounts payable with respect to the outstanding shares of Series A Preferred Stock or any stock whose rights are equal to the Series A Preferred Stock, holders of the Series A Preferred Stock would share ratably in any such distribution in proportion to the full respective distributions to which they are entitled. Shareholders are not subject to further assessments on their shares of the New Preferred Stock.

 

 

8.     Retirement Plans

 

The components of our net periodic pension benefit are included in miscellaneous income in our income statement. During the three-months ended March 31, 2019, the amount recorded as a benefit was not material, and we did not make a contribution to our defined benefit pension plan. During the remainder of 2019, we expect to contribute $2 million to this plan.

 

During the three-months ended March 31, 2019, we contributed $3 million in matching cash contributions, and shares of our common stock valued at $4 million for our 2018 discretionary profit-sharing contributions, to the 401(k) plan. During the remainder of 2019, we expect to contribute $13 million of matching cash contributions to this plan.

 

 

9. Stock-based Compensation

 

We recognize compensation expense for share-based payment awards made to our employees, consultants and directors. Our current stock-based compensation plans include our 2017 Equity and Incentive Compensation Plan (the “2017 EICP”); our 2007 Long-Term Incentive Plan, as amended (the “2007 Incentive Plan”); and our Directors’ Restricted Stock Plan. The following table provides our stock-based compensation expense and related income tax benefit for the three-months ended March 31, 2019 and 2018, respectively (in millions).

 

 

All shares of common stock and Class A common stock underlying outstanding options, restricted stock units and performance awards are counted as issued at target levels under the 2017 EICP, the 2007 Incentive Plan and the Directors’ Restricted Stock Plan for purposes of determining the number of shares available for future issuance.

 

During the three-months ended March 31, 2019, we granted under the 2017 EICP:

 

●

99,905 shares of restricted Class A common stock with a grant date fair value per share of $15.36 to an employee, of which 33,302 shares will vest on each of January 31, 2020 and 2021 and 33,301 shares will vest on January 31, 2022;

 

●

99,905 shares of restricted Class A common stock with a grant date fair value per share of $15.36 to an employee, subject to the achievement of certain performance measures, which will vest on January 31, 2022;

 

 

●

340,993 shares of restricted common stock with a grant date fair value per share of $14.85 to certain employees that will vest on January 2, 2021;

 

●

277,048 shares of restricted common stock with a grant date fair value of $16.55 to certain employees, of which 92,349 shares will vest on each of January 31, 2020 and 2021, and 92,350 shares will vest on January 31, 2022;

 

●

48,338 shares of restricted common stock with a grant date fair value per share of $16.55 to an employee, subject to the achievement of certain performance measures, which will vest on January 31, 2022; and

 

●

11,223 shares of restricted common stock with a grant date fair value per share of $17.83 to an employee that will vest on February 15, 2020.

 

During the three-months ended March 31, 2018, we granted under the 2017 EICP:

 

●

110,040 shares of restricted Class A common stock with a grant date fair value per share of $12.65 to an employee, of which 36,680 shares vested on February 28, 2019 and 36,680 shares will vest on each of February 28, 2020 and 2021;

 

●

110,040 shares of restricted Class A common stock with a grant date fair value per share of $12.65 to an employee, subject to the achievement of certain performance measures, which will vest on February 28, 2021; and

 

●

318,196 shares of restricted common stock with a grant date fair value per share of $15.25 to certain employees; net of forfeitures, 131,106 shares vested on February 28, 2019, 69,651 shares will vest on February 28, 2020, and 69,652 shares will vest on February 28, 2021.

 

 

A summary of restricted common stock and Class A common stock activities for the three-months ended March 31, 2019 and 2018, respectively, is as follows:

 

 

(1)	For awards subject to future performance conditions, amounts assume target performance.

 

At March 31, 2019 and December 31, 2018, we had 274,746 options to acquire our common stock outstanding, all of which were vested and exercisable. The exercise price of all outstanding stock options is $1.99 per share. As of March 31, 2019 and December 31, 2018, we did not have any options outstanding for our Class A common stock. The aggregate intrinsic value of our outstanding stock options was $5 million based on the closing market price of our common stock on March 31, 2019.

 

 

10. Leases

 

Operating Leases

 

We lease various assets with non-cancellable lease terms that range between one and ninety-nine years. Many of these leases have optional renewal periods ranging between one and twenty years. We define the lease term as the original lease base period plus optional renewal periods that we reasonably expect to be exercised. We do not include renewal periods exercisable more than ten years from the commencement date in the lease term as we cannot reasonably expect to exercise an option that far into the future. Some of our leases have free rent periods, tenant allowances and/or fixed or variable rent escalators. We record operating lease expense on a straight-line basis over the lease term. Operating lease expense is included in operating expenses in our statements of operations.

 

We lease land, buildings, transmission towers, right of way easements, and equipment through operating leases. We generally lease land for the purpose of erecting transmission towers for our broadcast operations. Our building leases consist of office space and broadcast studios. For transmission towers we do not own, we lease space for our transmission equipment on the third party towers. We lease right of ways for various purposes including ingress and egress for tower locations and guyed wire space. Our equipment leases consist of office, transmission and production equipment.

 

We allocate consideration paid in the contract to lease and nonlease components based upon the contract or associate invoice received if applicable. Lease components include base rent, fixed rate escalators and in-substance fixed payments associated with the asset leased. Non-lease components include common area maintenance and operating expenses associated with the leased asset. We have not elected the practical expedient to combine lease and nonlease components. As such, we only include the lease component in the calculation of right-of-use asset and lease liability. The incremental borrowing rate we use for the calculation is the rate of interest that we would have to pay to borrow on a collateralized basis over a similar term based upon our borrower risk profile.

 

 

Variable lease payments are not significant and are included in operating lease expense as a component of operating expense in our statement of operations. Variable lease payments are generally associated with usage based leases and variable payment escalators such as consumer price index increases (CPI) incurred after the date of the adoption of ASC 842. Some of our land leases require us to pay a percentage of the revenue earned from leasing space on the towers we erect on the leased land. We included the payment level of CPI and percentage rent amounts at the time of the adoption of ASC 842 in the base rent for calculating the right-of-use asset and lease liability. CPI adjustments and percentage rent amounts that differ from the amount included in ASC 842 calculation are included in variable lease payments.

 

We recognize leases with an initial term of 12 months or less as short-term leases. Lease payments associated with short-term leases are expensed as incurred in our operating lease expense and are not included in our calculation of right-of-use assets or lease liabilities. Short-term leases generally consist of rentals of production or broadcast equipment for short periods of time.

 

As of March 31, 2019, the weighted average remaining term of our operating leases was 10.9 years. The weighted average discount rate used to calculate the values associated with our operating leases was 6.75%.

 

The table below describes the nature of lease expense and classification of operating lease expense recognized in the three months ended (in millions):

 

 

The maturities of operating lease liabilities as of March 31, 2019, for the remainder of 2019 and the succeeding 5 years were as follows (in millions):

 

 

We had no material capital leases as of December 31, 2018. Our aggregate minimum lease payments under operating leases as of December 31, 2018 were as follows (in millions):

 

 

Our aggregate lease payments under operating leases as of December 31, 2018 are based on ASC 840 that was superseded upon the adoption of ASC 842 on January 1, 2019. Our maturities of operating lease liabilities as of March 31, 2019 was significantly higher than our aggregate lease payments under operating leases as of December 31, 2018 due primarily to our completion of the Raycom Merger on January 2, 2019.

 

 

Financing Leases

 

We lease certain vehicles through a financing master lease. The weighted average remaining lease term of the vehicles under this lease is 3.4 years. The interest rate for each vehicle leased is 4.5%.  We recorded a right-of-use asset and lease liability of $2 million, respectively, upon the adoption of ASC 842 related to these financing leases. The right-of-use asset is recorded in other noncurrent assets in our balance sheets. The current portion of the lease liability is recorded as current portion of the financing lease liability in current liabilities and the long term portion is recorded as finance lease liability in noncurrent liabilities in our balance sheets. 

 

Amortization expense associated with this lease is included in amortization expense as a component of operating expense, and interest expense is included in interest expense in our statement of operations. Amortization and interest expenses were not material in the three months ended March 31, 2019. Cash paid for financing leases is included in our cash flows from financing activities and cash paid for interest on financing leases is included in our cash flow from operating activities.

 

Supplemental Cash Flow Information

 

Supplemental cash flow information related to leases is as follows (in millions):

 

 

For the three months ended March 31, 2019, cash paid for amounts included in measurement of liabilities for operating cash flows from finance leases and financing cash flows from finance leases as well as ROU assets obtained in exchange for lease liabilities were not material.

 

 

11. Commitments and Contingencies

 

Legal Proceedings and Claims

 

We are and expect to continue to be subject to legal actions, proceedings and claims that arise in the normal course of our business. In the opinion of management, the amount of ultimate liability, if any, with respect to these actions, proceedings and claims will not materially affect our financial position, results of operations or cash flows, although legal proceedings are subject to inherent uncertainties, and unfavorable rulings or events could have a material adverse impact on our financial position, results of operations or cash flows.

 

Pending Acquisitions

 

On May 1, 2018, we entered into an agreement to acquire KDLT-TV (NBC), in the Sioux Falls, South Dakota market (DMA 115), for $32.5 million. The transaction is subject to regulatory approvals and other customary closing conditions. Pending such approvals and conditions, we expect that this transaction will close in the second or third quarter of 2019, using cash on hand.

 

Charlottesville Transactions - On February 28, 2019, we entered into an agreement to acquire the assets of WVIR-TV (NBC) in the Charlottesville, Virginia market (DMA 183) from Waterman Broadcasting Corporation for $12.0 million, using cash on hand. Also on February 28, 2019, in order to meet regulatory requirements, we agreed to divest our stations in that market, WCAV-TV (CBS/FOX) and WVAW-TV (ABC), for $25.0 million in cash to Lockwood Broadcasting, Inc. We expect these transactions will close later in the second quarter of 2019.

 

 

 

12.      Goodwill and Intangible Assets

 

During the three months ended March 31, 2019, we completed the Raycom Merger, that included the acquisition of goodwill, broadcast licenses and finite-lived intangible assets. See Note 3 “Acquisitions and Divestitures” for more information regarding these transactions. A summary of changes in our goodwill and other intangible assets, on a net basis, for the three months ended March 31, 2019 is as follows (in millions):

 

 

A summary of the changes in our goodwill, on a gross basis, for the three months ended March 31, 2019, is as follows (in millions):

 

 

As of March 31, 2019 and December 31, 2018, our intangible assets and related accumulated amortization consisted of the following (in millions):

 

 

 

Amortization expense for the three-months ended March 31, 2019 and 2018 was $29 million and $5 million, respectively. Based on the current amount of intangible assets subject to amortization, we expect that amortization expense for the remainder of 2019 will be approximately $85 million, and, for the succeeding five years, amortization expense will be approximately as follows: 2020, $100 million; 2021, $95 million; 2022, $91 million; 2023, $85 million; and 2024, $21 million. If and when acquisitions and dispositions occur in the future, actual amounts may vary from these estimates.

 

Impairment of goodwill and broadcast licenses

 

Our intangible assets are primarily comprised of broadcast licenses. There were no triggering events that required a test of our goodwill or intangible assets for impairment during the three-months ended March 31, 2019 or 2018.