|NATURE OF OPERATIONS AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES:
Nature of Operations
Sinclair Broadcast Group, Inc. ("SBG" or the "Company") is a diversified television media company with national reach and a strong focus on providing high-quality content on our local television stations, digital platforms, and, prior to Deconsolidation, as defined below in Deconsolidation of Diamond Sports Intermediate Holdings LLC, regional sports networks. The content, distributed through our broadcast platform and third-party platforms, consists of programming provided by third-party networks and syndicators, local news, college and professional sports, and other original programming produced by us. Additionally, we own digital media products that are complementary to our extensive portfolio of television station related digital properties. Outside of our media related businesses, we operate technical services companies focused on supply and maintenance of broadcast transmission systems as well as research and development for the advancement of broadcast technology, and we manage other non-media related investments.
For the quarter ended March 31, 2022, we had two reportable segments for accounting purposes, broadcast and, prior to Deconsolidation, as defined below in Deconsolidation of Diamond Sports Intermediate Holdings LLC, local sports. The broadcast segment consists primarily of our 185 broadcast television stations in 86 markets, which we own, provide programming and operating services pursuant to agreements commonly referred to as local marketing agreements ("LMA"), or provide sales services and other non-programming operating services pursuant to other outsourcing agreements (such as joint sales agreements ("JSA") and shared services agreements ("SSA")). These stations broadcast 634 channels as of March 31, 2022. For the purpose of this report, these 185 stations and 634 channels are referred to as "our" stations and channels. The local sports segment consisted primarily of our Bally Sports network brands ("Bally RSNs"), the Marquee Sports Network ("Marquee") joint venture and a minority equity interest in the Yankee Entertainment and Sports Network, LLC ("YES Network") through February 28, 2022. On March 1, 2022, the Bally RSNs, Marquee and YES Network were deconsolidated from the Company's financial statements. See Deconsolidation of Diamond Sports Intermediate Holdings LLC below. Through February 28, 2022, we refer to the Bally RSNs and Marquee as "the RSNs". The RSNs and YES Network own the exclusive rights to air, among other sporting events, the games of professional sports teams in designated local viewing areas.
Principles of Consolidation
The consolidated financial statements include our accounts and those of our wholly-owned and majority-owned subsidiaries, and VIEs for which we are the primary beneficiary. Noncontrolling interests represent a minority owner’s proportionate share of the equity in certain of our consolidated entities. Noncontrolling interests which may be redeemed by the holder, and the redemption is outside of our control, are presented as redeemable noncontrolling interests. All intercompany transactions and account balances have been eliminated in consolidation.
We consolidate VIEs when we are the primary beneficiary. We are the primary beneficiary of a VIE when we have the power to direct the activities of the VIE that most significantly impact the economic performance of the VIE and have the obligation to absorb losses or the right to receive returns that would be significant to the VIE. See Note 9. Variable Interest Entities for more information on our VIEs.
Investments in entities over which we have significant influence but not control are accounted for using the equity method of accounting. Income from equity method investments represents our proportionate share of net income generated by equity method investees.
Deconsolidation of Diamond Sports Intermediate Holdings LLC
On March 1, 2022, SBG's subsidiary Diamond Sports Intermediate Holdings, LLC, and certain subsidiaries (collectively "DSIH") completed a series of transactions (the “Transaction”) which are expected to provide DSIH with approximately $1 billion of liquidity enhancement over the next five years. As part of the Transaction, the governance structure of DSIH was modified including changes to the composition of its Board of Managers, resulting in the Company's loss of voting control. As a result, DSIH, whose operations represented the entirety of our local sports segment, was deconsolidated from the Company’s consolidated financial statements effective as of March 1, 2022 (the "Deconsolidation"). The consolidated statement of operations therefore includes two months of activity related to DSIH in the fiscal quarter ended March 31, 2022 prior to Deconsolidation. The assets and liabilities of DSIH are no longer included within the Company's consolidated balance sheets as of March 31, 2022. Any discussions related to results, operations, and accounting policies associated with DSIH are referring to the periods prior to Deconsolidation.
Upon Deconsolidation, the Company recognized a gain before income taxes of approximately $3,357 million, which is recorded within gain on deconsolidation of subsidiary in our consolidated statements of operations. Subsequent to Deconsolidation, the Company accounted for our equity ownership interest in DSIH under the equity method of accounting. See Note 3. Other Assets for more information.
Interim Financial Statements
The consolidated financial statements for the three months ended March 31, 2022 and 2021 are unaudited. In the opinion of management, such financial statements have been presented on the same basis as the audited consolidated financial statements and include all adjustments, consisting only of normal recurring adjustments necessary for a fair statement of the consolidated balance sheets, consolidated statements of operations, consolidated statements of comprehensive income, consolidated statements of equity (deficit) and redeemable noncontrolling interests, and consolidated statements of cash flows for these periods as adjusted for the adoption of recent accounting pronouncements.
As permitted under the applicable rules and regulations of the Securities and Exchange Commission (the "SEC"), the consolidated financial statements do not include all disclosures normally included with audited consolidated financial statements and, accordingly, should be read together with the audited consolidated financial statements and notes thereto in our Annual Report on Form 10-K for the year ended December 31, 2021 filed with the SEC. The consolidated statements of operations presented in the accompanying consolidated financial statements are not necessarily representative of operations for an entire year.
Use of Estimates
The preparation of financial statements in accordance with accounting principles generally accepted in the United States of America requires management to make estimates and assumptions that affect the reported amounts of assets, liabilities, revenues, and expenses in the consolidated financial statements and in the disclosures of contingent assets and liabilities. Actual results could differ from those estimates.
The impact of the war in Ukraine and the outbreak of the novel coronavirus ("COVID-19") continues to create significant uncertainty and disruption in the global economy and financial markets. It is reasonably possible that these uncertainties could further materially impact our estimates related to, but not limited to, revenue recognition, goodwill and intangible assets, program contract costs, sports programming rights, and income taxes. As a result, many of our estimates and assumptions require increased judgment and carry a higher degree of variability and volatility. Our estimates may change as new events occur and additional information emerges, and such changes are recognized or disclosed in our consolidated financial statements.
Recent Accounting Pronouncements
In March 2020, the FASB issued guidance providing optional expedients and exceptions for applying GAAP to contracts, hedging relationships, and other transactions affected by the discontinuation of the London Interbank Offered Rate ("LIBOR") or by another reference rate expected to be discontinued. The guidance was effective for all entities immediately upon issuance of the update and may be applied prospectively to applicable transactions existing as of or entered into from the date of adoption through December 31, 2022. We adopted this guidance upon issuance and it did not have an impact on our consolidated financial statements.In October 2021, the FASB issued guidance to improve the accounting for acquired revenue contracts with customers in a business combination by addressing diversity in practice. ASU 2021-08 requires that an acquiring entity recognize and measure contract assets and contract liabilities acquired in a business combination in accordance with Topic 606, as if it had originated the contracts. The guidance is effective for fiscal years beginning after December 15, 2022, including interim periods within those fiscal years. We are currently evaluating the impact of this guidance, but do not expect a material impact on our consolidated financial statements.
Broadcast Television Programming
We have agreements with programming syndicators for the rights to television programming over contract periods, which generally run from to seven years. Contract payments are made in installments over terms that are generally equal to or shorter than the contract period. Pursuant to accounting guidance for the broadcasting industry, an asset and a liability for the rights acquired and obligations incurred under a license agreement are reported on the balance sheet when the cost of each program is known or reasonably determinable, the program material has been accepted by the licensee in accordance with the conditions of the license agreement, and the program is available for its first showing or telecast. The portion of program contracts which becomes payable within one year is reflected as a current liability in the accompanying consolidated balance sheets
The rights to this programming are reflected in the accompanying consolidated balance sheets at the lower of unamortized cost or fair value. Program contract costs are amortized on a straight-line basis except for contracts greater than three years which are amortized utilizing an accelerated method. Program contract costs estimated by management to be amortized in the succeeding year are classified as current assets. Payments of program contract liabilities are typically made on a scheduled basis and are not affected by amortization or fair value adjustments.
Fair value is determined utilizing a discounted cash flow model based on management’s expectation of future advertising revenues, net of sales commissions, to be generated by the program material. We assess our program contract costs on a quarterly basis to ensure the costs are recorded at the lower of unamortized cost or fair value.
Sports Programming Rights
DSIH has multi-year program rights agreements that provide DSIH with the right to produce and telecast professional live sports games within a specified territory in exchange for a rights fee. Prior to the Deconsolidation, a prepaid asset was recorded for rights acquired related to future games upon payment of the contracted fee. The assets recorded for the acquired rights were classified as current or non-current based on the period when the games were expected to be aired. Liabilities were recorded for any program rights obligations that had been incurred but not yet paid at period end. We amortized these rights as an expense over each season based upon contractually stated rates. Amortization was accelerated in the event that the stated contractual rates over the term of the rights agreement resulted in an expense recognition pattern that was inconsistent with the projected growth of revenue over the contractual term.
The National Basketball Association (“NBA”) and the National Hockey League (“NHL”) delayed the start of their 2020-2021 seasons until December 22, 2020 and January 13, 2021, respectively, and both leagues postponed games in the fourth quarter 2021 and rescheduled these games to be played in the first quarter 2022. The sports rights expense associated with these seasons was recognized over the modified term of these seasons.
Non-cash Investing and Financing Activities
Leased assets obtained in exchange for new operating lease liabilities were $5 million and $3 million for the three months ended March 31, 2022 and 2021, respectively. Leased assets obtained in exchange for new finance lease liabilities were $1 million for the three months ended March 31, 2022.
The following table presents our revenue disaggregated by type and segment (in millions):
|For the three months ended March 31, 2022||Broadcast||Local sports||Other||Eliminations||Total|
|Distribution revenue||$||392 ||$||433 ||$||48 ||$||— ||$||873 |
|Advertising revenue||282 ||44 ||68 ||(23)||371 |
|Other media, non-media, and intercompany revenues||47 ||5 ||18 ||(26)||44 |
|Total revenues||$||721 ||$||482 ||$||134 ||$||(49)||$||1,288 |
|For the three months ended March 31, 2021||Broadcast||Local sports||Other||Eliminations||Total|
|Distribution revenue||$||361 ||$||698 ||$||50 ||$||— ||$||1,109 |
|Advertising revenue||267 ||65 ||40 ||(1)||371 |
|Other media, non-media, and intercompany revenues||37 ||5 ||18 ||(29)||31 |
|Total revenues||$||665 ||$||768 ||$||108 ||$||(30)||$||1,511 |
Distribution Revenue. We have agreements with multi-channel video programming distributors ("MVPD") and virtual MVPDs ("vMVPD," and together with MVPDs, "Distributors"). We generate distribution revenue through fees received from these Distributors for the right to distribute our stations, RSNs, and other properties. Distribution arrangements are generally governed by multi-year contracts and the underlying fees are based upon a contractual monthly rate per subscriber. These arrangements represent licenses of intellectual property; revenue is recognized as the signal or network programming is provided to our customers (as usage occurs) which corresponds with the satisfaction of our performance obligation. Revenue is calculated based upon the contractual rate multiplied by an estimated number of subscribers. Our customers will remit payments based upon actual subscribers a short time after the conclusion of a month, which generally does not exceed 120 days. Historical adjustments to subscriber estimates have not been material.
Advertising Revenue. We generate advertising revenue primarily from the sale of advertising spots/impressions within our broadcast television, RSN, and digital platforms.
In accordance with ASC 606, we do not disclose the value of unsatisfied performance obligations for (i) contracts with an original expected length of one year or less and (ii) distribution arrangements which are accounted for as a sales/usage based royalty.
Deferred Revenue. We record deferred revenue when cash payments are received or due in advance of our performance, including amounts which are refundable. We classify deferred revenue as either current in other current liabilities or long-term in other long-term liabilities in our consolidated balance sheets based on the timing of when we expect to satisfy our performance obligations. Deferred revenue was $230 million and $235 million as of March 31, 2022 and December 31, 2021, respectively, of which $159 million and $164 million, respectively, was reflected in other long-term liabilities in our consolidated balance sheets. Deferred revenue recognized during the three months ended March 31, 2022 and 2021, included in the deferred revenue balance as of December 31, 2021 and 2020, was $29 million and $17 million, respectively.
For the three months ended March 31, 2022, three customers accounted for 17%, 17%, and 14%, respectively, of our total revenues. For the three months ended March 31, 2021, three customers accounted for 20%, 19%, and 15%, respectively, of our total revenues. As of March 31, 2022, two customers accounted for 13% and 10%, respectively, of our accounts receivable, net. For purposes of this disclosure, a single customer may include multiple entities under common control.
Our income tax provision for all periods consists of federal and state income taxes. The tax provision for the three months ended March 31, 2022 and 2021 is based on the estimated effective tax rate applicable for the full year after taking into account discrete tax items and the effects of the noncontrolling interests. We provide a valuation allowance for deferred tax assets if we determine that it is more likely than not that some or all of the deferred tax assets will not be realized. In evaluating our ability to realize net deferred tax assets, we consider all available evidence, both positive and negative, including our past operating results, tax planning strategies, current and cumulative losses, and forecasts of future taxable income. In considering these sources of taxable income, we must make certain judgments that are based on the plans and estimates used to manage our underlying businesses on a long-term basis. A valuation allowance has been provided for deferred tax assets related to interest expense carryforwards under the Internal Revenue Code ("IRC") Section 163(j) and a substantial amount of our available state net operating loss carryforwards based on past operating results, expected timing of the reversals of existing temporary basis differences, alternative tax strategies and projected future taxable income.
Our effective income tax rate for the three months ended March 31, 2022 approximated the statutory rate. Our effective income tax rate for the three months ended March 31, 2021 was less than the statutory rate primarily due to substantially magnified impact of discrete items as a result of low pre-tax income.
We do not believe that our liability for unrecognized tax benefits would be materially impacted, in the next twelve months, as a result of expected statute of limitations expirations, the application of limits under available state administrative practice exceptions, and the resolution of examination issues and settlements with federal and certain state tax authorities.
Share Repurchase Program
On August 4, 2020, the Board of Directors authorized an additional $500 million share repurchase authorization in addition to the previous repurchase authorization of $1 billion. There is no expiration date and currently, management has no plans to terminate this program. For the three months ended March 31, 2022, we repurchased approximately 2 million shares of Class A Common Stock for $68 million. As of March 31, 2022, the total remaining purchase authorization was $751 million. As of May 5, 2022, we repurchased an additional 1 million shares of Class A Common Stock, for $26 million since March 31, 2022. All shares were repurchased under an SEC Rule 10b5-1 plan.
Certain reclassifications have been made to prior years' consolidated financial statements to conform to the current year's presentation.