GRAY MEDIA, INC (GTN) FY 2021 MD&A

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.

This section of our Annual Report on Form 10-K discusses 2021 and 2020 items and year-over-year comparisons between 2021 and 2020. A detailed discussion of 2019 items and year-over-year comparisons between 2020 and 2019 that are not included in this Annual Report on Form 10-K can be found in “Management’s Discussion and Analysis of Financial Condition and Results of Operations” in Part II, Item 7 of our Annual Report on Form 10-K for the year ended December 31, 2020.

Business Overview. We are a multimedia company headquartered in Atlanta, Georgia, that is the nation’s second largest television broadcaster in terms of revenues. We are the nation’s largest owner of top-rated local television stations and digital assets in the United States. Our television stations serve 113 television markets that collectively reach approximately 36 percent of US television households. This portfolio includes 80 markets with the top-rated television station and 100 markets with the first and/or second highest rated television station. We also own video program companies Raycom Sports, Tupelo Honey, PowerNation Studios and Third Rail Studios.

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 television and event programming, television commercials, tower rentals and management fees. For the years ended December 31, 2021, 2020 and 2019, we generated revenue of $2.4 billion, $2.4 billion and $2.1 billion, respectively.

Impact of the COVID-19 Global Pandemic and Related Government Restrictions on our Markets and Operations. The impact of the COVID-19 global pandemic and measures to prevent its spread continue to affect our businesses in a number of ways. The extent to which the COVID-19 global pandemic impacts our business, financial condition, results of operations and cash flows will depend on numerous evolving factors that we may not be able to accurately predict or assess, including the duration and scope of the pandemic; the negative impact it has on global and regional economies and economic activity, changes in advertising customers and consumer behavior, impact of governmental regulations that might be imposed in response to the pandemic; its short and longer-term impact on the levels of consumer confidence; actions governments, businesses and individuals take in response to the pandemic; and how quickly economies recover after the COVID-19 global pandemic subsides. The COVID-19 global pandemic’s impact on the capital markets could impact our cost of borrowing.

We have continued to actively monitor the global outbreak and spread of COVID-19 and continue to take steps to mitigate the potential risks to us posed by its spread and related circumstances and impacts. We are focused on navigating these challenges presented by the COVID-19 global pandemic through protecting the safety of our employees, seeking to maintain revenues and reducing expenses. There are certain limitations on our ability to mitigate the adverse financial impact of the pandemic, including the high fixed-cost nature of our businesses. The COVID-19 global pandemic, and the related economic disruptions and uncertainty also makes it more challenging for management to estimate future performance of our businesses, particularly over the near to medium term, and consequently the broader impact that it could have on our business, financial condition, results of operations and cash flows. See “The “COVID-19” global pandemic has had and is expected to continue to have an adverse impact on our business.” in Part I, Item 1A. Risk Factors of our 2021 Form 10-K.

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In March 2020, most of our employees began working from home, with only essential employees working on site. We have implemented plans to reopen our offices through a hybrid format in which our employees work part of each week in our offices and part remotely. We are generally following the requirements and protocols published by the U.S. Centers for Disease Control, the World Health Organization and state and local governments and we continue to monitor the latest public health and government guidance related to COVID-19, including vaccine availability to our employees. We cannot predict when or how these policies will change in the future. We continue to maintain operations while employing the latest guidelines to promote the health of our employees including a requirement that all employees be fully vaccinated against COVID-19 (except where otherwise required by applicable law).

Quincy Transaction. On August 2, 2021, we completed the acquisition of all the equity interests of Quincy for an adjusted purchase price of $936 million, which amount includes an additional $6 million for working capital. Quincy owned and operated television stations in 16 markets. Also on August 2, 2021, and concurrently with the acquisition of Quincy, we completed the divestiture to Allen of television stations in seven markets previously owned by Quincy and located in our existing television markets, for an adjusted divestiture price of $401 million, which amount includes $21 million for working capital. The Quincy Divestiture resulted in a non-cash loss of $45 million.

Acquisition of Meredith. On December 1, 2021, we completed the acquisition of all the equity interests of Meredith, after the spinoff of Meredith’s National Media Group to the current Meredith shareholders for $16.99 per share in cash, or $2.8 billion in total enterprise value. In this transaction we acquired Meredith’s remaining operating division, known as the Local Media Group, which owns 17 television stations in 12 local markets, adding 11 new markets to our operations. To facilitate regulatory approvals for the Meredith transaction, on September 23, 2021, we divested our existing television station WJRT (ABC) in the Flint-Saginaw, Michigan market, to Allen for and adjusted purchase price, including working capital, of $72 million in cash.

Acquisition of Studio Production Facilities. On April 7, 2021, we acquired land in the Atlanta suburb of Doraville, Georgia for approximately $80 million of cash. We intend to use this property, in part, for future studio production facilities. On September 13, 2021, we completed the acquisition of Third Rail Studios for an adjusted purchase price of $27 million in cash. The transaction represents an initial step in the broader development of our planned studio production facilities.

Please see Note 3. “Acquisitions and Divestitures” in our consolidated financial statements contained elsewhere herein for further discussion of these transactions.

Revenues, Operations, Cyclicality and Seasonality. Broadcast advertising is sold for placement generally 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. 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.

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

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

We derived a material portion of our non-political broadcast advertising revenue from advertisers in a limited number of industries, particularly the services sector, comprising financial, legal and medical advertisers, and the automotive industry. The services sector has become an increasingly important source of advertising revenue over the past few years. During the years ended December 31, 2021, 2020 and 2019 approximately 29%, 28% and 25% of our broadcast advertising revenue (excluding political advertising revenue) was obtained from advertising sales to the services sector. During the years ended December 31, 2021, 2020 and 2019 approximately 17%, 21% and 25%, respectively, of our broadcast advertising revenue (excluding political advertising revenue) was obtained from advertising sales to automotive customers. Revenue from these industries may represent 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.

While our total revenues have increased in recent years as a result of our acquisitions, our revenue remains under pressure from the impact on the advertising market as a result of the COVID-19 global pandemic and from the internet as a competitor for advertising spending. We have been taking steps to mitigate the impacts of COVID-19 and 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.

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Risk Factors. The broadcast television industry relies primarily on advertising revenue and faces significant competition. For a discussion of certain other presently known, significant risk 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, and the percentage contribution of each to our total revenue (dollars in millions):

Results of Operations

Year Ended December 31, 2021 (“2021”) Compared to Year Ended December 31, 2020 (“2020”)

Revenue. Total revenue increased approximately $32 million, or 1%, to $2.4 billion for 2021 compared to 2020, primarily as a result of the television stations acquired in our 2021 Acquisitions and increases in combined local and national advertising revenue and retransmission consent revenue at our legacy television stations. Total broadcasting revenue from our 2021 Acquisitions was $128 million.

Excluding the revenue from our 2021 Acquisitions:

Local and national advertising revenue also increased due to the broadcast of the Olympic Games that contributed approximately $14 million, and the broadcast of the 2021 Super Bowl on our CBS-affiliated stations was approximately $6 million, compared to $3 million that we earned from the broadcasting of the 2020 Super Bowl on our FOX-affiliated stations.

Broadcasting operating expenses. Broadcasting operating expenses (before depreciation, amortization and gain on disposal of assets) increased $208 million, or 16%, to $1.5 billion for 2021, compared to 2020, primarily as a result of the television stations acquired in our 2021 Acquisitions. Total broadcasting operating expenses from our 2021 Acquisitions were $79 million.

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Excluding the broadcasting operating expenses from our 2021 Acquisitions:

We recorded broadcast non-cash stock-based amortization expense of $2 million and $5 million in 2021 and 2020, respectively.

Production Company Operating Expenses. Production company operating expenses (before depreciation, amortization and gain on disposal of assets) increased by approximately $10 million in 2021 to $62 million, compared to $52 million 2020. These increases were primarily due to increasing business activity consistent with the diminished effects of the COVID-19 global pandemic.

Corporate and administrative expenses. Corporate and administrative expenses (before depreciation, amortization and gain or loss on disposal of assets) increased by $94 million, or 145%, to $159 million in 2021 compared to 2020. Compensation expenses increased by approximately $15 million in 2021 primarily as a result of increases in incentive compensation. Non-payroll corporate expenses increased by approximately $80 million which included corporate transaction related expenses of $71 million in 2021. We recorded corporate non-cash stock-based amortization expense of $12 million and $11 million in 2021 and 2020, respectively.

Depreciation. Depreciation of property and equipment totaled $104 million and $96 million for 2021 and 2020, respectively. Depreciation expense increased due to the 2021 Acquisitions and to purchases of property and equipment at our existing stations.

Amortization of intangible assets. Amortization of intangible assets totaled $117 million and $105 million for 2021 and 2020, respectively. Amortization expense increased due to the 2021 Acquisitions.

Loss (gain) on disposal of assets, net. We reported a loss on disposals of assets of $42 million in 2021 and a gain of $29 million in 2020. These losses and gains were primarily related the divestitures of television stations required in order to comply with regulatory requirements for the 2021 Acquisitions and to asset disposals from the FCC Repack process.

Interest expense. Interest expense increased $14 million, or 7%, to $205 million for 2021 compared to 2020 due to additional borrowings of $1.5 billion under our Senior Credit Facility and the issuance of $1.3 billion of our 2031 Notes to finance our acquisition of Meredith. During 2021 the average interest rate on our Senior Credit Facility, excluding the amortization of deferred financing costs, decreased to 2.6% from 3.1% in 2020.

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Income tax expense. Our effective income tax rate increased to a net provision of 46% for 2021 from 25% for 2020. Our effective income tax rates differed from the statutory rate due to the following items:

Liquidity and Capital Resources

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

Financing Transactions. To complete the Meredith Transaction, we (1) incurred a $1.5 billion incremental term loan under our Senior Credit Facility, (2) amended our existing revolving credit facility to increase our borrowing capacity under the facility from up to $300 million to up to $500 million, which will consist of (i) a $425 million five year revolving credit facility and (ii) a $75 million revolving credit facility with commitments expiring January 2, 2026 and (3) on November 9, 2021, issued $1.3 billion in aggregate principal amount of 5.375% senior unsecured notes due 2031 at par (the “2031 Notes”). The interest rate and yield on the 2031 Notes is 5.375%. The 2031 Notes rank equally with the 2030 Notes, 2027 Notes and the 2026 Notes. The 2031 Notes mature on November 15, 2031 and interest is payable semiannually, on May 15 and November 15 of each year.

The proceeds of the transactions mentioned above, plus cash on hand, after deducting transaction fees and estimated expenses, were used to pay a portion of the consideration for the Meredith Transaction.

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 estimate that these income tax payments, net of refunds, will be within a range of $170 million to $190 million in 2022.

Dividend on common stock and Class A common stock. Beginning in 2021, the Board declared a quarterly cash dividend of $0.08 per share of its common stock and Class A common stock. We paid cash dividends on our common stock and Class A common stock totaling $31 million in the year ended December 31, 2021.

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Net Cash Provided By (Used In) Operating, Investing and Financing Activities – 2021 Compared to 2020

Net cash provided by operating activities decreased $352 million to $300 million in 2021 compared to net cash provided by operating activities of $652 million in 2020. The decrease in cash provided by operating activities was due primarily to the net impact of several factors including: a decrease in net income of $320 million; a net decrease of $43 million in non-cash expenses; and an increase of $11 million due to changes in working capital balances.

Net cash used in investing activities increased to $3.5 billion for 2021 compared to $211 million for 2020. The net increase was due primarily to $3.8 billion of cash used to finance our acquisitions of businesses in 2021. In 2020, we completed only $91 million of acquisition transactions. Other significant changes in 2021 compared to 2020 included the receipt in 2021 of $473 million in proceeds from the divestiture of television stations to facilitate regulatory approval of our acquisitions of businesses in 2021.

Net cash provided by financing activities was $2.7 billion in 2021 compared to $120 million in 2020. This increase of $2.6 billion was due primarily to the borrowings of $1.5 billion in term loan financing under our Senior Credit Facility and the $1.3 billion of 2031 Notes to fund a portion of the cash consideration of the Meredith Transaction in 2021. During 2020, we borrowed $800 million of our 2030 Notes and redeemed our 2024 Notes in the amount of $525 million. Also during 2021, we used $30 million of cash to repurchase shares of our common stock compared to $75 million in 2020. During 2021 and 2020, we used $52 million of cash in each year to pay dividends on our Series A Perpetual Preferred stock. In 2021 paid $31 million of cash dividends our our common stock and Class A common stock. During 2021 we paid $30 million of deferred loan costs primarily related to the term loan financing and the 2031 Notes. In 2020 we paid $14 million of deferred loan costs related to the 2030 Notes.

Retirement Plans

We sponsor and contribute to defined benefit and defined contribution retirement plans:

The Gray Pension Plan is a defined benefit pension plan covering certain of our legacy employees. Benefits under the Gray Pension Plan are frozen and can no longer increase, and no new participants can be added to the plan.

Our funding policy for the Gray Pension Plan 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, 2021, was 2.73%, which reflects the results of this yield curve analysis. The discount rate used for determining benefit obligations as of December 31, 2020 was 2.38%. 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. In 2021, we use an assumed rate of return of 6.25% 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 a gain of 11.4% for the year ended December 31, 2021, and a gain of 11.1% for the year ended December 31, 2020. 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 Pri-2012 total mortality table and the MP-2021 projection scale published by the Society of Actuaries.

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During each of the years ended December 31, 2021 and 2020, we contributed an aggregate of $4 million, and $3 million, respectively, to the Gray Pension Plan, and we anticipate making an aggregate contribution of approximately $4 million to the Gray Pension Plan in 2022. 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 401(k) Plan is a defined contribution plan intended to meet the requirements of section 401(k) of the Internal Revenue Code. Employer contributions under the Gray 401(k) Plan include matching cash contributions at a rate of 100% of the first 1% of each employee’s salary deferral, and 50% of the next 5% 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. For the years ended December 31, 2021 and 2020, our matching contributions to our Capital Accumulation Plan were approximately $15 million and $13 million, respectively. For the years ended December 31, 2021 and 2020, we accrued contributions of approximately $7 million and $6 million respectively, as discretionary profit-sharing contributions. Each of these discretionary profit-sharing contributions was subsequently made in the form of shares of our common stock.

In connection with the Meredith Transaction, On December 1, 2021, we assumed a defined benefit pension plan covering certain legacy Meredith bargaining class employees. The Meredith Plan had combined plan assets of $15 million and combined projected benefit obligations of $17 million. The net liability for this plan is recorded as a liability in our financial statements as of December 31, 2021.

See Note 11 “Retirement Plans” of our audited consolidated financial statements included elsewhere herein for further information concerning these retirement plans.

Capital Expenditures

In April 2017, the FCC began the process of requiring certain television stations to change channels and/or modify their transmission facilities (“Repack”). Capital expenditures, including Repack, for each of the 2021 and 2020 periods were $207 million and $110 million, respectively. Excluding Repack, our capital expenditures were $199 million and $87 million, respectively. Our capitalized Repack costs for the 2021 and 2020 periods were $8 million and $23 million, respectively. As of December 31, 2021, the amount requested from the FCC for Repack, but not yet received, was approximately $7 million. Excluding Repack, we expect that our capital expenditures will be approximately $125 million during 2022 for routine purchases of broadcasting and production company equipment. In addition, we currently anticipate capital expenditures of between $110 million and $120 million in connection with development of our studio production facilities for our own use and several additional such facilities that we anticipate constructing on our property pursuant to a long-term lease with a major content creation company. Additional capital expenditures for Repack during 2022 are expected to be approximately $2 million and we anticipate being reimbursed for the majority of these Repack costs. However, reimbursement may be received in periods subsequent to those in which they were expended.

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Off-Balance Sheet Arrangements

Operating Commitments. We have various commitments for 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 The Big Bang Theory. 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.

The following are our material expected off balance sheet contractual obligations and commitments as of December 31, 2021:

For more information about these off-balance sheet contractual obligations and commitments please refer to Note 12 “Commitments and Contingencies” of our audited consolidated financial statements included elsewhere herein.

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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 Senior Credit Facility incur interest at a variable rate.

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 significant judgments or estimations in their application where variances may result in significant differences to future reported results. Our policies concerning intangible assets and income taxes are disclosed below.

Variability of Critical Accounting Estimates. Our critical accounting estimates include estimates and assumptions that are material to our financial statements. These estimates and assumptions are used in:

Our estimates and assumptions have been materially accurate in the past and have not changed materially. We do not expect that these assumptions are likely to change in the future.

Annual Impairment Testing of Broadcast Licenses and Goodwill. We evaluate broadcast licenses and goodwill for impairment on an annual basis, or more often when certain triggering events occur. Goodwill is evaluated at the reporting unit level.

Beginning in 2021, we have changed our methodology for performing our annual evaluation of goodwill. Consistent with changes in our internal reporting systems and management structure for television station operations, we have determined that our broadcasting operating segment is comprised of six regional components, all of which report to the same segment manager. Based upon the economic similarities and the manner in which the six components of the broadcasting segment are managed, we have concluded that they aggregate into a single reporting unit.

Each of the distinct businesses within our production companies operating segment continue to be separately managed and each represent a reporting unit. This is consistent with the Company’s historical view of its reporting units within the production companies operating segment.

Therefore, beginning with our 2021 annual evaluation we now evaluate our goodwill for impairment for five reporting units. One reporting unit for all of our broadcast television operations and four for each of the distinct businesses within our production companies.

With respect to the accounting effects of this reorganization, the Company has considered the requirements as stipulated within ASC 350. Based upon the updated reporting structure, Management has identified the applicable assets and liabilities for each of the reporting units in accordance with ASC 350. With respect to the reassignment of goodwill to the Broadcast reporting unit, this reporting unit is an aggregation of the entirety of the Company’s previous television market reporting units prior to the reorganization. As such, the goodwill attributable to the Broadcast reporting unit would be the aggregate sum of the previous reporting units which now have been aggregated within the broadcast reporting unit. There is no reassignment of goodwill required within the Production Companies operating segment as the identified reporting units have not changed from Management’s previously identified reporting units.

In the process of preparing for this change we considered potential impairment of reporting units prior to the realignment using our prior definition of reporting units. In the performance of this test of reporting unit impairment assessments, we had the option of performing a qualitative assessment to determine if it is more likely than not that the respective asset has been impaired. We performed a qualitative assessment for all of our reporting units as then defined and concluded that there was no impairment at the time of change.

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In the first quarter of 2020, the COVID-19 global pandemic and measures to prevent its spread began to affect our businesses in a number of ways. In the first quarter of 2020, we concluded that the uncertainties surrounding this event were a triggering event that required us to evaluate whether or not it was more likely than not that the value of our goodwill and other intangible assets were impaired. Based upon our analysis of both qualitative and quantitative factors, we concluded that such assets were not impaired. We will continue to evaluate both the subjective and objective criteria that may cause us to re-evaluate this conclusion in the future.

In the performance of our annual broadcast license and reporting unit impairment assessments, we have the option of performing a qualitative assessment to determine if it is more likely than not that the respective asset has been impaired. In 2021, we performed a qualitative assessment for 59 of our broadcast licenses and one of our reporting units. In 2020, we performed a qualitative assessment for 55 of our broadcast licenses and 36 of our reporting units.

As part of this qualitative assessment we evaluate the relative impact of factors that are specific to the reporting units as well as industry, regulatory, and macroeconomic factors that could affect the significant inputs used to determine the fair value of the assets. We also consider the significance of the excess fair value over the carrying value reflected in prior quantitative assessments and the changes to the reporting units’ carrying value since the last impairment test.

If we conclude that it is more likely than not that a broadcast license or reporting unit is impaired, or if we elect not to perform the optional qualitative assessment, we perform the quantitative assessment which involves comparing the estimated fair value of the broadcast license or reporting unit to its respective carrying value.

For our annual broadcast licenses impairment test in 2021, we concluded that it was more likely than not that all of our broadcast licenses that were evaluated were not impaired based upon our qualitative assessments. We elected to perform a quantitative assessment for our remaining broadcast licenses and concluded that their fair values exceeded their carrying values. To estimate the fair value of our broadcast licenses, we utilize a discounted cash flow model assuming an initial hypothetical start-up operation maturing into an average performing station in a specific television market and giving consideration to other relevant factors such as the technical qualities of the broadcast license and the number of competing broadcast licenses within that market.

For our annual goodwill impairment test in 2021, we concluded that it was more likely than not that goodwill was not impaired based upon our qualitative assessments for one of our reporting units. We elected to perform a quantitative assessment for the remainder of our reporting units and concluded that their fair values exceeded their carrying values. 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 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 a strategic market participant would utilize if they were to value our television stations.

We believe we have made reasonable estimates and utilized appropriate assumptions to evaluate whether the fair values of our broadcast licenses and reporting units were less than their carrying values. If future results are not consistent with our assumptions and estimates, including future events such as a deterioration of market conditions or significant increases in discount rates, we could be exposed to impairment charges in the future. Any resulting impairment loss could have a material adverse impact on our consolidated balance sheets, consolidated statements of operations and consolidated statements of cash flows.

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The recorded value of our broadcast licenses was $5.3 billion and $3.6 billion at December 31, 2021 and 2020, respectively. As of December 31, 2021 and 2020, the recorded value of our goodwill was $2.6 billion and $1.5 billion, respectively. See Note 13 “Goodwill and Intangible Assets” of our audited consolidated financial statements included elsewhere herein, for the results of our annual impairment tests for the years ended December 31, 2021, 2020 and 2019.

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 our 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, 2021, 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. Due to certain characteristics of a small number of the stations acquired in 2021 and 2020, we ascribed approximately $136 million and $11 million of the value of those transactions to network affiliations, respectively.

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.

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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, 2021 (in millions, except per share data):

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. As of December 31, 2021, we have an aggregate of approximately $10 million of federal operating loss carryforwards that expect to utilize in 2022 We have an aggregate of approximately $424 million of various state operating loss carryforwards. We expect to have state taxable income in the carryforward periods. Therefore, we believe that it is more likely than not that approximately half of the state operating loss carryforwards will be utilized.

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.