Sinclair, Inc. — Q2 2023 Form 10-Q
Business context and period. Unaudited results cover the quarter and six months ended June 30, 2023. Sinclair operates local television and digital media businesses and Tennis Channel. Its 185 stations in 86 markets broadcast 639 channels. On June 1, Sinclair completed a holding-company reorganization: Sinclair, Inc. became the public parent, Old Sinclair became Sinclair Broadcast Group, LLC (SBG), and Tennis Channel and certain other assets were transferred to Sinclair Ventures. Diamond Sports Group (DSG), which owns regional sports networks, is unconsolidated and in Chapter 11.
Key financial metrics
| Metric | Q2 2023 | Q2 2022 | Six months 2023 | Six months 2022 |
|---|---|---|---|---|
| Total revenue | $768 million | $837 million | $1.541 billion | $2.125 billion |
| Operating income (loss) | $(3) million | $107 million | $18 million | $3.573 billion |
| Net income (loss) attributable to Sinclair | $(89) million | $(11) million | $96 million | $2.576 billion |
| Basic EPS | $(1.38) | $(0.17) | $1.44 | $36.00 |
Revenue and margins. Q2 revenue declined 8% year over year. Local media revenue was $699 million, down 8%; distribution revenue fell 3% and advertising fell 15%. Advertising weakness primarily reflected $49 million less political advertising than in the 2022 election year. Q2 operating margin was approximately negative 0.4%, versus 12.8% a year earlier. Six-month comparisons are substantially affected by the 2022 deconsolidation gain and the absence of local sports results after February 2022.
Cash flow and liquidity. Six-month operating cash flow was $142 million, versus $207 million; capital expenditures were $40 million, implying cash flow after capital expenditures of approximately $102 million. Investing activities provided $129 million, including distributions from investments and the repayment of the DSG receivable. Financing activities used $427 million, including $153 million of share repurchases, $34 million of dividends, and $190 million to repurchase subsidiary preferred equity. Cash was $728 million at June 30, down $156 million from year-end. Working capital was approximately $882 million, with $650 million of available borrowing capacity.
Debt. Balance-sheet notes payable, finance leases, and commercial bank financing totaled approximately $4.222 billion; cash less this debt was approximately $3.494 billion. Sinclair reported no revolver utilization and stated it was in compliance with applicable covenants. The first-lien leverage ratio was below the 4.5x limit; the maintenance covenant was not applicable because revolver utilization was below the specified trigger. A $600 million interest-rate swap fixes a portion of variable-rate exposure at 3.9% through February 2026. Interest expense rose to $76 million for Q2 from $54 million, mainly due to higher rates on variable-rate debt.
Material changes, outlook, and risks
- Q2 operating results weakened as advertising revenue and distribution subscribers declined, while programming, production, and corporate costs increased. Corporate G&A rose $24 million year over year, primarily from compensation and legal, consulting, and regulatory costs.
- Six-month 2023 net income includes a $224 million income tax benefit, a $30 million gain from equity-method investments, and an $11 million debt-extinguishment gain. Six-month 2022 results included a $3.357 billion gain on deconsolidating DSIH; reported year-over-year earnings are therefore not directly comparable.
- Management said cash, operating cash flow, and borrowing capacity are expected to meet local media debt service, capital expenditure, and working-capital needs for the next 12 months; Sinclair also expects Tennis and other operations to meet their needs. No quantified earnings or revenue guidance is provided.
- DSG and Diamond Sports Net sued Sinclair-related entities and executives in July 2023, alleging unfair transactions, improper distributions, and other claims, and seeking unspecified damages and avoidance of transfers. Defendants dispute the allegations. The filing says potential loss cannot yet be estimated and an adverse result could materially affect Sinclair. DSG’s bankruptcy and potential adverse tax consequences are also identified risks.
- Other notable exposures include a regional-sports-network guarantee capped at $112 million annually with scheduled escalations, which management said was not probable to be called; pending FCC matters, including a $3.4 million accrued proposed fine; and a consolidated antitrust class action that Sinclair says it will vigorously defend.
- Sinclair repurchased approximately 8.8 million shares for $151 million in the first half and declared quarterly dividends of $0.25 per share in May and August. The remaining share-repurchase authorization was $547 million at June 30.
Important facts for investors to verify
- Progress and potential financial impact of DSG’s bankruptcy litigation, including any court rulings, settlement, or claim quantification.
- Whether local advertising and distributor subscriber trends improve, and how much reported comparisons reflect the non-election year and changing business scope.
- Debt balances, interest costs, covenant headroom, and the availability of the stated $650 million borrowing capacity.
- Cash generation and liquidity after share repurchases, dividends, and the Ventures reorganization; assess cash and obligations at both Sinclair, Inc. and SBG.
- Effect of the reorganization and transferred assets on future segment results, taxes, and comparability; the filing does not provide standalone pro forma results for the post-reorganization structure.