Sinclair, Inc. — Q3 2023 Form 10-Q
Business context and reporting period. Unaudited results cover the quarter and nine months ended September 30, 2023. Sinclair operates local television stations and, following a June 1, 2023 reorganization, reports local media, Tennis Channel and other activities in its consolidated results. Tennis and certain other assets were transferred to a new subsidiary, Ventures; this makes some comparisons with SBG’s standalone results less comparable. Sinclair reported 185 stations in 86 markets, broadcasting 639 channels. Diamond Sports Group (DSG), which owns regional sports networks, is independently managed and unconsolidated.
Key financial results
Amounts in $ millions except per-share data and percentages.
| Metric | Q3 2023 | Q3 2022 | Nine months 2023 | Nine months 2022 |
|---|---|---|---|---|
| Total revenue | 767 | 843 | 2,308 | 2,968 |
| Operating income | 37 | 154 | 55 | 3,727 |
| Net income (loss) attributable to Sinclair | (46) | 21 | 50 | 2,597 |
| Basic and diluted EPS | (0.74) | 0.32 | 0.75 | 36.59 |
| Operating cash flow | 1 | 251 | 143 | 458 |
- Q3 operating margin was approximately 4.8%, versus 18.3% a year earlier; net margin was approximately negative 6.0%, versus 2.5%. Nine-month operating margin was approximately 2.4% in 2023; the 2022 comparison was exceptionally elevated by a $3.357 billion gain on deconsolidating Diamond Sports.
- Q3 media revenue was $758 million, down 9% year over year. Local media revenue fell 11% to $697 million: distribution revenue declined 4% and advertising revenue declined 20%. Tennis revenue rose 9% to $59 million.
- Q3 interest expense was $77 million, up from $59 million. Sinclair recorded a $12 million income tax benefit in the quarter, versus a $109 million tax provision in Q3 2022. Nine-month tax benefit was $236 million, primarily reflecting release of a valuation allowance on interest-related deferred tax assets.
- At September 30, cash and cash equivalents were $643 million, down from $884 million at year-end 2022. Current assets were $1.454 billion and current liabilities $624 million. Management reported $830 million of net working capital and $650 million of available borrowing capacity.
- Balance-sheet notes payable, finance leases and commercial bank financing totaled approximately $4.182 billion, including $37 million current and $4.145 billion long term. Nine-month debt repayments were $76 million. Capital expenditures were $70 million.
Material changes and capital allocation
- Q3 revenue declined 9% year over year, while operating income fell 76%. Management attributed the advertising decline principally to $77 million less political advertising than in the 2022 election cycle. Distribution revenue was lower mainly because of subscriber declines, partly offset by contractual rate increases.
- For the first nine months, revenue declined 22%; comparisons are affected by the 2022 deconsolidation of Diamond Sports and, for SBG standalone results, the 2023 transfer of assets to Ventures. The 2022 net income and operating income figures include the large deconsolidation gain and should not be treated as recurring earnings.
- Corporate G&A rose 50% in Q3 to $45 million, primarily due to higher legal, consulting and regulatory costs. Higher variable-rate borrowing costs also increased interest expense.
- Sinclair repurchased approximately 8.8 million Class A shares for $151 million through May 2023 and paid $50 million in dividends during the nine-month period. The board declared a $0.25-per-share quarterly dividend in November, payable December 15, 2023. STG repurchased $64 million principal of debt after June for $49 million, including open-market purchases described in the filing.
- Sinclair’s $600 million interest-rate swap fixes a portion of exposure at 3.9% and runs through February 2026. STG was in compliance with its other reported debt covenants; its revolving facility was unused at quarter-end, so the leverage maintenance covenant was not then applicable.
Outlook, risks and contingencies
- Management expects cash, operating cash flow and available borrowing capacity to meet local media needs for debt service, capital spending and working capital over the next 12 months; it similarly expects cash flows from Tennis and other operations to meet those businesses’ needs. This is not a quantified earnings forecast. Management cautioned that economic, geopolitical and other events could affect liquidity and borrowing access.
- DSG filed for Chapter 11 in March 2023. In July, DSG and a subsidiary sued Sinclair-related entities and certain executives, alleging misconduct in historical transactions and claiming approximately $1.5 billion in payments or indirect benefits. Plaintiffs seek avoidance of certain transfers and unspecified damages. Sinclair disputes the allegations; the filing says loss probability and amount cannot currently be determined and an adverse outcome could materially affect results and financial condition.
- Sinclair also disclosed a pending advertising-pricing class action, FCC matters including a proposed children’s-programming fine for which $3.4 million was accrued, and other litigation. A regional sports network guarantee has a maximum annual amount of $112 million, escalating 4% annually for six years; management said performance was not probable as of quarter-end.
- Business risks include political-advertising cyclicality, subscriber losses and cord-cutting, network and programming costs, retransmission negotiations, regulation, and cybersecurity. Sinclair announced new or extended distribution and affiliation agreements, including Hulu carriage planned for January 2024 and expanded CW affiliation; these are developments, not financial guidance.
Important facts for investors to verify
- Track the DSG bankruptcy litigation, potential damages and any related tax consequences; no reliable loss estimate is provided.
- Assess whether distribution subscriber trends and non-election-year advertising weakness persist, and distinguish recurring results from political-cycle effects.
- Monitor operating cash generation, the cash balance, debt costs and available revolver capacity against the company’s 12-month liquidity expectation.
- Review year-over-year comparisons in light of the 2022 Diamond Sports deconsolidation and June 2023 reorganization, particularly when comparing Sinclair with SBG.
- Check subsequent filings for developments in FCC and class-action matters, debt repurchases, dividends and the collectability of deferred management fees owed by DSG.