Gray Television, Inc. — Q3 2023 Form 10-Q
Reporting period: Quarter and nine months ended September 30, 2023; unaudited. The filing identifies the registrant as Gray Television, Inc.
Business context and financial performance
Gray operates local television stations and digital assets in 113 U.S. markets, alongside production businesses and studio facilities. Its two operating segments are broadcasting and production companies. Unless otherwise stated, amounts are in millions of dollars.
| Metric | Q3 2023 | Q3 2022 | Nine months 2023 | Nine months 2022 |
|---|---|---|---|---|
| Revenue, net of agency commissions | $803 | $909 | $2,417 | $2,604 |
| Operating income | $84 | $245 | $270 | $627 |
| Operating margin | 10.5% | 27.0% | 11.2% | 24.1% |
| Net income (loss) | $(40) | $108 | $(67) | $269 |
| Net income (loss) attributable to common stockholders | $(53) | $95 | $(106) | $230 |
| Interest expense | $111 | $94 | $324 | $254 |
- Revenue mix, Q3: Core advertising was $363 (up 1%); political advertising was $26 (down $118); retransmission consent was $378 (up 3%). Nine-month political revenue fell $214 to $46, while core advertising rose 1% and retransmission revenue rose 2%.
- Cash flow, nine months: Operating activities provided $565, versus $596 in 2022. Investing activities used $259, versus $362; financing activities used $346, versus $279. Cash declined by $40 to $21.
- Capital spending: Property and equipment purchases were $288, including $210 for Assembly Atlanta and $78 for recurring operations.
- Liquidity at September 30: Cash was $21; current assets were $495 and current liabilities $414. The revolver had $469 of availability, with $25 drawn. The company reported $6,239 of debt principal outstanding, $6,186 of debt carrying value including current debt and net of financing costs, and $650 of preferred stock.
Material changes and notable items
- Q3 revenue declined 12% and nine-month revenue declined 7%, mainly reflecting lower political advertising compared with the 2022 election cycle. Operating income and net income also fell substantially.
- Interest expense increased 18% in Q3 and 28% for the nine-month period. Average debt interest rates rose to 6.6% in Q3 and 6.5% for the nine months, compared with 5.3% and 4.8%, respectively, in 2022.
- Gray recorded a $43 non-cash impairment charge in its production companies segment after Diamond Sports Group’s bankruptcy and rejection of ACC sports-rights agreements. Replacement arrangements with The CW and ESPN mitigate a portion of the loss. Gray also reserved $17 for amounts owed by Diamond; its total allowance for credit losses was $31.
- Nine-month production-company expenses included a $17 credit-loss allowance related to Diamond and $18 to settle Assembly Atlanta litigation. The company also recorded a $14 loss on sale of station KNIN and an $8 charge associated with its receivables securitization facility.
- On May 1, Gray sold KNIN and purchased WPGA for $6 each. The 2017 Term Loan was repaid in full; Gray also made required principal reductions on its 2021 Term Loan. Debt principal declined from $6,520 at year-end 2022 to $6,239 at September 30, 2023.
Outlook, risks and contingencies
- Management expects cash on hand, operating cash flows and available borrowing capacity to fund debt service and expected expenditures for the next 12 months, and states it expects funding capacity for long-term debt service through at least January 2, 2026. It estimates approximately $426 of debt interest payments over the 12 months after September 30, 2023.
- For the remainder of 2023, management expects routine capital expenditures of approximately $35–$40. Assembly Atlanta construction expenditures are expected at $20–$25, with property-sale proceeds and CID incentive payments expected at $85–$90 combined. The filing cautions that proceeds and timing are uncertain.
- Gray identifies advertising-market competition, industry and economic conditions, political-advertising cyclicality, and its substantial debt service as relevant risks. Broadcast advertising is seasonal; political spending is typically higher in even-numbered election years.
- Gray reported compliance with debt covenants. It states that ordinary-course legal matters are not expected to materially affect its financial position, results or cash flows, while noting that litigation outcomes remain uncertain. No material changes to the risk factors in its 2022 Form 10-K were reported.
- Gray uses interest-rate caps on portions of variable-rate debt; the caps limit the applicable SOFR rate at 4.97% and 5.015% through December 31, 2025. Management reported no material change in market risk from year-end 2022.
Key facts investors should verify
- Whether core advertising and retransmission growth can offset the cyclical decline in political revenue, and how political revenue develops in the 2024 election year.
- Diamond-related receivable collections, the adequacy of the $17 specific reserve, and the financial effect of the replacement ACC rights arrangements.
- Debt maturities, interest costs, revolver availability and covenant compliance, particularly the 2026 maturities and exposure to variable rates.
- Actual Assembly Atlanta construction costs and timing and amount of property-sale and CID incentive proceeds relative to management’s estimates.
- The effects of the $43 impairment, KNIN disposal loss, Assembly Atlanta litigation settlement and securitization costs on future reported results and cash flows.