Gray Television, Inc. — Q3 2019 Form 10-Q
Reporting period: Three and nine months ended September 30, 2019. Amounts are in millions of dollars except per-share data. Results include Raycom from January 2, 2019 and the United stations from March 1, 2019; comparisons with 2018 are therefore materially affected by acquisitions.
Business context
Gray operated television stations in 93 markets, reaching approximately 24% of U.S. television households, alongside production businesses. The January 2019 Raycom merger substantially expanded the company’s scale and added production operations. Gray also completed the United acquisition in May and acquired a Sioux Falls station on September 25.
Financial performance
| Metric | Q3 2019 | Q3 2018 | Nine months 2019 | Nine months 2018 |
|---|---|---|---|---|
| Revenue | $517 | $279 | $1,543 | $756 |
| Operating income | $139 | $108 | $298 | $238 |
| Net income | $59 | $61 | $85 | $123 |
| Net income attributable to common stockholders | $46 | $61 | $46 | $123 |
| Diluted earnings per share | $0.46 | $0.69 | $0.46 | $1.38 |
| Operating margin | 26.9% | 38.7% | 19.3% | 31.5% |
Revenue rose 85% in Q3 and 104% year to date, primarily due to acquired businesses. The acquisitions contributed $274 of Q3 revenue and $63 of Q3 operating income; nine-month contributions were $819 and $112, respectively. Excluding acquisitions, revenue declined $35 in Q3 and $32 year to date, chiefly because 2019 was an off-year for political advertising. Higher retransmission consent revenue partly offset the decline. Nine-month political revenue fell $42, to $30.
Q3 interest expense increased to $57 from $25; nine-month interest expense rose to $173 from $74. Net income attributable to common stockholders includes $13 of preferred dividends in Q3 and $39 for the nine months. Acquisition-related costs totaled $72 for the nine months, including $29 to terminate sales representation agreements. Asset disposal gains were $27 for the nine months, primarily related to FCC Repack reimbursements.
Cash flow, debt and liquidity
- Nine-month operating cash flow was $255, versus $186 in 2018. Investing cash outflow was $2,646, principally reflecting acquisitions; financing cash inflow was $1,298, largely associated with acquisition financing.
- Cash was $326 at September 30, compared with $667 at December 31, 2018. The prior-year-end balance also included $752 of restricted cash; September 2019 had none.
- Long-term debt carrying value, including current portion, was $3,895; outstanding principal was $3,960. Revolving credit availability was $200. Gray reported compliance with debt covenants.
- Current assets were $789 and current liabilities $292. Debt principal payments due over the 12 months following quarter-end were $14; management estimated approximately $202 of interest payments over that period.
- On November 1, Gray prepaid $100 of its 2019 Term Loan with cash on hand, reducing the commitment and relieving future quarterly principal payments on that loan. Management stated that cash, operating cash flow and available borrowing capacity should fund debt service and expected investment needs.
Outlook, risks and unusual items
- Management expected remaining 2019 capital expenditures of $35–$37, excluding Repack, plus $2–$3 for Repack. Approximately $8 of Repack reimbursements had been requested but not received; funding sufficiency and timing remain uncertain.
- Management anticipated cost synergies from the Raycom combination to be implemented over several years. The filing provides no quantified synergy target or formal earnings guidance.
- Advertising is seasonal and sensitive to election cycles, audience ratings and competition from internet advertising. Automotive customers represented 24% of broadcast advertising revenue for the nine months, versus 21% in 2018. Political demand can displace other advertising.
- The Series A preferred stock carries cumulative dividends of 8% annually if paid in cash or 8.5% if paid in additional preferred shares. Preferred dividends reduce income available to common shareholders.
- Gray cited legal proceedings arising in the ordinary course and said management did not expect ultimate liability to materially affect results, while acknowledging litigation uncertainty. The FCC Repack fund may not fully reimburse eligible costs. No material change in previously disclosed risk factors was reported.
- Subsequent events included the October Charlottesville acquisition and related station divestitures, for which Gray expected a gain of approximately $19 in Q4, and a November authorization to repurchase up to $150 of shares through 2022.
Most important facts for investors to verify
- How much of revenue and operating-income growth is attributable to acquisitions versus underlying station performance, and whether expected integration synergies materialize.
- Debt reduction, interest burden, covenant headroom and the cash-flow impact of preferred dividends.
- Whether political advertising normalizes in the next election cycle and how retransmission rates and advertising demand develop.
- Final purchase accounting for acquisitions, Repack reimbursement amounts and timing, and the expected Charlottesville divestiture gain.
- Whether the new share-repurchase authorization is used and how repurchases compare with debt repayment and other capital needs.