GRAY MEDIA, INC annual report, FY2019

Business context and reporting period

Gray Television, Inc. (NYSE: GTN and GTN.A) filed this Form 10-K for the fiscal year ended December 31, 2019; it is an annual report, not a standalone fourth-quarter filing. Gray operates local television stations and digital properties in 93 markets, reaching about 24% of U.S. television households, and owns sports and television production businesses. Revenue is driven mainly by advertising and retransmission consent fees.

Financial performance and liquidity

2019 revenue consisted of local advertising of $898 million, national advertising of $229 million, political advertising of $68 million, retransmission consent of $796 million, production companies of $87 million and other revenue of $44 million. Cash used in investing activities was $2.656 billion, primarily reflecting $2.837 billion of acquisition spending, partly offset by $253 million of station-sale proceeds and $41 million of FCC Repack reimbursements. Cash provided by financing activities was $1.064 billion.

Fourth-quarter 2019 revenue was $579 million, operating income was $180 million and net income available to common stockholders was $81 million, or $0.82 per basic share. Comparable fourth-quarter 2018 revenue was $329 million, operating income $151 million and net income $88 million, or $1.01 per basic share.

Material changes versus the prior comparable period

• Revenue increased 96% year over year, principally because of the Raycom merger and other 2019 acquisitions. The acquired businesses contributed $1.1 billion of 2019 revenue and $198 million of operating income.
• Excluding acquisition revenue, revenue declined $95 million, mainly because 2019 was an election off-year. Political revenue fell 56% to $68 million from $155 million.
• Retransmission consent revenue rose 124% to $796 million, reflecting acquisitions and higher rates. Local and national advertising revenue also increased substantially, mainly due to acquisitions.
• Operating income rose, but operating margin narrowed. Acquisition-related expenses, higher amortization and interest costs, and the lower political-advertising cycle affected the comparison.
• Interest expense increased 112% to $227 million, primarily due to debt used to finance the Raycom merger. Net income attributable to common stockholders included $52 million of preferred dividends.
• The Raycom merger and other acquisitions expanded the company’s assets, goodwill and broadcast licenses. Year-end assets were $6.972 billion, including $3.573 billion of broadcast licenses and $1.446 billion of goodwill.

Outlook, risks and unusual items

• The filing provides no formal revenue or earnings guidance. Management expected 2020 capital expenditures of about $80 million, plus $27–$32 million of Repack spending, with most Repack costs expected to be reimbursed. Estimated 2020 income tax payments were $79–$81 million; expected defined-benefit pension contributions were about $3 million.
• Management described the acquisitions as creating opportunities to reduce redundancies, with synergies expected to be implemented over several years. It also cited election-cycle seasonality: political advertising typically rises in even-numbered years, including 2020, and advertising is generally stronger in the second and fourth quarters.
• Debt is substantial: outstanding principal was $3.760 billion at year-end, and the company had $200 million available under its revolving facility. Most debt was fixed-rate, but borrowings under the senior credit facility were floating-rate; a 100-basis-point rate change was estimated to alter annual interest expense by about $18 million.
• Series A preferred stock issued in the Raycom transaction has a $650 million liquidation value and cumulative dividends of 8% in cash or, at Gray’s option, 8.5% in additional preferred shares. Gray paid $39 million of preferred dividends in 2019.
• Key risks include cyclical and seasonal advertising demand, competition from digital and streaming platforms, dependence on retransmission consent and network-affiliation agreements, concentration of broadcast advertising in automotive, acquisition integration, leverage and interest-rate exposure, FCC regulation, and potential impairment of goodwill or broadcast licenses.
• Gray disclosed consolidated class-action litigation related to an alleged exchange of competitively sensitive information in the broadcasting industry; it stated that it could not predict the outcome. Management considered other known legal claims unlikely to materially affect financial position, results or cash flows.
• 2019 included $79 million of transaction-related expenses and a $54 million net gain on asset disposals, including station divestitures and Repack proceeds. No impairment expense was recorded in 2019.
• Management and the auditor reported effective internal control over financial reporting, but the assessment and audit excluded acquired operations representing approximately 60% of year-end assets and 53% of 2019 revenue. The auditor issued an unqualified opinion on the financial statements and internal controls.

Important facts for investors to verify

• How much of post-merger revenue and operating cash flow is recurring, and whether anticipated integration savings are being realized.
• Debt reduction capacity, covenant headroom, refinancing terms and sensitivity to floating-rate interest costs.
• Renewal economics for retransmission consent and network-affiliation agreements, including the effects of regulatory changes and MVPD buying groups.
• 2020 political-advertising contribution and whether it offsets weaker non-political advertising or automotive demand.
• Repack reimbursement timing and sufficiency, and actual capital spending versus the disclosed estimates.
• Progress integrating acquired businesses and extending internal-control coverage to the acquired operations excluded from the 2019 assessment.
• Developments in the industry litigation and potential implications for the company.