Gray Television, Inc. — Form 10-Q Summary
Reporting period: Quarter and nine months ended September 30, 2018. Unaudited consolidated results; amounts below are in U.S. dollars. Gray owned stations in 57 television markets at quarter-end.
Financial results and liquidity
| Metric | Three months ended Sept. 30 | Nine months ended Sept. 30 |
|---|---|---|
| Revenue | $279.3 million, up 28% from $219.0 million | $755.9 million, up 16% from $649.1 million |
| Operating income | $108.4 million, versus $49.9 million | $238.1 million, versus $235.8 million |
| Net income | $61.9 million, versus $15.3 million | $122.5 million, versus $96.4 million |
| Diluted EPS | $0.70, versus $0.21 | $1.38, versus $1.33 |
| Operating margin | 38.8%, versus 22.8% | 31.5%, versus 36.3% |
| Cash from operating activities | Not presented for the quarter | $186.2 million, versus $114.3 million |
Operating margins are calculated from reported revenue and operating income. Nine-month operating income was nearly flat because 2017 included a $75.1 million gain, principally related to the FCC spectrum auction; the comparable 2018 gain was $5.2 million. Nine-month net income increased despite that comparison, helped by lower income tax expense and the 2017 period’s debt-extinguishment loss.
Revenue growth chiefly reflected political advertising and higher retransmission consent fees. Q3 political advertising was $48.0 million versus $4.0 million; retransmission revenue was $91.6 million versus $70.2 million. For nine months, political advertising was $71.9 million versus $9.0 million, and retransmission revenue was $262.5 million versus $207.1 million. Local advertising declined in Q3 by $3.1 million, partly due to political inventory displacement.
Broadcast expenses rose 4% in Q3 and 7% for nine months, largely from higher retransmission expenses. Corporate and administrative expenses rose 33% in Q3 and 23% for nine months, partly due to acquisition-related professional fees. Interest expense was $25.1 million in Q3 and $74.2 million for nine months; average debt interest rates rose year over year.
At September 30, cash was $550.9 million, total current assets $762.0 million, and current liabilities $120.5 million. Outstanding debt principal was $1.820 billion; its net carrying value was $1.800 billion. Gray had $100 million available under its revolving facility and reported compliance with debt covenants. Nine-month investing cash use was $33.5 million and financing cash use was $64.2 million. Cash increased $88.5 million to $550.9 million. No dividends were declared; Gray repurchased $19.6 million of common stock during the nine-month period.
Material changes, outlook and risks
- Raycom merger: Pending at the filing date; Gray expected completion later in Q4 2018, subject to regulatory approvals and other closing conditions. Consideration includes $2.85 billion cash, 11.5 million Gray common shares and 650,000 preferred shares with $650 million aggregate face value. Gray anticipated a combined presence in 92 markets after overlap divestitures.
- Merger financing and obligations: Planned financing included an approximately $1.4 billion term loan, up to $200 million of new revolving capacity and $750 million of 2027 notes expected to yield 7%. Preferred shares accrue dividends at 8% cash or 8.5% in additional preferred shares, at Gray’s election. If the merger did not close by December 15, 2018, a ticking fee could apply and increase after January 15, 2019.
- Management outlook: Gray expected broadcast advertising, retransmission, production and other revenue to increase substantially following the Raycom merger, with cost synergies implemented over several years. Management anticipated $15–$16 million of remaining 2018 capital expenditures excluding acquisitions and Repack, plus $13.5–$14 million for Repack.
- Repack and weather: Repack costs are partly reimbursable, but the company said the FCC fund’s sufficiency is uncertain and reimbursements may lag spending. Gray had $12.8 million of requests outstanding at September 30. Hurricane Michael damaged northwest Florida facilities; most repair costs were expected to be insured, but the filing did not quantify them.
- Other considerations: Political advertising is cyclical and may displace other advertising; automotive advertisers represented approximately 21% of broadcast advertising revenue for the nine months, versus 25% in 2017. The company expected adoption of the new lease standard to increase reported assets and liabilities by approximately 1%. It reported no material change in risk factors and stated disclosure controls were effective.
Most important facts for investors to verify
- Whether the Raycom merger closed on the expected timetable, its final financing terms, required divestitures and realized synergies.
- Final acquisition-related debt, interest expense, leverage and preferred dividend obligations after closing.
- Whether political advertising and retransmission revenue trends persisted, and how much political inventory displaced other advertising.
- Timing and amount of FCC Repack reimbursements, plus total project costs and Hurricane Michael repair costs and insurance recoveries.
- Cash generation and capital requirements, including the planned Sioux Falls station acquisition and share repurchases.