Gray Television, Inc. — Q1 2018 Form 10-Q
Business context and period: Unaudited results for the three months ended March 31, 2018, compared with Q1 2017. Gray operated television stations in 57 markets, reaching approximately 10.4% of U.S. television households. The company reports one segment.
Financial results and liquidity
| Metric | Q1 2018 | Q1 2017 / comparison |
|---|---|---|
| Revenue | $226.3 million | $203.5 million; up 11% |
| Operating income and margin | $50.0 million; 22.1% | $43.5 million; 21.4% |
| Net income and diluted EPS | $19.9 million; $0.22 | $10.5 million; $0.14 diluted EPS |
| Net cash from operating activities | $14.4 million | $(0.5) million |
| Cash at period end | $443.4 million | $462.4 million at Dec. 31, 2017 |
| Debt principal outstanding | $1.859 billion | $1.860 billion at Dec. 31, 2017 |
| Revolving credit availability | $100.0 million | $100.0 million at Dec. 31, 2017 |
Net margin was approximately 8.8%, versus 5.2% in Q1 2017. Cash declined by $19.0 million during the quarter. Cash used in investing was $7.8 million; cash used in financing was $25.6 million, including $19.6 million of share repurchases. Gross debt principal less cash was approximately $1.415 billion. The company reported compliance with all debt covenants and no dividends declared or paid.
Material changes versus Q1 2017
- Revenue growth was driven principally by retransmission consent fees, up $18.0 million to $85.6 million, and political advertising, up $4.5 million to $5.8 million. Local advertising rose $2.9 million; national advertising declined $0.3 million.
- Three stations acquired between April 2017 and March 2018 contributed approximately $9.6 million of revenue and $6.6 million of broadcast operating expense growth.
- Broadcast expenses increased 12% to $149.7 million, including a $9.4 million increase in retransmission expense. Operating income improved despite higher expenses.
- Interest expense rose $1.1 million to $24.3 million, mainly due to higher average rates. Q1 2017 included a $2.5 million loss on early debt extinguishment; Q1 2018 did not.
- The effective tax rate fell to 24.3% from 41.1%, reflecting the lower 2018 federal statutory rate and other tax adjustments.
Outlook, risks and unusual items
- Management expected 2018 remaining capital expenditures of approximately $50–53 million, plus $49–50 million for the FCC spectrum Repack. Estimated full-power Repack costs eligible for reimbursement were $81.4 million; related, non-reimbursable improvements were estimated at $26.7 million. The company cautioned that FCC funding may not cover all eligible costs; approximately $4.2 million was receivable from the FCC at March 31.
- Management anticipated $93.3 million of debt interest payments and $6.4 million of debt principal payments over the 12 months after March 31. It expected sufficient cash, operating cash flow and borrowing availability to meet debt service and capital needs, while noting cash flows are subject to risks and uncertainties.
- Management expected approximately $36.0 million of net income tax payments and $2.0 million of defined-benefit pension contributions during the remainder of 2018.
- On May 1, 2018, after quarter-end, Gray agreed to acquire KDLT-TV for $32.5 million, funded with cash on hand, subject to regulatory and customary conditions. Closing was expected in Q2 or Q3 2018.
- Revenue is seasonal, typically stronger in Q2 and Q4, and political advertising is generally higher in even-numbered election years. Q1 2018 revenue included approximately $5.5 million from the Winter Olympics and $2.3 million from the Super Bowl broadcast, versus $0.6 million from the prior-year Super Bowl.
- Key business exposures include competition from internet advertising, reliance on retransmission consent revenue, automotive advertising concentration, interest-rate changes, acquisition execution, and Repack reimbursement uncertainty. The filing reported no material change in risk factors and stated disclosure controls were effective.
Important facts for investors to verify
- Whether retransmission consent growth and political advertising trends continue, and how much Q1 growth reflects acquisitions and event-related advertising.
- Actual Repack spending, reimbursement timing and adequacy of FCC funding compared with management’s estimates.
- Completion and financing of the KDLT-TV acquisition, including regulatory approvals and closing timing.
- Debt levels, floating-rate exposure, covenant compliance and available revolving credit as cash is used for capital expenditures and acquisitions.
- Actual 2018 capital expenditures, tax payments and operating cash generation compared with management’s expectations.