Gray Television, Inc. — Q1 2016 Form 10-Q
Business context and period. This unaudited report covers the three months ended March 31, 2016, compared with the three months ended March 31, 2015. Gray operated television stations in 50 markets, reaching approximately 9.4% of U.S. television households. Results reflect major station acquisitions, including the Schurz transaction completed February 16, 2016; therefore, reported year-over-year comparisons include changes in the company’s station portfolio.
Financial performance and liquidity
- Revenue: $173.7 million, up 30% from $133.3 million. Local advertising was $89.4 million (+19%), national advertising $22.1 million (+24%), political advertising $9.7 million versus $1.2 million, and retransmission consent $47.3 million (+30%). The company attributed growth to acquired stations, improved economic conditions, higher retransmission rates, and the 2016 election cycle.
- Profit: Operating income was $36.1 million, up 29%; net income was $9.0 million, up from $5.6 million. Diluted EPS was $0.12 versus $0.10. Operating margin was approximately 20.8%, compared with 21.0%; net margin was approximately 5.2%, compared with 4.2%.
- Costs and interest: Broadcast expenses rose 25% to $108.6 million. Corporate and administrative expenses increased to $15.7 million from $6.8 million, including $6.7 million of acquisition-related transaction costs. Interest expense rose 15% to $21.3 million, primarily due to higher average borrowings.
- Cash flow: Operating cash flow was $28.3 million versus $29.2 million. Investing activities used $420.2 million, primarily for acquisitions; financing activities provided $415.2 million, principally from a $425.0 million term-loan borrowing. Cash increased by $23.3 million to $120.7 million.
- Debt and liquidity: March 31 debt carrying value, including current portion, was $1.636 billion; outstanding principal was $1.655 billion. Cash was $120.7 million and revolving-credit availability was $60.0 million. The Senior Credit Facility balance carried a 4.1% rate; the $675.0 million 2020 Notes had a 7.5% coupon. The company reported compliance with debt covenants.
- Balance sheet: Total assets were $2.558 billion and stockholders’ equity was $438.1 million. Goodwill and broadcast licenses increased substantially following acquisitions.
Material changes and unusual items
- The Schurz acquisition and related transactions had net consideration of approximately $416.2 million, excluding transaction and financing costs. Gray also acquired WBXX-TV and WLUC-TV, exchanged/divested stations to address regulatory requirements, and sold Schurz radio assets for $16.0 million.
- Acquisitions contributed approximately $30.7 million of Q1 revenue and $18.4 million of broadcast expenses, according to management; the Schurz-related results included $16.6 million of revenue and $5.8 million of operating income from transaction dates through quarter-end.
- Gray recorded a gain of approximately $2.0 million on the KAKE-TV divestiture; the income statement reports a net gain on disposal of assets of $1.6 million.
- Unaudited pro forma results assuming the transactions occurred January 1, 2015 show revenue of $187.1 million and net income of $4.6 million for Q1 2016, versus revenue of $157.5 million and net income of $7.2 million for Q1 2015. The filing cautions that these figures are not necessarily indicative of actual or future results.
- Political advertising rose sharply in this even-numbered election year. Advertising revenue is seasonal and generally strongest in the second and fourth quarters; Olympic broadcasts can also lift revenue in even-numbered years.
Outlook, risks, and contingencies
- Management expected capital expenditures of approximately $35–$40 million over the twelve months after March 31, 2016; it separately estimated $33–$35 million for the remainder of 2016. Q1 capital expenditures were $5.9 million.
- Management estimated $4.3 million of debt principal payments and approximately $90.8 million of interest payments due over the next twelve months, and expected cash, operating cash flow, and available borrowing capacity to fund obligations and planned spending. It believed resources would support debt service and capital needs through the June 2021 term-loan maturity, subject to risks and financing availability.
- Gray expected $1.7 million of additional defined-benefit pension contributions during 2016. It also noted that it had begun paying more significant federal and state income taxes following use of net operating loss carryforwards.
- Risks include economic and advertising cyclicality, reliance on automotive and other major advertising categories, acquisition integration and preliminary purchase-price allocations, substantial leverage and restrictive covenants, and legal proceedings. Automotive accounted for approximately 23% of non-political broadcast advertising revenue in Q1 2016. The company said it knew of no material change in risk factors from its 2015 Form 10-K.
- No specific revenue or earnings guidance was provided. The filing states that Q1 results are not necessarily indicative of full-year results.
Important facts for investors to verify
- How much of reported revenue and operating profit growth is attributable to acquired stations versus organic performance, and how acquisition results develop after full-period ownership.
- The final purchase-price allocation and acquired-station cash flows, given that goodwill and other acquired asset values were preliminary estimates.
- Debt-service capacity, leverage covenant headroom, floating-rate exposure, and the effect of the $425.0 million incremental borrowing on future interest expense.
- Whether management’s capital expenditure, cash flow, and liquidity expectations remain achievable as seasonal advertising patterns and election-year spending evolve.
- The durability of retransmission consent revenue growth and exposure to automotive and other concentrated advertising categories.