Gray Television, Inc. — 2016 Form 10-K
Reporting period: Fiscal year ended December 31, 2016. The filing is an annual report, not a standalone fourth-quarter filing. Amounts below are in U.S. dollars; financial figures are rounded to millions unless noted.
Business context and reporting period
Gray Television owned and/or operated stations in 54 U.S. television markets, reaching about 10.1% of U.S. television households, with more than 200 programming streams. Revenue comes mainly from local, national and political advertising, retransmission-consent fees, and other station-related activities. The 2016 results reflect station acquisitions, including the Schurz transaction, as well as a presidential-election year and the Summer Olympics.
Financial performance and liquidity
| Metric | 2016 | 2015 |
|---|---|---|
| Revenue | $812.5 million | $597.4 million |
| Operating income | $234.1 million | $140.1 million |
| Operating margin | 28.8% | 23.4% |
| Net income | $62.3 million | $39.3 million |
| Diluted EPS | $0.86 | $0.57 |
| Cash from operations | $206.6 million | $105.6 million |
| Capital expenditures | $43.6 million | $24.2 million |
| Cash at year-end | $325.2 million | $97.3 million |
| Long-term debt, including current portion | $1,756.7 million carrying value | $1,220.1 million carrying value |
| Total current assets / current liabilities | $536.3 million / $119.4 million | $285.5 million / $87.6 million |
Operating cash flow less capital expenditures was approximately $163.0 million in 2016, compared with $81.4 million in 2015. Year-end debt principal was $1,781.4 million before deferred financing costs and premium; cash was $325.2 million. Debt obligations are substantial, and credit agreements restrict certain actions, including dividends and share repurchases. Gray reported covenant compliance at year-end.
Revenue mix in 2016: local advertising, including internet/digital/mobile, $403.3 million (49.6%); national advertising, $98.4 million (12.1%); political advertising, $90.1 million (11.1%); retransmission consent, $200.9 million (24.7%); and other, $19.8 million (2.5%).
Material changes versus the prior comparable period
- Revenue rose 36%, primarily reflecting acquired stations. Excluding acquired stations, political revenue increased $50.1 million and retransmission revenue increased $12.8 million; local and national advertising each declined, partly due to political inventory displacement.
- Political advertising represented about 11% of total revenue, versus 3% in 2015. Gray also recorded approximately $8.2 million of Olympic advertising revenue.
- Broadcast operating expenses increased 27% to $475.1 million, chiefly due to acquired stations and higher compensation and other operating costs. Despite expense growth, operating income and operating margin increased.
- Interest expense increased 31% to $97.2 million as average debt rose to $1.6 billion from $1.2 billion, partially offset by a lower average interest rate (5.5% versus 5.8%).
- Gray recorded a $32.0 million pretax loss ($19.5 million after tax) on early extinguishment of debt, associated with retiring its 7.5% notes due 2020.
- Investing cash outflow rose to $479.3 million, mainly from acquisitions. Financing cash flow was $500.6 million, reflecting new debt issuance and repayment/redemption activity.
Outlook, management commentary, risks and unusual items
- Management estimated 2017 capital expenditures of approximately $35 million, debt principal repayments of $5.6 million for the remainder of 2017, and interest payments of approximately $122.4 million for the 12 months following year-end, including accrued interest. It said cash, operating cash flow and available borrowing were expected to fund these needs and support long-term debt service through at least February 2024.
- On February 7, 2017, Gray refinanced and amended its credit facility: the term-loan rate was reduced to LIBOR plus 2.50%, the revolver increased from $60 million to $100 million, and maturities were extended to 2024 for the term loan and 2022 for the revolver.
- Gray anticipated $90.8 million of proceeds from FCC spectrum-auction bids, expected in the second or third quarter of 2017, and did not expect a material operational change. The auction/repacking process may nonetheless entail relocation costs, channel constraints or displacement of low-power stations.
- Subsequent to year-end, Gray acquired Fairbanks stations for $8 million and Green Bay and Quad Cities stations for an adjusted $269.9 million. It also announced an $85 million agreement to acquire stations in Bangor and Gainesville, subject to approvals. These transactions affect post-year-end debt, cash and operating scale.
- Principal business risks include advertising cyclicality and election-year volatility, automotive-sector concentration (22% of broadcast advertising revenue), competition from digital and other media, dependence on network affiliations and retransmission agreements, high debt and variable-rate exposure, acquisition integration, FCC regulation and spectrum repacking, and underfunded pension obligations.
- Gray reported no goodwill or broadcast-license impairment in 2016. These assets were significant—$1.34 billion of broadcast licenses and $485.3 million of goodwill—and impairment testing depends on assumptions about future cash flows and market values.
- Fourth-quarter 2016 revenue was $237.6 million, operating income $83.9 million and net income $35.8 million; fourth-quarter 2015 figures were $169.5 million, $43.9 million and $15.0 million, respectively. Period comparisons are affected by acquisitions and political-season patterns.
Most important facts for investors to verify
- How much 2016 growth and margin improvement was organic versus attributable to acquisitions, political advertising and Olympics-related revenue.
- Debt principal, interest burden, covenant headroom and liquidity after 2017 acquisitions and the credit-facility refinancing.
- Whether retransmission-consent revenue growth and local/national advertising trends can persist in non-election years.
- Completion, financing and integration of announced or recently completed acquisitions, including the $85 million proposed transaction.
- Receipt and operational consequences of the expected $90.8 million spectrum-auction proceeds, as well as any repacking costs or station impacts.
- Assumptions underpinning goodwill and broadcast-license valuations, and the funding outlook for the frozen pension plan.