Gray Television, Inc. — Q2 2015 Form 10-Q
Reporting period: Quarter and six months ended June 30, 2015. Unaudited interim results; amounts below are in millions of dollars unless stated otherwise. Gray reported one operating segment. Results are not fully comparable because acquisitions completed during 2014 contributed more revenue and expenses in 2015.
Financial performance
| Metric | Q2 2015 | Q2 2014 | Six months 2015 | Six months 2014 |
|---|---|---|---|---|
| Revenue | $143.5 | $107.2 | $276.8 | $198.5 |
| Operating income | $38.8 | $23.2 | $66.8 | $40.6 |
| Operating margin | 27.0% | 21.6% | 24.1% | 20.4% |
| Interest expense | $18.6 | $15.8 | $37.1 | $31.1 |
| Net income | $12.1 | $1.6 | $17.7 | $2.9 |
| Diluted EPS | $0.17 | $0.03 | $0.27 | $0.05 |
| Net margin | 8.4% | 1.5% | 6.4% | 1.4% |
Q2 revenue rose 34% and six-month revenue rose 39%. Reported 2014 acquisitions contributed $34.5 million of Q2 2015 revenue and $67.3 million of six-month 2015 revenue. Retransmission-consent revenue increased 109% in Q2 to $36.9 million and 117% for six months to $73.2 million. Local advertising increased 34% in both comparisons. Political advertising fell 75% in Q2 and 71% for six months, reflecting the 2015 election off-year.
Operating costs also grew: broadcast expenses before depreciation, amortization and asset-disposal losses increased 31% in Q2 and 37% for six months. Higher network affiliation fees—including new CBS program fees—and acquired-station costs were key drivers. Higher depreciation and intangible amortization also reflected acquisitions. Corporate and administrative expenses declined 35% in Q2 and 19% for six months, mainly as acquisition-related legal and professional fees eased.
Cash flow, debt and liquidity
- Six-month operating cash flow was $32.5 million, versus $29.3 million in 2014. Investing cash outflow was $8.4 million versus $335.3 million, primarily because the prior-year period included acquisitions. Financing cash inflow was $167.4 million, mainly from the March 2015 equity offering.
- Cash was $222.2 million at June 30, 2015, compared with $30.8 million at year-end. Current assets were $360.4 million and current liabilities $55.4 million.
- Long-term debt carrying value was $1.236 billion; outstanding principal was $1.231 billion, comprising $556.4 million under the Senior Credit Facility and $675.0 million of 7.5% notes due 2020. The Senior Credit Facility rate was 3.8%. Gray reported $50 million of revolver availability and compliance with debt covenants.
- Management reported no required debt principal payments over the following 12 months and estimated $71.8 million of interest payments over that period. Expected capital expenditures were $20–$25 million over the 12 months after June 30.
Material changes and notable items
- Gray issued 13.5 million common shares on March 31 at $13 per share, raising net proceeds of $167.4 million. Weighted-average diluted shares rose to 72.3 million in Q2 from 58.3 million a year earlier; no dividends were declared.
- On July 1, 2015, Gray completed five acquisitions for total consideration of approximately $84.4 million, funded with cash on hand. It had paid $7.0 million in deposits by June 30 and paid the remaining approximately $77.4 million after quarter-end. Acquired properties included stations or assets in Odessa-Midland, Twin Falls, Presque Isle, Wausau-Rhinelander and Laredo.
- Gray agreed to sell two Montana stations for $3.0 million, subject to FCC approval, and expected a $0.9 million gain. It also agreed to donate certain Helena assets and expected a $0.1 million loss; both transactions were expected to close in Q3 2015.
- Six-month comprehensive income included $7.5 million of after-tax other comprehensive income from a pension-liability adjustment. The Gray Pension Plan benefit accruals were frozen effective July 1, 2015; employer 401(k) matching was enhanced from that date.
Outlook, commentary and risks
Management said cash on hand, operating cash generation and available borrowing were expected to fund debt service, capital expenditures and acquisition obligations; it believed funding capacity would be adequate through the Senior Credit Facility term-loan maturity on June 13, 2021. The filing does not provide specific revenue or earnings guidance. Management cited improving economic conditions as supporting non-political advertising, while noting broadcast advertising seasonality and stronger political spending in even-numbered election years.
Advertising concentration is a risk: automotive was the largest category and represented approximately 24% of broadcast advertising revenue in each six-month period presented. Results are also exposed to changes in other major advertising categories, network-affiliation costs, economic cycles, acquisition integration and leverage/covenant restrictions. Gray stated that it knew of no material change to the risk factors in its 2014 Form 10-K. Legal matters were described as ordinary-course claims whose outcomes cannot be predicted; management did not expect known matters to materially affect financial position.
Investor facts to verify
- How much reported growth reflects acquisitions versus organic advertising and retransmission-consent rate changes.
- The economics and integration results of the five July acquisitions, including final purchase-price allocations, which were not complete when the filing was prepared.
- Whether retransmission-consent growth can offset rising network fees and other broadcast costs.
- Cash and leverage after the $77.4 million acquisition payment, future interest burden, and continued covenant compliance.
- Advertising trends, particularly automotive exposure and political revenue in the next election cycle.