Gray Television, Inc. — Q3 2022 Form 10-Q
Reporting period: Three and nine months ended September 30, 2022. Figures are in U.S. dollars and millions unless stated otherwise. The filing describes Gray Television, Inc.; the 2022 results include the effects of substantial 2021 acquisitions.
Business context and financial performance
Gray is a multimedia company operating local television stations and digital assets across 113 U.S. markets, alongside television production businesses and studio facilities. Its principal revenue sources are advertising, retransmission consent fees, and production activities.
| Metric | Q3 2022 | Q3 2021 | Nine months 2022 | Nine months 2021 |
|---|---|---|---|---|
| Revenue | $909 | $601 | $2,604 | $1,692 |
| Operating income | $245 | $67 | $627 | $276 |
| Net income (loss) | $108 | $(17) | $269 | $61 |
| Net income (loss) attributable to common stockholders | $95 | $(30) | $230 | $22 |
| Interest expense | $94 | $48 | $254 | $143 |
| Operating margin, calculated | 27.0% | 11.1% | 24.1% | 16.3% |
For the nine months, operating cash flow was $596, investing cash flow was $(362), and financing cash flow was $(279), leaving a $45 net decrease in cash. Cash was $144 at September 30, versus $189 at December 31, 2021. Current assets were $934 and current liabilities $446.
At September 30, principal debt outstanding was $6,674; the balance sheet reported long-term debt, net of financing costs and current portion, of $6,590. The company also had $650 of Series A perpetual preferred stock and $496 of available revolver borrowing capacity. Management reported compliance with debt covenants. Common dividends were $0.08 per share per quarter.
Material changes versus comparable periods
- Revenue increased 51% in Q3 and 54% for the nine months. Management attributed $249 of the quarterly and $735 of the nine-month increase to the net impact of 2021 acquisitions. These comparisons are therefore not equivalent to organic growth.
- Excluding those acquisition effects, Q3 political advertising rose $73, while core advertising fell $11; retransmission revenue was unchanged. For the nine months, political advertising rose $133, retransmission revenue rose $37, core advertising was unchanged, and production revenue increased $8.
- Political revenue benefited from 2022 being an election year: it was $144 in Q3 and $260 for the nine months, compared with $9 and $24, respectively, in 2021.
- Interest expense rose sharply, reflecting higher debt balances associated with acquisitions and higher rates. Average debt principal was $6.7 billion in Q3 and $6.8 billion for the nine months, versus $4.0 billion and $4.1 billion in the comparable periods.
- Depreciation and amortization increased with acquired assets. Amortization was $156 for the nine months, versus $81 in 2021. The prior-year comparison also included a $51 loss on asset disposals in Q3, primarily from divestitures; 2022 reported a $1 gain for Q3 and a $6 gain for the nine months.
- Capital spending was $298 for the nine months, versus $154 in 2021, including $179 on Assembly Atlanta. In 2021, investing cash use was also higher due to acquisitions.
Outlook, commentary, risks and unusual items
- Management expected routine 2022 capital expenditures of approximately $120–$130, in addition to approximately $201 of 2022 Assembly Atlanta expenditures; it projected $73 of Assembly Atlanta spending in 2023. These Assembly estimates are net of anticipated property-sale proceeds and incentives, whose amounts and timing are not assured.
- Gray entered a long-term agreement for NBCUniversal to lease and operate studio facilities at Assembly Atlanta. Management cited expected 2022 and 2023 proceeds/incentives of approximately $43 and $59, respectively, plus a further $20 after Q3 2023.
- Management estimated approximately $386 of debt interest payments over the 12 months after September 30, noting that rates could rise and actual payments could exceed the estimate. It stated that available cash, operating cash flow, and borrowing capacity should fund obligations and planned spending, and expected funding capacity through at least the February 2024 maturity of the 2017 Term Loan.
- Gray repaid $161 of debt during the first nine months, including a $150 voluntary prepayment of the 2017 Term Loan. On November 1, 2022, it made a further $100 voluntary prepayment of that loan.
- Management cited ongoing uncertainty from COVID-19 and its economic effects, competition from internet advertising, political and seasonal advertising fluctuations, and exposure to advertising demand in concentrated industries. Most broadcasting operating expenses are fixed. Rising interest rates and the LIBOR replacement for credit-facility borrowings are additional considerations.
- Legal claims arise in the ordinary course; management did not expect the ultimate liability, if any, to materially affect results, while cautioning that proceedings have inherent uncertainties. No material changes to the risk factors in the 2021 Form 10-K were reported.
- A previously reported material weakness in user-access and segregation-of-duties controls was reported as remediated after corrective actions and testing. Management concluded internal control over financial reporting was effective as of September 30, 2022; it reported no related misstatements.
Important facts for investors to verify
- How much reported revenue and profit growth reflects acquired operations versus underlying performance, and how political advertising compares after the election cycle.
- Debt repayment plans, floating-rate exposure, the LIBOR transition, the 2017 Term Loan maturity, and the effect of interest costs on cash generation.
- Assembly Atlanta spending, NBCUniversal lease economics, and whether anticipated property-sale proceeds and incentive payments arrive on the expected schedule.
- Retransmission consent rate trends, renewal terms, and the sustainability of core advertising demand.
- Execution of the remediated internal controls and any developments in legal matters or other contingencies.