GRAY MEDIA, INC quarterly report, Q1 FY2021

Gray Television, Inc. — Q1 2021 Form 10-Q

Reporting period: Three months ended March 31, 2021; filed May 6, 2021. Gray operates television stations and digital properties in 94 markets, reaching approximately 24% of U.S. television households, alongside production businesses. The filing reports in millions of dollars unless stated otherwise.

Financial performance and liquidity

Metric	Q1 2021	Q1 2020
Revenue	$544 million	$534 million
Operating income	$101 million	$124 million
Net income	$39 million	$53 million
Net income attributable to common stockholders	$26 million	$40 million
Basic / diluted EPS	$0.28 / $0.27	$0.41 / $0.40
Operating cash flow	$147 million	$131 million
Cash at period end	$819 million	$296 million

Revenue rose 2%. Operating income declined 19% and net income declined 26%. Approximate operating margin was 18.6%, versus 23.2%; net margin was 7.2%, versus 9.9%.
Broadcasting generated $530 million of revenue; production companies generated $14 million. Retransmission consent revenue was $247 million, up $34 million, while total broadcast advertising was $269 million, down $17 million.
Operating expenses were $443 million, versus $410 million. Broadcasting expenses increased $26 million, chiefly from a $23 million increase in retransmission expense. Depreciation was $25 million and intangible amortization was $26 million.
Interest expense declined to $48 million from $52 million as lower term-loan rates more than offset higher average debt. Average debt was approximately $4.0 billion, versus $3.8 billion.
Cash from operations increased $16 million, primarily reflecting working-capital changes despite lower net income. Investing used $73 million, including $40 million for acquisitions and $24 million for investments in broadcasting, production and technology companies. Financing used $28 million, including common and preferred dividends.
At March 31, cash was $819 million; long-term debt was $3.976 billion net of deferred financing costs, representing $4.035 billion of principal. Revolver availability was $299 million. Current liabilities were $249 million and current assets were $1.298 billion.

Material changes and management commentary

Local and national revenue increased by a combined $10 million, which management attributed primarily to easing effects of COVID-19 on customers. Political revenue fell $27 million because 2021 was an election-cycle off-year. Production-company revenue declined $5 million, primarily due to COVID-related disruption to sporting events.
Retransmission revenue growth was driven by higher rates; related retransmission expense also increased. The 2021 Super Bowl contributed approximately $6 million of local and national revenue, compared with $3 million from the 2020 broadcast.
Management said the pandemic continued to disrupt content and events and made near- to medium-term performance harder to estimate. The company cited the fixed-cost nature of broadcasting as a constraint on mitigating adverse impacts. It continued expense controls, delayed some capital spending, and had begun plans to reopen offices and studios.
The company declared a quarterly common-stock dividend of $0.08 per share, its first common dividend in the comparable period; approximately $8 million was paid. Preferred dividends were $13 million in each period.
The company reported compliance with debt covenants. It estimated approximately $178 million of debt-interest payments over the 12 months after quarter-end and said cash, operating cash flow and borrowing capacity were expected to support debt service, capital spending and acquisition obligations. It expected 2021 capital expenditures of $75–$85 million, plus approximately $7 million of Repack spending; reimbursement may lag expenditures.

Transactions, outlook and risks

Quincy: Gray agreed in January to acquire Quincy Media for $925 million in cash, subject to adjustments and regulatory and other conditions. Gray expected closing in Q3 2021. On April 29, it agreed to sell Quincy stations in seven overlapping markets for $380 million to facilitate approval. A $25 million termination fee may apply in specified regulatory-failure circumstances.
Meredith: On May 3, after quarter-end, Gray agreed to acquire Meredith’s Local Media Group following the planned spinoff of its National Media Group. The transaction was valued at approximately $2.7 billion in total enterprise value and expected to close in Q4 2021, subject to conditions and regulatory approvals. Financing commitments included a $1.45 billion term loan and a $1.35 billion bridge facility; their final economic terms could change. The agreement includes specified termination fees, including a potential $125 million payment by Gray in certain circumstances.
Other subsequent event: Gray acquired Atlanta-area land on April 7 for $83 million, partly for future studio facilities.
COVID-19 and economic uncertainty, advertising competition from the internet, political and seasonal advertising swings, automotive-advertiser concentration, and acquisition financing and regulatory execution are relevant risks. The filing says the FCC Repack fund may not fully reimburse eligible costs; approximately $6 million of requested reimbursement remained outstanding at March 31. Management did not expect ordinary-course legal claims to materially affect results, while noting litigation uncertainty.
No specific earnings or revenue guidance was provided. The company expected $28 million of net income-tax payments for the remainder of 2021 and $4 million of pension contributions. It estimated federal net operating loss carryforwards of $204 million and state carryforwards of $567 million, of which it expects about half to be used.

Key facts for investors to verify

Progress, regulatory approvals, closing timing, divestiture proceeds and final financing terms for the Quincy and Meredith transactions; assess resulting debt, interest burden and leverage.
Whether retransmission revenue growth continues to exceed the associated programming-cost increases, and whether advertising and production recover as pandemic effects recede.
Cash conversion and working-capital trends, planned capital expenditures, Repack reimbursements and capacity to fund debt service and acquisition commitments.
Execution of Meredith’s planned spinoff and transaction conditions, including potential termination fees and the effect of required station divestitures.
COVID-19 impacts, advertising cyclicality and concentration, and whether projected tax-loss utilization and other management estimates remain supportable.