Gray Television, Inc. — FY 2017 Form 10-K
Reporting period: Year ended December 31, 2017; filed February 27, 2018. The filing identifies the registrant as Gray Television, Inc. (not Gray Media, Inc.). Gray operated stations in 57 markets, with more than 200 programming streams, reaching about 10.4% of U.S. television households.
Financial performance and liquidity
| Metric | FY 2017 | FY 2016 |
|---|---|---|
| Revenue | $882.7 million | $812.5 million |
| Operating income | $291.2 million | $234.1 million |
| Operating margin | 33.0% | 28.8% |
| Net income | $262.0 million | $62.3 million |
| Diluted EPS | $3.55 | $0.86 |
| Cash from operations | $180.0 million | $210.1 million |
| Cash at year-end | $462.4 million | $325.2 million |
| Long-term debt, including current portion | $1.84 billion | $1.76 billion |
- Revenue increased 9%. Local advertising rose 12% to $451.3 million, national advertising rose 21% to $118.8 million, and retransmission consent revenue rose to $276.6 million from $200.9 million. Political revenue fell to $16.5 million from $90.1 million, reflecting the election-cycle off-year.
- Broadcast operating expenses increased 17% to $557.1 million, primarily from acquired stations and related staffing and costs. Corporate and administrative expense declined 22% to $31.5 million.
- Interest expense was $95.3 million; the average debt balance was about $1.8 billion and its average interest rate was 4.9%. At year-end, $1.86 billion of principal was outstanding, with $100 million available under the revolving facility. The company reported compliance with debt covenants.
- Investing cash outflow was $349.8 million, including $416.0 million for acquisitions and $34.5 million of property and equipment purchases, partly offset by $90.8 million of spectrum-auction proceeds. Financing cash inflow was $307.0 million, including $238.9 million net proceeds from a common-stock offering.
- For fourth-quarter 2017, revenue was $233.6 million, operating income $55.1 million, and net income $165.6 million, versus $237.6 million, $83.9 million, and $35.8 million, respectively, in fourth-quarter 2016. The quarter’s net income included substantial tax-reform benefits.
Material changes and unusual items
- Acquisitions contributed approximately $232.2 million of 2017 revenue; the 2017 acquisitions alone contributed $79.8 million of revenue and $33.7 million of operating income from their acquisition dates. Gray completed multiple station acquisitions during the year.
- The FCC spectrum auction generated $90.8 million of proceeds. Gray recorded a $74.2 million net gain on asset disposals after removing assets with a combined cost of $13.1 million.
- The Tax Cuts and Jobs Act reduced the value of deferred tax liabilities, producing an approximately $146.0 million fourth-quarter tax benefit. Total income tax benefit for 2017 was $68.7 million, compared with tax expense of $43.4 million in 2016. The tax accounting was provisional and could change; management expected significant income-tax payments in 2018.
- Gray recorded a $2.9 million loss on early extinguishment of debt in 2017, compared with $32.0 million in 2016. Operating cash flow declined by $30.1 million despite higher net income, in part because of noncash tax and disposal-gain effects and working-capital changes.
- Goodwill and broadcast licenses totaled approximately $2.14 billion at year-end. No impairment was recorded in 2017, 2016, or 2015.
Outlook, risks, and contingencies
- Management expected 2018 capital expenditures of about $50 million, excluding reimbursable repack costs but including related non-reimbursable upgrades. The FCC repack was expected to take about three years; Gray estimated approximately $75.6 million of reimbursable costs and $26.1 million of related non-reimbursable spending.
- Management estimated 2018 income-tax payments of $40–$44 million, debt principal payments of $6.4 million, and debt interest payments of approximately $117.5 million. It expected cash, operating cash flow, and available borrowing capacity to fund expected obligations and capital spending.
- Key risks include substantial indebtedness and variable-rate exposure; dependence on advertising, retransmission fees, network affiliations, and automotive advertisers; economic, seasonal, and election-cycle volatility; competition from digital and other video platforms; FCC regulation and spectrum-repacking costs; acquisition integration; underfunded pension obligations; and potential impairment of goodwill or broadcast licenses.
- At year-end, most debt bore fixed interest, but the senior credit facility was floating-rate; a 100-basis-point rate change was estimated to alter annual interest expense by about $6.4 million. The pension plan was underfunded by $37.8 million; expected 2018 contributions were approximately $2.0 million.
- The filing reports no known legal proceedings expected to materially affect financial position, results, or cash flows. The independent auditor issued unqualified opinions on the financial statements and internal control; acquired 2017 stations, representing about 14% of assets and 9% of revenue, were excluded from the internal-control assessment.
Important facts for investors to verify
- How much of revenue and operating-income growth reflects acquisitions versus organic performance, and whether acquired-station results meet expectations.
- Whether retransmission revenue growth and advertising trends can offset political-advertising cyclicality and continuing competition for ad spending.
- The debt maturity, covenant, and refinancing profile, together with cash generation and sensitivity to rising interest rates.
- The final tax-reform accounting and actual 2018 cash taxes, compared with management’s estimates.
- Actual repack costs, reimbursements, timing, and any effect on station coverage or programming capacity.
- Potential dilution and voting control: the December 2017 offering issued 17.25 million common shares; Class A shares carry 10 votes each, and the Howell-Robinson family held about 39% of combined voting power.