Business context and reporting period
Gray Television, Inc. (NYSE: GTN, GTN.A), a local television broadcaster with production businesses, filed this unaudited Form 10-Q for the quarter ended September 30, 2021. Financial figures below are in millions of dollars unless otherwise stated. The company reports broadcasting and production companies segments.
Key financial metrics
| Metric | Q3 2021 | Q3 2020 | Nine months 2021 | Nine months 2020 |
|---|---|---|---|---|
| Revenue | $601 | $604 | $1,692 | $1,589 |
| Operating income | $67 | $212 | $276 | $401 |
| Net income (loss) | $(17) | $122 | $61 | $186 |
| Net income (loss) attributable to common stockholders | $(30) | $109 | $22 | $147 |
| Diluted EPS | $(0.32) | $1.14 | $0.23 | $1.52 |
| Operating cash flow | Not presented quarterly | Not presented quarterly | $283 | $488 |
Q3 operating margin was approximately 11% versus 35% a year earlier; nine-month operating margin was approximately 16% versus 25%. These are calculated from reported revenue and operating income.
- Revenue mix: Q3 retransmission consent revenue was $266, up $49; political advertising was $9, down $119. Nine-month retransmission consent revenue was $755, up $105, while political advertising fell $161 to $24. Local and national advertising benefited from recovering customer demand; the Olympics contributed approximately $14 in Q3.
- Cash flow and investment: Nine-month investing cash outflow was $664, including $956 for acquisitions net of cash acquired, offset in part by $470 of station-sale proceeds. Capital expenditures were $154. Cash decreased $451, from $773 at December 31, 2020 to $322 at September 30, 2021.
- Debt and liquidity: Long-term debt, net of deferred financing costs, was $3,981; outstanding principal was $4,035. Revolver availability was $299. The company also had $650 of Series A perpetual preferred stock. It reported compliance with debt covenants. Estimated debt interest payments for the 12 months after quarter-end were approximately $178.
- Other balance-sheet items: Total assets were $7,779 and total liabilities were $5,367 at September 30, 2021. Common dividends declared were $0.08 per share in Q3; $0.24 per share for the nine-month period.
Material changes versus the prior comparable period
- Q3 revenue was nearly flat, but operating income fell by $145 and the company recorded a common-stockholder loss, primarily reflecting a $53 noncash loss on the Quincy and Flint divestitures, higher broadcasting expenses, and lower political advertising.
- Nine-month revenue increased 6%, driven by recovering local and national advertising, higher retransmission fees, acquisitions, and production revenue. Operating income and net income declined, with lower political revenue, acquisition-related costs, and divestiture losses contributing.
- Operating cash flow declined $205 year over year. Management cited lower net income and approximately $82 of cash used by changes in net working capital.
- The August Quincy transaction involved a $930 purchase and $398 divestiture of overlapping stations. Gray also sold WJRT in Flint for $72 in September to facilitate regulatory approval of the pending Meredith acquisition, and acquired Third Rail Studios for $27.
Outlook, risks and unusual items
- Gray expected the Meredith Local Media Group acquisition to close in Q4 2021, subject to shareholder approval, regulatory approvals and other closing conditions. The amended consideration was $16.99 per share, with stated total enterprise value of $2.8 billion. Planned contingent financing included a $1.5 billion incremental term loan, expanded revolver capacity up to $500 million, and $1.3 billion of 5.375% notes due 2031. Completion would materially affect operations, liquidity, capital expenditures and debt service.
- Management expected full-year 2021 capital expenditures, excluding Repack, of approximately $185–$190, including the Doraville land/studio project; Repack spending was expected to be about $3, with most costs expected to be reimbursed. Management anticipated approximately $18 of income-tax payments for the remainder of 2021.
- The Q3 effective tax rate was 194% and the nine-month rate was 52%, largely due to divestiture-related goodwill tax effects; management reported this as a significant driver of the unusual tax burden.
- Management described continuing COVID-19 uncertainty, content and event disruption, advertising competition from internet platforms, political-advertising cyclicality, and the fixed-cost nature of broadcasting. Automotive customers represented approximately 18% of nonpolitical broadcasting advertising revenue for the first nine months of 2021, down from 21%.
- Management did not expect existing legal proceedings to materially affect results, while noting the inherent uncertainty of litigation. The filing reported no material changes to previously disclosed risk factors and stated disclosure controls were effective.
Most important facts for investors to verify
- Whether the Meredith transaction closed on schedule and on the stated terms, and its final financing costs, debt burden and integration effects.
- Whether advertising and retransmission revenue trends continue, particularly as political advertising rebounds or retreats with the election cycle.
- How cash generation, working capital and capital spending evolve as acquisition spending and studio development proceed.
- The final accounting and tax consequences of the Quincy and Flint divestitures, including the unusually high effective tax rates.
- Debt covenant headroom, interest expense, and availability under the revolving credit facility after the Meredith financing.