Gray Television, Inc. — Q2 2017 Form 10-Q
Reporting period: Quarter and six months ended June 30, 2017. The filing identifies the registrant as Gray Television, Inc. Gray operated more than 100 television stations in 57 markets, reaching approximately 10.6% of U.S. television households. Financial amounts below are in millions unless otherwise stated.
Financial performance
- Q2 revenue: $226.7, up 15% from $196.6 a year earlier. Six-month revenue: $430.1, up 16% from $370.4.
- Revenue mix: Q2 retransmission consent revenue was $69.4, up from $50.5; local revenue was $117.9 versus $104.7. Political revenue declined to $3.7 from $9.6. For the first half, retransmission revenue rose to $136.9 from $97.8, while political revenue fell to $5.0 from $19.3.
- Net income: Q2 $70.6 ($0.97 diluted per share), versus $17.7 ($0.24); six months $81.1 ($1.12 diluted), versus $26.7 ($0.37). Results include a substantial one-time gain on spectrum-related asset dispositions.
- Operating income: Q2 $142.6 versus $53.7; six months $186.1 versus $89.8. The 2017 periods included gains on asset disposals of $77.3 and $76.8, respectively. Excluding those gains, operating income was approximately $65.2 for Q2 and $109.3 for the first half; these are simple calculations from reported figures, not company-defined adjusted measures.
- Cash flow: First-half operating cash flow was $59.1, compared with $45.5. Investing used $413.2, primarily reflecting acquisitions; financing provided $71.2. Cash declined by $282.8 to $42.4. Capital expenditures were $10.4 in the first half.
- Debt and liquidity: June 30 debt principal was $1,863.4; reported debt carrying value, including current portion, was $1,838.6. Cash was $42.4 and unused revolving credit availability was $100.0. The company reported compliance with debt covenants.
- Margins and costs: Broadcast expenses rose 14% in Q2 and 18% in the first half, driven largely by acquisitions and higher retransmission costs. Retransmission revenue growth also contributed to higher operating costs. Reported operating margins are materially affected by the spectrum-auction gain.
Material changes and unusual items
- Gray acquired stations in Fairbanks, Alaska; Green Bay, Wisconsin and the Quad Cities; and Bangor, Maine and Gainesville, Florida during the first half. The Clarksburg, West Virginia acquisition also closed in May after operation under an LMA. The filing reports total preliminary purchase consideration of $389.5 for the listed acquisitions, including Clarksburg. These acquisitions contributed $31.8 of revenue and $15.7 of operating income in the first half; results also reflect acquired stations from prior-year transactions.
- Gray tendered two broadcast licenses and modified other spectrum in the FCC spectrum auction. It recorded $90.8 of proceeds receivable and a $77.3 gain in Q2; the proceeds were received August 7, 2017. The gain reflects $90.8 in proceeds less $13.1 in disposed asset cost.
- Gray refinanced its prior credit facility in February and borrowed an additional $85.0 in April to fund an acquisition. It recorded a $2.9 early-debt-extinguishment loss and incurred $5.0 in deferred financing costs.
- Gray repurchased 322,038 common shares in Q2 for $4.0 million, averaging $12.39 per share. No dividends were declared or paid.
Outlook, commentary and risks
- Management expected remaining-2017 capital expenditures of approximately $20.0–$24.5, debt principal payments of $6.4 over the next 12 months, and interest payments of approximately $91.1 over that period. It said available cash, operating cash flow and credit-facility borrowings should be sufficient for debt service, capital expenditures and acquisition obligations, and expected funding capacity for long-term debt service through the term loan’s February 2024 maturity.
- Management expected to contribute another $1.7 to defined-benefit pension plans during the remainder of 2017. It anticipated approximately $1.0 of net income-tax payments for the remainder of 2017 and said payments were likely to be higher beginning in 2018, absent significant tax-code changes.
- Advertising is seasonal and cyclical: revenue is generally strongest in Q2 and Q4, and political spending is typically higher in even-numbered election years. Management attributed lower political revenue to 2017 being an off-year. Automotive represented approximately 25% of first-half non-political broadcast advertising revenue, versus 23% in the prior-year period; a substantial decline in automotive or other key advertising categories could adversely affect results.
- Gray reported no material change to the risk factors in its 2016 Form 10-K. Legal claims arise in the ordinary course; management said known matters were not expected to materially affect financial position, but outcomes cannot be predicted. Management also noted that adoption of the new lease standard was expected to materially affect the balance sheet; it estimated related assets and liabilities of about $13.2 as of year-end 2016.
- After quarter-end, Gray completed the $29.0 Vermont station acquisition on August 1. On August 7, the board approved a change-in-control severance plan for executives and certain key employees.
Important facts for investors to verify
- How much future earnings and cash flow depend on retransmission-consent revenue growth, and how related retransmission expenses evolve.
- The sustainability of operating performance after separating recurring operations from the $77.3 spectrum-auction gain, and the contribution of acquired stations.
- Debt leverage, interest costs, covenant headroom and liquidity following acquisition spending and the reduction in cash.
- The final purchase-price allocations for acquisitions, integration results, and the use and tax treatment of the FCC auction proceeds.
- Exposure to automotive and other advertising categories, political-advertising cycles, and the timing and amount of forecast capital expenditures and taxes.