Gray Television, Inc. — Q1 2020 Form 10-Q
Reporting period: Three months ended March 31, 2020; comparative period is Q1 2019. Unaudited. Unless stated otherwise, amounts are in U.S. dollars and millions. Gray owns and operates television stations and digital properties in 93 markets, reaching approximately 24% of U.S. television households, and also operates production businesses.
Financial performance and position
| Metric | Q1 2020 | Q1 2019 / prior date |
|---|---|---|
| Total revenue | $534 | $518 |
| Operating income | $124 | $40 |
| Net income (loss) | $53 | ($18) |
| Net income (loss) attributable to common stockholders | $40; diluted EPS $0.40 | ($31); diluted EPS ($0.31) |
| Operating cash flow | $131 | $24 |
| Cash | $296 at March 31, 2020 | $212 at December 31, 2019 |
| Long-term debt, net of financing costs | $3,700 at March 31, 2020 | $3,697 at December 31, 2019 |
| Revolving credit availability | $200 | $200 at December 31, 2019 |
Revenue increased 3% year over year. Operating margin was approximately 23% versus 8% in Q1 2019. The improvement in operating income reflected lower expenses, including nonrecurring transaction costs in the prior-year quarter; it should not be read as a like-for-like measure of underlying growth. Interest expense was $52, down from $58. The company reported $18 of income tax expense and a 25% effective tax rate, compared with $3 of expense and a negative 20% rate in Q1 2019.
Broadcasting revenue was $515, including $286 of advertising and $213 of retransmission consent revenue. Production-company revenue was $19. Local advertising fell to $199 from $211, while political advertising rose to $36 from $3. Production-company revenue declined from $37.
Net cash used in investing was $24, versus $2,562 in Q1 2019, when major acquisition activity drove spending. Financing used $23 in Q1 2020, including $13 of preferred dividends and $6 of common-stock repurchases. Current assets were $721 and current liabilities $243 at quarter-end. The company also had $650 of cumulative, redeemable preferred stock outstanding. No common-stock dividends were declared for either comparative quarter.
Material changes and management commentary
- Management attributed the $16 revenue increase principally to election-cycle political advertising and higher retransmission revenue. It attributed decreases in local and national advertising and production revenue primarily to COVID-19’s effects on customers, sports, and event programming.
- Broadcast expenses before depreciation, amortization, and asset-disposal gains fell $21 to $335; corporate and administrative costs fell $33 to $15. Management said these reductions largely reflected transaction-related expenses in 2019 that did not recur. Retransmission expense increased $18.
- COVID-19 disrupted broadcast content creation and production-company events and programming, including sports cancellations and suspended television production. Management warned that advertising demand, consumer behavior, liquidity, access to financing, and business performance could be adversely affected; duration and magnitude could not be reliably estimated. The business’s fixed costs limit management’s ability to offset revenue declines.
- Management reported that it was protecting employee safety, seeking to maintain revenue, reduce expenses, and defer capital expenditures. Most employees were working remotely. Management said it did not believe these arrangements had adversely affected operations or financial reporting as of the filing date, while noting that control impacts were being evaluated.
- COVID-19 was treated as a triggering event for impairment review. Management concluded goodwill and intangible assets were not impaired as of the report date, but said it would continue to reassess. Goodwill and broadcast licenses totaled approximately $5.0 billion.
Outlook, liquidity, and contingencies
- No specific revenue or earnings guidance was provided. Management said cash on hand, operating cash flows, and available credit were expected to fund debt service, capital expenditure, and acquisition-related obligations; it believed these resources would support long-term debt service until at least the February 2024 maturity of the 2017 Term Loan.
- Estimated debt-interest payments for the 12 months after March 31, 2020 were approximately $192. The company reported compliance with debt covenants at quarter-end. Outstanding principal was $3.76 billion, with $1.12 billion scheduled to mature in 2024; term-loan rates were 3.8% and 4.0% at quarter-end.
- Expected 2020 capital expenditures, excluding Repack costs, were approximately $60–$80; additional Repack spending was estimated at $17–$22, with reimbursement expected for the majority. Approximately $8 of Repack reimbursements had been requested but not received at March 31. Management cautioned that the FCC fund may not reimburse all eligible costs and reimbursements may lag spending.
- Management expected approximately $65 of net income-tax payments and $3 of pension contributions during the remainder of 2020. It also expected approximately $13 of 401(k) matching contributions.
- The CARES Act’s tax provisions were under evaluation. The company stated that ordinary-course legal claims were not expected to materially affect results, while acknowledging litigation uncertainty.
- The company repurchased 500,923 common shares for approximately $6 during Q1 at an average $11.39 per share. In April it repurchased another 404,913 shares for approximately $4, then terminated its issuer repurchase plan; approximately $119 remained under the broader authorization.
Key facts for investors to verify
- How COVID-19 and the resulting economic conditions affected advertising demand, receivable collections, production activity, and cash generation after quarter-end.
- Whether the Q1 operating-income improvement persists once prior-year transaction costs and unusually strong political advertising are considered.
- Debt leverage, refinancing and interest-rate exposure, and the company’s ability to maintain covenant compliance and liquidity if cash flows weaken.
- Repack reimbursement timing and sufficiency, and whether planned capital expenditures or other cash needs change.
- Future impairment assessments for goodwill and broadcast licenses, and the impact of any deterioration in expected business performance.
- The filing states that no impairment was identified as of its report date; subsequent conditions may change that assessment.