Gray Television, Inc. — Q2 2019 Form 10-Q
Business context and period. The unaudited filing covers the quarter and six months ended June 30, 2019. Gray operates television stations and digital platforms, as well as production businesses. The January 2 Raycom merger materially expanded the business; results include Raycom from that date and the United acquisition from March 1. Gray reported operating stations in 93 markets, reaching approximately 24% of U.S. television households.
Financial performance and position
| Metric | Q2 2019 | Q2 2018 | Six months 2019 | Six months 2018 |
|---|---|---|---|---|
| Revenue | $508 million | $250 million | $1,026 million | $477 million |
| Operating income | $119 million | $80 million | $159 million | $130 million |
| Net income | $44 million | $41 million | $26 million | $61 million |
| Interest expense | $58 million | $25 million | $116 million | $49 million |
| Operating cash flow | Not presented by quarter | $105 million | $98 million |
All amounts are in millions. Q2 net income attributable to common stockholders was $31 million, or $0.31 per basic and diluted share, after $13 million of preferred dividends. For the six-month period, preferred dividends were $26 million, leaving no net income attributable to common stockholders in the statement; reported common-stockholder EPS is shown as a dash.
Calculated operating margins were approximately 23.4% in Q2 2019 versus 32.0% in Q2 2018, and 15.5% for the first half of 2019 versus 27.3% in the prior-year period. Net margins were approximately 8.7% and 16.4% for the respective quarters, and 2.5% and 12.8% for the respective six-month periods.
At June 30, 2019, cash was $251 million, current assets $683 million, and current liabilities $233 million. Long-term debt carrying value, including the current portion, was approximately $3.895 billion; total debt principal was $3.963 billion. Revolver availability was $200 million. Total liabilities were $4.988 billion. Cash declined from $667 million at December 31, 2018; restricted cash declined from $752 million to zero.
For the six months, investing cash outflow was $2.599 billion, principally reflecting acquisitions, while financing cash inflow was $1.326 billion. Capital expenditures were $44 million, including $30 million for the FCC Repack. Debt interest paid was approximately $105 million.
Material changes versus prior periods
- Reported revenue more than doubled in Q2 and increased 115% in the first half, primarily because of the acquisitions. Acquired businesses contributed $264 million of Q2 revenue and $545 million of first-half revenue. These reported comparisons are not like-for-like with 2018.
- Retransmission consent revenue rose to $201 million in Q2 from $85 million and to $405 million in the first half from $171 million. Political advertising fell to $5 million in Q2 from $18 million and to $8 million in the first half from $24 million, reflecting the 2019 off-year in the election cycle.
- First-half operating income increased to $159 million from $130 million, but net income declined to $26 million from $61 million. Higher acquisition-related interest expense, amortization, and transaction costs weighed on results. First-half transaction-related expenses were $70 million.
- The Raycom transaction was funded in part with $2.84 billion cash, 11.5 million common shares valued at $170 million, and $650 million of Series A preferred stock. Debt principal rose from $2.570 billion at year-end 2018 to $3.963 billion at June 30, 2019.
Outlook, commentary, risks and unusual items
- Management expects operating synergies from the acquisitions to be implemented over several years. It stated that cash on hand, operating cash generation, available borrowing and potentially external financing should fund debt service, capital expenditures, preferred dividends and acquisition obligations. This is management’s expectation, not a guarantee.
- Management forecast approximately $80 million of 2019 capital expenditures excluding Repack, plus $26–$30 million of Repack spending, with the majority expected to be reimbursed. Approximately $13 million of Repack reimbursements had been requested but not received at June 30; the filing cautions that FCC funding may not fully cover eligible costs or may be delayed.
- Management estimated $218 million of debt interest payments over the 12 months following June 30 and $14 million of principal payments during that period. Debt covenants include restrictions on additional debt, acquisitions, dividends and repurchases; Gray reported compliance at quarter-end.
- The Series A preferred stock carries cumulative dividends at 8% annually if paid in cash or 8.5% if paid in additional preferred shares. It ranks ahead of common equity for dividends and liquidation proceeds.
- Management identified advertising competition from the internet, automotive-advertising concentration, political-advertising cyclicality, and reliance on retransmission consent revenue as relevant business considerations. Legal proceedings are in the ordinary course; management did not expect them to materially affect the company, while noting litigation uncertainty.
- Gray reported no material change in risk factors from its 2018 Form 10-K. It also reported effective disclosure controls and procedures. The acquisition purchase-price allocations remained preliminary, though management expected subsequent adjustments not to be material.
Important facts for investors to verify
- How much of revenue and operating performance reflects acquired stations versus comparable, legacy operations, and whether expected synergies are realized.
- Debt repayment capacity, interest costs, covenant headroom, and the effect of the preferred stock’s cumulative dividend obligations.
- Timing and amount of FCC Repack reimbursements, and whether the program’s funding proves sufficient.
- Final acquisition accounting, including goodwill and intangible-asset valuations and the resulting amortization burden.
- Pending KDLT-TV and WVIR-TV acquisitions and related station divestitures, including regulatory approvals, timing and final cash requirements.
- The first-half common-stockholder earnings presentation: the filing reports $26 million net income and $26 million preferred dividends, with common-stockholder income shown as zero.