Gray Television, Inc. — Q3 2017 Form 10-Q
Reporting period: Three and nine months ended September 30, 2017. Unaudited; amounts below are in U.S. dollars. Gray operated more than 100 television stations in 57 markets, reaching about 10.4% of U.S. television households.
Financial performance
| Metric | Q3 2017 | Q3 2016 | Nine months 2017 | Nine months 2016 |
|---|---|---|---|---|
| Revenue | $219.0m | $204.5m | $649.1m | $574.8m |
| Operating income | $50.0m | $60.5m | $236.1m | $150.3m |
| Net income (loss) | $15.3m | $(0.2)m | $96.4m | $26.4m |
| Diluted EPS | $0.21 | $0.00 | $1.33 | $0.36 |
| Operating cash flow | Not provided for quarter | Not provided for quarter | $114.3m | $103.4m |
- Revenue rose 7% in Q3 and 13% for the nine-month period. Retransmission consent revenue increased to $70.2m in Q3 from $51.1m and to $207.1m for nine months from $148.9m.
- Q3 operating income declined 17%, as broadcast expense grew faster than revenue, partly reflecting acquired stations and higher retransmission costs. Q3 operating margin was about 22.8%, versus 29.6% in 2016.
- Nine-month operating income and net income benefited materially from a $75.1m gain on asset disposals, associated in the filing’s discussion with the FCC spectrum auction. The gain reduced reported operating expenses; it is an unusual item and should not be treated as recurring performance.
- Nine-month diluted EPS was $1.33, compared with $0.36. The 2016 comparison included a $32.0m pretax loss on early extinguishment of debt; the 2017 period included a $2.9m loss from refinancing.
Cash, debt and liquidity
- At September 30, cash was $172.9m, versus $325.2m at December 31, 2016. Current assets were $379.6m and current liabilities $115.9m.
- Nine-month cash flow: operating activities provided $114.3m; investing activities used $336.3m; financing activities provided $69.7m. Investing included $415.4m for acquisitions and $21.4m of capital expenditures, partly offset by $90.8m of FCC spectrum-auction proceeds.
- Debt principal outstanding was $1.862bn; reported debt carrying value was $1.832bn. The company had $100m available under its revolving credit facility. Debt principal increased from $1.781bn at year-end 2016.
- The new 2017 Senior Credit Facility carried a 3.7% term-loan rate at quarter-end; the notes included $525m due 2024 at 5.125% and $700m due 2026 at 5.875%. The credit facility is secured by substantially all consolidated assets other than real estate. Gray reported compliance with debt covenants.
- Management estimated $6.4m of principal and about $90.8m of interest payments due in the 12 months after quarter-end. It expected cash, operating cash generation and borrowing availability to cover obligations and capital needs, and believed funding would be adequate through the term loan’s February 2024 maturity.
Material changes and business developments
- Gray completed station acquisitions in Fairbanks, Green Bay, the Quad Cities, Clarksburg-Weston, Bangor, Gainesville and Burlington-Plattsburgh. The filing reports a combined preliminary purchase price of about $418.5m for the transactions listed in its acquisition allocation table.
- The 2017 acquisitions contributed $54.2m of revenue and $25.2m of operating income during the nine months ended September 30. Acquisition activity increased broadcast costs, depreciation and amortization.
- The February 2017 credit agreement refinanced the prior term loan and provided a $100m revolver; an $85m incremental term borrowing helped fund the Diversified acquisition.
- Gray received $90.8m from relinquishing two licenses in the FCC spectrum auction and said it expected to defer related income taxes on a long-term basis.
- The company repurchased 322,038 common shares for $4.0m during the nine months; $69.0m remained under its $75m authorization. No shares were repurchased in Q3. No dividends were declared.
Outlook, commentary and risks
- Management forecast $14m–$15m of capital expenditures for the remainder of 2017. It also expected $1.7m–$2.4m of additional defined-benefit pension contributions and about $0.6m of net tax payments for the rest of 2017.
- Broadcast advertising is seasonal and typically stronger in the second and fourth quarters; political advertising and Olympic broadcasts can make even-numbered years stronger. 2017 was an election-cycle off-year, reducing political revenue.
- Automotive was the largest non-political advertising category, accounting for about 25% of non-political broadcast advertising revenue in the first nine months of 2017, compared with 23% in 2016. The filing warns that weakness in automotive or other major advertising categories could materially harm results.
- Retransmission revenue growth was accompanied by higher retransmission expenses. Debt is substantial, with interest costs and leverage covenants creating financing risks; variable-rate borrowings expose the company to rate changes.
- Management reported no goodwill or intangible-asset impairment triggering events in the nine-month period. Legal claims arise in the ordinary course; the company said known matters were not expected to materially affect its financial position, while noting outcomes are uncertain.
- Adoption of the new revenue standard was not expected to materially affect the balance sheet or statements of operations, though expanded deferred-revenue disclosures were expected. The new lease standard was expected to materially affect the balance sheet; the company estimated approximately $13.2m each in right-of-use assets and lease liabilities based on year-end 2016 values.
Key facts for investors to verify
- How much of reported nine-month earnings and operating margin depended on the $75.1m disposal gain, and how underlying station performance compares after acquisitions.
- Whether retransmission revenue gains continue to exceed associated expense increases, and whether legacy-station advertising stabilizes after the political and Olympic comparison effects.
- Debt leverage, variable-rate exposure, covenant headroom and cash available after acquisition spending, interest and scheduled principal payments.
- Whether acquisition purchase-price allocations remain preliminary and how acquired stations perform against expected synergies and integration costs.
- Timing and tax treatment of the FCC auction proceeds, including the expected long-term deferral of related taxes.