Gray Television, Inc. — Q1 2017 Form 10-Q
Reporting period: Three months ended March 31, 2017; unaudited. Gray operated stations in 54 markets, reaching approximately 10.1% of U.S. television households.
Financial performance
| Metric | Q1 2017 | Q1 2016 | Change |
|---|---|---|---|
| Revenue | $203.5 million | $173.7 million | +17% |
| Operating income | $43.6 million | $36.1 million | +21% |
| Operating margin | 21.4% | 20.8% | +0.6 percentage points |
| Net income | $10.5 million | $9.0 million | +17% |
| Diluted earnings per share | $0.14 | $0.12 | +$0.02 |
| Operating cash flow | $(0.5) million | $29.7 million | Down $30.2 million |
| Capital expenditures | $4.0 million | $5.9 million | Down $1.9 million |
Revenue growth reflected acquisitions and higher retransmission-consent revenue, partly offset by weaker political advertising and lower local and national advertising at legacy stations. Retransmission-consent revenue was $67.6 million, up from $47.3 million; political revenue was $1.3 million, down from $9.7 million. Acquisition revenue contributed approximately $47.5 million in Q1 2017, including $10.9 million from the 2017 acquisitions.
Broadcast expenses increased 23% to $133.5 million, chiefly due to acquired stations and higher retransmission expense. Corporate and administrative expenses fell 51% to $7.7 million, largely reflecting lower acquisition-related professional fees. Interest expense rose 9% to $23.2 million as average debt increased; a $2.5 million loss from early debt extinguishment also reduced pretax income. The effective tax rate was 41.1%, compared with 41.6%.
Liquidity, debt and balance sheet
- Cash was $23.5 million at March 31, 2017, down from $325.2 million at year-end, primarily following acquisition spending. Current assets were $212.2 million and current liabilities $92.6 million.
- Long-term debt carrying value, including current portion, was $1.754 billion; outstanding principal was $1.780 billion. The company reported $100 million of revolving-credit availability and was in compliance with debt covenants.
- Operating cash flow was negative as working-capital movements used $40.7 million, which management attributed primarily to the effects of acquisitions. Investing cash outflow was $293.4 million, including $277.9 million for television businesses and licenses.
- Management estimated $6.4 million of principal payments and $90.4 million of interest payments over the twelve months following March 31. Q1 interest payments were $29.9 million.
Material changes, outlook and risks
- Gray acquired stations in Fairbanks, Alaska, for $8.0 million and two Media General-divested stations for an adjusted $269.9 million in January. These acquisitions added $86.4 million of preliminary goodwill. The company subsequently completed the $26.5 million Clarksburg acquisition and the $85.0 million Diversified acquisition on May 1, 2017.
- On April 3, Gray borrowed an additional $85.0 million under its credit facility, largely to fund the Diversified acquisition. Term-loan quarterly principal payments increase to $1.6 million beginning June 30, 2017.
- Gray expected 2017 remaining capital expenditures of $26–$31 million and pension contributions of $1.7 million. It anticipated $90.8 million of FCC spectrum-auction proceeds in Q2 or Q3 2017, with no material operational change expected. A further $29.0 million station acquisition in Vermont was announced May 4, subject to approvals and expected to close in Q3.
- No specific revenue or earnings guidance was provided. Management said cash, operating cash flow and available borrowing were expected to cover debt service, capital spending and acquisition obligations, and expected funding capacity through the February 2024 term-loan maturity.
- Advertising is seasonal, generally strongest in Q2 and Q4, and political advertising tends to be higher in even-numbered election years. Automotive represented approximately 25% of nonpolitical broadcast advertising revenue in Q1 2017, versus 23% a year earlier; management cautioned that weakness in automotive or other major advertising categories could materially affect results.
- Other considerations include substantial debt and related interest obligations, acquisition integration and valuation estimates, and customary legal contingencies. The filing reported no material change in risk factors and no impairment-triggering events during the quarter.
Important facts for investors to verify
- Whether the expected $90.8 million spectrum-auction proceeds were received, and their timing and tax treatment.
- Post-acquisition operating results, integration costs and the final allocation of purchase prices and goodwill.
- Debt levels, borrowing availability, interest expense and covenant headroom following the $85 million incremental borrowing.
- Whether working-capital cash use reverses and whether retransmission growth offsets weaker political and other legacy-station advertising.
- Progress and regulatory status of the announced Vermont acquisition, and actual capital spending against management’s estimate.