Gray Television, Inc. — Q3 2016 Form 10-Q
Business context and reporting period
Unaudited results cover the three and nine months ended September 30, 2016, compared with the same 2015 periods. Gray owns or operates television stations in 51 U.S. markets, reaching approximately 9.5% of U.S. television households. The company reports one operating segment. Results include acquired stations from their respective acquisition dates.
Financial performance and liquidity
| Metric | Q3 2016 | Q3 2015 | First nine months 2016 | First nine months 2015 |
|---|---|---|---|---|
| Revenue | $204.5 million | $151.1 million | $574.8 million | $427.9 million |
| Operating income | $60.5 million | $29.3 million | $150.3 million | $96.2 million |
| Operating margin | 29.6% | 19.4% | 26.1% | 22.5% |
| Interest expense | $27.9 million | $18.6 million | $73.5 million | $55.8 million |
| Net income (loss) | $(0.2) million | $6.6 million | $26.4 million | $24.3 million |
| Operating cash flow | Not separately provided | Not separately provided | $102.0 million | $82.7 million |
Operating margins are calculated as operating income divided by revenue. Q3 net loss included a $32.0 million pretax loss on early debt extinguishment; excluding tax effects, the filing reports this item as $19.5 million net of tax. The nine-month period also included this charge.
For the first nine months, investing cash outflow was $469.5 million (versus $199.6 million in 2015), chiefly reflecting acquisitions and higher capital spending. Financing cash inflow was $500.6 million (versus $167.3 million). Cash increased by $133.1 million to $230.4 million. At September 30, current assets were $467.6 million and current liabilities $97.6 million.
At September 30, long-term debt carrying value was $1.756 billion; outstanding principal was $1.781 billion. Gray had $60 million available under its revolving facility and reported compliance with debt covenants. It had no required debt principal payments due within the following 12 months and estimated approximately $90.3 million of interest payments over that period.
Changes versus the prior comparable period
- Revenue rose 35% in Q3 and 34% in the first nine months, primarily from acquisitions and higher political advertising. The 2016 and 2015 acquisitions together contributed $50.8 million of Q3 revenue and $128.3 million of nine-month revenue in 2016.
- Political revenue increased to $22.3 million in Q3 from $4.6 million, and to $41.6 million for nine months from $8.0 million, reflecting the election-year cycle.
- Retransmission consent revenue rose 30% in Q3 and 32% for nine months, primarily from higher rates. Local and national advertising also benefited from acquisitions; Q3 included $8.2 million related to the 2016 Olympics.
- Operating expenses increased with acquired operations, programming/network fees, compensation, depreciation and amortization. Higher operating income was offset below the operating line by increased interest expense and the debt-extinguishment charge, resulting in a Q3 net loss.
- Debt was refinanced: Gray issued $700 million of 5.875% notes due 2026 and $525 million of 5.125% notes due 2024, and tendered or redeemed its $675 million of 7.5% notes due 2020.
Outlook, risks and unusual items
- Management expected $9–$10 million of capital expenditures in the remainder of 2016. It stated available cash, operating cash flow and borrowing capacity should be sufficient for debt service, estimated capital expenditures and acquisition-related obligations.
- Pending transactions included the Clarksburg, West Virginia stations for a maximum $26.5 million, expected in late 2016 or early 2017, and Green Bay and Davenport stations for $270 million, also expected in late 2016 or early 2017. The Fairbanks acquisition for $8 million was announced after quarter-end and was expected to close in Q1 or Q2 2017, subject to approvals.
- On November 6, 2016, the board authorized up to $75 million of additional common-stock repurchases through December 31, 2019; repurchases are discretionary and subject to market conditions and other considerations.
- Advertising revenue is seasonal and cyclical, and political revenue varies with election cycles. Automotive was the largest nonpolitical advertising category, representing approximately 23% of nonpolitical broadcast advertising revenue in the first nine months. A significant decline in automotive or other major categories could adversely affect results.
- Legal proceedings arise in the ordinary course; management did not expect known matters to materially affect financial position, but noted an unfavorable resolution could have a material adverse effect. No impairment-triggering events for goodwill or intangible assets were reported in the period.
- Management said it did not expect significant federal or state income tax payments in Q4 2016. The filing cautions that forward-looking expectations are subject to risks and actual outcomes may differ.
Important facts for investors to verify
- How much reported revenue and operating income growth is attributable to acquired stations versus organic performance, political spending and retransmission rate increases.
- The earnings and cash-flow impact of the refinancing, including ongoing interest costs and the one-time $32.0 million pretax debt-extinguishment loss.
- Available liquidity and covenant headroom after pending acquisitions, capital expenditures and any share repurchases.
- Regulatory status, closing timing and financing for the pending acquisitions, and the final purchase-price allocations for recent acquisitions, which were preliminary.
- Whether the unusually high Q3 effective tax rate and acquisition-related cost increases persist or normalize.