Gray Television, Inc. — 2015 Form 10-K
Reporting period: Fiscal year ended December 31, 2015. The filing is Gray Television, Inc.’s annual report, not a quarterly filing; it also reports standalone fourth-quarter results. The company operates television stations and digital assets. As of February 2016, it reached about 9.4% of U.S. television households across 50 markets.
Financial performance and liquidity
| Metric | 2015 | 2014 |
|---|---|---|
| Revenue, less agency commissions | $597.4 million | $508.1 million |
| Operating income | $140.1 million | $153.8 million |
| Net income | $39.3 million | $48.1 million |
| Diluted earnings per share | $0.57 | $0.82 |
| Cash from operating activities | $105.6 million | $134.2 million |
| Capital expenditures | $24.2 million | $32.2 million |
- Revenue rose 18%, while operating income fell 9% and net income fell 18%. Calculated operating margin declined to 23.4% from 30.3%; net margin declined to 6.6% from 9.5%.
- Revenue mix in 2015: local advertising $308.2 million (51.6%); national advertising $81.1 million (13.6%); internet $28.3 million (4.7%); political advertising $17.2 million (2.9%); retransmission consent $152.0 million (25.4%); other $10.7 million (1.8%).
- Retransmission consent revenue more than doubled, to $152.0 million, mainly from higher subscriber rates and acquired stations. Political revenue fell 79% in the election-cycle off-year. Automotive advertisers represented about 24% of broadcast advertising revenue.
- At year-end, cash was $97.3 million, total assets $2.14 billion, and reported long-term debt including current portion $1.24 billion. Debt principal was $1.231 billion; the company reported $50 million of revolving borrowing availability and compliance with debt covenants.
- Operating cash flow fell 21%. Investing cash outflow was $206.4 million, including $185.1 million for acquisitions; financing cash inflow was $167.3 million, largely from the common-stock offering. Year-end cash increased to $97.3 million.
- Fourth-quarter 2015 revenue was $169.5 million, operating income $43.9 million, and net income $15.0 million, versus $177.9 million, $72.0 million, and $31.3 million, respectively, in fourth-quarter 2014.
Material changes and unusual items
- Six 2015 acquisitions added seven stations; acquired stations from 2014 and 2015 contributed $163.4 million of 2015 revenue, versus $72.1 million in 2014. Acquisition-driven growth limits comparability.
- Broadcast expenses increased 31% to $374.2 million, including higher employee costs and network-affiliation fees. A $6.3 million charge accrued for termination of national sales representation agreements was paid in January 2016.
- Gray issued 13.5 million common shares in March 2015, receiving net proceeds of $167.3 million to help fund acquisitions.
- After year-end, on February 16, 2016, Gray completed the Schurz acquisition and related transactions for a net acquisition cost of $415.3 million plus expenses. It funded the transaction in part with a new $425 million term loan. The acquisition was not included in December 31, 2015 balance-sheet debt.
Outlook, risks and contingencies
- Management estimated 2016 capital expenditures of about $40 million, debt interest payments of about $87.4 million, and principal repayments of $4.3 million over the following 12 months. It expected cash, operating cash flow, and available borrowing to fund obligations and capital spending; this is management’s expectation, not a guarantee.
- Management anticipated potentially beginning significant federal or state income-tax payments in 2016. All three defined-benefit pension plans were frozen; expected 2016 contributions were about $2.3 million.
- Key exposures include substantial debt and variable-rate borrowing, cyclical and seasonal advertising, political-advertising volatility, concentration in automotive and other advertiser industries, competition from digital and other video platforms, and dependence on network affiliations and retransmission-consent agreements.
- FCC licensing, media-ownership rules and the broadcast-spectrum incentive auction create regulatory and potential station-relocation risks. The filing says relocation costs may not be fully reimbursed and low-power stations could be displaced.
- Goodwill and broadcast licenses totaled approximately $1.54 billion net. No impairment was recorded in 2015; valuations depend on forecast and discount-rate assumptions. Routine legal proceedings were not expected by management to have a material adverse effect.
- Gray paid no dividends. Its dual-class structure gives Class A shares ten votes each; the Howell-Robinson family held approximately 44.2% of combined voting power as of February 19, 2016.
Most important facts for investors to verify
- How much of revenue and cash-flow growth is attributable to acquired stations, and whether acquired businesses meet expected performance and integration targets.
- Post-Schurz leverage, borrowing availability, interest costs, covenant headroom, and the company’s ability to service debt while funding investment.
- Whether retransmission-consent revenue growth can offset lower political advertising and pressure on traditional advertising.
- Actual 2016 capital expenditures, cash generation, tax payments, and pension contributions compared with management estimates.
- FCC outcomes, spectrum-auction or repacking costs, and any resulting effects on station operations or licenses.