Gray Television, Inc. — Q2 2018 Form 10-Q
Reporting period: Quarter and six months ended June 30, 2018; unaudited. Gray operated television stations in 57 markets, reaching approximately 10.4% of U.S. television households. Dollar amounts below are in millions unless noted.
Financial performance
| Metric | Q2 2018 | Q2 2017 | Six months 2018 | Six months 2017 |
|---|---|---|---|---|
| Revenue | $250.3 | $226.7 | $476.6 | $430.1 |
| Operating income | $79.7 | $142.4 | $129.7 | $185.9 |
| Interest expense | $24.8 | $23.8 | $49.1 | $47.0 |
| Net income | $40.7 | $70.6 | $60.7 | $81.1 |
| Diluted EPS | $0.46 | $0.97 | $0.68 | $1.12 |
- Revenue grew 10% in Q2 and 11% for the first half. Retransmission consent revenue rose to $85.3 million in Q2 (+23%) and $170.9 million for six months (+25%). Political revenue rose to $18.1 million in Q2 from $3.7 million, and to $23.8 million for six months from $5.0 million, reflecting the 2018 election cycle.
- Local advertising declined 4% in Q2 to $112.9 million; national advertising also declined. Management cited softer demand and inventory displacement from political ads. First-half local and national advertising were slightly lower year over year.
- Operating income and earnings comparisons were affected by a $77.3 million gain on asset disposals in Q2 2017, principally from the FCC spectrum auction; the corresponding first-half 2017 gain was $76.8 million. The 2018 gains were $0.8 million in Q2 and $1.6 million for six months. Reported operating margins were approximately 31.8% versus 62.8% in Q2 and 27.2% versus 43.2% for the first half; these comparisons are substantially affected by the prior-year gain.
- Effective tax rates were 26.7% in Q2 and 26.0% for the first half, versus 40.4% and 40.5% in 2017, respectively. The lower 2018 rate reflects the reduced federal statutory rate, among other items.
Cash flow, debt and liquidity
- First-half operating cash flow was $97.5 million, up from $59.1 million. Investing cash outflow was $22.1 million versus $413.2 million, which included substantial 2017 acquisition spending. Financing cash outflow was $27.2 million versus $71.2 million of inflow in 2017. Cash increased $48.2 million to $510.6 million.
- At June 30, cash was $510.6 million and debt carrying value, including current portion, was $1.836 billion. Outstanding debt principal was $1.857 billion; the $100 million revolving facility was undrawn and available. The term loan rate was 4.3%; management reported compliance with debt covenants.
- On July 27, 2018, Gray prepaid $37.0 million of term-loan principal, satisfying all future quarterly term-loan payment obligations. Gray estimated approximately $94.4 million of debt interest payments over the 12 months after June 30.
- Gray repurchased 1.55 million common shares for $19.6 million during the first half, averaging $12.64 per share. No dividends were declared or paid.
Outlook, transactions and risks
- Gray expected the Raycom Media merger to close in Q4 2018, subject to regulatory and other customary conditions. Consideration includes $2.85 billion cash, 11.5 million Gray common shares and 650,000 shares of perpetual preferred stock with a $1,000 face value per share. The preferred stock accrues dividends at 8% in cash or 8.5% in additional preferred shares, at Gray’s election.
- Lenders committed to provide a $2.525 billion incremental term loan for part of the merger consideration and refinancing of Raycom debt; financing remains subject to customary conditions and syndication terms. Gray expected the combination to materially affect operations, liquidity and capital expenditures and anticipated phased cost synergies over several years.
- A separate $32.5 million acquisition of KDLT-TV in Sioux Falls was expected to close in Q3 2018, subject to approvals and customary conditions, using cash on hand.
- For the remainder of 2018, excluding acquisitions and Repack work, expected capital expenditures were $30–$33 million, plus $44–$46 million for FCC Repack work. Gray anticipated reimbursement for most Repack costs, but stated the fund’s sufficiency was uncertain and reimbursements could lag spending. At June 30, $12.4 million of requested Repack reimbursement had not been received.
- Twenty-six full-power and 36 low-power stations were affected by the Repack, expected to take approximately three years. Other disclosed considerations include political-advertising cyclicality, competition from internet and other media, and the risks and financing needs associated with the pending merger. Management stated existing liquidity and expected cash generation would be sufficient for debt service and capital expenditures through at least the February 2024 term-loan maturity, excluding the effects of pending acquisitions.
Important facts for investors to verify
- Whether the Raycom merger received regulatory approvals, closed on schedule, and was completed on the announced financing and consideration terms.
- The resulting debt, interest burden, preferred-stock dividend obligations, and realized timing and scale of merger synergies.
- Whether FCC Repack reimbursements are sufficient and timely relative to projected spending.
- Whether retransmission growth offsets trends in local and national advertising, including election-year inventory displacement.
- The effect of the post-quarter $37 million term-loan prepayment and the $32.5 million KDLT acquisition on cash and liquidity.