Gray Television, Inc. — Q1 2019 Form 10-Q
Reporting period: Three months ended March 31, 2019. Unaudited results are compared with Q1 2018. Amounts are in millions of dollars except per-share data. The Raycom merger closed January 2, 2019, so reported results include Raycom for nearly all of Q1 2019 but not Q1 2018; year-over-year comparisons are therefore substantially affected by the acquisition.
Business context
Gray operates television stations and digital platforms, along with television production businesses. Following the Raycom merger, the company reported broadcasting and production companies segments and stated that it owned stations in 93 markets, reaching approximately 24% of U.S. television households.
Financial performance and liquidity
| Metric | Q1 2019 | Q1 2018 |
|---|---|---|
| Revenue, net of agency commissions | $518 | $226 |
| Operating income | $40 | $50 |
| Operating margin (calculated) | Approximately 7.7% | Approximately 22.1% |
| Interest expense | $58 | $24 |
| Income (loss) before taxes | $(15) | $26 |
| Net income (loss) | $(18) | $20 |
| Net income (loss) attributable to common stockholders | $(31) | $20 |
| Basic and diluted earnings (loss) per common share | $(0.31) | $0.22 |
| Cash provided by operating activities | $24 | $15 |
| Cash used in investing activities | $(2,562) | $(8) |
| Cash provided by (used in) financing activities | $1,344 | $(26) |
Revenue rose 129%, with approximately $280 attributable to Raycom. The acquired businesses contributed $37 of production revenue. Reported operating income fell despite the larger scale, while interest expense increased with acquisition financing and operating expenses included substantial transaction-related costs. Broadcasting revenue was $481 and production revenue was $37. Revenue mix included $264 of broadcast advertising, $204 of retransmission consent, and $13 of other revenue.
Cash was $225 at March 31, versus $667 at December 31, 2018; restricted cash declined from $752 to zero. Current assets were $674 and current liabilities $268. Operating cash flow increased by $9 year over year; management attributed the improvement primarily to noncash expenses and working-capital changes, including merger-related effects.
Outstanding debt principal was $3,967, compared with $2,570 at year-end; reported debt carrying value, net of financing costs and including current debt, was approximately $3,896. The company had $200 of available revolving-credit capacity. Long-term debt fair value was estimated at $4.0 billion. Debt covenants were reported as satisfied at quarter-end. The company expected approximately $14 of principal payments and $219 of interest payments over the 12 months after March 31.
Material changes and unusual items
- The January 2 Raycom merger involved $2.84 billion cash, 11.5 million Gray common shares valued at approximately $170, and 650,000 Series A preferred shares with $650 aggregate liquidation value. The net acquisition consideration, including assumed station transactions and after divestitures, was reported as $3.444 billion.
- Raycom-related transaction expenses were approximately $68: $22 of professional fees, $18 of incentive compensation and severance, and $28 related to termination of national sales representation agreements. The acquired operations contributed $280 of revenue and a $6 operating loss in the reported quarter.
- The merger was financed in part with a $1.4 billion term loan and $750 of 2027 notes; the company also refinanced its credit facility. The Series A preferred stock carries cumulative dividends at 8% annually in cash or, at Gray’s option, 8.5% in additional preferred shares.
- Cash paid for acquisitions was $2.740 billion, offset in part by $231 of station-sale proceeds. The company recorded a $10 net gain on disposal of assets, including $12 of FCC Repack reimbursements.
- Operating lease right-of-use assets and liabilities were recognized following adoption of the new lease standard and the merger. At March 31, operating lease liabilities had a present value of $71.
- Common shares outstanding increased in part through the 11.5 million shares issued for Raycom. No common-stock dividends were declared for either comparative quarter; preferred dividends of $13 were recorded in Q1 2019.
Outlook, commentary and risks
Management said it expects merger synergies to be implemented in phases over several years but provided no quantified savings target. It expects cash on hand, operating cash flow and borrowing availability to fund debt service, capital expenditures and acquisition obligations; this expectation is subject to risks and financing availability. Management stated that liquidity and borrowing capacity should support capital expenditures and debt service until at least the February 2024 maturity of the term loans.
For 2019, management estimated approximately $75 of capital expenditures excluding Repack, plus $24–$28 of Repack spending, with most Repack costs expected to be reimbursed. Approximately $17 of requested Repack reimbursements remained unpaid at March 31; the company cautioned that FCC funding may not cover eligible costs fully and reimbursement timing may lag expenditures. Management also anticipated approximately $13 of net income-tax payments and $2 of pension contributions for the remainder of 2019.
Advertising is seasonal and sensitive to political-election cycles, network programming, automotive advertising demand and competition from internet advertising. Political revenue was $3 versus $6 a year earlier, reflecting the election-cycle off-year. Management reported no material change in risk factors from its 2018 Form 10-K. Routine legal claims were not expected by management to materially affect results, though unfavorable outcomes could have an adverse effect.
Pending or subsequent transactions included the expected acquisition of KDLT-TV for $32.5, expected Charlottesville-area station acquisitions and divestitures, and the May 1, 2019 completion of the $45 United Communications station acquisition. The filing does not provide a quantified full-year revenue or earnings forecast.
Important facts for investors to verify
- How Raycom integration, synergies and transaction costs affect ongoing operating margins and cash generation after the merger period.
- The company’s leverage, interest burden, covenant headroom and ability to refinance or service debt, including the terms and cash-versus-in-kind elections for preferred dividends.
- Whether FCC Repack reimbursements are sufficient and timely, including recovery of the $17 already requested but unpaid.
- Final purchase-accounting valuations for Raycom; the filing describes them as preliminary, including $822 of acquired goodwill.
- Completion, regulatory approval and final economics of pending station transactions, and the effects of the newly completed United acquisition.
- Underlying advertising and retransmission-consent trends, separating acquired revenue from organic performance; the filing reports that excluding Raycom, retransmission revenue increased $15 while local and national revenue were unchanged.