Gray Television, Inc. — Q2 2016 Form 10-Q
Reporting period: Three and six months ended June 30, 2016; filed August 4, 2016. Gray owned or operated stations in 51 markets, reaching approximately 9.5% of U.S. television households. The company reports one operating segment. Amounts below are in millions unless stated otherwise.
Financial performance
| Metric | Q2 2016 | Q2 2015 | Six months 2016 | Six months 2015 |
|---|---|---|---|---|
| Revenue | $196.6 | $143.5 | $370.4 | $276.8 |
| Operating income | $53.7 | $38.8 | $89.8 | $66.8 |
| Operating margin | 27.3% | 27.0% | 24.2% | 24.1% |
| Interest expense | $24.3 | $18.6 | $45.5 | $37.1 |
| Net income | $17.7 | $12.1 | $26.7 | $17.7 |
| Diluted earnings per share | $0.24 | $0.17 | $0.37 | $0.27 |
Six-month operating cash flow was $44.0 million, versus $32.5 million a year earlier. Investing used $448.4 million, primarily for acquisitions; financing provided $483.4 million. Cash increased $79.0 million to $176.3 million at June 30.
Long-term debt, net of unamortized costs and premiums, was $1.705 billion, up from $1.220 billion at December 31, 2015. The company reported $60 million available under its revolving facility and compliance with its debt covenants. Current liabilities were $74.0 million; the filing reports no required debt principal payments in the following 12 months.
Changes versus prior periods
- Q2 revenue rose 37%; six-month revenue rose 34%. Management attributed most of the increases—88% and 83%, respectively—to the 2016 and 2015 acquisitions, with additional contributions from stronger advertising and retransmission consent revenue.
- Political revenue increased to $9.6 million in Q2 and $19.3 million for six months, reflecting the 2016 election-year cycle. Retransmission consent revenue increased 37% in Q2 and 34% for six months.
- Operating expenses also rose, including higher broadcast costs, depreciation and amortization. Acquisition-related costs contributed to the increases; six-month corporate and administrative expense included $7.2 million of acquisition-related legal and professional fees.
- Interest expense increased as average debt outstanding rose to approximately $1.5 billion from $1.2 billion. In June, Gray issued $500 million of 5.875% notes due 2026 and used part of the proceeds to repay the $425 million acquisition term loan.
Acquisitions, outlook and risks
- Gray completed the Schurz broadcast-asset acquisition in February and acquired KYES-TV in June. 2016 acquired stations contributed $34.1 million of revenue and $13.2 million of operating income in Q2; six-month contributions were $50.7 million and $19.0 million.
- Gray had agreed to acquire two West Virginia stations for up to $26.5 million; it paid $16.5 million for non-license assets and began operating under an LMA, with license completion subject to approvals. It also agreed to acquire two stations for $270 million, with closing anticipated late in 2016 and funding expected primarily from cash and, if needed, borrowings.
- Management expected remaining-2016 capital expenditures of approximately $26–$30 million and interest payments of approximately $102.2 million over the 12 months after June 30. It expected cash, operating cash flow and available borrowing capacity to fund debt service, capital spending and acquisition obligations. These are forward-looking estimates, not guarantees.
- Key exposures include advertising cyclicality and political-year comparisons; automotive was the largest nonpolitical advertising category, contributing approximately 23% of such advertising revenue for the first half. Management also noted declines in communications advertising. The filing identifies leverage, restrictive debt covenants, acquisition execution and ordinary-course legal claims as matters to monitor. No material change in reported risk factors was identified.
Important facts for investors to verify
- How much of reported growth reflects acquired stations versus comparable-station performance, political advertising and retransmission rate increases.
- Closing status, regulatory approvals, final purchase accounting and financing for the pending station acquisitions.
- Debt balances, interest costs, revolving-credit availability and covenant headroom after acquisition funding.
- Whether operating cash flow and liquidity can support planned capital expenditures, debt service and acquisition commitments.
- The filing’s preliminary acquisition valuations and estimates; management stated that purchase-price allocations could change.