Gray Television, Inc. — Q2 2023 Form 10-Q
Reporting period: Quarter and six months ended June 30, 2023; unaudited. The filing identifies the registrant as Gray Television, Inc.
Business context
Gray operates local television stations and digital assets in 113 U.S. markets, reaching approximately 36% of U.S. television households, and owns production businesses and studio facilities. Its two operating segments are broadcasting and production companies. Revenue is driven mainly by advertising and retransmission consent fees; political advertising is cyclical and typically higher in even-numbered election years.
Financial results and liquidity
| Metric (USD millions, except per-share data) | Q2 2023 | Q2 2022 | Six months 2023 | Six months 2022 |
|---|---|---|---|---|
| Total revenue | 813 | 868 | 1,614 | 1,695 |
| Operating income | 119 | 218 | 186 | 382 |
| Operating margin | 14.6% | 25.1% | 11.5% | 22.5% |
| Net income (loss) | 4 | 99 | (27) | 161 |
| Net income (loss) attributable to common stockholders | (9) | 86 | (53) | 135 |
| Diluted EPS attributable to common stockholders | $(0.10) | $0.91 | $(0.58) | $1.44 |
- Revenue mix: Q2 core advertising was $379 million, political advertising $12 million, retransmission consent $394 million, and production companies $12 million. For the six months, the corresponding amounts were $736 million, $20 million, $789 million, and $34 million.
- Cash flow: Six-month operating cash flow was $459 million versus $330 million; investing cash outflow was $187 million versus $201 million; financing cash outflow was $297 million versus $156 million. Cash declined to $36 million from $61 million at year-end 2022.
- Cash-flow qualification: Operating cash flow benefited materially from the new receivables securitization facility, including $299 million of cash provided from receivables sales, as well as working-capital changes.
- Debt and liquidity: June 30 principal debt was $6.268 billion, compared with $6.520 billion at December 31, 2022; carrying debt, including current portion and net of deferred financing costs, was $6.212 billion. Revolver borrowings were $50 million, with $444 million available. Preferred stock liquidation value was $650 million. The company reported compliance with debt covenants.
- Interest: Q2 interest expense was $109 million versus $81 million; six-month expense was $213 million versus $160 million. Average debt interest rates rose to 6.6% for Q2 and 6.5% for the six-month period, from 4.6% and 4.5%, respectively. Management estimated approximately $444 million of debt interest payments over the 12 months after June 30.
- Capital spending and dividends: Six-month capital expenditures were $213 million, including $168 million for Assembly Atlanta. Common dividends declared were $0.08 per share quarterly; preferred dividends were $26 million for the six-month period.
Material changes versus prior comparable periods
- Q2 revenue declined 6% year over year and six-month revenue declined 5%. The principal driver was political advertising: down $78 million in Q2 and $96 million in the first half, consistent with 2023 being an election-cycle off-year.
- Core advertising increased $13 million in Q2 and $5 million in the first half. Retransmission revenue rose $12 million and $14 million, respectively, from higher rates, partly offset by fewer subscribers.
- Operating expenses rose 7% in Q2 and 9% in the first half, while operating income fell $99 million in Q2 and $196 million in the first half. First-half production-company expenses included a $17 million Diamond Sports Group credit-loss allowance and $18 million to settle Assembly Atlanta litigation.
- First-half interest expense rose $53 million year over year, primarily reflecting higher average interest rates. Gray prepaid its $295 million 2017 Term Loan in March and made required principal reductions; it also drew $50 million on its revolving facility.
- Q2 included a $14 million loss on the sale of station KNIN, contributing to a $16 million quarterly net loss on disposal of assets. The six-month disposal loss was $26 million.
- Current assets were $512 million versus $857 million at year-end, and current liabilities were $357 million versus $409 million. Cash was $36 million at June 30; the filing also reports a $300 million receivables securitization balance and $277 million of unsold receivables maintained as collateral.
Outlook, commentary, risks, and unusual items
- Management stated that cash on hand, operating cash flows, credit-facility borrowings and potentially external financing are expected to fund debt service, capital expenditures, and acquisition obligations for the next 12 months and foreseeable future. It also expects available cash generation and borrowing capacity to support obligations at least through the January 2, 2026 maturity of the 2019 Term Loan. These are forward-looking expectations, not guarantees.
- For the remainder of 2023, Gray expected routine capital expenditures of approximately $60–$65 million. Assembly Atlanta construction spending was expected at $25–$30 million, versus anticipated property-sale and CID incentive proceeds of $85–$90 million; the company cautioned that proceeds and timing are not assured.
- Assembly Studios was substantially complete, with preliminary move-in and start-up activities commencing in Q3 2023. NBCUniversal is to lease and operate the facilities under an operating agreement.
- Diamond Sports Group filed for bankruptcy in March 2023. After the bankruptcy court approved termination of the ACC sports-rights agreements in July, The CW entered into a similar rights arrangement with Raycom Sports and Raycom modified its ESPN license. Gray said the new agreements mitigate part of the losses, but expects a Q3 2023 non-cash impairment charge of $33–$43 million for production-segment goodwill and intangible assets.
- A three-year, $300 million revolving receivables securitization facility was established in February 2023, bearing one-month SOFR plus 100 basis points and maturing in February 2026. Gray accounted for receivables sales as true sales and recorded a $9 million discount charge during the first half.
- Interest-rate caps cover approximately $2.6 billion of variable-rate debt through December 2025, with SOFR caps of 4.97% and 5.015%. Aggregate cap fees of approximately $34 million are payable at maturity.
- Management reported no material changes to the risk factors in its 2022 Form 10-K, no material change in market-risk profile, and effective disclosure controls as of June 30. Legal claims arise in the ordinary course; management said their ultimate impact is not expected to be material, while acknowledging litigation uncertainty.
Important facts for investors to verify
- Whether advertising and retransmission trends, including political revenue recovery in the next election cycle and subscriber changes, support future earnings and cash flow.
- How much reported operating cash flow depends on receivables securitization and working-capital movements, and the facility’s ongoing capacity, cost, and terms.
- Debt-service capacity in light of higher rates, the estimated $444 million of next-12-month interest payments, and substantial maturities in 2026, including $1.955 billion of principal scheduled that year.
- The actual amount and timing of Assembly Atlanta construction costs, property-sale proceeds, and CID incentives relative to management’s estimates.
- The Q3 impairment amount and the financial and operational effects of Diamond’s rejection of the ACC rights agreements and replacement arrangements.
- The $17 million Diamond credit reserve, $18 million Assembly Atlanta litigation settlement, and $14 million KNIN disposal loss, including any further related charges or recoveries.