Gray Television, Inc. — Q3 2015 Form 10-Q
Business context and period: Unaudited results for the three and nine months ended September 30, 2015. Gray owns and operates television stations and digital properties; results reflect substantial acquisitions, so year-over-year comparisons are not fully comparable. Amounts below are in millions unless noted.
Financial performance
| Metric | Q3 2015 | Q3 2014 | Nine months 2015 | Nine months 2014 |
|---|---|---|---|---|
| Revenue | $151.1 | $131.7 | $427.9 | $330.2 |
| Operating income | $29.3 | $41.2 | $96.2 | $81.8 |
| Operating margin | 19.4% | 31.3% | 22.5% | 24.8% |
| Net income | $6.6 | $13.9 | $24.3 | $16.8 |
| Diluted EPS | $0.09 | $0.24 | $0.36 | $0.29 |
| Operating cash flow | Not provided quarterly | Not provided quarterly | $82.7 | $88.4 |
- Q3 revenue rose 15%, but operating income fell 29% and net income fell 53%. Nine-month revenue increased 30%; operating income rose 18% and net income rose 45%.
- Retransmission consent revenue was $39.3 in Q3, up 100%, and $112.5 for nine months, up 110%. Local advertising rose 24% in Q3 and 30% year to date; national advertising rose 29% and 30%, respectively.
- Political revenue declined to $4.6 in Q3 from $22.0 and to $8.0 for nine months from $33.4, reflecting the 2015 off-year of the election cycle.
- Broadcast operating expenses before depreciation, amortization and asset-disposal losses rose 35% in Q3 and 36% year to date. Higher network affiliation and program fees, acquired-station costs, and a $6.1 charge following termination of national ad-sales representation agreements weighed on results.
- Interest expense was $18.6 in Q3, essentially unchanged, and $55.8 for nine months, up 12%. The nine-month increase reflected higher average debt balances.
Cash, debt and liquidity
- At September 30, cash was $81.2, compared with $30.8 at year-end 2014. Operating cash flow was $82.7; investing cash outflow was $199.6, primarily for acquisitions; financing inflow was $167.3, largely from the March stock offering.
- Long-term debt carrying value was $1,235.8; outstanding principal was $1,231.4, comprising a $556.4 term loan and $675.0 of 7.5% notes due 2020. The term-loan rate was 3.8%. Revolver availability was $50.0, subject to covenants.
- No required debt principal payments were due in the next 12 months. Management estimated $71.8 of debt-interest payments over that period. Gray reported compliance with debt covenants.
- Gray raised $167.3 net through a March offering of 13.5 million common shares, used toward acquisition consideration. No dividends were declared or paid.
Outlook, transactions and risks
- Management expected capital expenditures, excluding acquisitions, of $25–$30 over the 12 months after September 30; $5–$10 was expected for the remainder of 2015. It anticipated liquidity from cash, operating cash flows and borrowing capacity would cover debt service, capital spending and acquisition obligations, while noting financing availability and costs could vary. No specific earnings guidance was provided.
- Management agreed to acquire Schurz Communications’ television and radio operations for approximately $442.5, with closing expected in Q4 2015 or Q1 2016. Planned funding included cash and additional borrowings. A $10 termination fee could apply in specified circumstances. Related regulatory divestitures and station transactions were also planned.
- Five station acquisitions were completed in July 2015, and Gray began operating KCRG-TV under an agreement in September; the KCRG transaction was completed after quarter-end. Acquisitions completed during the nine-month period contributed $8.3 of revenue and $3.0 of operating income, according to the filing. Preliminary purchase-price allocations remain subject to change.
- Advertising is cyclical and seasonal; even-year election spending typically boosts political revenue. Automotive represented approximately 24% of broadcast advertising revenue in the first nine months, making a decline in that category a stated business risk.
- Other notable items: defined-benefit pension benefits were frozen effective July 1, 2015; the company recorded a $0.1 disposal loss on a donated station license. Management said known legal matters were not expected to materially affect financial position, while acknowledging outcomes cannot be predicted with certainty.
Key facts for investors to verify
- Whether revenue and earnings growth persist after separating acquired-station contributions from organic trends, and whether higher network fees continue to pressure margins.
- Completion, final purchase accounting, financing and integration of the Schurz and related transactions, including their effect on leverage and covenant headroom.
- Cash generation relative to acquisition spending, estimated interest and capital expenditures; confirm actual revolver availability under applicable covenants.
- Advertising trends, especially automotive concentration and political-revenue cyclicality, and the effect of retransmission-consent renewals and rates.
- Final acquisition valuations, including goodwill and intangible assets, and any resulting impairment or amortization effects.