Gray Television, Inc. — Q3 2020 Form 10-Q
Reporting period: Three and nine months ended September 30, 2020. The filing identifies the registrant as Gray Television, Inc. (NYSE: GTN and GTN.A).
Business context and key financial metrics
Gray operates television stations and digital properties in 94 U.S. markets, reaching approximately 24% of U.S. television households, and owns production businesses. Amounts below are in millions except per-share data.
| Metric | Q3 2020 | Q3 2019 | Nine months 2020 | Nine months 2019 |
|---|---|---|---|---|
| Revenue, less agency commissions | $604 | $517 | $1,589 | $1,543 |
| Operating income | $212 | $139 | $401 | $298 |
| Operating margin | 35.1% | 26.9% | 25.2% | 19.3% |
| Net income | $122 | $59 | $186 | $85 |
| Net income attributable to common stockholders | $109 | $46 | $147 | $46 |
| Diluted earnings per share | $1.14 | $0.46 | $1.52 | $0.46 |
| Interest expense | $45 | $57 | $143 | $173 |
For the nine months, operating cash flow was $488 versus $255; investing cash outflow was $129 versus $2,646; financing cash outflow was $104 versus financing inflow of $1,298. Cash increased by $255 during the 2020 period to $467 at September 30.
At September 30, total assets were $7,224 and total liabilities were $5,012. Current assets were $918 and current liabilities $344. Long-term debt had $3,760 of principal outstanding ($3,706 net carrying value); the company also had $650 of Series A preferred stock. Revolver availability was $200. Gray reported compliance with all debt covenants. Common-stock dividends were not declared; preferred dividends were $13 in Q3 and $39 year to date.
Material changes versus comparable periods
- Q3 revenue rose 17%, led by political advertising, up $106, and retransmission consent revenue, up $21. Local and national revenue combined fell $37, and production-company revenue fell $5.
- Nine-month revenue rose 3%. Political advertising increased $155 and retransmission consent revenue increased $49, while local and national revenue combined declined $132 and production-company revenue declined $30.
- COVID-19 disruptions affected advertisers, sports and event programming, and production. Lower production activity reduced production-company expenses; cost reductions and lower transaction-related expenses also helped results.
- Interest expense declined as both average debt principal and interest rates fell. The average rate excluding deferred financing cost amortization was 4.7% for the first nine months of 2020 versus 5.5% in 2019.
- Cash from operations improved, partly reflecting higher earnings and approximately $103 of cash provided by working-capital changes. The large year-over-year decline in investing outflows primarily reflects acquisition and divestiture activity in 2019 that did not recur in 2020.
Outlook, risks, contingencies and unusual items
- Management described COVID-19’s duration and financial effects as uncertain. It cited content and event disruption, economic and advertising weakness, changing customer behavior, possible borrowing-cost impacts, and the difficulty of forecasting. The business has significant fixed costs. Gray reported employee work-from-home and safety measures and said controls remained effective, while evaluating pandemic-related changes to the work environment and their potential control impacts.
- Management expected cash, operating cash flow and available borrowing capacity to support debt service, capital spending and acquisition obligations; it stated these resources were expected to cover long-term debt service at least until the February 2024 maturity of the 2017 Term Loan. Estimated interest payments for the twelve months after September 30 were approximately $167.
- For the remainder of 2020, expected capital expenditures were $24–$29 excluding Repack, plus $12–$19 of Repack spending. Approximately $6 of Repack reimbursement had been requested but not received; reimbursement timing and the sufficiency of FCC funds were uncertain.
- Gray had approximately $80 of commitments for station acquisitions and other investments expected to close in Q4 2020 or early 2021. It acquired Alaska station operations for $19 in July and paid $22 for Columbus, Georgia non-license assets and related arrangements in September; the latter purchase-price allocation was not yet available.
- After quarter-end, Gray issued $800 of 4.750% notes due 2030 and used the net proceeds to redeem all 5.125% notes due 2024, including the redemption premium and related costs. Remaining proceeds were intended for general corporate purposes, potentially including debt repayment.
- After quarter-end, the board authorized up to an additional $150 of share repurchases through December 2023, bringing stated program capacity to $220 including the prior authorization’s approximately $70 remaining. Gray repurchased 649,000 shares in August for an average $15.64 per share.
- Legal claims arise in the ordinary course; management did not expect ultimate liability, if any, to materially affect results, while noting litigation uncertainty. Gray reported no material changes to previously disclosed risk factors.
Most important facts for investors to verify
- How political advertising affected Q3 and full-year comparisons, and whether it offset continuing weakness in local and national advertising.
- Whether COVID-related advertiser, programming and production impacts, and receivables collectability, develop differently from management’s assumptions.
- Debt and refinancing terms, including the use of remaining 2030 Notes proceeds, leverage, interest costs and covenant headroom.
- Timing and amount of the approximately $80 in acquisition and investment commitments, and the final Columbus acquisition accounting.
- Repack spending, FCC reimbursement timing and fund sufficiency, alongside forecast capital expenditures.
- Execution of the expanded repurchase authorization and its effect on cash available for debt reduction and investment.