Gray Television, Inc. (NYSE: GTN, GTN.A) — FY 2018 Form 10-K
Reporting period: Fiscal year ended December 31, 2018; this is an annual report, not a standalone fourth-quarter filing. The filing identifies the registrant as Gray Television, Inc., although the request metadata says Gray Media, Inc.
Business context
Gray operated television stations in 57 markets during 2018; following its January 2, 2019 Raycom merger, the combined company operated in 91 markets, with nearly 400 program streams and reach of approximately 24% of U.S. television households. Its principal revenue sources are advertising and retransmission consent fees. Stations ranked first or second in 86 of the combined markets, based on the cited ratings period.
Financial results and liquidity
| Metric | 2018 | 2017 |
|---|---|---|
| Revenue | $1,084.1 million | $882.7 million |
| Operating income | $388.8 million | $290.7 million |
| Operating margin | 35.9% | 32.9% |
| Net income | $210.8 million | $262.0 million |
| Diluted earnings per share | $2.37 | $3.55 |
| Cash provided by operating activities | $323.3 million | $180.0 million |
| Cash used in investing activities | $47.4 million | $349.8 million |
| Cash provided by financing activities | $680.6 million | $307.0 million |
- Revenue increased 23%. Political advertising rose to $155.1 million from $16.5 million, reflecting the 2018 election cycle; retransmission consent revenue grew 28% to $355.4 million, primarily from higher rates. Local and national advertising declined 2% and 4%, respectively.
- Operating income increased 34%. The reported operating result included net asset-disposal gains of $16.4 million in 2018 and $74.2 million in 2017, so reported margins are affected by these items.
- Net income declined despite higher operating income, principally because 2017 included a $68.7 million income tax benefit related to tax reform; 2018 had $76.8 million of income tax expense. The 2017 result also benefited from larger asset-disposal gains.
- At December 31, 2018, cash was $667.0 million and restricted cash was $752.0 million. Restricted cash represented proceeds from the 2027 Notes held in escrow for the Raycom transaction and was released in January 2019. Gross debt principal was $2.57 billion; the balance-sheet carrying value was $2.55 billion. Total assets were $4.21 billion and stockholders’ equity was $1.19 billion.
- Capital expenditures were $70.0 million in 2018, including $27.1 million of Repack costs. The company expected 2019 capital expenditures of approximately $75 million, plus $24–28 million for Repack, with most Repack costs expected to be reimbursed.
Material changes and transactions
- Gray completed the Raycom merger on January 2, 2019, after the fiscal year-end. The filing reports approximately $3.66 billion of total consideration: $2.84 billion cash, 11.5 million Gray common shares valued at $169.5 million, and 650,000 shares of perpetual preferred stock with a $650 million stated face value.
- To finance the transaction, Gray established a $1.4 billion term loan, assumed $750 million of 7.0% notes due 2027, and amended its credit facility to provide a $200 million revolving facility. The post-transaction debt principal schedule totals approximately $3.97 billion. The term loan matures in 2026; the revolving facility matures in 2024. The term loan rate was 5.0% as of February 22, 2019.
- The preferred stock accrues dividends at 8% in cash or, at Gray’s option, 8.5% in additional preferred shares. The transaction materially increases the company’s scale, debt and integration responsibilities. Gray expects operating results and cash flows to increase substantially and synergies to be implemented over several years; it did not quantify expected synergies in the supplied filing text.
- Gray divested nine overlap-market stations in connection with regulatory approval. It also announced a separate $45 million agreement to acquire four stations from United Communications, subject to regulatory and other approvals, with expected closing in the second quarter of 2019.
Outlook, risks and contingencies
- No specific earnings or revenue guidance is provided. Management estimated 2019 income tax payments of $29–31 million and pension contributions of approximately $2.5 million.
- Advertising is seasonal and cyclical: revenue is typically stronger in the second and fourth quarters and in even-numbered election years. Automotive advertisers accounted for approximately 25% of broadcast advertising revenue in 2018; no single customer exceeded 5% of broadcast advertising revenue.
- Key risks include substantial and increased indebtedness, variable-rate borrowing exposure, debt covenants, execution and integration risks from the Raycom merger, and reliance on advertising, network affiliations and retransmission consent negotiations. Management estimated that a 100-basis-point rate change would affect annual interest expense by about $20 million including the debt incurred for the merger.
- The company’s frozen defined-benefit pension plan was underfunded by $33.2 million at year-end. Repack reimbursement timing and fund sufficiency remain uncertain. Goodwill and broadcast licenses totaled approximately $2.14 billion net; no impairment was recorded for 2016–2018, but future impairments are possible.
- Gray disclosed consolidated putative class actions related to alleged exchanges of competitively sensitive information among broadcasters; the DOJ had separately sued six broadcasters, including Raycom, and proposed a settlement that included compliance requirements. No party to that proposed settlement admitted wrongdoing. Gray said it could not predict the outcome of the litigation.
- The company reported effective disclosure controls and internal control over financial reporting; its auditor issued unqualified opinions on the financial statements and internal controls.
Important facts for investors to verify
- Post-merger debt balance, interest costs, covenant headroom and the impact of variable rates on cash available for debt service.
- Actual operating performance of the combined company, integration costs and whether expected synergies are realized on schedule.
- Preferred-stock dividend payments or accretion and the resulting effect on cash flow and common-stockholder economics.
- Renewal terms for retransmission consent agreements and major network affiliations, and developments in related regulation or litigation.
- Repack spending and reimbursements, pension funding needs, and any changes in impairment assumptions or asset values.
- Completion and final purchase accounting for the Raycom merger, whose preliminary purchase price allocation was not available in this filing.