Gray Television, Inc. — Q3 2014 Form 10-Q
Reporting period: Three and nine months ended September 30, 2014. Unaudited results; amounts below are in millions of dollars except per-share data. The filing identifies the registrant as Gray Television, Inc.
Financial results
| Metric | Q3 2014 | Q3 2013 | Nine months 2014 | Nine months 2013 |
|---|---|---|---|---|
| Revenue | $131.7 | $88.3 | $330.2 | $250.7 |
| Operating income | $41.2 | $24.2 | $81.8 | $60.6 |
| Net income | $13.9 | $7.1 | $16.8 | $13.1 |
| Diluted EPS | $0.24 | $0.12 | $0.29 | $0.23 |
| Operating margin | 31.2% | 27.4% | 24.8% | 24.2% |
| Net margin | 10.6% | 8.0% | 5.1% | 5.2% |
Q3 revenue rose 49% and operating income rose 70% year over year; nine-month revenue increased 32% and operating income 35%. The filing attributes growth to acquired stations, political advertising, higher retransmission consent fees, and gains in local, national and internet advertising. Acquired stations contributed $28.2 million of Q3 revenue and $40.7 million for the nine-month period. No dividends were declared.
Cash flow, debt and liquidity
- Nine-month cash from operations was $88.4 million, versus $51.6 million a year earlier. Investing used $477.1 million, primarily for acquisitions; financing provided $455.0 million. Cash increased $66.3 million to $79.8 million.
- At September 30, 2014, reported long-term debt including current portion was $1,306.5 million, up from $842.9 million at December 31, 2013. Debt included $623.4 million under the 2014 term loan and $675.0 million of 7.5% notes due 2020. The term-loan rate was 3.8%; $40 million was available under the revolver.
- Quarterly interest expense was $18.6 million, up 47%; nine-month interest expense was $49.7 million, up 32%. The company recorded a $4.9 million loss on early extinguishment of debt in the first nine months.
- Current assets were $233.7 million and current liabilities $113.7 million. Management estimated $74.3 million of debt interest payments over the next 12 months and $6.5 million of principal repayments. It said cash, operating cash flow and available borrowing capacity should fund anticipated obligations, subject to risks and financing availability.
Material changes and operating context
- Gray completed six acquisitions in 2014, including Hoak Media stations for approximately $299.8 million and SJL stations for $131.5 million. Acquisition activity substantially increased assets, debt, depreciation and amortization; preliminary acquisition accounting added $187.6 million of goodwill.
- Political revenue reached $22.0 million in Q3 versus $1.4 million in Q3 2013, reflecting the even-year election cycle. Retransmission consent revenue rose 115% in Q3 to $19.7 million, primarily from higher subscriber rates.
- Q3 broadcast costs rose 37% to $73.2 million, reflecting acquisitions, personnel, network affiliation fees and other costs. Nine-month corporate and administrative expense rose 59% to $21.6 million, partly due to acquisition-related professional fees.
- Management noted that broadcast advertising is seasonal and cyclical, typically stronger in the second and fourth quarters and in even-numbered election years. Automotive was the largest advertising category, representing 23% of broadcast advertising revenue for the first nine months, down from 25% a year earlier.
Outlook, risks and contingencies
- No specific earnings or revenue guidance was provided. Management expected 12-month capital expenditures of $25–$28 million, including $9.5–$12.5 million for the remainder of 2014, and additional 2014 pension contributions of $1.3–$1.8 million.
- At September 30, approximately $13.7 million remained payable for pending acquisitions; subsequent to quarter-end, Yellowstone and Beartooth transactions closed. Management expected about $3.7 million for remaining pending acquisitions.
- Key risks discussed include economic and advertising-market sensitivity, political-advertising variability, dependence on major advertising categories, debt service and covenant restrictions, acquisition integration and valuation uncertainty, and legal matters. The company reported compliance with debt covenants and no material change in disclosed risk factors.
- Acquisition fair values were preliminary and could change materially. Management stated that known legal proceedings were not expected to materially affect financial position, while noting unfavorable outcomes could have a material adverse effect. Management also reported effective disclosure controls and no material change in internal control over financial reporting.
Important facts for investors to verify
- How much reported growth reflects acquired stations versus organic advertising and retransmission consent performance.
- Whether political advertising and election-cycle revenue can be sustained, and how nonpolitical advertising categories perform.
- Acquisition integration, final purchase-price allocations, goodwill and intangible-asset valuations, and expected returns on acquired stations.
- Debt levels, interest costs, revolver availability, covenant headroom and the company’s ability to fund debt service and planned spending.
- Execution of pending acquisitions and actual capital expenditure, pension contribution and cash-flow requirements.