Gray Television, Inc. — Q1 2014 Form 10-Q
Business context and reporting period
Unaudited results for the three months ended March 31, 2014, compared with Q1 2013. Gray owned or operated stations in 34 markets, reaching approximately 6.4% of U.S. households. The company reports one operating segment. Amounts below are in U.S. dollars; financial statement figures are converted to millions unless noted.
Key financial metrics
| Metric | Q1 2014 | Q1 2013 / prior period |
|---|---|---|
| Revenue | $91.3 million | $78.2 million; up 17% |
| Operating income | $17.4 million; 19.1% margin | $15.1 million; 19.3% margin |
| Net income | $1.3 million; $0.02 per share | $0.9 million; $0.02 per share |
| Interest expense | $15.3 million | $12.5 million |
| Operating cash flow | $16.4 million | $17.6 million |
| Cash and cash equivalents | $27.0 million | $13.5 million at December 31, 2013 |
| Debt, including current portion | $842.6 million carrying value | $842.9 million at December 31, 2013 |
| Revolver availability | $30.0 million | $30.0 million at December 31, 2013 |
Current assets were $147.1 million and current liabilities were $70.4 million at quarter-end. The company generated $13.6 million of net cash during the quarter. Investing activities used $2.7 million, chiefly reflecting $3.8 million of property and equipment purchases; financing activities used $0.2 million.
Material changes versus Q1 2013
- Revenue increased $13.1 million, led by retransmission consent revenue, up $6.4 million to $16.1 million; local advertising, up $4.6 million to $51.0 million; and political advertising, up $2.2 million to $2.8 million.
- Acquired stations contributed approximately $3.4 million of revenue and $3.0 million of broadcast expenses in Q1 2014. Local and national advertising also benefited from approximately $3.8 million of Winter Olympics revenue.
- Broadcast expenses rose 13% to $60.4 million. Corporate and administrative expenses rose 70% to $6.5 million, including higher stock-based compensation and acquisition-related professional fees.
- Interest expense increased 22% to $15.3 million, reflecting higher average rates and slightly higher average debt. Average total debt interest rate was 7.0%, versus 5.7% in Q1 2013.
- Net income increased despite higher interest costs, partly reflecting income tax expense of $0.9 million versus $1.7 million. The prior-year effective tax rate was unusually high at 65.5%, partly due to a quarter-specific charge related to expired stock options; the 2014 rate was 40.2%.
Outlook, risks and unusual items
- No formal revenue or earnings guidance was provided. Management expected advertising revenue to benefit from improving economic conditions, while noting that broadcast advertising is seasonal and typically stronger in Q2 and Q4. Political spending generally rises in even-numbered election years, particularly in Q4.
- Management estimated $58.2 million of debt interest payments over the 12 months after March 31, 2014, and capital expenditures of $25–$30 million over that period. It expected an additional $5.1 million of pension contributions during 2014.
- Gray had approximately $312.5 million of pending acquisition commitments at quarter-end, subject to closing conditions and, in some cases, FCC approval. Management anticipated funding obligations through operating cash flow, available cash and credit-facility borrowings, with potential external financing also noted.
- Management stated it expected available cash generation and borrowing capacity to fund capital expenditures and long-term debt service at least until the senior credit facility term-loan maturity in October 2019. This is forward-looking and depends on operating results, financing availability and covenant compliance.
- Debt included $675 million of 7.5% Senior Notes due 2020 and $159 million outstanding under the senior credit facility term loan. Debt is substantially secured under the credit facility; restrictive covenants limit, among other matters, additional debt, acquisitions, dividends and share repurchases. Gray reported compliance with required covenants at March 31, 2014.
- Automotive was the largest advertising category, representing approximately 25% of broadcast advertising revenue, versus 24% in Q1 2013. Reduced spending by automotive or other major advertising categories could materially affect results.
- Gray consolidated Excalibur, a variable interest entity, and guaranteed its approximately $3.0 million loan. Excalibur’s assets are restricted to settling its own obligations; Gray reported $2.95 million of recourse exposure at quarter-end.
- Subsequent acquisitions included WQCW-TV, completed April 1, and additional station purchases and agreements announced in May. Their completion and integration, and required regulatory approvals, are relevant to the acquisition outlook.
Most important facts for investors to verify
- Whether revenue growth, particularly retransmission consent and political advertising, is sustainable and translates into stronger operating margins and cash flow.
- Debt service capacity, covenant headroom and the actual cost and funding source for the approximately $312.5 million of pending acquisitions.
- Final purchase prices, FCC approvals, closing status and operating performance of announced and completed station acquisitions.
- Progress against management’s capital expenditure and pension contribution estimates, and whether cash flow covers these needs alongside interest payments.
- Exposure to automotive and other concentrated advertising categories, as well as seasonal and election-cycle variability.