Gray Television, Inc. — Form 10-Q Summary
Reporting period: Quarter and nine months ended September 30, 2013; comparative periods ended September 30, 2012. Unaudited results. Gray operated television stations in 31 markets and reported one operating segment.
Financial performance
Amounts are in millions of dollars, except per-share data and percentages.
| Metric | Q3 2013 | Q3 2012 | Nine months 2013 | Nine months 2012 |
|---|---|---|---|---|
| Revenue | $88.3 | $102.9 | $250.7 | $278.2 |
| Operating income | $24.2 | $41.1 | $60.6 | $94.9 |
| Operating margin | 27.4% | 39.9% | 24.2% | 34.1% |
| Net income | $7.1 | $15.9 | $13.1 | $30.2 |
| Net income per diluted share | $0.12 | $0.26 | $0.23 | $0.47 |
| Operating cash flow | Not provided for quarter | Not provided for quarter | $51.6 | $90.3 |
- Q3 broadcast expenses before depreciation, amortization and asset-sale gains/losses were $53.5 million, up 3%; corporate and administrative expenses were $4.5 million, up 11%. Nine-month figures were $158.8 million, up 2%, and $13.6 million, up 26%, respectively.
- Nine-month investing cash outflow was $19.6 million, including $18.4 million of property and equipment purchases and $1.3 million for broadcast licenses. Financing activities provided $0.3 million. Cash increased $32.3 million to $43.3 million from December 31, 2012.
- At September 30, current assets were $130.9 million and current liabilities $54.6 million. Long-term debt at recorded value was $833.1 million; face-value debt was $835.0 million. Revolver availability was $40 million. The company reported compliance with debt covenants.
Material changes and drivers
- Revenue fell 14% in Q3 and 10% for the first nine months. Political advertising declined 94% in both comparisons, reflecting 2013’s off-year in the election cycle. The prior-year Q3 also included Olympic-related advertising revenue of approximately $5.1 million across local, national and political advertising.
- Local advertising increased 4% in both comparison periods; retransmission consent revenue rose 8% in Q3 and 12% year to date, primarily from higher subscriber counts and rates. National advertising declined 5% in Q3 and increased 1% year to date.
- Q3 and nine-month 2013 revenue included $7.1 million of one-time consulting revenue from an expired agreement; Gray expected no further revenue under that agreement. The filing does not separately state the agreement’s associated costs.
- Interest expense declined 16% in Q3 and 17% year to date as average interest rates fell to approximately 5.7% from 7.0%, partly offset by higher average debt balances. Nine-month operating cash flow was lower, primarily due to reduced political advertising and higher operating expenses.
- Automotive represented approximately 25% of broadcast advertising revenue for the first nine months, versus 20% in the prior-year period.
Outlook, transactions and risks
- No formal earnings guidance was provided. Management estimated approximately $58 million of debt-interest payments and $20 million of capital expenditures in the twelve months following September 30, 2013, and said cash, operating cash flow and borrowing availability should be sufficient for expected needs. It estimated remaining 2013 capital expenditures of $4.6 million to $5.6 million.
- After quarter-end, Gray issued $375 million of additional 2020 Notes at 102.125% of principal, with a stated yield to worst of 6.984%, and used net proceeds to repay $376 million of term loans. The transaction shifted debt from the secured credit facility to senior unsecured notes; the filing states that the change moved certain debt maturities from 2016–2017 to 2018 and thereafter.
- Gray announced its agreement to acquire Yellowstone Television on November 4, 2013. It paid $23 million for a 99% non-voting interest and began operating the stations under a local marketing agreement; voting control was subject to approvals, with management expecting it in Q1 2014. Initial acquisition accounting was incomplete.
- In a separate post-period transaction, Excalibur acquired KJCT license assets while Gray paid approximately $9 million for related non-license assets, agreed to provide support services, and guaranteed approximately $3 million of Excalibur debt. Gray also has an option to purchase KJCT assets, subject to FCC approval.
- Risks include advertising cyclicality and election-year variability, dependence on automotive and other major advertising categories, restrictive debt covenants, and potential legal or other contingencies. Gray said it did not consider IMG’s ability to pay remaining University of Kentucky license fees a high risk, but Gray could be required to pay if IMG failed to do so.
- Gray expected additional pension contributions of $1.7 million to $4.3 million for the remainder of 2013. It reported no material changes in risk factors from its 2012 Form 10-K and no material change in market risk.
Important facts for investors to verify
- Whether advertising trends, especially political and automotive demand, support a recovery in revenue and operating margins.
- How much of reported 2013 revenue and earnings depended on the nonrecurring $7.1 million consulting payment.
- The post-quarter debt refinancing’s final debt balances, interest costs, maturity profile, covenant headroom and available borrowing capacity.
- Regulatory approvals, final purchase accounting, funding and integration outcomes for Yellowstone and the KJCT-related arrangements, including Gray’s guarantee and purchase option.
- Whether operating cash flow can fund interest, capital expenditures, pension contributions and other commitments while maintaining adequate liquidity.