Gray Television, Inc. — FY 2011 Form 10-K
Reporting period: Fiscal year ended December 31, 2011. The filing also provides unaudited fourth-quarter results. The registrant named in the filing is Gray Television, Inc. (not “Gray Media, Inc.”).
Business context
Gray owned 36 television stations in 30 markets, reaching approximately 6.2% of U.S. households, and operated 40 secondary channels. Its primary revenue source was local, national and political broadcast advertising; other revenue included internet ads and retransmission-consent fees. The station group had leading audience positions in most of its markets.
Financial performance
| Metric | 2011 | 2010 | Change |
|---|---|---|---|
| Revenue | $307.1 million | $346.1 million | Down 11% |
| Operating income | $75.3 million | $107.0 million | Down 30% |
| Net income | $9.0 million | $23.2 million | Down 61% |
| Net income available to common stockholders | $1.8 million | $8.6 million | Down 79% |
| Operating cash flow | $38.2 million | $38.1 million | Essentially unchanged |
| Capital expenditures | $24.3 million | $19.4 million | Up $4.9 million |
| Cash at year-end | $5.2 million | $5.4 million | Down $0.2 million |
| Recorded long-term debt, including current portion | $832.2 million | $826.7 million | Up $5.5 million |
Operating margin was approximately 24.5%, versus 30.9% in 2010; net margin was approximately 2.9%, versus 6.7%. Operating cash flow less capital expenditures was approximately $13.9 million, compared with $18.7 million in 2010. Current assets were $79.4 million and current liabilities $49.5 million at year-end, a current ratio of approximately 1.6.
Revenue mix in 2011 included local advertising of $187.0 million, national advertising of $56.3 million, internet advertising of $20.1 million, political advertising of $13.5 million and retransmission-consent revenue of $20.2 million. Political revenue fell 77% from 2010; internet revenue rose 50%, and retransmission revenue rose 8%.
Fourth-quarter revenue was $84.7 million, versus $114.6 million in Q4 2010. Operating income was $26.6 million versus $52.2 million, net income was $7.6 million versus $21.9 million, and income available to common stockholders was $5.9 million versus $20.1 million.
Changes, liquidity and capital structure
- Management attributed the annual revenue decline chiefly to the expected “off-year” fall in political advertising. Local and internet advertising benefited from an improving economy; national advertising was also affected by the Super Bowl moving from CBS to FOX, no Olympic Games coverage, and Japanese auto-industry disruptions.
- Broadcast expenses fell 1% to $194.2 million, while corporate and administrative expenses rose 5% to $14.2 million. Interest expense fell 12% to $61.8 million, reflecting lower average debt and interest rates.
- Year-end debt comprised approximately $472.0 million under the senior credit facility and $365.0 million principal of 10.5% second-lien notes due June 2015. The credit facility matures in 2014; borrowing availability was $31.0 million, subject to covenants. The senior facility rate was 3.8% at year-end; the notes’ stated coupon was 10.5% and yield 11.0%.
- Management expected cash, operating cash flows and available credit to cover near-term debt service and planned capital spending, and stated it believed funding would be adequate through at least December 31, 2014. Scheduled 2012 debt principal payments were $4.8 million; estimated interest payments were $56.6 million.
- Common-stock dividends have not been paid since 2008. Preferred dividends have generally been deferred since 2008; the Series D preferred dividend accrues at 17% while payments remain in arrears. Preferred holders may require redemption beginning June 30, 2015.
Outlook, risks and unusual items
- Management estimated 2012 capital expenditures of approximately $20 million and pension contributions of approximately $6.9 million. It did not provide a specific revenue or earnings forecast.
- Key risks include high leverage and refinancing needs concentrated in 2014–2015, restrictive debt covenants, variable-rate debt exposure, dependence on advertising and network affiliations, retransmission-consent negotiations, competition from digital and pay-TV alternatives, and FCC licensing and spectrum regulation.
- A 100-basis-point increase in market rates was estimated to add approximately $4.7 million to annual interest expense, based on year-end floating-rate debt.
- The WEAU-TV tower collapsed in March 2011. Gray received $3.2 million in property insurance proceeds, recorded a $3.0 million disposal gain, spent $3.9 million on a replacement tower, and received $450,000 of business-interruption proceeds.
- No goodwill or broadcast-license impairment was recorded in 2011. Those assets totaled approximately $989.5 million; management’s valuation depended on assumptions about advertising growth, cash-flow margins and discount rates. The filing also reported that market capitalization remained below book value.
- Gray reported compliance with debt covenants at year-end. Management and the auditor concluded internal control over financial reporting was effective; the auditor issued an unqualified opinion on the financial statements and controls.
Important facts for investors to verify
- Debt maturities, covenant headroom, available revolving credit and the company’s refinancing plans ahead of 2014–2015 obligations.
- Whether operating cash flow can sustain debt service, capital expenditures and expected pension contributions amid modest cash balances.
- Progress in local, internet and retransmission revenue, and the expected normalization of political advertising after the 2010 election cycle.
- Preferred-dividend arrears, the 17% accrual rate, redemption rights, and the resulting restrictions on common dividends.
- Sensitivity of broadcast-license valuations to advertising, margin and discount-rate assumptions, given the large intangible-asset balance and market capitalization below book value.