Business Context and Reporting Period
Company: Gray Television, Inc.
Filing Type: Form 10-Q (Quarterly Report)
Period Ended: March 31, 2011
Business Overview: Gray Television operates 36 television stations serving 30 markets, primarily affiliated with CBS, NBC, ABC, and FOX. The company generates revenue from broadcast and internet advertising, retransmission consent fees, and production services.
Key Financial Metrics
| Metric | Q1 2011 | Q1 2010 |
|---|---|---|
| Revenue | $69.7 million | $70.5 million |
| Operating Income | $11.5 million | $11.9 million |
| Net Loss | $(3.1) million | $(4.7) million |
| Net Loss to Common Stockholders | $(4.9) million | $(9.3) million |
| Operating Cash Flow | $14.9 million | $7.0 million |
| Cash and Equivalents | $9.8 million | $13.7 million (Q1 2010 end) |
| Total Debt (Recorded Value) | $825.8 million | $826.7 million (Dec 31, 2010) |
| Debt Availability | $40.0 million | $40.0 million |
Margins: Operating margin was approximately 16.5% for Q1 2011 compared to 16.9% in Q1 2010. The effective income tax rate was 31.4% in Q1 2011 versus 40.6% in Q1 2010.
Material Changes vs. Prior Period
- Revenue: Total revenue decreased 1% ($0.8 million) year-over-year. This was driven by a 50% decline in political advertising (due to the non-election year) and a 7% drop in national advertising (absence of Olympic Games and Super Bowl on CBS). These declines were partially offset by a 38% increase in internet advertising and a 1% increase in local advertising.
- Expenses: Broadcast expenses increased 1% ($0.6 million) primarily due to higher compensation costs. Corporate and administrative expenses rose 4% ($0.1 million). Depreciation decreased 12% ($1.0 million) as more assets became fully depreciated.
- Interest Expense: Decreased 18% ($3.6 million) to $16.0 million due to lower average interest rates following the expiration of interest rate swap agreements in April 2010, despite a higher average debt balance.
- Preferred Dividends: Decreased 61% ($2.8 million) to $1.8 million following the repurchase of a portion of Series D Preferred Stock in April 2010.
Outlook, Risks, and Unusual Items
- Unusual Item (Tower Collapse): On March 22, 2011, the primary broadcast tower for WEAU-TV (La Crosse-Eau Claire, WI) collapsed. The company lost signal for approximately 48 hours. No injuries occurred. The loss is expected to be covered by insurance, with minimal out-of-pocket costs anticipated. The cost to rebuild is not yet estimated.
- Capital Expenditures: Q1 2011 capex was $9.2 million, significantly higher than the $2.9 million in Q1 2010, driven by high-definition equipment upgrades. Excluding the new tower rebuild, remaining 2011 capex is projected at $10.8 million.
- Preferred Stock Dividends: Cash dividends on Series D Preferred Stock have been deferred since October 2008. The dividend rate increased to 17.0% per annum in July 2009 due to arrears. While dividends are in arrears, the company is prohibited from paying common stock dividends.
- Seasonality: Management notes that broadcast advertising revenues are typically highest in Q2 and Q4. Political advertising is higher in even-numbered election years.
Investor Verification Checklist
- Insurance Recovery: Verify the final insurance payout and reconstruction costs for the WEAU-TV tower collapse to confirm the "minimal cost" expectation.
- Preferred Stock Arrears: Monitor the status of the $15.8 million in accrued Series D Preferred Stock dividends and the company's ability to fund them, as this blocks common stock dividends.
- Debt Covenants: Confirm continued compliance with debt covenants given the high leverage ratio (Total Debt ~$826M vs. Equity ~$125M).
- Political Ad Cycle: Assess the impact of the non-election year on Q2 and Q3 revenue projections compared to the prior year.
- Internet Growth: Evaluate the sustainability of the 38% year-over-year growth in internet advertising revenue.