Business Context and Reporting Period
Company: Gray Television, Inc.
Filing Type: Form 10-Q (Quarterly Report)
Period Ended: September 30, 2010
Business Overview: Gray operates 36 television stations serving 30 markets, with affiliations to CBS, NBC, ABC, and FOX. It is the largest independent owner of CBS affiliates in the U.S. The company also operates 39 digital second channels. Revenues are derived primarily from broadcast and internet advertising, retransmission consent fees, and production services.
Key Financial Metrics
| Metric (in thousands) | Three Months Ended Sep 30, 2010 | Nine Months Ended Sep 30, 2010 | Nine Months Ended Sep 30, 2009 |
|---|---|---|---|
| Total Revenues | $85,345 | $231,463 | $192,857 |
| Operating Income | $24,650 | $54,726 | $24,394 |
| Net Income (Loss) | $5,508 | $1,299 | $(21,088) |
| Net Income Available to Common Stockholders | $3,719 | $(11,494) | $(33,657) |
| Operating Cash Flow (9 months) | N/A | $24,739 | $5,438 |
| Total Assets | $1,251,959 | N/A | N/A |
| Total Liabilities | $1,103,085 | N/A | N/A |
| Long-Term Debt (incl. current) | $845,857 | N/A | N/A |
| Cash and Equivalents | $20,170 | N/A | N/A |
Margins (Nine Months 2010): Operating margin was approximately 23.6%. The effective income tax rate for the nine-month period was (84)% due to a release of a deferred tax asset valuation allowance.
Material Changes vs. Prior Period
- Revenue Growth: Total revenue increased 28% ($18.9M) for the three months and 20% ($38.6M) for the nine months ended September 30, 2010, compared to 2009. This was driven primarily by a 422% increase in political advertising revenue (due to the election cycle) and growth in local, national, and internet advertising.
- Profitability: The company returned to profitability in the third quarter of 2010 with net income of $5.5M, compared to a net loss of $5.5M in the same period in 2009. For the nine-month period, the net loss narrowed significantly from $21.1M in 2009 to $1.3M in 2010.
- Debt Restructuring: On April 29, 2010, the company issued $365.0M of 10.5% senior secured second lien notes. Proceeds were used to repay $300.0M of its senior credit facility term loan. This reduced the annual facility fee from 3.0% to 0.75% and eliminated a 2.0% incentive fee.
- Preferred Stock: The company repurchased approximately $60.7M in face amount of Series D Perpetual Preferred Stock in exchange for cash and 8.5M shares of common stock. Outstanding preferred shares decreased from 1,000 to 393.
- Interest Expense: Interest expense decreased 14% ($2.7M) for the three-month period due to lower average interest rates following the debt restructuring, despite a higher average debt balance.
Guidance, Outlook, and Risks
- Capital Expenditures: The company anticipates capital expenditures for the remainder of 2010 to range between $8.0M and $12.0M, driven by plans to provide local studio broadcasts and syndicated programming in high definition.
- Tax Outlook: Management estimates the effective income tax rate for the full year 2010 will be approximately 35%. The company expects to utilize loss carryforwards to avoid significant federal income taxes in the near term but anticipates paying state income taxes in certain jurisdictions.
- Pension Contributions: The company contributed $4.4M to pension plans in the first nine months of 2010 and expects to contribute between $0.1M and $0.6M for the remainder of the year.
- Dividend Status: Cash dividends on Series D Preferred Stock remain in arrears (accruing at 17.0% per annum). Consequently, the company is prohibited from paying cash dividends on common or Class A common stock.
- Risks: The company notes that advertising revenues remain under pressure from internet competition. It also highlights the risk of non-performance by IMG regarding a sports marketing agreement, though it currently does not consider this risk high.
Key Facts for Investor Verification
- Debt Covenants: Verify compliance with the new "first lien leverage ratio" covenant (actual 5.10x vs. maximum 7.00x) and the minimum fixed charge coverage ratio (0.90x to 1.0x) following the April 2010 refinancing.
- Preferred Stock Arrears: Confirm the status of the $12.4M in accrued preferred dividends and the implications for common stock dividend restrictions.
- Political Revenue Volatility: Assess the sustainability of revenue growth given that political advertising (10.5% of 9-month revenue) is cyclical and significantly higher in even-numbered election years.
- Interest Rate Exposure: Note that interest rate swap agreements expired in April 2010, leaving the company exposed to variable rate fluctuations on its senior credit facility.
- Subsequent Events: The company prepaid an additional $15.1M of its senior credit facility obligations after September 30, 2010, using cash from operations.