Business Context and Reporting Period
Company: Gray Television, Inc.
Filing Type: Form 10-K (Annual Report)
Period Ended: December 31, 2003
Business Overview: Gray Television operates in three segments: broadcasting (29 television stations in 25 markets), publishing (four daily newspapers), and paging. The company is the largest independent owner of CBS affiliates in the U.S. The 2003 fiscal year was significantly impacted by the 2002 acquisitions of Gray MidAmerica Television (15 stations) and KOLO-TV, which were fully integrated into operations.
Key Financial Metrics
| Metric | 2003 | 2002 (Restated) |
|---|---|---|
| Total Revenues | $295.4 million | $198.6 million |
| Operating Income | $74.7 million | $55.2 million |
| Net Income | $14.0 million | ($23.9 million) |
| Net Income Available to Common Stockholders | $10.7 million | ($30.4 million) |
| Diluted EPS | $0.21 | ($1.37) |
| Operating Cash Flow | $62.3 million | $27.2 million |
| Total Assets | $1,325.3 million | $1,332.0 million |
| Long-Term Debt (incl. current) | $655.9 million | $658.2 million |
| Cash and Cash Equivalents | $11.9 million | $12.9 million |
Material Changes vs. Prior Period
- Revenue Growth: Total revenues increased 49% to $295.4 million, driven primarily by the inclusion of the 2002 acquisitions. Broadcasting revenues rose 66% to $243.1 million. Publishing revenues grew 2% to $44.4 million, while paging revenues declined 4% to $7.9 million due to competition from cellular services.
- Profitability Turnaround: The company returned to profitability with $14.0 million in net income, compared to a net loss of $23.9 million in 2002. The 2002 loss included a $26.6 million non-cash cumulative effect of an accounting change (SFAS 142) and a $16.8 million loss on early extinguishment of debt.
- Expense Increases: Operating expenses increased 54% to $220.7 million, largely due to the integration of acquired stations. Depreciation and amortization increased significantly due to new assets and intangible amortization from acquisitions.
- Tax Impact: The effective tax rate rose to 55.3% in 2003 (from 41.2% in 2002) due to a $5.8 million non-cash charge related to the settlement of an IRS audit regarding 1996 and 1998 tax returns.
Guidance, Outlook, Risks, and Contingencies
- IRS Settlement: In January 2004, the company settled litigation with the IRS. The settlement required no cash payment but resulted in a $16.3 million reduction of federal net operating loss carryforwards. The company expects to collect a $1.2 million tax refund related to 1996.
- Legal Proceedings: The company is involved in litigation with Sarkes Tarzian, Inc. ("Tarzian") regarding the ownership of Tarzian shares. Tarzian has sued Gray for tortious interference and conversion, seeking damages up to $75 million. Gray intends to vigorously defend the lawsuit.
- Digital Television (DTV) Transition: As of March 2004, 27 of 29 stations were broadcasting digital signals. The company anticipates additional cash payments of $7.7 million in 2004 for DTV equipment and services.
- Debt and Liquidity: The company maintains a senior credit facility with $75.0 million available. Management believes current cash balances and operating cash flows are adequate for capital expenditures, debt service, and dividends. However, the company carries significant debt ($655.9 million) and has substantial intangible assets ($1.1 billion) subject to impairment testing.
- Regulatory Risks: The company is subject to FCC regulations regarding license renewals, ownership rules, and the transition to digital broadcasting. New FCC ownership rules adopted in 2003 were stayed pending judicial review.
Important Facts for Investor Verification
- Acquisition Integration: Verify the sustained revenue contribution and operating margin performance of the 16 stations acquired in late 2002 (Gray MidAmerica and KOLO-TV) as they move beyond the initial integration phase.
- Tax Asset Utilization: Confirm the company's ability to utilize its remaining $190 million in federal net operating loss carryforwards before expiration, given the recent reduction in carryforwards due to the IRS settlement.
- Legal Exposure: Monitor the status of the Tarzian litigation, as a negative outcome could result in significant damages or loss of the investment in Tarzian.
- Debt Covenants: Review the company's compliance with financial covenants in its senior credit facility and subordinated notes, particularly regarding leverage ratios and dividend restrictions.
- DTV Capital Expenditures: Track the actual costs and timeline for completing the digital television conversion for the remaining stations to ensure they align with the projected $7.7 million expenditure for 2004.