Gray Television, Inc. — FY 2013 Form 10-K
Reporting period: Year ended December 31, 2013, with unaudited fourth-quarter comparisons. The filing is for Gray Television, Inc.; the request metadata’s “GRAY MEDIA, INC” does not match the registrant named in the filing.
Business context
Gray operates television stations and digital properties across the United States. As of February 1, 2014, it owned or operated stations in 34 markets, reaching approximately 6.4% of U.S. households. Revenue comes mainly from broadcast and internet advertising and retransmission consent fees. The company reported strong local audience positions and pursued further station acquisitions.
Financial performance
| Metric | FY 2013 | FY 2012 | Change |
|---|---|---|---|
| Revenue | $346.3 million | $404.8 million | Down 14% |
| Operating income | $83.9 million | $153.4 million | Down 45% |
| Net income | $18.3 million | $28.1 million | Down 35% |
| Net income per diluted share | $0.32 | $0.42 | Down $0.10 |
| Cash from operating activities | $60.2 million | $89.4 million | Down $29.1 million |
Operating margin was approximately 24.2% versus 37.9% in 2012; net margin was approximately 5.3% versus 6.9%. Broadcast expenses rose 2% to $217.4 million, while corporate and administrative expenses increased 24% to $19.8 million. Interest expense declined 12% to $52.4 million. FY 2012 included a $46.7 million loss from early extinguishment of debt; FY 2013 had no such loss.
Revenue mix: Local advertising was $203.1 million, national advertising $58.3 million, internet $25.4 million, political advertising $4.6 million, retransmission consent $39.8 million, other revenue $8.0 million, and consulting revenue $7.1 million. The consulting amount included a one-time final incentive payment from an expired agreement.
Fourth quarter: Revenue was $95.6 million versus $126.6 million in Q4 2012; operating income was $23.3 million versus $58.5 million; net income was $5.2 million versus a $2.1 million loss. The prior-year quarter included debt-extinguishment effects, while political advertising was substantially lower in 2013.
Debt, liquidity, and cash flow
At year-end, cash was $13.5 million, total assets were $1.334 billion, and stockholders’ equity was $174.0 million. Reported debt carrying value, including current portion, was $842.9 million; outstanding principal was $837.0 million. The company had $30.0 million of borrowing availability under its revolving facility and was in compliance with debt covenants.
Gray issued $375.0 million of additional 7.5% senior notes due 2020 and used the net proceeds primarily to repay $376.0 million of term-loan borrowings. Investing activities used $60.5 million, including $36.6 million for acquisitions and $24.1 million for property and equipment. Current assets were $130.6 million and current liabilities $63.1 million.
The company estimated approximately $58.4 million of debt interest payments and $25.0 million of capital expenditures over the 12 months after year-end; 2014 capital expenditures could reach $30.0 million depending on acquisition timing. Pending acquisitions represented approximately $318.0 million of commitments net of expected divestiture proceeds.
Material changes, outlook, and risks
- Revenue declined mainly because political advertising fell $81.4 million, or 95%, in the off-year election cycle. Local and national advertising and retransmission consent revenue increased; retransmission revenue rose 18% to $39.8 million.
- Automotive advertisers contributed approximately 25% of broadcast advertising revenue, up from 18% in 2012. Political advertising represented approximately 1% of total revenue in 2013 versus 21% in 2012.
- Gray completed acquisitions involving Yellowstone Television and KJCT-TV during 2013. Further station acquisitions, including the Hoak-related transactions, remained subject to regulatory approvals. Management anticipated pending transactions would close in the first half of 2014, but gave no assurance.
- Management expected cash on hand, operating cash generation, available borrowing, and potentially external financing to cover debt service, capital spending, and acquisition obligations. It stated that it expected liquidity to support long-term debt service at least until the term loan’s October 2019 maturity.
- Significant risks include substantial debt and variable-rate exposure, advertising cyclicality and industry concentration, acquisition financing and integration, FCC approvals and broadcast regulation, network affiliation and retransmission negotiations, competition from digital video and other media, and underfunded pension plans. A 100-basis-point increase in market rates was estimated to raise annual interest expense by about $1.1 million.
- The pension plans were underfunded; Gray expected to contribute approximately $6.1 million in 2014. No impairment charge was recorded for goodwill or broadcast licenses in 2013, although their carrying values were substantial. The company paid no common or Class A dividends.
- Management and the auditor reported effective internal control over financial reporting; the assessment excluded the 2013-acquired Yellowstone and KJCT-TV businesses, together representing approximately 3% of reported assets and net income. The auditor gave an unqualified opinion on the consolidated financial statements.
Important facts for investors to verify
- Whether pending acquisitions closed as planned, their final funding sources and purchase prices, and the effect of any related debt or equity issuance.
- Whether operating cash flow and available revolver capacity can support acquisition spending, capital expenditures, pension contributions, and debt service.
- How political advertising, automotive-sector exposure, and retransmission consent renewals affect revenue and margins in subsequent periods.
- Debt covenant headroom, refinancing needs, and sensitivity to interest-rate changes, including any guarantees associated with Excalibur.
- FCC approval, license-renewal, spectrum-reallocation, and online-distribution developments that could affect station operations or acquisition plans.