Gray Television, Inc. — 2012 Form 10-K
Reporting period: Fiscal year ended December 31, 2012; filed March 5, 2013. The filing identifies the registrant as Gray Television, Inc. (not Gray Media, Inc.). Annual results are summarized below; fourth-quarter figures are identified separately and are unaudited.
Business context and reporting period
Gray owned and operated 40 primary and 45 secondary television channels in 30 U.S. markets, reaching approximately 6.2% of U.S. television households. The company’s principal revenue sources were local, national, political and internet advertising, retransmission consent fees, and other services. It ranked first or second in overall audience in 29 of its 30 markets.
Financial performance and liquidity
| Metric | 2012 | 2011 |
|---|---|---|
| Revenue, net of agency commissions | $404.8 million | $307.1 million |
| Operating income | $153.4 million | $75.3 million |
| Operating margin | 37.9% | 24.5% |
| Net income | $28.1 million | $9.0 million |
| Net income available to common stockholders | $24.0 million; $0.42 per diluted share | $1.8 million; $0.03 per diluted share |
| Net cash from operating activities | $89.4 million | $38.2 million |
| Capital expenditures | $24.5 million | $24.3 million |
Operating margin is calculated from reported revenue and operating income. Interest expense was $59.4 million, down from $61.8 million. The $46.7 million loss on early extinguishment of debt materially reduced 2012 pretax income.
At year-end, cash was $11.1 million and total current assets were $96.4 million, versus current liabilities of $47.7 million. Recorded debt was $832.9 million; principal at liquidation value was $835.0 million. The company reported $40.0 million of borrowing availability under its revolving facility and compliance with debt covenants. Debt fair value was $844.4 million.
Fourth-quarter 2012 revenue was $126.6 million and operating income was $58.5 million. The quarter reported a $2.1 million net loss and a $2.6 million loss available to common stockholders, compared with fourth-quarter 2011 net income of $7.6 million and common-stockholder income of $5.9 million.
Material changes versus 2011
- Revenue rose 32%, driven primarily by political advertising, which increased to $86.0 million from $13.5 million, and retransmission consent revenue, which rose 67% to $33.8 million.
- Internet revenue increased 24% to $25.0 million. Local advertising excluding political revenue grew 2% to $191.3 million; national advertising excluding political revenue grew 1% to $56.8 million.
- Broadcast expenses increased 9% to $212.3 million, including higher network affiliation fees, programming costs, commissions and compensation. Depreciation declined to $23.1 million from $26.2 million.
- Operating cash flow increased by $51.2 million. Investing cash use was $23.3 million; financing cash use was $60.2 million. Cash increased by $5.9 million to $11.1 million.
- Gray refinanced its capital structure: it issued $300 million of 7.5% senior notes due 2020, repurchased and redeemed all $365 million of 10.5% notes due 2015, and replaced its prior credit facility. It also repurchased all Series D preferred stock, eliminating $25.9 million of preferred liquidation value and $13.7 million of accrued dividends reported at the end of 2011.
Outlook, commentary and risks
- Management expected 2013 capital expenditures of approximately $20 million and estimated $47.9 million of debt interest payments over the following 12 months. It anticipated funding these needs with operating cash, cash on hand and facility borrowings, and stated it expected liquidity to cover long-term debt service through the term loan’s October 2019 maturity.
- Management anticipated no significant federal income tax payments for several years because of loss carryforwards, but expected state income tax payments. The company reported $250.2 million of federal and $259.1 million of state net operating loss carryforwards.
- Management expected acquisitions of one full-power and two low-power stations in Lincoln, Nebraska, and one low-power station in Dothan, Alabama, during the first and second quarters of 2013, respectively. The filing lists approximately $1.2 million of acquisition commitments.
- Political advertising and seasonal demand make results cyclical; political revenue represented 21% of total 2012 revenue versus 4% in 2011. Automotive customers accounted for 18% of broadcast advertising revenue, down from 21%.
- Key risks include substantial debt and restrictive covenants, variable-rate exposure, dependence on advertising and network affiliations, retransmission-consent negotiations, competition from digital and other media, underfunded pension plans, and potential FCC spectrum reallocation. A 100-basis-point rate increase was estimated to add approximately $4.7 million to annual interest expense.
- Gray reported no 2012 impairment of goodwill or broadcast licenses, whose carrying values were $170.5 million and $819.2 million, respectively. Management noted that market capitalization remained below book value, and impairment estimates rely on subjective forecasts and assumptions.
- The management agreement with Young Broadcasting expired December 31, 2012. Gray recorded $2.4 million of consulting revenue in 2012; any additional incentive revenue related to 2012 was not yet estimable.
- The filing states pension contributions for 2013 could be $3.1 million to $8.0 million in one section, but approximately $3.1 million elsewhere; the precise expected contribution is therefore not clear from the filing text. No known legal proceeding was expected by management to materially affect financial position, results or cash flows.
Most important facts for investors to verify
- Whether the strong 2012 revenue and cash-flow results persist after the unusually high even-year political advertising cycle and 2012 Olympic-related advertising.
- Debt repayment capacity, covenant headroom, refinancing needs and exposure to changes in floating interest rates under the new credit facility.
- Renewal economics for retransmission-consent contracts and network affiliation agreements, and the effect of the expired Young agreement.
- Actual 2013 capital spending, pension contributions and station acquisition closings and costs.
- Assumptions supporting the carrying values of broadcast licenses and goodwill, given market capitalization below book value and the sensitivity of impairment estimates.
The independent auditor issued an unqualified opinion on the financial statements and internal control over financial reporting; management reported effective controls as of December 31, 2012.