Gray Television, Inc. — Q2 2013 Form 10-Q
Reporting period: Three and six months ended June 30, 2013; unaudited. Gray operated television stations in 30 markets, reaching approximately 6.2% of U.S. households. The company reports one operating segment. Amounts below are in millions except per-share data.
Financial performance
| Metric | Q2 2013 | Q2 2012 | First half 2013 | First half 2012 |
|---|---|---|---|---|
| Revenue | $84.3 | $94.7 | $162.5 | $175.4 |
| Operating income | $21.3 | $33.0 | $36.4 | $53.9 |
| Operating margin | 25.3% | 34.9% | 22.4% | 30.7% |
| Net income | $5.1 | $11.0 | $6.0 | $14.4 |
| Net income per diluted share | $0.09 | $0.17 | $0.10 | $0.21 |
| Interest expense | $12.6 | $15.1 | $25.1 | $30.3 |
- Q2 revenue fell 11% year over year and first-half revenue fell 7%. Political advertising declined 94% in Q2 and 92% in the first half, reflecting the non-election year.
- Local and national advertising grew in both periods, which management attributed to an improving economic environment. Retransmission consent revenue rose 13% in Q2 and 14% in the first half, driven primarily by subscriber counts and rates.
- Q2 broadcast expenses decreased 2%, but first-half broadcast expenses increased 2%. Corporate and administrative expense rose 46% in Q2 and 35% in the first half, including higher stock-based compensation and professional-services costs.
- Interest expense declined 17% in both reported periods as lower average interest rates more than offset higher average debt balances. Effective tax rates increased to 41.0% in Q2 and 46.5% for the first half, versus 38.6% and 39.1%, respectively.
Cash flow, debt and liquidity
- First-half operating cash flow was $25.9 million, down from $45.1 million. Investing cash use was $13.7 million, including $12.5 million of property and equipment purchases and $1.3 million for broadcast licenses. Financing provided $0.1 million; cash increased $12.3 million to $23.4 million.
- Capital expenditures exceeded operating cash flow by approximately $1.4 million in the first half, compared with operating cash flow exceeding capital expenditures by approximately $33.5 million in the prior-year period.
- At June 30, cash was $23.4 million; recorded long-term debt was $833.0 million, representing $535.0 million under the senior credit facility and $300.0 million of 7.5% senior notes due 2020. The credit-facility balance carried a 4.8% rate. Borrowing availability was $40.0 million, subject to covenants. The company reported covenant compliance.
- Current assets were $103.7 million and current liabilities $41.0 million. No debt principal payments were due in the following 12 months. Management estimated $48.2 million of debt-interest payments and $20.0 million of capital expenditures over that period.
Outlook, risks and unusual items
- Management expected remaining-2013 capital expenditures of $10.5–$11.5 million and additional 2013 pension contributions of $2.8–$5.4 million. It stated that cash, expected operating cash flow and available revolver borrowings should fund near-term debt service and capital spending, and that resources should be adequate for the foreseeable future.
- On August 6, 2013, Gray received $7.1 million of incentive consulting revenue under an expired Young Broadcasting agreement. It will be recognized in Q3 2013, not in the reported first half.
- On July 31, Gray agreed to pay $9.0 million for certain non-license assets of KJCT-TV and related low-power stations; the transaction and associated shared-services arrangement were expected to close in Q4, subject to regulatory approval and other conditions.
- Stock-based compensation included $1.0 million of expense associated with accelerated vesting of awards held by a former employee. A separate departure arrangement requires $1.9 million of non-compete and non-solicitation payments over three years.
- Automotive advertisers accounted for approximately 24% of first-half broadcast advertising revenue, up from 20% a year earlier, creating customer-category concentration risk. Management reported no material change in risk factors or market risk from year-end 2012. Legal matters were described as ordinary-course; the company cautioned that an unfavorable resolution could have a material adverse effect.
Important facts for investors to verify
- Whether local/national ad growth and retransmission-fee gains can offset election-cycle-driven revenue volatility and concentration in automotive advertising.
- Cash generation and liquidity relative to substantial debt, interest obligations, capital expenditures and pension funding; also confirm revolver availability and covenant headroom.
- Q3 recognition and cash receipt of the $7.1 million consulting payment, and the timing, approvals and costs of the KJCT-TV transaction.
- Drivers of higher corporate costs and the elevated first-half effective tax rate, including the impact of expired stock options.
- Potential exposure from the IMG/University of Kentucky agreement: Gray could be required to pay unpaid license fees if IMG fails to pay; the remaining aggregate fees were approximately $17.6 million, though Gray did not consider non-performance risk high.