Gray Television, Inc. — Form 10-Q
Reporting period: Quarter and nine months ended September 30, 2011. Unaudited; amounts below are in U.S. dollars, generally millions unless noted. Gray operated 36 television stations in 30 markets and reported one segment.
Financial performance and liquidity
| Metric | Q3 2011 | Q3 2010 | Nine months 2011 | Nine months 2010 |
|---|---|---|---|---|
| Revenue, net of agency commissions | $76.5 | $85.3 | $222.5 | $231.5 |
| Operating income | $18.2 | $24.7 | $48.8 | $54.7 |
| Operating margin | 23.8% | 28.9% | 21.9% | 23.6% |
| Net income | $2.0 | $5.5 | $1.5 | $1.3 |
| Net income (loss) available to common stockholders | $0.03 | $3.7 | $(4.1) | $(11.5) |
| Interest expense | $15.2 | $16.7 | $46.5 | $53.7 |
- Cash flow: Nine-month operating cash flow was $37.6, versus $24.7 in 2010. Investing used $20.1, including $21.4 of capital expenditures; financing used $13.9. Cash increased $3.7 to $9.1.
- Debt: Recorded long-term debt, including current maturities, was $824.1 at September 30, compared with $826.7 at year-end 2010. It included $464.2 of senior credit facility term loans and $365.0 face value of 10.5% second-lien notes due 2015. The revolver had no balance; $40.0 of borrowing availability was subject to covenants. The company reported covenant compliance.
- Liquidity and obligations: Current assets were $81.2 and current liabilities $62.7. Management estimated debt principal of $4.8, interest of $55.9, and capital expenditures of $20.0 over the 12 months after September 30, and expected available cash, operating cash flows, and borrowing capacity to be sufficient for obligations and foreseeable needs.
Material changes and operating drivers
- Q3 revenue fell 10%, mainly because political advertising declined $10.8 (67%) in the off-year election cycle. For the first nine months, revenue fell 4%; political revenue declined $15.5 (63%).
- Local advertising increased 1% in Q3 and 2% year to date; internet advertising rose 57% and 50%, respectively. Retransmission consent revenue increased 11% in Q3 and 9% year to date. National advertising fell 4% in both periods.
- Management attributed year-to-date national advertising pressure in part to the 2011 Super Bowl airing on FOX rather than CBS and the absence of the 2010 Winter Olympics. The company said local and internet advertising benefited from a modestly improving economy and increased automotive spending.
- Q3 operating income declined despite lower broadcast expenses, as revenue fell and corporate and administrative costs rose. Year-to-date broadcast costs increased 1%, including higher healthcare claims; depreciation declined. Interest expense fell 9% in Q3 and 13% year to date, reflecting lower average debt balances and interest rates.
- Common-stockholder results remained weak after preferred dividends: Q3 income attributable to common holders was approximately break-even, while the nine-month common loss narrowed from 2010.
Outlook, risks, contingencies, and unusual items
- Outlook: No specific revenue or earnings guidance was provided. Management expected approximately $1.6 of capital expenditures for the rest of 2011, including construction of a replacement WEAU-TV tower, and an additional $1.0 pension contribution during the remainder of 2011. Management anticipated no significant income-tax payments for several years, subject to use of available loss carryforwards.
- Preferred stock: In August, Gray redeemed $6.5 face value of Series D preferred stock and paid $3.0 of related accrued dividends, using $9.5 of cash. Preferred dividends had been deferred since 2008; accrued dividends were $16.0 at quarter-end and the stated dividend rate remained 17% while three consecutive cash payments remained unfunded. Arrears restrict cash dividends and repurchases on common and other junior-ranking equity.
- WEAU tower collapse: The primary tower collapsed in March 2011 during inclement weather. Gray had received about $2.0 of insurance proceeds by September 30 and recorded a $1.9 gain on disposal for the nine-month period. Management expected insurance to cover property and business-interruption losses and anticipated any uninsured excess would not be material.
- Other exposures: Gray had a contingent obligation to pay University of Kentucky sports-marketing license fees if IMG failed to pay; approximately $33.8 remained over the agreement’s remaining term, including its optional extension. Gray said it did not consider IMG’s non-performance risk high. The filing also notes ordinary-course litigation and uncertainty of outcomes.
- Advertising is seasonal and typically stronger in the second and fourth quarters; political advertising tends to be higher in even-numbered election years. Management cited internet competition, economic conditions, debt service, and covenant requirements among relevant business and financial risks. No material change to previously disclosed risk factors was reported.
Most important facts for investors to verify
- Whether local and internet advertising growth can offset weak political and national advertising, particularly as election-cycle comparisons change.
- Cash generation against substantial interest obligations, capital spending, and the $824.1 recorded debt balance; confirm covenant headroom and access to the $40.0 revolver.
- Progress and insurance recovery for the WEAU replacement tower, including whether final costs exceed coverage.
- Accumulating Series D dividend arrears, the 17% rate, and the constraints they place on common-stock distributions.
- Actual capital expenditures and pension contributions versus management’s estimates, and any developments in the IMG/University of Kentucky agreement or litigation.