Business Context and Reporting Period
Company: Gray Television, Inc.
Filing Type: Form 10-Q (Quarterly Report)
Period Ended: September 30, 2009
Business Overview: Gray Television owns 36 television stations serving 30 markets, with affiliations to CBS, NBC, ABC, and FOX. The company is the largest independent owner of CBS affiliates in the U.S. Operations are subject to seasonality, with revenues typically higher in Q2 and Q4, and significantly impacted by political advertising cycles (higher in even-numbered years).
Key Financial Metrics
| Metric (in thousands) | Three Months Ended Sep 30, 2009 | Nine Months Ended Sep 30, 2009 | Nine Months Ended Sep 30, 2008 |
|---|---|---|---|
| Total Revenues | $66,446 | $192,857 | $232,373 |
| Operating Income | $10,630 | $24,394 | $48,530 |
| Net (Loss) Income | $(5,520) | $(21,088) | $4,009 |
| Net Loss to Common Stockholders | $(9,988) | $(33,657) | $717 |
| Operating Cash Flow (9mo) | $5,438 (2009) vs $36,692 (2008) | ||
| Cash and Equivalents | $8,200 (Sep 30, 2009) vs $30,649 (Dec 31, 2008) | ||
| Total Debt (Long-term + Current) | $793,829 (Sep 30, 2009) | ||
| Leverage Ratio (Actual vs Max) | 8.22 vs 8.50 |
Material Changes vs. Prior Period
- Revenue Decline: Total revenue decreased 20% ($16.2 million) for the three months and 17% ($39.5 million) for the nine months ended September 30, 2009, compared to the prior year.
- Local & National Advertising: Significant drops due to the economic recession, particularly in the automotive sector (down ~33% QoQ and ~41% YoY).
- Political Advertising: Decreased 76% ($10.0 million) in the three-month period due to the "off-year" election cycle.
- Retransmission Consent: Increased 466% ($3.6 million) in the three-month period due to more profitable terms in renewed contracts.
- Expense Reductions: Broadcast expenses decreased 7% ($3.7 million) in the three-month period, driven by reduced compensation (fewer employees), lower professional service fees, and reduced facility fees (discontinuation of analog broadcasts).
- Interest Expense: Increased 54% ($6.8 million) in the three-month period due to higher interest rates and facility fees resulting from a March 2009 amendment to the senior credit facility.
- One-Time Items: Recorded an $8.4 million loss on early extinguishment of debt in the nine-month period related to the credit facility amendment. Recognized a $4.5 million gain on disposal of assets related to FCC-mandated spectrum reallocation.
Outlook, Risks, and Management Commentary
- Liquidity and Covenant Compliance: Management states that while currently compliant with the senior credit facility leverage ratio (8.22 vs. 8.50 max), internal projections indicate they are not likely to be in compliance with the leverage ratio requirement as of March 31, 2010.
- Dividend Deferral: The company has deferred cash payments on Series D Perpetual Preferred Stock since October 1, 2008. Consequently, the dividend rate increased from 15% to 17% per annum on July 16, 2009. Common stock dividends are also suspended.
- Economic Risks: Continued recession and reduced automotive advertising spending pose significant risks to cash flow generation and the ability to service debt.
- Capital Expenditures: Expected to be approximately $4.0 million in Q4 2009. The credit facility limits 2010 capital expenditures to $15 million.
- Asset Valuation: No triggering events for goodwill or broadcast license impairment were identified in the nine-month period, though the company notes that market capitalization remains below book value.
Investor Verification Checklist
- Covenant Breach Risk: Verify the company's ability to negotiate a waiver or amendment for the leverage ratio covenant by March 31, 2010, to avoid default and potential debt acceleration.
- Preferred Stock Obligations: Monitor the accrued preferred dividend balance (approx. $14.7 million) and the impact of the 17% dividend rate on future cash flow requirements.
- Automotive Ad Recovery: Assess the trajectory of automotive advertising spend, which historically represents a significant portion of revenue and has been disproportionately affected by the recession.
- Cash Burn Rate: Review the decline in operating cash flow (from $36.7M to $5.4M YoY) and the reduction in cash reserves (from $30.6M to $8.2M) to evaluate liquidity runway.
- Debt Structure: Confirm the terms of the amended senior credit facility, specifically the increased interest margins and the $12.2 million accrued facility fee classified as current interest.