Business Context and Reporting Period
Company: Gray Television, Inc.
Filing Type: Form 10-Q (Quarterly Report)
Period Ended: September 30, 2005
Business Overview: Gray operates in three segments: broadcasting (31 TV stations), publishing (5 daily newspapers), and paging. The company announced a plan to spin off its publishing and paging businesses into a new entity, Triple Crown Media, Inc. (TCM), which is expected to merge with Bull Run Corporation.
Key Financial Metrics
| Metric (in thousands) | Three Months Ended Sep 30, 2005 | Nine Months Ended Sep 30, 2005 |
|---|---|---|
| Total Operating Revenues | $75,118 | $227,892 |
| Operating Income | $13,762 | $49,535 |
| Net Income | $1,743 | $7,211 |
| Net Income Available to Common Stockholders | $928 | $4,767 |
| Diluted EPS (Common) | $0.02 | $0.10 |
| Cash and Cash Equivalents | $4,056 | $4,056 (Balance Sheet) |
| Long-Term Debt (incl. current) | $633,006 | $633,006 (Balance Sheet) |
| Operating Cash Flow (9 months) | N/A | $39,251 |
Material Changes vs. Prior Period
- Revenue Decline: Total revenues decreased 13% ($75.1M) for the quarter and 7% ($227.9M) for the nine months compared to the prior year. This was primarily driven by a significant drop in political advertising revenue (due to the 2004 election cycle) and the absence of 2004 Summer Olympics broadcast revenue.
- Profitability Drop: Net income available to common stockholders fell 92% for the quarter ($0.93M vs $11.0M) and 82% for the nine months ($4.8M vs $27.0M). Operating income decreased 54% for the quarter and 38% for the nine months.
- Expense Increases: Corporate and administrative expenses rose 62% for the quarter and 54% for the nine months, largely due to professional fees associated with the planned spin-off of publishing and paging businesses.
- Debt Restructuring: The company amended its senior credit facility and repurchased $21.5 million of its 9 1/4% Notes, resulting in a $4.8 million loss on early extinguishment of debt for the nine-month period.
- Acquisitions: Completed the acquisition of KKCO-TV (Grand Junction, CO) for $14.2 million in January 2005. Announced an agreement to acquire WSAZ-TV for $186 million, pending regulatory approval.
Guidance, Outlook, and Risks
- Spin-Off Strategy: Management expects the spin-off of publishing and paging assets into Triple Crown Media, Inc. (TCM) to allow Gray to focus on broadcasting. TCM will distribute $40 million to Gray to reduce indebtedness.
- Debt Management: Gray amended its credit facility to reduce interest rates, anticipating annual savings of $1.4 million. Repurchasing notes is expected to save an additional $2.0 million annually in interest.
- Liquidity: Cash balances decreased significantly from $50.6 million to $4.1 million over the nine months due to debt repayments, acquisitions, and dividends. Management believes current cash flows and available credit ($26 million) are sufficient for foreseeable needs.
- Risks and Contingencies:
- Litigation: Ongoing disputes regarding the ownership of shares in Sarkes Tarzian, Inc., with potential damages claimed up to $75 million.
- Regulatory Approval: The pending $186 million acquisition of WSAZ-TV is subject to regulatory approval.
- Accounting Changes: Adoption of SFAS 123(R) regarding share-based payment in 2006 is expected to increase expenses by $125,000 to $175,000 annually.
Investor Verification Checklist
- Spin-Off Timeline: Verify the expected closing date for the Triple Crown Media spin-off and the merger with Bull Run Corporation.
- WSAZ-TV Acquisition: Confirm regulatory approval status and financing terms for the $186 million WSAZ-TV purchase.
- Cash Position: Monitor the low cash balance ($4.1M) relative to upcoming debt service and capital expenditure requirements.
- Debt Covenants: Review the specific leverage and interest coverage ratios required under the amended senior credit facility.
- Legal Exposure: Assess the potential financial impact of the Tarzian litigation on the company's equity and assets.