Business Context and Reporting Period
Company: Gray Television, Inc.
Filing Type: Form 10-Q (Quarterly Report)
Period Ended: September 30, 2004
Business Overview: Gray operates in three segments: Broadcasting (30 television stations), Publishing (5 daily newspapers), and Paging (operations in Florida, Georgia, and Alabama). The company is a holding company with no material independent assets other than its investment in subsidiaries.
Key Financial Metrics
| Metric (in thousands) | Three Months Ended Sep 30, 2004 | Nine Months Ended Sep 30, 2004 |
|---|---|---|
| Total Operating Revenues | $86,912 | $245,993 |
| Operating Income | $29,620 | $79,277 |
| Net Income | $11,782 | $29,482 |
| Net Income Available to Common Stockholders | $10,967 | $27,024 |
| Diluted EPS (Common) | $0.22 | $0.54 |
| Cash and Cash Equivalents (Sep 30, 2004) | $56,990 | - |
| Net Cash Provided by Operating Activities (9mo) | - | $82,469 |
| Total Debt (Long-term + Current) | $655,888 | - |
| Preferred Stock (Liquidation Value) | $39,640 | - |
Material Changes vs. Prior Period
- Revenue Growth: Total revenues increased 18% for the quarter and 14% for the nine-month period compared to the prior year.
- Broadcasting: Revenues rose 22% (quarter) and 17% (nine months). The primary driver was political advertising, which surged 965% in the quarter and 512% for the nine months due to the 2004 presidential election. Local advertising also increased 5% (quarter) and 9% (nine months).
- Publishing: Revenues grew 3% in both periods, driven by retail and classified advertising. Circulation revenue declined due to rate decreases intended to boost subscription retention.
- Paging: Revenues declined 4% (quarter) and 6% (nine months) due to price competition and a reduction in units in service (from 58,000 to 45,000) caused by competition from cellular telephones.
- Profitability: Net income available to common stockholders more than doubled, rising from $4.7 million to $11.0 million for the quarter, and from $10.3 million to $27.0 million for the nine-month period.
- Expenses: Operating expenses increased 6% for the quarter and 3% for the nine months. Corporate and administrative expenses rose significantly (52% for the quarter) largely due to costs associated with complying with Section 404 of the Sarbanes-Oxley Act. Amortization of intangible assets decreased 85% for the quarter as certain assets became fully amortized.
- Liquidity: Cash and cash equivalents increased from $11.9 million at year-end 2003 to $57.0 million at September 30, 2004, driven by strong operating cash flows.
Guidance, Outlook, Risks, and Unusual Items
- Acquisitions:
- Completed acquisition of WCAV (Charlottesville, VA) for approximately $1 million in August 2004.
- Announced on October 21, 2004, a definitive agreement to acquire KKCO-TV (Grand Junction, CO) for approximately $13.5 million, expected to close in Q1 2005.
- Debt Amendments: In May 2004, the company amended its senior credit facility, reducing the interest rate by 0.5% and extending the maturity date to June 30, 2011. The outstanding balance is $375 million with an interest rate of 3.37% as of September 30, 2004.
- Capital Expenditures: Significant spending on digital television conversion equipment ($9.7 million for the nine months). Management anticipates $6.5 million in total capital expenditures for Q4 2004, with $2.8 million related to digital conversion.
- Commitments: Entered a new sports marketing agreement with the University of Kentucky (commencing April 2005) with aggregate license fees of approximately $80.5 million over ten years, shared equally with Host Communications.
- Legal Contingencies:
- Tarzian Litigation: Gray is involved in litigation regarding its equity investment in Sarkes Tarzian, Inc. Tarzian claims damages up to $75 million and seeks title to the shares. Gray denies liability and intends to defend vigorously.
- Outlook: Management believes current cash balances and operating cash flows are adequate for capital expenditures, debt service, and dividends. The company expects to utilize loss carryforwards to avoid significant federal/state income tax payments in the near future.
Investor Verification Checklist
- Political Revenue Sustainability: Verify the extent to which the 2004 revenue surge is attributable to the presidential election cycle and assess the risk of a revenue drop in non-election years.
- Paging Segment Decline: Monitor the continued erosion of the paging business due to cellular competition and the impact on overall revenue mix.
- KKCO-TV Acquisition: Confirm the closing of the $13.5 million KKCO-TV acquisition and the associated FCC approval status.
- Legal Exposure: Track the status of the Tarzian litigation, specifically the potential $75 million claim and the risk to Gray's equity investment.
- Debt Covenants: Review the amended senior credit facility terms and ensure compliance with covenants, particularly given the high debt load ($655.9 million total).
- Digital Conversion Costs: Verify the completion of digital broadcasting requirements and the accuracy of projected Q4 capital expenditures.