Gray Television, Inc. - 10-Q Summary (Period Ended June 30, 2003)
Business Context and Reporting Period
This Form 10-Q covers the quarterly period ended June 30, 2003, and the six-month period ended June 30, 2003, for Gray Television, Inc. The Company operates in three segments: broadcasting (29 television stations), publishing (four daily newspapers), and paging (operations in Florida, Georgia, and Alabama). The reporting period reflects the full impact of the "2002 Acquisitions" (Gray MidAmerica Television and KOLO-TV), which were completed in the fourth quarter of 2002.
Key Financial Metrics
| Metric (in thousands) | Three Months Ended June 30, 2003 |
Six Months Ended June 30, 2003 |
|---|---|---|
| Total Operating Revenues | $76,647 | $141,622 |
| Operating Income | $22,365 | $34,030 |
| Net Income (Loss) | $7,032 | $7,203 |
| Net Income Available to Common Stockholders | $6,211 | $5,560 |
| Diluted EPS (Available to Common) | $0.12 | $0.11 |
| Cash and Cash Equivalents | $14,769 | $14,769 |
| Net Cash Provided by Operating Activities | N/A | $27,129 |
| Total Debt (Long-term + Current) | $656,435 | $656,435 |
| Available Credit Facility | $75,000 | $75,000 |
Material Changes vs. Prior Period
- Revenue Growth: Total revenues increased 80% for the quarter and 76% for the six-month period compared to the prior year. This growth is primarily attributable to the inclusion of the 2002 Acquisitions. Broadcasting revenues specifically increased 115% (quarter) and 111% (six months).
- Profitability: Net income available to common stockholders turned positive ($6.2M for the quarter, $5.6M for six months) compared to a net loss of $1.5M (quarter) and $39.7M (six months) in the prior year. The prior year loss included a $30.6M cumulative effect of accounting change (SFAS 142 goodwill impairment) and a $11.3M loss on early extinguishment of debt.
- Operating Expenses: Expenses increased 78% (quarter) and 80% (six months), driven by the acquired stations. Depreciation and amortization increased 92% (quarter) due to new intangible assets.
- Segment Performance:
- Broadcasting: Local and national advertising revenues increased. Political advertising decreased due to the "off-year" election cycle.
- Paging: Revenues declined 6% (quarter) and 4% (six months) due to price competition and a reduction in units in service (61,000 vs. 69,000 in 2002).
Outlook, Risks, and Contingencies
- Capital Expenditures: The Company anticipates aggregate cash payments for capital expenditures, including digital television conversion, to range between $22.0 million and $23.0 million for the full year 2003. Approximately $10.0 million is expected in the remainder of 2003.
- Debt Management: On June 9, 2003, the Company amended its senior credit facility, reducing the interest rate on its $375 million term loan by 0.5% annually. The Company also entered into three interest rate swap agreements with a combined notional amount of $50.0 million.
- Legal Proceedings:
- IRS Audit: A dispute regarding the 1996 purchase of assets from First American Media, Inc. remains pending. An adverse ruling could reduce the tax basis of assets by approximately $166 million, though the Company expects no immediate cash tax impact due to net operating losses.
- Tarzian Litigation: The Company is involved in litigation regarding its equity investment in Sarkes Tarzian, Inc. A jury awarded Tarzian $4.0 million in damages (plus interest), which is currently under appeal. Tarzian has also sued the Company for tortious interference, seeking up to $75 million.
- Accounting Changes: The Company adopted SFAS 145, reclassifying prior extraordinary losses on debt extinguishment as operating losses. No such losses occurred in the current period.
Investor Verification Checklist
- Verify the sustainability of revenue growth from the 2002 Acquisitions versus organic growth in continuously owned stations.
- Monitor the resolution of the IRS audit regarding the 1996 asset purchase and potential future tax basis adjustments.
- Track the outcome of the Sarkes Tarzian litigation, specifically the appeal of the $4.0 million judgment and the $75 million tortious interference claim.
- Assess the impact of declining paging unit counts and competition from cellular services on the paging segment's long-term viability.
- Review the Company's ability to meet the $22-$23 million capital expenditure forecast for digital television conversion within the current fiscal year.