GTN

Business Context and Reporting Period

Company: Gray Television, Inc.
Filing Type: Form 10-K (Annual Report)
Period Ended: December 31, 2008
Business Overview: Gray Television owns and operates 36 television stations serving 30 markets, reaching approximately 6.1% of U.S. TV households. The company is the largest independent owner of CBS affiliates (17 stations). Revenue is primarily derived from local and national advertising, with significant seasonality driven by political election cycles (even-numbered years) and holiday retail spending.

Key Financial Metrics

Material Changes vs. Prior Period

• Revenue Growth: Total revenues increased 6% to $327.2 million, driven primarily by a 521% increase in political advertising revenue ($48.5 million) due to the 2008 election cycle. However, non-political local and national advertising revenues declined due to the national economic recession.
• Significant Impairment Charges: The company recorded a non-cash impairment expense of $338.7 million, consisting of a $240.1 million write-down of broadcast licenses and a $98.6 million write-down of goodwill. This was triggered by declining stock prices, falling station selling prices, and reduced operating margins.
• Debt Reduction: Long-term debt decreased by approximately $124.6 million. The company utilized proceeds from the issuance of Series D Perpetual Preferred Stock ($91.6 million net proceeds) to voluntarily prepay $88.0 million of its term loan.
• Stock Performance: The company's stock price declined significantly, with the average closing price falling below $1.00 per share in late 2008, triggering a non-compliance notice from the NYSE regarding listing standards.

Guidance, Outlook, Risks, and Unusual Items

• Dividend Suspension: The Board did not declare a cash dividend for the fourth quarter of 2008. Additionally, the company did not fund the Series D Perpetual Preferred Stock dividend due January 15, 2009. While dividends are in arrears, the company is prohibited from paying common stock dividends.
• NYSE Listing Risk: The company received notice of non-compliance with NYSE listing standards due to stock price and market capitalization thresholds. While the NYSE temporarily suspended the $1.00 minimum price requirement, the company faces potential delisting if standards are not met.
• Debt Covenants: The company is subject to restrictive covenants under its senior credit facility, including leverage ratio tests. As of December 31, 2008, the company was in compliance, but future compliance is not assured given the economic environment.
• Subsequent Event: On March 31, 2009, the company amended its senior credit facility. The amendment increased interest rates (LIBOR + 3.5% vs. prior LIBOR + 1.5%), reduced the revolving credit commitment from $100 million to $50 million, and increased the maximum allowable leverage ratio temporarily.
• Impairment Risk: Management noted that if economic trends continue, further impairment charges on goodwill and broadcast licenses may be required in future periods.

Investor Verification Checklist

• Impairment Methodology: Verify the assumptions used for the $338.7 million impairment charge, specifically the discount rates (10.5% for licenses, 11.5% for goodwill) and projected cash flow margins.
• Debt Covenant Compliance: Monitor the company's ability to maintain the leverage ratio covenants under the amended credit facility, particularly given the increased interest rates and reduced liquidity.
• Preferred Stock Dividends: Track the status of the Series D Perpetual Preferred Stock dividends. If three consecutive payments remain unfunded, the dividend rate increases from 15% to 17%.
• NYSE Listing Status: Confirm whether the company has successfully cured the NYSE listing deficiencies regarding stock price and market capitalization.
• Advertising Concentration: Assess the impact of the economic recession on key advertising sectors, specifically automotive (19% of 2008 revenue) and restaurants (10% of 2008 revenue).