Gray Television, Inc. — Q2 2012 Form 10-Q
Reporting period: Three and six months ended June 30, 2012; unaudited. Gray operated 36 primary television channels in 30 markets and 41 secondary channels. The company reports one operating segment.
Financial performance
| Metric | Q2 2012 | Q2 2011 | First half 2012 | First half 2011 |
|---|---|---|---|---|
| Revenue | $94.7 million | $76.2 million | $175.4 million | $145.9 million |
| Operating income | $33.0 million | $19.0 million | $53.9 million | $30.5 million |
| Operating margin | 34.9% | 25.0% | 30.7% | 20.9% |
| Net income (loss) attributable to common stockholders | $9.8 million | $0.8 million | $12.0 million | $(4.1) million |
| Diluted earnings (loss) per share | $0.17 | $0.01 | $0.21 | $(0.07) |
| Operating cash flow | Not separately presented | Not separately presented | $45.1 million | $17.3 million |
Revenue increased 24% in Q2 and 20% in the first half. Political advertising was $13.1 million in Q2 and $18.1 million in the first half, versus $2.3 million and $3.7 million, respectively, a year earlier. Retransmission-consent revenue also rose significantly after contract renewals on more favorable terms. Local, national and internet advertising increased as well.
Broadcast expenses rose 10% in Q2 and 8% in the first half, driven by compensation, programming and sales-related costs. Interest expense was $15.1 million for Q2 and $30.3 million for the first half. The first-half result also included $5.5 million of other revenue, primarily copyright royalty payments that management said could recur at lower amounts.
Cash, debt and liquidity
- Cash was $28.0 million at June 30, 2012, compared with $5.2 million at December 31, 2011.
- First-half cash flow: $45.1 million from operations, $10.8 million used in investing and $11.4 million used in financing; cash increased $22.9 million.
- Recorded long-term debt, including current portion, was $821.5 million, down from $832.2 million at year-end. The debt included $460.6 million outstanding under the senior credit facility and $365.0 million principal of 10.5% second-lien notes due June 2015. Facility borrowing availability was $40 million.
- The senior facility term loan matures December 2014 and its revolving facility matures March 2014. Gray reported compliance with debt covenants at June 30.
- Management estimated the next 12 months’ debt principal payments at $4.8 million, interest payments at $54.9 million and capital expenditures at $23.0 million. It expected cash, operating cash flow and available borrowing to cover obligations and capital spending through at least December 31, 2014.
Outlook, risks and unusual items
- No specific earnings or revenue guidance was provided. Management forecast approximately $11.4 million of capital expenditures for the remainder of 2012 and $4.6 million of additional pension contributions.
- Management attributed improving non-political advertising to a gradually improving economy, while noting that broadcast advertising is cyclical and typically stronger in the second and fourth quarters. Political advertising benefits in even-numbered election years and is typically heaviest in Q4; therefore, 2012 political revenue may not represent a recurring level.
- Advertising concentration is a risk: automotive and medical accounted for approximately 20% and 10% of first-half broadcast advertising revenue, respectively. The filing also identifies other significant advertising categories whose declines could hurt results.
- Series D preferred dividends had been deferred since 2008; accrued dividends were $15.9 million at June 30. The 17% annual dividend rate remains in effect while three consecutive cash payments are unfunded. Arrears prevent cash dividends on common stock. On July 31, Gray repurchased preferred shares for $12.3 million and paid $7.7 million of related accrued dividends.
- The company reported no material change in risk factors, no material change in market-risk profile, and no impairment-triggering events for goodwill or intangible assets during the first half. It reported effective disclosure controls and no material control changes. Legal claims arise in the ordinary course; management did not expect them to materially affect financial position, but outcomes are uncertain.
- Under a University of Kentucky sports-marketing agreement, Gray could be required to cover unpaid license fees if IMG fails to pay; approximately $25.8 million remained payable by IMG over the agreement’s remaining term. Gray said it did not consider non-performance risk high.
Key facts for investors to verify
- How much of the revenue and earnings improvement is attributable to election-year political spending, and how results develop in the second half.
- The durability of retransmission-consent rate increases as contracts renew, and the impact of rising broadcast and pension expenses.
- Cash generation, covenant headroom and refinancing plans ahead of the 2014 credit-facility maturities and 2015 notes maturity.
- The cost and terms of the July preferred-stock repurchase, remaining preferred dividend arrears, and implications for common-shareholder distributions.
- Whether projected operating cash flow can fund debt service, capital expenditures and pension contributions as management anticipated; the filing does not provide a clear standalone EBITDA value.