GTN

Gray Television, Inc. - 10-Q Summary (Period Ended Sept 30, 2008)

Business Context and Reporting Period

This filing covers the quarterly period ended September 30, 2008. Gray Television, Inc. operates 36 television stations across 30 markets, serving approximately 6.1% of U.S. TV households. The company is the largest independent owner of CBS affiliates in the United States. Operations are reported as a single segment, with revenues derived primarily from local and national broadcast advertising, internet advertising, and retransmission consent fees.

Key Financial Metrics

Material Changes vs. Prior Period

• Revenue Growth: Total revenues increased 12% ($9.0 million) for the quarter and 4% ($9.4 million) for the nine-month period compared to 2007. This growth was driven primarily by a surge in political advertising due to the 2008 general and primary elections.
• Political Advertising: Political revenues jumped 801% to $13.1 million for the quarter and 307% to $21.1 million for the nine-month period. Key markets included Colorado, West Virginia, Wisconsin, Michigan, and North Carolina.
• Decline in Core Advertising: Local and national advertising revenues decreased due to general economic weakness. Local revenue fell 3% for the quarter, and national revenue fell 9%.
• Debt Reduction: The company significantly reduced its debt load. Total long-term debt decreased from $925.0 million (Dec 31, 2007) to $830.4 million (Sept 30, 2008). This was achieved through voluntary prepayments totaling $88 million funded by the issuance of Series D Perpetual Preferred Stock.
• Interest Expense: Interest expense decreased 25% for the quarter and 17% for the nine-month period, attributed to lower average interest rates and reduced debt balances.
• Depreciation: Depreciation expenses declined 14% for the quarter and 11% for the nine-month period as equipment acquired in 2002 became fully depreciated.

Guidance, Outlook, Risks, and Unusual Items

• Capital Structure Changes: In June and July 2008, the company issued 1,000 shares of Series D Perpetual Preferred Stock (liquidation value $100,000/share) raising approximately $91.6 million in net proceeds. Dividends accrue at 12.0% annually through Dec 31, 2008, rising to 15.0% thereafter.
• Unusual Gains: The company recognized a $1.3 million gain on the disposal of assets during the nine-month period related to the FCC-mandated spectrum reallocation project, where third parties provided replacement equipment and reimbursed expenses.
• Market Risk: A 100 basis point increase in market interest rates would increase interest expense by approximately $3.2 million for a nine-month period. The fair value of long-term debt ($647.7 million) was significantly lower than its carrying value ($830.4 million).
• NYSE Listing Status: On November 4, 2008, the NYSE notified Gray that its common stock did not meet the $1.00 minimum price criterion for continued listing. The company has a six-month cure period to restore compliance. Management stated this does not affect operations or debt obligations.
• Pension Plan: Due to the global financial crisis, the company noted that its pension plan investments likely incurred a significant decline in value since December 31, 2007.

Investor Verification Checklist

• Preferred Stock Terms: Verify the impact of the 12% (rising to 15%) dividend rate on the Series D Preferred Stock on future cash flows and earnings available to common shareholders.
• NYSE Compliance: Monitor the stock price performance over the next six months to ensure compliance with NYSE listing standards and avoid delisting.
• Debt Covenants: Confirm continued compliance with leverage ratio covenants in the senior credit facility, especially given the high debt load relative to equity.
• Political Revenue Sustainability: Assess the sustainability of revenue growth given that the 2008 results were heavily bolstered by election-year political spending, which is not a recurring annual factor.
• Pension Funding: Review future funding requirements for the pension plan given the noted decline in asset values due to market volatility.