Gray Television, Inc. — Q1 2013 Form 10-Q
Reporting period: Three months ended March 31, 2013; unaudited. Gray operated television stations in 30 markets, with 45 Big Four network-affiliated channels and 41 additional channels. The filing reports one operating segment.
Financial performance and position
| Metric | Q1 2013 | Q1 2012 / prior date |
|---|---|---|
| Revenue | $78.2 million | $80.7 million |
| Operating income | $15.1 million | $20.8 million |
| Operating margin | 19.3% | 25.8% |
| Net income | $0.9 million | $3.4 million |
| Net income available to common stockholders | $0.9 million; $0.02 per diluted share | $2.2 million; $0.04 per diluted share |
| Cash from operating activities | $17.6 million | $27.0 million |
| Capital expenditures | $6.5 million | $6.8 million |
| Cash and cash equivalents | $21.0 million | $11.1 million at Dec. 31, 2012 |
| Long-term debt, recorded value | $832.9 million | $832.9 million at Dec. 31, 2012 |
| Credit facility availability | $40.0 million | $40.0 million at Dec. 31, 2012 |
Revenue less agency commissions fell 3%. Operating expenses rose to $63.1 million from $59.9 million; broadcast expenses increased 5% to $53.5 million. Interest expense declined 17% to $12.5 million. The effective tax rate rose to 65.5% from 40.4%, with a 24.6 percentage-point increase attributed to the expiration of certain unexercised stock options. No preferred dividends were recorded in Q1 2013, versus $1.2 million in Q1 2012.
Cash from operations declined by $9.4 million year over year. Net cash used in investing was $7.7 million, including $1.2 million for broadcast licenses; financing provided $0.05 million, compared with $10.2 million of debt repayments in Q1 2012. The balance sheet showed $101.5 million of current assets and $50.3 million of current liabilities at March 31, 2013.
Material changes and management commentary
- Political advertising declined $4.3 million, or 87%, to $0.6 million, reflecting the off-year election cycle. Local and national advertising increased 1% and 3%, respectively; retransmission consent revenue grew 14% to $9.7 million.
- Management attributed higher local and national advertising to an improving economy and noted that the 2013 Super Bowl generated approximately $1.1 million on Gray’s 20 CBS channels.
- Broadcast compensation costs rose, including higher healthcare and pension expense; programming and other non-compensation costs also increased. Corporate and administrative expenses rose 23% to $3.8 million.
- Management stated that non-political advertising had continued to improve in 2013. Advertising is seasonal, generally stronger in Q2 and Q4, and political revenue is typically greater in even-numbered election years.
Outlook, risks and unusual items
- No specific revenue or earnings guidance was provided. Management estimated $20.0 million of capital expenditures and $48.1 million of debt interest payments over the 12 months following March 31, 2013, with no debt principal payments due in that period. It expected remaining 2013 capital expenditures of approximately $13.5 million to $15.5 million.
- Management expected cash on hand, operating cash flow and available borrowing capacity to cover near-term debt service and capital spending, and believed funding would be sufficient through at least the term loan’s October 12, 2019 maturity. These are forward-looking expectations subject to risks.
- Debt comprised a $535.0 million term loan and $300.0 million of 7.5% senior notes due 2020. The company reported covenant compliance; borrowing availability is subject to covenant limits. The debt fair value was $860.4 million versus $832.9 million carrying value.
- Automotive was the largest advertising category, representing 24% of total broadcast advertising revenue, up from 20%. Management cautioned that reduced automotive or other major-category revenue could materially harm results.
- Gray could be required to pay unpaid University of Kentucky sports marketing license fees if IMG fails to pay; approximately $21.7 million remained over the agreement term. Gray said it did not consider IMG nonperformance risk high. Ordinary-course legal matters were not expected to materially affect financial position, though outcomes are uncertain.
- Gray contributed $1.5 million to pension plans in Q1 and expected additional 2013 contributions of $1.6 million to $6.5 million. It reported no impairment-triggering events for goodwill or intangible assets and no material change in market risk or risk factors.
- Management concluded disclosure controls were effective and reported no material change in internal control over financial reporting during the quarter.
Investor verification points
- Check whether revenue and operating performance recover as political advertising normalizes, and monitor advertising-category concentration and retransmission consent growth.
- Assess the effect of higher operating costs and the unusually high 65.5% quarterly effective tax rate on subsequent results.
- Review operating cash generation against interest expense, planned capital expenditures, pension contributions and the company’s substantial debt burden.
- Monitor credit-facility covenant headroom and liquidity; the stated $40.0 million availability is subject to covenant restrictions.
- Track IMG’s payment performance under the University of Kentucky agreement and any developments in legal contingencies.