Gray Television, Inc. — Q2 2011 Form 10-Q
Business context and reporting period. The filing covers the quarter and six months ended June 30, 2011. Gray operated 36 television stations in 30 markets, with 40 digital secondary channels; revenue came primarily from broadcast and internet advertising, retransmission consent, and other services. Figures below are in millions of dollars unless stated otherwise.
Financial performance and position
| Metric | Q2 2011 | Q2 2010 | Six months 2011 | Six months 2010 |
|---|---|---|---|---|
| Revenue | $76.2 | $75.6 | $145.9 | $146.1 |
| Operating income | $19.0 | $18.1 | $30.5 | $30.1 |
| Net income (loss) | $2.6 | $0.5 | $(0.5) | $(4.2) |
| Net income (loss) available to common stockholders | $0.8 | $(5.9) | $(4.1) | $(15.2) |
| Operating margin | 25.0% | 24.0% | 20.9% | 20.6% |
- Revenue mix and changes: Q2 revenue rose 1%. Local advertising increased 4% to $47.8 million, internet advertising rose 56% to $4.9 million, and retransmission consent revenue increased 8% to $5.1 million. Political advertising fell 59% to $2.3 million. For the first half, revenue was nearly flat: growth in local, internet, and retransmission consent was offset mainly by lower political and national advertising.
- Costs and interest: Q2 broadcast expenses before depreciation and amortization rose 4% to $47.9 million, primarily from compensation, incentive pay, and healthcare claims. First-half broadcast expenses increased 3% to $96.1 million. Interest expense declined 12% in Q2 to $15.3 million and 15% for the first half to $31.3 million, reflecting lower average rates; first-half average debt was approximately $831.8 million.
- Cash flow: First-half operating cash flow was $17.3 million, versus $14.0 million. Investing used $16.2 million, versus $6.3 million, largely due to higher equipment spending; financing used $3.0 million, versus $7.9 million. Cash decreased $2.0 million to $3.5 million.
- Liquidity and debt: Current assets were $68.5 million and current liabilities $45.4 million at June 30. Recorded long-term debt, including current maturities, was $825.0 million, including $465.4 million under the senior credit facility and $365.0 million principal amount of 10.5% second-lien notes due 2015. The company had $40.0 million available under its revolver and reported compliance with debt covenants. Preferred stock had a $39.3 million liquidation value and $17.5 million of accrued dividends.
- Capital and obligations: First-half capital expenditures were $16.7 million, compared with $6.2 million. Stockholders’ equity was $125.4 million, down from $129.4 million at year-end 2010. No common dividends were declared.
Material changes versus the prior period
- Q2 common-stockholder earnings improved from a $5.9 million loss to $0.8 million of income, while first-half common-stockholder loss narrowed to $4.1 million from $15.2 million. Lower preferred dividends materially aided the comparison; 2010 included a large charge related to the preferred-stock redemption and issuance costs.
- First-half national advertising was affected by the Super Bowl airing on FOX rather than Gray’s larger group of CBS affiliates and the absence of Winter Olympics coverage. The company reported approximately $0.2 million of Super Bowl-related net advertising revenue in 2011 versus $0.9 million in 2010, and $2.8 million of Olympic-related revenue in 2010.
- Interest expense declined, while equipment investment increased. The senior credit facility rate was 3.7% at June 30, compared with 4.5% at December 31, 2010.
Outlook, commentary, risks, and unusual items
- Management attributed stronger local and internet advertising to improving advertiser spending and noted automotive spending increased in the first half. It also cited internet competition as continuing pressure on advertising revenue. Political advertising is typically higher in even-numbered election years.
- Management estimated approximately $4.7 million of capital expenditures for the remainder of 2011, excluding construction of the replacement WEAU-TV tower. It expected an additional $1.9 million of pension contributions in the remainder of 2011 and said available tax-loss carryforwards were expected to limit significant cash income taxes for several years.
- The WEAU-TV primary tower collapsed in severe weather on March 22, 2011. Gray had received approximately $1.0 million of insurance proceeds and recorded a $0.8 million gain on disposal. Management expected insurance to cover property and business-interruption losses and anticipated any excess costs would not be material; tower replacement costs and further insurance recoveries remain relevant to monitor.
- Series D preferred dividends have been deferred since October 2008, except for a payment associated with a 2010 redemption. The dividend accrues at 17% while three or more consecutive cash payments remain unfunded; arrears rose to $17.5 million. Arrears restrict cash dividends and repurchases of common and other junior equity. A June 2011 credit-facility amendment permits certain security proceeds to fund preferred redemption subject to specified debt-repayment conditions.
- Other matters include a $33.8 million aggregate remaining potential UK sports-marketing license fee obligation if IMG cannot pay; Gray said it did not consider IMG’s risk of non-performance high. Management stated that ordinary-course legal claims were not expected to materially affect financial position, while noting outcomes cannot be predicted with certainty.
- No formal full-year revenue or earnings guidance was provided. The filing notes that broadcast advertising is seasonal and interim results are not necessarily indicative of full-year results. Management reported effective disclosure controls and no material change in internal control over financial reporting.
Important facts for investors to verify
- Debt maturities, covenant headroom, revolver availability, interest-rate exposure, and the terms governing any preferred-stock redemption.
- Preferred-stock dividend arrears, the 17% accrual rate, and the resulting restrictions on common-stock distributions.
- Final insurance recoveries, replacement-tower spending, and any business-interruption effects from the WEAU-TV tower collapse.
- Whether local and internet advertising growth can offset political-cycle and national-advertising declines, along with changes in retransmission consent revenue.
- Actual remaining-2011 capital spending and pension contributions compared with management’s estimates.