Business Context and Reporting Period
Company: Gray Television, Inc.
Filing Type: Form 10-Q (Quarterly Report)
Period Ended: June 30, 2010
Business Overview: Gray operates 36 television stations serving 30 markets, with 17 CBS affiliates, 10 NBC affiliates, 8 ABC affiliates, and 1 FOX affiliate. The company also operates 39 digital second channels. Revenues are derived primarily from broadcast and internet advertising, retransmission consent fees, and production services.
Key Financial Metrics
| Metric (in thousands) | Six Months Ended June 30, 2010 | Six Months Ended June 30, 2009 |
|---|---|---|
| Total Revenues | $146,118 | $126,411 |
| Operating Income | $30,076 | $13,764 |
| Net Income (Loss) | $(4,209) | $(15,568) |
| Net Loss Available to Common Stockholders | $(15,213) | $(23,669) |
| Net Cash Provided by Operating Activities | $13,961 | $377 |
| Cash and Cash Equivalents (End of Period) | $15,714 | $9,786 |
| Total Long-Term Debt (incl. current portion) | $846,772 | $791,809 |
| Long-Term Accrued Facility Fee | $26,139 | $18,307 |
Liquidity: As of June 30, 2010, the company had $40.0 million in borrowing availability under its senior credit facility. The company was in compliance with all debt covenants.
Material Changes vs. Prior Period
- Revenue Growth: Total revenue increased 16% ($19.7 million) compared to the prior year period. This was driven by a 329% increase in political advertising revenue ($8.4 million vs. $2.0 million) due to the election cycle, an 8% increase in local advertising, and a 10% increase in national advertising.
- Operating Income: Operating income improved significantly to $30.1 million from $13.8 million, aided by revenue growth and a decrease in depreciation and bad debt expenses.
- Interest Expense: Interest expense increased 23% to $37.0 million for the six-month period. This was due to a higher average debt balance and higher average interest rates prior to the April 2010 refinancing, despite the expiration of interest rate swaps.
- Preferred Stock Dividends: Preferred dividends increased 36% to $11.0 million. This included the recognition of unaccreted issuance costs and discounts associated with the repurchase of $60.7 million in face amount of Series D Perpetual Preferred Stock in April 2010.
Guidance, Outlook, and Management Commentary
- Refinancing Activity: On April 29, 2010, the company issued $365.0 million of 10.5% senior secured second lien notes due 2015. Proceeds were used to repay $300.0 million of term loans under the senior credit facility and to repurchase preferred stock. This transaction reduced the facility fee rate and eliminated the annual incentive fee.
- Preferred Stock Status: The company has deferred cash payments on Series D Perpetual Preferred Stock dividends since October 1, 2008. Due to these arrears, the dividend rate increased to 17.0% per annum. While dividends are in arrears, the company is prohibited from paying cash dividends on common stock.
- Capital Expenditures: Capital expenditures for the six months ended June 30, 2010, were $6.2 million. The company anticipates capital expenditures for the remainder of 2010 to be approximately $8.8 million.
- Tax Outlook: Management estimates the effective income tax rate for the full year 2010 will be approximately 42%.
- Risks: The company faces risks related to the negotiation of retransmission consent agreements, potential legislative changes regarding cable/satellite negotiations, and the impact of internet competition on advertising revenue.
Investor Verification Checklist
- Debt Covenants: Verify continued compliance with the new first lien leverage ratio (maximum 6.5x to 7.5x depending on repayment) and minimum fixed charge coverage ratio (0.90x to 1.0x) following the April 2010 refinancing.
- Preferred Dividend Arrears: Confirm the status of the $10.8 million in accrued Series D Preferred Stock dividends and the impact of the 17.0% accrual rate on future cash flow.
- Political Advertising Volatility: Assess the sustainability of revenue growth given the significant contribution of political advertising (5.7% of total revenue for the six months) which is cyclical and election-year dependent.
- Retransmission Consent: Monitor the outcome of retransmission consent negotiations, as failure to agree could lead to blackouts or required payments to networks, adversely affecting operating results.
- Interest Rate Exposure: Review the impact of the expiration of interest rate swap agreements in April 2010 on future interest expense volatility given the variable rate nature of the remaining senior credit facility.