Business Context and Reporting Period
Company: Gray Television, Inc.
Filing Type: Form 10-Q (Quarterly Report)
Period Ended: March 31, 2010
Business Overview: Gray operates 36 television stations serving 30 markets, with affiliations to CBS, NBC, ABC, and FOX. It is the largest independent owner of CBS affiliates in the U.S. 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) | Q1 2010 | Q1 2009 |
|---|---|---|
| Total Revenues | $70,482 | $61,354 |
| Operating Income | $11,940 | $4,766 |
| Net Loss | $(4,743) | $(8,920) |
| Net Loss Available to Common Stockholders | $(9,294) | $(12,971) |
| Diluted EPS (Loss) | $(0.19) | $(0.27) |
| Operating Cash Flow | $6,986 | $(1,296) |
| Cash and Equivalents (End of Period) | $13,664 | $14,857 |
| Total Debt (Current + Long-term) | $789,789 | $791,809 |
| Accrued Facility Fee | $24,245 | $18,307 |
| Preferred Stock (Liquidation Value) | $100,000 | $100,000 |
Note: All figures in thousands except per share data.
Material Changes vs. Prior Period
- Revenue Growth: Total revenues increased 15% ($9.1 million) driven by a 11% increase in local advertising, an 8% increase in national advertising, and a 176% surge in political advertising ($2.8 million). The 2010 period also benefited from $2.8 million in net revenues from the Winter Olympic Games broadcast, which was absent in 2009.
- Operating Expenses: Broadcast expenses rose 4% ($1.9 million) primarily due to higher sales incentive compensation and pension costs. Corporate and administrative expenses decreased 28% ($1.1 million) due to reduced legal fees and relocation costs.
- Interest Expense: Interest expense increased 94% ($9.5 million) to $19.6 million. This was caused by higher average interest rates (9.8% vs. 4.9%) following a credit facility amendment in March 2009, partially offset by a slight decrease in average debt principal.
- Debt Restructuring Costs: The company recorded a $0.3 million loss from the early extinguishment of debt in Q1 2010 related to amending its senior credit facility, compared to an $8.4 million loss in Q1 2009.
- Cash Flow: Operating cash flow turned positive, providing $7.0 million compared to a $1.3 million usage in the prior year, largely due to increased revenues.
Guidance, Outlook, and Risks
Capital Structure Changes (Subsequent Event): On April 29, 2010, Gray issued $365 million of 10.5% senior secured second lien notes due 2015. Proceeds were used to repay $300 million of term loans under its senior credit facility and to repurchase approximately $60.7 million of Series D Perpetual Preferred Stock (along with accrued dividends) in exchange for cash and common stock.
Debt Covenants: The March 31, 2010 amendment to the senior credit facility increased the maximum total net leverage ratio to 9.00x through March 2011. Following the April 2010 debt issuance, the company is subject to a first lien leverage test ranging from 7.5x to 6.5x.
Preferred Stock Dividends: Cash dividends on Series D Perpetual Preferred Stock have been deferred since October 2008. The dividend rate increased to 17.0% per annum in July 2009 due to three consecutive unfunded payments. While dividends are in arrears, the company is prohibited from paying dividends on common stock.
Risks:
- Subordination: The new second lien notes are junior to the senior credit facility. In a foreclosure, senior lenders are paid first.
- Liquidity: Significant debt obligations mature between 2014 and 2015. The company relies on operating cash flow and refinancing capabilities.
- Collateral Risks: Certain security interests for the new notes were not perfected at issuance, and some collateral may be subject to release or dilution under intercreditor agreements.
Investor Verification Checklist
- Debt Service Capacity: Verify the company's ability to service the new $365 million second lien notes and the remaining senior credit facility given the high leverage ratio (8.43x actual vs. 9.00x maximum).
- Preferred Stock Arrears: Confirm the status of the $23.2 million in accrued preferred dividends and the impact of the 17% dividend rate on future cash flow.
- Revenue Sustainability: Assess whether the 176% increase in political advertising and Olympic-related revenues are recurring or one-time events.
- Covenant Compliance: Monitor compliance with the new first lien leverage test and fixed charge coverage ratio following the April 2010 refinancing.
- Collateral Perfection: Review the status of security interests for the new notes, noting that some mortgages and title insurance were not in place at issuance.