Gray Television, Inc. - 2010 Annual Report (10-K) Summary
Business Context and Reporting Period
Company: Gray Television, Inc.
Reporting Period: Fiscal year ended December 31, 2010.
Business Overview: Gray owns and operates 36 television stations serving 30 markets across the United States. The company is the largest independent owner of CBS affiliates (17 stations), with additional affiliations to NBC (10), ABC (8), and FOX (1). The stations reach approximately 6.3% of U.S. households. The company also broadcasts 40 digital second channels. Revenue is primarily derived from local, national, and political advertising, as well as retransmission consent fees.
Key Financial Metrics (Year Ended Dec 31, 2010)
| Metric | 2010 | 2009 |
|---|---|---|
| Total Revenue | $346.1 million | $270.4 million |
| Operating Income | $107.0 million | $43.1 million |
| Net Income | $23.2 million | $(23.0 million) |
| Net Income Available to Common Stockholders | $8.6 million | $(40.2 million) |
| Diluted EPS (Common) | $0.16 | $(0.83) |
| Operating Cash Flow | $38.1 million | $18.9 million |
| Total Assets | $1,242.3 million | $1,245.7 million |
| Total Debt (Long-term + Current) | $826.7 million | $791.8 million |
| Cash and Cash Equivalents | $5.4 million | $16.0 million |
Material Changes vs. Prior Period
- Revenue Growth: Total revenue increased 28% ($75.7 million) compared to 2009. This was driven by a 477% increase in political advertising revenue ($57.6 million vs. $10.0 million) due to the 2010 election cycle, alongside improvements in local and national advertising as the economy recovered.
- Profitability: The company returned to profitability, reporting net income of $23.2 million compared to a net loss of $23.0 million in 2009. Operating income more than doubled to $107.0 million.
- Debt Restructuring: In April 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 its senior credit facility term loan, reducing the annual facility fee from 3.0% to 0.75%.
- Preferred Stock: The company repurchased approximately $60.7 million in face amount of Series D Perpetual Preferred Stock in April 2010. Dividends on the remaining preferred stock remain in arrears, causing the dividend rate to accrue at 17.0% per annum.
Guidance, Outlook, and Risks
- Outlook: Management expects capital expenditures for 2011 to range between $15.0 million and $20.0 million, funded by cash from operations and borrowings. The company anticipates paying state income taxes in certain states over the next several years but expects to utilize federal loss carryforwards to avoid significant federal tax payments.
- Seasonality: Revenues are cyclical, typically higher in even-numbered years due to political advertising. The company notes that 2010 was an "on year" for political spending.
- Key Risks:
- Debt Obligations: Significant debt maturities are due between late 2014 and mid-2015. The company is subject to strict covenants, including a first lien leverage ratio and fixed charge coverage ratio.
- Dividend Restrictions: While Series D Preferred Stock dividends are in arrears, the company is prohibited from paying dividends on common or Class A common stock.
- Regulatory Environment: The FCC's National Broadband Plan could require spectrum reallocation, potentially incurring conversion costs or reducing signal coverage. Changes to retransmission consent rules could also impact revenue.
- Advertising Concentration: Automotive (17%) and restaurant (9%) industries represent a material portion of revenue; downturns in these sectors could materially affect results.
Investor Verification Checklist
- Debt Covenants: Verify continued compliance with the first lien leverage ratio (actual 4.46x vs. max 7.00x) and fixed charge coverage ratio (actual 1.27x vs. min 0.90x) as of Dec 31, 2010.
- Preferred Stock Status: Confirm the status of accrued dividends on Series D Perpetual Preferred Stock ($14.1 million accrued as of year-end) and the impact of the 17.0% accrual rate on future cash flow.
- Political Revenue Volatility: Assess the sustainability of revenue growth given the significant contribution of political advertising in 2010 (16.6% of total revenue) compared to non-election years.
- Liquidity Position: Review the cash balance ($5.4 million) against upcoming debt service obligations and the $40.0 million availability under the revolving credit facility.
- Impairment Testing: Monitor the annual impairment testing of broadcast licenses and goodwill ($989.5 million combined carrying value), noting that a 100 basis point increase in the discount rate could hypothetically result in a $4.0 million impairment charge.