GTN

Business Context and Reporting Period

Company: Gray Television, Inc.
Filing Type: Form 10-K (Annual Report)
Period Ended: December 31, 2009
Business Overview: Gray Television owns and operates 36 television stations serving 30 markets across the United States, reaching approximately 6.3% of total U.S. households. The company is the largest independent owner of CBS affiliates. Revenue is derived primarily from local, regional, and national advertising, with significant exposure to the automotive and restaurant sectors.

Key Financial Metrics

Material Changes vs. Prior Period

• Revenue Decline: Total revenues decreased 17% ($56.8 million) compared to 2008. This was driven by a 79% drop in political advertising (due to the non-election year cycle), a 31% decline in automotive advertising, and reduced spending in the general recessionary environment.
• Impairment Charges: Unlike 2008, which included a massive $338.7 million non-cash impairment charge on goodwill and broadcast licenses, Gray recorded no impairment charges in 2009.
• Debt Restructuring: The company amended its senior credit facility in March 2009, incurring an $8.4 million loss on early extinguishment of debt. This amendment increased interest rates and introduced a 3% annual facility fee to avoid default on leverage covenants.
• Dividend Suspension: The company suspended cash dividends on common and Class A stock (last paid Q3 2008) and deferred Series D Perpetual Preferred Stock dividends (last paid Oct 2008). The preferred dividend rate increased to 17.0% due to consecutive deferrals.
• Retransmission Consent: Revenue from retransmission consent fees increased 414% to $15.6 million due to more profitable contract terms finalized in 2009.

Guidance, Outlook, and Risks

• Liquidity and Debt Covenants: The company's leverage ratio was 8.42x at year-end, approaching the 8.75x maximum allowed under the amended facility. In March 2010, the company further amended its credit facility to increase the leverage cap and reduce revolving loan availability to $40 million to ensure compliance. An additional 2.0% incentive fee was imposed until $200 million of term loan debt is repaid.
• Capital Expenditures: Expected to be approximately $15.0 million in 2010, funded by cash flow and borrowings. This is capped by the credit facility.
• Key Risks:
  • Economic Sensitivity: Heavy reliance on advertising revenue, particularly from the automotive (17% of 2009 revenue) and restaurant (12%) sectors, which are highly sensitive to economic downturns.
  • Regulatory: FCC ownership rules and the National Broadband Plan could impact spectrum usage and expansion capabilities.
  • Dividend Restrictions: While Series D Preferred dividends are in arrears, the company is prohibited from paying common stock dividends.
  • Asset Valuation: Significant portions of assets are intangible (broadcast licenses and goodwill). Future impairment charges remain a risk if market conditions or stock prices deteriorate.

Investor Verification Checklist

• Covenant Compliance: Verify the company's ability to maintain the total net leverage ratio under the March 2010 amended credit facility terms.
• Preferred Stock Status: Monitor the accumulation of deferred Series D Preferred dividends and the potential impact of the 17% dividend rate on future cash flows.
• Debt Refinancing: Assess the feasibility and timing of the proposed capital raising transaction required to repay $200 million of term loan debt to eliminate the 2.0% incentive fee.
• Advertising Trends: Track recovery in automotive and restaurant advertising spending as a leading indicator of revenue stabilization.
• Intangible Asset Valuation: Review the assumptions used in the annual impairment testing of broadcast licenses and goodwill, specifically discount rates and revenue growth projections.