Gray Television, Inc. - 10-Q Filing Summary
Business Context and Reporting Period
Company: Gray Television, Inc.
Filing Type: Form 10-Q (Quarterly Report)
Period Ended: September 30, 2006
Business Overview: Gray operates 31 television stations across 31 markets, affiliated primarily with CBS, NBC, and ABC. The company also operates 24 digital multi-cast channels and four digital local news/weather channels. The reporting period includes the impact of recent acquisitions (WNDU-TV, WSAZ-TV, WSWG-TV) and the spinoff of publishing and wireless businesses (Triple Crown Media, Inc.) in late 2005.
Key Financial Metrics (Nine Months Ended Sept 30, 2006)
| Metric | 2006 (in thousands) | 2005 (in thousands) |
|---|---|---|
| Revenues | $230,216 | $188,578 |
| Operating Income | $54,697 | $43,355 |
| Net Income | $3,124 | $7,211 |
| Net Income Available to Common Stockholders | $655 | $4,767 |
| Operating Cash Flow | $60,444 | $39,251 |
| Total Assets | $1,629,463 | $1,525,054 |
| Total Debt (Long-term + Current) | $855,996 | $792,509 |
| Cash and Cash Equivalents | $4,157 | $9,315 |
Note: 2005 Net Income includes $3.7 million from discontinued operations (publishing/wireless). 2006 Net Income is derived solely from continuing operations.
Material Changes vs. Prior Period
- Revenue Growth: Revenues increased 22% ($41.6 million) year-over-year. This was driven primarily by the acquisition of WNDU-TV (March 2006), WSAZ-TV, and WSWG-TV, as well as the launch of digital second channels. Political advertising revenue surged to $17.1 million (vs. $1.4 million in 2005) due to the 2006 election cycle.
- Profitability Decline: Despite revenue growth, Net Income available to common stockholders dropped significantly ($4.1 million decrease). This was caused by:
- Higher interest expense ($16.2 million increase) due to debt financing acquisitions and higher rates.
- Increased operating expenses ($30.3 million increase) related to new stations and depreciation/amortization.
- Loss on early extinguishment of debt ($347,000).
- Adoption of SFAS 123(R) resulting in additional stock-based compensation expense ($216,000).
- Balance Sheet: Total assets increased by $104.4 million, largely due to the addition of broadcast licenses and goodwill from acquisitions. Cash reserves decreased by $5.2 million due to heavy investing activity ($117.1 million used for acquisitions and capex).
Outlook, Risks, and Management Commentary
- Capital Resources: Management believes cash flows and available credit ($93.8 million under the senior credit facility) are sufficient for capital expenditures, debt service, and dividends. The company repurchased $5.6 million of common stock and $1.8 million of preferred stock during the period.
- Accounting Changes: The company adopted SFAS 123(R) on Jan 1, 2006, requiring fair value measurement of stock-based awards. Future standards (FIN 48, SFAS 157, SFAS 158) are being assessed; SFAS 158 may reduce stockholders' equity by approximately $2.8 million upon adoption.
- Risk Factors:
- Impairment Risk: Significant intangible assets (FCC licenses: $1.1 billion; Goodwill: $269.8 million) require annual testing. A decline in fair value could trigger material non-cash impairment charges.
- Integration Risk: Successful integration of recent acquisitions is critical; failure could adversely affect operations.
- Debt Levels: High debt levels increase sensitivity to interest rate changes and economic downturns.
- Legal Proceedings: Litigation regarding the Company's investment in Sarkes Tarzian, Inc. concluded in June 2006 with a dismissal of claims against the Company.
Investor Verification Checklist
- Debt Service Coverage: Verify the ability to service $856 million in debt given the high interest expense ($49.7 million for 9 months) and reliance on operating cash flow.
- Intangible Asset Valuation: Monitor the $1.3 billion in goodwill and broadcast licenses for potential impairment triggers in future quarters.
- Acquisition Integration: Assess the performance of WNDU-TV and other "expanded channels" to ensure they meet revenue projections and offset increased operating costs.
- Political Revenue Cyclicality: Note that Q3 2006 results were boosted by $17.1 million in political advertising; compare Q4 2006 results to Q4 2005 to gauge the sustainability of revenue growth absent election-year spending.
- Preferred Stock Dividends: Confirm the impact of preferred dividends ($2.5 million for 9 months) on net income available to common shareholders.