Business context and reporting period
Gray Television, Inc. (now identified in the request as Gray Media, Inc.) filed this unaudited Form 10-Q for the quarter ended September 30, 2012. The company operated television stations in 30 U.S. markets and reported one segment. Results reflect the seasonality of broadcast advertising and the even-year political advertising cycle.
Financial performance
Amounts below are in millions of dollars except per-share data and percentages.
| Metric | Q3 2012 | Q3 2011 | 9M 2012 | 9M 2011 |
|---|---|---|---|---|
| Revenue | $102.9 | $76.5 | $278.2 | $222.5 |
| Operating income | $41.1 | $18.2 | $94.9 | $48.8 |
| Operating margin | 39.9% | 23.8% | 34.1% | 21.9% |
| Net income | $15.9 | $2.0 | $30.2 | $1.5 |
| Net income (loss) attributable to common stockholders | $14.6 | $0.03 | $26.6 | ($4.1) |
| Diluted earnings (loss) per share attributable to common stockholders | $0.26 | $0.00 | $0.47 | ($0.07) |
- Q3 revenue rose 34%; nine-month revenue rose 25%. Political advertising contributed $24.5 million in Q3 and $42.6 million year to date, versus $5.2 million and $8.9 million in the comparable 2011 periods.
- Retransmission consent revenue increased 65% in Q3 to $8.5 million and 66% year to date to $25.3 million, primarily due to more favorable renewed contract terms. Internet advertising also grew, while local and national advertising increased more modestly.
- Broadcast expense increased 7% in both comparison periods, reflecting compensation, programming costs and sales commissions. Interest expense was $15.2 million in Q3 and $45.4 million for nine months.
- Nine-month operating cash flow was $90.3 million, compared with $37.6 million. Investing cash use was $17.2 million, including $17.7 million of capital expenditures; financing cash use was $32.6 million. Cash increased to $45.7 million from $5.2 million at year-end 2011.
Financial position and material changes
- At September 30, 2012, total assets were $1.274 billion, total liabilities $1.111 billion, and stockholders’ equity $149.9 million. Cash was $45.7 million and current assets exceeded current liabilities by $50.9 million.
- Recorded long-term debt, including the current portion, was $820.6 million; face value was $824.4 million. The company reported $40 million of availability under its then-current senior credit facility and compliance with its debt covenants at quarter-end.
- After quarter-end, Gray issued $300 million of 7.5% senior notes due 2020 and entered a new senior credit facility with $555 million of term loans and a $40 million revolver. It tendered for $222.6 million of 10.5% notes due 2015 and planned to redeem the remainder on November 13, 2012. Management estimated pro forma debt face value of $855 million after that redemption.
- The company repurchased the remaining Series D preferred stock on October 9, 2012. Preferred stock outstanding at September 30 had a recorded value of $13.2 million and a 17% annual dividend rate.
Outlook, commentary and risks
- Management said non-political advertising had continued to improve with the economy, while emphasizing that revenue is seasonal and typically stronger in the second and fourth quarters and in even-numbered election years. Q3 revenue benefited from political advertising and the 2012 Summer Olympics; nine-month results also benefited from the Super Bowl.
- No formal earnings guidance is provided. Management expected approximately $5.3 million of capital expenditures for the remainder of 2012 and $1.3 million of additional pension contributions. It estimated at least $148 million of debt principal payments, $48.9 million of interest payments and $17.3 million of capital expenditures in the 12 months after September 30, and said available cash, operating cash flow and credit access should cover these needs and debt service through at least the October 2019 term-loan maturity.
- Gray expected to record approximately $8.2 million of debt-extinguishment loss related to the credit-facility refinancing and approximately $38.6 million related to the 2015 note tender and redemption, both in Q4 2012. These were estimates disclosed after quarter-end.
- Key risks include dependence on cyclical advertising and political spending, concentration in automotive and other advertiser categories, network affiliation and retransmission negotiations, competition from cable and online video, substantial debt and variable-rate exposure, restrictive debt covenants, underfunded pensions, FCC regulation and potential broadcast-spectrum reallocation. The filing reported no goodwill or intangible-asset impairment triggering event during the nine months.
- Management stated that disclosure controls were effective at period-end and that no material change in internal control over financial reporting was identified during Q3.
Important facts for investors to verify
- Whether the planned November 2012 redemption of remaining 2015 notes was completed as expected, and the resulting debt balance, interest costs and actual extinguishment charges.
- Whether the new credit facility’s leverage, pricing and covenant terms leave adequate liquidity under weaker operating conditions.
- How much of Q3 and year-to-date revenue and cash-flow improvement was attributable to election-cycle political advertising, Olympics, Super Bowl and timing or working-capital effects, rather than recurring growth.
- Progress and economics of upcoming network affiliation and retransmission consent renewals, and the status of the NBC affiliation agreements noted as extended short-term during negotiations.
- Trends in automotive and other concentrated advertising categories, pension funding requirements, and any developments affecting broadcast licenses or spectrum use.