GTN

Business Context and Reporting Period

Company: Gray Television, Inc.
Filing Type: Form 10-K (Annual Report)
Period Ended: December 31, 2006
Business Overview: Gray Television operates 36 television stations serving 30 markets, making it the largest independent owner of CBS affiliates in the U.S. The company generates revenue primarily through local and national advertising sales. In 2006, the company completed the acquisition of WNDU-TV (South Bend, IN) for $88.8 million and launched 36 digital second channels. The company also spun off its publishing and wireless businesses into Triple Crown Media, Inc. in late 2005.

Key Financial Metrics

Material Changes vs. Prior Period

• Revenue Growth: Total revenues increased 27% to $332.1 million. This was driven by a 1,400% increase in political advertising revenue ($42.7 million in 2006 vs. $2.9 million in 2005) due to the 2006 election cycle, as well as the acquisition of WNDU-TV and WSAZ-TV.
• Operating Expenses: Broadcast expenses increased 18% to $191.5 million, primarily due to the inclusion of newly acquired stations and costs associated with digital second channels.
• Interest Expense: Interest expense rose 44% to $66.8 million, attributed to higher average interest rates (7.63% in 2006 vs. 6.79% in 2005) and increased debt balances to fund acquisitions.
• Profitability: Despite higher revenues, net income available to common stockholders turned positive ($8.5 million) from a loss in 2005, aided by the absence of discontinued operations losses and improved operating margins.
• Debt Levels: Long-term debt increased by approximately $59 million to $851.7 million to finance the WNDU-TV acquisition and other corporate purposes.

Guidance, Outlook, Risks, and Unusual Items

• Refinancing Activity: In March 2007 (subsequent to the reporting period), the company initiated a refinancing of its senior credit facility and plans to redeem its 9 1/4% Senior Subordinated Notes and Series C Preferred Stock. A new $1.025 billion facility was arranged.
• Seasonality: Revenues are typically highest in the second and fourth quarters. Political advertising spending is significantly higher in even-numbered years.
• Key Risks:
  • Advertising Dependence: Revenue is highly sensitive to economic conditions and competition from cable/satellite. Approximately 23% of 2006 revenue came from the automotive sector.
  • Debt Covenants: The senior credit facility restricts dividends, additional debt, and asset sales. Failure to meet financial ratios could trigger a default.
  • Impairment Risk: The company holds $1.1 billion in broadcast licenses and $269.5 million in goodwill. Future impairment charges could materially affect assets if fair value declines.
  • Network Compensation: Network compensation revenue is declining and is expected to be immaterial (less than $1 million) starting in 2007.
• Unusual Items: The company recorded a $347,000 loss on the early extinguishment of debt in 2006 related to the repurchase of senior notes. The 2005 period included significant losses related to the spinoff of publishing/wireless operations and debt amendments.

Investor Verification Checklist

• Debt Refinancing Status: Verify the completion and terms of the March 2007 refinancing and the redemption of the 9 1/4% Notes and Preferred Stock.
• Political Ad Revenue Sustainability: Assess the impact of the 2006 election cycle on 2007 revenue projections, as political ad revenue is cyclical.
• Intangible Asset Valuation: Review the methodology for valuing broadcast licenses and goodwill, given they comprise over 80% of total assets.
• Automotive Sector Exposure: Monitor the health of the automotive industry, which accounted for 23% of total revenue in 2006.
• Dividend Restrictions: Confirm compliance with debt covenants regarding dividend payments, as the company pays a quarterly dividend of $0.03 per share.