Nexstar Media Group, Inc. — Q3 2022 Form 10-Q
Reporting period: Three and nine months ended September 30, 2022. Unaudited results; comparisons are with the corresponding 2021 periods. Amounts are in millions unless stated otherwise.
Business context
Nexstar operates television stations, NewsNation, digital media businesses and, since September 30, 2022, a 75% interest in The CW. It owned, operated, programmed or provided services to 199 full-power TV stations in 116 markets. The CW’s operating results enter consolidated results beginning in Q4 2022.
Financial performance
| Metric | Q3 2022 | Q3 2021 | Nine months 2022 | Nine months 2021 |
|---|---|---|---|---|
| Net revenue | $1,269.1 | $1,157.0 | $3,724.3 | $3,402.5 |
| Income from operations | $355.3 | $277.4 | $1,018.1 | $850.6 |
| Net income attributable to Nexstar | $288.7 | $169.6 | $767.8 | $570.6 |
| Diluted EPS | $7.30 | $3.90 | $18.81 | $12.84 |
| Operating margin | 28.0% | 24.0% | 27.3% | 25.0% |
Q3 net income includes a $54.1 million bargain-purchase gain from The CW acquisition. Net margin was 22.7% in Q3 2022 versus 14.6% in Q3 2021; the gain contributed to the increase.
- Revenue mix, Q3: Distribution $641.7 million, political advertising $129.3 million, core advertising $399.7 million and digital $85.7 million. Political advertising rose $116.9 million year over year in the midterm election year; distribution rose $22.9 million; core advertising fell $33.0 million.
- Cash flow, nine months: Operating cash flow was $1,185.0 million, compared with $881.6 million. Investing cash outflow was $10.9 million and financing cash outflow was $1,018.4 million. Cash, cash equivalents and restricted cash ended at $362.2 million.
- Debt and liquidity: Debt carrying value was $7,177.2 million ($7,229.0 million principal); cash and cash equivalents were $346.6 million, with another $15.6 million restricted. Current assets were $1,666.3 million and current liabilities $915.1 million. $542.6 million of revolving commitments was unused and available, subject to covenants.
- Capital returns: Nexstar repurchased $621.3 million of shares and paid $108.3 million in dividends during the first nine months. The quarterly dividend was $0.90 per share.
Material changes versus prior period
- Nine-month revenue increased 9.5%; Q3 revenue increased 9.7%. Election-year political advertising and higher distribution revenue more than offset weaker core advertising.
- Nine-month core advertising declined 2.1%, with management citing a weaker national advertising market, the absence of Olympics-related advertising, and automotive supply constraints. Nine-month digital revenue increased 14.4%, partly reflecting the 2021 digital acquisition.
- Operating expenses increased, including costs for expanded NewsNation programming, network affiliation renewals and digital operations. Q3 interest expense rose to $88.6 million from $70.4 million, primarily amid higher benchmark rates.
- Nexstar refinanced term loans in June 2022, extending the new Term Loan A to June 2027. Debt principal declined from $7,474.9 million at year-end 2021 to $7,229.0 million at September 30, 2022.
Outlook, risks and unusual items
- No specific earnings or revenue guidance is provided. Management expects retransmission fees to continue increasing until it believes fees better reflect viewers delivered, while noting MVPD subscriber attrition.
- Management stated that available cash, positive working capital and revolving credit availability should cover operations, capital expenditures and debt service for at least 12 months from the filing date. The company was compliant with financial covenants at September 30, 2022.
- The company is highly leveraged. A 100-basis-point increase in SOFR and U.S. LIBOR would, based on period-end variable-rate debt, increase annual interest expense and reduce operating cash flow by an estimated $44.7 million, before tax effects. No interest-rate hedges were in place.
- Management identifies inflation, higher interest rates, economic conditions, COVID-19 uncertainty and supply-chain disruption as potential risks. FCC ownership rules and retransmission-consent negotiations also remain relevant regulatory and operating risks.
- The CW was acquired for no purchase consideration; the provisional allocation produced a $54.1 million bargain-purchase gain. The CW had recurring losses, and its Q4 inclusion may affect future results. The sellers retain 12.5% each and have specified put rights; Nexstar has a call right.
- After quarter-end, a buyer exercised an option to acquire real estate for $201.5 million gross proceeds; closing remained subject to conditions, and Nexstar estimated a $36.0 million pretax disposal loss if completed. The company also repurchased $100.0 million of shares through November 7, 2022.
- Ongoing matters include a local-TV advertising antitrust class action in discovery and tax proceedings related to Tribune’s former Chicago Cubs transactions. The Tax Court entered a decision on October 19, 2022 finding no 2009 tax deficiency or penalty; an appeal remained possible. Nexstar said the Tax Court opinion’s tax impact was not material to its accounting at September 30.
Important facts for investors to verify
- Underlying advertising trends excluding election-year political revenue, especially core and automotive advertising.
- The CW’s operating performance, integration costs and effects on consolidated margins after Q4 2022 consolidation.
- Variable-rate debt exposure, interest costs, covenant headroom and progress on debt reduction.
- Cash generation after dividends and repurchases, and whether the planned real-estate sale closes on expected terms.
- Final purchase-accounting values for The CW and developments in the antitrust and Tribune tax matters.