Nexstar Media Group, Inc. — Q2 2020 Form 10-Q
Business context and reporting period
Unaudited results for the three and six months ended June 30, 2020. Nexstar operated, programmed or provided services to 196 full-power television stations in 114 markets, plus one AM station, and owned WGN America and a 31.3% interest in TV Food Network. Comparisons are materially affected by the September 2019 Tribune acquisition.
Key financial results
| Metric | Q2 2020 | Q2 2019 | Six months 2020 | Six months 2019 |
|---|---|---|---|---|
| Net revenue | $914.6 million | $649.0 million | $2,006.5 million | $1,275.7 million |
| Operating income | $196.3 million | $149.9 million | $501.3 million | $277.0 million |
| Net income attributable to Nexstar | $99.6 million | $68.0 million | $256.5 million | $122.9 million |
| Diluted EPS | $2.13 | $1.42 | $5.43 | $2.57 |
Q2 revenue grew 40.9% year over year; operating income rose 30.9%. Calculated operating margin was approximately 21.5%, versus 23.1% a year earlier; calculated net margin was approximately 10.9%, versus 10.5%. Six-month operating cash flow was $717.3 million, compared with $236.4 million. It included $197.1 million in distributions from TV Food Network; cash paid for interest was $171.3 million.
- Q2 revenue included $536.5 million of distribution revenue, $298.2 million of core advertising, $21.6 million of political advertising and $46.7 million of digital revenue.
- At June 30, cash and cash equivalents were $664.6 million unrestricted and $16.6 million restricted. Working capital was $720.5 million.
- Debt was $8.129 billion principal, or $8.038 billion net of financing costs and discounts; net debt using unrestricted cash was approximately $7.37 billion. Unused revolving commitments available to borrow totaled $142.7 million. Nexstar reported compliance with its financial covenants.
- Six-month capital expenditures were $115.7 million. Cash provided by investing activities was $321.9 million, including station and business sale proceeds and the $98.0 million Sinclair settlement payment.
Changes versus the prior comparable period
- Tribune and other acquired businesses were the main drivers of reported growth. Management attributed $343.7 million of the Q2 revenue increase to acquisitions.
- Legacy-station core advertising fell $90.4 million in Q2, primarily due to COVID-19 disruption and the shift in advertising mix toward political. Legacy distribution revenue increased $48.5 million, reflecting rate escalations, contract renewals and online video distributor agreements.
- Digital revenue declined $9.5 million in Q2, which management attributed to pandemic disruption and realigned digital operations. Political advertising increased from $3.2 million to $21.6 million as 2020 was an election year.
- Q2 interest expense increased to $82.3 million from $51.4 million, largely reflecting debt used to finance Tribune. Six-month interest expense was $183.5 million, up from $104.3 million.
- During the first half, Nexstar prepaid $430.0 million of term-loan principal, repaid $40.3 million of scheduled maturities, repurchased 950,000 shares for $72.6 million and paid $51.0 million of dividends.
Outlook, risks and unusual items
- Management said the pandemic hurt results most in the early part of Q2, followed by significant improvement as some businesses reopened. It expected revenue and operating results for the rest of 2020 to be below expectations formed at the start of the year. The full effect remained uncertain and was not quantified.
- Management said liquidity was not materially affected by COVID-19 and believed available cash and credit would support operations, capital expenditures and debt service for at least 12 months from the filing date. The nearest debt maturity was October 2023. Floating-rate debt creates exposure to LIBOR changes; the filing estimated a 100-basis-point increase would add about $54.4 million to annual interest expense.
- Q2 included a noncash $10.8 million gain from final spectrum relinquishment. For the six months, Nexstar also recorded a $7.5 million loss on debt extinguishment and a $7.0 million net gain on disposal of stations and entities. FCC station-repack reimbursements reduced operating expenses by $38.5 million in the first half; management said full reimbursement of remaining costs was uncertain.
- Significant contingencies include the Chicago Cubs transaction tax dispute inherited with Tribune. Nexstar estimated federal and state taxes of about $225 million before interest and penalties if the IRS prevails, subject to offsets for prior payments; no tax reserve was recorded. The IRS had proposed tax and penalty amounts, and the Tax Court had not yet resolved the underlying tax issue.
- Other legal matters include the local television advertising antitrust class litigation and Marshall-related litigation. Nexstar denied the allegations and said it intended to defend itself. The filing does not provide a clear quantified estimate of potential loss for these matters.
- TV Food Network’s partnership agreement identifies December 31, 2020 as a specified dissolution date unless the partnership is continued or reconstituted. Nexstar reported no impairment of the investment at June 30 but noted future impairment remained possible.
- Subsequent events: Mission exercised an option to acquire WPIX for $75.0 million plus accrued interest, subject to approvals and agreement completion; Nexstar agreed to acquire WDKY-TV for $18.0 million, subject to approvals. The board declared a $0.56-per-share dividend payable August 21, 2020.
Important facts for investors to verify
- How much of reported growth and cash generation reflects Tribune consolidation, asset sales, settlement proceeds and TV Food Network distributions rather than ongoing comparable operations.
- Whether advertising demand and political revenue recover as management expected, and the continuing effect of COVID-19 and the postponed Olympics.
- Debt repayment capacity, floating-rate exposure, covenant headroom and funding needs for announced acquisitions and pension contributions.
- Resolution and potential financial exposure from the Cubs tax dispute, antitrust and Marshall litigation, and remaining Tribune bankruptcy claims.
- Whether FCC repack reimbursements cover remaining costs and whether TV Food Network’s partnership continues beyond its specified 2020 date.