Nexstar Media Group, Inc. — 2019 Q3 Form 10-Q
Reporting period: Three and nine months ended September 30, 2019. Unaudited; amounts below are in U.S. dollars. Nexstar completed its Tribune acquisition on September 19, so reported results include only 12 days of Tribune operations. Comparisons with 2018 are therefore not like-for-like.
Business context
Nexstar owned, operated, programmed or provided services to 197 full-power television stations and one AM radio station across 115 markets, and owned WGN America and a 31.3% interest in TV Food Network. Following the Tribune merger and related station sales, the company reported reach of approximately 39% of U.S. television households using the FCC’s UHF discount.
Financial performance
| Metric | Q3 2019 | Q3 2018 | Nine months 2019 | Nine months 2018 |
|---|---|---|---|---|
| Revenue | $663.6 million | $693.0 million | $1,939.2 million | $1,968.7 million |
| Operating income | $121.6 million | $192.9 million | $398.6 million | $485.0 million |
| Net income attributable to Nexstar | $(5.8) million | $100.5 million | $117.0 million | $236.4 million |
| Diluted earnings per share | $(0.13) | $2.12 | $2.44 | $4.99 |
| Cash from operating activities | Not provided for the quarter | $316.0 million | $487.2 million |
- Q3 revenue declined 4.2%; operating margin was approximately 18.3%, versus 27.8% a year earlier. Nine-month revenue declined 1.5%, while operating margin was approximately 20.6%, versus 24.6%.
- Q3 revenue included $294.8 million of retransmission compensation, $208.3 million local advertising, $81.9 million national advertising, $58.1 million digital revenue and $10.9 million political advertising. Political revenue was down from $70.1 million in Q3 2018.
- Nine-month operating cash flow fell $171.2 million year over year. Capital expenditures were $110.2 million, including $56.3 million for station repacking; FCC repack reimbursements were $54.0 million.
Balance sheet, debt and liquidity
- At September 30, cash and cash equivalents were $317.4 million and restricted cash was $16.6 million. Total debt, net of financing costs and discounts, was $8.536 billion, compared with $3.981 billion at December 31, 2018. Total assets rose to $14.103 billion from $7.062 billion, principally reflecting Tribune.
- Cash, cash equivalents and restricted cash totaled $334.0 million. Nexstar reported $166.4 million of unused revolving commitments, all available under its covenant calculations. It was in compliance with its financial covenant, a maximum first-lien net leverage ratio of 4.25 to 1.00.
- Management said available cash, expected operating cash flow and borrowing availability should fund working capital, capital expenditures, interest and scheduled principal payments for at least 12 months from the filing date. The company cautioned that its leverage makes it vulnerable to economic and market changes.
- The September merger financing included $3.065 billion of new Term Loan B, $675 million of Term Loan A and $1.120 billion of 5.625% notes due 2027. The term loans carry floating rates; a 100-basis-point LIBOR increase was estimated to raise annual interest expense and reduce operating cash flow by approximately $56.3 million. The company had no interest-rate hedges.
Material changes and unusual items
- Tribune became a wholly owned subsidiary on September 19. The transaction included $4.197 billion of cash consideration and repayment of $2.989 billion of Tribune debt. Nexstar acquired Tribune assets net of divestitures; the purchase price allocation remained provisional.
- Twenty-one stations were sold for approximately $1.36 billion. The sales produced a reported net gain of $96.6 million. Q3 results also included $63.3 million of non-cash goodwill and intangible impairment, $31.0 million of merger-related transaction costs, and $26.6 million of one-time financing fees contributing to higher interest expense.
- The impairment related to a digital reporting unit affected by deteriorating customer relationships and marketplace changes, including reduced buying by select demand-side platform customers. The unit had no remaining goodwill at quarter-end.
- The Q3 effective tax rate was 115.1%, affected by nondeductible goodwill associated with station divestitures and impairment, and nondeductible merger and severance costs. The nine-month effective tax rate was 40.3%, versus 26.9%.
- Adoption of lease accounting standard ASC 842 increased balance-sheet lease assets and liabilities; it did not affect operating results, cash flows or equity. Operating-lease right-of-use assets were $237.6 million at quarter-end.
Outlook, commentary and risks
- No specific numerical earnings or revenue guidance was provided. Management expected advertising revenue to decline in 2019 versus 2018 because 2019 was neither an election year nor an Olympic year, and described advertising as generally stronger in the second and fourth quarters.
- Management expected retransmission fees to continue increasing over time, citing the share of viewing audiences delivered by broadcasters relative to their share of cable programming fees. The AT&T/DirecTV distribution agreements expired July 2 and were renewed August 29 at higher rates.
- Approximately $106.3 million of estimated station-repack costs remained; some or all may be reimbursable. Full FCC reimbursement is uncertain and subject to available funds and actual eligible costs.
- A disputed IRS assessment concerning Tribune’s 2009 Chicago Cubs transactions remained in Tax Court, with trial beginning October 28, 2019. The IRS proposed $182 million tax and a $73 million penalty, plus approximately $96 million of after-tax interest through September 30. Nexstar estimated potential federal and state taxes, net of prior payments, of approximately $225 million before interest and penalties if the IRS prevails; no reserve was recorded.
- Other material matters include private antitrust class-action litigation over alleged television-advertising coordination, unresolved Tribune bankruptcy claims and a pending appeal, and litigation related to Tribune’s terminated Sinclair merger. Nexstar said outcomes are uncertain.
- Subsequent to quarter-end, Nexstar declared a $0.45-per-share dividend and agreed to buy two Charlotte stations for approximately $45 million while selling three stations in Seattle and Milwaukee for approximately $350 million, subject to approvals. The transaction was expected to close in the first half of 2020, with net proceeds intended to reduce credit-facility borrowings.
Important facts for investors to verify
- Assess the post-merger earnings and cash-flow run rate separately from the partial-period Tribune contribution and the merger-related costs, financing charges and divestiture gain.
- Review debt maturities, floating-rate exposure, covenant headroom and the company’s ability to reduce leverage after the acquisition.
- Track retransmission renewals and rates, political-ad comparisons, and whether digital revenue pressures persist.
- Monitor the final Tribune purchase-price allocation, integration performance, and the financial contribution and distribution terms of the TV Food Network investment.
- Follow the Chicago Cubs tax litigation, advertising antitrust cases, Tribune bankruptcy matters, FCC ownership-rule developments and the sufficiency of repack reimbursements.