Nexstar Broadcasting Group, Inc. — Q1 2014 Form 10-Q
Reporting period: Three months ended March 31, 2014. The unaudited consolidated results include Mission Broadcasting, which Nexstar consolidates as a variable-interest entity. Nexstar operated or provided services to 74 television stations and 19 digital multicast channels in 44 markets. The filing is by Nexstar Broadcasting Group, Inc.; it is not identified in the filing as Nexstar Media Group, Inc.
Financial performance
| Metric | Q1 2014 | Q1 2013 | Change |
|---|---|---|---|
| Net revenue | $133.8 million | $112.2 million | +19.3% |
| Operating income | $27.7 million | $17.8 million | +55.5% |
| Net income | $7.4 million | $0.7 million | Up $6.6 million |
| Diluted earnings per share | $0.23 | $0.02 | — |
| Cash from operations | $44.7 million | $13.1 million | Up $31.6 million |
| Cash and equivalents, March 31 | $50.6 million | $22.6 million | — |
| Total debt, including current portion | $1,067.6 million | $1,071.1 million at Dec. 31, 2013 | Down $3.6 million |
Operating margin was approximately 20.7%, compared with 15.9% a year earlier; net margin was approximately 5.5%, compared with 0.6%. The quarter-end current ratio was approximately 2.9. Total liabilities exceeded total assets, leaving a stockholders’ deficit of $8.4 million.
Operating cash flow was substantially higher year over year, partly reflecting the timing of receivable collections. Investing used $26.0 million, including $22.1 million for the remaining Citadel acquisition payment; financing used $8.2 million, including $4.6 million of dividends and $3.6 million of debt repayments. Cash increased by $10.6 million during the quarter.
Drivers and material changes
- Retransmission compensation rose 47.6% to $35.1 million, driven by acquired stations and higher contractual rates. Local and national advertising increased, with management citing Olympics-related demand and growth at legacy stations.
- Political advertising increased to $4.0 million from $0.8 million, reflecting the 2014 election year. Digital media revenue declined 3.4% to $6.3 million, mainly due to terminated customer contracts at Inergize.
- Revenue from newly acquired or serviced stations contributed to growth; management estimated approximately $11.9 million in incremental total revenue from those stations. Higher station and programming costs, including increased network programming fees, partly offset revenue gains.
- Net interest expense declined 8.3% to $15.2 million, principally following the 2013 refinancing at lower rates. Income tax expense rose to $5.0 million; the effective tax rate was 40.7%.
Outlook, financing, and risks
- No formal earnings or revenue guidance is provided. Management expected 2014 advertising revenue to benefit from the election and Olympic cycles and said cash, operating cash flow, and available facilities should fund working capital, capital expenditures, interest, and scheduled principal payments for at least 12 months.
- Management described the company as highly leveraged. Nexstar and Mission had $105.0 million of available revolving commitments and $184.0 million of unused incremental term-loan commitments, subject to facility terms and covenants. Nexstar reported compliance with its covenants at quarter-end. Nexstar guarantees Mission’s credit-facility obligations; Mission had $231.4 million outstanding under its facility.
- Several station acquisitions remained pending, including CCA/White Knight, Grant, Gray/Excalibur, and Stainless transactions. Regulatory approvals and financing were conditions; management targeted closings during 2014, but gave no assurance. The filing also reports a $20.0 million Internet Broadcasting Systems asset acquisition effective April 1, 2014, funded with cash.
- FCC rule changes may require amendments, waivers, or termination of certain joint sales agreements and may delay pending acquisitions. Management warned of possible lost revenue and higher costs if existing arrangements cannot be replaced on comparable terms. New restrictions on joint retransmission-consent negotiations, agreement renewals, and possible changes to spectrum rules also pose risks.
- Other exposures include interest-rate sensitivity: a 100-basis-point LIBOR increase was estimated to raise annual interest expense by about $1.2 million. Ordinary-course litigation was not expected by management to have a material adverse effect; certain contractual indemnification exposures have no stated maximum.
Important facts for investors to verify
- Whether retransmission agreements renew on favorable terms and how FCC restrictions affect Nexstar–Mission negotiations and local service agreements.
- Approval, timing, purchase prices, and financing of pending acquisitions, including resulting debt levels and integration costs.
- Debt-covenant headroom, availability of credit commitments, refinancing needs, and the effect of rate changes on interest expense.
- How much Q1 cash-flow growth was recurring versus attributable to collection timing, and whether political and Olympic advertising trends persist.
- Post-quarter IBS acquisition accounting and the impact of the April credit amendments and subsequent $3.2 million Term Loan A prepayment.