Nexstar Broadcasting Group, Inc. — Q3 2013 Form 10-Q
Reporting period: Three and nine months ended September 30, 2013; unaudited. The filing registrant is Nexstar Broadcasting Group, Inc. (the company identified in the request as Nexstar Media Group). Results consolidate Mission Broadcasting as a variable interest entity.
Business context
At quarter-end, Nexstar owned, operated, programmed, or provided services to 75 television stations and 19 digital multicast channels in 44 markets. Revenue growth reflected station acquisitions, including the 2012 Newport acquisition and eight stations acquired during the first nine months of 2013; Nexstar also began providing services to three proposed Citadel stations in September.
Financial performance
Amounts below are in millions, except per-share data and percentages.
| Metric | Q3 2013 | Q3 2012 | Nine months 2013 | Nine months 2012 |
|---|---|---|---|---|
| Net revenue | $125.8 | $90.0 | $364.2 | $262.5 |
| Operating income | $25.2 | $23.6 | $71.2 | $64.5 |
| Net income | $3.6 | $9.6 | $10.7 | $21.4 |
| Diluted EPS | $0.11 | $0.31 | $0.34 | $0.70 |
| Operating margin | 20.0% | 26.2% | 19.5% | 24.6% |
- Revenue increased 39.8% in Q3 and 38.8% for the nine-month period. Management attributed the increase primarily to acquired stations; legacy local and national advertising revenue declined against prior-year periods that included Olympics revenue.
- Q3 net income fell 62.4% year over year despite higher revenue and operating income. Higher operating costs, interest expense, and income taxes weighed on results. Nine-month net income declined about 50.1%.
- Retransmission compensation rose 69.4% in Q3 to $25.6 million and 65.6% for nine months to $74.3 million, from acquired stations and higher rates under legacy contracts. Political revenue fell as expected in a non-election year.
- Digital media revenue grew, but included nonrecurring customer contract termination fees: $4.3 million in Q3 and $5.5 million for nine months. The terminations also caused an additional $1.0 million of intangible amortization.
- Cash provided by operations was $45.7 million for nine months, versus $68.7 million a year earlier. Investing used $237.7 million, principally for acquisitions; capital expenditures were $16.9 million. Financing provided $147.6 million. Cash decreased $44.4 million to $24.6 million.
- Approximate operating cash flow less capital expenditures was $28.8 million, compared with $57.7 million in the prior-year period; this is a simple calculation from reported figures, not a company-defined measure.
Balance sheet, debt, and liquidity
- At September 30, cash was $24.6 million, current assets $149.3 million, and current liabilities $99.0 million; the resulting current ratio was approximately 1.5. Cash was $69.0 million at December 31, 2012.
- Total debt, including current maturities, was $1.011 billion, up from $858 million at year-end 2012. Stockholders’ equity was $11.4 million. Management reported combined debt at 98.9% of combined capitalization.
- Interest expense, net, rose 35.9% in Q3 to $16.9 million and 32.8% for nine months to $50.4 million, primarily reflecting borrowings for acquisitions. The company reported covenant compliance at September 30.
- At quarter-end, $45 million of revolving commitments was available, along with $184 million of incremental term-loan commitments available upon the CCA/White Knight acquisition closing. Availability depended on covenant compliance.
- Management said available cash, operating cash flow, and borrowing capacity should fund working capital, capital expenditures, interest, and scheduled principal payments for at least 12 months. It also emphasized the company’s high leverage and exposure to economic and financing conditions.
Material changes, outlook, and risks
- Acquisitions announced or in progress include CCA/White Knight for $270 million, Citadel stations for $87.9 million, and Mission’s Stainless stations for $15.3 million. These remained subject to regulatory and customary closing conditions. Nexstar projected CCA/White Knight to close in Q4 2013 or Q1 2014 and Citadel and Stainless in Q1 2014.
- After quarter-end, Nexstar issued $275 million of additional 6.875% notes and Nexstar and Mission arranged $150 million of incremental term loans and expanded revolving facilities. They repurchased $292.7 million of 8.875% notes for $318.7 million, producing a reported $31.3 million extinguishment loss, and planned to redeem the remaining $21.9 million in November. Proceeds also supported acquisition funding and repayment of $55 million of revolving loans.
- On November 6, Nexstar agreed to acquire Grant Company stations for $87.5 million, subject to adjustments and approvals, with a projected Q1 2014 closing. An $8.5 million deposit was paid.
- The board declared a $0.12 per-share quarterly dividend after quarter-end, payable December 2, 2013. Nine-month dividends paid totaled $10.7 million.
- Management gave no specific earnings or revenue guidance. It noted that 2013 was not an election or Olympics year and that advertising is seasonal, generally stronger in the second and fourth quarters. Network programming fees were increasing industry-wide and expected to continue rising.
- Key risks include substantial leverage and refinancing needs; interest-rate sensitivity (a 100-basis-point LIBOR increase was estimated to raise annual interest expense by about $1.9 million); FCC ownership and spectrum-reallocation proceedings; possible changes to retransmission-consent rules; and Section 382 limits on use of tax-loss carryforwards following ABRY’s ownership change. Nexstar said expected NOL use could be affected by future taxable income or further ownership changes.
- Management considered ordinary-course litigation unlikely to have a material adverse effect. Certain indemnification obligations may have no stated maximum, and the potential amount under some arrangements was not determinable. The filing also corrected a prior tower-lease deferred-rent error, which management considered immaterial to prior periods.
Important facts for investors to verify
- How much reported growth and operating performance came from acquired stations versus comparable legacy-station results, including the effect of nonrecurring digital contract termination fees.
- Acquisition closing status, final purchase prices, required financing, FCC approvals, and integration costs for CCA/White Knight, Citadel, Stainless, and Grant.
- Post-quarter refinancing completion, remaining debt balances and maturities, interest costs, covenant headroom, and liquidity after acquisition spending.
- Whether retransmission revenue growth offsets higher network-programming costs and softer legacy advertising, including the non-election-year comparison.
- Cash conversion and working-capital trends, particularly the $28.4 million increase in accounts receivable during the nine-month period and lower operating cash flow.
- The practical effect of Section 382 limits on NOL utilization, FCC regulatory developments, and any material changes in litigation or indemnification exposures.