Nexstar Media Group, Inc. — Q2 2019 Form 10-Q
Reporting period: Three and six months ended June 30, 2019; comparisons are with the corresponding 2018 periods. Financial statements are unaudited. Nexstar owned, operated, programmed or provided services to 174 full-power television stations in 100 markets.
Key financial results
| Metric | Q2 2019 | Q2 2018 | Six months 2019 | Six months 2018 |
|---|---|---|---|---|
| Net revenue | $649.0 million | $660.3 million | $1,275.7 million | $1,275.7 million |
| Operating income | $149.9 million | $174.5 million | $277.0 million | $292.1 million |
| Net income attributable to Nexstar | $68.0 million | $87.7 million | $122.9 million | $135.9 million |
| Diluted EPS | $1.42 | $1.86 | $2.57 | $2.87 |
| Net cash from operating activities | Not provided quarterly | Not provided quarterly | $236.4 million | $317.1 million |
Q2 operating margin was approximately 23.1%, versus 26.4% a year earlier; six-month operating margin was approximately 21.7%, versus 22.9%. These are calculated from reported revenue and operating income. The filing does not present a separately labeled EBITDA figure.
Revenue changes and operating performance
- Q2 revenue declined 1.7%. Retransmission compensation rose $38.0 million (13.8%) to $314.3 million, partly offsetting lower political advertising, digital and other revenue.
- Political revenue was $3.2 million in Q2 versus $31.6 million, and $4.5 million for the first half versus $40.9 million, reflecting the absence of an election year. Management also cited the lack of Olympic-related advertising in 2019.
- Q2 digital revenue fell 12.1% to $56.2 million; management attributed the decline mainly to marketplace changes affecting demand-side platform buying. Local advertising was broadly stable.
- Q2 direct operating expenses increased $21.6 million and SG&A increased $5.2 million. Management cited higher programming and network affiliation costs, as well as higher corporate legal and professional fees associated with the proposed Tribune acquisition.
- FCC station-repack reimbursements recognized as operating income were $19.4 million in Q2 2019 versus $5.7 million in Q2 2018, and $33.6 million versus $7.1 million for the respective six-month periods. These reimbursements affect period comparability.
Cash flow, debt and liquidity
- For the first half, operating cash flow was $236.4 million, down from $317.1 million. Management cited collection timing, higher income-tax payments and increased operating expenses; lower interest and broadcast-rights payments partly offset the decline.
- Investing cash outflow was $36.9 million, compared with $110.9 million in 2018, when Nexstar acquired LKQD. Property and equipment purchases increased to $71.5 million from $36.4 million, primarily due to station repacking.
- Financing cash outflow was $264.7 million, including $203.6 million of long-term debt repayments and $41.3 million of dividends. Cash declined by $65.2 million to $79.9 million.
- Debt, including current maturities and net of financing costs and discounts, was $3.785 billion at June 30, down from $3.981 billion at year-end. The company reported $166.4 million of available revolving credit and compliance with its financial covenants. It described itself as leveraged and said cash, operating cash flow and available borrowing capacity should cover needs for at least the next 12 months.
- Interest expense was $51.4 million in Q2 and $104.3 million for the first half, lower year over year. Management cited refinancing and principal repayments, partly offset by rising LIBOR. A 100-basis-point LIBOR increase was estimated to raise annual interest expense and reduce operating cash flow by approximately $22.4 million; the company had no interest-rate hedges.
Outlook, transactions and risks
- No quantified earnings or revenue guidance is provided. Management expected 2019 advertising revenue to be lower than 2018 because 2019 is neither an election nor an Olympic year; advertising is also seasonal, generally stronger in the second and fourth quarters.
- The proposed $7.165 billion cash acquisition of Tribune, including refinancing Tribune debt and assumed warrants, was expected to close in Q3 2019, subject to regulatory approvals and other conditions. The estimate excludes Tribune cash and pension liabilities. Tribune shareholders could receive approximately $0.30 per share per month if closing did not occur by August 31, 2019, subject to stated adjustments.
- Proposed station divestitures were valued at approximately $1.363 billion: $740 million to TEGNA, $580 million to Scripps and $42.5 million to Circle City Broadcasting. Proceeds were intended to help fund the merger and related refinancing. On July 31, 2019, after quarter-end, the DOJ gave conditional approval through a proposed settlement involving further station divestitures and conditions; FCC review remained outstanding as of the filing.
- On July 3, 2019, a subsidiary issued $1.120 billion of 5.625% notes due 2027. Proceeds were held in escrow pending merger-related conditions; if the merger failed or was not completed within the specified period, the notes would be subject to special mandatory redemption.
- Retransmission consent agreements with AT&T/DirecTV in 97 markets expired July 3, 2019. Nexstar reported it was not providing service to the customer while negotiating renewal terms.
- Station repacking remained a cost and reimbursement risk: Nexstar estimated about $146.6 million of remaining costs, some or all potentially reimbursable, and said full FCC reimbursement was uncertain. The company also cited regulatory and spectrum risks, high leverage and floating-rate exposure.
- A DOJ antitrust consent decree entered in May 2019 imposed information-sharing restrictions and compliance obligations, without a financial penalty. A separate consolidated class-action case alleging television advertising price coordination was ongoing; Nexstar denied the allegations and was seeking dismissal.
Most important facts for investors to verify
- Progress and final terms of the Tribune merger, required divestitures, financing and FCC approval.
- Resolution of the AT&T/DirecTV retransmission negotiations and any effect on revenue or cash flow.
- Whether retransmission growth can continue to offset weaker advertising and digital revenue.
- Actual repack costs and reimbursements compared with the estimated remaining costs and available FCC funding.
- Debt repayment capacity, covenant headroom and sensitivity to floating interest rates.
- Developments in the advertising antitrust litigation and compliance with the DOJ consent decree.