Nexstar Media Group, Inc. — Q2 2018 Form 10-Q
Reporting period: Three and six months ended June 30, 2018; unaudited. Nexstar owned, operated, programmed or provided services to 169 full-power television stations in 100 markets, and provided services to 36 independently owned stations.
Financial results
| Metric | Q2 2018 | Q2 2017 | Six months 2018 | Six months 2017 |
|---|---|---|---|---|
| Net revenue | $660.3 million | $626.1 million | $1,275.7 million | $1,166.4 million |
| Income from operations | $174.5 million | $135.5 million | $292.1 million | $243.0 million |
| Operating margin | 26.4% | 21.6% | 22.9% | 20.8% |
| Net income attributable to Nexstar | $87.7 million | $44.0 million | $135.9 million | $50.0 million |
| Diluted EPS | $1.86 | $0.91 | $2.87 | $1.07 |
| Net interest expense | $56.3 million | $55.7 million | $110.9 million | $134.9 million |
| Cash from operating activities | Not separately provided for the quarter | $324.1 million | $110.8 million |
Q2 revenue grew 5.5%; six-month revenue grew 9.4%. Q2 political revenue rose to $31.6 million from $5.5 million, and retransmission compensation increased 9.2% to $276.3 million. These gains were partly offset by lower local and national advertising. Six-month results also benefited from political and Olympic advertising, acquisitions, and lower corporate costs; 2017 included a $57.7 million station-disposal gain and larger debt-extinguishment losses.
Cash, debt and capital allocation
- At June 30, cash was $147.7 million; total debt carrying value, including current maturities, was $4.288 billion, down from $4.362 billion at December 31, 2017. Current debt was $41.7 million.
- The company reported $172.0 million of unused revolving commitments, all available under covenant calculations, and said it was compliant with its financial covenant. The maximum first-lien net leverage covenant was 4.50 to 1.00.
- Six-month investing cash use was $118.0 million, including the LKQD acquisition; financing cash use was $174.1 million. Capital expenditures were $36.4 million. Cash interest paid was $104.9 million.
- Nexstar repaid $60.0 million of term-loan principal ahead of schedule and $21.2 million of scheduled maturities during the six months. Subsequent to quarter-end, it prepaid another $85.0 million. The company paid $34.4 million in dividends and repurchased 751,920 shares for $50.5 million in the first half; $201.9 million remained authorized for repurchases at June 30.
Changes, outlook and notable items
- Management attributed Q2 revenue growth chiefly to political advertising and higher retransmission fees, which rose through annual rate escalators and contract renewals. Management said it expected retransmission fees to continue increasing, while network affiliation costs were also rising industry-wide.
- Management expected higher 2018 advertising revenue than 2017 because 2018 was an election year and an Olympic year. Advertising is generally seasonal, strongest in the second and fourth quarters. No specific earnings or revenue guidance was provided.
- LKQD was acquired in January for approximately $97 million. From acquisition through June 30, it contributed $15.9 million of revenue and a $1.1 million operating loss; sellers may receive up to $35 million in contingent payments tied to 2019 performance and employee retention.
- Adoption of ASC 606 in 2018 was not material to opening retained earnings. Comparative 2017 figures were not restated; 2018 no longer includes barter revenue and related expense for certain program-material exchanges, and advertising revenue presentation changed to exclude agency commissions. These differences affect comparisons of revenue categories and expenses.
- Eight stations’ channel-sharing arrangements led to derecognition of a $314.1 million spectrum asset and matching surrender liability in Q2, with no equivalent cash proceeds in the period. Nexstar expected to incur $230.8 million of repacking costs through July 2020; reimbursement is uncertain. The company recorded $7.1 million of FCC repack reimbursements in the first half.
- Key risks include substantial leverage and floating-rate exposure: management estimated a 100-basis-point LIBOR increase would raise annual interest expense and reduce operating cash flow by about $27.7 million. Nexstar said available cash, operating cash flow and borrowing capacity should cover requirements for at least 12 months from the filing date.
- A July 30, 2018 antitrust class action alleged coordination among local television station owners to inflate advertising prices. Nexstar denied the allegations and said it would defend its practices. Management said ordinary-course claims were not expected to materially affect financial position or results.
- The Tax Act reduced the federal corporate rate to 21%; the company’s provisional tax accounting remained subject to refinement, with analysis expected to be completed in the second half of 2018. Subsequent events also included agreements to acquire WHDF and KRBK stations for $19.45 million, subject to FCC approval and customary conditions.
Investor verification priorities
- Confirm how much revenue and operating income growth reflects political spending, retransmission rate increases, acquisitions, and changes in station ownership, rather than underlying comparable-station trends.
- Review debt maturities, variable-rate exposure, covenant headroom, and the impact of post-quarter debt prepayments on liquidity and interest costs.
- Track repack spending against expected FCC reimbursements, including whether allocated funds will cover costs.
- Assess progress and integration economics for LKQD and the proposed WHDF and KRBK acquisitions, including contingent consideration and regulatory approvals.
- Monitor the antitrust litigation and finalization of provisional Tax Act accounting.