Nexstar Media Group, Inc. — Q3 2018 Form 10-Q
Reporting period: Three and nine months ended September 30, 2018. Financial statements are unaudited; dollar amounts below are in millions except per-share data. Nexstar owned, operated, programmed or provided services to 171 full-power television stations in 100 markets and provided services to 38 independently owned stations.
Financial performance
| Metric | Q3 2018 | Q3 2017 | Nine months 2018 | Nine months 2017 |
|---|---|---|---|---|
| Net revenue | $693.0 | $611.9 | $1,968.7 | $1,778.3 |
| Operating income | $192.9 | $125.9 | $485.0 | $369.0 |
| Operating margin | 27.8% | 20.6% | 24.6% | 20.7% |
| Net income attributable to Nexstar | $100.5 | $46.5 | $236.4 | $96.5 |
| Diluted EPS | $2.12 | $0.98 | $4.99 | $2.05 |
| Net cash from operating activities | Not provided for quarter | Not provided for quarter | $499.7 | $63.2 |
Q3 revenue rose 13.3%; nine-month revenue rose 10.7%. Q3 growth was led by political advertising, up $63.0 million, retransmission compensation, up $26.8 million, and digital revenue, up $14.0 million. Local and national advertising together declined $12.6 million in Q3. Retransmission revenue increased 10.4% in Q3 and 12.7% year to date, supported by rate escalators and contract renewals. Political advertising benefited from the 2018 election cycle.
Operating income increased in both comparisons. For the first nine months, higher revenue and lower corporate expenses—partly reflecting elevated acquisition-related costs in 2017—were offset in part by increased station costs, including network affiliation fees. Q3 net interest expense was $56.2 million versus $53.6 million; year-to-date interest expense fell to $167.1 million from $188.5 million, while debt-extinguishment losses were $4.6 million versus $34.3 million. Effective tax rates were 26.1% for Q3 and 26.9% year to date, down from 43.2% and 38.0%; the lower federal tax rate under the Tax Act was a primary factor.
Cash, debt and liquidity
- At September 30, cash was $118.4 million; total debt carrying value, including current debt, was $4.148 billion, down from $4.362 billion at December 31, 2017. Current debt was $42.1 million.
- Nexstar had $166.4 million of unused revolving commitments available, subject to covenant compliance, and reported compliance with its financial covenant. Its maximum first-lien net leverage covenant was 4.25-to-1.00.
- Nine-month operating cash flow was $499.7 million; investing cash outflow was $161.7 million and financing cash outflow was $335.2 million. Operating cash flow benefited from working-capital timing, including collections and tax payments: cash income taxes paid were $59.1 million versus $221.3 million in 2017. Interest paid was $170.8 million versus $200.9 million.
- Nexstar prepaid $195.0 million of term-loan principal during the first nine months and paid $51.5 million in dividends and $50.5 million for share repurchases. It reported $201.9 million remaining under its repurchase authorization.
Material changes, outlook and risks
- Acquisitions and consolidation: Nexstar acquired digital video advertising company LKQD for a $97.0 million base price and began acquiring WHDF and KRBK stations. KRBK was consolidated as a variable interest entity beginning August 1; the remaining asset acquisition closed November 1. The WHDF acquisition was expected to close in early November. LKQD sellers may receive up to $35.0 million in contingent payments; $1.9 million was accrued at quarter-end.
- Post-quarter debt refinancing: On October 26, Nexstar refinanced certain secured facilities, reducing applicable interest margins by 25 basis points and extending Term Loan A and revolving-facility maturities to October 2023. Term Loan B maturity remained January 2024. Nexstar also prepaid $55.0 million on October 1 and $70.0 million on October 29.
- Management outlook: Management said cash, operating cash flow and available borrowings should be sufficient for working capital, capital expenditures, interest and scheduled principal payments for at least the next 12 months. It expects retransmission fees to continue increasing, but provided no specific earnings or revenue guidance. Management expects station-repack spending through July 2020 of approximately $230.8 million, some or all of which may be reimbursable.
- Key risks and contingencies: The company is highly leveraged and exposed to floating-rate debt; a 100-basis-point LIBOR increase was estimated to raise annual interest expense and reduce operating cash flow by about $26.3 million. Repack reimbursement is uncertain: $12.5 million of $16.1 million spent had been reimbursed by September 30. Nexstar also faces 14 related antitrust complaints alleging coordination in local television advertising sales; the company denies the allegations and intends to defend itself. FCC ownership-rule appeals and changes to retransmission-related rules could affect operations or revenue.
- Accounting and comparability: Nexstar adopted ASC 606 in 2018 using the modified retrospective method; prior periods were not restated. It stopped recording barter revenue and related expense in 2018, and changed the presentation of certain advertising revenues to exclude agency commissions. These presentation changes affect comparisons of revenue categories; the filing says agency-commission reclassification did not affect net revenue or income.
Important facts for investors to verify
- Whether political-advertising strength and retransmission growth persist after the 2018 election cycle, and how much local and national advertising softness continues.
- Debt balances, floating-rate exposure, covenant headroom and the realized savings and maturity effects of the October refinancing.
- Actual station-repack costs and reimbursements relative to the $230.8 million expected spending estimate and available FCC funding.
- Final purchase accounting and performance for LKQD, KRBK and WHDF, including any LKQD earnout payments.
- Developments in the consolidated antitrust litigation and any potential financial or operational consequences.