Nexstar Media Group, Inc. — Q1 2017 Form 10-Q
Business context and reporting period. Unaudited results cover the three months ended March 31, 2017. Nexstar completed its merger with Media General on January 17, acquiring 71 stations in 42 markets, net of seven station divestitures. Accordingly, Q1 2017 includes Media General results only from the merger closing date, making year-over-year comparisons substantially affected by the acquisition. At quarter-end, Nexstar owned, operated, programmed or provided services to 170 stations in 100 markets.
Key financial metrics
| Metric | Q1 2017 | Q1 2016 |
|---|---|---|
| Net revenue | $540.3 million | $255.7 million |
| Income from operations | $110.2 million | $57.9 million |
| Operating margin | 20.4% | 22.7% |
| Net income attributable to Nexstar | $6.0 million | $21.7 million |
| Diluted earnings per share | $0.13 | $0.69 |
| Net cash from (used in) operating activities | $(21.0) million | $51.7 million |
Revenue increased 111.3%, primarily from acquired stations; management cited $290.5 million of incremental acquired-station revenue and $17.2 million of higher retransmission compensation at legacy stations, partly offset by divestitures. Retransmission compensation was $231.9 million versus $97.3 million. Political advertising fell to $2.0 million from $11.8 million, as 2017 was not an election year.
Operating income included a $57.7 million net gain on station disposals. Excluding that gain, operating income was approximately $52.4 million, or 9.7% of revenue. Interest expense rose to $79.2 million from $20.7 million, and the company recorded a $31.8 million debt-extinguishment loss. These items contributed to a pretax loss of $1.0 million. The $5.9 million income tax benefit included an $8.3 million benefit related to divested stations; the reported effective tax rate was unusually high at 595.9%.
Balance sheet and liquidity: At March 31, cash was $72.9 million and debt, including current maturities, was $4.502 billion, up from $2.342 billion at year-end. Current assets were $1.082 billion and current liabilities $551.2 million; current assets included a $441.6 million spectrum-auction asset. The company reported $172.0 million of available revolving commitments and was in compliance with its debt covenants. Cash interest paid was $74.7 million. Management said available cash, expected operating cash flow and borrowing capacity should cover working capital, capital spending, interest and scheduled debt payments for at least the next 12 months.
Material changes and unusual items
- The Media General merger was recorded with total consideration of approximately $4.341 billion, including cash, Nexstar shares, assumed debt and a contingent value right. Merger-related transaction costs were $47.7 million in Q1.
- Station sales generated $481.9 million of cash proceeds and the $57.7 million net disposal gain. Acquisitions used $2.971 billion of cash, contributing to investing cash outflow of $2.498 billion.
- Financing activities provided $2.504 billion, including new borrowings and debt refinancing. The company redeemed $525 million of 6.875% notes and prepaid $125 million of new Term Loan B principal.
- Operating cash flow turned negative, which management attributed principally to higher interest payments and timing of vendor payments, partly offset by higher revenue.
- The board declared a $0.30-per-share quarterly dividend in Q1. A further $0.30 dividend was declared April 20, payable May 26, 2017.
Outlook, commentary and risks
No specific earnings or revenue guidance was provided. Management noted that advertising revenue is generally strongest in the second and fourth quarters and expected lower advertising revenue in 2017 than in 2016 because 2017 is neither an election nor Olympic year. Programming costs, including network affiliation fees, were expected to continue increasing.
Nexstar described itself as highly leveraged; debt service limits cash available for other uses, and the company’s ability to refinance depends on market and business conditions. Floating-rate borrowings expose cash flow to LIBOR changes: a 100-basis-point increase was estimated to raise annual interest expense by approximately $30 million. Other material uncertainties include FCC ownership and retransmission-consent rules, spectrum repacking costs and execution, and the operational and integration effects of the Media General merger. Nexstar expected approximately $479 million of gross spectrum-auction proceeds, but the recorded auction asset was $441.6 million and the CVR’s estimated fair value was $265.0 million; proceeds remained subject to transaction expenses, repacking expenses, taxes and the CVR agreement.
Important facts for investors to verify
- Assess comparable performance using the filing’s pro forma merger information, rather than treating reported year-over-year growth as organic growth.
- Track post-merger cash generation, interest costs, debt reduction and compliance with the first-lien leverage covenant, which begins June 30, 2017.
- Verify final spectrum-auction proceeds, related expenses and taxes, and the amount ultimately payable under the CVRs.
- Monitor integration results, expected cost savings, higher network-affiliation costs, and the effect of FCC repacking and regulatory changes.
- Review whether the company sustains dividend payments while meeting debt-service and capital requirements.