Nexstar Media Group, Inc. — Q2 2017 Form 10-Q
Reporting period: Three and six months ended June 30, 2017. Financial statements are unaudited. Unless noted otherwise, amounts are in U.S. dollars; financial statement figures below are in millions.
Business context and reporting period
Nexstar owns, operates, programs or provides services to 170 full-power television stations in 100 markets. On January 17, 2017, it completed its merger with Media General, adding 71 stations net of divestitures. Consequently, 2017 results include acquired operations only from the merger closing and are not directly comparable with 2016.
Financial performance and liquidity
- Q2 revenue: $626.1 million, up 139.0% from $262.0 million. Management attributed the increase principally to acquired stations. Retransmission compensation was $253.1 million; local advertising $238.0 million; national advertising $91.1 million; digital $64.0 million; and political advertising $6.5 million.
- Q2 earnings: Operating income was $138.7 million versus $64.0 million; operating margin was 22.1% versus 24.4%. Net income attributable to Nexstar was $44.0 million versus $24.5 million; diluted EPS was $0.91 versus $0.78. Interest expense rose to $55.7 million from $20.6 million.
- First-half revenue and earnings: Revenue was $1,166.4 million versus $517.7 million. Operating income was $248.8 million versus $121.9 million, but 2017 includes a $57.7 million net gain on station disposals. Reported operating margin was 21.3% versus 23.6%. Net income attributable to Nexstar was $50.0 million versus $46.3 million; diluted EPS was $1.07 versus $1.46. Interest expense was $134.9 million versus $41.2 million, and debt-extinguishment losses were $33.1 million in 2017.
- Cash flow, six months: Operating cash flow was $137.9 million, compared with $109.4 million. Investing activities used $2,497.3 million, largely reflecting the Media General transaction; financing activities provided $2,357.6 million. Cash ended at $85.9 million, down from $87.7 million at year-end 2016. Capital expenditures were $27.7 million.
- Debt and liquidity: Debt, net of financing costs and discounts, was $4,435.5 million at June 30, versus $2,342.4 million at December 31. Cash was $85.9 million and $172.0 million of revolving commitments was available. The company reported compliance with its 4.50-to-1.00 maximum first-lien net leverage covenant. Management said available cash, operating cash flow and borrowing capacity should cover expected needs for at least 12 months.
- Other metrics: The company declared $0.30 per share in dividends in each 2017 quarter and repurchased 1.0 million shares for $58.3 million in Q2. At June 30, it had $93.1 million remaining under its increased repurchase authorization.
Material changes versus the prior comparable period
- The Media General merger substantially expanded the business and drove most of the reported revenue growth; the acquired stations contributed $652.5 million of revenue and $100.3 million of operating income from January 17 through June 30.
- Q2 retransmission compensation increased 157.9%, including $14.8 million of growth at legacy stations. For the first half, legacy-station retransmission revenue rose $32.0 million, which management linked to prior contract renewals and scheduled rate increases.
- Political advertising fell as 2017 was not an election year. Management also reported declines in legacy local and national advertising and a 3.6% decrease in automobile advertising across the combined station base during the periods discussed.
- Higher acquired-station costs, amortization and interest burdened results. First-half corporate expenses included $53.9 million of acquisition-related transaction costs; the merger also produced a $57.7 million net station-disposal gain.
Outlook, risks and unusual items
- No specific financial earnings or revenue guidance was provided. Management expects advertising revenue to be lower in 2017 than in 2016 because 2017 is neither an election nor an Olympic year. It anticipates continued growth in retransmission fees, while noting industry-wide increases in network affiliation fees.
- On July 19, 2017, the company amended its secured credit facilities, borrowing an additional $456.0 million under Term Loan A to partially repay Term Loan B, reducing applicable interest margins by 50 basis points and extending certain Term Loan A and revolving-credit maturities to five years from that date.
- On July 21, 2017, Nexstar received $479 million gross proceeds from the Media General spectrum auction. The estimated $275.4 million fair value payable to CVR holders, after specified costs and taxes, was expected to be paid principally at the end of August. This was a post-quarter event, not June 30 cash available to Nexstar for general use.
- FCC repacking will require channel changes for 61 Nexstar-owned and 17 VIE-owned stations by deadlines no later than July 2020. Industry reimbursement claims exceeded the $1.75 billion authorized fund; Nexstar said full reimbursement of its costs was uncertain.
- Nexstar described itself as highly leveraged. A 100-basis-point increase in LIBOR was estimated to add approximately $29.3 million to annual interest expense and reduce operating cash flow by the same amount; the company had no interest-rate hedges. It also guarantees specified Mission, Marshall and Shield debt.
- Other risks include changing FCC ownership and retransmission-consent rules, possible pressure on retransmission revenues, station-repacking costs and execution of the large acquisition. Management said ordinary-course litigation was not expected to have a material adverse effect; no material risk-factor changes were reported.
Most important facts for investors to verify
- How much of post-merger revenue and operating performance is organic versus attributable to acquired stations, and how the combined business performs on a comparable basis.
- Debt balances, interest costs, covenant headroom and the effects of the July 2017 refinancing and subsequent principal repayments.
- The final spectrum-auction proceeds, CVR payments and related estimated costs, taxes and repacking deductions.
- Actual repacking costs and the extent to which FCC reimbursements cover them.
- Legacy advertising trends, retransmission-contract renewals and rising network affiliation fees.
- Acquisition accounting estimates, including acquired intangible values, goodwill and the contingent consideration liability.