Nexstar Media Group, Inc. — Q3 2017 Form 10-Q
Reporting period: Three and nine months ended September 30, 2017. Financial statements are unaudited. Comparisons with 2016 are substantially affected by the January 17, 2017 merger with Media General; 2017 includes acquired stations only from the merger date.
Business context
Nexstar owned, operated, programmed or provided services to 170 full-power television stations in 100 markets, and provided services under local agreements to 36 additional stations. The Media General merger added 71 stations in 42 markets, net of seven divestitures. Nexstar also completed other station transactions and consolidated additional entities under variable-interest-entity accounting.
Financial results
Amounts below are in millions, except per-share data and percentages. Operating margins are calculated as operating income divided by net revenue.
| Metric | Q3 2017 | Q3 2016 | Nine months 2017 | Nine months 2016 |
|---|---|---|---|---|
| Net revenue | $611.9 | $275.7 | $1,778.3 | $793.3 |
| Income from operations | $129.1 | $72.9 | $377.9 | $194.8 |
| Operating margin | 21.1% | 26.4% | 21.3% | 24.6% |
| Net income attributable to Nexstar | $46.5 | $24.8 | $96.5 | $71.1 |
| Diluted earnings per share | $0.98 | $0.78 | $2.05 | $2.25 |
| Net cash provided by operating activities | Not provided for quarter | Not provided for quarter | $90.8 | $176.4 |
- Q3 revenue grew 122.0%, primarily due to acquired stations; management cited $361.7 million of incremental acquired-station revenue. Legacy retransmission revenue increased $19.5 million, while legacy local and national advertising declined $8.1 million and political advertising fell with 2017 being a non-election year.
- Q3 operating income rose 77.0%, but operating margin fell from 26.4% to 21.1%. Higher direct and corporate costs, acquired-station expenses, and increased depreciation and amortization accompanied the larger business. Interest expense increased to $53.6 million from $29.6 million.
- For the nine months, net income attributable to Nexstar rose, but diluted EPS declined as the share count increased following the merger and financing costs rose. Results included a $57.7 million net gain on station disposals and $34.3 million of debt-extinguishment losses.
- Revenue mix shifted toward retransmission compensation: it was $257.5 million, or 40.2% of gross revenue, in Q3 2017, compared with $98.3 million, or 34.4%, in Q3 2016. Q3 political revenue declined to $8.4 million from $25.5 million.
Cash flow, debt and liquidity
- Nine-month operating cash flow was $90.8 million, down from $176.4 million. Investing cash outflow was $2.038 billion, mainly reflecting the Media General transaction; financing cash inflow was $1.995 billion. Cash ended the period at $135.8 million.
- Capital expenditures were $48.8 million for the nine months. Operating cash flow less capital expenditures was approximately $41.9 million, versus $150.8 million in the prior-year period; this simple comparison is not a company-reported free-cash-flow measure.
- Debt carrying value, including current maturities, was $4.390 billion at September 30, 2017, versus $2.342 billion at December 31, 2016. Cash was $135.8 million; unused revolving commitments of $172.0 million were available, subject to covenant compliance. The company reported compliance with its financial covenant.
- Nexstar described itself as highly leveraged. It estimated that a 100-basis-point increase in LIBOR would raise annual interest expense and reduce operating cash flow by approximately $28.8 million. Management believed cash, expected operating cash flow and available borrowing capacity would cover requirements for at least the next 12 months.
- The senior secured credit agreement requires a maximum first-lien net leverage ratio of 4.50 to 1.00. Nexstar guarantees debt of Mission, Marshall and Shield; Marshall had $53.0 million outstanding, scheduled to mature in June 2018.
Material developments, outlook and risks
- The Media General merger involved approximately $4.3 billion of consideration, including cash, Nexstar shares, assumed debt and contingent value rights. Nexstar issued new term loans, assumed notes and refinanced debt; July amendments reduced applicable interest margins by 50 basis points and extended certain maturities. It prepaid $240 million of term-loan principal through September.
- Nexstar received $478.6 million of gross proceeds from Media General spectrum relinquishment. The spectrum had not yet been surrendered at quarter-end, so related proceeds were recorded as liabilities. The company paid $258.6 million initially on the CVRs and $145.9 million in initial taxes; it estimated $13.6 million of CVR payments and $29.1 million of spectrum-related taxes remained payable.
- Management expected retransmission fees to continue rising over time, citing the gap between broadcasters’ audience share and their share of cable programming fees. It also expected lower advertising revenue in 2017 than in 2016 because 2017 was neither an election nor an Olympic year. The filing provides no formal earnings or revenue guidance.
- FCC spectrum repacking affects 61 Nexstar-owned and 17 VIE-owned stations. The industry reimbursement fund is capped at $1.75 billion, while submitted cost estimates exceeded $1.86 billion as of October 17, 2017; Nexstar could not determine whether all its eligible costs would be reimbursed. Eleven stations accepted auction bids, with channel changes or cessation of service scheduled over multiple years.
- Other risks include retransmission-consent regulation, possible changes to broadcast ownership rules, rising network affiliation fees, the company’s significant debt burden and interest-rate exposure. Management stated that ordinary-course litigation was not expected to have a material adverse effect; reported risk factors were unchanged from the prior Form 10-K.
- After quarter-end, Nexstar acquired WLWC for $4.1 million, prepaid an additional $20 million of Term Loan B in October and November, and declared a $0.30-per-share dividend payable in December.
Important facts for investors to verify
- How much of reported revenue and operating growth reflects the Media General merger rather than comparable, legacy-station performance.
- Whether retransmission revenue growth, advertising trends and network affiliation costs support margins after acquisition-related effects.
- Debt balances, required repayments, covenant headroom, floating-rate exposure and the impact of continued dividends and share repurchases on deleveraging.
- Final spectrum-surrender timing, CVR and tax settlements, and the amount and timing of any repacking-cost reimbursement.
- Acquisition accounting remains subject to finalization; review subsequent purchase-price adjustments and amortization assumptions.
- The company’s consolidated statements include VIE assets and liabilities that are not available to settle Nexstar’s obligations, and Nexstar guarantees certain VIE debt; assess these exposures alongside reported liquidity.