Nexstar Broadcasting Group, Inc. — Q2 2016 Form 10-Q
Business context and reporting period. Unaudited results cover the quarter and six months ended June 30, 2016, compared with the same 2015 periods. Nexstar owned, operated, programmed or provided services to 104 full-power stations in 62 markets and provided services to 30 additional stations. The filing consolidates certain variable interest entities (VIEs). The registrant was Nexstar Broadcasting Group, Inc.; the proposed post-merger name was Nexstar Media Group, Inc.
Financial performance
| Metric | Q2 2016 | Q2 2015 | Six months 2016 | Six months 2015 |
|---|---|---|---|---|
| Net revenue | $262.0M | $219.3M | $517.7M | $421.1M |
| Operating income | $64.0M | $52.5M | $121.9M | $90.4M |
| Operating margin | 24.4% | 24.0% | 23.6% | 21.5% |
| Net income attributable to Nexstar | $24.5M | $20.3M | $46.3M | $33.2M |
| Diluted earnings per share | $0.78 | $0.63 | $1.46 | $1.03 |
| Dividends declared per share | $0.24 | $0.19 | $0.48 | $0.38 |
Q2 revenue rose 19.4%; management attributed the increase mainly to higher retransmission compensation and revenue from acquired or serviced stations. Retransmission compensation was $98.1M, up 40.8%; political revenue was $11.3M versus $1.9M. Local advertising increased 3.8%, while national advertising declined 7.5%. Digital revenue rose 17.4%. For the first half, revenue increased 22.9% and Nexstar-attributable net income increased 39.2%.
Costs also increased: Q2 direct operating expenses rose 27.2% to $92.9M and SG&A rose 16.3% to $65.8M. Management cited newly acquired stations, higher network affiliation fees, acquisition-related costs and a fair-value charge on contingent consideration. Q2 interest expense was $20.6M, broadly flat year over year; first-half interest expense rose 3.9% to $41.2M. Effective tax rates were 42.7% for Q2 and 41.5% for the first half, versus 37.8% and 37.0% a year earlier.
Cash flow, debt and liquidity
- First-half operating cash flow was $96.2M, up from $80.6M. Investing used $118.7M, principally for acquisitions and $15.0M of capital expenditures. Financing provided $6.2M; cash declined $16.2M to $27.2M.
- At June 30, total debt carrying value was $1.488B, including $26.1M current; the filing reports combined principal debt of approximately $1.503B. Debt carrying value increased from $1.476B at year-end 2015. Cash was $27.2M, and $83.0M of revolving commitments was available, subject to covenants.
- Current assets were $261.9M and current liabilities $156.0M. Nexstar was in compliance with its financial covenants at quarter-end. Management said available cash, operating cash flow and borrowing capacity should cover working capital, capital spending, interest and scheduled principal payments for at least the next 12 months.
- The company characterized itself as highly leveraged; debt represented 91.9% of combined capitalization. A 100-basis-point increase in LIBOR was estimated to increase annual interest expense by about $4.4M based on quarter-end facility balances. There were no interest-rate hedges.
Material developments, outlook and risks
- Acquisitions completed in the first half included four North Dakota stations for $44.0M and the KCWI station for $3.9M. Nexstar also made a $65.0M first closing payment toward the planned $130.0M acquisition of four West Virginia stations; the remaining closing was expected in Q4 2016, subject to approvals.
- The proposed Media General merger was valued at approximately $2.2B in cash and stock, plus a potential spectrum-auction contingent value right. Both companies’ shareholders approved it, but regulatory and other conditions remained. Nexstar agreed to sell 13 stations for approximately $547.8M, subject to working-capital adjustments, to facilitate the merger and approvals. The parties expected closing and related divestitures/refinancing in Q4 2016; the merger agreement provided for $80M termination fees in specified circumstances.
- After quarter-end, Nexstar Escrow issued $900M of 5.625% notes due 2024. Proceeds were restricted in escrow pending merger-related conditions and were intended to help fund the merger and refinance debt. If the merger failed or was not completed by the specified deadline, the notes would be subject to special mandatory redemption. Nexstar also repaid $16M of revolving loans after quarter-end.
- Management expected 2016 advertising revenue to benefit from the even-year election cycle and Olympic Games, while noting that advertising is seasonal and generally stronger in Q2 and Q4. No specific full-year revenue or earnings guidance was provided.
- Key risks include leverage and refinancing needs; merger and FCC/other regulatory approvals; potential divestitures and execution; rising network affiliation fees; changes to FCC ownership, retransmission-consent and spectrum rules; and potential costs or revenue losses if local service agreements must be changed. The FCC’s JSA attribution rule had been vacated by a court but could be reconsidered. Management reported no material change to previously disclosed risk factors and said ordinary-course litigation was not expected to have a material adverse effect.
Investor verification priorities
- Track Media General merger approvals, closing conditions, station sales, proceeds and resulting share issuance, debt and leverage.
- Confirm that acquisition-driven and retransmission-compensation growth translates into sustainable cash flow, especially as legacy local and national advertising showed weakness.
- Monitor network affiliation costs, contingent consideration and acquisition integration against revenue and operating-margin gains.
- Review liquidity, covenant headroom, debt maturities, refinancing terms and interest-rate exposure; distinguish debt carrying value from combined principal debt.
- Check the status and financial implications of the West Virginia acquisition, spectrum auction and FCC rules affecting retransmission revenue and local service agreements.