Nexstar Broadcasting Group, Inc. — Q2 2015 Form 10-Q
Reporting period: Three and six months ended June 30, 2015; statements are unaudited. Nexstar operated, programmed or provided services to 107 television stations and 36 digital multicast channels in 58 markets. Results consolidate certain variable interest entities (VIEs).
Financial performance and liquidity
| Metric | Q2 2015 | Q2 2014 | Six months 2015 | Six months 2014 |
|---|---|---|---|---|
| Net revenue | $221.3 million | $146.9 million | $424.7 million | $280.8 million |
| Operating income | $52.5 million | $34.9 million | $90.4 million | $62.6 million |
| Net income attributable to Nexstar | $20.3 million | $10.9 million | $33.2 million | $18.3 million |
| Diluted EPS | $0.63 | $0.34 | $1.03 | $0.57 |
| Operating cash flow | Not provided for quarter | Not provided for quarter | $80.6 million | $73.4 million |
- Q2 revenue rose 50.6%; operating income increased 50.4%. Operating margin was approximately 23.7%, compared with 23.8% a year earlier. Six-month operating margin was approximately 21.3%, versus 22.3%.
- For the first half, investing activities used $444.1 million, principally reflecting $459.7 million of acquisition payments; financing activities provided $258.5 million. Cash declined by $105.0 million to $26.9 million from $131.9 million at year-end 2014.
- At June 30, total debt was $1.50 billion, up from $1.24 billion at year-end; cash was $26.9 million. Unused revolving commitments of $103.0 million were available, and the company reported compliance with covenants. Current assets were $266.9 million and current liabilities $123.3 million.
- Six-month capital expenditures were $13.4 million. Interest paid was $30.7 million. The company declared dividends of $0.19 per share each quarter during the first half.
Material changes and drivers
- Growth reflected acquisitions and higher retransmission compensation. Q2 revenue included $59.4 million of incremental revenue from newly acquired stations and entities; legacy-station retransmission revenue increased $17.4 million, primarily after contract renewals at higher subscriber rates.
- Q2 retransmission compensation increased 99.4% to $69.7 million; digital media revenue rose 59.9% to $21.2 million. Political revenue fell to $1.9 million from $6.7 million because 2015 was not an election year. Management also cited the absence of an Olympic year as a factor affecting advertising.
- Acquisitions included CCA, KASW, Yashi and KLAS. The transactions expanded Nexstar’s station footprint and digital media operations; acquisition-related expenses, depreciation and intangible amortization increased.
- Q2 net interest expense rose 32.9% to $20.4 million, mainly due to acquisition-related borrowings, partly offset by lower rates. Nexstar issued $275 million of 6.125% senior unsecured notes due 2022.
Outlook, risks and unusual items
- No specific earnings or revenue guidance was provided. Management said available cash, expected operating cash flow and available borrowings should fund working capital, capital expenditures, interest and scheduled principal payments for at least the next 12 months. The company expected to close its pending $3.5 million KCWI acquisition in 2015, subject to approvals and other conditions.
- Management characterized the company as highly leveraged and said debt service limits funds available for other uses. A 100-basis-point increase in LIBOR was estimated to increase annual interest expense and reduce operating cash flow by approximately $3.0 million; the company had no interest-rate hedges.
- Regulatory risks include FCC rules concerning joint sales agreements, retransmission-consent negotiations and possible spectrum repacking. Nexstar said JSA changes could reduce revenue or raise costs, potentially beginning in 2016; spectrum changes could require investment or affect station operations. Rising network affiliation fees were also expected to continue over several years.
- Q2 tax expense included a $0.5 million benefit from revaluation of deferred tax liabilities; the first-half benefit was $1.4 million. The company recorded a $0.5 million loss on disposal of the WEVV station. Litigation was described as ordinary-course, with management not expecting material adverse effects. No material changes to previously disclosed risk factors were reported.
- After quarter-end, Nexstar created a digital-media subsidiary and amended credit facilities to accommodate it; the amendments also brought that entity and subsidiaries into covenant calculations and required guarantees of specified secured facilities. The board declared a further $0.19-per-share dividend payable August 28, 2015.
Investor verification priorities
- Separate acquisition-driven growth from comparable legacy-station performance, especially retransmission revenue and advertising trends.
- Review debt maturities, covenant headroom, the guarantees of Mission and Marshall debt, and the effects of interest-rate changes on cash flow.
- Assess whether operating cash flow can support dividends, capital spending and scheduled debt service after the acquisition-related cash outflows.
- Track FCC decisions and compliance deadlines affecting JSAs, retransmission negotiations and spectrum repacking, along with potential network-fee increases.
- Verify the subsequent credit-facility amendments, KCWI acquisition status and integration performance of the acquired businesses.