Nexstar Broadcasting Group, Inc. — Q2 2014 Form 10-Q
Reporting period: Three and six months ended June 30, 2014; unaudited. The filing is by Nexstar Broadcasting Group, Inc. and consolidates Mission Broadcasting as a variable interest entity. Nexstar operated or provided services to 80 television stations and 20 digital multicast channels in 46 markets.
Financial performance
| Metric | Q2 2014 | Q2 2013 | Six months 2014 | Six months 2013 |
|---|---|---|---|---|
| Net revenue | $146.9m | $126.2m | $280.8m | $238.4m |
| Operating income | $34.9m | $28.2m | $62.6m | $46.0m |
| Net income | $10.9m | $6.4m | $18.3m | $7.1m |
| Diluted earnings per share | $0.34 | $0.20 | $0.57 | $0.23 |
| Operating margin | 23.8% | 22.3% | 22.3% | 19.3% |
- Q2 net revenue rose 16.4%; six-month revenue rose 17.8%. Growth reflected acquisitions, political advertising, higher retransmission compensation and digital media revenue.
- Q2 gross political advertising revenue was $6.7m versus $1.8m; retransmission compensation was $35.0m versus $24.9m; digital media revenue was $13.2m versus $7.7m.
- Q2 local advertising increased 5.6%, while national advertising declined 8.7%. Management said legacy-station local and national advertising together declined $0.8m in Q2.
- Operating expenses increased alongside acquisitions and higher network programming costs. Net interest expense declined to $15.3m in Q2 and $30.5m for six months, primarily reflecting the prior-year refinancing to lower-cost debt.
- Six-month operating cash flow was $73.4m, compared with $11.8m. Investing cash outflow was $94.3m, including acquisitions; capital expenditures were $9.1m. Cash flow from operations less capital expenditures was approximately $64.4m. Management attributed much of the cash-flow improvement to collections timing, including a $34.0m favorable accounts-receivable timing effect.
Balance sheet and liquidity
- At June 30, cash was $32.1m, total debt including current maturities was $1.088bn, and stockholders’ equity was $9.5m, versus a $13.2m deficit at year-end 2013.
- Cash declined from $40.0m at December 31, 2013. Combined unused revolving commitments of $105.0m and unused Term Loan A commitments of $147.2m were reported as available, subject to covenant compliance.
- The company reported compliance with its financial covenants. It described itself and Mission as highly leveraged; combined debt represented 99.5% of combined capitalization.
- Dividends declared were $0.15 per share in each of the first two quarters; $9.2m was paid during the six-month period. A further $0.15 dividend was declared July 25, 2014.
Material changes, outlook and risks
- Completed acquisitions included three Citadel stations for $87.9m, digital businesses IBS for $18.8m and ETG for $7.2m, and Gray TV stations for $34.5m. Management attributed approximately $12.3m of Q2 revenue to newly acquired entities.
- Pending 2014 transactions included CCA, Grant and Stainless acquisitions, alongside planned station sales. Closings remained subject to regulatory approvals and other conditions; the filing describes significant funding needs, including expected borrowings and cash generation. Nexstar also agreed to guarantee future credit transactions used by Marshall to fund station purchases.
- Management expected advertising revenue to benefit in 2014 from the election and Olympics, and believed available cash, operating cash flow and borrowing capacity would fund needs for at least the next 12 months. No specific earnings or revenue guidance was provided.
- Risks include substantial leverage and refinancing dependence; rising network programming fees; new FCC rules affecting joint sales and retransmission consent arrangements; and the planned 2015 spectrum incentive auction and potential channel repacking, which could require added investment. A 100-basis-point increase in LIBOR was estimated to raise annual interest expense by approximately $1.5m.
- The 2013 interim cash-flow statement was revised for classification errors involving property purchases and capital lease payments. The company said the corrections were not material and did not affect net income or equity.
- FCC license and goodwill impairment testing identified no triggering events at June 30. Management said ordinary-course litigation was not expected to have a material adverse effect; indemnification exposure under some agreements could be unlimited or undeterminable.
Important facts for investors to verify
- How much revenue and operating income growth came from acquisitions versus legacy-station performance, particularly political and retransmission revenue.
- Whether pending acquisitions and divestitures close on schedule, receive FCC and DOJ approvals, and are funded within available covenant capacity.
- Debt maturities, variable-rate exposure, covenant headroom, and the practical availability of reported credit commitments.
- Potential impact of FCC JSA, retransmission-consent and spectrum rules on revenues, station arrangements and capital spending.
- The effect of higher network programming fees and acquisition-related costs on future margins and cash generation.