Nexstar Broadcasting Group, Inc. — Q2 2013 Form 10-Q
Reporting period: Three and six months ended June 30, 2013. The unaudited consolidated statements include Mission Broadcasting as a variable interest entity; Nexstar states it does not own Mission. The company operated or provided services to 72 television stations and 17 digital multicast channels in 41 markets.
Financial results and liquidity
| Metric | Q2 2013 | Q2 2012 | First half 2013 | First half 2012 |
|---|---|---|---|---|
| Net revenue | $126.2 million | $88.9 million | $238.4 million | $172.5 million |
| Operating income | $28.2 million | $23.5 million | $46.0 million | $41.0 million |
| Net income | $6.4 million | $8.8 million | $7.1 million | $11.8 million |
| Diluted EPS | $0.20 | $0.29 | $0.23 | $0.39 |
| Operating margin | 22.3% | 26.4% | 19.3% | 23.7% |
Q2 revenue increased 42.0%; first-half revenue increased 38.2%. Acquired stations, net of disposals, contributed approximately $41.4 million to Q2 revenue. Growth also reflected higher retransmission compensation and eMedia revenue, partly offset by lower political advertising. Revenue growth did not translate into higher net income: increased operating costs, amortization, depreciation, interest expense and taxes weighed on earnings.
For the first half, operating cash flow was $13.8 million, down from $42.4 million. Investing used $167.1 million, largely for station acquisitions and the CCA/White Knight deposit; financing provided $129.9 million. Cash declined $23.4 million to $45.6 million. Capital expenditures were $12.5 million.
At June 30, cash was $45.6 million, total debt including current maturities was $994.3 million, and net debt was approximately $948.7 million. Current assets were $168.4 million versus current liabilities of $63.3 million. Nexstar reported $73 million of unused revolving commitments and $184 million of incremental term-loan commitments available, subject to covenant compliance. Management described the company as highly leveraged and said expected cash, operating cash flow and borrowing availability should fund requirements for at least the next 12 months.
Material developments and comparison
- Growth included 2012 and 2013 station acquisitions. In the first half of 2013, the company acquired stations in Arkansas, California and Vermont for approximately $137 million in aggregate consideration described in the acquisition disclosures.
- On April 24, Nexstar and Mission agreed to acquire CCA and White Knight, owners of 19 stations in 10 markets, for $270 million, subject to working-capital adjustments and regulatory and other conditions. The company expected closing in Q4 2013. A $27 million deposit had been paid by June 30.
- Debt rose from $857.6 million at December 31, 2012 to $994.3 million at June 30, reflecting acquisition financing and other borrowings. First-half net interest expense increased to $33.5 million from $25.5 million.
- Retransmission compensation rose 63.1% in Q2 and 63.6% in the first half, from acquired stations and higher rates on certain legacy-station contracts. Political revenue declined as expected in a non-election year.
- On June 28, credit-facility amendments established incremental term-loan commitments of $144 million for Nexstar and $90 million for Mission, with up to $18 million subject to reallocation for Rocky Creek. Nexstar reported compliance with debt covenants at quarter-end.
- ABRY sold its remaining shares in May and no longer held an ownership interest. The company reported that this ownership change triggered Section 382 limits on Nexstar’s use of net operating loss carryforwards.
Outlook, risks and unusual items
- Management said advertising revenue is generally seasonal, strongest in the second and fourth quarters, and typically higher in even-numbered election years. It expected less political advertising in 2013 than in 2012.
- Management noted that network programming fees had increased industry-wide and were expected to continue rising over the next several years.
- The $1.2 million eMedia customer contract termination fee was nonrecurring and included in Q2 and first-half 2013 revenue.
- Interest-rate exposure is primarily on floating-rate secured debt. A 100-basis-point LIBOR increase was estimated to raise annual interest expense and reduce cash flow by approximately $1.7 million; the company had no hedges for this exposure.
- Risks include high leverage and dependence on cash generation and refinancing; FCC approval and other conditions for acquisitions; potential changes to spectrum, media-ownership and retransmission-consent rules; and limits on NOL utilization following ownership changes. Nexstar guaranteed Mission’s secured debt; Mission had $108.7 million outstanding under a maximum $228.7 million commitment.
- Ordinary-course litigation was not expected by management to have a material adverse effect. A deferred-rent correction of $0.7 million to beginning accumulated deficit was reported as immaterial to prior periods.
- After quarter-end, Nexstar declared a $0.12-per-share quarterly dividend, payable August 30, 2013. Nexstar and Mission also repaid outstanding revolving loans in July.
Important facts for investors to verify
- Whether the CCA/White Knight transaction closed as expected, its final purchase price and funding, and the acquired stations’ subsequent contribution to revenue and cash flow.
- Whether operating cash flow recovers from the first-half decline, including the timing of receivables collections and acquisition-related working-capital needs.
- Debt balances, interest costs, covenant headroom and borrowing availability after the July repayments and any further acquisition financing.
- Whether retransmission and eMedia growth can offset political-revenue cyclicality, rising programming fees and acquired-station operating costs.
- The practical effect of Section 382 limits on NOL utilization and the company’s ability to realize its deferred tax assets.