Nexstar Broadcasting Group, Inc. — Q3 2015 Form 10-Q
Reporting period: Quarter and nine months ended September 30, 2015. Financial statements are unaudited; amounts below are in U.S. dollars. The filing identifies the registrant as Nexstar Broadcasting Group, Inc.
Business context and results
Nexstar operated, programmed, or provided services to 107 television stations and 36 digital multicast channels in 58 markets. Results include consolidated variable interest entities (VIEs). The 2015 comparison includes acquired stations and entities, notably CCA, KASW, Yashi, and KLAS, so reported growth is not solely organic.
| Metric | Q3 2015 | Q3 2014 | Nine months 2015 | Nine months 2014 |
|---|---|---|---|---|
| Net revenue | $224.9 million | $157.7 million | $649.6 million | $438.5 million |
| Income from operations | $48.3 million | $41.7 million | $138.8 million | $104.3 million |
| Net income attributable to Nexstar | $17.3 million | $15.4 million | $50.5 million | $33.7 million |
| Diluted earnings per share | $0.54 | $0.48 | $1.57 | $1.05 |
| Operating margin | 21.5% | 26.4% | 21.4% | 23.8% |
Q3 net revenue increased 42.6%; management attributed the increase mainly to acquired operations and higher retransmission compensation. Operating income rose more slowly than revenue, and operating margin declined as operating expenses grew. Political advertising was lower because 2015 was not an election year.
Revenue, cash flow, debt, and liquidity
- Revenue mix, Q3: Retransmission compensation was $80.0 million, up 96.5%; local advertising was $88.0 million, up 33.7%; national advertising was $37.9 million, up 48.2%; digital media revenue was $20.1 million, up 55.6%; and political advertising was $2.6 million, down from $18.2 million. Acquisitions contributed materially to these changes. Legacy-station retransmission revenue increased $19.7 million, primarily following contract renewals.
- Operating costs: Q3 direct operating expenses were $80.4 million versus $48.4 million, and SG&A was $56.4 million versus $43.7 million. Management cited acquired operations and higher programming costs, including network affiliation fees, as key drivers.
- Cash flow, nine months: Operating cash flow was $140.7 million, compared with $120.6 million. Investing used $453.9 million, largely reflecting acquisitions; financing provided $204.7 million. Cash declined by $108.6 million to $23.4 million. Capital expenditures were $21.3 million.
- Debt: Balance-sheet debt, including current maturities, was $1.485 billion at September 30, compared with $1.220 billion at year-end 2014. The filing reports combined principal indebtedness of $1.503 billion for Nexstar, Mission, and Marshall. Nexstar issued $275 million of 6.125% senior unsecured notes due 2022; it also reported $525 million of 6.875% notes due 2020. Net interest expense was $20.4 million in Q3 and $60.1 million for the nine months.
- Liquidity: Current assets were $289.2 million and current liabilities $143.0 million. The company had $98.0 million of available revolving commitments at quarter-end and was in compliance with its financial covenants. Management said cash, expected operating cash flow, and available borrowing capacity should fund needs for at least the next 12 months, while warning the company is highly leveraged.
- Capital returns: Nexstar repurchased 1,010,565 shares for $48.7 million in Q3 under a $100 million authorization and paid $17.9 million of dividends in the first nine months. Quarterly dividends declared were $0.19 per share.
Material changes, outlook, and risks
- Acquisitions expanded the station portfolio and drove much of the increase in revenue, assets, goodwill, intangible assets, and debt. The CCA transaction and related VIE consolidations added stations; KASW, Yashi, and KLAS were also acquired in 2015.
- Management gave no specific earnings or revenue guidance. It expected to close the Reiten station acquisition in Q1 2016, subject to FCC approval and customary conditions; the expected remaining purchase price was approximately $41.8 million. A separate KCWI acquisition was also expected in Q1 2016, subject to approvals.
- After quarter-end, Nexstar acquired Kixer for $8.0 million; sellers may receive up to $7.0 million of earnout payments if 2016 revenue targets are met. The board also declared a $0.19-per-share dividend payable in November.
- Regulatory exposure: FCC rules on joint sales agreements could require Nexstar to change or terminate arrangements by December 19, 2016, potentially reducing revenue or increasing costs. Retransmission-consent negotiation restrictions and possible changes to exclusivity rules may also affect revenue. Spectrum incentive auctions and repacking could require station changes and additional investment.
- Leverage and interest-rate risk: A 100-basis-point increase in LIBOR was estimated to raise annual interest expense by approximately $3.1 million based on quarter-end secured borrowings. Nexstar guaranteed Mission and Marshall credit-facility obligations; outstanding debt under those facilities was $225.9 million and $58.6 million, respectively.
- Management said ordinary-course litigation was not expected to have a material adverse effect. It reported no material changes to previously disclosed risk factors. Results may be affected by advertising seasonality, acquisition integration, higher network affiliation costs, and economic, competitive, or regulatory conditions.
Important facts for investors to verify
- How much of reported revenue and earnings growth came from acquired operations versus legacy-station performance.
- Whether retransmission-consent increases and digital-media growth can continue, and how the weaker non-election-year advertising environment compares with future periods.
- Debt balances, scheduled amortization, covenant headroom, and the extent of Nexstar’s guarantees of Mission and Marshall debt.
- Cash needs and financing for planned acquisitions, the Kixer earnout, dividends, and any remaining share repurchases.
- Potential financial effects of FCC rules affecting joint sales agreements, retransmission negotiations, and spectrum repacking.