Nexstar Broadcasting Group, Inc. — Q3 2016 Form 10-Q
Reporting period: Three and nine months ended September 30, 2016. The unaudited filing covers Nexstar Broadcasting Group, Inc. and consolidated entities, including variable interest entities (VIEs). At period-end, Nexstar owned, operated, programmed or provided services to 104 full-power stations in 62 markets, and provided services to 30 additional stations.
Financial performance
| Metric | Q3 2016 | Q3 2015 | Nine months 2016 | Nine months 2015 |
|---|---|---|---|---|
| Net revenue | $275.7 million | $223.0 million | $793.3 million | $644.1 million |
| Operating income | $72.9 million | $48.3 million | $194.8 million | $138.8 million |
| Net income attributable to Nexstar | $24.8 million | $17.3 million | $71.1 million | $50.5 million |
| Diluted EPS | $0.78 | $0.54 | $2.25 | $1.57 |
| Net cash from operating activities | Not separately provided | Not separately provided | $163.0 million | $140.7 million |
- Q3 revenue increased 23.6% year over year; nine-month revenue increased 23.2%. Operating income rose 50.9% and 40.4%, respectively. Operating margin was approximately 26.4% in Q3 versus 21.7%, and 24.6% for nine months versus 21.5%.
- Management attributed Q3 revenue growth chiefly to acquired and serviced stations (+$20.1 million), higher political advertising (+$22.9 million gross) and higher retransmission compensation on legacy stations (+$12.2 million). Digital revenue increased 42.2% in Q3, to $28.6 million.
- Q3 retransmission compensation was $98.3 million, up 22.8%; political advertising was $25.5 million versus $2.6 million. Nine-month retransmission revenue was $293.7 million, up 35.8%, and political advertising was $48.5 million versus $4.8 million.
- Q3 operating expenses increased 16.1% to $202.8 million. Higher station costs included acquired operations and increased network programming fees; management noted network affiliation fees were rising industry-wide and expected to continue rising.
- Net interest expense increased to $29.6 million in Q3 from $20.4 million, and to $70.9 million for nine months from $60.1 million, primarily reflecting acquisition-related borrowing. The nine-month effective tax rate was 41.2%, versus 37.5%.
Cash, liquidity and debt
- At September 30, cash and cash equivalents were $29.3 million, versus $43.4 million at December 31, 2015. Current assets were $287.0 million and current liabilities $181.2 million.
- Nine-month cash flow: operating activities provided $163.0 million; investing activities used $129.0 million; financing activities used $48.1 million. Capital expenditures were $25.6 million, and cash dividends paid were $22.1 million.
- Debt carrying value, including current maturities, was $2.348 billion, compared with $1.476 billion at year-end 2015. The filing describes combined debt as approximately 93.9% of capitalization. Cash interest paid for nine months was $68.1 million.
- Nexstar had $103.0 million of unused revolving commitments available under covenant calculations and reported compliance with financial covenants. Management said available cash, operating cash flow and borrowing capacity should fund expected needs for at least 12 months, while warning that the company was highly leveraged.
- The $900 million 5.625% notes due 2024 were issued into escrow; the proceeds were restricted pending merger-related release conditions. Balance-sheet restricted cash was $900.4 million and was not available for general use while in escrow.
Material changes, outlook and risks
- Acquisitions included four North Dakota stations for $44.0 million, KCWI in Iowa for $3.9 million, and the first closing of the West Virginia Media Holdings (WVMH) transaction. Nexstar began consolidating the WVMH stations on August 2 after FCC approval; the remaining $65 million purchase price was expected to be paid at the second closing.
- The proposed Media General merger was valued at approximately $2.3 billion in cash and stock, plus a potential contingent value right tied to spectrum-auction proceeds. Shareholders of both companies approved it; FCC and other regulatory approvals and customary closing conditions remained outstanding. Nexstar expected the merger, required station divestitures and debt refinancing to close in Q4 2016.
- To address ownership limits and regulatory approvals, Nexstar agreed to divest 13 stations in 12 markets for approximately $547.8 million, subject to working-capital adjustments. Merger termination fees of $80 million could apply in specified circumstances. Failure to complete the merger by the applicable deadline could also trigger mandatory redemption of the escrowed notes.
- Management cited election-year and Olympic-year advertising as a source of increased 2016 advertising revenue. The filing provides no quantified full-year earnings or revenue guidance.
- Key risks include substantial leverage and refinancing needs; merger and divestiture execution and regulatory approvals; possible changes to FCC ownership, retransmission-consent and spectrum rules; and potential costs or revenue loss if local service agreements must be changed. A 100-basis-point LIBOR increase was estimated to raise annual interest expense by about $4.5 million.
- Management considered ordinary-course litigation unlikely to have a material adverse effect. It disclosed potentially unlimited indemnification obligations under certain agreements, although historical related payments were immaterial. The filing reported no material changes to previously disclosed risk factors.
Investor verification points
- Verify subsequent completion and final terms of the Media General merger, the station divestitures, debt refinancing and release of the escrowed note proceeds.
- Assess whether political advertising growth was temporary and whether retransmission, digital and legacy local and national advertising trends persisted after Q3.
- Track debt, cash interest, covenant headroom and available revolver capacity, including debt and obligations associated with consolidated VIEs.
- Confirm the final WVMH acquisition price and whether contingent consideration for the Kixer acquisition was earned or paid.
- Monitor FCC actions affecting ownership limits, local service agreements, retransmission negotiations and spectrum repacking.