Nexstar Broadcasting Group, Inc. — Q1 2016 Form 10-Q
Reporting period: Three months ended March 31, 2016; unaudited. The filing is by Nexstar Broadcasting Group, Inc. (the company later expected to be named Nexstar Media Group, Inc. upon completion of its proposed Media General merger). Unless stated otherwise, amounts below are in U.S. dollars.
Business context and operating results
Nexstar owned, operated, programmed or provided services to 104 full-power television stations in 62 markets, and provided services to 30 additional independently owned stations. It operates in a seasonal, advertising-sensitive broadcasting business.
| Metric | Q1 2016 | Q1 2015 | Change |
|---|---|---|---|
| Net revenue | $255.7 million | $201.7 million | +26.7% |
| Income from operations | $57.9 million | $37.9 million | +52.8% |
| Operating margin | 22.7% | 18.8% | +3.9 percentage points |
| Net income attributable to Nexstar | $21.7 million | $12.9 million | +68.3% |
| Diluted earnings per share | $0.69 | $0.40 | +$0.29 |
| Net cash provided by operating activities | $38.4 million | $49.6 million | −$11.2 million |
Interest expense, net, was $20.7 million versus $19.3 million. Income tax expense was $14.9 million versus $6.6 million; the effective tax rate rose to 40.0% from 35.6%. Dividends declared were $0.24 per share, compared with $0.19 a year earlier.
Revenue drivers and material changes
- Retransmission compensation increased 46.2% to $97.3 million, including $22.0 million growth at legacy stations, primarily from higher rates under renewed contracts, and $8.7 million from acquired stations.
- Gross political advertising rose to $11.8 million from $0.4 million, reflecting the 2016 election cycle. Management also cited the Olympic year as a favorable advertising factor.
- Gross local advertising increased 10.9% to $93.8 million; gross national advertising was essentially flat at $35.4 million. Management said legacy local and national advertising together declined $3.1 million, while newly acquired and serviced stations contributed $12.2 million.
- Digital revenue grew 16.7% to $22.5 million. Acquisitions and stations under service agreements contributed to overall revenue growth.
- Operating costs also rose: direct operating expenses increased 32.5% to $90.1 million and selling, general and administrative expenses increased 19.0% to $68.2 million. Drivers included acquired stations, higher legacy programming costs and deal-related legal and professional fees.
Cash flow, debt and liquidity
- Cash and cash equivalents were $12.8 million at March 31, down from $43.4 million at year-end. Operating cash flow was $38.4 million; investing cash outflow was $111.6 million, mainly reflecting acquisitions; financing cash inflow was $42.5 million.
- Total debt, including current maturities, was $1.514 billion, compared with $1.476 billion at December 31, 2015. Debt comprised term loans, revolving borrowings and 6.875% notes due 2020 and 6.125% notes due 2022. Management reported combined debt of approximately $1.5 billion, equal to 93.1% of capitalization.
- Unused revolving commitments were $61.0 million, all available under covenant calculations at quarter-end. Nexstar said it was in compliance with financial covenants and expected available cash, operating cash flow and borrowing capacity to cover needs for at least 12 months. It repaid $14.0 million of revolving loans in the first week of May.
- The company described itself as highly leveraged. A 100-basis-point increase in LIBOR was estimated to raise annual interest expense and reduce operating cash flow by approximately $4.6 million, based on quarter-end facility balances; the company had no interest-rate hedges.
- Q1 operating cash flow declined year over year, with reported drivers including a larger effect from excess tax benefits, increased cash interest payments and timing of receivable collections and vendor payments. A $13.2 million excess tax benefit related to stock-option exercises was recognized in additional paid-in capital and shown as a financing cash flow.
Acquisitions, outlook and risks
- Nexstar completed the $44.0 million acquisition of four North Dakota stations and the $3.8 million acquisition of a station in Iowa. It also completed the first closing of its West Virginia station transaction, paying approximately $65.0 million; the remaining approximately $65.0 million was expected to be paid at a second closing projected for late 2016, subject to approvals and other conditions.
- The proposed Media General merger was valued at approximately $2.1 billion in cash and stock, plus a possible contingent value right tied to Media General spectrum-auction proceeds. Closing was expected in Q4 2016, subject to shareholder, FCC and other regulatory approvals. Committed financing of up to $4.7 billion was obtained; the merger had no financing condition. The parties could owe termination fees of up to $80 million in specified circumstances.
- Management expected advertising revenue to benefit in 2016 from the election and Olympic cycles, but gave no quantified full-year revenue, earnings or cash-flow guidance in the supplied filing text. Management noted that advertising revenue is generally strongest in the second and fourth quarters.
- Key exposures include leverage and refinancing needs; acquisition execution and integration; FCC ownership and retransmission-consent rules; the broadcast spectrum incentive auction and potential repacking costs; and possible changes affecting retransmission revenues. Nexstar and certain service-agreement partners had applied to participate in the auction, whose outcome and business impact the company said it could not predict.
- Nexstar guaranteed Mission and Marshall senior secured debt. At March 31, Mission had $225.1 million outstanding and Marshall $56.5 million outstanding; the guarantees could expose Nexstar to repayment obligations in a default. The filing also describes potentially unlimited indemnification exposure under certain agreements, with maximum future payments not determinable.
- Management said ordinary-course litigation was not expected to have a material adverse effect and reported no material changes to previously disclosed risk factors. Disclosure controls were assessed as effective; no material change in internal control over financial reporting was reported.
Most important facts for investors to verify
- Whether operating cash generation can sustain acquisition spending, dividends and debt service while cash balances remain low.
- Debt maturities, covenant headroom, interest-rate exposure and the effect of any refinancing or additional borrowing for the Media General merger.
- Completion, final purchase accounting and expected returns for the West Virginia transaction and other station acquisitions.
- Media General merger approvals, divestiture requirements, financing and any spectrum-auction-related contingent value right or termination exposure.
- Whether retransmission compensation growth and political/seasonal advertising offset rising programming, network affiliation and operating costs.
- Potential effects of FCC rules, spectrum repacking and service-agreement restrictions on revenue, costs and station operations.