Nexstar Broadcasting Group, Inc. — Q3 2014 Form 10-Q
Reporting period: Three and nine months ended September 30, 2014. The unaudited consolidated statements include Mission Broadcasting as a variable interest entity. Nexstar owned, operated, programmed, or provided services to 80 television stations and 21 digital multicast channels in 46 markets.
Financial performance
| Metric | Q3 2014 | Q3 2013 | Nine months 2014 | Nine months 2013 |
|---|---|---|---|---|
| Net revenue | $157.7 million | $125.8 million | $438.5 million | $364.2 million |
| Operating income | $41.7 million | $25.2 million | $104.3 million | $71.2 million |
| Net income | $15.4 million | $3.6 million | $33.7 million | $10.7 million |
| Diluted earnings per share | $0.48 | $0.11 | $1.05 | $0.34 |
- Q3 operating margin was approximately 26.4%, up from 20.0%; net margin was approximately 9.8%, versus 2.9%. Nine-month operating and net margins were approximately 23.8% and 7.7%, compared with 19.5% and 2.9%.
- For the first nine months, operating cash flow was $120.6 million, investing cash flow was negative $99.1 million, and financing cash flow was positive $7.1 million. Cash increased by $28.6 million to $68.7 million.
- At September 30, total debt, including current maturities, was $1.087 billion; cash-adjusted debt was approximately $1.019 billion. The company reported $105.0 million of available revolving commitments and $147.2 million of available Term Loan A capacity, subject to covenants.
- Current assets were $230.1 million and current liabilities $82.3 million. Total stockholders’ equity was $22.2 million, versus a $13.2 million deficit at year-end 2013.
- Dividends declared were $0.15 per share for Q3; $0.45 per share for the first nine months, compared with $0.36 in the prior-year period.
Changes and drivers
- Q3 revenue increased 25.4%; nine-month revenue increased 20.4%. Growth reflected station and digital-business acquisitions, higher retransmission compensation, and political advertising in the 2014 election year.
- Q3 political revenue was $18.2 million versus $1.0 million; retransmission compensation rose 59.2% to $40.7 million. Nine-month political revenue was $28.9 million versus $3.6 million, and retransmission compensation rose 49.2% to $110.8 million.
- Digital media revenue rose 28.6% in Q3 to $12.9 million and 34.0% year to date to $32.5 million. Management cited acquired businesses and new offerings, partly offset by terminated customer contracts.
- Operating expenses increased with acquired operations and higher network programming fees. Q3 direct operating expenses rose 29.9% and SG&A rose 16.1%; management said network program fees are increasing industry-wide.
- Net interest expense declined 8.1% in Q3 and 8.6% year to date, primarily reflecting the prior-year refinancing of 8.875% notes into lower-rate 6.875% notes and credit-facility borrowings. Higher acquisition-related debt partly offset the benefit.
Outlook, risks, and unusual items
- No specific earnings or revenue guidance was provided. Management expected cash, operating cash flow, and available borrowings to cover working capital, capital expenditures, interest, and scheduled principal payments for at least 12 months, while emphasizing the company’s high leverage and exposure to economic, market, and regulatory conditions.
- Management expected election-year advertising to benefit 2014 results. Advertising is seasonal and generally stronger in the second and fourth quarters; even-numbered election years can also increase demand.
- Pending acquisitions included CCA and Grant, expected to close in Q4 2014 subject to regulatory approvals; Mission’s Stainless acquisition and Nexstar’s KASW and KCWI acquisitions were expected in Q1 2015. The company disclosed substantial purchase-price funding needs. On October 31, after quarter-end, it borrowed $147.2 million under Term Loan A facilities to partially fund CCA and Grant purchases.
- FCC rule changes pose risks: attribution of certain joint sales agreements could require amendment or termination and reduce revenue or increase costs; new scrutiny of shared-services and related acquisition arrangements could delay or affect transactions. Separate retransmission-consent negotiations and possible changes to exclusivity protections could also affect revenue.
- The planned spectrum incentive auction and television-band repacking could require station channel changes or additional investment; timing and impact were uncertain. Interest-rate risk is material: management estimated a 100-basis-point LIBOR increase would add about $1.5 million to annual interest expense, with no hedging instruments in place.
- Nexstar guaranteed Mission’s senior secured debt; Mission had $230.5 million outstanding under its facility. The company reported compliance with debt covenants at quarter-end and no material litigation exposure, in management’s opinion.
- The 2013 comparative cash-flow statement was revised for classification errors: operating cash flow decreased by $1.8 million, investing cash use decreased by $2.5 million, and financing cash flow decreased by $0.7 million. The company said the errors were not material and did not affect net income or equity.
Important facts for investors to verify
- Whether acquired-station and digital-business contributions translate into sustainable organic revenue and earnings growth.
- Progress, regulatory approvals, purchase prices, financing, and closing terms for the pending CCA, Grant, Stainless, KASW, and KCWI transactions, including the effect of the October 31 borrowing.
- Debt levels, covenant headroom, refinancing needs, and sensitivity to floating interest rates as acquisition funding increases.
- Potential revenue or cost effects from FCC changes to joint sales agreements, retransmission negotiations, and spectrum reallocation.
- Cash conversion and the durability of operating cash flow, including the effects of political-advertising cycles, network programming costs, and dividend payments.