Nexstar Broadcasting Group, Inc. — Q1 2013 Form 10-Q
Reporting period: Three months ended March 31, 2013. The unaudited consolidated results include Mission Broadcasting, which Nexstar consolidates as a variable interest entity. The filing identifies the registrant as Nexstar Broadcasting Group, Inc.
Business context and financial performance
Nexstar operated, programmed, or provided services to television stations across 41 markets. The quarter’s results reflect several station acquisitions, including eight stations acquired during Q1, as well as the December 2012 Newport acquisition.
| Metric | Q1 2013 | Q1 2012 |
|---|---|---|
| Net revenue | $112.2 million | $83.6 million |
| Income from operations | $17.8 million | $17.5 million |
| Operating margin | 15.9% | 20.9% |
| Interest expense, net | $16.5 million | $12.9 million |
| Income before taxes | $1.2 million | $4.6 million |
| Net income | $0.7 million | $3.0 million |
| Diluted earnings per share | $0.02 | $0.10 |
| Cash from operating activities | $13.1 million | $26.0 million |
Revenue increased 34.1%, driven principally by acquired stations, which contributed approximately $32.8 million, and by higher retransmission compensation and eMedia revenue. Local and national advertising also rose, largely from acquired stations. Political advertising fell 72.7% to $0.8 million, as expected in a non-election year. Increased station operating costs, depreciation, and amortization, along with higher interest expense, meant operating income was nearly flat and net income declined.
Retransmission compensation increased 64.2% to $23.8 million; eMedia revenue rose 57.3% to $6.5 million. Management noted that network programming fees had risen industry-wide and were expected to continue increasing. The filing does not provide a clear consolidated gross-margin figure.
Cash, debt, and liquidity
- Cash and cash equivalents were $22.6 million at March 31, down from $69.0 million at year-end 2012. Current assets were $134.0 million and current liabilities were $78.8 million.
- Reported debt, including current maturities, was $928.0 million, up from $857.6 million at December 31. Debt was approximately 99.7% of combined capitalization, according to management.
- Net cash used in investing was $127.9 million, including $121.1 million for station acquisitions and $6.8 million of capital expenditures. Financing provided $68.4 million, including $70.0 million of additional term and revolving borrowings. Cash declined by $46.4 million.
- Nexstar and Mission had $90.0 million of unused revolving commitments available based on covenant calculations at quarter-end. Nexstar reported compliance with its financial covenants.
- Management said available cash, expected operating cash flow, and borrowing availability should be sufficient for working capital, capital expenditures, interest, and scheduled principal payments for at least the next 12 months. It also emphasized that the company is highly leveraged and its ability to repay or refinance debt depends on factors partly outside its control.
Material changes, outlook, and risks
- Acquisitions: Q1 activity included the acquisition of KLRT-TV and KASN for $59.7 million, KGET/KKEY-LP/KGPE for $35.4 million, and WFFF/WVNY for $16.6 million. Nexstar also began operating KSEE under an agreement pending completion of its remaining asset purchase; the remaining $6.5 million was recorded as payable at quarter-end. Acquired stations contributed to both revenue and higher operating costs.
- Subsequent transaction: In April, Nexstar and Mission agreed to acquire CCA and White Knight, which own 19 stations in 10 markets, for $270.0 million, subject to adjustments and approvals. A $27.0 million deposit was made. Management expected closing early in Q4 2013; remaining funding was expected from operating cash flow, existing facilities, and future credit-market transactions.
- Interest-rate exposure: A 100-basis-point increase in LIBOR was estimated to increase annual interest expense and reduce operating cash flow by approximately $1.1 million. The company had no interest-rate hedges on its senior secured facilities.
- Industry and regulatory risks: FCC proposals concerning spectrum reallocation and repacking could require station changes or additional investment. Proposed changes to retransmission-consent rules could affect retransmission revenue. The company also cited rising network programming fees, advertising seasonality, and its substantial leverage.
- Other items: The board declared a $0.12-per-share quarterly dividend in April, payable May 31, subject to the credit facility’s dividend restrictions. In May, ABRY sold shares and ceased to own Nexstar stock; the resulting ownership change triggered a Section 382 limitation on net operating loss use, which Nexstar was evaluating and expected to have no significant impact. The company corrected a deferred-rent error related to tower leases; management said it was not material to prior periods. Management reported no material change in risk factors and no material adverse effect expected from ordinary-course litigation.
Most important facts for investors to verify
- Whether acquired stations deliver expected revenue and cost synergies, and how much reported growth reflects acquisitions versus existing operations.
- Cash conversion and working-capital trends, particularly the effect of receivables timing on operating cash flow.
- Debt levels, covenant headroom, borrowing availability, and funding terms for the CCA/White Knight transaction and other commitments.
- Trends in interest expense, network programming fees, retransmission compensation, and the effects of potential FCC rule changes.
- The final effect of the Section 382 ownership-change limitation on use of tax net operating losses.