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NXST > SEC Filings for NXST > Form 10-Q on 9-Nov-2011All Recent SEC Filings

Show all filings for NEXSTAR BROADCASTING GROUP INC

Form 10-Q for NEXSTAR BROADCASTING GROUP INC


9-Nov-2011

Quarterly Report


ITEM 2. Management's Discussion and Analysis of Financial Condition
and Results of Operations

The following discussion and analysis should be read in conjunction with our Condensed Consolidated Financial Statements and related Notes included elsewhere in this Quarterly Report on Form 10-Q and the Consolidated Financial Statements and related Notes contained in our Annual Report on Form 10-K for the year ended December 31, 2010.

As used in the report, unless the context indicates otherwise, "Nexstar" refers to Nexstar Broadcasting Group, Inc. and its consolidated subsidiaries Nexstar Finance Holdings, Inc. ("Nexstar Holdings") and Nexstar Broadcasting, Inc. ("Nexstar Broadcasting"), and "Mission" refers to Mission Broadcasting, Inc. All references to "we," "our," "ours," and "us" refer to Nexstar. All references to the "Company" refer to Nexstar and Mission collectively.

As a result of our deemed controlling financial interest in Mission, in accordance with accounting principles generally accepted in the United States of America ("U.S. GAAP"), we consolidate the financial position, results of operations and cash flows of Mission as if it were a wholly-owned entity. We believe this presentation is meaningful for understanding our financial performance. Refer to Note 2 to our Condensed Consolidated Financial Statements for a discussion of our determination that we are required to consolidate Mission's financial position, results of operations and cash flows under the authoritative guidance for variable interest entities. Therefore, the following discussion of our financial condition and results of operations includes Mission's financial position and results of operations.

Executive Summary

2011 Highlights

Net revenue increased 2.3% during the third quarter of 2011 compared to the same period in 2010. The acquisition of WFRV and WJMN, along with increases in eMedia advertising revenue and retransmission compensation, more than offset the decrease of $5.0 million in political advertising.

On July 1, 2011, we purchased the assets of WFRV and WJMN, the CBS affiliates serving the Green Bay, Wisconsin and Marquette, Michigan markets, respectively, from an affiliate of Liberty Media Corporation for $19.1 million in cash and the issuance of 334,292 shares of our Class A common stock, valued at $2.4 million. The cash consideration was funded by borrowing from the revolver under our senior secured credit facility.

On August 8, 2011, we signed a definitive agreement to acquire the assets of WEHT, the ABC affiliate serving the Evansville, Indiana market, from Gilmore Broadcasting Corporation for approximately $18.5 million in cash, subject to adjustments for working capital acquired. In addition, Nexstar signed a definitive agreement to sell the FCC licenses and certain equipment of WTVW to Mission for $6.7 million in cash. Upon consummation of the sale of WTVW, Nexstar expects to sign local service agreements with Mission for WTVW, similar to Nexstar's existing local service arrangements with Mission. Both transactions have been approved by the FCC and we expect them to close on December 1, 2011.

We and Mission renewed our affiliation agreements with ABC through June 2017 for all nine of the Company's ABC stations. Additionally, Mission signed an agreement with ABC for affiliation of its station in Terre Haute, Indiana. The Terre Haute station, previously the FOX affiliate WFXW, launched with ABC on September 1, 2011 as WAWV.

On July 1, 2011, WTVW, our Evansville, Indiana owned and operated station, launched LOCAL 7, an independent station. WTVW's FOX affiliation agreement terminated on June 30, 2011. On August 1, 2011, WFFT, our Ft. Wayne, Indiana owned and operated station, launched WFFT LOCAL, an independent station. WFFT's FOX affiliation agreement terminated on July 31, 2011. On September 1, 2011, KSFX, our Springfield, Missouri owned and operated station, launched OZARKS LOCAL, an independent station, with the call letters KOZL. KSFX's FOX affiliation agreement terminated on August 31, 2011. We are in continued negotiations with FOX Broadcasting Company for the renewal of our remaining FOX affiliate stations and expect to sign a new FOX affiliation agreement by the first quarter of 2012.

On September 26, 2011, we launched 10 new digital multicasts as affiliates of Bounce TV network, the first broadcast television network targeting African-American audiences.


In June 2011, our Board of Directors retained Moelis & Company as its financial advisor to assist with the exploration and evaluation of strategic alternatives intended to maximize stockholder value, including a possible sale of Nexstar. We have not made a decision to pursue any specific strategic transaction or other strategic alternative and there is no set timetable for the process, so there can be no assurance that the exploration of strategic alternatives will result in a sale of Nexstar or any other transaction.

In September 2011, Four Points entered into a definitive agreement to sell their stations to Sinclair Broadcast Group. We currently serve Four Points' seven stations in four markets through a management services agreement, which comprises our management fee revenue. The management services agreement will terminate at the earlier of the closing of the sale or March 31, 2012. We expect to earn base and incentive compensation related to the management services agreement during the fourth quarter of 2011.

During the quarter ended September 30, 2011, we borrowed $19.3 million of our revolving loan in our senior secured credit facility in connection with the acquisition of WFRV and WJMN. We repaid $12.5 million of our outstanding revolving loan balance on September 30, 2011.

Overview of Operations

We owned and operated 36 television stations and seven digital multicast channels as of September 30, 2011. Additionally, as of September 30, 2011, we programmed or provided sales and other services to 25 additional television stations and seven digital multicast channels, through various local service agreements with their owners, including 16 television stations and four digital multicast channels owned and operated by Mission. All of the stations to which we provide programming, sales, or other services, including Mission, are wholly owned by independent third parties.

The following table summarizes the various local service agreements we had in effect as of September 30, 2011 with Mission:

Service Agreements Mission Stations

TBA Only(1)        WFXP and KHMT

SSA & JSA(2)       KJTL, KJBO-LP, KOLR, KCIT, KCPN-LP, KAMC, KRBC,
                   KSAN, WUTR, WAWV, WYOU, KODE, WTVO and KTVE

(1) We have a time brokerage agreement ("TBA") with each of these stations which allows us to program most of each station's broadcast time, sell each station's advertising time and retain the advertising revenue generated in exchange for monthly payments to Mission.

(2) We have both a shared services agreement ("SSA") and a joint sales agreement ("JSA") with each of these stations. Each SSA allows our station in the market to provide services including news production, technical maintenance and security, in exchange for our right to receive certain payments from Mission as described in the SSAs. Each JSA permits us to sell the station's advertising time and retain a percentage of the net revenue from the station's advertising time in return for monthly payments to Mission of the remaining percentage of net revenue as described in the JSAs.

Our ability to receive cash from Mission is governed by these local service agreements. Under the local service agreements, we have received substantially all of Mission's available cash, after satisfaction of its operating costs and debt obligations. We anticipate we will continue to receive substantially all of Mission's available cash, after satisfaction of its operating costs and debt obligations.

We also guarantee all obligations incurred under Mission's senior secured credit facility. Similarly, Mission is a guarantor of our senior secured credit facility and senior subordinated notes. In consideration of our guarantee of Mission's senior secured credit facility, Mission has granted us a purchase option to acquire the assets and assume the liabilities of each Mission station, subject to FCC consent, for an amount equal to the greater of (1) seven times the station's cash flow, as defined in the option agreement, less the amount of its indebtedness, as defined in the option agreement, or (2) the amount of its indebtedness. These option agreements expire on various dates between 2012 and 2021 and are freely exercisable or assignable by us without consent or approval by Mission. We expect these option agreements to be renewed upon expiration.


We do not own Mission or its television stations. However, we are deemed under U.S. GAAP to have a controlling financial interest in Mission because of (1) the local service agreements Nexstar has with the Mission stations, (2) Nexstar's guarantee of the obligations incurred under Mission's senior secured credit facility, (3) Nexstar having power over significant activities affecting Mission's economic performance, including budgeting for advertising revenue, advertising and hiring and firing of sales force personnel and (4) purchase options granted by Mission that permit Nexstar to acquire the assets and assume the liabilities of each Mission station, subject to FCC consent. In compliance with FCC regulations for both us and Mission, Mission maintains complete responsibility for and control over programming, finances and personnel for its stations.

Seasonality

Advertising revenue is positively affected by strong local economies, national and regional political election campaigns, and certain events such as the Olympic Games or the Super Bowl. The Company's stations' advertising revenue is generally highest in the second and fourth quarters of each year, due in part to increases in consumer advertising in the spring and retail advertising in the period leading up to, and including, the holiday season. In addition, advertising revenue is generally higher during even-numbered years, when state, congressional and presidential elections occur and advertising aired during the Olympic Games. As 2011 is not an election year, we expect significantly less political advertising revenue to be reported in 2011 compared to 2010.

Historical Performance

Revenue

The following table sets forth the amounts of the Company's principal types of
revenue (in thousands) and each type of revenue (other than trade and barter)
and agency commissions as a percentage of total gross revenue:

                         Three Months Ended September 30,                    Nine Months Ended September 30,
                           2011                     2010                     2011                      2010
                    Amount         %         Amount         %         Amount          %         Amount          %
Local              $ 43,343        56.1     $ 41,705        54.5     $ 132,266        58.0     $ 126,760        56.0
National             16,302        21.1       14,961        19.6        47,719        20.9        45,856        20.2
Political             1,727         2.2        6,728         8.8         4,319         1.9        16,686         7.4
Retransmission
compensation          9,982        12.9        7,649        10.0        27,099        11.9        22,279         9.8
eMedia revenue        4,207         5.4        3,581         4.7        11,963         5.3         9,880         4.4
Network
compensation            234         0.3          500         0.7           776         0.3         1,528         0.7
Management fee          968         1.3          800         1.0         1,968         0.9         1,800         0.8
Other                   574         0.7          568         0.7         1,746         0.8         1,645         0.7
Total gross
revenue              77,337       100.0       76,492       100.0       227,856       100.0       226,434       100.0
Less: Agency
commissions          (7,622 )      (9.9 )     (8,054 )     (10.5 )     (22,967 )     (10.1 )     (23,989 )     (10.6 )
Net broadcast
revenue              69,715        90.1       68,438        89.5       204,889        89.9       202,445        89.4
Trade and barter
revenue               5,124                    4,688                    15,400                    13,849
Net revenue        $ 74,839                 $ 73,126                 $ 220,289                 $ 216,294


Results of Operations

The following table sets forth a summary of the Company's operations (in
thousands) and each component of operating expense as a percentage of net
revenue:

                         Three Months Ended September 30,                    Nine Months Ended September 30,
                           2011                     2010                     2011                      2010
                    Amount         %         Amount         %         Amount          %         Amount          %
Net revenue        $ 74,839       100.0     $ 73,126       100.0     $ 220,289       100.0     $ 216,294       100.0
Operating
expenses
(income):
Corporate
expenses              5,094         6.8        4,656         6.4        14,428         6.5        14,992         6.9
Station direct
operating
expenses, net of
trade                19,187        25.6       17,774        24.3        54,274        24.6        52,704        24.4
Selling, general
and
administrative
expenses             21,252        28.4       19,330        26.4        61,885        28.1        56,998        26.4
Loss (gain) on
asset disposal,
net                     (82 )      (0.1 )         10         0.0            20         0.0           (34 )      (0.0 )
Trade and barter
expense               5,036         6.7        4,796         6.6        15,197         6.9        14,035         6.5
Depreciation and
amortization         12,831        17.2       11,184        15.3        36,464        16.6        33,740        15.6
Amortization of
broadcast
rights,
excluding barter      3,253         4.4        2,520         3.4         7,662         3.5         7,221         3.3
Income from
operations         $  8,268                 $ 12,856                 $  30,359                 $  36,638

Three Months Ended September 30, 2011 Compared to Three Months Ended September 30, 2010

Revenue

Gross local advertising revenue was $43.3 million for the three months ended September 30, 2011, compared to $41.7 million for the same period in 2010, an increase of $1.6 million, or 3.9%, of which $1.9 million related to the acquisition of WFRV and WJMN. Gross national advertising revenue was $16.3 million for the three months ended September 30, 2011, compared to $15.0 million for the same period in 2010, an increase of $1.3 million, or 9.0%, of which $1.0 million related to the acquisition of WFRV and WJMN. Excluding WFRV and WJMN, gross local and national advertising revenue was consistent with the prior year. Within our customer categories, we saw an increase in advertising from automotive of $0.5 million, school and instruction of $0.5 million and department and retail stores of $0.3 million, which was offset by a decrease in advertising from media (radio, television, cable and newspapers) of $0.6 million, grocery stores of $0.3 million and paid programming of $0.3 million during the third quarter of 2011 compared to the prior year. The increase in automotive advertising was primarily driven by increases in domestic manufacturers and dealers, particularly Ford and GM, and was partially offset by decreases in foreign manufacturers, most notably Toyota. The increase in school and instruction advertising was primarily driven by increases in advertising from higher education and vocational schools, both from existing and new customers. The decrease in media advertising was primarily driven by the timing of spending by cable providers on their annual advertising commitments.

Gross political advertising revenue was $1.7 million for the three months ended September 30, 2011, compared to $6.7 million for the same period in 2010, a decrease of $5.0 million, or 74.3%, as expected since 2011 is not an election year. The current quarter political revenue primarily related to the Wisconsin State Senate special recall elections and a special primary election in the West Virginia gubernatorial race.

Retransmission compensation was $10.0 million for the three months ended September 30, 2011, compared to $7.6 million for the same period in 2010, an increase of $2.3 million, or 30.5%. The increase in retransmission compensation was primarily the result of renegotiated contracts providing for higher rates per subscriber during the year and additional revenue from WFRV and WJMN of $0.5 million.

eMedia revenue, representing web-based advertising revenue generated at the Company's stations, was $4.2 million for the three months ended September 30, 2011, compared to $3.6 million for the same period in 2010, an increase of $0.6 million or 17.5%. The increase in eMedia revenue is attributable to introduction of new service offerings and increased penetration of the Company's customer base by its eMedia sales efforts.


Operating Expenses

Corporate expenses, related to costs associated with the centralized operation of Nexstar's and Mission's stations, were $5.1 million for the three months ended September 30, 2011, compared to $4.7 million for the same period in 2010, an increase of $0.4 million, or 9.4%. The increase was primarily due to an increase in legal expense of $0.3 million related to our acquisition of WFRV and WJMN, our antitrust lawsuit and our strategic initiatives.

Station direct operating expenses, consisting primarily of news, engineering and programming, and selling, general and administrative expenses (net of trade expense) were $40.4 million for the three months ended September 30, 2011, compared to $37.1 million for the same period in 2010, an increase of $3.3 million, or 9.0%. The increase was primarily attributed to an increase of $2.2 million in station expenses of WFRV and WJMN and an increase of $0.5 million in employee health care costs, due to some large claims during the quarter.

Amortization of broadcast rights, excluding barter, was $3.3 million for the three months ended September 30, 2011, compared to $2.5 million for the same period in 2010, an increase of $0.7 million, or 29.1%. The increase was primarily attributed to amortization at WFRV and WJMN of $1.0 million, the majority of which related to the Green Bay Packers pre-season, which was partially offset by a decrease across a number of our stations related to the termination of syndication of The Oprah Winfrey Show.

Amortization of intangible assets was $7.2 million for the three months ended September 30, 2011, compared to $5.9 million for the same period in 2010, an increase of $1.3 million, or 21.6%. The increase was due to incremental amortization recorded on network affiliation agreement intangibles on our FOX affiliate stations with agreements terminating in 2011, as well as amortization of newly acquired intangibles in connection with the acquisition of WFRV, WJMN and GoLocal.Biz.

While there are no known circumstances or events as of September 30, 2011 that indicate an impairment might exist, any future significant adverse change in the advertising marketplaces in which Nexstar and Mission operate could lead to an impairment and reduction of the carrying value of the Company's goodwill and intangible assets, including FCC licenses. If such a condition were to occur, the resulting non-cash charge could have a material adverse effect on Nexstar and Mission's financial position and results of operations.

Depreciation of property and equipment was $5.6 million for the three months ended September 30, 2011, compared to $5.3 million for the same period in 2010, an increase of $0.4 million, or 7.0%.

Interest Expense

Interest expense, net was $13.1 million for the three months ended September 30, 2011, compared to $14.3 million for the same period in 2010, a decrease of $1.2 million, or 8.7%. The decrease was primarily attributed to our decrease in outstanding indebtedness from our repurchases and redemptions of outstanding notes during the last half of 2010 and throughout 2011 and the refinancing of higher coupon debt tranches.

Income Taxes

Income tax expense remained consistent at $1.5 million for the three months ended September 30, 2011 and 2010. Our provision for income taxes is primarily created by an increase in the deferred tax liability position arising from the amortization of goodwill and other indefinite-lived assets for income tax purposes, which are not amortized for financial reporting purposes. No tax benefit was recorded with respect to the losses in 2011 and 2010 as the utilization of such losses is not more likely than not to be realized in the foreseeable future.


Nine Months Ended September 30, 2011 Compared to Nine Months Ended September 30, 2010

Revenue

Gross local advertising revenue was $132.3 million for the nine months ended September 30, 2011, compared to $126.8 million for the same period in 2010, an increase of $5.5 million, or 4.3%, of which $1.9 million related to the acquisition of WFRV and WJMN. Gross national advertising revenue was $47.7 million for the nine months ended September 30, 2011, compared to $45.9 million for the same period in 2010, an increase of $1.9 million, or 4.1%, of which $1.0 million related to the acquisition of WFRV and WJMN. Excluding WFRV and WJMN, gross local and national advertising revenue increased by $4.4 million, which was largely the result of an increase in advertising from automotive of $1.8 million, which provided 20.4% and 19.9% of our core local and national advertising revenue for the nine months ended September 30, 2011 and 2010, respectively. The increase in automotive advertising was primarily driven by increases in domestic manufacturers and dealers, particularly Ford and GM, and was partially offset by decreases in foreign manufacturers, most notably Toyota. Additionally, we had increases in advertising from department and retail stores of $1.2 million, school/instruction of $0.9 million, home repair and manufacturing of $0.5 million and insurance of $0.5 million, which was partially offset by a decrease in advertising from grocery stores of $0.6 million and media (radio, television, cable and newspapers) of $0.6 million during the first nine months of 2011 compared to the prior year. The increase in department and retail store advertising was primarily driven by increases in local retailers as well as BonTon, Walmart and Shoe Carnival. The increase in school and instruction advertising was primarily driven by increases in advertising from higher education and vocational schools, both from existing and new customers.

Gross political advertising revenue was $4.3 million for the nine months ended September 30, 2011, compared to $16.7 million for the same period in 2010, a decrease of $12.4 million, or 74.1%, as expected since 2011 is not an election year.

Retransmission compensation was $27.1 million for the nine months ended September 30, 2011, compared to $22.3 million for the same period in 2010, an increase of $4.8 million, or 21.6%. The increase in retransmission compensation was primarily the result of renegotiated contracts providing for higher rates per subscriber during the year and additional revenue from WFRV and WJMN of $0.5 million.

eMedia revenue, representing web-based advertising revenue generated at the Company's stations, was $12.0 million for the nine months ended September 30, 2011, compared to $9.9 million for the same period in 2010, an increase of $2.1 million or 21.1%. The increase in eMedia revenue is attributable to introduction of new service offerings and increased penetration of the Company's customer base by its eMedia sales efforts.

Operating Expenses

Corporate expenses, related to costs associated with the centralized operation of Nexstar's and Mission's stations, were $14.4 million for the nine months ended September 30, 2011, compared to $15.0 million for the same period in 2010, a decrease of $0.6 million, or 3.8%. The decrease was primarily due to the 2010 recognition of $1.6 million of non-cash incremental stock-based compensation expense from a repricing of employee stock options performed in May 2010, which was partially offset by an increase in legal expense of $0.7 million related to our acquisition of WFRV and WJMN, amendments to our senior secured credit facilities, our antitrust lawsuit and to our strategic initiatives.

Station direct operating expenses, consisting primarily of news, engineering and programming, and selling, general and administrative expenses (net of trade expense) were $116.2 million for the nine months ended September 30, 2011, compared to $109.7 million for the same period in 2010, an increase of $6.5 million, or 5.9%. The increase was primarily attributed to an increase of $2.2 million in station expenses of WFRV and WJMN, an increase of $1.4 million in national, local and eMedia sales commissions due to an increase in local, national and eMedia revenue, an incremental $0.5 million in fees paid to Sinclair for our outsourcing arrangements in Peoria and Rochester, as revenues and broadcasting cash flows for those stations increased year-over-year, an increase of $0.5 million in bad debt expense and an increase of $0.4 million in employee health care costs, due to some large claims during the year.

Amortization of broadcast rights, excluding barter, remained relatively consistent at $7.7 million for the nine months ended September 30, 2011, compared to $7.2 million for the same period in 2010, an increase of $0.4 million, or 6.1%.


Amortization of intangible assets was $20.4 million for the nine months ended September 30, 2011, compared to $17.9 million for the same period in 2010, an increase of $2.6 million, or 14.3%. The increase was due to incremental amortization recorded on network affiliation agreement intangibles on our FOX affiliate stations with agreements terminating in 2011, as well as amortization of newly acquired intangibles in connection with the acquisition of WFRV, WJMN and GoLocal.Biz.

While there are no known circumstances or events as of September 30, 2011 that indicate an impairment might exist, any future significant adverse change in the advertising marketplaces in which Nexstar and Mission operate could lead to an impairment and reduction of the carrying value of the Company's goodwill and intangible assets, including FCC licenses. If such a condition were to occur, the resulting non-cash charge could have a material adverse effect on Nexstar and Mission's financial position and results of operations.

Depreciation of property and equipment remained relatively consistent at $16.1 million for the nine months ended September 30, 2011, compared to $15.9 million for the same period in 2010.

Interest Expense

Interest expense, net remained relatively consistent at $40.1 million for the nine months ended September 30, 2011, compared to $40.2 million for the same period in 2010. Interest expense increased due to the higher interest rate of the 8.875% senior secured second lien notes due 2017 ("8.875% Notes") issued in April 2010 compared to the senior secured credit facilities, which was offset by a decrease in outstanding indebtedness from our repurchases and redemptions of . . .

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