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NXST > SEC Filings for NXST > Form 10-Q on 8-Nov-2012All Recent SEC Filings

Show all filings for NEXSTAR BROADCASTING GROUP INC

Form 10-Q for NEXSTAR BROADCASTING GROUP INC


8-Nov-2012

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, 2011.

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

2012 Highlights

Net revenue during the third quarter of 2012 increased by $15.1 million, or 20.2 % as compared to the same period in 2011. The increase in net revenue was primarily due to the December 2011 acquisition of WEHT along with increases in retransmission compensation and political advertising, which were partially offset by the discontinuance of management fee revenue from our terminated management services agreement with Four Points. The newly acquired station contributed approximately $2.3 million to the consolidated net revenue for the third quarter of 2012.

On July 18, 2012, Nexstar and Mission signed definitive agreements to acquire the assets of twelve television stations in eight markets and Inergize Digital Media operations from Newport for $285.5 million in cash, subject to adjustments for working capital acquired. The Company also received commitments for $445.0 million in new senior secured credit facilities consisting of $350.0 million in term loans due 2019 and $95.0 million in revolving credit due December 2017. We expect the Newport acquisitions to close in December 2012.

On October 24, 2012, Nexstar commenced an offer to sell $250.0 million of 6.875% Notes due 2020 at par. The sale of the 6.875% Notes is expected to be completed on or about November 9, 2012. The proceeds of the 6.875% Notes will be used to retire the 7% Notes and 7% PIK Notes, repay a portion of the amounts outstanding under Nexstar's senior secured credit facility and pay related fees and expenses. The 6.875% Notes will be senior unsecured obligations of Nexstar and will be guaranteed by Mission. On October 24, 2012, Nexstar commenced a tender offer to retire the 7% Notes and 7% PIK Notes for $1,003 per each $1,000 of outstanding principal plus accrued and unpaid interest. The tender offer will expire on November 21, 2012, unless extended or earlier terminated by Nexstar in its sole discretion.

During the quarter, the Company borrowed $6.0 million, net, from its revolving loans under its senior secured credit facilities.

Overview of Operations

We owned and operated 36 television stations and seven digital multicast channels as of September 30, 2012. Additionally, as of September 30, 2012, we programmed or provided sales and other services to 19 additional television stations and four digital multicast channels through various local service agreements with their owners, including 17 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. See Note 2 to our condensed consolidated financial statements in this Form 10-Q for a discussion of the local service agreements we have with Mission.


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. Additionally, on November 29, 2011, Mission's shareholders granted us an option to purchase any or all of Mission's stock, subject to FCC consent, for a price equal to the pro rata portion of the greater of (1) five times the stations' cash flow, as defined in the agreement, reduced by the amount of indebtedness, as defined in the agreement, or (2) $100,000. These option agreements (which expire on various dates between 2012 and 2022) are freely exercisable or assignable by us without consent or approval by Mission or its shareholders. 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 airs during the Olympic Games. As 2012 is an election year, we expect an increase in political advertising revenue to be reported in 2012 compared to 2011.


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,
                           2012                     2011                     2012                      2011
                    Amount         %         Amount         %         Amount          %         Amount          %
Local              $ 44,743        47.3     $ 43,343        56.1     $ 137,535        50.2     $ 132,266        58.0
National             19,308        20.4       16,302        21.1        55,543        20.3        47,719        20.9
Political            10,153        10.7        1,727         2.2        18,929         6.9         4,319         1.9
Retransmission
compensation         15,102        16.0        9,982        12.9        44,881        16.3        27,099        11.9
eMedia revenue        4,482         4.7        4,207         5.4        13,041         4.8        11,963         5.3
Network
compensation            191         0.2          234         0.3           585         0.2           776         0.3
Management fee            -           -          968         1.3         1,961         0.7         1,968         0.9
Other                   528         0.7          574         0.7         1,760         0.6         1,746         0.8
Total gross
revenue              94,507       100.0       77,337       100.0       274,235       100.0       227,856       100.0
Less: Agency
commissions          (9,661 )     (10.2 )     (7,622 )      (9.9 )     (27,344 )     (10.0 )     (22,967 )     (10.1 )
Net broadcast
revenue              84,846        89.8       69,715        90.1       246,891        90.0       204,889        89.9
Trade and barter
revenue               5,106                    5,124                    15,567                    15,400
Net revenue        $ 89,952                 $ 74,839                 $ 262,458                 $ 220,289

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,
                           2012                     2011                     2012                      2011
                    Amount         %         Amount         %         Amount          %         Amount          %
Net revenue        $ 89,952       100.0     $ 74,839       100.0     $ 262,458       100.0     $ 220,289       100.0
Operating
expenses
(income):
Corporate
expenses              5,891         6.5        5,094         6.8        16,424         6.2        14,428         6.5
Station direct
operating
expenses, net of
trade                20,536        22.8       19,187        25.6        61,047        23.3        54,274        24.6
Selling, general
and
administrative
expenses             21,619        24.0       21,252        28.4        65,347        24.9        61,885        28.1
(Gain) loss on
asset
disposal, net            (4 )         -          (82 )      (0.1 )         (25 )         -            20           -
Trade and barter
expense               4,661         5.2        5,036         6.7        14,697         5.6        15,197         6.9
Depreciation and
amortization         11,376        12.7       12,831        17.2        33,954        12.9        36,464        16.6
Amortization of
broadcast
rights,
excluding barter      2,316         2.6        3,253         4.4         6,489         2.5         7,662         3.5
Income from
operations         $ 23,557                 $  8,268                 $  64,525                 $  30,359


Three Months Ended September 30, 2012 Compared to Three Months Ended September 30, 2011

Revenue

Gross local advertising revenue was $44.7 million for the three months ended September 30, 2012, compared to $43.3 million for the same period in 2011, an increase of $1.4 million, or 3.2%. The increase was primarily related to incremental advertising from our automotive customers and revenue from our acquired stations which more than offset the decrease associated with the termination of certain station affiliation agreements. Gross national advertising revenue was $19.3 million for the three months ended September 30, 2012, compared to $16.3 million for the same period in 2011, an increase of $3.0 million, or 18.4%, primarily attributable to the station acquired in the second half of 2011 and changes in mix between our local and national advertising revenues. Our largest advertiser category, automotive, represented 26.0% and 21.5% of local and national advertising revenue for the three months ended September 30, 2012 and 2011, respectively. Overall, this category increased by 30.0%, of which approximately 5.4% came from our acquired station. The other categories representing our top five were fast food/restaurants, which decreased 16.2%, furniture, which increased 9.1%, paid programming, which increased 1.5% and medical/healthcare, which increased 14.8%.

Gross political advertising revenue was $10.1 million for the three months ended September 30, 2012, compared to $1.7 million for the same period in 2011, an increase of $8.4 million, or 487.9%, as expected, due to 2012 being an election year.

Retransmission compensation was $15.1 million for the three months ended September 30, 2012, compared to $10.0 million for the same period in 2011, an increase of $5.1 million, or 51.3%. The increase in retransmission compensation was primarily the result of contracts providing for higher rates per subscriber during the year.

eMedia revenue, representing web-based advertising revenue generated at the Company's stations, was $4.5 million for the three months ended September 30, 2012, compared to $4.2 million for the same period in 2011, an increase of $0.3 million or 6.5%. The increase in eMedia revenue is primarily attributable to eMedia sales efforts.

Operating Expenses

Corporate expenses, related to costs associated with the centralized management of Nexstar's and Mission's stations, were $5.9 million for the three months ended September 30, 2012, compared to $5.1 million for the same period in 2011, an increase of $0.8 million, or 15.6%. This was due to an increase in legal and professional fees associated with our acquisitions and debt transactions of $0.5 million as well as increased bonus expense related to higher revenues in this political year of $0.2 million.

Station direct operating expenses, consisting primarily of news, engineering and programming, and selling, general and administrative expenses (net of trade expense) were $42.1 million for the three months ended September 30, 2012, compared to $40.4 million for the same period in 2011, an increase of $1.7 million, or 4.2%. The increase was primarily due to expenses of the newly acquired station and an increase of $0.8 million in programming costs primarily due to the renewed network agreements entered into in 2011 and 2012. These increases were partially offset by a decrease in employee health claims of $1.2 million.

Amortization of broadcast rights, excluding barter was $2.3 million for the three months ended September 30, 2012, compared to $3.3 million for the same period in 2011, a decrease of $1.0 million, or 28.8%, of which $0.7 million is attributable to changes in sports programming on one of our stations.

Amortization of intangible assets was $5.5 million for the three months ended September 30, 2012, compared to $7.2 million for the same period in 2011, a decrease of $1.7 million, or 24.0%. The decrease was primarily due to termination of certain FOX affiliation contracts which were fully amortized in 2011, partially offset by incremental amortization from acquired stations.

Depreciation of property and equipment was $5.9 million for the three months ended September 30, 2012, compared to $5.6 million for the same period in 2011, an increase of $0.3 million, or 4.9%, primarily due to the incremental depreciation of fixed assets at our newly acquired stations.


Interest Expense

Interest expense, net was $12.4 million for the three months ended September 30, 2012, compared to $13.1 million for the same period in 2011, a decrease of $0.6 million, or 4.8%. The decrease was primarily attributed to our redemption of notes with higher interest financed with our senior secured credit facility, as well as an overall reduction in debt.

Income Taxes

Income tax expense was $1.6 million for the three months ended September 30, 2012, compared to $1.5 million for the same period in 2011, an increase of $0.1 million, or 6.9%. The increase was due to the incremental goodwill and FCC licenses from our 2011 acquisitions. Our provision for income taxes is primarily created by changes in the position during the year 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 2012 and 2011 as the utilization of such losses is not more likely than not to be realized in the foreseeable future.

Nine Months Ended September 30, 2012 Compared to Nine Months Ended September 30, 2011

Revenue

Gross local advertising revenue was $137.5 million for the nine months ended September 30, 2012, compared to $132.3 million for the same period in 2011, an increase of $5.3 million, or 4.0%. The increase was primarily related to incremental advertising from our automotive customers and revenue from our acquired stations which more than offset a decrease associated with the termination of certain station affiliation agreements. Gross national advertising revenue was $55.5 million for the nine months ended September 30, 2012, compared to $47.7 million for the same period in 2011, an increase of $7.8 million, or 16.4%, primarily attributable to the acquired stations and changes in mix between our local and national advertising revenues. Our largest advertiser category, automotive, represented 23.8% and 20.4% of local and national advertising revenue for the nine months ended September 30, 2012 and 2011, respectively. Overall, this category increased by 25.7%, of which 8.5% was attributable to our acquired stations. The other categories representing our top five were fast food/restaurants, which decreased 7.8%, paid programming, which increased 4.2%, furniture, which increased 6.2% and medical/healthcare, which increased 13.1%.

Gross political advertising revenue was $18.9 million for the nine months ended September 30, 2012, compared to $4.3 million for the same period in 2011, an increase of $14.6 million, or 338.3%, as expected, due to 2012 being an election year.

Retransmission compensation was $44.9 million for the nine months ended September 30, 2012, compared to $27.1 million for the same period in 2011, an increase of $17.8 million, or 65.6%. The increase in retransmission compensation was primarily the result of our acquired stations and contracts providing for higher rates per subscriber in the current year.

eMedia revenue, representing web-based advertising revenue generated at the Company's stations, was $13.0 million for the nine months ended September 30, 2012, compared to $12.0 million for the same period in 2011, an increase of $1.1 million or 9.0%. The increase in eMedia revenue is attributable to our eMedia sales efforts and incremental revenue from acquired stations.

Management fee revenue was $2.0 million for the nine months ended September 30, 2012. The 2012 revenue primarily represents a contract termination fee received upon closing of the sale of Four Points' stations to Sinclair Broadcast Group. Management fee revenue was $2.0 million for the nine months ended September 30, 2011.

Operating Expenses

Corporate expenses, related to costs associated with the centralized operation of Nexstar's and Mission's stations, were $16.4 million for the nine months ended September 30, 2012, compared to $14.4 million for the same period in 2011, an increase of $2.0 million, or 13.8%. This was due to an increase in legal and professional fees associated with our acquisitions, debt transactions and the culmination of our strategic alternative process of $0.2 million, increase in payroll and payroll-related costs due to increased headcount related to acquisitions and operational initiatives of $0.7 million and increased bonus expense related to higher revenues in this political year of $0.6 million.


Station direct operating expenses, consisting primarily of news, engineering and programming, and selling, general and administrative expenses (net of trade expense) were $126.4 million for the nine months ended September 30, 2012, compared to $116.2 million for the same period in 2011, an increase of $10.2 million, or 8.8%. The increase was primarily due to expenses of the newly acquired stations, as well as an increase of $2.5 million in programming costs primarily due to the renewed network agreements entered into in 2011. These increases were partially offset by a decrease in employee health claims of $0.4 million.

Amortization of broadcast rights, excluding barter was $6.5 million for the nine months ended September 30, 2012, compared to $7.7 million for the same period in 2011, a decrease of $1.2 million, or 15.3%. The decrease was primarily due to the changes in programming mix, which was partially offset by the incremental amortization of broadcast rights of newly acquired stations.

Amortization of intangible assets was $16.6 million for the nine months ended September 30, 2012, compared to $20.4 million for the same period in 2011, a decrease of $3.8 million, or 18.7%. The decrease was primarily due to termination of certain FOX affiliation contracts which were fully amortized in 2011, partially offset by incremental amortization from acquired stations.

Depreciation of property and equipment was $17.4 million for the nine months ended September 30, 2012, compared to $16.1 million for the same period in 2011, an increase of $1.3 million, or 8.1%, primarily due to the incremental depreciation of fixed assets at our newly acquired stations.

Interest Expense

Interest expense, net was $37.9 million for the nine months ended September 30, 2012, compared to $40.1 million for the same period in 2011, a decrease of $2.2 million, or 5.4%. The decrease in interest expense was primarily attributed to the buyback and redemption of notes with higher interest rates, financed with our senior secured credit facility, as well as an overall reduction in debt.

Income Taxes

Income tax expense was $4.7 million for the nine months ended September 30, 2012, compared to $4.3 million for the same period in 2011, an increase of $0.4 million, or 10.2%. The increase was due to the incremental goodwill and FCC licenses from our 2011 acquisitions. 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 expense or benefit was recorded with respect to the net income (loss) in 2012 and 2011 as the utilization of net operating losses is not more likely than not to be realized in the foreseeable future.

Liquidity and Capital Resources

We and Mission are highly leveraged, which makes the Company vulnerable to changes in general economic conditions. Our and Mission's ability to meet the future cash requirements described below depends on our and Mission's ability to generate cash in the future, which is subject to general economic, financial, competitive, legislative, regulatory and other conditions, many of which are beyond our and Mission's control. Based on current operations and anticipated future growth, we believe that our and Mission's available cash, anticipated cash flow from operations and available borrowings under the Nexstar and Mission senior secured credit facilities will be sufficient to fund working capital, capital expenditure requirements, interest payments and scheduled debt principal payments for at least the next twelve months. In order to meet future cash needs, we may, from time to time, borrow under our existing senior secured credit facilities or issue other long- or short-term debt or equity, if the market and the terms of our existing debt arrangements permit, and Mission may, from time to time, borrow under its existing senior secured credit facility. We will continue to evaluate the best use of Nexstar's operating cash flow among its capital expenditures, acquisitions and debt reduction.


Overview

The following tables present summarized financial information management
believes is helpful in evaluating the Company's liquidity and capital resources
(in thousands):

                                                          Nine Months Ended
                                                            September 30,
                                                         2012          2011
Net cash provided by operating activities              $  68,729     $  34,966
Net cash used in investing activities                    (39,539 )     (31,812 )
Net cash used in financing activities                    (24,500 )     (18,998 )
Net increase (decrease) in cash and cash equivalents   $   4,690     $ (15,844 )
Cash paid for interest                                 $  32,693     $  34,208
Cash paid for income taxes, net                        $     522     $     499



                                                                    As of              As of
                                                                September 30,       December 31,
                                                                    2012                2011
Cash and cash equivalents                                        $       12,236      $       7,546
Long-term debt including current portion                                615,248            640,361
Unused commitments under senior secured credit facilities(1)             42,000             50,700

Based on covenant calculations, as of September 30, 2012, all of the $42 (1 ) million of total unused revolving loan commitments under the Nexstar and Mission senior secured credit facilities were available for borrowing.

Cash Flows - Operating Activities

Net cash provided by operating activities increased by $33.8 million during the nine months ended September 30, 2012 compared to the same period in 2011. The increase was primarily due to an increase in net revenue of $42.2 million and a decrease in cash paid for interest of $1.5 million which was partially offset by incremental expenses of newly acquired businesses.

Cash paid for interest decreased by $1.5 million during the nine months ended September 30, 2012 compared to the same period in 2011. The decrease was due to the $2.8 million decrease in cash paid for interest of our 11.375% senior discount notes redeemed in 2011, which was partially offset by a $1.0 million increase in cash interest paid on the senior secured credit facilities due to larger amounts outstanding under the Company's revolving credit facility and a $0.5 million increase in cash interest paid on the 7% PIK Notes, which converted to cash pay in July 2011.

Due to our and Mission's recent history of net operating losses, we and Mission currently do not pay any federal income taxes. These net operating losses may be carried forward, subject to expiration and certain limitations, and used to reduce taxable earnings in future years. Through the use of available loss carryforwards, it is possible that we and Mission may not pay significant amounts of federal income taxes in the foreseeable future.

Cash Flows - Investing Activities

Net cash used in investing activities increased by $7.7 million during the nine months ended September 30, 2012 compared to the same period in 2011. In 2012, . . .

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