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NXST > SEC Filings for NXST > Form 10-Q on 10-May-2013All Recent SEC Filings

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Form 10-Q for NEXSTAR BROADCASTING GROUP INC


10-May-2013

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, 2012.

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

2013 Highlights

Net revenue during the first quarter of 2013 increased by $28.6 million, or 34.1% compared to the same period in 2012. The increase in net revenue was primarily due to our December 2012 acquisition of ten television stations and Inergize Digital Media from Newport Television, LLC ("Newport"), eight television stations acquired during the three months ended March 31, 2013 as well as increases in retransmission compensation and eMedia revenue. These increases were partially offset by a reduction in political advertising revenue and terminated management services agreement with Four Points Media Group, LLC on January 3, 2012. The newly acquired stations contributed approximately $32.8 million to the consolidated net revenue for the first quarter of 2013.

On April 26, 2013, our Board of Directors declared a quarterly dividend of $0.12 per share of Nexstar's Class A and Class B common stock. The dividend is payable on May 31, 2013 to shareholders of record on May 17, 2013.

On April 24, 2013, we and Mission entered into a stock purchase agreement to acquire the stock of privately-held Communications Corporation of America ("CCA") and White Knight Broadcasting ("White Knight"), the owners of nineteen television stations in ten markets, for a total consideration of $270.0 million, subject to adjustments for working capital to be acquired. A deposit of $27.0 million was made upon signing the agreement which was funded by a combination of borrowings under our revolving credit facility and cash on hand. The remaining purchase price is expected to be funded through cash generated from operations prior to closing, borrowings under the existing credit facilities and future credit market transactions. We and Mission expect the acquisitions to close early in the fourth quarter of 2013.

On March 1, 2013, we and Mission acquired the assets of WFFF, the FOX affiliate, and WVNY, the ABC affiliate, both in the Burlington, Vermont market from Smith Media, LLC for a total consideration of $16.6 million in cash, funded by a combination of our and Mission's $10.0 million total borrowings from the revolving credit facilities and cash on hand.

Effective February 1, 2013, we acquired the assets of KGPE, the CBS affiliate in Fresno, California market, KGET, the NBC/CW affiliate, and KKEY-LP, the low powered Telemundo affiliate, both in the Bakersfield, California market, from Newport for $35.4 million in cash, funded by cash on hand.

Effective February 1, 2013, we entered into a definitive agreement to acquire the assets of KSEE, the NBC affiliate serving the Fresno, California market, from Granite Broadcasting Corporation for $26.5 million in cash, subject to adjustments for working capital acquired. Pursuant to the purchase agreement, we made a payment of $20.0 million, funded by cash on hand, to acquire the station's assets excluding FCC license and certain transmission equipment. We also entered into a TBA with KSEE, effective February 1, 2013, to program most of KSEE's broadcast time, sell its advertising time and retain the advertising revenue generated during the pendency of the FCC approval on the asset purchase. On April 17, 2013, we received approval from the FCC to purchase the remaining assets of KSEE, which we expect to complete before the end of May 2013.

On January 24, 2013, our Board of Directors declared a quarterly dividend of $0.12 per share of its Class A and Class B common stock. The first dividend payment was made on March 1, 2013 for a total of $3.5 million to shareholders of record on February 15, 2013.

Effective January 1, 2013, Mission acquired the assets of KLRT-TV, the FOX affiliate and KASN, the CW affiliate, both in the Little Rock, Arkansas market, from Newport for $59.7 million in cash, funded by Mission's $60.0 million term loan under its senior secured credit facility.


Overview of Operations

We owned and operated 49 television stations and 13 digital multicast channels as of March 31, 2013. Additionally, as of March 31, 2013, we programmed or provided sales and other services to 23 additional television stations and four digital multicast channels through various local service agreements with their owners, including 20 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 purchase options 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 2013 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 sales 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 2013 is not an election year, we expect less political advertising revenue to be reported in 2013 compared to 2012.


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 March 31,
                                      2013                      2012
                               Amount          %         Amount         %
Local                         $  59,934        51.9     $ 45,433        52.2
National                         23,375        20.2       17,406        20.0
Political                           762         0.7        2,794         3.2
Retransmission compensation      23,796        20.7       14,496        16.7
eMedia revenue                    6,500         5.6        4,133         4.7
Network compensation                166         0.1          172         0.2
Management fee                        -           -        1,961         2.3
Other                               959         0.8          620         0.7
Total gross revenue             115,492       100.0       87,015       100.0
Less: Agency commissions        (10,705 )      (9.3 )     (8,361 )      (9.6 )
Net broadcast revenue           104,787        90.7       78,654        90.4
Trade and barter revenue          7,418                    4,988
Net revenue                   $ 112,205                 $ 83,642

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 March 31,
                                                    2013                        2012
                                            Amount           %          Amount           %
Net revenue                                $ 112,205         100.0     $  83,642         100.0
Operating expenses (income):
Corporate expenses                             6,733           6.0         5,414           6.5
Station direct operating Corporate
expenses, net of trade                        32,591          29.0        20,570          24.6
Selling, general and administrative
expenses                                      28,760          25.7        21,714          25.9
Loss (gain) on asset disposal, net                 7             -           (19 )           -
Trade and barter expense                       7,357           6.6         4,995           6.0
Depreciation and amortization                 15,970          14.2        11,352          13.6
Amortization of broadcast rights,
excluding barter                               2,969           2.6         2,111           2.5
Income from operations                     $  17,818                   $  17,505


Three Months Ended March 31, 2013 Compared to Three Months Ended March 31, 2012

Revenue

Gross local advertising revenue was $59.9 million for the three months ended March 31, 2013, compared to $45.4 million for the same period in 2012, an increase of $14.5 million, or 31.9%. The increase was primarily related to incremental revenue from our newly acquired stations of $14.1 million. Gross national advertising revenue was $23.4 million for the three months ended March 31, 2013, compared to $17.4 million for the same period in 2012, an increase of $6.0 million, or 34.3%, primarily attributable to new stations acquired of $6.5 million, partially offset by changes in the mix between our local and national advertising revenues. Our largest advertiser category, automotive, represented 24.3% and 23.2% of our legacy stations' local and national advertising revenue for the three months ended March 31, 2013 and 2012, respectively. Overall, this category increased by 1%. The other categories representing our top five were fast food/restaurants, which decreased 8.8%, furniture, which increased 4.6%, paid programming, which decreased 11.7% and medical/healthcare, which decreased 6.9%.

Gross political advertising revenue was $0.8 million for the three months ended March 31, 2013, compared to $2.8 million for the same period in 2012, a decrease of $2.0 million, or 72.7%, as expected, due to 2013 being not an election year.

Retransmission compensation was $23.8 million for the three months ended March 31, 2013, compared to $14.5 million for the same period in 2012, an increase of $9.3 million, or 64.2%. The increase in retransmission compensation was primarily the result of contracts providing for higher rates per subscriber during the year. We also earned approximately $6.8 million in retransmission compensation from new stations acquired in December 2012 and during the first quarter of 2013.

eMedia revenue, representing web-based advertising revenue generated at the our stations, was $6.5 million for the three months ended March 31, 2013, compared to $4.1 million for the same period in 2012, an increase of $2.4 million or 57.3%. The increase is primarily attributable to the $2.3 million incremental revenue from the new stations acquired in December 2012 and during the first quarter of 2013.

Operating Expenses

Corporate expenses, related to costs associated with the centralized management of Nexstar's and Mission's stations, were $6.7 million for the three months ended March 31, 2013, compared to $5.4 million for the same period in 2012, an increase of $1.3 million, or 24.4%. This was primarily due to an increase in legal and professional fees associated with our acquisitions and post-closing activities relative to our and Mission's senior secured credit facilities of $0.7 million and capital market activities of $0.2 million, increase in stock-based compensation expense of $0.3 million due to stock option grants during the third quarter of 2012 and increase in bonus expense related to higher revenue of $0.3 million.

Station direct operating expenses, consisting primarily of news, engineering, programming and selling, general and administrative expenses (net of trade expense) were $61.4 million for the three months ended March 31, 2013, compared to $42.3 million for the same period in 2012, an increase of $19.1 million, or 45.1%. The increase was primarily due to expenses of our acquired stations in December 2012 and during the first quarter of 2013 of $17.8 million and increase in programming costs of our legacy stations of $2.2 million related to reverse transmission compensation charged by the networks. Networks now require compensation from broadcasters for the use of network programming. Network program fees have increased industry wide over the last eight months and are expected to continue to increase over the next several years.

Amortization of broadcast rights, excluding barter was $3.0 million for the three months ended March 31, 2013, compared to $2.1 million for the same period in 2012, an increase of $0.9 million, or 40.6%, of which $1.5 million is attributable to our newly acquired stations. This increase was partially offset by general programming mix changes among our legacy stations.

Amortization of intangible assets was $8.0 million for the three months ended March 31, 2013, compared to $5.6 million for the same period in 2012, an increase of $2.4 million, or 42.6%. The increase was primarily attributable to incremental amortization of intangible assets from our newly acquired stations of $3.3 million, which was partially offset by $0.9 million decrease from certain of our legacy stations upon reaching full amortization of intangible assets.

Depreciation of property and equipment was $8.0 million for the three months ended March 31, 2013, compared to $5.8 million for the same period in 2012, an increase of $2.2 million, or 38.8%, primarily due to the incremental depreciation of fixed assets from our newly acquired stations.

Interest Expense

Interest expense, net was $16.5 million for the three months ended March 31, 2013, compared to $12.9 million for the same period in 2012, an increase of $3.6 million, or 28.2%. The increase was primarily attributable to our and Mission's borrowings during the fourth quarter of 2012 and first quarter of 2013 to fund the purchase price of newly acquired stations. This was partially offset by lower interest rates on our outstanding debt as a result of refinanced senior secured credit facilities that we and Mission completed during the fourth quarter of 2012.

Income Taxes

Income tax expense was $0.5 million for the three months ended March 31, 2013, compared to $1.6 million for the same period in 2012, a decrease of $1.1 million, or 69.6%. The effective tax rate for the three months ended March 31, 2013 was a provision of 40.5%. Prior to the fourth quarter of 2012, a valuation allowance was recorded against deferred tax assets for net operating loss carryforwards and other deferred tax assets, and our provision for income taxes was primarily created by changes in the position arising from the amortization of goodwill and other indefinite-lived assets for income tax purposes, which are not amortized for financial reporting purposes. In the fourth quarter of 2012, we released the full amount of our valuation allowance against deferred tax assets for net operating loss carryforwards and other deferred tax assets.


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):

                                                          Three Months Ended
                                                              March 31,
                                                          2013          2012
Net cash provided by operating activities              $   13,105     $  26,042
Net cash used in investing activities                    (127,894 )      (4,043 )
Net cash provided by (used in) financing activities        68,415       (17,696 )
Net (decrease) increase in cash and cash equivalents   $  (46,374 )   $   4,303
Cash paid for interest                                 $    3,350     $   7,508
Cash paid for income taxes, net                        $      899     $      43



                                                           As of              As of
                                                         March 31,         December 31,
                                                            2013               2012
       Cash and cash equivalents                          $     22,625      $      68,999
       Long-term debt including current portion                927,967            857,642
       Unused commitments under senior secured credit
       facilities(1)                                            90,000            100,000

Based on covenant calculations, as of March 31, 2013, all of the $90 million of (1 ) total unused revolving
loan commitments under the Nexstar and Mission senior secured credit facilities were available for borrowing.

Cash Flows - Operating Activities

Net flows cash provided by operating activities decreased by $12.9 million during the three months ended March 31, 2013 compared to the same period in 2012. This was primarily due to a decrease of $24.6 million resulting from the timing of collections of accounts receivable, which was partially offset by decrease in amounts due to lenders for interest of $7.7 million and the timing of payments to our vendors of $2.6 million.

Cash paid for interest decreased by $4.1 million during the three months ended March 31, 2013 compared to the same period in 2012. The decrease was due to the $5.3 million decrease in cash paid for interest of our 7% Senior subordinated notes and 7% Senior subordinated PIK notes retired in the fourth quarter of 2012, which was partially offset by a $1.1 million increase in cash interest paid on the senior secured credit facilities due to higher amounts outstanding during the three months ended March 31, 2013 compared to the same period in 2012.

Cash Flows - Investing Activities

Net cash flows used in investing activities increased by $123.9 million during the three months ended March 31, 2013 compared to the same period in 2012. Capital expenditures were $6.8 million during the first quarter of 2013 compared to $4.1 million for the same period in 2012. Additionally, we and Mission made total payments of $121.1 million during the three months ended March 31, 2013 to acquire the assets of eight television stations in four markets from various sellers.

Cash Flows - Financing Activities

Net cash flows provided by financing activities was $68.4 million for the three months ended March 31, 2013 compared to the net cash used in financing activities of $17.7 million for the same period in 2012. In 2013, we and Mission borrowed a total of $70.0 million in additional term loans and revolving loans under the senior secured credit facilities to finance various acquisitions. We also received $1.5 million proceeds from stock option exercises. These cash flow increases were partially offset by $3.5 million in quarterly dividend payments to our Class A and Class B stockholders and payments for debt financing costs of $0.7 million. In 2012, we repaid a net amount of $17.6 million on the revolving loans and paid the contractual maturities under the senior secured credit facilities.

Our senior secured credit facility restricts the payment of cash dividends to common stockholders.


Future Sources of Financing and Debt Service Requirements

As of March 31, 2013, Nexstar and Mission had total combined debt of $928.0 million, which represented 99.7% of Nexstar and Mission's combined capitalization. Our and Mission's high level of debt requires that a substantial portion of cash flow be dedicated to pay principal and interest on debt, which reduces the funds available for working capital, capital expenditures, acquisitions and other general corporate purposes.

Nexstar and Mission had $90.0 million of total unused revolving loan commitments under their respective senior secured credit facilities, all of which was available for borrowing, based on the covenant calculations as of March 31, 2013. The Company's ability to access funds under its senior secured credit facilities depends, in part, on our compliance with certain financial covenants. Any additional drawings under senior secured credit facilities will reduce our future borrowing capacity and the amount of total unused revolving loan commitments.

During the three months ended March 31, 2013, we and Mission borrowed a total of $70.0 million in additional term loans and revolving loans under the senior secured credit facilities to finance various acquisitions.

On April 24, 2013, Nexstar and Mission entered into a stock purchase agreement to acquire the stock of privately-held CCA and White Knight, the owners of nineteen television stations in ten markets, for a total consideration of $270.0 million, subject to FCC approval and adjustments for working capital to be acquired. A deposit of $27.0 million was made upon signing the agreement which was funded by a combination of borrowings under Nexstar's revolving credit facility and cash on hand. The remaining purchase price is expected to be funded through cash generated from operations prior to closing, borrowings under the existing credit facilities and future credit market transactions. Nexstar and Mission expects the acquisitions to close early in the fourth quarter of 2013.

During April of 2013, we borrowed a net amount of $32.0 million from our revolving credit facility to partially fund the required deposit to acquire the stock of CCA and White Knight and to fund the remaining purchase price of $6.5 million in relation to our purchase of KSEE's assets.

The following table summarizes the approximate aggregate amount of principal indebtedness scheduled to mature for the periods referenced as of March 31, 2013 (in thousands):

                                                 Remainder
                                    Total         of 2013         2014-2015       2016-2017      Thereafter
Nexstar senior secured credit
facility                          $ 251,000     $     1,845     $     4,920     $     9,920     $    234,315
Mission senior secured credit
facility                            109,000             780           2,080           7,080           99,060
8.875% senior secured second
lien notes
due 2017                            325,000               -               -         325,000                -
6.875 senior unsecured notes
due 2020                            250,000               -               -               -          250,000
                                  $ 935,000     $     2,625     $     7,000     $   342,000     $    583,375

We make semiannual interest payments on our 8.875% Notes on April 15 and October 15 of each year. We will make semiannual interest payments on our 6.875% Notes on May 15 and November 15 of each year. We fully paid all debt outstanding on our 7% Notes and 7% PIK Notes in 2012. Interest payments on our and Mission's . . .

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