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NXST > SEC Filings for NXST > Form 10-Q on 8-Aug-2013All Recent SEC Filings

Show all filings for NEXSTAR BROADCASTING GROUP INC

Form 10-Q for NEXSTAR BROADCASTING GROUP INC


8-Aug-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 second quarter of 2013 increased by $37.3 million, or 42.0% 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 six months ended June 30, 2013 as well as increases in retransmission compensation and eMedia revenue. These increases were partially offset by a reduction in political advertising revenue. The newly acquired stations, net of disposal contributed approximately $41.4 million to the consolidated net revenue for the second quarter of 2013.

On June 28, 2013, we and Mission entered into amendments to each of our and Mission's senior secured credit facilities. The amendments provided commitments for incremental term loan facilities available to us of $144.0 million and to Mission of $90.0 million, subject to reallocation of up to $18.0 million for the benefit of Rocky Creek Communications, Inc. ("Rocky Creek"), an independent third party, pursuant to the terms of the amended credit agreements. On June 28, 2013, we received initial proceeds of $50.0 million under our incremental term loan facility, which was used to repay outstanding revolving loans of $27.0 million in June 2013 and $22.0 million in July 2013.

During the six months ended June 30, 2013, our Board of Directors declared quarterly dividends of $0.12 per share of Nexstar's Class A and Class B common stock. Total payments for dividends during the six months ended June 30, 2013 were $7.1 million.

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 19 television stations in 10 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 paid 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 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, and an unrelated network affiliation agreement 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. On April 17, 2013, we received approval from the FCC to purchase the remaining assets of KSEE. On May 31, 2013, we completed the acquisition of the FCC license and certain transmission equipment and paid the remaining purchase price of $6.5 million.

Overview of Operations

As of June 30, 2013, we owned, operated, programmed or provided sales and other services to 72 television stations and 17 digital multicast channels, including those owned by Mission, in 41 markets in the states of Illinois, Indiana, Maryland, Missouri, Montana, Tennessee, Texas, Pennsylvania, Louisiana, Arkansas, Alabama, New York, Florida, Wisconsin, Michigan, Utah, Vermont and California. The stations are affiliates of NBC (16 stations), CBS (12 stations), ABC (17 stations), FOX (14 stations), MyNetworkTV (5 stations and 2 digital multicast channels), The CW (6 stations and 2 digital multicast channel), Bounce TV (9 digital multicast channels), Me-TV (2 digital multicast channels), Telemundo (one station), LATV (one digital multicast), one independent station and one independent digital multicast. Through various local service agreements, we provided sales, programming and other services to 22 stations and four digital multicast channels owned and/or operated 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 2023) 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 June 30,                          Six Months Ended June 30,
                            2013                      2012                     2013                      2012
                     Amount          %         Amount         %         Amount          %         Amount          %
Local               $  66,731        51.0     $ 47,359        51.1     $ 126,665        51.4     $  92,792        51.6
National               28,575        21.8       18,829        20.3        51,950        21.1        36,235        20.2
Political               1,823         1.4        5,982         6.4         2,585         1.0         8,776         4.9
Retransmission
compensation           24,922        19.1       15,283        16.5        48,718        19.8        29,779        16.5
eMedia revenue          7,665         5.8        4,426         4.8        14,165         5.8         8,559         4.8
Network
compensation              197         0.2          222         0.2           363         0.1           394         0.2
Management fee              -           -            -           -             -           -         1,961         1.1
Other                     902         0.7          612         0.7         1,861         0.8         1,232         0.7
Total gross
revenue               130,815       100.0       92,713       100.0       246,307       100.0       179,728       100.0
Less: Agency
commissions           (12,478 )      (9.5 )     (9,322 )     (10.1 )     (23,183 )      (9.4 )     (17,683 )      (9.8 )
Net broadcast
revenue               118,337        90.5       83,391        89.9       223,124        90.6       162,045        90.2
Trade and barter
revenue                 7,874                    5,473                    15,292                    10,461
Net revenue         $ 126,211                 $ 88,864                 $ 238,416                 $ 172,506

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 June 30,                            Six Months Ended June 30,
                             2013                      2012                       2013                       2012
                     Amount          %          Amount         %          Amount          %          Amount          %
Net revenue         $ 126,211        100.0     $ 88,864        100.0     $ 238,416        100.0     $ 172,506        100.0
Operating
expenses
(income):
Corporate
expenses                6,879          5.5        5,119          5.8        13,612          5.7        10,533          6.1
Station direct
operating
expenses, net of
trade                  34,408         27.3       19,941         22.4        66,999         28.1        40,511         23.5
Selling, general
andadministrative
expenses               30,686         24.3       22,012         24.8        59,453         24.9        43,707         25.4
Trade and barter
expense                 7,608          6.0        5,041          5.7        14,965          6.3        10,036          5.8
Depreciation            8,213          6.5        5,715          6.4        16,193          6.8        11,463          6.6
Amortization of
intangible assets       6,914          5.5        5,511          6.2        14,904          6.3        11,115          6.5
Amortization of
broadcastrights,
excluding barter        3,311          2.6        2,062          2.3         6,280          2.6         4,173          2.4
Income from
operations          $  28,192                  $ 23,463                  $  46,010                  $  40,968


Three Months Ended June 30, 2013 Compared to Three Months Ended June 30, 2012

Revenue

Gross local advertising revenue was $66.7 million for the three months ended June 30, 2013, compared to $47.4 million for the same period in 2012, an increase of $19.4 million, or 40.9%. The increase was primarily related to incremental revenue from our newly acquired stations, net of station disposal, of $20.1 million. Gross national advertising revenue was $28.6 million for the three months ended June 30, 2013, compared to $18.8 million for the same period in 2012, an increase of $9.8 million, or 51.8%, primarily attributable to our newly acquired stations, net of station disposal, of $10.4 million. Our largest advertiser category, automotive, represented 23.4% and 22.5% of our legacy stations' local and national advertising revenue for the three months ended June 30, 2013 and 2012, respectively. Overall, this category increased by 1.9% for our legacy stations. The other categories representing our top five for our legacy stations were fast food/restaurants, which decreased 11.9%, furniture, which increased 2.2%, radio/TV/cable/newspapers, which increased 5.1% and paid programming, which decreased 14.6%.

Gross political advertising revenue was $1.8 million for the three months ended June 30, 2013, compared to $6.0 million for the same period in 2012, a decrease of $4.2 million, or 69.5%, as expected, due to 2013 not being an election year.

Retransmission compensation was $24.9 million for the three months ended June 30, 2013, compared to $15.3 million for the same period in 2012, an increase of $9.6 million, or 63.1%. The increase in retransmission compensation was primarily attributable to the $8.1 million incremental revenue from our newly acquired stations, net of station disposal, and the result of contracts providing for higher rates per subscriber during the year on our legacy stations.

eMedia revenue, representing web-based advertising revenue generated at our stations and Inergize, was $7.7 million for the three months ended June 30, 2013, compared to $4.4 million for the same period in 2012, an increase of $3.2 million, or 73.2%. The increase is primarily attributable to the $3.0 million incremental revenue from our newly acquired stations and Inergize, net of station disposal, including a nonrecurring customer contract termination fee of $1.2 million.

Operating Expenses

Corporate expenses, related to costs associated with the centralized management of Nexstar's and Mission's stations, were $6.9 million for the three months ended June 30, 2013, compared to $5.1 million for the same period in 2012, an increase of $1.8 million, or 34.4%. This was primarily due to an increase in legal and professional fees of $0.7 million associated with our and Mission's acquisitions of television stations and activities relative to senior secured credit facilities, an increase in stock-based compensation expense of $0.3 million due to stock option grants during the third quarter of 2012, an increase in bonus expense related to higher revenue of $0.3 million and an increase in payroll and payroll-related costs of $0.2 million.

Station direct operating expenses, consisting primarily of news, engineering, programming and selling, general and administrative expenses (net of trade expense) were $65.1 million for the three months ended June 30, 2013, compared to $42.0 million for the same period in 2012, an increase of $23.1 million, or 55.2%. The increase was primarily due to expenses of our newly acquired stations, net of station disposal, of $19.9 million and an increase in programming costs of our legacy stations of $2.5 million related to recently enacted network agreements. Networks now require compensation from broadcasters for the use of network programming. Network program fees have increased industry wide over the last 12 months and are expected to continue to increase over the next several years.

Amortization of broadcast rights, excluding barter was $3.3 million for the three months ended June 30, 2013, compared to $2.1 million for the same period in 2012, an increase of $1.2 million, or 60.6%, of which $1.7 million is attributable to our newly acquired stations. This increase was partially offset by changes in programming mix of our legacy stations.

Amortization of intangible assets was $6.9 million for the three months ended June 30, 2013, compared to $5.5 million for the same period in 2012, an increase of $1.4 million, or 25.5%. The increase was primarily attributable to incremental amortization of intangible assets from our newly acquired stations of $2.5 million, which was partially offset by $1.1 million decrease from certain of our legacy stations upon reaching full amortization of intangible assets.


Depreciation of property and equipment was $8.2 million for the three months ended June 30, 2013, compared to $5.7 million for the same period in 2012, an increase of $2.5 million, or 43.7%, primarily due to the incremental depreciation of fixed assets from our newly acquired stations.

Interest Expense

Interest expense, net was $16.9 million for the three months ended June 30, 2013, compared to $12.6 million for the same period in 2012, an increase of $4.3 million, or 34.4%. 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 $4.8 million for the three months ended June 30, 2013, compared to $1.6 million for the same period in 2012, an increase of $3.2 million. The effective tax rate for the three months ended June 30, 2013 was 43.08%. Prior to the fourth quarter of 2012, a valuation allowance was recorded against deferred tax assets for net operating loss carryforwards ("NOLs") 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 NOLs and other deferred tax assets.

Six Months Ended June 30, 2013 Compared to Six Months Ended June 30, 2012

Revenue

Gross local advertising revenue was $126.7 million for the six months ended June 30, 2013, compared to $92.8 million for the same period in 2012, an increase of $33.9 million, or 36.5%. The increase was primarily related to incremental revenue from our newly acquired stations, net of station disposal, of $36.0 million. Gross national advertising revenue was $52.0 million for the six months ended June 30, 2013, compared to $36.2 million for the same period in 2012, an increase of $15.7 million, or 43.4%, primarily attributable to our newly acquired stations, net of station disposal, of $17.7 million. Our largest advertiser category, automotive, represented 23.9% and 22.8% of our legacy stations' local and national advertising revenue for the six months ended June 30, 2013 and 2012, respectively. Overall, this category increased by 2.2% for our legacy stations. The other categories representing our top five for our legacy stations were fast food/restaurants, which decreased 9.0%, furniture, which increased 4.1%, paid programming, which decreased 11.4% and radio/TV/cable/newspapers, which decreased 0.3%.

Gross political advertising revenue was $2.6 million for the six months ended June 30, 2013, compared to $8.8 million for the same period in 2012, a decrease of $6.2 million, or 70.5%, as expected, due to 2013 not being an election year.

Retransmission compensation was $48.7 million for the six months ended June 30, 2013, compared to $29.8 million for the same period in 2012, an increase of $18.9 million, or 63.6%. The increase in retransmission compensation was primarily attributable to the $14.7 million incremental revenue from our newly acquired stations, net of station disposal, and the result of contracts providing for higher rates per subscriber during the year on our legacy stations.

eMedia revenue, representing web-based advertising revenue generated at our stations and Inergize, was $14.2 million for the six months ended June 30, 2013, compared to $8.6 million for the same period in 2012, an increase of $5.6 million or 65.5%. The increase is primarily attributable to the $5.1 million incremental revenue from our newly acquired stations and Inergize, net of station disposal, including a nonrecurring customer contract termination fee of $1.2 million.


Operating Expenses

Corporate expenses, related to costs associated with the centralized management of Nexstar's and Mission's stations, were $13.6 million for the six months ended June 30, 2013, compared to $10.5 million for the same period in 2012, an increase of $3.1 million, or 29.2%. This was primarily due to an increase in legal and professional fees associated with our and Mission's acquisition of television stations and post-closing activities relative to senior secured credit facilities of $1.4 million and capital market activities of $0.4 million, an increase in stock-based compensation expense of $0.6 million due to stock option grants during the third quarter of 2012 and an increase in bonus expense related to higher revenue of $0.6 million.

Station direct operating expenses, consisting primarily of news, engineering, programming and selling, general and administrative expenses (net of trade expense) were $126.4 million for the six months ended June 30, 2013, compared to $84.2 million for the same period in 2012, an increase of $42.2 million, or 50.1%. The increase was primarily due to expenses of our newly acquired stations, net of disposal, of $36.2 million and an increase in programming costs of our legacy stations of $4.7 million related to recently enacted network agreements. Networks now require compensation from broadcasters for the use of network programming. Network program fees have increased industry wide over the last 12 months and are expected to continue to increase over the next several years.

Amortization of broadcast rights, excluding barter was $6.3 million for the six months ended June 30, 2013, compared to $4.2 million for the same period in 2012, an increase of $2.1 million, or 50.5%, of which $3.2 million is attributable to our newly acquired stations. This increase was partially offset by changes in programming mix of our legacy stations.

Amortization of intangible assets was $14.9 million for the six months ended June 30, 2013, compared to $11.1 million for the same period in 2012, an increase of $3.8 million, or 34.1%. The increase was primarily attributable to incremental amortization of intangible assets from our newly acquired stations of $5.9 million, which was partially offset by $1.9 million decrease from certain of our legacy stations upon reaching full amortization of intangible assets.

Depreciation of property and equipment was $16.2 million for the six months ended June 30, 2013, compared to $11.5 million for the same period in 2012, an increase of $4.7 million, or 41.3%, primarily due to the incremental depreciation of fixed assets from our newly acquired stations.

Interest Expense

Interest expense, net was $33.5 million for the six months ended June 30, 2013, compared to $25.5 million for the same period in 2012, an increase of $8.0 million, or 31.3%. The increase was primarily attributable to our and Mission's borrowings during the fourth quarter of 2012 and first half of 2013 to fund the purchase price of newly acquired stations and for general corporate purposes. 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 $5.3 million for the six months ended June 30, 2013, compared to $3.2 million for the same period in 2012, an increase of $2.1 million. The effective tax rate for the six months ended June 30, 2013 was 43.08%. Prior to the fourth quarter of 2012, a valuation allowance was recorded against deferred tax assets for NOLs 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 NOLs 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 . . .

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