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NXST > SEC Filings for NXST > Form 10-Q on 8-Aug-2014All Recent SEC Filings

Show all filings for NEXSTAR BROADCASTING GROUP INC

Form 10-Q for NEXSTAR BROADCASTING GROUP INC


8-Aug-2014

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, 2013.

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, 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 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

2014 Highlights

Net revenue during the second quarter of 2014 increased by $20.7 million, or 16.4% compared to the same period in 2013. The increase in net revenue was primarily due to the acquisition of 3 television stations from Citadel which was completed during the first quarter of 2014 and the acquisition of IBS, ETG and 3 television stations and 2 satellite stations from Gray TV during the second quarter of 2014 along with an increase in advertising on our legacy stations as 2014 is a political year. The incremental revenue from our newly acquired entities was approximately $12.3 million for the second quarter of 2014.

For each of the first two quarters of 2014, our Board of Directors declared dividends of $0.15 per share of Nexstar's outstanding common stock, or total dividend payments of $9.2 million.

On March 13, 2014, we completed our acquisitions of the assets of KCAU, the ABC affiliate serving the Sioux City, Iowa market and WHBF, the CBS affiliate serving the Quad Cities, Iowa market, and the outstanding equity of WOI, the ABC affiliate serving the Des Moines, Iowa market, from Citadel. The total purchase price of these acquisitions amounted to $87.9 million, of which $65.9 million was paid during 2013, funded by the proceeds from our borrowings under our senior secured credit facility, and the remaining $22.0 million was paid in March 2014, funded by cash on hand.

Effective April 1, 2014, we acquired the assets of IBS, a digital publishing platform and digital agency services provider, for a total purchase price of $18.8 million, funded by cash on hand. On May 15, 2014, we acquired the outstanding equity of ETG, a digital content management firm that offers solutions for media companies to build a presence on the web and in the mobile content sector, for a total purchase price of $7.2 million. These acquisitions broaden our digital media portfolio with technologies and offerings that are complementary to our existing digital businesses and multi-screen strategies.

Effective June 13, 2014, we completed the acquisition of 3 television stations and 2 satellite stations from Gray TV for $34.5 million in cash, funded by a combination of proceeds from borrowings under our Term Loan A Facility and cash on hand. The acquired stations along with their network affiliations are:
WMBB, the ABC affiliate in the Panama City, Florida market, KREX/KREG/KREY, the CBS affiliates and KGJT, the MyNetworkTV affiliate, all in the Grand Junction, Colorado market.


On June 13, 2014, Mission paid a $3.2 million deposit to acquire KFQX from Parker pursuant to the amended purchase agreement. Mission expects to fund the remaining purchase price of $0.8 million through cash generated from operations prior to closing.

We have restructured our pending acquisitions from CCA, White Knight and Grant, such that Mission and Rocky Creek will no longer participate in the acquisitions and White Knight will continue to own and operate its stations. In June 2014, Mission entered into an assignment and assumption agreement with Marshall whereby Marshall assumed Mission's rights and obligations to acquire CCA television stations KPEJ, the FOX affiliate serving the Odessa-Midland market and KMSS, the FOX affiliate serving the Shreveport market, and Grant television station KLJB, the FOX affiliate in the Quad Cities, Iowa market. Additionally, simultaneous with our acquisition of CCA, we will sell the CCA television station WEVV, the CBS affiliate serving the Evansville market, to BCB. These transactions are subject to DOJ approval and FCC consent. We will fund the remaining purchase price of $243.0 million to acquire CCA and $79.0 million to acquire Grant through cash generated from operations prior to closing and borrowings under existing credit facilities. Marshall will fund the payment of $58.6 million purchase price to us through future credit transactions which we have agreed to guarantee.

Effective April 30, 2014, we and Mission amended each of our credit agreements. The amendments increased the total commitments under our Term Loan A Facility from $144.0 million to $159.0 million and reduced Mission's total commitments under its Term Loan A Facility from $90.0 million to $60.0 million. Pursuant to the terms of the amended credit agreements, we may also reallocate unused Term Loan A Facility to Mission and Mission may reallocate its unused Term Loan A Facility to us. Additionally, the amendments increased the commitment fees on unused Term Loan A Facilities from 0.5% to 1.0% and extended the quarterly principal payments commencement to December 31, 2014.

On June 12, 2014, we borrowed $25.0 million under our Term Loan A Facility to partially fund our acquisition of certain television stations from Gray TV.

In March and June 2014, we and Mission collectively repaid a total of $7.8 million of the outstanding principal balances under our and Mission's term loans.

Overview of Operations

As of June 30, 2014, we owned, operated, programmed or provided sales and other services to 80 television stations and 20 digital multicast channels, including those owned by Mission, in 46 markets in the states of Illinois, Indiana, Maryland, Missouri, Montana, Tennessee, Texas, Pennsylvania, Louisiana, Arkansas, Alabama, New York, Florida, Wisconsin, Michigan, Utah, Vermont, California, Iowa and Colorado. The stations are affiliates of ABC (20 stations), NBC (16 stations), FOX (14 stations), CBS (16 stations), The CW (6 stations and 2 digital multicast channels), MyNetworkTV (6 stations and 2 digital multicast channels), Telemundo (one station and one digital multicast channel), Bounce TV (9 digital multicast channels), Me-TV (3 digital multicast channels), LiveWell (2 digital multicast channels), LATV (one digital multicast channel) and one independent station. Through various local service agreements, we provided sales, programming and other services to 22 stations and 5 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, we have 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 2014 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.

Industry Trends

As a television broadcaster, we are highly regulated and our operations require that we retain or renew a variety of government approvals and comply with changing federal regulations. Effective June 19, 2014, the FCC modified its television ownership rules such that a television licensee that sells more than 15 percent of the weekly advertising inventory of another television station in the same Designated Market Area will be deemed to have an attributable ownership interest in that station. Stations with existing JSAs that will be deemed attributable interests have two years to amend or terminate those arrangements or to obtain waivers. Although the FCC will consider waivers of the new JSA attribution rule, the FCC thus far has provided little guidance on what factors must be present for a waiver to be granted. The Company expects to incur additional costs in complying with this new rule. We do not expect the new rules to impact our JSA revenue in 2014; however, within the next two years our company may be negatively impacted by the new JSA attibution rule. If we are unable to obtain waivers from the FCC and are required to amend or terminate our existing agreements we could have a reduction in revenue and increased costs if we are unable to successfully implement alternative arrangements that are as beneficial as the existing JSAs. The Company, along with several other entities, has filed for review of the new JSA rule in the U.S. Court of Appeals for the D.C. Circuit. The D.C. Circuit currently is considering whether to hear the appeal or transfer it to the Third Circuit.

Also in March 2014, the FCC's Media Bureau issued a public notice announcing "processing guidelines" for certain pending and future applications for FCC approval of television acquisitions. The FCC will "closely scrutinize" applications which propose a JSA, SSA or LMA between television stations, combined with an option, a similar "contingent interest," or a loan guarantee. We have four announced acquisitions that are pending FCC approval which include "guideline" agreements. As a result of the recently adopted JSA rule and the processing guidelines the timing of ultimate approval for these transactions may be delayed in part because the new rule and guidelines may require amendments or waivers in order to obtain FCC approval. We plan to respond to regulatory inquires associated with each of the announced acquisitions and our intent is to close each of the transactions in 2014.

Also in March 2014, the FCC amended its rules governing retransmission consent negotiations. The amended rule prohibits two non-commonly owned stations ranked in the top four in viewership in a market from negotiating jointly with MVPDs. Historically, Nexstar has negotiated retransmission consent agreements jointly with Mission. In most Mission markets, Mission is now required to separately negotiate its future retransmission consent agreements with MVPDs. We cannot predict at this time the impact this amended rule will have on future negotiations with MVPDs and the impact, if any, it will have on the Company's revenues and expenses.

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 2014 is an election year and an Olympic year, we expect an increase in advertising revenue to be reported in 2014 compared to 2013.


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) as
a percentage of total gross revenue:

                                        Three Months Ended June 30,                          Six Months Ended June 30,
                                      2014                      2013                      2014                      2013
                               Amount          %         Amount          %         Amount          %         Amount          %
Local                         $  70,461        46.2     $  66,731        51.0     $ 136,103        46.6     $ 126,665        51.4
National                         26,075        17.1        28,575        21.8        53,264        18.3        51,950        21.1
Political                         6,746         4.4         1,823         1.4        10,749         3.7         2,585         1.0
Retransmission compensation      34,960        22.9        24,922        19.1        70,089        24.0        48,718        19.8
Digital media revenue            13,248         8.7         7,665         5.8        19,525         6.7        14,165         5.8
Other                             1,131         0.7         1,099         0.9         2,112         0.7         2,224         0.9
Total gross revenue             152,621       100.0       130,815       100.0       291,842       100.0       246,307       100.0
Less: Agency commissions        (13,392 )                 (12,478 )                 (25,908 )                 (23,183 )
Net broadcast revenue           139,229                   118,337                   265,934                   223,124
Trade and barter revenue          7,701                     7,874                    14,829                    15,292
Net revenue                   $ 146,930                 $ 126,211                 $ 280,763                 $ 238,416

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,
                                     2014                      2013                      2014                      2013
                              Amount          %         Amount          %         Amount          %         Amount          %
Net revenue                  $ 146,930       100.0     $ 126,211       100.0     $ 280,763       100.0     $ 238,416       100.0
Operating expenses:
Corporate expenses               9,101         6.2         6,879         5.5        17,605         6.3        13,612         5.7
Station direct operating
expenses, net of trade          43,185        29.4        34,408        27.3        83,564        29.8        66,999        28.1
Station selling, general
and administrative
expenses                        34,695        23.6        30,686        24.3        67,231        23.9        59,453        24.9
Trade and barter expense         7,581         5.2         7,608         6.0        14,723         5.2        14,965         6.3
Depreciation                     8,543         5.8         8,213         6.5        16,962         6.0        16,193         6.8
Amortization of intangible
assets                           6,112         4.2         6,914         5.5        12,305         4.4        14,904         6.3
Amortization of broadcast
rights, excluding barter         2,771         1.8         3,311         2.6         5,731         2.1         6,280         2.6
Income from operations       $  34,942                 $  28,192                 $  62,642                 $  46,010


Three Months Ended June 30, 2014 Compared to Three Months Ended June 30, 2013

Revenue

Gross local advertising revenue was $70.5 million for the three months ended June 30, 2014, compared to $66.7 million for the same period in 2013, an increase of $3.7 million, or 5.6%. Gross national advertising revenue was $26.1 million for the three months ended June 30, 2014, compared to $28.6 million for the same period in 2013, a decrease of $2.5 million, or 8.7%. The net increase in local and national advertising revenue was primarily attributable to incremental revenue from our newly acquired stations of $2.0 million, net of a terminated outsourcing agreement of one station. Our legacy stations' local and national advertising revenue decreased by $0.8 million during the three months ended June 30, 2014 compared to 2013. Our largest advertiser category, automotive, represented 23.2% and 24.1% of our legacy stations' local and national advertising revenue for the three months ended June 30, 2014 and 2013, respectively. Overall, this category increased by 4% for our legacy stations. The other categories representing our top five for our legacy stations were fast food/restaurants, which decreased 2.7%, furniture, which increased 5.7%, department/retail stores, which increased 11.7%, and medical/healthcare, which increased 3.8%.

Gross political advertising revenue was $6.7 million for the three months ended June 30, 2014, compared to $1.8 million for the same period in 2013, an increase of $4.9 million, due to 2014 being an election year.

Retransmission compensation was $35.0 million for the three months ended June 30, 2014, compared to $24.9 million for the same period in 2013, an increase of $10.0 million, or 40.3%. The increase in retransmission compensation was primarily attributable to the result of contracts providing for higher rates per subscriber during the year on our legacy stations and $1.9 million incremental revenue from our newly acquired stations.

Digital media revenue, representing advertising revenue on our stations' web and mobile sites and other internet-based revenue, was $13.2 million for the three months ended June 30, 2014, compared to $7.7 million for the same period in 2013, an increase of $5.6 million, or 72.8%. The increase was primarily attributable to $5.9 million incremental revenue from our newly acquired stations and entities, and a $0.6 million increase in revenue from our legacy stations primarily due to new product offerings. This was partially offset by a $0.9 million decrease due to the termination of certain customer contracts.

Operating Expenses

Corporate expenses, related to costs associated with the centralized management of our and Mission's stations, were $9.1 million for the three months ended June 30, 2014, compared to $6.9 million for the same period in 2013, an increase of $2.2 million, or 32.3%. This was primarily attributable to an increase in stock-based compensation expense of $1.4 million due to stock option grants during 2014, an increase in bonus expense of $0.4 million related to the increased number of stations and higher revenue and an increase in payroll and payroll related expenses of $0.6 million. These increases were partially offset by a decrease in legal and professional fees of $0.4 million primarily associated with our and Mission's acquisitions of television stations in the prior year.

Station direct operating expenses, consisting primarily of news, engineering, programming and station selling, general and administrative expenses (net of trade expense) were $77.9 million for the three months ended June 30, 2014, compared to $65.1 million for the same period in 2013, an increase of $12.8 million, or 19.6%. The increase was primarily due to expenses of our newly acquired stations and entities of $8.2 million, net of a terminated outsourcing agreement of one station, and an increase in programming costs for our legacy stations of $4.1 million primarily related to recently enacted network agreements. Networks now require additional compensation from broadcasters for the use of network programming. Network program fees have recently increased industry wide and will continue to increase over the next several years.

Depreciation of property and equipment was $8.5 million for the three months ended June 30, 2014, compared to $8.2 million for the same period in 2013, an increase of $0.3 million, or 4.0%, primarily due to the incremental depreciation of fixed assets from our newly acquired stations and entities.

Amortization of intangible assets was $6.1 million for the three months ended June 30, 2014, compared to $6.9 million for the same period in 2013, a decrease of $0.8 million, or 11.6%. This was primarily attributable to decreases in amortization of other intangible assets from certain fully amortized assets, partially offset by incremental amortization of our newly acquired intangible assets.

Amortization of broadcast rights, excluding barter was $2.8 million for the three months ended June 30, 2014, compared to $3.3 million for the same period in 2013, a decrease of $0.5 million, or 16.3%, primarily attributable to nonrecurring adjustments to the net realizable value of broadcast rights during 2013.


Interest Expense

Interest expense, net was $15.3 million for the three months ended June 30, 2014, compared to $16.9 million for the same period in 2013, a decrease of $1.6 million, or 9.3%. The decrease was primarily attributable to lower interest rates on the Company's outstanding debt as a result of refinancing the $325.0 million 8.875% senior second lien notes into a combination of $275.0 million 6.875% senior unsecured notes and borrowings under our and Mission's amended credit facilities in October 2013. This decrease was partially offset by additional interest on increased borrowings during 2013 to fund our and Mission's acquisitions.

Income Taxes

Income tax expense was $8.5 million for the three months ended June 30, 2014, compared to $4.8 million for the same period in 2013, an increase of $3.6 million, or 74.9%. The effective tax rates for the three months ended June 30, 2014 and 2013 were 43.6% and 43.2%, respectively.

Six Months Ended June 30, 2014 Compared to Six Months Ended June 30, 2013

Revenue

Gross local advertising revenue was $136.1 million for the six months ended June 30, 2014, compared to $126.7 million for the same period in 2013, an increase of $9.4 million, or 7.5%. Gross national advertising revenue was $53.3 million for the six months ended June 30, 2014, compared to $52.0 million for the same period in 2013, an increase of $1.3 million, or 2.5%. The increase in local and national advertising revenue was primarily attributable to incremental revenue from our newly acquired stations of $7.4 million, net of a terminated outsourcing agreement of one station. Our legacy stations' local and national advertising revenue increased by $3.3 million during the six months ended June 30, 2014 compared to 2013, primarily due to increased advertising revenue from the Olympics in our NBC affiliate stations. Our largest advertiser category, automotive, represented 23.1% and 23.8% of our legacy stations' local and national advertising revenue for the six months ended June 30, 2014 and 2013, respectively. Overall, this category increased by 4.9% for our legacy stations. The other categories representing our top five for our legacy stations were fast food/restaurants, which decreased 10.6%, furniture, which increased 4.1%, radio/TV/cable/newspapers, which increased 10.9% and medical/healthcare, which increased 6.9%.

Gross political advertising revenue was $10.7 million for the six months ended June 30, 2014, compared to $2.6 million for the same period in 2013, an increase of $8.2 million, due to 2014 being an election year.

Retransmission compensation was $70.1 million for the six months ended June 30, 2014, compared to $48.7 million for the same period in 2013, an increase of $21.4 million, or 43.9%. The increase in retransmission compensation was primarily attributable to the result of contracts providing for higher rates per subscriber during the year on our legacy stations and $6.7 million incremental revenue from our newly acquired stations.

Digital media revenue, representing advertising revenue on our stations' web and mobile sites and other internet-based revenue, was $19.5 million for the six months ended June 30, 2014, compared to $14.2 million for the same period in 2013, an increase of $5.4 million or 37.8%. The increase is primarily attributable to the $6.2 million incremental revenue from our newly acquired stations and entities, and a $1.3 million increase in revenue from our legacy stations primarily attributable to increased advertising revenue from the Olympics and new product offerings. This was partially offset by a $1.6 million decrease due to the termination of certain customer contracts.

Operating Expenses

Corporate expenses, related to costs associated with the centralized management of Nexstar's and Mission's stations, were $17.6 million for the six months ended June 30, 2014, compared to $13.6 million for the same period in 2013, an increase of $4.0 million, or 29.3%. This was primarily attributable to an increase in stock-based compensation expense of $2.6 million due to stock option grants during 2014, an increase in bonus expense of $0.8 million related to the increased number of stations and higher revenue and an increase in payroll and payroll related expenses of $1.0 million. These increases were partially offset by a decrease in legal and professional fees of $0.8 million primarily associated with our and Mission's acquisitions of television stations in the prior year.


Station direct operating expenses, consisting primarily of news, engineering, programming and selling, general and administrative expenses (net of trade expense) were $150.8 million for the six months ended June 30, 2014, compared to $126.5 million for the same period in 2013, an increase of $24.3 million, or 19.3%. The increase was primarily due to expenses of our newly acquired stations . . .

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