UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, DC 20549
FORM 10-Q
☒
QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended March 31, 2019
OR
☐
TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the transition period from to .
Commission File Number: 000-50478
NEXSTAR MEDIA GROUP, INC.
(Exact Name of Registrant as Specified in Its Charter)
Delaware
23-3083125
(State of Incorporation or Organization)
(I.R.S. Employer Identification No.)
545 E. John Carpenter Freeway, Suite 700, Irving, Texas
75062
(Address of Principal Executive Offices)
(Zip Code)
(972) 373-8800
(Registrant’s Telephone Number, Including Area Code)
Indicate by check mark whether the registrant: (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that it was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes ☒ No ☐
Indicate by check mark whether the registrant has submitted electronically every Interactive Data File required to be submitted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit such files). Yes ☒ No ☐
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, smaller reporting company or an emerging growth company. See the definitions of “large accelerated filer,” “accelerated filer,” “smaller reporting company” and “emerging growth company” in Rule 12b-2 of the Exchange Act.
Large accelerated filer
Accelerated filer
Non-accelerated filer
Smaller reporting company
Emerging growth company
If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act. ☐
Indicate by check mark whether the Registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes ☐ No ☒
Securities registered pursuant to Section 12(b) of the Act:
Title of each class
Trading
Symbol(s)
Name of each exchange on which registered
Class A Common Stock
NXST
NASDAQ Global Select Market
As of May 8, 2019, the registrant had 46,091,815 shares of Class A Common Stock outstanding.
TABLE OF CONTENTS
Page
PART I
FINANCIAL INFORMATION
ITEM 1.
Financial Statements (Unaudited)
Condensed Consolidated Balance Sheets as of March 31, 2019 and December 31, 2018
1
Condensed Consolidated Statements of Operations for the three months ended March 31, 2019 and 2018
2
Condensed Consolidated Statement of Changes in Stockholders’ Equity for the three months ended March 31, 2019 and 2018
3
Notes to Condensed Consolidated Financial Statements
5
ITEM 2.
Management’s Discussion and Analysis of Financial Condition and Results of Operations
30
ITEM 3.
Quantitative and Qualitative Disclosures About Market Risk
40
ITEM 4.
Controls and Procedures
PART II
OTHER INFORMATION
Legal Proceedings
41
ITEM 1A.
Risk Factors
Unregistered Sales of Equity Securities and Use of Proceeds
Defaults Upon Senior Securities
Mine Safety Disclosures
ITEM 5.
Other Information
ITEM 6.
Exhibits
42
PART I. FINANCIAL INFORMATION
Financial Statements
CONDENSED CONSOLIDATED BALANCE SHEETS
(in thousands, except share information, unaudited)
March 31,
December 31,
2019
2018
ASSETS
Current assets:
Cash and cash equivalents
$
128,591
145,115
Accounts receivable, net of allowance for doubtful accounts of $13,541 and $13,158, respectively
540,525
547,285
Spectrum asset
52,002
Prepaid expenses and other current assets
22,401
22,673
Total current assets
743,519
767,075
Property and equipment, net
739,981
731,538
Goodwill
2,167,954
FCC licenses
1,778,268
Other intangible assets, net
1,432,029
1,491,923
Other noncurrent assets, net
235,435
125,272
Total assets(1)
7,097,186
7,062,030
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Current portion of debt
95,516
96,093
Accounts payable
72,285
67,828
Accrued expenses
158,981
143,850
Interest payable
24,223
32,047
Liability to surrender spectrum asset
Other current liabilities
26,931
12,352
Total current liabilities
429,938
404,172
Debt
3,797,188
3,884,910
Deferred tax liabilities
637,026
633,880
Other noncurrent liabilities
334,024
270,084
Total liabilities(1)
5,198,176
5,193,046
Commitments and contingencies (Note 13)
Stockholders' equity:
Preferred stock - $0.01 par value, 200,000 shares authorized; none issued and outstanding at each of March 31, 2019 and December 31, 2018
-
Class A Common stock - $0.01 par value, 100,000,000 shares authorized; 47,291,463 shares issued,
46,016,371 shares outstanding as of March 31, 2019 and 47,291,463 shares issued, 45,626,246 shares
outstanding as of December 31, 2018
473
Class B Common stock - $0.01 par value, 20,000,000 shares authorized; none issued and outstanding
at each of March 31, 2019 and December 31, 2018
Class C Common stock - $0.01 par value, 5,000,000 shares authorized; none issued and outstanding
Additional paid-in capital
1,332,612
1,351,931
Accumulated other comprehensive loss
(14,316
)
Retained earnings
654,682
620,371
Treasury stock - at cost; 1,275,092 and 1,665,217 shares at each of March 31, 2019 and December 31, 2018, respectively
(86,146
(105,685
Total Nexstar Media Group, Inc. stockholders' equity
1,887,305
1,852,774
Noncontrolling interests in consolidated variable interest entities
11,705
16,210
Total stockholders' equity
1,899,010
1,868,984
Total liabilities and stockholders' equity
The accompanying Notes are an integral part of these Condensed Consolidated Financial Statements.
(1)
The consolidated total assets as of March 31, 2019 and December 31, 2018 include certain assets held by consolidated variable interest entities (“VIEs”) of $392.4 million and $390.3 million, respectively, which are not available to be used to settle the obligations of Nexstar. The consolidated total liabilities as of March 31, 2019 and December 31, 2018 include certain liabilities of consolidated VIEs of $58.8 million and $45.1 million, respectively, for which the creditors of the VIEs have no recourse to the general credit of Nexstar. See Note 2 for additional information.
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(in thousands, except per share information, unaudited)
Three Months Ended
Net revenue
626,647
615,336
Operating expenses (income):
Direct operating expenses, excluding depreciation and amortization
292,863
278,963
Selling, general and administrative expenses, excluding depreciation and amortization
142,360
141,905
Amortization of broadcast rights
14,362
16,100
Amortization of intangible assets
36,738
36,302
Depreciation
27,437
25,814
Reimbursement from the FCC related to station repack
(14,187
(1,364
Total operating expenses
499,573
497,720
Income from operations
127,074
117,616
Interest expense, net
(52,957
(54,589
Loss on extinguishment of debt
(1,698
(1,005
Pension and other postretirement plans credit, net
1,400
2,950
Other income, net
(491
(127
Income before income taxes
73,328
64,845
Income tax expense
(16,441
(17,504
Net income
56,887
47,341
Net (income) loss attributable to noncontrolling interests
(1,995
781
Net income attributable to Nexstar Media Group, Inc.
54,892
48,122
Net income per common share attributable to Nexstar Media Group, Inc.:
Basic
1.20
1.04
Diluted
1.15
1.01
Weighted average number of common shares outstanding:
45,785
46,075
47,784
47,685
CONDENSED CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS’ EQUITY
For the Three Months Ended March 31, 2019 and 2018
Accumulated
Class A
Additional
Other
Total
Common Stock
Paid-In
Retained
Comprehensive
Treasury Stock
Noncontrolling
Stockholders'
Shares
Amount
Capital
Earnings
Income
interests
Equity
Balances as of December 31, 2018
47,291,463
(1,665,217
Stock-based compensation expense
8,069
Vesting of restricted stock units and
exercise of stock options
(27,388
390,125
19,539
(7,849
Common stock dividends declared
(20,581
Purchase of noncontrolling interest from a consolidated variable interest entity
(6,500
1,995
Balances as of March 31, 2019
(1,275,092
Balances as of December 31, 2017
1,342,541
299,523
6,140
(1,325,049
(78,063
10,696
1,581,310
Purchase of treasury stock
(501,920
(33,820
6,400
(17,258
269,992
14,593
(2,665
(17,288
Contribution from a
noncontrolling interest
226
Net income (loss)
(781
Balances as of March 31, 2018
1,331,683
330,357
(1,556,977
(97,290
10,141
1,581,504
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(in thousands, unaudited)
Three Months Ended March 31,
Cash flows from operating activities:
Adjustments to reconcile net income to net cash provided by operating activities:
Provision for bad debt
2,545
3,294
Depreciation of property and equipment
Gain on asset disposal, net
(533
(59
Amortization of debt financing costs and debt discounts
1,942
2,626
1,698
1,005
Deferred income taxes
2,309
184
Payments for broadcast rights
(14,489
(16,249
Other noncash credits, net
(398
(404
Spectrum repack reimbursements
Changes in operating assets and liabilities, net of acquisitions and dispositions:
Accounts receivable
4,184
42,949
(1,415
(1,243
Other noncurrent assets
2,248
(1,567
Accounts payable, accrued expenses and other current liabilities
(4,105
12,887
Taxes payable
12,249
18,547
(7,824
(10,359
(3,128
(4,203
Net cash provided by operating activities
124,589
179,365
Cash flows from investing activities:
Purchases of property and equipment
(28,579
(21,092
Deposits and payments for acquisitions, net of cash acquired
(82,790
14,187
Proceeds from disposals of property and equipment
588
2,847
Proceeds received from settlement of corporate-owned life insurance policies
51
Net cash used in investing activities
(13,753
(101,035
Cash flows from financing activities:
Proceeds from long-term debt, net of debt discounts
44,000
Repayments of long-term debt
(91,805
(74,579
Contributions from a noncontrolling interest, net
Proceeds from exercise of stock options
1,427
1,878
Common stock dividends paid
(6,393
Cash paid for shares withheld for taxes
(9,276
(4,543
Payments for capital lease and capitalized software obligations
(732
(735
Net cash used in financing activities
(127,360
(84,861
Net decrease in cash, cash equivalents and restricted cash
(16,524
(6,531
Cash, cash equivalents and restricted cash at beginning of period
115,652
Cash, cash equivalents and restricted cash at end of period
109,121
Supplemental information:
Interest paid
58,839
62,322
Income taxes paid, net of refunds (income tax refund, net of taxes paid)
1,883
(1,225
Non-cash investing and financing activities:
Accrued purchases of property and equipment
27,796
4,080
Right-of-use assets obtained in exchange for operating lease obligations(1)
113,598
(1) Amounts for the three months ended March 31, 2019 include the transition adjustment of $112.8 million for the adoption of ASC 842.
4
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
1. Organization and Business Operations
As of March 31, 2019, Nexstar Media Group, Inc. and its wholly-owned subsidiaries (“Nexstar”) owned, operated, programmed or provided sales and other services to 174 full power television stations, including those owned by VIEs, in 100 markets in the states of Alabama, Arizona, Arkansas, California, Colorado, Connecticut, Florida, Georgia, Hawaii, Illinois, Indiana, Iowa, Kansas, Louisiana, Maryland, Massachusetts, Michigan, Mississippi, Missouri, Montana, Nevada, New Mexico, New York, North Carolina, North Dakota, Ohio, Oregon, Pennsylvania, Rhode Island, South Carolina, South Dakota, Tennessee, Texas, Utah, Vermont, Virginia, West Virginia and Wisconsin. The stations are affiliates of ABC, NBC, FOX, CBS, The CW, MNTV and other broadcast television networks. Through various local service agreements, Nexstar provided sales, programming and other services to 36 full power television stations owned and/or operated by independent third parties.
2. Summary of Significant Accounting Policies
Principles of Consolidation
The Condensed Consolidated Financial Statements include the accounts of Nexstar and the accounts of independently-owned VIEs for which Nexstar is the primary beneficiary (See Note 2—Variable Interest Entities). Nexstar and the consolidated VIEs are collectively referred to as the “Company.” Noncontrolling interests represent the VIE owners’ share of the equity in the consolidated VIEs and are presented as a component separate from Nexstar Media Group, Inc. stockholders’ equity. All intercompany account balances and transactions have been eliminated in consolidation. Nexstar management evaluates each arrangement that may include variable interests and determines the need to consolidate an entity where it determines Nexstar is the primary beneficiary of a VIE in accordance with related authoritative literature and interpretive guidance.
The following are assets of consolidated VIEs, excluding intercompany amounts, that are not available to settle the obligations of Nexstar and the liabilities of consolidated VIEs, excluding intercompany amounts, for which their creditors do not have recourse to the general credit of Nexstar (in thousands):
March 31, 2019
December 31, 2018
Current assets
21,151
20,898
14,404
10,994
121,600
151,808
157,658
73,598
75,513
9,798
3,652
Total assets
392,359
390,315
Current liabilities
21,206
17,594
Noncurrent liabilities
37,571
27,542
Total liabilities
58,777
45,136
Liquidity
The Company is leveraged, which makes it vulnerable to changes in general economic conditions. The Company’s ability to repay or refinance its debt will depend on, among other things, financial, business, market, competitive and other conditions, many of which are beyond the Company’s control.
On November 30, 2018, Nexstar entered into a definitive merger agreement with Tribune Media Company (“Tribune”) to acquire the latter’s outstanding equity and to settle the outstanding equity-based awards for $46.50 per share in a cash transaction. The estimated total purchase price is valued at $6.4 billion, consisting of the merger cash consideration and the refinancing of Tribune's outstanding debt. The merger has been approved by the boards of directors of both companies and the stockholders of Tribune and is projected to close in the third quarter of 2019, subject to (i) FCC approval, (ii) other regulatory approvals (including expiration of the applicable Hart-Scott-Rodino (“HSR”) waiting period) and (iii) satisfaction of other customary closing conditions. On November 30, 2018, Nexstar received committed financing up to a maximum of $6.4 billion from a group of commercial banks to provide the debt financing to consummate the merger and the refinancing of certain of the existing indebtedness of Tribune and related transactions. See Note 3 for additional information on the merger agreement and Note 7 for information with respect to the Company’s other debt transactions during the three months ended March 31, 2019.
Interim Financial Statements
The Condensed Consolidated Financial Statements as of March 31, 2019 and for the three months ended March 31, 2019 and 2018 are unaudited. However, in the opinion of management, such financial statements include all adjustments (consisting solely of normal recurring adjustments) necessary for the fair statement of the financial information included herein in accordance with accounting principles generally accepted in the United States of America (“U.S. GAAP”) and pursuant to the rules and regulations of the Securities and Exchange Commission (the “SEC”). The preparation of the Condensed Consolidated Financial Statements in conformity with U.S. GAAP requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and the disclosure of contingent assets and liabilities at the date of the financial statements and reported amounts of revenue and expenses during the period. Actual results could differ from those estimates. Results of operations for interim periods are not necessarily indicative of results for the full year. These Condensed Consolidated Financial Statements should be read in conjunction with the Condensed Consolidated Financial Statements and related Notes included in Nexstar’s Annual Report on Form 10-K for the year ended December 31, 2018. The balance sheet as of December 31, 2018 has been derived from the audited financial statements as of that date but does not include all of the information and footnotes required by U.S. GAAP for complete financial statements.
Variable Interest Entities
The Company may determine that an entity is a VIE as a result of local service agreements entered into with an entity. The term local service agreement generally refers to a contract between two separately owned television stations serving the same market, whereby the owner-operator of one station contracts with the owner-operator of the other station to provide it with administrative, sales and other services required for the operation of its station. Nevertheless, the owner-operator of each station retains control and responsibility for the operation of its station, including ultimate responsibility over all programming broadcast on its station. A local service agreement can be (1) a time brokerage agreement (“TBA”) or a local marketing agreement (“LMA”) which allows Nexstar to program most of a station’s broadcast time, sell the station’s advertising time and retain the advertising revenue generated in exchange for monthly payments, based on the station’s monthly operating expenses, (2) a shared services agreement (“SSA”) which allows the Nexstar station in the market to provide services including news production, technical maintenance and security, in exchange for Nexstar’s right to receive certain payments as described in the SSA, or (3) a joint sales agreement (“JSA”) which permits Nexstar to sell certain of the station’s advertising time and retain a percentage of the related revenue, as described in the JSA.
Consolidated VIEs
Nexstar consolidates entities in which Nexstar is deemed under U.S. GAAP to have controlling financial interests for financial reporting purposes as a result of (1) local service agreements Nexstar has with the stations owned by these entities, (2) Nexstar’s guarantees of the obligations incurred under certain VIEs’ senior secured credit facilities (see Note 7), (3) Nexstar having power over significant activities affecting these VIEs’ economic performance, including budgeting for advertising revenue, certain advertising sales and, in some cases, hiring and firing of sales force personnel and (4) purchase options granted by each VIE, exclusive of Marshall Broadcasting Group, Inc. (“Marshall”), which permit Nexstar to acquire the assets and assume the liabilities of each of the VIEs’ stations, subject to Federal Communications Commission (“FCC”) consent.
6
The following table summarizes the various local service agreements Nexstar had in effect as of March 31, 2019 with its consolidated VIEs:
Service Agreements
Owner
Full Power Stations
TBA Only
Mission Broadcasting, Inc. (“Mission”)
WFXP, KHMT and KFQX
LMA Only
WNAC, LLC
WNAC
54 Broadcasting, Inc. (“54 Broadcasting”)
KNVA
SSA & JSA
Mission
KJTL, KLRT, KASN, KOLR, KCIT, KAMC, KRBC, KSAN, WUTR, WAWV, WYOU, KODE, WTVO, KTVE, WTVW and WVNY
White Knight Broadcasting (“White Knight”)
WVLA, KFXK, KSHV
Shield Media, LLC (“Shield”)
WXXA and WLAJ
Vaughan Media, LLC (“Vaughan”)
WBDT, WYTV and KTKA
Marshall
KLJB, KPEJ and KMSS
SSA Only
Tamer Media, LLC (“Tamer”)
KWBQ, KASY and KRWB
Nexstar’s ability to receive cash from its VIEs is governed by the local service agreements. Under these agreements, Nexstar has received substantially all of the consolidated VIEs’ available cash, after satisfaction of operating costs and debt obligations. Nexstar anticipates it will continue to receive substantially all of the consolidated VIEs’ available cash, after satisfaction of operating costs and debt obligations. In compliance with FCC regulations for all the parties, each VIE maintains complete responsibility for and control over programming, finances, personnel and operations of its stations.
Nexstar had a variable interest in HITV License Subsidiary, Inc., the owner of station KHII, upon execution of a TBA effective November 1, 2018 and a purchase agreement to acquire certain assets of the station. On December 17, 2018, the FCC approved Nexstar’s acquisition of the station. Nexstar evaluated its business arrangement with KHII and determined that it was the primary beneficiary of the variable interest because it had the ultimate power to direct the activities that most significantly impact the economic performance of the station including developing the annual operating budget, selling advertising, and oversight and control of sales management personnel. Thus, Nexstar consolidated KHII as of December 17, 2018 under authoritative guidance related to the consolidation of VIEs. The assets that were consolidated into Nexstar included the license assets and network affiliation agreement of KHII but were attributed to the owner of the station at the time (noncontrolling interest). On January 28, 2019, Nexstar paid the former owner the remaining purchase price, acquired the noncontrolling interest in full and completed the acquisition. As of this date, KHII is no longer a VIE. See Note 3 for additional information.
The carrying amounts and classification of the assets and liabilities, excluding intercompany amounts, of the VIEs which have been included in the Condensed Consolidated Balance Sheets were as follows (in thousands):
14,389
19,060
Accounts receivable, net
25,991
22,725
2,523
4,423
42,903
46,208
35,104
30,861
154,787
86,791
89,225
21,141
8,073
492,534
486,812
54,039
54,616
1,206
345
76,451
72,555
243,083
243,717
357,105
343,814
7
Non-Consolidated VIEs
Nexstar has an outsourcing agreement with Cunningham Broadcasting Corporation (“Cunningham”), which continues through December 31, 2020. Under the outsourcing agreement, Nexstar provides certain engineering, production, sales and administrative services for WYZZ, the FOX affiliate in the Peoria, Illinois market, through WMBD, the Nexstar television station in that market. During the term of the outsourcing agreement, Nexstar retains the broadcasting revenue and related expenses of WYZZ and is obligated to pay a monthly fee to Cunningham based on the combined operating cash flow of WMBD and WYZZ, as defined in the agreement.
Nexstar has determined that it has a variable interest in WYZZ. Nexstar has evaluated its arrangements with Cunningham and has determined that it is not the primary beneficiary of the variable interest in this station because it does not have the ultimate power to direct the activities that most significantly impact the station’s economic performance, including developing the annual operating budget, programming and oversight and control of sales management personnel. Therefore, Nexstar has not consolidated WYZZ under authoritative guidance related to the consolidation of VIEs. Under the local service agreement for WYZZ, Nexstar pays for certain operating expenses, and therefore may have unlimited exposure to any potential operating losses. Nexstar’s management believes that Nexstar’s minimum exposure to loss under the WYZZ agreement consists of the fees paid to Cunningham. Additionally, Nexstar indemnifies the owners of Cunningham from and against all liability and claims arising out of or resulting from its activities, acts or omissions in connection with the agreement. The maximum potential amount of future payments Nexstar could be required to make for such indemnification is undeterminable at this time. There were no significant transactions arising from Nexstar’s outsourcing agreement with Cunningham.
Leases
As discussed in Recent Accounting Pronouncements below, the Company adopted the FASB issued ASU No. 2016-02, Leases (Topic 842) and all related amendments. ASC 842 establishes a comprehensive new lease accounting model that requires the recording of assets and liabilities arising from operating leases on the balance sheet accompanied by enhanced qualitative and quantitative disclosures in the notes to the financial statements. The standard was issued to help investors and other financial statement users better understand the amount, timing, and uncertainty of cash flows arising from leases.
The Company adopted this standard effective January 1, 2019 using the optional transition method. The most significant impact was the recognition of right-of-use (“ROU”) assets and lease liabilities for operating leases, while the Company’s accounting for finance leases remained substantially unchanged. Financial information for reporting periods beginning after January 1, 2019 is presented under ASC 842, while comparative financial information has not been adjusted and continues to be reported in accordance with the Company’s historical accounting policy for lease contracts prior to the adoption of ASC 842.
The Company has elected the ‘package of practical expedients’ permitted under the transition guidance within ASC 842, which permits the Company to carry forward the historical lease classification and not reassess whether any expired or existing contracts are or contain leases. In addition, the Company is not required to reassess initial direct costs for any existing leases. The Company did not elect the land easements and the use of hindsight practical expedients in determining the lease term for existing leases. ASC 842 also provides practical expedients for an entity’s ongoing accounting. The Company has elected the short-term lease recognition exemption for all leases that qualify. As a result, for those leases with a term of less than 12 months, it will not recognize ROU assets or lease liabilities. The vast majority of the Company’s television station leases are comprised of fixed lease payments, with a small percentage of television station lease payments that are tied to a rate or index which may be subject to variability. For these leases, the calculation of the present value of future minimum lease payments is the base rate as of the later of (i) when the television station was acquired by the Company, or (ii) the commencement date of the lease agreement. Certain real estate leases also include executory costs such as common area maintenance (non-lease component), as well as property insurance and property taxes (non-components). These are not significant and the Company historically excluded these executory costs from its future minimum lease payments under its historical policy prior to the adoption of ASC 842. As such, the executory costs were excluded from the calculation of ROU assets and lease liabilities associated with operating leases upon transition. The Company’s lease terms may include options to extend or terminate the lease when it is reasonably certain that it will exercise that option. The discount rate represents a risk-adjusted rate on a secured basis, and is the rate at which the Company would borrow funds to satisfy the scheduled lease liability payment streams commensurate with the lease term. On January 1, 2019, the discount rate used on existing leases at adoption was determined based on the remaining lease term using available data as of that date.
8
The Company recognized operating lease ROU assets on its Condensed Consolidated Balance Sheet as of January 1, 2019 of $112.8 million, inclusive of the present value of remaining future operating lease payments of $98.9 million and reclassifications of certain operating lease related assets and liabilities under the Company’s historical accounting policy prior to the adoption of ASC 842 such as favorable (unfavorable) lease intangible assets, deferred rent, short-term and long-term prepaid expenses and other accruals. These are summarized in the table below (in thousands). The adoption did not result in a cumulative impact on retained earnings as of January 1, 2019.
ASC 842 Adoption Adjustments
Present Value of Remaining Operating Lease
Reclassifications of Operating Lease Related Balance Sheet Items to Operating Lease ROU Assets
Impact on Consolidated Balance Sheets
Payments as of January 1, 2019
Net Favorable
Deferred Rent
Adjustments
January 1, 2019
Prepaid expenses and other
current assets
(270
22,403
(24,181
1,467,742
98,887
24,181
(9,748
(720
112,600
237,872
(990
88,149
7,150,179
17,367
(1,643
(431
15,293
27,645
81,520
(8,105
(559
72,856
342,940
5,281,195
After transition to ASC 842, the Company determines if an arrangement is a lease at inception. The ROU assets arising from operating leases are included in other noncurrent assets, other current liabilities and other noncurrent liabilities in the accompanying Condensed Consolidated Balance Sheets. Operating lease ROU assets and operating lease liabilities that are recognized after the adoption of ASC 842 are based on the present value of the future minimum lease payments over the lease term at commencement date. The operating lease ROU asset also includes any lease payments made and excludes lease incentives and executory costs (not significant). The Company’s lease terms may include options to extend or terminate the lease when it is reasonably certain that it will exercise that option. When determining if a renewal option is reasonably certain of being exercised, the Company considers several factors, including but not limited to, the significance of leasehold improvements incurred on the property, whether the asset is difficult to replace, or specific characteristics unique to the particular lease that would make it reasonably certain that the Company would exercise such option. In most cases, the Company has concluded that renewal and early termination options are not reasonably certain of being exercised by the Company (and thus not included in its ROU asset and lease liability) unless there is an economic, financial or business reason to do so. As most of the Company’s leases do not provide an implicit rate, the incremental borrowing rate was used based on the information available at commencement date in determining the present value of future lease payments. The discount rate represents a risk-adjusted rate on a secured basis and is the rate at which the Company would borrow funds to satisfy the scheduled lease liability payment streams commensurate with the lease term. For new or renewed leases starting in 2019, the discount rate is determined using available data at lease commencement and based on the lease term including any reasonably certain renewal periods. Lease expense for minimum lease payments is recognized on a straight-line basis over the lease term.
In rare circumstances, the Company may enter into finance leases for specific equipment or real estate used in its operations, in which the lease term is for the major part of the remaining economic life of the underlying asset or the present value of the lease payments equals or exceeds substantially all of the estimated fair value of the underlying asset. The Company records its finance leases within property, plant and equipment, other current liabilities and other noncurrent liabilities on the accompanying Condensed Consolidated Balance Sheets.
See Note 8 for additional disclosures on leases as of and for the three months ended March 31, 2019.
Financial Instruments
The carrying amounts of cash and cash equivalents, accounts receivable, broadcast rights, accounts payable, broadcast rights payable and accrued expenses approximate fair value due to their short-term nature.
See Note 7 for fair value disclosures related to the Company’s debt.
9
Income Per Share
Basic income per share is computed by dividing the net income by the weighted-average number of common shares outstanding during the period. Diluted income per share is computed using the weighted-average number of common shares and potentially dilutive common shares outstanding during the period. Potentially dilutive common shares are calculated using the treasury stock method. They consist of stock options and restricted stock units outstanding during the period and reflect the potential dilution that could occur if common shares were issued upon exercise of stock options and vesting of restricted stock units. The following table shows the amounts used in computing the Company’s diluted shares (in thousands):
Weighted average shares outstanding - basic
Dilutive effect of equity incentive plan instruments
1,999
1,610
Weighted average shares outstanding - diluted
Stock options and restricted stock units to acquire a weighted average of 30,000 shares and 76,000 shares for the three months ended March 31, 2019 and 2018, respectively, of Class A common stock were excluded from the computation of diluted earnings per share because their impact would have been anti-dilutive.
Basis of Presentation
Certain prior year financial statement amounts have been reclassified to conform to the current year presentation. These reclassifications had no effect on net income or stockholders’ equity as previously reported.
Recent Accounting Pronouncements
New Accounting Standards Adopted
In February 2016, the FASB issued ASU No. 2016-02, Leases (Topic 842). The Company adopted this standard and all related amendments effective January 1, 2019 using the optional transition method. The standard had a material impact on the Company’s Condensed Consolidated Balance Sheets but did not impact its operating results, cash flows or equity. The most significant impact was the recognition of ROU assets and lease liabilities for operating leases, while our accounting for finance leases remained substantially unchanged. The adoption did not result in a cumulative impact on retained earnings as of January 1, 2019. See Leases above for the Company’s updated accounting policy and Note 8 for expanded disclosures.
New Accounting Standards Not Yet Adopted
In June 2016, the FASB issued ASU No. 2016-13, Financial Instruments - Credit Losses (Topic 326) (“ASU 2016-13”). The standard requires entities to estimate loss of financial assets measured at amortized cost, including trade receivables, debt securities and loans, using an expected credit loss model. The expected credit loss model differs from the previous incurred losses model primarily in that the loss recognition threshold of “probable” has been eliminated and that expected loss should consider reasonable and supportable forecasts in addition to the previously considered past events and current conditions. Additionally, the guidance requires additional disclosures related to the further disaggregation of information related to the credit quality of financial assets by year of the asset’s origination for as many as five years. In November 2018, the FASB issued ASU No. 2018-19 to clarify the scope of the guidance in the amendments in ASU 2016-13. Entities must apply the standard provision as a cumulative-effect adjustment to retained earnings as of the beginning of the first reporting period in which the guidance is effective. The standard is effective for fiscal years beginning after December 15, 2019, and interim periods within those fiscal years. Early adoption is permitted for annual periods beginning after December 15, 2018, and interim periods within those fiscal years. The Company is currently evaluating the impact of adopting ASU 2016-13 on its Condensed Consolidated Financial Statements.
In August 2018, the FASB issued ASU No. 2018-13, Fair Value Measurement (Topic 820) (“ASU 2018-13”), which modifies the disclosure requirements on fair value measurements. The amendments in this update are effective for all entities for fiscal years, and interim periods within those fiscal years, beginning after December 15, 2019. Early adoption is permitted for any removed or modified disclosures. The Company is currently evaluating the impact of adopting ASU 2018-13 on its Condensed Consolidated Financial Statements.
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In August 2018, the FASB issued ASU 2018-14, Compensation-Retirement Benefits-Defined Benefit Plans-General (Subtopic 715-20) (“ASU 2018-14”). ASU 2018-14 removes certain disclosures that are not considered cost beneficial, clarifies certain required disclosures and adds additional disclosures. The amendments in ASU 2018-14 are effective for fiscal years ending after December 15, 2020, and early adoption is permitted. The updated standard should be applied on a retrospective basis. The Company is currently evaluating the impact of adopting ASU 2018-14 on its Condensed Consolidated Financial Statements.
In October 2018, the FASB issued ASU 2018-17, Consolidation (Topic 810): Targeted Improvements to Related Party Guidance for Variable Interest Entities (“ASU 2018-17”). The amendments in ASU 2018-17 for determining whether a decision-making fee is a variable interest require reporting entities to consider indirect interests held through related parties under common control on a proportional basis rather than as the equivalent of a direct interest in its entirety (as currently required in GAAP). Therefore, these amendments likely will result in more decision makers not having a variable interest through their decision-making arrangements. The amendments in ASU 2018-17 are effective for interim and annual reporting periods beginning after December 15, 2019, and early adoption is permitted. The Company is currently evaluating the impact of adopting ASU 2018-17 on its Consolidated Financial Statements.
3. Acquisitions and Dispositions
Merger Agreement with Tribune
On November 30, 2018, Nexstar entered into a definitive merger agreement with Tribune to acquire Tribune’s outstanding equity for $46.50 per share in a cash transaction. All equity-based awards of Tribune that are outstanding prior to the merger will vest in full and will be converted into the right to receive the same cash consideration. The estimated total purchase price is valued at $6.4 billion, consisting of the merger cash consideration and the refinancing of Tribune's outstanding debt. Tribune shareholders will be entitled to additional cash consideration of approximately $0.30 per share per month if the transaction has not closed by August 31, 2019, pro-rated for partial months and less an adjustment for any dividends declared on or after September 1, 2019. Transaction costs relating to this proposed acquisition, including legal and professional fees of $4.1 million, were expensed as incurred during the three months ended March 31, 2019. No costs were incurred during the three months ended March 31, 2018.
The merger agreement contains certain termination rights for both Nexstar and Tribune. If the merger agreement is terminated in connection with Tribune entering into a definitive agreement with respect to a superior proposal, as well as under certain other circumstances, the termination fee payable by Tribune to Nexstar will be $135 million. Either party may terminate the merger agreement if the merger is not consummated on or before an end date of November 30, 2019, with an automatic extension to February 29, 2020, if necessary to obtain regulatory approval under circumstances specified in the merger agreement.
The merger has been approved by the boards of directors of both companies and the stockholders of Tribune and is projected to close in the third quarter of 2019, subject to (i) FCC approval, (ii) other regulatory approvals (including expiration of the applicable HSR waiting period) and (iii) satisfaction of other customary closing conditions. The merger does not require approval of our stockholders and is not subject to any financing contingency. On November 30, 2018, we received committed financing up to a maximum of $6.4 billion from a group of commercial banks to provide the debt financing to consummate the merger and the refinancing of certain of the existing indebtedness of Tribune and related transactions.
Tribune is a diversified media and entertainment business, comprised of 41 owned and operated local television stations and one AM radio station. Nexstar and Tribune plan to divest certain of their stations in connection with the proposed merger in order to comply with FCC media ownership rules.
In connection with obtaining the HSR approval and the FCC approval, Nexstar agreed to divest one or more television stations in certain DMAs.
On March 20, 2019, Nexstar entered into definitive asset purchase agreements to sell a total of nineteen stations in fifteen markets. Under the terms of the agreements, TEGNA Inc. (“TEGNA”) will acquire eleven stations in eight markets and The E.W. Scripps Company (“Scripps”) will acquire eight stations in seven markets.
Under the terms of the asset purchase agreement with TEGNA, TEGNA will acquire substantially all of the assets of television broadcast stations (i) WTIC and WCCT in Hartford-New Haven, CT; (ii) WPMT in Harrisburg-Lancaster-Lebanon-York, PA; (iii) WATN and WLMT in Memphis, TN; (iv) WNEP in Wilkes Barre-Scranton, PA; (v) WOI and KCWI in Des Moines-Ames, IA; (vi) WZDX in Huntsville-Decatur (Florence), AL; (vii) WQAD in Davenport, IA-Rock Island-Moline, IL; and (viii) KFSM in Ft. Smith-Fayetteville-Springdale-Rogers, AR for cash consideration of $740 million (subject to customary purchase price adjustments).
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Under the terms of the asset purchase agreement with Scripps, Scripps will acquire substantially all of the assets of television broadcast stations (i) KASW in Phoenix (Prescott), AZ; (ii) WPIX in New York, NY, (iii) WSFL-TV in Miami-Ft. Lauderdale, FL, (iv) KSTU in Salt Lake City, UT, (v) WTKR and WGNT in Norfolk-Portsmouth-Newport News, VA, (vi) WXMI in Grand Rapids-Kalamazoo-Battle Creek, MI and (vii) WTVR-TV in Richmond-Petersburg, VA for cash consideration of $580 million (subject to customary purchase price adjustments). WPIX, WSFL and KASW are being divested in order to bring Nexstar into compliance with the FCC’s national ownership cap.
On April 8, 2019, Nexstar entered into a definitive asset purchase agreement to sell to Circle City Broadcasting I, Inc., a newly-formed minority-led broadcast company managed by DuJuan McCoy, two stations in Indianapolis, IN -- WISH, the CW affiliate, and WNDY, the MyNetwork TV affiliate -- for $42.5 million in cash.
The consummation of each divestiture transaction is subject to the satisfaction or waiver of certain customary conditions, including, among others, (i) the closing of the transactions contemplated by the Tribune Merger Agreement, (ii) the receipt of approval from the FCC and the expiration or termination of any waiting period applicable to such transaction under the Hart-Scott-Rodino Antitrust Improvements Act of 1976, as amended, and (iii) the absence of certain legal impediments to the consummation of such transaction.
The consummation of each divestiture transaction is expected to occur simultaneously with the closing of the Nexstar/Tribune merger.
KHII
KHII operated under a TBA with Nexstar that began on November 1, 2018. On December 17, 2018, Nexstar became the primary beneficiary of its variable interest in KHII and its satellite stations and consolidated the assets that Nexstar agreed to acquire as of this date, all of which were attributed to noncontrolling interest.
On January 28, 2019, Nexstar completed its acquisition of KHII and paid the remaining purchase price of $6.4 million, funded by cash on hand. Accordingly, this final payment and the previous deposit of $0.1 million were utilized by Nexstar to acquire in full the noncontrolling interest at KHII of $6.5 million. As of January 28, 2019, the TBA was terminated and KHII is no longer a VIE.
4. Intangible Assets and Goodwill
Intangible assets subject to amortization consisted of the following (in thousands):
Estimated
useful life,
in years
Gross
Amortization
Net
Network affiliation agreements
15
1,977,825
(604,193
1,373,632
(575,860
1,401,965
Other definite-lived intangible assets
1-20
221,581
(163,184
58,397
246,137
(156,179
89,958
Other intangible assets
2,199,406
(767,377
2,223,962
(732,039
The following table presents the Company’s estimate of amortization expense for the remainder of 2019, each of the five succeeding years ended December 31 and thereafter for definite-lived intangible assets as of March 31, 2019 (in thousands):
Remainder of 2019
106,823
2020
131,361
2021
115,913
2022
113,645
2023
112,348
2024
111,837
Thereafter
740,102
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The amounts recorded to goodwill and FCC licenses were as follows (in thousands):
FCC Licenses
Impairment
2,257,774
(89,820
1,825,678
(47,410
Indefinite-lived intangible assets are not subject to amortization but are tested for impairment annually or whenever events or changes in circumstances indicate that such assets might be impaired. During the three months ended March 31, 2019, the Company did not identify any events that would trigger impairment assessment.
5. Accrued Expenses
Accrued expenses consisted of the following (in thousands):
Compensation and related taxes
47,935
44,269
Network affiliation fees
19,189
21,916
Capital expenditures
26,135
18,273
65,722
59,392
6. Retirement and Postretirement Plans
The Company has a funded, qualified non-contributory defined benefit retirement plan which covers certain employees and former employees. Additionally, there are non-contributory unfunded supplemental executive retirement and ERISA excess plans which supplement the coverage available to certain executives. All of these retirement plans are frozen. The Company also has a retiree medical savings account plan which reimburses eligible retired employees for certain medical expenses and an unfunded plan that provides certain health and life insurance benefits to retired employees who were hired prior to 1992. Nexstar recognizes the underfunded status of these plan liabilities on its Condensed Consolidated Balance Sheets. The funded status of a plan represents the difference between the fair value of plan assets and the related plan projected benefit obligation. Changes in the funded status are recognized through comprehensive income in the year in which the changes occur.
The following table provides the components of net periodic benefit cost (credit) for the Company’s pension and other postretirement benefit plans (“OPEB”) (in thousands):
March 31, 2018
Pension Benefits
OPEB
Interest cost
3,875
200
3,350
150
Expected return on plan assets
(5,475
(6,450
Net periodic benefit (income) cost
(1,600
(3,100
The Company has no required contributions to its qualified retirement plan in 2019. Payments to fund the obligations under the remaining plans are considered contributions and are expected to be less than $6.0 million in 2019.
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7. Debt
Long-term debt consisted of the following (in thousands):
Term loans, net of financing costs and discount of $34,287 and $37,679, respectively
2,319,077
2,407,490
Revolving loans
5,628
6.125% Senior unsecured notes due 2022, net of financing costs of $1,442 and $1,556,
respectively
273,558
273,444
5.875% Senior unsecured notes due 2022, plus premium of $5,784 and $6,233, respectively
405,784
406,233
5.625% Senior unsecured notes due 2024, net of financing costs of $11,343 and $11,792,
888,657
888,208
3,892,704
3,981,003
Less: current portion
(95,516
(96,093
2019 Transactions
During the three months ended March 31, 2019, Nexstar prepaid a total of $80.0 million in principal balance under its term loans, funded by cash on hand. This resulted in a loss on extinguishment of debt of $1.7 million, representing write-offs of unamortized debt financing costs and discounts.
During the three months ended March 31, 2019, the Company also repaid scheduled maturities of $11.8 million of its term loans.
On April 29, 2019, Nexstar prepaid $30.0 million of the outstanding principal balance under its term loans, funded by cash on hand.
Unused Commitments and Borrowing Availability
The Company had $166.4 million of total unused revolving loan commitments under its senior secured credit facilities, all of which was available for borrowing, based on the covenant calculations as of March 31, 2019. The Company’s ability to access funds under its senior secured credit facilities depends, in part, on its compliance with certain financial covenants. As of March 31, 2019, the Company was in compliance with its financial covenants.
On November 30, 2018, Nexstar received committed financing up to a maximum of $6.4 billion from a group of commercial banks to provide the debt financing to consummate its proposed merger with Tribune and the refinancing of certain of the existing indebtedness of Tribune and related transactions. The merger has been approved by the boards of directors of both companies and is projected to close in the third quarter of 2019, subject to FCC approval, other regulatory approvals and satisfaction of other customary closing conditions. See Note 3 for additional information.
Collateralization and Guarantees of Debt
The Company’s credit facilities described above are collateralized by a security interest in substantially all the combined assets, excluding FCC licenses and the other assets of consolidated VIEs unavailable to creditors of Nexstar (See Note 2). Nexstar guarantees full payment of all obligations incurred under the Mission, Marshall and Shield senior secured credit facilities in the event of their default. Mission, a consolidated VIE, and Nexstar Digital LLC (“Nexstar Digital”), a wholly-owned subsidiary of Nexstar, are both guarantors of Nexstar’s senior secured credit facility. Mission is also a guarantor of Nexstar’s 6.125% senior secured notes due 2022 (the “6.125% Notes”) and the 5.625% Notes due 2024 but does not guarantee Nexstar’s 5.875% Senior Notes due 2022 (the “5.875% Notes”). Nexstar Digital does not guarantee any of the notes. Marshall and Shield are not guarantors of any debt within the group.
In consideration of Nexstar’s guarantee of the Mission senior secured credit facility, Mission has granted Nexstar purchase options to acquire the assets and assume the liabilities of each Mission station, subject to FCC consent. These option agreements (which expire on various dates between 2021 and 2028) are freely exercisable or assignable by Nexstar without consent or approval by Mission. The Company expects these option agreements to be renewed upon expiration.
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Debt Covenants
The Nexstar credit agreement (senior secured credit facility) contains a covenant which requires Nexstar to comply with a maximum consolidated first lien net leverage ratio of 4.25 to 1.00. The financial covenant, which is formally calculated on a quarterly basis, is based on the combined results of the Company. The Mission, Marshall and Shield amended credit agreements do not contain financial covenant ratio requirements but do provide for default in the event Nexstar does not comply with all covenants contained in its credit agreement. As of March 31, 2019, the Company was in compliance with its financial covenants.
Fair Value of Debt
The aggregate carrying amounts and estimated fair values of the Company’s debt were as follows (in thousands):
Carrying
Fair
Value
Term loans(1)
2,313,395
2,389,439
Revolving loans(1)
5,603
5,528
6.125% Senior unsecured notes(2)
279,125
275,688
5.875% Senior unsecured notes(2)
410,000
397,000
5.625% Senior unsecured notes(2)
913,500
837,000
The fair value of senior secured credit facilities is computed based on borrowing rates currently available to the Company for bank loans with similar terms and average maturities. These fair value measurements are considered Level 3, as significant inputs to the fair value calculation are unobservable in the market.
(2)
The fair value of the Company’s fixed rate debt is estimated based on bid prices obtained from an investment banking firm that regularly makes a market for these financial instruments. These fair value measurements are considered Level 2, as quoted market prices are available for low volume trading of these securities.
8. Leases
The Company as a Lessee
The Company has operating and finance leases for office space, vehicles, tower facilities, antenna sites, studio and other real estate properties and equipment. The Company’s leases have remaining lease terms of one year to 95 years, some of which may include options to extend the leases from two to 99 years, and some of which may include options to terminate the leases within one year. The depreciable lives of assets and leasehold improvements are limited by the expected lease term, unless there is a transfer of title or purchase option reasonably certain of exercise. Lease contracts that the Company has executed but which have not yet commenced as of March 31, 2019 were not material and are excluded.
(In thousands)
Balance Sheet Classification
Operating leases
Operating lease right-of-use assets, net
108,668
Current lease liabilities
17,022
Noncurrent lease liabilities
77,368
Finance leases
Finance lease right-of-use assets, net of accumulated depreciation of $2,075
Property, plant and equipment, net
8,914
837
15,866
Operating lease expense for the three months ended March 31, 2019 was $5.5 million, inclusive of immaterial short-term and variable lease costs. During the three months ended March 31, 2019, $3.1 million of operating lease cost is included in Direct operating expenses, excluding depreciation and amortization and $2.4 million of operating lease cost is included in Selling, general and administrative expenses, excluding depreciation and amortization in the accompanying Condensed Consolidated Statements of Operations. The depreciation expense and interest expense associated with finance leases during the three months ended March 31, 2019 were not material.
Other information related to leases as of March 31, 2019 was as follows (in thousands, except lease term and discount rate):
Supplemental Cash Flows Information
Cash paid for amounts included in the measurement of lease liabilities:
Operating cash flows from operating leases
5,714
Operating cash flows from finance leases
240
Financing cash flows from finance leases
Weighted Average Remaining Lease Term
7.2 years
12.3 years
Weighted Average Discount Rate
5.2
%
5.7
Future minimum lease payments under non-cancellable leases as of March 31, 2019 were as follows (in millions):
Operating Leases
Finance Leases
16,227
1,325
19,629
1,795
16,606
1,843
13,653
1,803
11,182
1,818
37,685
15,202
Total future minimum lease payments
114,982
23,786
Less imputed interest
(20,592
(7,083
94,390
16,703
The Company as a Lessor
The Company has various arrangements for which it is the lessor for the use of its tower space. These leases meet the criteria for operating lease classification, but the associated lease income is not material. As part of the adoption, the Company elected the practical expedient to combine lease and non-lease components in its lessor arrangements.
9. Common Stock
On April 26, 2018, Nexstar’s Board of Directors approved an additional $200 million increase in Nexstar’s share repurchase authorization to repurchase its Class A common stock. As of March 31, 2019, the remaining available amount under the share repurchase authorization was $201.9 million, inclusive of the 2018 additional authorization and the remaining balance under the prior authorization. There were no share repurchases of Nexstar’s Class A common stock during the three months ended March 31, 2019.
Share repurchases may be made from time to time in open market transactions, block trades or in private transactions. There is no minimum number of shares that Nexstar is required to repurchase and the repurchase program may be suspended or discontinued at any time without prior notice.
During the three months ended March 31, 2019 and 2018, Nexstar declared and paid dividends of $20.6 million ($0.45 per share) and $17.3 million ($0.375 per share), respectively.
10. Stock-Based Compensation Plans
During the three months ended March 31, 2019, Nexstar granted 340,500 time-based restricted stock units and 113,334 performance-based restricted stock units to employees and non-employee directors with an estimated fair value of $33.0 million and $9.6 million, respectively. During the three months ended March 31, 2018, Nexstar granted 285,000 time-based restricted stock units and 142,500 performance-based restricted stock units to employees and non-employee directors with an estimated fair value of $19.0 million and $9.6 million, respectively. The time-based restricted stock units vest over a range of three to four years from the date of the award. The performance-based restricted stock units vest over a range of three to four years from the date of the award, subject to the achievement of pre-established Company performance metrics.
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11. Income Taxes
Income tax expense was $16.4 million for the three months ended March 31, 2019 compared to $17.5 million for the same period in 2018. The effective tax rates were 22.4% and 27.0% for each of the respective periods. The decrease in the effective tax rate between the two periods was primarily due to a $3.5 million increase in the deduction for excess tax benefits related to stock-based compensation, resulting in a decrease in the effective tax rate of 4.7%.
12. FCC Regulatory Matters
Television broadcasting is subject to the jurisdiction of the FCC under the Communications Act of 1934, as amended (the “Communications Act”). The Communications Act prohibits the operation of television broadcasting stations except under a license issued by the FCC, and empowers the FCC, among other things, to issue, revoke and modify broadcasting licenses, determine the location of television stations, regulate the equipment used by television stations, adopt regulations to carry out the provisions of the Communications Act and impose penalties for the violation of such regulations. The FCC’s ongoing rule making proceedings could have a significant future impact on the television industry and on the operation of the Company’s stations and the stations to which it provides services. In addition, the U.S. Congress may act to amend the Communications Act or adopt other legislation in a manner that could impact the Company’s stations, the stations to which it provides services and the television broadcast industry in general.
The FCC has adopted rules with respect to the final conversion of existing low power and television translator stations to digital operations, which must be completed by July 2021.
Media Ownership
The FCC is required to review its media ownership rules every four years and to eliminate those rules it finds no longer serve the “public interest, convenience and necessity.”
In August 2016, the FCC adopted a Second Report and Order (the “2016 Ownership Order”) concluding the agency’s 2010 and 2014 quadrennial reviews. The 2016 Ownership Order (1) retained the then-existing local television ownership rule and radio/television cross-ownership rule with minor technical modifications, (2) extended the ban on common ownership of two top-four television stations in a market to network affiliation swaps, (3) retained the then-existing ban on newspaper/broadcast cross-ownership in local markets while considering waivers and providing an exception for failed or failing entities, (4) retained the dual network rule, (5) made JSA relationships attributable interests and (6) defined a category of sharing agreements designated as SSAs between stations and required public disclosure of those SSAs (while not considering them attributable).
The 2016 Ownership Order reinstated a previously adopted rule that attributed another in-market station toward the local television ownership limits when one station owner sells more than 15% of the second station’s weekly advertising inventory under a JSA. Parties to JSAs entered into prior to March 31, 2014 were permitted to continue to operate under those JSAs until September 30, 2025.
Nexstar and other parties filed petitions seeking reconsideration of various aspects of the 2016 Ownership Order. On November 16, 2017, the FCC adopted an order (the “Reconsideration Order”) addressing the petitions for reconsideration. The Reconsideration Order (1) eliminated the rules prohibiting newspaper/broadcast cross-ownership and limiting television/radio cross-ownership, (2) eliminated the requirement that eight or more independently-owned television stations remain in a local market for common ownership of two television stations in that market to be permissible, (3) retained the general prohibition on common ownership of two “top four” stations in a local market but provided for case-by-case review, (4) eliminated the television JSA attribution rule, and (5) retained the SSA definition and disclosure requirement for television stations. These rule modifications took effect on February 7, 2018, when the U.S. Court of Appeals for the Third Circuit denied a mandamus petition which had sought to stay their effectiveness. The Reconsideration Order remains subject to appeals before that court.
In December 2018, the FCC initiated its 2018 quadrennial review with the issuance of a Notice of Proposed Rulemaking. Among other things, the FCC seeks comment on all aspects of the local television ownership rule’s implementation and whether the current version of the rule remains necessary in the public interest. Comments and reply comments in the 2018 quadrennial review are due in the second quarter of 2019.
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The FCC’s media ownership rules limit the percentage of U.S. television households which a party may reach through its attributable interests in television stations to 39% on a nationwide basis. Historically, the FCC has counted the ownership of an ultra-high frequency (“UHF”) station as reaching only 50% of a market’s percentage of total national audience. On August 24, 2016, the FCC adopted a Report and Order abolishing this “UHF discount,” and that rule change became effective in October 2016. On April 20, 2017, the FCC adopted an order on reconsideration that reinstated the UHF discount, which became effective again on June 15, 2017. A federal court of appeals dismissed a petition for review of the discount’s reinstatement in July 2018. In December 2017, the FCC initiated a comprehensive rulemaking to evaluate the UHF discount together with the national ownership limit. Comments and reply comments were filed in 2018, and the proceeding remains open. Nexstar is in compliance with the 39% national cap limitation.
Spectrum
The FCC is in the process of repurposing a portion of the broadcast television spectrum for wireless broadband use. Pursuant to federal legislation enacted in 2012, the FCC conducted an incentive auction for the purpose of making additional spectrum available to meet future wireless broadband needs. Under the auction statute and rules, certain television broadcasters accepted bids from the FCC to voluntarily relinquish their spectrum in exchange for consideration, and certain wireless broadband providers and other entities submitted successful bids to acquire the relinquished television spectrum. Over the next several years, television stations that are not relinquishing their spectrum are being “repacked” into the frequency band still remaining for television broadcast use. The incentive auction commenced on March 29, 2016 and officially concluded on April 13, 2017. Ten of Nexstar’s stations and one station owned by Vaughan, a consolidated VIE, accepted bids to relinquish their spectrum. On July 21, 2017, the Company received $478.6 million of gross proceeds from the FCC related to the incentive auction. These were recorded as liability to surrender spectrum asset pending the relinquishment of spectrum assets or conversion from UHF to VHF. Of the 11 total stations that accepted bids, one station went off the air in November 2017 and the associated spectrum asset and liability to surrender spectrum, both amounting to $34.6 million, were derecognized in the fourth quarter of 2017. The station that went off the air is not expected to have a significant impact on the Company’s future financial results because it was located in a remote rural area of the country and the Company has other stations which serve the same area. Of the remaining ten stations, eight have ceased broadcasting on their previous channels and implemented channel sharing agreements. As a result, the associated spectrum asset and liability to surrender spectrum, both amounting to $314.1 million, were derecognized in the second quarter of 2018. The remaining two stations will move to VHF channels and must vacate their current channels by September 2019 and May 2020, respectively.
The majority of the Company’s television stations did not accept bids to relinquish their television channels. Of those stations, 61 full power stations owned by Nexstar and 17 full power stations owned by VIEs have been assigned to new channels in the reduced post-auction television band. These “repacked” stations are required to construct and license the necessary technical modifications to operate on their newly assigned channels and must cease operating on their former channels on a rolling schedule ending in July 2020. Congress has allocated up to an industry-wide total of $2.75 billion to reimburse television broadcasters, MVPDs and other parties for costs reasonably incurred due to the repack. This allocation includes $1 billion added to the TV Broadcaster Relocation Fund as part of the Consolidated Appropriations Act, 2018. This fund is not available to reimburse repacking costs for stations which are surrendering their spectrum and entering into channel sharing relationships. Broadcasters and MVPDs have submitted estimates to the FCC of their reimbursable costs. As of February 6, 2019, these costs were approximately $1.9 billion, and the FCC has indicated that it expects those costs to rise. During the three months ended March 31, 2019 and 2018, the Company spent a total of $14.7 million and $5.4 million, respectively, in capital expenditures related to station repack which were recorded as assets under the property and equipment caption in the accompanying Condensed Consolidated Balance Sheets. During the three months ended March 31, 2019 and 2018, the Company received $14.2 million and $1.4 million, respectively, in reimbursements from the FCC related to these expenditures which were recorded as operating income in the accompanying Condensed Consolidated Statements of Operations and Comprehensive Income. The Company cannot determine if the FCC will be able to fully reimburse its repacking costs as this is dependent on certain factors, including the Company’s ability to incur repacking costs that are equal to or less than the FCC’s allocation of funds to the Company and whether the FCC will have available funds to reimburse the Company for additional repacking costs that it previously may not have anticipated. Whether the FCC will have available funds for additional reimbursements will also depend on the repacking costs that will be incurred by other broadcasters, MVPDs and other parties that are also seeking reimbursements.
The reallocation of television spectrum to broadband use may be to the detriment of the Company’s investment in digital facilities, could require substantial additional investment to continue current operations, and may require viewers to invest in additional equipment or subscription services to continue receiving broadcast television signals. The Company cannot predict the impact of the incentive auction and subsequent repacking on its business.
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Exclusivity/Retransmission Consent
On March 3, 2011, the FCC initiated a Notice of Proposed Rulemaking which among other things asked for comment on eliminating the network non-duplication and syndicated exclusivity protection rules, which may permit MVPDs to import out-of-market television stations in certain circumstances. In March 2014, the FCC adopted a further notice of proposed rulemaking which sought additional comment on the elimination or modification of the network non-duplication and syndicated exclusivity rules. The FCC’s possible elimination or modification of the network non-duplication and syndicated exclusivity protection rules may affect the Company’s ability to sustain its current level of retransmission consent revenues or grow such revenues in the future and could have an adverse effect on the Company’s business, financial condition and results of operations. The Company cannot predict the resolution of the FCC’s network non-duplication and syndicated exclusivity proposals or the impact of these proposals if they are adopted.
On December 5, 2014, federal legislation directed the FCC to commence a rulemaking to “review its totality of the circumstances test for good faith [retransmission consent] negotiations.” The FCC commenced this proceeding in September 2015 and comments and reply comments were submitted. In July 2016, the then-Chairman of the FCC publicly announced that the agency would not adopt additional rules in this proceeding. However, the proceeding remains open.
Further, online video distributors (“OVDs”) have begun streaming broadcast programming over the Internet. In June 2014, the U.S. Supreme Court held that an OVD’s retransmissions of broadcast television signals without the consent of the broadcast station violate copyright holders’ exclusive right to perform their works publicly as provided under the Copyright Act. In December 2014, the FCC issued a Notice of Proposed Rulemaking proposing to interpret the term “MVPD” to encompass OVDs that make available for purchase multiple streams of video programming distributed at a prescheduled time and seeking comment on the effects of applying MVPD rules to such OVDs. Comments and reply comments were filed in 2015. Although the FCC has not classified OVDs as MVPDs to date, several OVDs have signed agreements for retransmission of local stations within their markets and others are actively seeking to negotiate such agreements.
13. Commitments and Contingencies
Guarantees of Mission, Marshall and Shield Debt
Nexstar and its subsidiaries guarantee full payment of all obligations incurred under the Mission, Marshall and Shield senior secured credit facilities. In the event that Mission, Marshall or Shield is unable to repay amounts due, Nexstar will be obligated to repay such amounts. The maximum potential amount of future payments that Nexstar would be required to make under these guarantees would be generally limited to the borrowings outstanding. As of March 31, 2019, Mission had a maximum commitment of $227.2 million under its senior secured credit facility, of which $224.2 million of debt was outstanding, Marshall had used all of its commitment and had outstanding debt obligations of $50.5 million and Shield had also used all of its commitment and had outstanding obligations of $22.4 million. Based on the terms of the credit agreements, Mission’s outstanding debt is due January 2024, Marshall’s outstanding debt is due December 2019 and Shield’s outstanding debt is due October 2023. Marshall’s debt is included in the current liabilities in the accompanying Condensed Consolidated Balance Sheets. The other debts guaranteed by Nexstar are long-term debt obligations of Mission and Shield.
Indemnification Obligations
In connection with certain agreements that the Company enters into in the normal course of its business, including local service agreements, business acquisitions and borrowing arrangements, the Company enters into contractual arrangements under which the Company agrees to indemnify the third-party to such arrangement from losses, claims and damages incurred by the indemnified party for certain events as defined within the particular contract. Such indemnification obligations may not be subject to maximum loss clauses and the maximum potential amount of future payments the Company could be required to make under these indemnification arrangements may be unlimited. Historically, payments made related to these indemnifications have been insignificant and the Company has not incurred significant costs to defend lawsuits or settle claims related to these indemnification agreements.
Litigation
From time to time, the Company is involved with claims that arise out of the normal course of its business. In the opinion of management, any resulting liability with respect to these claims would not have a material adverse effect on the Company’s financial position or results of operations.
19
On March 16, 2018, a group of companies including Nexstar (the “Defendants”) received a Civil Investigative Demand from the Antitrust Division of the DOJ regarding an investigation into the exchange of certain information related to the pacing of sales related to the same period in the prior year among broadcast stations in some DMAs in alleged violation of federal antitrust law. Other Defendants entered into a proposed consent decree with the DOJ on November 6, 2018. Without admitting any wrongdoing, Nexstar agreed to settle the matter with the DOJ on December 5, 2018. The DOJ filed an amended complaint adding Nexstar to the consent decree on December 13, 2018. The consent decree, which settles any claims by the government of alleged violations of federal antitrust laws in connection with the alleged information sharing, does not include any financial penalty. Pursuant to the consent decree, Nexstar has agreed not to exchange certain non-public information with other stations operating in the same DMA and to implement certain antitrust compliance measures and to monitor and report on compliance with the consent decree.
On July 30, 2018, Clay, Massey & Associates, PC filed an antitrust class action complaint in the U.S. District Court for the Northern District of Illinois on behalf of itself and all others similarly situated against Gray Television, Inc., Hearst Communications, Nexstar Media Group, Inc., Tegna Inc., Tribune Media Company and Sinclair Broadcast Group, Inc. The lawsuit alleges unlawful coordination between broadcast television station owners to artificially increase prices of television spot advertisements in violation of Section 1 of the Sherman Act (15 U.S.C. §1). Nexstar has since been named in 15 similar complaints, including ten in the Northern District of Illinois, three in the Southern District of New York and two in the District of Maryland. Each complaint includes similar allegations and claims a violation of Section 1 of the Sherman Act. One, filed in the District of Maryland, also alleges violations of state antitrust and consumer protection statutes and a claim for unjust enrichment.
On October 9, 2018, these cases were consolidated in a multi-district litigation in the District Court for the Northern District of Illinois captioned In Re: Local TV Advertising Antitrust Litigation, No. 1:18-cv-06785 (“MDL Litigation”). On January 23, 2019, the Court in the MDL Litigation appointed plaintiffs’ lead and liaison counsel. The MDL Litigation is ongoing. The Plaintiffs’ Consolidated Complaint was filed on April 3, 2019; Defendants’ Motion to Dismiss must be filed by June 5, 2019. Nexstar denies the allegations against it and will defend its advertising practices as necessary.
14. Segment Data
The Company evaluates the performance of its operating segments based on net revenue and operating income. The Company’s broadcast segment includes television stations and related community-focused websites that Nexstar owns, operates, programs or provides sales and other services to in various markets across the United States. The other activities of the Company include corporate functions, digital businesses and eliminations.
Segment financial information is included in the following tables for the periods presented (in thousands):
Three Months Ended March 31, 2019
Broadcast
Consolidated
599,183
27,464
23,627
3,810
30,845
5,893
Income (loss) from operations
168,500
(41,426
Three Months Ended March 31, 2018
576,985
38,351
21,400
4,414
32,053
4,249
152,567
(34,951
As of March 31, 2019
2,125,479
42,475
Assets
6,681,378
415,808
As of December 31, 2018
6,622,604
439,426
20
The following tables present the disaggregation of the Company’s revenue for the periods presented (in thousands):
Local
188,166
National
63,678
Political
1,307
Retransmission compensation
313,974
Digital
25,386
27,449
52,835
3,849
3,864
Trade revenue
2,823
Total revenue
193,268
67,045
9,266
275,941
24,468
38,336
62,804
4,154
4,169
2,843
The Company is a television broadcasting and digital media company focused on the acquisition, development and operation of television stations and interactive community websites and digital media services in medium-sized markets in the United States.
Advertising revenue (local, national, political and digital) is positively affected by national and regional political campaigns, and certain events such as the Olympic Games or the Super Bowl. Company 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 congressional and presidential elections occur, and advertising is aired during the Olympic Games.
The Company receives compensation from MVPDs and OVDs in return for the consent to the retransmission of the signals of its television stations. Retransmission compensation is recognized at the point in time the broadcast signal is delivered to the distributors and is based on a price per subscriber.
15. Condensed Consolidating Financial Information
The following condensed consolidating financial information presents the financial position, results of operations and cash flows of the Company, including its wholly-owned subsidiaries and its consolidated VIEs. This information is presented in lieu of separate financial statements and other related disclosures pursuant to Regulation S-X Rule 3-10 of the Securities Exchange Act of 1934, as amended, “Financial Statements of Guarantors and Issuers of Guaranteed Securities Registered or Being Registered.”
The Nexstar column presents the parent company’s financial information, excluding consolidating entities. The Nexstar Broadcasting column presents the financial information of Nexstar Broadcasting, Inc. (“Nexstar Broadcasting”), a wholly-owned subsidiary of Nexstar and issuer of the 5.625% Notes, the 6.125% Notes and the 5.875% Notes. The Mission column presents the financial information of Mission, an entity which Nexstar Broadcasting is required to consolidate as a VIE (See Note 2). The Non-Guarantors column presents the combined financial information of Nexstar Digital, a wholly-owned subsidiary of Nexstar, and other VIEs consolidated by Nexstar Broadcasting (See Note 2).
Nexstar Broadcasting’s outstanding 5.625% Notes and 6.125% Notes are fully and unconditionally guaranteed, jointly and severally, by Nexstar and Mission, subject to certain customary release provisions. These notes are not guaranteed by any other entities.
Nexstar Broadcasting’s outstanding 5.875% Notes are fully and unconditionally guaranteed, jointly and severally, by Nexstar, subject to certain customary release provisions. These notes are not guaranteed by any other entities.
The indentures governing the 5.625% Notes and the 6.125% Notes are not registered but require consolidating information that presents the guarantor information.
21
As discussed in Note 2, the Company adopted ASU No. 2016-02 Leases (Topic 842) and all related amendments using the optional transition method. As a result, financial information for reporting periods beginning after January 1, 2019 is presented under ASC 842, while comparative financial information has not been adjusted and continues to be reported in accordance with the Company’s historical accounting policy for lease contracts prior to the adoption of ASC 842. The standard had a material impact on our Condensed Consolidated Balance Sheets but did not have an impact on our Condensed Consolidated Income Statements. The most significant impact was the recognition of ROU assets and lease liabilities for operating leases, while our accounting for finance leases remained substantially unchanged. Comparative information has not been restated and continues to be reported under the accounting standards in effect for those periods.
22
CONDENSED CONSOLIDATING BALANCE SHEET
(in thousands)
Nexstar
Non-
Broadcasting
Guarantors
Eliminations
Company
89,909
5,583
33,099
471,876
15,448
53,201
Amounts due from consolidated entities
90,173
77,158
(167,331
Other current assets
18,830
721
2,850
722,790
98,910
89,150
Investments in subsidiaries
1,180,364
108,884
(1,289,248
761,209
(761,209
702,372
20,700
16,979
(70
1,970,692
33,187
164,075
1,626,460
43,102
108,706
1,312,565
13,193
106,271
206,551
11,343
17,541
1,941,573
6,650,314
220,435
502,722
(2,217,858
LIABILITIES AND STOCKHOLDERS' EQUITY (DEFICIT)
41,477
2,285
51,754
58,018
1,392
12,875
Amounts due to consolidated entities
167,332
(167,332
524
174,079
6,834
28,698
210,135
325,576
10,511
260,659
3,554,105
221,956
21,127
536,797
224,621
(761,418
62
628,780
8,184
303,384
11,563
19,077
586
5,348,642
244,030
533,668
(928,750
Total Nexstar Media Group, Inc.
stockholders' equity (deficit)
1,940,987
1,301,672
(23,595
(42,651
(1,289,108
Noncontrolling interests in consolidated
variable interest entities
Total liabilities and stockholders' equity (deficit)
23
105,665
10,798
28,652
466,270
12,857
68,158
88,987
77,521
(166,508
17,420
1,655
3,598
730,344
102,831
100,408
1,119,605
(1,228,489
782,365
(782,365
696,910
19,867
14,833
(72
1,620,610
114,556
1,365,159
13,712
113,052
116,660
4,421
4,191
1,901,970
6,609,259
217,120
511,115
(2,177,434
52,331
47,574
2,357
17,897
166,508
299
155,023
4,441
28,486
188,249
296,076
9,083
265,222
3,641,193
222,354
21,363
559,057
223,519
(782,576
624,869
8,949
255,228
6,820
8,036
361
5,376,423
238,257
527,089
(949,084
1,901,609
1,232,836
(21,137
(32,184
(1,228,350
24
CONDENSED CONSOLIDATING STATEMENT OF OPERATIONS
Net broadcast revenue (including trade)
567,780
19,407
39,460
Revenue between consolidated entities
8,418
22,233
7,762
17,717
(56,130
590,013
27,169
57,177
Direct operating expenses, excluding
depreciation and amortization
240,195
12,036
42,499
(1,867
Selling, general, and administrative expenses,
excluding depreciation and amortization
9,748
137,269
991
10,027
(15,675
Local service agreement fees between
consolidated entities
16,354
14,575
7,659
(38,588
13,351
383
628
28,663
519
7,556
25,227
608
1,602
(9,685
(1,536
(2,966
451,374
27,576
67,005
(Loss) income from operations
(1,330
138,639
(407
(9,828
(49,208
(2,886
(863
Other expenses
(475
(16
Equity in income of subsidiaries
60,758
(60,758
Income (loss) before income taxes
59,428
88,658
(3,293
(10,707
Income tax benefit (expense)
312
(19,822
835
2,234
59,740
68,836
(2,458
(8,473
Net income attributable to noncontrolling interests
Net income (loss) attributable to Nexstar
(10,468
25
Net broadcast revenue
549,681
16,102
49,498
615,281
20,256
8,483
16,705
(45,389
55
569,937
24,585
66,203
Operating expenses:
221,179
10,147
48,991
(1,354
136,185
1,216
11,306
(6,802
16,976
13,250
7,007
(37,233
14,995
412
693
29,845
544
5,913
23,461
517
1,836
441,277
26,086
75,746
128,660
(1,501
(9,543
(51,034
(2,611
(944
Other (expense) income
(129
52,032
(52,032
79,442
(4,112
(10,485
Income tax (expense) benefit
(20,450
981
1,965
58,992
(3,131
(8,520
Net loss attributable to noncontrolling interests
(7,739
26
CONDENSED CONSOLIDATING STATEMENT OF CASH FLOWS
Cash flows from operating activities
124,410
(5,289
5,468
(24,586
(891
(3,102
9,685
1,536
2,966
Other investing activities
639
(14,262
645
(136
(90,370
(571
(864
Inter-company payments
28,430
(28,430
Other financing activities
(711
(21
(8,581
(125,904
(885
Net increase in cash,
cash equivalents and restricted cash
(15,756
(5,215
4,447
Cash, cash equivalents and restricted
cash at beginning of period
cash at end of period
27
171,164
(4,060
12,261
(18,266
(830
(1,996
Deposits and payments for acquisitions
(98,209
Proceeds from long-term debt
(73,061
(578
(940
53,773
(53,773
(3,174
Net cash provided by (used in)
financing activities
(83,569
(714
Net (decrease) increase in cash,
(10,614
(5,468
9,551
90,860
9,524
15,268
80,246
4,056
24,819
28
16. Subsequent Events
On April 25, 2019, Nexstar’s Board of Directors declared a quarterly cash dividend of $0.45 per share of its Class A common stock. The dividend is payable on May 24, 2019 to stockholders of record on May 10, 2019.
29
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, 2018.
As used in this Quarterly Report on Form 10-Q and unless the context indicates otherwise, “Nexstar” refers to Nexstar Media Group, Inc. and its consolidated subsidiaries; “Nexstar Broadcasting” refers to Nexstar Broadcasting, Inc., our wholly-owned direct subsidiary; the “Company” refers to Nexstar and the variable interest entities required to be consolidated in our financial statements; and all references to “we,” “our,” “ours,” and “us” refer to Nexstar.
As a result of our deemed controlling financial interests in the consolidated VIEs in accordance with U.S. GAAP, we consolidate their financial position, results of operations and cash flows as if they were wholly-owned entities. 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 determinations of VIE consolidation under the related authoritative guidance. Therefore, the following discussion of our financial position and results of operations includes the consolidated VIEs’ financial position and results of operations.
Executive Summary
2019 Highlights
•
During the first quarter of 2019, net revenue increased by $11.3 million, or 1.8% compared to the same period in 2018, primarily due to an increase in retransmission compensation of $38.0 million. This increase was partially offset by a decrease in television advertising revenue of $16.4 million, primarily due to 2019 not being an election or Olympic year, and a decrease in digital revenue of $10.0 million.
During the first quarter of 2019, our Board of Directors declared cash dividends of $0.45 per share of our outstanding Class A common stock, or total dividend payments of $20.6 million.
On November 30, 2018, we entered into a definitive merger agreement with Tribune to acquire Tribune’s outstanding equity for $46.50 per share in a cash transaction. All equity-based awards of Tribune that are outstanding prior to the merger will vest in full and will be converted into the right to receive the same cash consideration. The estimated total purchase price is valued at $6.4 billion, consisting of the merger cash consideration and the refinancing of Tribune's outstanding debt. Tribune shareholders will be entitled to additional cash consideration of approximately $0.30 per share per month if the transaction has not closed by August 31, 2019, pro-rated for partial months and less an adjustment for any dividends declared on or after September 1, 2019. Tribune currently owns, operates or provides services to 41 television stations and one AM radio station. We and Tribune plan to divest certain of our stations in connection with the proposed merger in order to comply with Federal Communications Commission (“FCC”) media ownership rules.
The merger agreement contains certain termination rights for both us and Tribune. If the merger agreement is terminated in connection with Tribune entering into a definitive agreement with respect to a superior proposal, as well as under certain other circumstances, the termination fee payable by Tribune to us will be $135 million. Either party may terminate the merger agreement if the merger is not consummated on or before an end date of November 30, 2019, with an automatic extension to February 29, 2020, if necessary to obtain regulatory approval under circumstances specified in the merger agreement.
The merger has been approved by the boards of directors of both companies and the stockholders of Tribune and is projected to close in the third quarter of 2019, subject to (i) FCC approval, (ii) other regulatory approvals (including expiration of the applicable Hart-Scott-Rodino “HSR” waiting period) and (iii) satisfaction of other customary closing conditions. The merger does not require approval of our stockholders and is not subject to any financing contingency. On November 30, 2018, we received committed financing up to a maximum of $6.4 billion from a group of commercial banks to provide the debt financing to consummate the merger and the refinancing of certain of the existing indebtedness of Tribune and related transactions.
In connection with obtaining the HSR approval and the FCC approval, we agreed to divest one or more television stations in certain DMAs.
On March 20, 2019, we entered into definitive asset purchase agreements to sell a total of nineteen stations in fifteen markets. Under the terms of the agreements, TEGNA Inc. will acquire eleven stations in eight markets and The E.W. Scripps Company will acquire eight stations in seven markets.
Under the terms of the asset purchase agreement with Scripps, Scripps will acquire substantially all of the assets of television broadcast stations (i) KASW in Phoenix (Prescott), AZ; (ii) WPIX in New York, NY, (iii) WSFL-TV in Miami-Ft. Lauderdale, FL, (iv) KSTU in Salt Lake City, UT, (v) WTKR and WGNT in Norfolk-Portsmouth-Newport News, VA, (vi) WXMI in Grand Rapids-Kalamazoo-Battle Creek, MI and (vii) WTVR-TV in Richmond-Petersburg, VA for cash consideration of $580 million (subject to customary purchase price adjustments).
On April 8, 2019, we entered into a definitive asset purchase agreement to sell to Circle City Broadcasting I, Inc., a newly-formed minority-led broadcastcompany managed by DuJuan McCoy, two stations in Indianapolis, IN -- WISH, the CW affiliate, and WNDY, the MyNetwork TV affiliate -- for $42.5 million in cash.
The consummation of each divestiture transaction is subject to the satisfaction or waiver of certain customary conditions, including, among others, (i) the closing of the transactions contemplated by the merger agreement, (ii) the receipt of approval from the FCC and the expiration or termination of any waiting period applicable to such transaction under the Hart-Scott-Rodino Antitrust Improvements Act of 1976, as amended, and (iii) the absence of certain legal impediments to the consummation of such transaction.
The consummation of each divestiture transaction is expected to occur simultaneously with the closing of the Nexstar/ Tribune merger.
Debt Transactions
During the three months ended March 31, 2019, we prepaid a total of $80.0 million in principal balance under our Term Loan B, funded by cash on hand.
During the three months ended March 31, 2019, the Company repaid scheduled maturities of $11.8 million under its term loans.
On April 29, 2019, we prepaid $30.0 million of the outstanding principal balance under our term loans, funded by cash on hand.
Overview of Operations
As of March 31, 2019, we owned, operated, programmed or provided sales and other services to 174 full power television stations, including those owned by VIEs, in 100 markets in the states of Alabama, Arizona, Arkansas, California, Colorado, Connecticut, Florida, Georgia, Hawaii, Illinois, Indiana, Iowa, Kansas, Louisiana, Maryland, Massachusetts, Michigan, Mississippi, Missouri, Montana, Nevada, New Mexico, New York, North Carolina, North Dakota, Ohio, Oregon, Pennsylvania, Rhode Island, South Carolina, South Dakota, Tennessee, Texas, Utah, Vermont, Virginia, West Virginia and Wisconsin. The stations are affiliates of ABC, NBC, FOX, CBS, The CW, MNTV and other broadcast television networks. Through various local service agreements, we provided sales, programming and other services to 36 full power television stations owned by independent third parties (VIEs). See Note 2—Variable Interest Entities to our Condensed Consolidated Financial Statements in Part I, Item 1 of this Form 10-Q for a discussion of the local service agreements we have with these independent third parties.
We guarantee full payment of all obligations incurred under Mission’s, Marshall’s and Shield’s senior secured credit facilities in the event of their default. Mission is a guarantor of our senior secured credit facility, our 6.125% Notes and our 5.625% Notes but does not guarantee our 5.875% Notes. Marshall and Shield do not guarantee any debt within the group. 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. These option agreements (which expire on various dates between 2021 and 2028) 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.
31
We do not own the consolidated VIEs or their television stations. However, we are deemed under U.S. GAAP to have controlling financial interests in these entities because of (1) the local service agreements Nexstar has with their stations, (2) our guarantees of the obligations incurred under Mission’s, Marshall’s and Shield’s senior secured credit facilities, (3) our power over significant activities affecting the VIEs’ economic performance, including budgeting for advertising revenue, advertising sales and, in some cases, hiring and firing of sales force personnel and (4) purchase options granted by each VIE, exclusive of Marshall, which permit Nexstar to acquire the assets and assume the liabilities of each of the VIEs’ stations at any time, subject to FCC consent. In compliance with FCC regulations for all the parties, each of the consolidated VIEs maintains complete responsibility for and control over programming, finances and personnel for its stations. Refer to Note 2 – Variable Interest Entities to our Condensed Consolidated Financial Statements in Part IV, Item 5(a) of this Annual Report on Form 10-K for additional information with respect to consolidated VIEs.
Regulatory Developments
As a television broadcaster, the Company is highly regulated, and its operations require that it retain or renew a variety of government approvals and comply with changing federal regulations. In 2016, the FCC reinstated a previously adopted rule providing that a television station licensee which sells more than 15 percent of the weekly advertising inventory of another television station in the same DMA is deemed to have an attributable ownership interest in that station. Parties to existing JSAs that were deemed attributable interests and did not comply with the FCC’s local television ownership rule were given until September 30, 2025 to come into compliance. In November 2017, however, the FCC adopted an order on reconsideration that eliminated the rule. That elimination became effective on February 7, 2018, although the FCC’s November 2017 order on reconsideration remains the subject of pending court appeals. If the Company is ultimately required to amend or terminate its existing JSAs, the Company could have a reduction in revenue and increased costs if it is unable to successfully implement alternative arrangements that are as beneficial as the existing JSAs.
The FCC is in the process of repurposing a portion of the broadcast television spectrum for wireless broadband use. In an incentive auction which concluded in April 2017, certain television broadcasters accepted bids from the FCC to voluntarily relinquish their spectrum in exchange for consideration. Television stations that are not relinquishing their spectrum are being “repacked” into the frequency band still remaining for television broadcast use. In July 2017, the Company received $478.6 million in gross proceeds from the FCC for eight stations that now share a channel with another station, two that will move to a VHF channel and one that went off the air in November 2017. The station that went off the air is not expected to have a significant impact on our future financial results because it was located in a remote rural area of the country and the Company has other stations which serve the same area. The two stations moving to VHF channels must vacate their current channels by September 2019 and May 2020, respectively.
61 full power stations owned by Nexstar and 17 full power stations owned by VIEs have been assigned to new channels in the reduced post-auction television band and are required to construct and license the necessary technical modifications to operate on their new assigned channels on a rolling schedule ending in July 2020. Congress has allocated up to an industry-wide total of $2.75 billion to reimburse television broadcasters, MVPDs and other parties for costs reasonably incurred due to the repack. During the three months ended March 31, 2019 and 2018, the Company spent a total of $14.7 million and $5.4 million, respectively, in capital expenditures related to station repack. During the three months ended March 31, 2019 and 2018, the Company received $14.2 million and $1.4 million, respectively, in reimbursements from the FCC related to these expenditures. As of March 31, 2019, approximately $171.4 million of estimated remaining costs in connection with the station repack are expected to be incurred by the Company, some or all of which will be reimbursable. If the FCC fails to fully reimburse the Company’s repacking costs, the Company could have increased costs related to the repacking.
Seasonality
Advertising revenue is positively affected by national and regional political election campaigns and certain events such as the Olympic Games or the Super Bowl. 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 when advertising airs during the Olympic Games. As 2019 is neither an election year nor an Olympic year, we expect a decrease in advertising revenues to be reported in 2019 compared to 2018.
32
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) as a percentage of total net revenue:
30.0
31.4
10.2
10.9
0.2
1.5
50.1
44.8
8.4
0.6
0.7
0.5
Total net revenue
100.0
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:
Corporate expenses
30,765
4.9
26,343
4.3
Direct operating expenses,
net of trade
289,432
46.2
275,479
Selling, general and administrative expenses, excluding corporate
111,595
17.8
115,562
18.8
4.4
4.2
5.9
2.3
2.5
Trade expense
3,431
3,484
(2.3
(0.2
33
Three Months Ended March 31, 2019 Compared to Three Months Ended March 31, 2018
The period-to-period comparability of our consolidated operating results is affected by acquisitions. For each quarter we present, our legacy stations include those stations that we owned or provided services to for the complete quarter in the current and prior years. For our annual and year to date presentations, we combine the legacy stations’ amounts presented in each quarter.
Local advertising revenue was $188.2 million for the three months ended March 31, 2019, compared to $193.3 million for the same period in 2018, a decrease of $5.1 million, or 2.6%. National advertising revenue was $63.7 million for the three months ended March 31, 2019, compared to $67.0 million for the same period in 2018, a decrease of $3.3 million, or 5.0%. Our legacy stations’ local and national advertising revenue decreased by $9.6 million, which includes the impact of prior year revenue from the Olympics on our NBC legacy affiliate stations. This was partially offset by incremental revenue from our stations acquired in 2018 of $1.2 million. Our largest advertiser category, automobile, represented approximately 22% and 23% of our local and national advertising revenue for the three months ended March 31, 2019 and 2018, respectively. Overall, including the past results of our stations acquired in 2018, automobile revenues decreased by 8.9% during the quarter. The other categories representing our top five were furniture, medical/healthcare, and fast food/restaurants, which decreased in 2019, and attorneys, which stayed consistent in 2019.
Political advertising revenue was $1.3 million for the three months ended March 31, 2019, compared to $9.3 million for the same period in 2018, a decrease of $8.0 million, as 2019 is not an election year.
Retransmission compensation was $314.0 million for the three months ended March 31, 2019, compared to $275.9 million for the same period in 2018, an increase of $38.0 million, or 13.8%. Our legacy stations’ revenue increased by $34.4 million, primarily due to scheduled annual escalation of rates per subscriber, renewals of smaller contracts providing for higher rates per subscriber (contracts generally have a three-year term) and contributions from distribution agreements with OVDs. Additionally, our stations acquired in 2018 increased our revenue by $3.6 million. Broadcasters currently deliver more than 30% of all television viewing audiences in a pay television household but are paid approximately 12-14% of the total cable programming fees. We anticipate continued increase of retransmission fees until there is a more balanced relationship between viewers delivered and fees paid for delivery of such viewers.
Digital revenue, representing advertising revenue on our stations’ web and mobile sites and other internet-based revenue, was $52.8 million for the three months ended March 31, 2019, compared to $62.8 million for the same period in 2018, a decrease of $10.0 million, or 15.9%, primarily due to marketplace changes which affected select demand-side platform customer buying with local customer buying trends remaining on track.
Operating Expenses
Corporate expenses, related to costs associated with the centralized management of our stations, were $30.8 million for the three months ended March 31, 2019, compared to $26.3 million for the same period in 2018, an increase of $4.5 million, or 16.8%. This was primarily attributable to a $4.3 million increase in legal fees associated with our proposed acquisition of Tribune and an increase in stock-based compensation related to new equity incentive awards of $1.7 million. These increases were partially offset by decreases in payroll expense of $0.6 million.
Direct operating expenses, consisting primarily of news, engineering, programming and station selling, general and administrative expenses (net of trade expense) were $401.0 million for the three months ended March 31, 2019, compared to $391.0 million for the same period in 2018, an increase of $10.0 million, or 2.6%. This was primarily due to an increase in our legacy stations’ programming costs of $22.8 million, primarily due to network affiliation renewals and annual increases in our network affiliation costs, and incremental costs from our 2018 television station acquisitions of $1.1 million. These increases were partially offset by a decrease of $4.1 million in variable costs in our stations, largely news and sales related, and a decrease in operating expenses on a few of our digital products of $9.6 million due to marketplace changes and challenges that led to lower revenue.
Depreciation of property and equipment was $27.4 million for the three months ended March 31, 2019, compared to $25.8 million for the same period in 2018, an increase of $1.6 million, or 6.3%, primarily due to incremental depreciation from newly capitalized assets.
Amortization of intangible assets was flat at $36.7 million for the three months ended March 31, 2019, compared to $36.3 million for the same period in 2018.
Amortization of broadcast rights was $14.4 million for the three months ended March 31, 2019, compared to $16.1 million for the same period in 2018, a decrease of $1.7 million, or 10.8%, primarily attributable to renegotiation of certain film contracts which resulted in reduced distribution rates.
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Interest Expense, net
Interest expense, net was $53.0 million for the three months ended March 31, 2019, compared to $54.6 million for the same period in 2018, a decrease of $1.6 million, or 3.0%, primarily due to the refinancing of certain of our senior secured credit facilities in October 2018, which reduced the applicable margin portion of the interest rates by 25 basis points, and principal prepayments of certain of our term loans in 2018 and during the first quarter of 2019. These were partially offset by the effects of an increasing trend in the London Interbank Offered Rate (“LIBOR”)
Loss on Extinguishment of Debt
Loss on extinguishment of debt was $1.7 million for the three months ended March 31, 2019, compared to $1.0 million for the same period in 2018, an increase of $0.7 million, primarily due to the increase in prepayments on our term loans of $40.0 million in 2019 compared to the prior period.
Income Taxes
Income tax expense was $16.4 million for the three months ended March 31, 2019, compared to $17.5 million for the same period in 2018. The effective tax rates were 22.4% and 27.0% for each of the respective periods. The decrease in the effective tax rate between the two periods was primarily due to a $3.5 million increase in the deduction for excess tax benefits related to stock-based compensation, resulting in a decrease in the effective tax rate of 4.7%.
Liquidity and Capital Resources
The Company is leveraged, which makes it vulnerable to changes in general economic conditions. The Company’s ability to meet the future cash requirements described below depends on its 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 the Company’s control. Based on current operations and anticipated future growth, the Company believes that its available cash, anticipated cash flow from operations and available borrowings under the 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 12 months as of the filing date of this Quarterly Report on Form 10-Q. In order to meet future cash needs the Company may, from time to time, borrow under its existing senior secured credit facilities or issue other long- or short-term debt or equity, if the market and the terms of its existing debt arrangements permit. We will continue to evaluate the best use of our operating cash flow among our 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):
Cash paid for interest
As of March 31,
As of December 31,
Long-term debt, including current portion
Unused revolving loan commitments under senior secured credit facilities (1)
166,372
Based on covenant calculations as of March 31, 2019, all of the $166.4 million unused revolving loan commitments under the Company’s senior secured credit facilities were available for borrowing.
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Cash Flows – Operating Activities
Net cash flows provided by operating activities decreased by $54.8 million during the three months ended March 31, 2019, compared to the same period in 2018. This was primarily due to decreases in the sources of cash resulting from timing of accounts receivable collections of $38.8 million and from timing of payments to vendors of $17.0 million. Additionally, our corporate, direct operating and selling, general and administrative expenses (excluding non-cash transactions) of $13.5 million during the period exceeded the increase in our net revenue (excluding trade and barter) of $11.3 million. These transactions were partially offset by a decrease in payments for broadcast rights of $1.8 million.
Cash Flows – Investing Activities
Net cash flows used in investing activities decreased by $87.3 million during the three months ended March 31, 2019, compared to the same period in 2018. In 2018, we completed our acquisition of LKQD for a cash purchase price of $96.9 million, less $11.2 million of cash acquired and $2.9 million amount due to the former owners, accounting for a total $82.8 million decrease between the periods. Capital expenditures increased during the three months ended March 31, 2019 by $7.5 million compared to the same period in 2018, primarily due to increased spending related to station repacking costs. Other activity included increases in reimbursement from the FCC for station repack costs of $14.2 million and a decrease in proceeds from disposal of assets of $2.3 million between the two periods.
Cash Flows – Financing Activities
Net cash flows used in financing activities increased by $42.5 million during the three months ended March 31, 2019, compared to the same period in 2018.
In 2019, we made payments on the outstanding principal balance of our term loans of $91.8 million, paid dividends to our common stockholders of $20.6 million ($0.45 per share each quarter), paid cash for taxes in exchange for shares of common stock withheld of $9.3 million resulting from net share settlements of certain stock-based compensation, completed our acquisition of the noncontrolling interest of KHII for a cash payment of $6.4 million, paid for capital lease and software obligations of $0.7 million and received proceeds from the exercise of stock options of $1.4 million.
In 2018, we borrowed $44.0 million under our revolving credit facility to partially fund our acquisition of Likqid Media Inc. We also received $1.9 million proceeds from stock option exercises. These cash flow increases were partially offset by repayments of outstanding obligations under our revolving credit facility of $24.0 million, repayments of outstanding principal balance under the Company’s term loans of $50.6 million, purchases of treasury stock of $33.8 million, payments of dividends to our common stockholders of $17.3 million ($0.375 per share each quarter), cash payment for taxes in exchange for shares of common stock withheld of $4.5 million resulting from net share settlements of certain stock-based compensation and payments for capital lease and software obligations of $0.7 million.
Our senior secured credit facility may limit the amount of dividends we may pay to stockholders over the term of the agreement.
Future Sources of Financing and Debt Service Requirements
As of March 31, 2019, the Company had total combined debt of $3.9 billion, net of financing costs and discounts, which represented 67.3% of the Company’s combined capitalization. The Company’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.
The following table summarizes the principal indebtedness scheduled to mature for the periods referenced as of March 31, 2019 (in thousands):
2020-2021
2022-2023
Nexstar senior secured credit facility
2,057,758
31,108
99,546
688,524
1,238,580
Mission senior secured credit facility
227,956
1,713
4,571
217,101
Marshall senior secured credit facility
50,606
Shield senior secured credit facility
22,672
861
2,755
19,056
5.875% senior unsecured notes due 2022
400,000
6.125% senior unsecured notes due 2022
275,000
5.625% senior unsecured notes due 2024
900,000
3,933,992
84,288
106,872
1,387,151
2,355,681
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We make semiannual interest payments on our $275.0 million 6.125% Notes on February 15 and August 15 of each year. We make semiannual interest payments on the 5.625% Notes on February 1 and August 1 of each year. We also make semiannual payments on the 5.875% Notes on May 15 and November 15 of each year. Interest payments on our, Mission’s, Marshall’s and Shield’s senior secured credit facilities are generally paid every one to three months and are payable based on the type of interest rate selected.
The terms of our, Mission’s, Marshall’s and Shield’s senior secured credit facilities, as well as the indentures governing our 6.125% Notes, 5.625% Notes and 5.875% Notes, limit, but do not prohibit us, Mission, Marshall, or Shield, from incurring substantial amounts of additional debt in the future.
The Company does not have any rating downgrade triggers that would accelerate the maturity dates of its debt. However, a downgrade in the Company’s credit rating could adversely affect its ability to renew the existing credit facilities, obtain access to new credit facilities or otherwise issue debt in the future and could increase the cost of such debt.
The Company had $166.4 million of total unused revolving loan commitments under the senior secured credit facilities, all of which were available for borrowing, based on the covenant calculations as of March 31, 2019. 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 the senior secured credit facilities will reduce the Company’s future borrowing capacity and the amount of total unused revolving loan commitments.
On April 26, 2018, our Board of Directors approved an additional $200 million increase in our share repurchase authorization to repurchase our Class A common stock. As of March 31, 2019, the remaining available amount under the share repurchase authorization was $201.9 million. There were no share repurchases of Nexstar’s Class A common stock during the three months ended March 31, 2019.
On November 30, 2018, we entered into a definitive merger agreement with Tribune to acquire Tribune’s outstanding equity for $46.50 per share in a cash transaction that is valued at $6.4 billion, consisting of the merger cash consideration and the refinancing of Tribune's outstanding debt. The merger is not subject to any financing condition and we received committed financing up to a maximum of $6.4 billion from a group of commercial banks to provide the debt financing to consummate the merger and the refinancing of certain of the existing indebtedness of Tribune and related transactions. The merger has been approved by the boards of directors of both companies and the stockholders of Tribune and is projected to close in the third quarter of 2019, subject to FCC approval, other regulatory approvals and satisfaction of other customary closing conditions.
In connection with obtaining the HSR approval and the FCC approval, we agreed to divest one or more television stations in certain DMAs. We also agreed to divest certain additional stations in order to comply with the FCC national cap.
On March 20, 2019, we entered into definitive asset purchase agreements to sell a total of nineteen stations in fifteen markets. Under the terms of the agreements, TEGNA Inc. will acquire eleven stations in eight markets for cash consideration of $740 million (subject to customary purchase price adjustments) and The E.W. Scripps Company will acquire eight stations in seven markets for cash consideration of $580 million (subject to customary purchase price adjustments).
On April 8, 2019, we entered into a definitive asset purchase agreement to sell to Circle City Broadcasting I, Inc., a newly-formed minority-led broadcast company managed by DuJuan McCoy, two stations in Indianapolis, IN -- WISH, the CW affiliate, and WNDY, the MyNetwork TV affiliate -- for $42.5 million in cash.
The consummation of each divestiture transaction is expected to occur simultaneously with the closing of the Nexstar and Tribune merger.
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Our credit agreement contains a covenant which requires us to comply with a maximum consolidated first lien net leverage ratio of 4.25 to 1.00. The financial covenant, which is formally calculated on a quarterly basis, is based on our combined results. The Mission, Marshall and Shield amended credit agreements do not contain financial covenant ratio requirements but do provide for default in the event we do not comply with all covenants contained in our credit agreement. As of March 31, 2019, we were in compliance with our financial covenant. We believe Nexstar, Mission, Marshall, and Shield will be able to maintain compliance with all covenants contained in the credit agreements governing their senior secured facilities and the indentures governing our 6.125% Notes, our 5.625% Notes and our 5.875% Notes for a period of at least the next 12 months from March 31, 2019.
No Off-Balance Sheet Arrangements
As of March 31, 2019, we did not have any relationships with unconsolidated entities or financial partnerships, such as entities often referred to as structured finance or VIEs, which would have been established for the purpose of facilitating off-balance sheet arrangements or other contractually narrow or limited purposes. All of our arrangements with our VIEs in which we are the primary beneficiary are on-balance sheet arrangements. Our variable interests in other entities are obtained through local service agreements, which have valid business purposes and transfer certain station activities from the station owners to us. We are, therefore, not materially exposed to any financing, liquidity, market or credit risk that could arise if we had engaged in such relationships.
Critical Accounting Policies and Estimates
Our Condensed Consolidated Financial Statements have been prepared in accordance with U.S. GAAP, which requires us to make estimates and assumptions that affect the reported amounts of assets and liabilities and the disclosure of contingent assets and liabilities as of the date of the Condensed Consolidated Financial Statements and reported amounts of revenue and expenses during the period. On an ongoing basis, we evaluate our estimates, including those related to business acquisitions, goodwill and intangible assets, property and equipment, broadcast rights, retransmission compensation, pension and postretirement benefits, trade and income taxes. We base our estimates on historical experience and on various other assumptions that we believe to be reasonable under the circumstances, the results of which form the basis for making judgments about the carrying values of assets and liabilities that are not readily apparent from other sources. Actual results may differ from those estimates.
Information with respect to the Company’s critical accounting policies which it believes could have the most significant effect on the Company’s reported results and require subjective or complex judgments by management is contained in our Annual Report on Form 10-K for the year ended December 31, 2018. Management believes that as of March 31, 2019, there has been no material change to this information.
As discussed in Note 2, the Company adopted the FASB issued ASU No. 2016-02, Leases (Topic 842) and all related amendments. ASC 842 establishes a comprehensive new lease accounting model that requires the recording of assets and liabilities arising from leases on the balance sheet accompanied by enhanced qualitative and quantitative disclosures in the notes to the financial statements. The Company adopted this standard effective January 1, 2019 using the optional transition method. As a result, financial information for reporting periods beginning after January 1, 2019 is presented under ASC 842, while comparative financial information has not been adjusted and continues to be reported in accordance with the Company’s historical accounting policy for revenue recognition prior to the adoption of ASC 842. The standard had a material impact on our Condensed Consolidated Balance Sheets but did not impact our operating results, cash flows or equity. The most significant impact was the recognition of ROU assets and lease liabilities for operating leases, while our accounting for finance leases remained substantially unchanged. Comparative information has not been restated and continues to be reported under the accounting standards in effect for those periods. See Note 2 to the Condensed Consolidated Financial Statements in Part I, Item 1 of this Form 10-Q for the Company’s updated accounting policy on leases.
Refer to Note 2 of our Condensed Consolidated Financial Statements in Part I, Item 1 of this Quarterly Report on Form 10-Q for a discussion of recently issued accounting pronouncements, including our expected date of adoption and effects on results of operations and financial position.
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Cautionary Note Regarding Forward-Looking Statements
This Quarterly Report on Form 10-Q contains “forward-looking statements” within the meaning of Section 27A of the Securities Act of 1933, as amended, and Section 21E of the Securities Exchange Act of 1934, as amended (the “Exchange Act”). All statements other than statements of historical fact are “forward-looking statements” for purposes of federal and state securities laws, including: any projections or expectations of earnings, revenue, financial performance, liquidity and capital resources or other financial items; any assumptions or projections about the television broadcasting industry; any statements of our plans, strategies and objectives for our future operations, performance, liquidity and capital resources or other financial items; any statements concerning proposed new products, services or developments; any statements regarding future economic conditions or performance; any statements of belief; and any statements of assumptions underlying any of the foregoing. Forward-looking statements may include the words “may,” “will,” “should,” “could,” “would,” “predicts,” “potential,” “continue,” “expects,” “anticipates,” “future,” “intends,” “plans,” “believes,” “estimates” and other similar words.
Although we believe that the expectations reflected in our forward-looking statements are reasonable, actual results could differ from a projection or assumption in any of our forward-looking statements. Our future financial position and results of operations, as well as any forward-looking statements, are subject to change and inherent risks and uncertainties, including those described in our Annual Report on Form 10-K for the year ended December 31, 2018 and in our other filings with the Securities and Exchange Commission. The forward-looking statements made in this Quarterly Report on Form 10-Q are made only as of the date hereof, and we do not have or undertake any obligation to update any forward-looking statements to reflect subsequent events or circumstances.
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Interest Rate Risk
The Company’s exposure to market risk for changes in interest rates relates primarily to its long-term debt obligations. The Company’s exposure to market risk did not change materially since December 31, 2018.
The term loan borrowings at March 31, 2019 under the Company’s senior secured credit facilities bear interest rates ranging from 3.99% to 4.74%, which represented the base rate, or the LIBOR plus the applicable margin, as defined. Interest is payable in accordance with the credit agreements.
If LIBOR were to increase by 100 basis points, or one percentage point, from its March 31, 2019 level, the Company’s annual interest expense would increase and cash flow from operations would decrease by approximately $23.6 million, based on the outstanding balances of the Company’s senior secured credit facilities as of March 31, 2019. An increase of 50 basis points in LIBOR would result in a $11.8 million increase in annual interest expense and decrease in cash flow from operations. If LIBOR were to decrease either by 100 basis points or 50 basis points, the Company’s annual interest would decrease and cash flow from operations would increase by $23.6 million and $11.8 million, respectively. Our 5.625% Notes, 6.125% Notes and 5.875% Notes are fixed rate debt obligations and therefore are not exposed to market interest rate changes. As of March 31, 2019, the Company has no financial instruments in place to hedge against changes in the benchmark interest rates on its senior secured credit facilities.
Impact of Inflation
We believe that the Company’s results of operations are not affected by moderate changes in the inflation rate.
Evaluation of Disclosure Controls and Procedures
Nexstar’s management, with the participation of its President and Chief Executive Officer along with its Chief Financial Officer, conducted an evaluation as of the end of the period covered by this report of the effectiveness of the design and operation of Nexstar’s disclosure controls and procedures as defined in Rules 13a-15(e) and 15d-15(e) under the Exchange Act.
Based upon that evaluation, Nexstar’s President and Chief Executive Officer and its Chief Financial Officer concluded that as of the end of the period covered by this report, Nexstar’s disclosure controls and procedures were effective, at a reasonable assurance level, to ensure that information required to be disclosed in the reports that it files or submits under the Exchange Act (i) is recorded, processed, summarized and reported within the time periods specified in the SEC’s rules and forms and (ii) is accumulated and communicated to Nexstar’s management, including its President and Chief Executive Officer and its Chief Financial Officer, as appropriate to allow timely decisions regarding required disclosure.
Changes in Internal Control over Financial Reporting
As of the quarter ended March 31, 2019, there have been no changes in Nexstar’s internal control over financial reporting that have materially affected, or are reasonably likely to materially affect, its internal control over financial reporting.
PART II. OTHER INFORMATION
From time to time, the Company is involved in litigation that arises from the ordinary operations of business, such as contractual or employment disputes or other general actions. In the event of an adverse outcome of these proceedings, the Company believes the resulting liabilities would not have a material adverse effect on its financial condition or results of operations.
On March 16, 2018, a group of companies including Nexstar (the “Defendants”) received a Civil Investigative Demand from the Antitrust Division of the DOJ regarding an investigation into the exchange of certain information related to the pacing of sales related to the same period in the prior year among broadcast stations in some DMAs in alleged violation of federal antitrust law. Other Defendants entered into a proposed consent decree with the DOJ on November 6, 2018. Without admitting any wrongdoing, Nexstar agreed to settle the matter with the DOJ on December 5, 2018. The DOJ filed an amended complaint adding Nexstar to the consent decree on December 13, 2018. The consent decree, which settles any claims by the government of alleged violations of federal antitrust laws in connection with the alleged information sharing, does not include any financial penalty. Pursuant to the consent decree, we have agreed not to exchange certain non-public information with other stations operating in the same DMA and to implement certain antitrust compliance measures and to monitor and report on compliance with the consent decree.
On July 30, 2018, Clay, Massey & Associates, PC filed an antitrust class action complaint in the U.S. District Court for the Northern District of Illinois on behalf of itself and all others similarly situated against Gray Television, Inc., Hearst Communications, Nexstar Media Group, Inc., Tegna Inc., Tribune Media Company and Sinclair Broadcast Group, Inc. The lawsuit alleges unlawful coordination between broadcast television station owners to artificially increase prices of television spot advertisements in violation of Section 1 of the Sherman Act (15 U.S.C. §1). Nexstar has since been named in 15 similar complaints, including ten in the Northern District of Illinois, three in the Southern District of New York, and two in the District of Maryland. Each complaint includes similar allegations and claims a violation of Section 1 of the Sherman Act. One, filed in the District of Maryland, also alleges violations of state antitrust and consumer protection statutes and a claim for unjust enrichment.
There are no material changes from the risk factors previously disclosed in Part I, Item 1A in our Annual Report on Form 10-K for the year ended December 31, 2018.
None.
The unaudited financial statements of Mission Broadcasting, Inc. as of March 31, 2019 and December 31, 2018 and for the three months ended March 31, 2019 and 2018, as filed in Mission Broadcasting, Inc.’s Quarterly Report on Form 10-Q, are incorporated herein by reference.
Exhibit No.
Description
2.1
Asset Purchase Agreement, dated as of March 20, 2019, by and among Nexstar Media Group, Inc., Belo Holdings, Inc. and TEGNA Inc. (Incorporated by reference to Exhibit 2.1 to Current Report on Form 8-K (File No. 000-50478) filed by Nexstar Media Group, Inc. on March 26, 2019).
2.2
Asset Purchase Agreement, dated as of March 20, 2019, by and among Nexstar Media Group, Inc., Scripps Media, Inc. and Scripps Broadcasting Holdings, LLC. (Incorporated by reference to Exhibit 2.2 to Current Report on Form 8-K (File No. 000-50478) filed by Nexstar Media Group, Inc. on March 26, 2019).
10.1
Amendment to Executive Employment Agreement, dated as of January 15, 2019 between Perry A. Sook and Nexstar Broadcasting, Inc. (Incorporated by reference to Exhibit 10.1 to Current Report on Form 8-K (File No. 000-50478) filed by Nexstar Media Group, Inc. on January 22, 2019).
31.1
Certification of Perry A. Sook pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.*
31.2
Certification of Thomas E. Carter pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.*
32.1
Certification of Perry A. Sook pursuant to 18 U.S.C. ss. 1350.*
32.2
Certification of Thomas E. Carter pursuant to 18 U.S.C. ss. 1350.*
101
The Company’s unaudited Condensed Consolidated Financial Statements and related Notes for the quarter ended March 31, 2019 from this Quarterly Report on Form 10-Q, formatted in iXBRL (Inline eXtensible Business Reporting Language).*
*
Filed herewith
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.
/S/ PERRY A. SOOK
By:
Perry A. Sook
Its:
President and Chief Executive Officer (Principal Executive Officer)
/S/ THOMAS E. CARTER
Thomas E. Carter
Chief Financial Officer (Principal Accounting and Financial Officer)
Dated: May 8, 2019