UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, DC 20549
FORM
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QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 |
For the quarterly period ended
OR
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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:
(Exact Name of Registrant as Specified in Its Charter)
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(State of Incorporation or Organization) |
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(I.R.S. Employer Identification No.) |
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(Address of Principal Executive Offices) |
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(Zip Code) |
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(Registrant’s Telephone Number, Including Area Code)
Securities registered pursuant to Section 12(b) of the Act:
Title of each class |
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Name of each exchange on which registered |
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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.
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).
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 |
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Accelerated filer |
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Non-accelerated filer |
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Smaller reporting company |
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Emerging growth company |
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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
As of August 5, 2020, the registrant had
TABLE OF CONTENTS
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PART I |
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FINANCIAL INFORMATION |
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ITEM 1. |
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Condensed Consolidated Balance Sheets as of June 30, 2020 and December 31, 2019 |
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2 |
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Condensed Consolidated Statements of Cash Flows for the six months ended June 30, 2020 and 2019 |
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ITEM 2. |
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Management’s Discussion and Analysis of Financial Condition and Results of Operations |
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ITEM 3. |
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48 |
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ITEM 4. |
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48 |
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PART II |
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OTHER INFORMATION |
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ITEM 1. |
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49 |
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ITEM 1A. |
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49 |
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ITEM 2. |
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50 |
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ITEM 3. |
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50 |
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ITEM 4. |
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50 |
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ITEM 5. |
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50 |
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ITEM 6. |
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51 |
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PART I. FINANCIAL INFORMATION
ITEM 1. |
Financial Statements |
NEXSTAR MEDIA GROUP, INC.
CONDENSED CONSOLIDATED BALANCE SHEETS
(in thousands, except for share and per share information, unaudited)
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June 30, |
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December 31, |
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2020 |
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2019 |
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ASSETS |
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Current assets: |
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Cash and cash equivalents |
$ |
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$ |
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Restricted cash and cash equivalents |
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Accounts receivable, net of allowance for doubtful accounts of $ |
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Spectrum asset |
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- |
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Prepaid expenses and other current assets |
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Total current assets |
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Property and equipment, net |
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Goodwill |
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FCC licenses |
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Network affiliation agreements, net |
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Other intangible assets, net |
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Assets held for sale |
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Investments |
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Other noncurrent assets, net |
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Total assets(1) |
$ |
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$ |
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LIABILITIES AND STOCKHOLDERS’ EQUITY |
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Current liabilities: |
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Current portion of debt |
$ |
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$ |
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Accounts payable |
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Accrued expenses |
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Income tax payable |
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Liability to surrender spectrum asset |
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- |
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Other current liabilities |
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Total current liabilities |
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Debt |
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Deferred tax liabilities |
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Other noncurrent liabilities |
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Total liabilities(1) |
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Commitments and contingencies (Note 15) |
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Stockholders' equity: |
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Preferred stock - $ |
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Class A Common stock - $ outstanding as of December 31, 2019 |
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Class B Common stock - $ at each of June 30, 2020 and December 31, 2019 |
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- |
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Class C Common stock - $ at each of June 30, 2020 and December 31, 2019 |
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- |
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Additional paid-in capital |
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Accumulated other comprehensive income |
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Retained earnings |
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Treasury stock - at cost; |
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Total Nexstar Media Group, Inc. stockholders’ equity |
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Noncontrolling interests |
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Total stockholders’ equity |
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Total liabilities and stockholders’ equity |
$ |
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$ |
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The accompanying Notes are an integral part of these Condensed Consolidated Financial Statements.
(1) |
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1
NEXSTAR MEDIA GROUP, INC.
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(in thousands, except per share information, unaudited)
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Three Months Ended |
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Six Months Ended |
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June 30, |
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June 30, |
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2020 |
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2019 |
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2020 |
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2019 |
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Net revenue |
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$ |
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$ |
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$ |
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$ |
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Operating expenses (income): |
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Direct operating expenses, excluding depreciation and amortization |
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Selling, general and administrative expenses, excluding depreciation and amortization |
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Amortization of broadcast rights |
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Amortization of intangible assets |
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Depreciation |
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Reimbursement from the FCC related to station repack |
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Loss (gain) on disposal of stations and entities, net |
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- |
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Change in the estimated fair value of contingent consideration attributable to a merger |
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- |
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Gain on relinquishment of spectrum |
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- |
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- |
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Total operating expenses |
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Income from operations |
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Income (loss) on equity investments, net |
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( |
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Interest expense, net |
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( |
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Loss on extinguishment of debt |
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- |
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( |
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Pension and other postretirement plans credit, net |
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Other (expenses) income, net |
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Income before income taxes |
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Income tax expense |
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( |
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( |
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( |
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Net income |
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Net loss (income) attributable to noncontrolling interests |
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( |
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( |
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Net income attributable to Nexstar Media Group, Inc. |
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$ |
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$ |
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$ |
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$ |
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Net income per common share attributable to Nexstar Media Group, Inc.: |
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Basic |
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$ |
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$ |
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$ |
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$ |
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Diluted |
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$ |
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$ |
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$ |
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$ |
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Weighted average number of common shares outstanding: |
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Basic |
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Diluted |
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The accompanying Notes are an integral part of these Condensed Consolidated Financial Statements.
2
NEXSTAR MEDIA GROUP, INC.
CONDENSED CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS’ EQUITY
For the Three Months Ended June 30, 2020 and 2019
(in thousands, except share information, unaudited)
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Accumulated |
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Class A |
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Additional |
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Other |
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Total |
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Common Stock |
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Paid-In |
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Retained |
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Comprehensive |
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Treasury Stock |
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Noncontrolling |
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Stockholders’ |
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Shares |
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Amount |
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Capital |
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Earnings |
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Income (Loss) |
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Shares |
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Amount |
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interests |
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Equity |
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Balances as of March 31, 2020 |
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$ |
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$ |
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$ |
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$ |
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( |
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$ |
( |
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$ |
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$ |
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Stock-based compensation expense |
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- |
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- |
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- |
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- |
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- |
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- |
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- |
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Vesting of restricted stock units and exercise of stock options |
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- |
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- |
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( |
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- |
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- |
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- |
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Dividends declared on common stock ($ |
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- |
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- |
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- |
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( |
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- |
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- |
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- |
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- |
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( |
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Net income (loss) |
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- |
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- |
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- |
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- |
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- |
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- |
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( |
) |
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Balances as of June 30, 2020 |
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$ |
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$ |
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$ |
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$ |
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( |
) |
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$ |
( |
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$ |
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$ |
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Balances as of March 31, 2019 |
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$ |
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$ |
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$ |
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$ |
( |
) |
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( |
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$ |
( |
) |
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$ |
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$ |
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Stock-based compensation expense |
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- |
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- |
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- |
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- |
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- |
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- |
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- |
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Vesting of restricted stock units and exercise of stock options |
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- |
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- |
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( |
) |
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- |
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- |
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- |
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( |
) |
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Dividends declared on common stock ($ |
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- |
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- |
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- |
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( |
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- |
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- |
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- |
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- |
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( |
) |
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Net income |
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- |
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- |
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- |
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- |
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- |
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- |
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Balances as of June 30, 2019 |
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$ |
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$ |
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$ |
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$ |
( |
) |
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( |
) |
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$ |
( |
) |
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$ |
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$ |
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The accompanying Notes are an integral part of these Condensed Consolidated Financial Statements.
3
NEXSTAR MEDIA GROUP, INC.
CONDENSED CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS’ EQUITY
For the Six Months Ended June 30, 2020 and 2019
(in thousands, except share information, unaudited)
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Accumulated |
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Class A |
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Additional |
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Other |
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Total |
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Common Stock |
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Paid-In |
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Retained |
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Comprehensive |
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Treasury Stock |
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Noncontrolling |
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Stockholders’ |
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Shares |
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Amount |
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Capital |
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Earnings |
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Income (Loss) |
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Shares |
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Amount |
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interests |
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Equity |
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Balances as of December 31, 2019 |
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$ |
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$ |
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$ |
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$ |
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( |
) |
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$ |
( |
) |
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$ |
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$ |
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Purchase of treasury stock |
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- |
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- |
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- |
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- |
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- |
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( |
) |
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( |
) |
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- |
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( |
) |
Stock-based compensation expense |
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- |
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- |
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- |
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- |
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- |
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- |
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- |
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Vesting of restricted stock units and exercise of stock options |
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- |
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- |
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( |
) |
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- |
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- |
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- |
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( |
) |
Dividends declared on common stock ($ |
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- |
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- |
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- |
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( |
) |
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- |
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- |
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- |
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- |
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( |
) |
Contribution from a noncontrolling interest |
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- |
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- |
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- |
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- |
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- |
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- |
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- |
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Disposal of an entity |
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- |
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- |
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( |
) |
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( |
) |
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- |
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- |
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- |
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- |
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( |
) |
Net income (loss) |
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- |
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- |
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- |
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- |
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- |
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|
- |
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( |
) |
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Balances as of June 30, 2020 |
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$ |
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$ |
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$ |
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$ |
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( |
) |
|
$ |
( |
) |
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$ |
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$ |
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Balances as of December 31, 2018 |
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$ |
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$ |
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|
$ |
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|
|
$ |
( |
) |
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|
( |
) |
|
$ |
( |
) |
|
$ |
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|
$ |
|
|
Stock-based compensation expense |
|
|
- |
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- |
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|
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|
- |
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- |
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- |
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|
|
- |
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|
|
- |
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|
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Vesting of restricted stock units and exercise of stock options |
|
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- |
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|
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- |
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( |
) |
|
|
- |
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- |
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- |
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( |
) |
Dividends declared on common stock ($ |
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- |
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- |
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- |
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( |
) |
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- |
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- |
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- |
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- |
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( |
) |
Purchase of noncontrolling interest from a consolidated variable interest entity |
|
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- |
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- |
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- |
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- |
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|
- |
|
|
|
- |
|
|
|
- |
|
|
|
( |
) |
|
|
( |
) |
Net income (loss) |
|
|
- |
|
|
|
- |
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|
|
- |
|
|
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|
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|
|
- |
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|
- |
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|
- |
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Balances as of June 30, 2019 |
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$ |
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$ |
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$ |
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$ |
( |
) |
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( |
) |
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$ |
( |
) |
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$ |
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$ |
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The accompanying Notes are an integral part of these Condensed Consolidated Financial Statements.
4
NEXSTAR MEDIA GROUP, INC.
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(in thousands, unaudited)
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Six Months Ended |
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June 30, |
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2020 |
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2019 |
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Cash flows from operating activities: |
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Net income |
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$ |
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$ |
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Adjustments to reconcile net income to net cash provided by operating activities: |
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Amortization of intangible assets |
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Amortization of broadcast rights |
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Depreciation of property and equipment |
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Stock-based compensation expense |
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Provision for bad debt |
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Amortization of debt financing costs, debt discounts and premium |
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Loss on extinguishment of debt |
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Gain on asset disposal, net |
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( |
) |
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( |
) |
Deferred income taxes |
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( |
) |
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Gain on relinquishment of spectrum |
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( |
) |
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- |
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Gain on disposal of stations and entities, net |
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( |
) |
|
|
- |
|
Change in the estimated fair value of contingent consideration attributable to a merger |
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|
- |
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Spectrum repack reimbursements |
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|
( |
) |
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|
( |
) |
Payments for broadcast rights |
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|
( |
) |
|
|
( |
) |
(Income) loss on equity investments, net |
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|
( |
) |
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Distribution from equity investments - return on capital |
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|
|
|
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|
- |
|
Other operating activities, net |
|
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( |
) |
|
|
( |
) |
Changes in operating assets and liabilities, net of acquisitions and dispositions: |
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Accounts receivable |
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Prepaid expenses and other current assets |
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|
( |
) |
Other noncurrent assets |
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( |
) |
Accounts payable |
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Accrued expenses and other current liabilities |
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( |
) |
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( |
) |
Income tax payable |
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|
( |
) |
Other noncurrent liabilities |
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( |
) |
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( |
) |
Net cash provided by operating activities |
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Cash flows from investing activities: |
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Purchases of property and equipment |
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( |
) |
|
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( |
) |
Payments for acquisitions, net of cash acquired |
|
|
( |
) |
|
|
- |
|
Proceeds from sale of stations and entities |
|
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|
|
- |
|
Proceeds from resolution of acquired contingency |
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|
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|
- |
|
Spectrum repack reimbursements from the FCC |
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Proceeds from disposals of property and equipment |
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Proceeds received from corporate-owned life insurance policies |
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Net cash provided by (used in) investing activities |
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( |
) |
Cash flows from financing activities: |
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|
|
|
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|
|
Repayments of long-term debt |
|
|
( |
) |
|
|
( |
) |
Payments for debt financing costs |
|
|
( |
) |
|
|
( |
) |
Purchase of treasury stock |
|
|
( |
) |
|
|
- |
|
Common stock dividends paid |
|
|
( |
) |
|
|
( |
) |
Payments for finance lease and capitalized software obligations |
|
|
( |
) |
|
|
( |
) |
Cash paid for shares withheld for taxes |
|
|
( |
) |
|
|
( |
) |
Proceeds from exercise of stock options |
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|
|
|
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|
|
Contribution from a noncontrolling interest |
|
|
|
|
|
|
- |
|
Purchase of noncontrolling interests |
|
|
- |
|
|
|
( |
) |
Net cash used in financing activities |
|
|
( |
) |
|
|
( |
) |
Net increase (decrease) in cash, cash equivalents and restricted cash |
|
|
|
|
|
|
( |
) |
Cash, cash equivalents and restricted cash at beginning of period |
|
|
|
|
|
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|
|
Cash, cash equivalents and restricted cash at end of period |
|
$ |
|
|
|
$ |
|
|
Supplemental information: |
|
|
|
|
|
|
|
|
Interest paid |
|
$ |
|
|
|
$ |
|
|
Income taxes paid, net of refunds |
|
$ |
|
|
|
$ |
|
|
Non-cash investing and financing activities: |
|
|
|
|
|
|
|
|
Accrued purchases of property and equipment |
|
$ |
|
|
|
$ |
|
|
Noncash purchases of property and equipment |
|
$ |
|
|
|
$ |
- |
|
Right-of-use assets obtained in exchange for operating lease obligations(1) |
|
$ |
|
|
|
$ |
|
|
The accompanying Notes are an integral part of these Condensed Consolidated Financial Statements.
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|
(1) |
Amounts for the six months ended June 30, 2019 include the transition adjustment of $ |
5
NEXSTAR MEDIA GROUP, INC.
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
Note 1: Organization and Business Operations
Nexstar Media Group, Inc., together with its wholly owned subsidiaries (“Nexstar”), a Delaware corporation, 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. As of June 30, 2020, Nexstar owned, operated, programmed or provided sales and other services to
Note 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):
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June 30, 2020 |
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December 31, 2019 |
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Current assets |
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$ |
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$ |
|
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Property and equipment, net |
|
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Goodwill |
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FCC licenses |
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Network affiliation agreements, net |
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Other intangible assets, net |
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- |
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Other noncurrent assets, net |
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Total assets |
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$ |
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|
|
$ |
|
|
|
|
|
|
|
|
|
|
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Current liabilities |
|
$ |
|
|
|
$ |
|
|
Noncurrent liabilities |
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|
|
|
|
|
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Total liabilities |
|
$ |
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|
$ |
|
|
6
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, for instance, uncertainties surrounding the business outlook caused by Coronavirus Disease 2019 (“COVID-19”). In December 2019, COVID-19 was reported and has spread globally, including to every state in the United States. In March 2020, the World Health Organization declared COVID-19 a pandemic and the United States government declared a national emergency with respect to COVID-19. COVID-19 has created and may continue to create significant uncertainty in global financial markets, which may reduce demand for the Company’s advertising, retransmission, and digital services, impact the productivity of its workforce, reduce its access to capital, and harm its business and results of operations.
The ongoing effect of the COVID-19 pandemic had an adverse impact on the Company’s financial results mostly in the first part of the second quarter in 2020. This was followed by a significant improvement in the Company’s financial results in the remaining part of the second quarter in 2020 as certain areas throughout the United States permitted the re-opening of non-essential businesses. As of June 30, 2020, the Company remained profitable. Its current year results were also higher than prior year results primarily due to contribution from the acquisition of Tribune Media Company (“Tribune”) in September 2019. Overall, the disruptions from COVID-19 did not have a material impact on the Company’s liquidity. As of June 30, 2020, the Company’s unrestricted cash on hand amounted to $
Interim Financial Statements
The Condensed Consolidated Financial Statements as of June 30, 2020 and for the three and six months ended June 30, 2020 and 2019 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 United States 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 related disclosure of contingent assets and liabilities at the date of the financial statements and reported amounts of revenue and expenses during the period. Results of operations for interim periods are not necessarily indicative of results for the full year. Estimates are used for, but are not limited to, allowance for doubtful accounts, valuation of assets acquired and liabilities assumed in business combinations, distribution revenue recognized, income taxes, the recoverability of goodwill, FCC licenses and long-lived assets, the recoverability of investments, the recoverability of broadcast rights and the useful lives of property and equipment and intangible assets. As of June 30, 2020, the Company is not aware of any specific event or circumstance that would require an update to its estimates or judgments or to revise the carrying value of its assets or liabilities. However, these estimates and judgments may change as new events occur and additional information is obtained, which may result in changes being recognized in the Company’s consolidated financial statements in future periods. While the Company considered the effects of COVID-19 in its estimates and assumptions, due to the current level of uncertainty over the economic and operational impacts of COVID-19 on its business, there may be other judgments and assumptions that were not currently considered. Such judgments and assumptions could result in a meaningful impact on the Company’s consolidated financial statements in future periods. Actual results could differ from those estimates and any such differences may have a material impact on the Company’s consolidated financial statements.
These Condensed Consolidated Financial Statements should be read in conjunction with the Consolidated Financial Statements and related Notes included in Nexstar’s Annual Report on Form 10-K for the year ended December 31, 2019. The balance sheet as of December 31, 2019 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.
7
Variable Interest Entities
The Company may determine that an entity is a VIE as a result of local service agreements entered into with that 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 9), (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 such VIE which permit Nexstar to acquire the assets and assume the liabilities of each of these VIEs’ stations, subject to FCC consent.
The following table summarizes the various local service agreements Nexstar had in effect as of June 30, 2020 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 |
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.
8
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):
|
|
June 30, 2020 |
|
|
December 31, 2019 |
|
||
Current assets: |
|
|
|
|
|
|
|
|
Cash and cash equivalents |
|
$ |
|
|
|
$ |
|
|
Accounts receivable, net |
|
|
|
|
|
|
|
|
Prepaid expenses and other current assets |
|
|
|
|
|
|
|
|
Total current assets |
|
|
|
|
|
|
|
|
Property and equipment, net |
|
|
|
|
|
|
|
|
Goodwill |
|
|
|
|
|
|
|
|
FCC licenses |
|
|
|
|
|
|
|
|
Network affiliation agreements, net |
|
|
|
|
|
|
|
|
Other intangible assets, net |
|
|
|
|
|
|
|
|
Other noncurrent assets, net |
|
|
|
|
|
|
|
|
Total assets |
|
$ |
|
|
|
$ |
|
|
|
|
|
|
|
|
|
|
|
Current liabilities: |
|
|
|
|
|
|
|
|
Current portion of debt |
|
$ |
|
|
|
$ |
|
|
Interest payable |
|
|
|
|
|
|
|
|
Other current liabilities |
|
|
|
|
|
|
|
|
Total current liabilities |
|
|
|
|
|
|
|
|
Debt |
|
|
|
|
|
|
|
|
Deferred tax liabilities |
|
|
|
|
|
|
|
|
Other noncurrent liabilities |
|
|
|
|
|
|
|
|
Total liabilities |
|
$ |
|
|
|
$ |
|
|
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.
9
On December 1, 2014, Nexstar met the accounting criteria for a controlling financial interest in Marshall Broadcasting Group, Inc. (“Marshall”) as a result of (i) local service agreements Nexstar had with the Marshall stations (JSAs and SSAs) as of that date, (ii) Nexstar’s guarantee as of that date of the obligations incurred under Marshall’s senior secured credit facility, and (iii) Nexstar having power as of that date over activities affecting Marshall’s significant economic performance, including management advice and consultation on broadcast matters, the ability to sell certain advertising on the Marshall stations, and the production of the Marshall stations’ news and other programming. Thus, Nexstar consolidated Marshall and its stations beginning on December 1, 2014. In December 2019, Marshall filed a voluntary petition for Chapter 11 protection in the U.S. Bankruptcy Court for the Southern District of Texas. Effective on December 6, 2019, the bankruptcy court ordered the cancellation of certain executory contracts between Nexstar and Marshall, including the JSAs. As a result of Marshall’s filing for bankruptcy protection and the cancellation of the JSAs, Nexstar evaluated its remaining business arrangements with Marshall and determined that it still has a variable interest in the entity. The services under the SSAs are still active and Mission, a VIE that is consolidated by Nexstar, is a lender of Marshall. However, Nexstar also determined that it no longer had the power to direct the most significant economic activities of the entity and thus no longer meets the accounting criteria for a controlling financial interest in Marshall due to the bankruptcy court taking control of Marshall’s significant financial affairs. Therefore, in accordance with the applicable accounting standards, Nexstar deconsolidated Marshall’s assets, liabilities and equity effective in December 2019. Accordingly, the operating results and cash flows of Marshall for the three and six months ended June 30, 2020 were excluded and the operating results and cash flows of Marshall for the three and six months ended June 30, 2019 were included in the accompanying Condensed Consolidated Statements of Operations and Consolidated Statements of Cash Flows. The assets and liabilities of Marshall as of June 30, 2020 and December 31, 2019 were excluded in the accompanying Condensed Consolidated Balance Sheets.
On March 30, 2020, Mission entered into an asset purchase agreement to acquire certain assets of the
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):
|
|
Three Months Ended |
|
|
Six Months Ended |
|
||||||||||
|
|
June 30, |
|
|
June 30, |
|
||||||||||
|
|
2020 |
|
|
2019 |
|
|
2020 |
|
|
2019 |
|
||||
Weighted average shares outstanding - basic |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Dilutive effect of equity incentive plan instruments |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted average shares outstanding - diluted |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
During the three months ended June 30, 2020, there were
For the six months ended June 30, 2020 and 2019, stock options and restricted stock units to acquire a weighted average of
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.
10
Recent Accounting Pronouncements
New Accounting Standards Adopted
In April 2019, the Financial Accounting Standards Board (FASB) issued Accounting Standards Update (ASU) 2019-04, “Codification Improvements to Topic 326, Financial Instruments-Credit Losses, Topic 815, Derivatives and Hedging, and Topic 825, Financial Instruments,” which provided certain improvements to ASU 2016-01, “Financial Instruments - Overall (Subtopic 825-10): Recognition and Measurement of Financial Assets and Financial Liabilities,” ASU 2016-13, “Financial Instruments - Credit Losses (Topic 326): Measurement of Credit Losses on Financial Instruments” and ASU 2017-12, “Derivatives and Hedging (Topic 815): Targeted Improvements to Accounting for Hedging Activities.” As the Company has adopted ASU 2016-01 and ASU 2017-12, the improvements in ASU 2019-04 are effective for fiscal years beginning after December 15, 2019, and the interim periods within those fiscal years. The Company adopted this guidance concurrent with our adoption of ASU 2016-13 effective January 1, 2020. The adoption of this standard did not have a material impact on the Company’s Condensed Consolidated Financial Statements and related disclosures and no cumulative-effect adjustment was required.
In March 2019, the FASB issued ASU 2019-02, “Entertainment-Films-Other Assets-Film Costs (Subtopic 926-20) and Entertainment-Broadcasters-Intangibles-Goodwill and Other (Subtopic 920-350).” The standard requires production costs of episodic television series to be capitalized as incurred, which aligns the guidance with the accounting for production costs of films. The guidance also provides that capitalized costs associated with films and license agreements will be tested for impairment based on the lower of unamortized cost or fair value, as opposed to the existing guidance where the impairment test is based on estimated net realizable value, and also includes additional disclosure requirements. The standard should be applied prospectively. The Company adopted this standard effective January 1, 2020. The adoption of this standard did not have a material impact on the Company’s Condensed Consolidated Financial Statements and related disclosures.
In October 2018, the FASB issued ASU 2018-17, “Consolidation (Topic 810): Targeted Improvements to Related Party Guidance for Variable Interest Entities.” The standard provides guidance for determining whether a decision-making fee is a variable interest and requires 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). The Company adopted this standard effective January 1, 2020. The adoption of this standard did not have a material impact on the Company’s Condensed Consolidated Financial Statements and related disclosures.
In August 2018, the FASB issued ASU 2018-13, “Fair Value Measurement (Topic 820),” which removes, modifies and adds to the disclosure requirements on fair value measurements in Topic 820. The amendments on changes in unrealized gains and losses, the range and weighted average of significant unobservable inputs used to develop Level 3 fair value measurements, and the narrative description of measurement uncertainty should be applied prospectively for only the most recent interim or annual period presented in the initial fiscal year of adoption. All other amendments should be applied retrospectively to all periods presented upon their effective date. The Company adopted this standard effective January 1, 2020. The adoption of this standard did not have a material impact on the Company’s Condensed Consolidated Financial Statements and related disclosures.
In August 2018, the FASB issued ASU 2018-14, “Compensation-Retirement Benefits-Defined Benefit Plans-General (Subtopic 715-20),” which removes certain disclosures that are not considered cost beneficial, clarifies certain required disclosures and adds additional disclosures. The standards 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 early adopted this standard effective January 1, 2020. The adoption of this standard did not have a material impact on the Company’s Condensed Consolidated Financial Statements and related disclosures.
In June 2016, the FASB issued ASU No. 2016-13, “Financial Instruments - Credit Losses (Topic 326),” which requires measurement and recognition of expected credit losses for financial assets held. The standard is to be applied through a cumulative-effect adjustment to retained earnings as of the beginning of the first reporting period in which the standard is effective. The Company adopted this standard effective January 1, 2020. The adoption of this standard did not have a material impact on the Company’s Condensed Consolidated Financial Statements and related disclosure and no cumulative-effect adjustment was required.
During the three and six months ended June 30, 2020, in connection with the Company’s estimate of allowance for doubtful accounts, due to the expected loss from future payments as a result of economic uncertainty arising from the negative effects which the COVID-19 pandemic has had on the United States economy and financial markets, the Company recorded bad debt expense of $
11
New Accounting Standards Not Yet Adopted
On May 21, 2020, the SEC issued Final Rule Release No. 33-10786, “Amendments to Financial Disclosures about Acquired and Disposed Businesses” (“SEC Rule 33-10786”), which amends the disclosure requirements applicable to acquisitions and dispositions of businesses to improve the financial information provided to investors, facilitate more timely access to capital, and reduce the complexity and costs to prepare disclosure. The SEC Rule 33-10786 amends, among other things, (i) the tests used to determine significance and expand the use of proforma financial information; (ii) revise the proforma information requirements; (iii) reduce maximum number of years for which financial statements under Regulation S-X are required to two years; (iv) permit abbreviated financial statements for certain acquisitions; (v) modify the disclosure requirements relating to the aggregate effect of acquisitions for which financial statements are not required; and, (vi) conform the significance threshold and tests on both disposed and acquired business. The amendments are effective January 1, 2021, but early compliance is permitted. The Company does not expect the standard to have a material impact on its Condensed Consolidated Financial Statements upon its adoption effective January 1, 2021.
In March 2020, FASB issued ASU No. 2020-04, “Reference Rate Reform (Topic 848)” (“ASU 2020-04”), which provides optional guidance for a limited period of time to ease potential accounting impacts associated with transitioning away from reference rates that are expected to be discontinued, such as the London Interbank Offered Rate ("LIBOR"). The amendments in ASU 2020-04 apply only to contracts, hedging relationships, and other transactions that reference LIBOR or another reference rate expected to be discontinued. The amendments in ASU 2020-04 are effective through December 31, 2022. The Company is currently assessing the potential impacts the adoption of ASU 2020-04 may have on its Condensed Consolidated Financial Statements upon its adoption.
In January 2020, FASB issued ASU 2020-01, “Investments—Equity securities (Topic 321)” (“ASU 2020-01”), which clarifies the interaction of the accounting for equity securities under Topic 321 and investments under the equity method of accounting in Topic 323 and the accounting for certain forward contracts and purchased options accounted for under Topic 815. The amendments in ASU 2020-01 clarify that an entity should consider observable transactions that require it to either apply or discontinue the equity method of accounting for the purposes of applying the measurement alternative in accordance with Topic 321 immediately before applying or upon discontinuing the equity method. The amendments in ASU 2020-01 are effective for all entities for fiscal years beginning after December 15, 2020, and interim periods within those fiscal years. Early adoption is permitted. The Company does not expect the standard to have a material impact on its Condensed Consolidated Financial Statements upon its adoption effective January 1, 2021.
In December 2019, the FASB issued ASU 2019-12, “Income taxes (Topic 740)—Simplifying the accounting for income taxes” (“ASU 2019-12”), which is intended to simplify various aspects related to accounting for income taxes. ASU 2019-12 removes certain exceptions to the general principles in Topic 740 and also clarifies and amends existing guidance to improve consistent application. ASU 2019-12 will be effective for interim and annual periods beginning after December 15, 2020 (January 1, 2021 for the Company). Early adoption is permitted. The Company is currently evaluating the impact the adoption of ASU 2019-12 will have on its Condensed Consolidated Financial Statements upon its adoption effective January 1, 2021.
Note 3: Acquisitions and Dispositions
2020 Acquisitions
On January 27, 2020, Nexstar and Sinclair Broadcast Group, Inc. (“Sinclair”) resolved the outstanding lawsuit between Tribune and Sinclair. Tribune was acquired by Nexstar on
On
Subject to final determination, which is expected to occur within twelve months of the acquisition dates, the provisional fair values of the assets acquired and liabilities assumed associated with the KGBT, WJZY, and WMYT acquisitions are as follows (in thousands):
12
Assets acquired |
|
|
|
|
Prepaid expenses and other current assets |
|
$ |
|
|
Broadcast rights |
|
|
|
|
Property and equipment |
|
|
|
|
FCC licenses |
|
|
|
|
Network affiliation agreements |
|
|
|
|
Goodwill |
|
|
|
|
Other intangible assets |
|
|
|
|
Other noncurrent assets |
|
|
|
|
Total assets acquired |
|
|
|
|
Less: Broadcast rights payable |
|
|
( |
) |
Accrued expenses and other current liabilities |
|
|
( |
) |
Net assets acquired |
|
$ |
|
|
The fair value assigned to goodwill is attributable to future expense reductions utilizing management’s leverage in programming and other station operating costs. The goodwill and FCC licenses are deductible for tax purposes. The intangible assets related to the network affiliation agreements are amortized over
The stations’ combined net revenue of $
2020 Dispositions
On January 14, 2020, the Company sold its sports betting information website business to Star Enterprises Ltd., a subsidiary of Alto Holdings, Ltd., for a net consideration of $
On March 2, 2020, Nexstar completed the sale of Fox affiliate television station KCPQ and MyNetworkTV affiliate television station KZJO in the Seattle, WA market, as well as Fox affiliate television station WITI in the Milwaukee, WI market, to Fox for approximately $
The net gain that resulted from the divestitures of stations and other business was recorded in the (Gain) loss on disposal of stations and entities, net in the accompanying Condensed Consolidated Statements of Operations.
Pro forma information for the above acquisitions and dispositions has not been provided as the Company believes that the impact of the historical financials for financial reporting purposes, both individually and in aggregate, to the Company’s revenue, operating income, net income, and earnings per share is not material.
2019 Merger with Tribune
On
13
Future Acquisitions
On January 27, 2020, Sinclair agreed to sell to Nexstar television station WDKY-TV in the Lexington, KY market (see Note 15, “Commitment and Contingencies”). On July 15, 2020, Nexstar entered into a definitive agreement with Sinclair to acquire this station for $
On March 30, 2020, Mission, a VIE consolidated by Nexstar, entered into an asset purchase agreement to acquire certain assets of the three television stations currently owned by Marshall: KMSS serving the Shreveport, Louisiana market, KPEJ serving the Odessa, Texas market and KLJB serving the Davenport, Iowa market. The purchase price for the acquisition is approximately $
On July 8, 2020, Nexstar assigned to Mission its option to purchase the CW affiliate WPIX in the New York, NY market from The E.W. Scripps Company (“Scripps”). On the same date, Mission notified Scripps of its exercise of the option to purchase the station for a purchase price of $
Note 4: Intangible Assets and Goodwill
Intangible assets subject to amortization consisted of the following (in thousands):
|
|
Estimated |
|
June 30, 2020 |
|
|
December 31, 2019 |
|
||||||||||||||||||
|
|
useful life, |
|
|
|
|
|
Accumulated |
|
|
|
|
|
|
|
|
|
|
Accumulated |
|
|
|
|
|
||
|
|
in years |
|
Gross |
|
|
Amortization |
|
|
Net |
|
|
Gross |
|
|
Amortization |
|
|
Net |
|
||||||
Network affiliation agreements |
|
|
|
$ |
|
|
|
$ |
( |
) |
|
$ |
|
|
|
$ |
|
|
|
$ |
( |
) |
|
$ |
|
|
Other definite-lived intangible assets |
|
|
|
|
|
|
|
|
( |
) |
|
|
|
|
|
|
|
|
|
|
( |
) |
|
|
|
|
Other intangible assets |
|
|
|
$ |
|
|
|
$ |
( |
) |
|
$ |
|
|
|
$ |
|
|
|
$ |
( |
) |
|
$ |
|
|
The following table presents the Company’s estimate of amortization expense for the remainder of 2020, each of the five succeeding years ended December 31 and thereafter for definite-lived intangible assets as of June 30, 2020 (in thousands):
Remainder of 2020 |
|
$ |
|
|
2021 |
|
|
|
|
2022 |
|
|
|
|
2023 |
|
|
|
|
2024 |
|
|
|
|
Thereafter |
|
|
|
|
|
|
$ |
|
|
The amounts recorded to goodwill and FCC licenses were as follows (in thousands):
|
|
Goodwill |
|
|
FCC Licenses |
|
||||||||||||||||||
|
|
|
|
|
|
Accumulated |
|
|
|
|
|
|
|
|
|
|
Accumulated |
|
|
|
|
|
||
|
|
Gross |
|
|
Impairment |
|
|
Net |
|
|
Gross |
|
|
Impairment |
|
|
Net |
|
||||||
Balances as of December 31, 2019 |
|
$ |
|
|
|
$ |
( |
) |
|
$ |
|
|
|
$ |
|
|
|
$ |
( |
) |
|
$ |
|
|
Current year acquisitions (See Note 3) |
|
|
|
|
|
|
- |
|
|
|
|
|
|
|
|
|
|
|
- |
|
|
|
|
|
Current year divestitures (See Note 3) |
|
|
( |
) |
|
|
- |
|
|
|
( |
) |
|
|
( |
) |
|
|
- |
|
|
|
( |
) |
Measurement period adjustments related to Nexstar and Tribune merger |
|
|
( |
) |
|
|
- |
|
|
|
( |
) |
|
|
- |
|
|
|
- |
|
|
|
- |
|
Balances as of June 30, 2020 |
|
$ |
|
|
|
$ |
( |
) |
|
$ |
|
|
|
$ |
|
|
|
$ |
( |
) |
|
$ |
|
|
14
During the three and six months ended 2020, Nexstar recorded a measurement period adjustment related to its acquisition of Tribune in September 2019. The measurement period adjustment is primarily attributable to a $
The measurement period adjustments recognized during the three and six months ended June 30, 2020 had no impact on the Company’s Condensed Consolidated Statements of Operations in the prior year and had no significant impact in the current year.
During the first and second quarters of 2020, the Company evaluated the changes in facts and circumstances and general market declines resulting from the COVID-19 pandemic, including their impact on its current operating results and whether an impairment triggering event has occurred on its indefinite-lived intangible assets, long-lived assets (including finite-lived intangible assets) and reporting units with goodwill. Based on the results of the evaluation, the Company concluded that, as of June 30, 2020, there were no impairment triggering events that occurred on these assets, mainly because as of this date, the Company’s market capitalization exceeded the carrying amount of its equity by a substantial amount. Despite the adverse effects of COVID-19 in the Company’s financial results, mostly in the first part of second quarter of 2020, there were significant improvements in the Company’s financial results in the remaining part of the quarter as certain areas throughout the United States permitted the re-opening of non-essential businesses. In the second quarter of 2020 and on a year to date basis, the Company remained profitable. There were also no material changes in its customers mix, including advertisers, multichannel video programming distributors and online video distributors. Due to the continued impact of the COVID-19 pandemic subsequent to June 30, 2020, the Company will continue to evaluate its indefinite-lived intangible assets, long-lived assets and goodwill if an impairment triggering event will occur in the future periods. Any further adverse impact of COVID-19 or the general market conditions to the Company’s operating results could reasonably be expected to negatively impact the fair value of the Company’s indefinite-lived intangible assets and its reporting units as well as the recoverability of its long-lived assets and may result in future impairment charges which could be material.
Note 5: Assets Held for Sale
Assets held for sale in the Company’s Condensed Consolidated Balance Sheets consisted of the following (in thousands):
|
|
June 30, 2020 |
|
|
December 31, 2019 |
|
||
Real estate |
|
$ |
|
|
|
$ |
|
|
In January 2020, management deferred its planned disposition of certain non-depreciable real estate property located in Chicago with a carrying amount of $
Note 6: Investments
Investments consisted of the following (in thousands):
|
|
June 30, 2020 |
|
|
December 31, 2019 |
|
||
Equity method investments |
|
$ |
|
|
|
$ |
|
|
Other equity investments |
|
|
|
|
|
|
|
|
Total investments |
|
$ |
|
|
|
$ |
|
|
Equity Method Investments
The Company’s equity method investments primarily included Nexstar’s investment in TV Food Network in which Nexstar has an ownership stake of
15
TV Food Network owns and operates “The Food Network,” a 24-hour lifestyle cable television channel focusing on food and related topics. TV Food Network also owns and operates “The Cooking Channel,” a cable television channel primarily devoted to cooking instruction, food information and other related topics. TV Food Network’s programming is distributed by cable and satellite television systems.
The partnership agreement governing TV Food Network provides that the partnership shall, unless certain actions are taken by the partners, dissolve and commence winding up and liquidating TV Food Network upon the first to occur of certain enumerated liquidating events, one of which is a specified date of December 31, 2020. The Company would be entitled to its proportionate share of distributions to partners in the event of a liquidation, which the partnership agreement provides would occur as promptly as is consistent with obtaining fair market value for the assets of TV Food Network. The partnership agreement also provides that the partnership may be continued or reconstituted in certain circumstances.
At acquisition date, the Company measured its estimated share of the differences between the estimated fair values and carrying values (the “basis difference”) of the investees’ tangible assets and amortizable intangible assets had the fair value of the investments been allocated to the identifiable assets of the investees in accordance with ASC Topic 805 “Business Combinations.” Additionally, the Company measured its estimated share of the basis difference attributable to investees’ goodwill. As a result of acquired investment in TV Food Network on September 19, 2019 through the Merger, Nexstar estimated a total of $
The Company amortizes its share of the basis differences attributable to tangible assets and intangible long-lived assets of investees, including TV Food Network, and records the amortization (the “amortization of basis difference”) as a reduction of income on equity investments, net in the unaudited Condensed Consolidated Statements of Operations. As of June 30, 2020, the Company’s remaining share of basis difference related to equity method investments, including TV Food Network, totaled $
Income (loss) on equity investments, net reported in the Company’s unaudited Condensed Consolidated Statements of Operations consisted of the following (in thousands):
|
|
Three Months Ended |
|
|
Six Months Ended |
|
|||||||||
|
|
June 30, |
|
|
June 30, |
|
|||||||||
|
|
2020 |
|
|
2019 |
|
|
2020 |
|
2019 |
|
||||
Income (loss) on equity investments, net, before amortization of basis difference |
|
$ |
|
|
|
$ |
( |
) |
|
$ |
|
|
$ |
( |
) |
Amortization of basis difference |
|
|
( |
) |
|
|
( |
) |
|
|
( |
) |
|
( |
) |
Income (loss) on equity investments, net |
|
$ |
|
|
|
$ |
( |
) |
|
$ |
|
|
$ |
( |
) |
Summarized financial information for TV Food Network is as follows (in thousands):
|
|
Three Months Ended |
|
|
Six Months Ended |
|
||
|
|
June 30, 2020 |
|
|
June 30, 2020 |
|
||
Net revenue |
|
$ |
|
|
|
$ |
|
|
Costs and expenses |
|
|
|
|
|
|
|
|
Income from operations |
|
|
|
|
|
|
|
|
Net income |
|
|
|
|
|
|
|
|
Net income attributable to Nexstar Media Group, Inc. |
|
|
|
|
|
|
|
|
16
During the second quarter of 2020, the Company evaluated its equity method investments for other-than-temporary impairment (“OTTI”) due to the events and circumstances surrounding the COVID-19 pandemic. Based on the results of the review, the Company determined that an OTTI had not occurred as of June 30, 2020. The Company may experience future declines in the fair value of its equity method investments, and it may determine an impairment loss will be required to be recognized in a future reporting period. Such determination will be based on the prevailing facts and circumstances, including those related to the reported results and financial statement disclosures of the investees as well as the general market conditions. The Company will continue to evaluate its equity method investments in future periods to determine if an OTTI has occurred.
Other Equity Investments
Other equity investments are investments without readily determinable fair values. All of the Company’s other equity investments are ownership interests in private companies. These assets were recorded at cost, subject to periodic evaluation of the carrying values.
Note 7: Accrued Expenses
Accrued expenses consisted of the following (in thousands):
|
|
June 30, 2020 |
|
|
December 31, 2019 |
|
||
Broadcast rights payable |
|
$ |
|
|
|
$ |
|
|
Compensation and related taxes |
|
|
|
|
|
|
|
|
Interest payable |
|
|
|
|
|
|
|
|
Network affiliation fees |
|
|
|
|
|
|
|
|
Other |
|
|
|
|
|
|
|
|
|
|
$ |
|
|
|
$ |
|
|
Note 8: Retirement and Postretirement Plans
On January 17, 2017, Nexstar assumed Media General’s pension and postretirement plan obligations upon consummation of the merger of the entities. As a result, Nexstar 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. Nexstar 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.
On September 19, 2019, Nexstar assumed Tribune’s pension and postretirement obligations upon consummation of the merger of the entities. As a result, Nexstar has a qualified and non-contributory defined benefit retirement plan which covers certain of Tribune’s employees and former employees. This retirement plan is frozen in terms of pay and service. Nexstar also assumed
17
The following tables provide the components of net periodic benefit cost (credit) for the Company’s pension and other postretirement benefit plans (“OPEB”) (in thousands):
|
|
Media General |
|
|
Tribune |
|
||||||||||||||||||
|
|
Pension Benefits |
|
|
OPEB |
|
|
Pension Benefits |
|
|
OPEB |
|
||||||||||||
|
|
Three Months Ended June 30, |
|
|
Three Months Ended June 30, |
|
|
Three Months Ended June 30, |
|
|||||||||||||||
|
|
2020 |
|
|
2019 |
|
|
2020 |
|
|
2019 |
|
|
2020 |
|
|||||||||
Service cost |
|
$ |
- |
|
|
$ |
- |
|
|
$ |
|
|
|
$ |
- |
|
|
$ |
|
|
|
$ |
- |
|
Interest cost |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Expected return on plan assets |
|
|
( |
) |
|
|
( |
) |
|
|
- |
|
|
|
- |
|
|
|
( |
) |
|
|
- |
|
Amortization of prior service costs |
|
|
- |
|
|
|
- |
|
|
|
( |
) |
|
|
- |
|
|
|
- |
|
|
|
- |
|
Amortization of net loss |
|
|
- |
|
|
|
- |
|
|
|
|
|
|
|
- |
|
|
|
- |
|
|
|
- |
|
Net periodic benefit cost (credit) |
|
$ |
( |
) |
|
$ |
( |
) |
|
$ |
|
|
|
$ |
|
|
|
$ |
( |
) |
|
$ |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Media General |
|
|
Tribune |
|
||||||||||||||||||
|
|
Pension Benefits |
|
|
OPEB |
|
|
Pension Benefits |
|
|
OPEB |
|
||||||||||||
|
|
Six Months Ended June 30, |
|
|
Six Months Ended June 30, |
|
|
Six Months Ended June 30, |
|
|||||||||||||||
|
|
2020 |
|
|
2019 |
|
|
2020 |
|
|
2019 |
|
|
2020 |
|
|||||||||
Service cost |
|
$ |
- |
|
|
$ |
- |
|
|
$ |
|
|
|
$ |
- |
|
|
$ |
|
|
|
$ |
- |
|
Interest cost |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Expected return on plan assets |
|
|
( |
) |
|
|
( |
) |
|
|
- |
|
|
|
- |
|
|
|
( |
) |
|
|
- |
|
Amortization of prior service costs |
|
|
- |
|
|
|
- |
|
|
|
( |
) |
|
|
- |
|
|
|
- |
|
|
|
- |
|
Amortization of net loss |
|
|
- |
|
|
|
- |
|
|
|
|
|
|
|
- |
|
|
|
- |
|
|
|
- |
|
Net periodic benefit cost (credit) |
|
$ |
( |
) |
|
$ |
( |
) |
|
$ |
|
|
|
$ |
|
|
|
$ |
( |
) |
|
$ |
|
|
For 2020, the Company’s cash contribution requirements for its qualified pension plans and other postretirement benefit plans are forecasted to be $
The primary investment objective of the pension benefit plans is to build and ensure an adequate pool of assets to support the benefit obligations to participants, retirees and beneficiaries. To meet this objective, the pension benefit plans seek to earn a rate of return on assets greater than the liability discount rate, with a prudent level of risk and diversification. The current investment policy includes a strategy intended to maintain an adequate level of diversification, subject to normal portfolio risks. As a result of the general market downturn in the first half of 2020 resulting from the COVID-19 pandemic, as of June 30, 2020, the fair value of the pension plans’ assets has declined. While the Company continues to monitor the performance of the pension plans’ assets, the declines as of June 30, 2020 have not materially impacted the Company’s financial position or liquidity. To the extent that there is further material deterioration in plan assets, the Company’s pension benefit plans may require additional contributions and/or may negatively impact future pension credit or expense of the Company.
Note 9: Debt
Long-term debt consisted of the following (in thousands):
|
|
June 30, 2020 |
|
|
December 31, 2019 |
|
||
Term loans |
|
$ |
|
|
|
$ |
|
|
5.625% Notes due 2024 |
|
|
|
|
|
|
|
|
5.625% Notes due 2027 |
|
|
|
|
|
|
|
|
Total outstanding principal |
|
|
|
|
|
|
|
|
Less: unamortized financing costs and discount - Term Loans |
|
|
( |
) |
|
|
( |
) |
Less: unamortized financing costs and discount - |
|
|
( |
) |
|
|
( |
) |
Add: unamortized premium, net of financing costs - |
|
|
|
|
|
|
|
|
Total outstanding debt |
|
|
|
|
|
|
|
|
Less: current portion |
|
|
( |
) |
|
|
( |
) |
Long-term debt, net of current portion |
|
$ |
|
|
|
$ |
|
|
18
2020 Transactions
During the six months ended June 30, 2020, Nexstar prepaid a total of $
During the six months ended June 30, 2020, the Company also repaid scheduled maturities of $
Unused Commitments and Borrowing Availability
The Company had $
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 and Shield senior secured credit facilities in the event of their default. Mission 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
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.
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
19
Note 10: 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
Supplemental balance sheet information related to leases was as follows (in thousands, except lease term and discount rate):
|
|
Balance Sheet Classification |
|
June 30, 2020 |
|
|
December 31, 2019 |
|
|||
Operating leases |
|
|
|
|
|
|
|
|
|
|
|
Operating lease right-of-use assets, net |
|
Other noncurrent assets, net |
|
$ |
|
|
|
$ |
|
|
|
Current lease liabilities |
|
Other current liabilities |
|
$ |
|
|
|
$ |
|
|
|
Noncurrent lease liabilities |
|
Other noncurrent liabilities |
|
$ |
|
|
|
$ |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Finance leases |
|
|
|
|
|
|
|
|
|
|
|
Finance lease right-of-use assets, net of accumulated depreciation of $ |
|
Property, plant and equipment, net |
|
$ |
|
|
|
$ |
|
|
|
Current lease liabilities |
|
Other current liabilities |
|
$ |
|
|
|
$ |
|
|
|
Noncurrent lease liabilities |
|
Other noncurrent liabilities |
|
$ |
|
|
|
$ |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted Average Remaining Lease Term |
|
|
|
|
|
|
|
|
|
|
|
Operating leases |
|
|
|
|
|
|
|
|
|||
Finance leases |
|
|
|
|
|
|
|
|
|||
Weighted Average Discount Rate |
|
|
|
|
|
|
|
|
|
|
|
Operating leases |
|
|
|
|
|
% |
|
|
|
% |
|
Finance leases |
|
|
|
|
|
% |
|
|
|
% |
Operating lease expense for the three months ended June 30, 2020 was $
Operating lease expense for the six month ended June 30, 2020 was $
The depreciation expense and interest expense associated with finance leases during the three and six months ended June 30, 2020 and 2019 were not material.
Supplemental cash flow information related to leases was as follows (in thousands):
|
|
Six Months Ended June 30, |
|
|||||
|
|
2020 |
|
|
2019 |
|
||
Cash paid for amounts included in the measurement of lease liabilities: |
|
|
|
|
|
|
|
|
Operating cash flows from operating leases |
|
$ |
|
|
|
$ |
|
|
Operating cash flows from finance leases |
|
|
|
|
|
|
|
|
Financing cash flows from finance leases |
|
|
|
|
|
|
|
|
20
Future minimum lease payments under non-cancellable leases as of June 30, 2020 were as follows (in thousands):
|
|
Operating Leases |
|
|
Finance Leases |
|
||
Remainder of 2020 |
|
$ |
|
|
|
$ |
|
|
2021 |
|
|
|
|
|
|
|
|
2022 |
|
|
|
|
|
|
|
|
2023 |
|
|
|
|
|
|
|
|
2024 |
|
|
|
|
|
|
|
|
Thereafter |
|
|
|
|
|
|
|
|
Total future minimum lease payments |
|
|
|
|
|
|
|
|
Less: imputed interest |
|
|
( |
) |
|
|
( |
) |
Total |
|
$ |
|
|
|
$ |
|
|
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.
Note 11: Fair Value Measurements
The Company measures and records in its condensed consolidated financial statements certain assets and liabilities at fair value. ASC Topic 820, “Fair Value Measurement and Disclosures,” establishes a fair value hierarchy for instruments measured at fair value that distinguishes between assumptions based on market data (observable inputs) and the Company’s own assumptions (unobservable inputs). This hierarchy consists of the following three levels:
|
• |
Level 1 – Assets and liabilities whose values are based on unadjusted quoted prices for identical assets or liabilities in an active market. |
|
• |
Level 2 – Assets and liabilities whose values are based on inputs other than those included in Level 1, including quoted market prices in markets that are not active; quoted prices of assets or liabilities with similar attributes in active markets; or valuation models whose inputs are observable or unobservable but corroborated by market data. |
|
• |
Level 3 – Assets and liabilities whose values are based on valuation models or pricing techniques that utilize unobservable inputs that are significant to the overall fair value measurement. |
Certain assets are measured at fair value on a nonrecurring basis; that is, the instruments are not measured at fair value on an ongoing basis but are subject to fair value adjustments in certain circumstances (for example, when there is evidence of impairment).
The carrying values of cash and cash equivalents, restricted cash and cash equivalents, accounts receivable, broadcast rights, accounts payable, and accrued expenses approximate fair value due to their short term to maturity.
|
|
June 30, 2020 |
|
|
December 31, 2019 |
|
||||||||||
|
|
Carrying |
|
|
Fair |
|
|
Carrying |
|
|
Fair |
|
||||
|
|
Amount |
|
|
Value |
|
|
Amount |
|
|
Value |
|
||||
Term loans(1) |
|
$ |
|
|
|
$ |
|
|
|
$ |
|
|
|
$ |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
21
(1)
(2)
During the three and six months ended 2020, there were no events or changes in circumstance that triggered an impairment to the Company’s significant assets, including equity method investments, indefinite-lived intangible assets, long-lived assets and goodwill. See Notes 4 and 6 for additional information.
Note 12: Common Stock
On April 26, 2018, Nexstar’s Board of Directors approved $
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.
Note 13: Income Taxes
Income tax expense was $
Income tax expense was $
The Company calculates its year-to-date provision for income taxes by applying the estimated annual effective tax rate to year-to-date pre-tax income or loss and adjusts the provision for discrete tax items recorded in the period. Future changes in the forecasted annual income projections, including changes due to the impact of the COVID-19 pandemic, could result in significant adjustments to quarterly income tax expense in future periods.
As discussed in Note 2—Liquidity, the business disruption caused by COVID-19 had an adverse impact on the Company’s financial results mostly in the first part of the second quarter in 2020. This was followed by a significant improvement in the Company’s financial results in the remaining part of the second quarter in 2020 as certain areas throughout the United States permitted the re-opening of non-essential businesses. As of June 30, 2020, the Company also remained profitable. The Company considered the COVID-19 disruption in its ability to realize deferred tax assets in the future and determined that such conditions did not change its overall valuation allowance positions. The U.S. signed into law on March 27, 2020 the CARES Act which includes various income tax provisions to help stabilize U.S. businesses. The CARES Act includes provisions to ease the limitation on deductible interest expense for 2019 and 2020 and enhance the utilization of net operating losses generated in tax years 2018-2020. The Company is currently evaluating the tax implications resulting from the CARES Act and continues to monitor any new legislation passed in response to COVID-19 to measure the federal and state effects where it has an income tax presence.
22
Note 14: 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 operation, 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 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 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 television JSA relationships attributable interests and (6) defined a category of sharing agreements designated as SSAs between commercial television 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 (the “eight voices test”), (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 (the “Third Circuit”) denied a mandamus petition which had sought to stay their effectiveness. On September 23, 2019, however, the Third Circuit issued an opinion vacating the Reconsideration Order on the ground that the FCC had failed to adequately analyze the effect of the Reconsideration Order’s deregulatory rule changes on minority and woman ownership of broadcast stations. The Third Circuit later denied petitions for en banc rehearing and its decision took effect on November 29, 2019. On December 20, 2019, the FCC issued an order reinstating the local television ownership rule, the radio/television cross-ownership rule, the newspaper/broadcast cross-ownership rule and the television JSA attribution rule as they existed prior to the Reconsideration Order (including the
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 were filed in the second quarter of 2019. As of June 30, 2020, the proceeding remains open.
23
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
Spectrum
The FCC has repurposed a portion of the broadcast television spectrum for wireless broadband use. Pursuant to federal legislation enacted in 2012, the FCC conducted an incentive auction in 2016-2017 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. Television stations that did not relinquish their spectrum were “repacked” into the frequency band still remaining for television broadcast use.
The majority of the Company’s television stations did not accept bids to relinquish their television channels. Of those stations,
24
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 fully predict the impact of the incentive auction and subsequent repack on its business.
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 September 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.
Note 15: Commitments and Contingencies
Guarantees of Mission and Shield Debt
Nexstar and its subsidiaries guarantee full payment of all obligations incurred under the Mission and Shield senior secured credit facilities. In the event that Mission 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 June 30, 2020, Mission had a maximum commitment of $
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.
25
Litigation
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.
Local TV Advertising Antitrust Litigation—On March 16, 2018, a group of companies including Nexstar and Tribune (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. Without admitting any wrongdoing, some Defendants, including Tribune, entered into a proposed consent decree (referred to herein as the “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 consent decree was entered in final form by the U.S. District Court for the District of Columbia on May 22, 2019. The consent decree, which settles 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 and Tribune agreed not to exchange certain non-public information with other stations operating in the same DMA except in certain cases, and to implement certain antitrust compliance measures and to monitor and report on compliance with the consent decree.
Starting in July 2018, a series of plaintiffs filed putative class action lawsuits against the Defendants and others alleging that they coordinated their pricing of television advertising, thereby harming a proposed class of all buyers of television advertising time from one or more of the Defendants since at least January 1, 2014. The plaintiff in each lawsuit seeks injunctive relief and money damages caused by the alleged antitrust violations. 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
Marshall Litigation—On April 3, 2019, Marshall filed a lawsuit against Nexstar in the Supreme Court of the State of New York (the “New York litigation”). The lawsuit initially asserted nine causes of action, five of which were subsequently dismissed by the Supreme Court (the Court’s order dismissing those five claims is currently on appeal), and one of which was withdrawn by Marshall. The remaining causes of action allege: (i) breach of the SSAs between Nexstar and Marshall; (ii) breach of the guaranty agreement between Nexstar and Marshall’s lenders; and (iii) conversion of certain retransmission fees collected by Nexstar on Marshall’s behalf. Marshall is seeking monetary and punitive damages, in addition to attorneys’ fees. Nexstar denies these allegations and intends to defend itself vigorously. On November 20, 2019, Nexstar filed counterclaims against Marshall and Pluria Marshall, in his individual capacity, alleging breach of the SSAs, unjust enrichment, and fraudulent conveyance. Nexstar seeks payment of the outstanding amount due under the SSAs as compensatory damages, punitive damages for the alleged fraudulent conveyances, and attorneys’ fees and costs. The parties have agreed to stay the New York litigation in the trial court until September 30, 2020 and have petitioned the Appellate Division to extend the deadline to perfect the related appeal until September 24, 2020.
On March 31, 2020, Marshall filed a bankruptcy adversary proceeding against Nexstar in the Southern District of Texas. This lawsuit arises in the context of the Marshall chapter 11 case and asserts many of the same causes of action that Marshall brought in the New York litigation, as well as turnover and fraudulent transfer claims. Marshall seeks monetary damages, punitive damages, and equitable relief, in addition to attorneys’ fees. Nexstar denies these allegations and intends to defend itself vigorously. Marshall filed a motion for partial summary judgment on its turnover claim. Nexstar moved for abstention, and in the alternative for dismissal and summary judgment, including a cross motion for summary judgment on Marshall’s turnover claim. On July 6, 2020, the bankruptcy court denied both parties’ partial motions for summary judgment on Marshall’s turnover claim. Nexstar’s motion otherwise remains pending, and oral argument on the remaining aspects of Nexstar’s motion is expected in August 2020.
26
In connection with Nexstar’s merger with Tribune on September 19, 2019, Nexstar assumed contingencies from certain legal proceedings, as follows:
Tribune Chapter 11 Reorganization and Confirmation Order Appeals—On December 8, 2008 (the “Petition Date”), Tribune and 110 of its direct and indirect wholly-owned subsidiaries (collectively, the “Debtors”) filed voluntary petitions for relief under chapter 11 (“Chapter 11”) of title 11 of the United States Code (the “Bankruptcy Code”) in the U.S. Bankruptcy Court for the District of Delaware (the “Bankruptcy Court”). On April 12, 2012, the Debtors, Oaktree Capital Management, L.P. (“Oaktree”), Angelo, Gordon & Co. L.P. (“AG”), the Official Committee of Unsecured Creditors (the “Creditors’ Committee”), and JPMorgan Chase Bank, N.A. (“JPMorgan” and, together with the Debtors, Oaktree, AG and the Creditors’ Committee, the “Plan Proponents”) filed the Fourth Amended Joint Plan of Reorganization for Tribune and its Subsidiaries with the Bankruptcy Court (as subsequently modified by the Plan Proponents, the “Plan”).
On July 23, 2012, the Bankruptcy Court issued an order confirming the Plan (the “Confirmation Order”). The Plan became effective and the Debtors emerged from Chapter 11 on December 31, 2012 (the “Effective Date”). The Bankruptcy Court has entered final decrees that have collectively closed 108 of the Debtors’ Chapter 11 cases. The remaining Debtors’ Chapter 11 proceedings continue to be jointly administered under the caption In re Tribune Media Company, et al., Case No. 08-13141.
Notices of appeal of the Bankruptcy Court’s order confirming the Plan (the “Confirmation Order”) were filed by (i) Aurelius Capital Management, LP, on behalf of its managed entities that were holders of the Predecessor’s senior notes and Exchangeable Subordinated Debentures due 2029 (“PHONES”); (ii) Law Debenture Trust Company of New York (n/k/a Delaware Trust Company) (“Delaware Trust Company”) and Deutsche Bank Trust Company Americas (“Deutsche Bank”), each successor trustees under the respective indentures for the Predecessor’s senior notes; (iii) Wilmington Trust Company, as successor indenture trustee for the PHONES; and (iv) EGI-TRB, L.L.C., a Delaware limited liability company wholly-owned by Sam Investment Trust (a trust established for the benefit of Samuel Zell and his family) (the “Zell Entity”). The appellants sought, among other relief, to overturn the Confirmation Order and certain prior orders of the Bankruptcy Court embodied in the Plan, including the settlement of certain claims and causes of action related to the Leveraged ESOP Transactions (as defined below) consummated by the Debtors, the Tribune employee stock ownership plan, the Zell Entity and Samuel Zell in 2007. Each of the Confirmation Order appeals has been dismissed or otherwise resolved by a final order, with the exception of the appeals of Delaware Trust Company and Deutsche Bank. On July 30, 2018, the United States District Court for the District of Delaware (the “District Court”) entered an order affirming (i) the Bankruptcy Court’s judgment overruling Delaware Trust Company’s and Deutsche Bank’s objections to confirmation of the Plan and (ii) the Bankruptcy Court’s order confirming the Plan. Delaware Trust Company and Deutsche Bank appealed the District Court’s order to the United States Court of Appeals for the Third Circuit (the “Third Circuit”) on August 27, 2018. That appeal remains pending before the Third Circuit. If the remaining appellants succeed on their appeals, Tribune’s financial condition may be adversely affected.
As of the Effective Date, approximately
As of June 30, 2020, all but
The Debtors are continuing to evaluate the remaining proofs of claim. The ultimate amounts to be paid in resolutions of the remaining proofs of claim, including indemnity claims, continue to be subject to uncertainty. If the aggregate allowed amount of the remaining claims exceeds the restricted cash and cash equivalents held for satisfying such claims, Tribune would be required to satisfy the allowed claims from its cash on hand from operations.
Reorganization Items, Net—Reorganization items, net are included in the “Other expenses, net” in the Company’s unaudited Condensed Consolidated Statements of Operations and primarily include professional advisory fees and other costs related to the resolution of unresolved claims. Such amounts were not significant during the three and six months ended June 30, 2020. The Company expects to continue to incur certain expenses pertaining to the Chapter 11 proceedings throughout 2020 and potentially in future periods.
27
Termination of Tribune and Sinclair Merger Agreement—On August 9, 2018, Tribune provided notification to Sinclair Broadcast Group, Inc. (“Sinclair”) that it terminated, effective immediately, the Agreement and Plan of Merger, dated May 8, 2017, with Sinclair, which provided for the acquisition by Sinclair of all of the outstanding shares of Tribune’s common stock. Additionally, on August 9, 2018, Tribune filed a complaint in the Delaware Court of Chancery against Sinclair, alleging that Sinclair willfully and materially breached its obligations under the merger agreement. The lawsuit sought damages for all losses incurred as a result of Sinclair’s breach of contract under the merger agreement.
On January 27, 2020, Nexstar and Sinclair agreed to settle the outstanding lawsuit between Tribune and Sinclair in connection with their terminated merger agreement. Tribune was acquired by Nexstar in September 2019. The companies will dismiss with prejudice the lawsuit pending in the Delaware Court of Chancery between Tribune and Sinclair concerning the terminated Tribune/Sinclair merger, and will release each other from any current and future claims relating to the terminated merger. Neither party has admitted any liability or wrongdoing in connection with the terminated merger. As such, both parties have settled the lawsuit to avoid the costs, distraction, and uncertainties of continued litigation. As part of the resolution, Sinclair has agreed to sell to Nexstar television station WDKY-TV in the Lexington, KY DMA, subject to FCC approval and other customary conditions. On July 15, 2020, Sinclair and Nexstar formalized this proposed acquisition and entered into a definitive agreement to acquire the station for $
Chicago Cubs Transactions—On August 21, 2009, Tribune and Chicago Entertainment Ventures, LLC (formerly Chicago Baseball Holdings, LLC) (“CEV LLC”), and its subsidiaries (collectively, “New Cubs LLC”), among other parties, entered into an agreement (the “Cubs Formation Agreement”) governing the contribution of certain assets and liabilities related to the businesses of the Chicago Cubs Major League Baseball franchise then owned by Tribune and its subsidiaries to New Cubs LLC. The transactions contemplated by the Cubs Formation Agreement and the related agreements thereto (the “Chicago Cubs Transactions”) closed on October 27, 2009. As a result of these transactions, Northside Entertainment Holdings LLC (f/k/a Ricketts Acquisition LLC) (“NEH”) owned
On June 28, 2016, the IRS issued Tribune a Notice of Deficiency which presented the IRS’s position that the gain should have been included in Tribune’s 2009 taxable income. Accordingly, the IRS has proposed a $
On January 22, 2019, Tribune sold its
28
Note 16: Segment Data
The Company evaluates the performance of its operating segments based on net revenue and operating income. The Company’s broadcast segment includes (i) 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, (ii) digital multicast network services, (iii) WGN America, a national general entertainment cable network, and (iv) WGN-AM, a Chicago radio station. The other activities of the Company include (i) corporate functions, (ii) the management of certain real estate assets, including revenues from leasing certain owned office and production facilities, (iii) digital businesses and (iv) eliminations.
Segment financial information is included in the following tables for the periods presented (in thousands):
Three Months Ended June 30, 2020 |
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Broadcast |
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Other |
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Consolidated |
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Net revenue |
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$ |
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$ |
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$ |
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Depreciation |
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Amortization of intangible assets |
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Income (loss) from operations |
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( |
) |
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Six Months Ended June 30, 2020 |
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Broadcast |
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Other |
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Consolidated |
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|||
Net revenue |
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$ |
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$ |
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$ |
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Depreciation |
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Amortization of intangible assets |
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Income (loss) from operations |
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( |
) |
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Three Months Ended June 30, 2019 |
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Broadcast |
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Other |
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Consolidated |
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Net revenue |
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$ |
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$ |
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$ |
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Depreciation |
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Amortization of intangible assets |
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Income (loss) from operations |
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( |
) |
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|
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Six Months Ended June 30, 2019 |
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Broadcast |
|
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Other |
|
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Consolidated |
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|||
Net revenue |
|
$ |
|
|
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$ |
|
|
|
$ |
|
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Depreciation |
|
|
|
|
|
|
|
|
|
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Amortization of intangible assets |
|
|
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Income (loss) from operations |
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|
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( |
) |
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|
|
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As of June 30, 2020 |
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Broadcast |
|
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Other |
|
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Consolidated |
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|||
Goodwill |
|
$ |
|
|
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$ |
- |
|
|
$ |
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Assets |
|
|
|
|
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|
|
|
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As of December 31, 2019 |
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Broadcast |
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Other |
|
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Consolidated |
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|||
Goodwill |
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$ |
|
|
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$ |
- |
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$ |
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Assets |
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The following tables present the disaggregation of the Company’s revenue for the periods presented (in thousands):
Three Months Ended June 30, 2020 |
|
Broadcast |
|
|
|
|
Other |
|
|
Consolidated |
|
|||
Core advertising (local and national) |
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$ |
|
|
|
|
|
$ |
|
|
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$ |
|
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Political |
|
|
|
|
|
|
|
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- |
|
|
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Retransmission compensation |
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Digital |
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Other |
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Trade revenue |
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|
|
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- |
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|
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Total revenue |
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$ |
|
|
|
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$ |
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$ |
|
|
29
Six Months Ended June 30, 2020 |
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Broadcast |
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Other |
|
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Consolidated |
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|||
Core advertising (local and national) |
|
$ |
|
|
|
$ |
|
|
|
$ |
|
|
Political advertising |
|
|
|
|
|
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- |
|
|
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Distribution revenue |
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Digital |
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Other |
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Trade revenue |
|
|
|
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|
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- |
|
|
|
|
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Total revenue |
|
$ |
|
|
|
$ |
|
|
|
$ |
|
|
Three Months Ended June 30, 2019 |
|
Broadcast |
|
|
|
|
Other |
|
|
Consolidated |
|
|||
Core advertising (local and national) |
|
$ |
|
|
|
|
|
$ |
- |
|
|
$ |
|
|
Political Advertising |
|
|
|
|
|
|
|
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- |
|
|
|
|
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Retransmission compensation |
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- |
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Digital |
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Other |
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Trade revenue |
|
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|
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|
|
|
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- |
|
|
|
|
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Total revenue |
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$ |
|
|
|
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$ |
|
|
|
$ |
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|
Six Months Ended June 30, 2019 |
|
Broadcast |
|
|
|
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Other |
|
|
Consolidated |
|
|||
Core advertising (local and national) |
|
$ |
|
|
|
|
|
$ |
- |
|
|
$ |
|
|
Political advertising |
|
|
|
|
|
|
|
|
- |
|
|
|
|
|
Distribution revenue |
|
|
|
|
|
|
|
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- |
|
|
|
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Digital |
|
|
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Other |
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Trade revenue |
|
|
|
|
|
|
|
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- |
|
|
|
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Total revenue |
|
$ |
|
|
|
|
|
$ |
|
|
|
$ |
|
|
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 (core, 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 and the carriage of WGN America. Distribution revenue is recognized at the point in time the broadcast signal is delivered to the distributors and is based on a price per subscriber.
Note 17: Subsequent Events
On July 8, 2020, Nexstar assigned to Mission its option to purchase the CW affiliate WPIX in the New York, NY market from Scripps. On the same date, Mission notified Scripps of its exercise of the option for a purchase price of $
On July 15, 2020, Nexstar entered into a definitive agreement to acquire the assets of WDKY-TV, the Fox affiliate in the Lexington, KY market, from Sinclair for $
On
30
ITEM 2. |
Management’s Discussion and Analysis of Financial Condition and Results of Operations |
The following discussion and analysis should be read in conjunction with our Condensed Consolidated Financial Statements and related Notes included elsewhere in this Quarterly Report on Form 10-Q and the Consolidated Financial Statements and related Notes contained in our Annual Report on Form 10-K for the year ended December 31, 2019.
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; “Nexstar Digital” refers to Nexstar Digital LLC, 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.
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: the risks and uncertainties related to the global COVID-19 pandemic, including, for example, expectations regarding the impact of COVID-19 on our businesses and our future financial performance; our ability to obtain financial and tax benefits from the recently-passed Coronavirus Aid, Relief, and Economic Security Act (“CARES Act”); any projections or expectations of earnings, revenue, financial performance, liquidity and capital resources or other financial items; the impact of pending or future litigation; the effects of governmental regulation and future regulation on broadcasting; competition from others in our broadcast television markets; volatility in programming costs; 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 the inherent risks and uncertainties, including those described in our Annual Report on Form 10-K for the year ended December 31, 2019 and in our other filings with the United States Securities and Exchange Commission (“SEC”). 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.
31
Executive Summary
2020 Highlights
|
• |
During the second quarter of 2020, net revenue increased by $265.6 million, or 40.9% compared to the same period in 2019. The increase was primarily due to the incremental revenue from acquisitions of $343.7 million and an increase in distribution revenue and political advertising revenue of our legacy stations of $48.5 million and $13.0 million, respectively. These increases were partially offset by a decrease in revenue from core advertising of our legacy stations of $90.4 million, primarily due to the business disruptions caused by COVID-19 and change in the mix between our core and political advertising as 2020 is an election year, a decrease in net revenue from station divestitures of $28.9 million and a $14.5 million net decrease in digital revenue of our digital businesses and legacy stations primarily due to the combined effect of business disruptions caused by COVID-19 and realigned digital business operations. Our deconsolidation of Marshall decreased the Company’s revenue by $4.4 million but also decreased the Company’s operating expenses by $5.5 million. |
|
• |
During the six months ended June 30, 2020, we repurchased a total of 950,000 shares of our Class A common stock for $72.6 million, funded by cash on hand. As of June 30, 2020, the remaining available amount under our share repurchase authorization was $84.2 million, net of all repurchases made. |
|
• |
During the three and six months ended June 30, 2020, we received a total of $26.7 million and $197.1 in million cash distributions, respectively, from our 31.3% equity method investment in TV Food Network. |
|
• |
For each of the first two quarters of 2020, our Board of Directors declared and paid cash dividends of $0.56 per share of our outstanding Class A common stock, or total dividend payments of $51.0 million. |
|
• |
On January 27, 2020, we and Sinclair resolved the outstanding lawsuit between Tribune and Sinclair in connection with their terminated merger agreement. We acquired Tribune through a merger on September 19, 2019. As part of the resolution, Sinclair has agreed to sell to us television station WDKY-TV in the Lexington, KY market. On July 15, 2020, we and Sinclair formalized this proposed acquisition and entered into a definitive agreement to acquire the station for $18.0 million in cash, subject to working capital adjustments. The proposed acquisition by us of this station is subject to FCC approval and other customary approvals and is projected to close at the end of 2020. Sinclair has also sold to us certain non-license assets associated with television station KGBT-TV in the Harlingen-Weslaco-Brownsville-McAllen, Texas market for $18.0 million in cash. We and Sinclair have also modified an existing agreement regarding carriage of certain of Sinclair’s digital networks by certain stations that we own. Finally, on January 28, 2020, Sinclair made a $98.0 million cash payment to us. |
2020 Acquisitions
On January 27, 2020, we acquired certain non-license assets associated with television station KGBT-TV in the Harlingen-Weslaco-Brownsville-McAllen, Texas market from Sinclair for $17.9 million in cash. On March 2, 2020, we completed our acquisition of Fox affiliate television station WJZY and MyNetworkTV affiliate television station WMYT in the Charlotte, NC market from Fox for $45.3 million in cash. The acquisition from Fox allowed us entry into the Charlotte, NC market.
2020 Dispositions
On January 14, 2020, the Company sold its sports betting information website business to Star Enterprises Ltd., a subsidiary of Alto Holdings, Ltd., for a net consideration of $12.9 million (net of $2.4 million cash balance of this business that was transferred to the buyer upon sale).
On March 2, 2020, Nexstar completed the sale of Fox affiliate television station KCPQ and MyNetworkTV affiliate television station KZJO in the Seattle, WA market, as well as Fox affiliate television station WITI in the Milwaukee, WI market, to Fox for approximately $349.9 million in cash, including working capital adjustments. Our proceeds from the sale of the stations were partially used to prepay our term loans.
32
Future Acquisitions
On January 27, 2020, Sinclair agreed to sell to Nexstar television station WDKY-TV in the Lexington, KY DMA (see Note 15, “Commitment and Contingencies”). On July 15, 2020, Sinclair and Nexstar formalized this proposed acquisition and entered into a definitive agreement to acquire the station for $18.0 million in cash, subject to working capital adjustments. The proposed acquisition by Nexstar of this station is subject to FCC approval and other customary approvals and is expected to close at the end of 2020.
On March 30, 2020, Mission, a VIE that we consolidate, entered into an asset purchase agreement to acquire certain assets of the three television stations currently owned by Marshall: KMSS serving the Shreveport, Louisiana market, KPEJ serving the Odessa, Texas market and KLJB serving the Davenport, Iowa market. The purchase price for the acquisition is approximately $49.0 million, which will be applied against Marshall’s existing loans payable to Mission on a dollar-for-dollar basis. The purchase price is subject to customary adjustments. The proposed acquisition was approved by the Bankruptcy Court for the Southern District of Texas but is also subject to FCC and other customary approvals and is expected to close in 2020.
On July 8, 2020, Nexstar assigned to Mission its option to purchase CW affiliate WPIX in the New York, NY market from Scripps. On the same date, Mission notified Scripps of its exercise of the option for a purchase price of $75.0 million, subject to customary adjustments, plus accrued interest pursuant to the option agreement. Mission expects to fund this acquisition through a new borrowing that is also expected to be guaranteed by Nexstar. Nexstar previously acquired WPIX through a merger with Tribune but simultaneously sold the station to Scripps on September 19, 2019. Under Nexstar’s sale agreement with Scripps, Nexstar was granted an assignable option to purchase the station.
Debt Transactions
|
• |
During the six months ended June 30, 2020, we prepaid a total of $230.0 million in principal balance under our term loans, funded by cash on hand. We also made an additional prepayment of $200.0 million in principal balance of term loans pursuant to the mandatory prepayment requirement of the amended credit agreement of Nexstar Broadcasting, Inc. The mandatory prepayment resulted from the disposition of certain television station assets in the Seattle, WA and Milwaukee, WI markets to Fox. |
|
• |
During the six months ended June 30, 2020, the Company repaid scheduled maturities of $40.3 million under its term loans. |
Impact of COVID-19 Pandemic
In March 2020, the World Health Organization declared the outbreak of Coronavirus Disease (“COVID-19”) a pandemic and the President of the United States declared the COVID-19 pandemic a national emergency. The virus continues to spread throughout the U.S. and the world and has resulted in authorities implementing numerous measures to contain the virus, including travel bans and restrictions, quarantines, shelter-in-place orders, and business limitations and shutdowns. While we are unable to accurately predict the full impact that COVID-19 will have on our results from operations, financial condition, liquidity and cash flows due to numerous uncertainties, including the duration, severity and containment measures, our compliance and the measures we have taken around the pandemic situation has impacted our day-to-day operations and disrupted our business and operations, as well as those of our key business partners, affiliates, vendors and other counterparties, for an indefinite period of time. To support the health and well-being of our employees, business partners and communities, a vast majority of our employees worked remotely since mid-March 2020 until the end of April 2020 when we partially resumed our normal onsite workplace setting. On May 1, 2020, the shelter-in-place orders in the state of Texas were lifted and we fully resumed our normal corporate workplace setting, subject to continuous monitoring.
33
The disruptions caused by COVID-19 had an adverse impact on our business and our financial results mostly in the first part of the second quarter in 2020. This was followed by a significant improvement in our financial results in the remaining part of the second quarter in 2020 as certain areas throughout the United States permitted the re-opening of non-essential businesses. As of June 30, 2020, we remained profitable. Our current year results were also higher than our prior year results primarily due to contribution from our acquisition of Tribune in September 2019. As of June 30, 2020, there have been no material changes in our customer mix, including our advertisers, multichannel video programming distributors and online video distributors. The disruptions from COVID-19 did not have a material impact on our liquidity. As of June 30, 2020, our unrestricted cash on hand and positive working capital were $664.6 million and $720.5 million, respectively, both of which increased from our December 31, 2019 levels of $232.1 million and $404.2 million, respectively. We continue to generate operating cash flows and we believe we have sufficient unrestricted cash on hand and have the availability to access additional cash up to $139.7 million and $3.0 million under the respective Nexstar and Mission revolving credit facilities (with a maturity date of October 2023) to meet our business operating requirements, our capital expenditures and to continue to service our debt for at least the next 12 months as of the filing date of this Quarterly Report on Form 10-Q. We currently estimate that overall revenue and operating results for the remainder of fiscal 2020 will be lower than initially anticipated at the beginning of fiscal 2020, despite that 2020 is an election year. The full extent of the impact of COVID-19 pandemic on our business operations will depend on future developments, which are highly uncertain and cannot be predicted with confidence, including the duration of the COVID-19 outbreak, new information which may emerge concerning the severity and impact of the COVID-19 pandemic, and any additional preventative and protective actions that the U.S. government, or the Company, may direct, which may result in an extended period of continued business disruption. Further financial impact cannot be reasonably estimated at this time but may continue to have a material impact on our business and results of operations and may also have a material impact on our financial condition and liquidity. We will continue to evaluate the nature and extent of the impact of COVID-19 on our business in future periods.
The CARES Act
On March 27, 2020, the CARES Act was signed into law. The CARES Act provides opportunities for additional liquidity, loan guarantees, and other government programs to support companies affected by the COVID-19 pandemic and their employees. The CARES Act, among other things, includes provisions relating to refundable payroll tax credits, deferment of employer side social security payments, deferral of contributions to qualified pension plans and other postretirement benefit plans, net operating loss carryback periods, alternative minimum tax credit refunds, modifications to the net interest deduction limitations and technical corrections to tax depreciation methods for qualified improvement property. In particular, under the CARES Act, (i) for taxable years beginning before 2021, net operating loss carryforwards and carrybacks may offset 100% of taxable income, (ii) NOLs arising in 2018, 2019, and 2020 taxable years may be carried back to each of the preceding five years to generate a refund and (iii) for taxable years beginning in 2019 and 2020, the base for interest deductibility is increased from 30% to 50% of EBITDA. We intend to continue to review and consider any available potential benefits under the CARES Act for which we qualify, including those described above. The U.S. government or any other governmental authority that agrees to provide such aid under the CARES Act or any other crisis relief assistance may impose certain requirements on the recipients of the aid, including restrictions on executive officer compensation, dividends, prepayment of debt, limitations on debt and other similar restrictions that will apply for a period of time after the aid is repaid or redeemed in full. The CARES Act is not expected to have a material impact on the Company’s Condensed Consolidated Financial Statements.
34
Overview of Operations
As of June 30, 2020, we owned, operated, programmed or provided sales and other services to 196 full power television stations, including those owned by VIEs, and one AM radio station in 114 markets in 38 states and the District of Columbia. 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, of which 32 full power television stations are VIEs that are consolidated into our financial statements. See Note 2—Variable Interest Entities to our unaudited 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 and Shield’s senior secured credit facilities in the event of their default. Mission is a guarantor of our senior secured credit facility, our 5.625% Notes due 2024 and our 5.625% Notes due 2027. Shield does 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.
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 and Shield’s senior secured credit facilities, (3) our power over significant activities affecting these 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 such VIE which permit Nexstar to acquire the assets and assume the liabilities of each of these 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.
In December 2019, Marshall, a VIE previously consolidated by us and the owner of three television stations, filed a voluntary petition for Chapter 11 protection in the U.S. Bankruptcy Court for the Southern District of Texas. Effective on December 6, 2019, the bankruptcy court ordered the cancellation of certain contracts between us and Marshall, including the JSAs. As a result of these developments, we evaluated our business arrangements with Marshall and determined that we no longer have the power to direct the most significant economic activities of the entity and thus we no longer meet the accounting criteria for a controlling financial interest in the entity. Thus, we deconsolidated Marshall’s assets, liabilities and equity effective in December 2019. The SSAs between us and Marshall are currently active.
On March 30, 2020, Mission (currently the lender of Marshall) entered into an asset purchase agreement to acquire certain assets of the three television stations currently owned by Marshall: KMSS serving the Shreveport, Louisiana market, KPEJ serving the Odessa, Texas market and KLJB serving the Davenport, Iowa market. The purchase price for the acquisition is approximately $49.0 million, which will be applied against Marshall’s existing loans payable to Mission on a dollar-for-dollar basis. The purchase price is subject to customary adjustments. The proposed acquisition was approved by the Bankruptcy Court for the Southern District of Texas but is also subject to FCC and other customary approvals and is expected to close in 2020.
See Note 2—Variable Interest Entities to our unaudited Condensed Consolidated Financial Statements in Part I, Item 1 of this Form 10-Q.
35
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 under a JSA 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, the FCC adopted an order on reconsideration that eliminated the rule. That elimination became effective on February 7, 2018. On September 23, 2019, a federal court of appeals vacated the FCC’s November 2017 order on reconsideration. The court later denied petitions for en banc rehearing; on November 29, 2019 its decision became effective; and on December 20, 2019 the FCC issued an order that formally reinstated the rule. The court’s decision has been appealed to the U.S. Supreme Court. 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 has repurposed 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 did not relinquish their spectrum were “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, one station that moved to a VHF channel in 2019, one station that moved to a VHF channel in April 2020 and one that went off the air in November 2017. The station that went off the air did not have a significant impact on our 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.
Sixty one (61) full power stations owned by Nexstar and 17 full power stations owned by VIEs were assigned to new channels in the reduced post-auction television band. All of these stations have ceased operating on their former channels and are operating on their new assigned channels, although the Company will continue to incur costs to convert certain stations from interim to permanent facilities on their new channels. 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 and six months ended June 30, 2020, the Company spent a total of $13.0 million and $29.9 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 and six months ended June 30, 2019, the Company spent a total of $22.6 million and $36.4 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 and six months ended June 30, 2020, the Company received $25.7 million and $38.5 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. During the three and six months ended June 30, 2019, the Company received $19.4 million and $33.6 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. As of June 30, 2020, approximately $52.8 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 repack.
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 2020 is an election year, we generally expect an increase in political advertising revenue in 2020 compared to 2019. However, due to business disruptions caused by COVID-19, our revenue from political advertising may be less than we initially anticipated at the beginning of 2020 but the ultimate outcome is unknown at this time. Additionally, the rescheduling of the summer Olympics to 2021, also due to the COVID-19 pandemic situation, decreased our advertising revenue in 2020 but is expected to increase our advertising revenue in 2021.
36
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 as a percentage of total net revenue:
|
|
Three Months Ended June 30, |
|
|
Six Months Ended June 30, |
|
||||||||||||||||||||||||||
|
|
2020 |
|
|
2019 |
|
|
2020 |
|
|
2019 |
|
||||||||||||||||||||
|
|
Amount |
|
|
% |
|
|
Amount |
|
|
% |
|
|
Amount |
|
|
% |
|
|
Amount |
|
|
% |
|
||||||||
Core advertising |
|
$ |
298,240 |
|
|
|
32.6 |
|
|
$ |
267,611 |
|
|
|
41.2 |
|
|
$ |
715,619 |
|
|
|
35.6 |
|
|
$ |
519,455 |
|
|
|
40.8 |
|
Political advertising |
|
|
21,566 |
|
|
|
2.4 |
|
|
|
3,157 |
|
|
|
0.5 |
|
|
|
76,907 |
|
|
|
3.8 |
|
|
|
4,464 |
|
|
|
0.3 |
|
Distribution revenue |
|
|
536,544 |
|
|
|
58.7 |
|
|
|
314,268 |
|
|
|
48.4 |
|
|
|
1,086,260 |
|
|
|
54.1 |
|
|
|
628,242 |
|
|
|
49.2 |
|
Digital |
|
|
46,661 |
|
|
|
5.1 |
|
|
|
56,237 |
|
|
|
8.7 |
|
|
|
103,101 |
|
|
|
5.1 |
|
|
|
109,072 |
|
|
|
8.6 |
|
Other |
|
|
8,663 |
|
|
|
0.9 |
|
|
|
3,625 |
|
|
|
0.6 |
|
|
|
18,815 |
|
|
|
1.1 |
|
|
|
7,489 |
|
|
|
0.6 |
|
Trade revenue |
|
|
2,959 |
|
|
|
0.3 |
|
|
|
4,114 |
|
|
|
0.6 |
|
|
|
5,753 |
|
|
|
0.3 |
|
|
|
6,937 |
|
|
|
0.5 |
|
Total net revenue |
|
$ |
914,633 |
|
|
|
100.0 |
|
|
$ |
649,012 |
|
|
|
100.0 |
|
|
$ |
2,006,455 |
|
|
|
100.0 |
|
|
$ |
1,275,659 |
|
|
|
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:
|
|
Three Months Ended June 30, |
|
|
Six Months Ended June 30, |
|
|
||||||||||||||||||||||||||
|
|
2020 |
|
|
2019 |
|
|
2020 |
|
|
2019 |
|
|
||||||||||||||||||||
|
|
Amount |
|
|
% |
|
|
Amount |
|
|
% |
|
|
Amount |
|
|
% |
|
|
Amount |
|
|
% |
|
|
||||||||
Net revenue |
|
$ |
914,633 |
|
|
|
100.0 |
|
|
$ |
649,012 |
|
|
|
100.0 |
|
|
$ |
2,006,455 |
|
|
|
100.0 |
|
|
$ |
1,275,659 |
|
|
|
100.0 |
|
|
Operating expenses (income): |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Corporate expenses |
|
|
35,399 |
|
|
|
3.9 |
|
|
|
31,821 |
|
|
|
4.9 |
|
|
|
88,873 |
|
|
|
4.4 |
|
|
|
62,586 |
|
|
|
4.9 |
|
|
Direct operating expenses, net of trade |
|
|
413,742 |
|
|
|
45.2 |
|
|
|
292,162 |
|
|
|
45.0 |
|
|
|
855,523 |
|
|
|
42.6 |
|
|
|
581,594 |
|
|
|
45.6 |
|
|
Selling, general and administrative expenses, excluding corporate |
|
|
157,844 |
|
|
|
17.3 |
|
|
|
112,237 |
|
|
|
17.3 |
|
|
|
322,754 |
|
|
|
16.1 |
|
|
|
223,832 |
|
|
|
17.5 |
|
|
Depreciation |
|
|
35,770 |
|
|
|
3.9 |
|
|
|
28,090 |
|
|
|
4.3 |
|
|
|
71,176 |
|
|
|
3.5 |
|
|
|
55,527 |
|
|
|
4.4 |
|
|
Amortization of intangible assets |
|
|
69,512 |
|
|
|
7.6 |
|
|
|
36,357 |
|
|
|
5.6 |
|
|
|
140,095 |
|
|
|
7.0 |
|
|
|
73,095 |
|
|
|
5.7 |
|
|
Amortization of broadcast rights |
|
|
35,740 |
|
|
|
3.9 |
|
|
|
13,935 |
|
|
|
2.2 |
|
|
|
72,948 |
|
|
|
3.7 |
|
|
|
28,297 |
|
|
|
2.2 |
|
|
Trade expense |
|
|
2,897 |
|
|
|
0.3 |
|
|
|
3,882 |
|
|
|
0.6 |
|
|
|
6,175 |
|
|
|
0.3 |
|
|
|
7,313 |
|
|
|
0.6 |
|
|
Reimbursement from the FCC related to station repack |
|
|
(25,716 |
) |
|
|
(2.8 |
) |
|
|
(19,416 |
) |
|
|
(3.0 |
) |
|
|
(38,474 |
) |
|
|
(1.9 |
) |
|
|
(33,603 |
) |
|
|
(2.6 |
) |
|
Change in the estimated fair value of contingent consideration attributable to a merger |
|
|
3,933 |
|
|
|
0.4 |
|
|
|
- |
|
|
|
- |
|
|
|
3,933 |
|
|
|
0.2 |
|
|
|
- |
|
|
|
- |
|
|
Gain on relinquishment of spectrum |
|
|
(10,791 |
) |
|
|
(1.2 |
) |
|
|
- |
|
|
|
- |
|
|
|
(10,791 |
) |
|
|
(0.5 |
) |
|
|
- |
|
|
|
- |
|
|
Loss (gain) on disposal of stations and entities, net |
|
|
50 |
|
|
|
- |
|
|
|
- |
|
|
|
- |
|
|
|
(7,025 |
) |
|
|
(0.4 |
) |
|
|
- |
|
|
|
- |
|
|
Total operating expenses |
|
|
718,380 |
|
|
|
|
|
|
|
499,068 |
|
|
|
|
|
|
|
1,505,187 |
|
|
|
|
|
|
|
998,641 |
|
|
|
|
|
|
Income from operations |
|
$ |
196,253 |
|
|
|
|
|
|
$ |
149,944 |
|
|
|
|
|
|
$ |
501,268 |
|
|
|
|
|
|
$ |
277,018 |
|
|
|
|
|
|
37
Three Months Ended June 30, 2020 Compared to Three Months Ended June 30, 2019
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.
Revenue
Core advertising revenue was $298.3 million for the three months ended June 30, 2020, compared to $267.6 million for the same period in 2019, an increase of $30.7 million, or 11.4%. The increase was primarily due to incremental revenue from Tribune stations and other businesses we acquired in 2019 of $129.7 million and current year station acquisitions of $3.7 million, partially offset by a decrease in revenue from station divestitures of $10.7 million. Our legacy stations’ core advertising revenue decreased by $90.4 million, primarily due to the business disruptions caused by COVID-19 and changes in the mix between our core and political advertising. Our deconsolidation of Marshall in December 2019 also resulted in a $1.6 million decrease in revenue. Our largest advertiser category, automobile, represented approximately 13% and 22% of our core advertising revenue for the three months ended June 30, 2020 and 2019, respectively. Overall, including past results of our newly acquired stations, automobile revenues decreased by approximately 9% during the quarter. The other categories representing our top five were attorneys, which increased in 2020, and medical/healthcare, furniture and fast food restaurants, which decreased in 2020. We currently estimate that overall core advertising revenue for the remainder of fiscal 2020 will continue to be negatively impacted by the business disruptions caused by COVID-19. The full extent of the impact of the COVID-19 pandemic on our business operations will depend on future developments, which are highly uncertain and cannot be predicted with confidence, including the duration of the COVID-19 outbreak, new information which may emerge concerning the severity of the COVID-19 pandemic, and any additional preventative and protective actions that the U.S. government, we, or our business partners, may direct, which may result in an extended period of continued business disruption. Further financial impact cannot be reasonably estimated at this time but may continue to have a material impact on our core advertising revenue and our overall results of operations. Additionally, the rescheduling of the summer Olympics to 2021, also due to the COVID-19 pandemic situation, decreased our advertising revenue in 2020 but is expected to increase our advertising revenue in 2021.
Political advertising revenue was $21.6 million for the three months ended June 30, 2020, compared to $3.2 million for the same period in 2019, an increase of $18.4 million, as 2020 is an election year. Of the $18.4 million increase, $5.3 million was attributable to incremental revenue from Tribune stations we acquired in 2019, and $13.0 million was attributable to our legacy stations. We generally expect an increase in political advertising revenue in 2020 compared to 2019. However, due to business disruptions caused by COVID-19, our revenue from political advertising may be less than we initially anticipated at the beginning of 2020, but the ultimate outcome is unknown at this time.
Distribution revenue was $536.5 million for the three months ended June 30, 2020, compared to $314.3 million for the same period in 2019, an increase of $222.2 million, or 70.7%. The increase was primarily due to incremental revenue from Tribune stations and other businesses we acquired in 2019 of $183.2 million (including $12.3 million revenue from copyright royalty received in 2020) and current year station acquisitions of $11.3 million, partially offset by a decrease in revenue from station divestitures and deconsolidation of Marshall of $16.4 million and $4.4 million, respectively. Our legacy stations’ revenue increased by $48.5 million primarily due to the combined effect of scheduled annual escalation of rates per subscriber, renewals of contracts providing for higher rates per subscriber (contracts generally have a three-year term) and contributions from distribution agreements with OVDs. 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 media revenue, representing advertising revenue on our stations’ web and mobile sites and other internet-based revenue, was $46.7 million for the three months ended June 30, 2020, compared to $56.2 million for the same period in 2019, a decrease of $9.5 million, or 17.0%. Our digital businesses’ revenue decreased by $7.6 million primarily due to the business disruption caused by COVID-19 and realigned digital business operations. Our legacy stations’ revenue from web and mobile sites also decreased by $6.9 million primarily due to the business disruption caused by COVID-19. These decreases were partially offset by incremental revenue from Tribune stations we acquired in 2019 of $6.1 million, less a decrease in revenue from station divestitures of $1.3 million.
Operating Expenses
Corporate expenses, related to costs associated with the centralized management of our stations, were $35.4 million for the three months ended June 30, 2020, compared to $31.8 million for the same period in 2019, an increase of $3.6 million, or 11.2%. This was primarily attributable to an increase in stock-based compensation due to new equity incentives granted and an increase in legal fees primarily attributable to the ongoing litigation inherited from Tribune, partially offset by a decrease in payroll and bonuses and professional fees.
38
Station direct operating expenses, consisting primarily of news, engineering, programming and station selling, general and administrative expenses (net of trade expense) were $571.6 million for the three months ended June 30, 2020, compared to $404.4 million for the same period in 2019, an increase of $167.2 million, or 41.3%. The increase was primarily due to expenses associated with Tribune stations and other businesses we acquired in 2019 of $174.3 million (including network and programming costs of $117.1 million) and our current year station acquisitions of $9.8 million, partially offset by decrease in expenses from our station divestitures and the deconsolidation of Marshall of $16.1 million and $3.7 million, respectively. In addition, our legacy stations’ programming costs increased by $29.1 million, primarily due to network affiliation renewals and annual increases in our network affiliation costs and an increase in selling, general and administrative expenses. These increases were partially offset by a $24.2 million decrease in the operating expenses of our digital products due to lower revenue.
Depreciation of property and equipment was $35.8 million for the three months ended June 30, 2020, compared to $28.1 million for the same period in 2019, an increase of $7.7 million, or 27.3%, primarily due to incremental depreciation from the Tribune stations and other businesses we acquired in 2019 and current year station acquisitions, partially offset by station divestitures, and increased depreciation from newly capitalized assets related to station repacking activities.
Amortization of intangible assets was $69.5 million for the three months ended June 30, 2020, compared to $36.4 million for the same period in 2019, an increase of $33.2 million, or 91.2%. This was primarily due to increased amortization from the Tribune stations and other businesses we acquired in 2019 and current year station acquisitions, partially offset by decreases in amortization from certain fully amortized assets and divested stations.
Amortization of broadcast rights was $35.7 million for the three months ended June 30, 2020, compared to $13.9 million for the same period in 2019, an increase of $21.8 million, or 156.5%. The increase was primarily due to incremental amortization from the Tribune stations and other businesses we acquired in 2019 and current year station acquisitions, less decreases from station divestitures. This increase was partially offset by a reduction in amortization costs on our legacy stations due to renegotiation of certain film contracts which resulted in reduced distribution rates.
Certain of the Company’s stations, including certain Tribune stations, were assigned to new channels (“repack”) in connection with the FCC’s process of repurposing a portion of the broadcast television spectrum for wireless broadband use. These stations have vacated their former channels by the prescribed FCC deadline of July 13, 2020 and are continuing to spend costs, mainly capital expenditures, to construct and license the necessary technical modifications to permanently operate on their newly assigned channels. Subject to fund limitations, the FCC reimburses television broadcasters, MVPDs and other parties for costs reasonably incurred due to the repack. During the three months ended June 30, 2020 and 2019, we received a total of $25.7 million and $19.4 million, respectively, in reimbursements from the FCC which we recognized as operating income.
During the three months ended June 30, 2020, we completed a station’s conversion to a VHF channel completing our final relinquishment of spectrum pursuant to the FCC’s incentive auction conducted in 2016-2017. Accordingly, the associated spectrum asset with a carrying amount of $67.2 million and liability to surrender spectrum of $78.0 million were derecognized, resulting in a non-cash gain on relinquishment of spectrum of $10.8 million. This gain was partially offset by a $3.9 million increase (expense) in the estimated fair value of contingent consideration liability related to a merger and spectrum auction.
Income on equity investments, net
Income on equity investments, net was $11.3 million for the three months ended June 30, 2020, compared to a $665 thousand loss on equity investments for the same period in 2019, an increase of $12.0 million. The increase was primarily attributable to our 31.3% equity in earnings of TV Food Network, less the amortization of basis difference. On September 19, 2019, we acquired our 31.3% ownership stake in TV Food Network through our merger with Tribune.
Pension and other postretirement plans credit, net
Pension and other postretirement plans credit, net was $10.8 million for the three months ended June 30, 2020, compared to $1.4 million for the same period in 2019, an increase of $9.4 million, primarily attributable to pension plans and other postretirement benefits we assumed through our merger with Tribune on September 19, 2019.
Interest Expense, net
Interest expense, net was $82.3 million for the three months ended June 30, 2020, compared to $51.4 million for the same period in 2019, an increase of $30.9 million, or 60.1%. The increase was primarily due to interest incurred on term loans issued on September 19, 2019 and 5.625% Notes due 2027 issued July 3, 2019 which were both related to the financing of Nexstar's acquisition of Tribune, partially offset primarily by a decrease in interest expense in conjunction with Nexstar's redemption of 6.125% and 5.875% Notes and a decrease in interest expense on our legacy term loans due to the combined effect of reduction in principal and the London Inter-Bank Offered Rate (“LIBOR”).
39
Loss on Extinguishment of Debt
During the three months ended June 30, 2020, there was no loss on extinguishment of debt as there were no debt prepayments or transactions that would result in the recognition of a loss during the quarter. During the same period in 2019, we made prepayments of our term loans amounting to $100.0 million and we recognized $2.0 million of loss on extinguishment as a result of such prepayments.
Income Taxes
Income tax expense was $37.4 million for the three months ended June 30, 2020 compared to $26.6 million for the same period in 2019. The effective tax rates were 27.6% and 27.4% for each of the respective periods. The increase in the effective tax rate between the two periods was primarily due to changes in state income taxes and other permanent adjustments, or a 0.2% increase to the effective tax rate.
The Company calculates its year-to-date provision for income taxes by applying the estimated annual effective tax rate to year-to-date pre-tax income or loss and adjusts the provision for discrete tax items recorded in the period. Future changes in the forecasted annual income projections, including changes due to the impact of the COVID-19 pandemic, could result in significant adjustments to quarterly income tax expense in future periods.
Six Months Ended June 30, 2020 Compared to Six Months Ended June 30, 2019
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.
Revenue
Core advertising revenue was $715.6 million for the six months ended June 30, 2020, compared to $519.4 million for the same period in 2019, an increase of $196.2 million, or 37.8%. The increase is primarily due to our incremental revenue from Tribune stations and other businesses we acquired in 2019 of $322.5 million, and an increase in revenue from our current year station acquisitions of $6.1 million, partially offset by a decrease in revenue from station divestitures of $20.6 million. Our legacy stations’ core advertising revenue decreased by $108.6 million, primarily due to the business disruptions caused by COVID-19 since mid-March of 2020 and changes in the mix between our core and political advertising. Our deconsolidation of Marshall in December 2019 also resulted in a $3.2 million decrease in revenue. Our largest advertiser category, automobile, represented approximately 16% and 22% of our core advertising revenue for the six months ended June 30, 2020 and 2019, respectively. Overall, including past results of our newly acquired stations, automobile revenues decreased by approximately 6% in 2020. The other categories representing our top five were attorneys, which increased in 2020, and medical/healthcare, furniture and fast food restaurants, which decreased in 2020. We currently estimate that overall core advertising revenue for the remainder of fiscal 2020 will continue to be negatively impacted by the business disruptions caused by COVID-19. The full extent of the impact of the COVID-19 pandemic on our business operations will depend on future developments, which are highly uncertain and cannot be predicted with confidence, including the duration of the COVID-19 outbreak, new information which may emerge concerning the severity of the COVID-19 pandemic, and any additional preventative and protective actions that the U.S. government, we, or our business partners, may direct, which may result in an extended period of continued business disruption. Further financial impact cannot be reasonably estimated at this time but may continue to have a material impact on our core advertising revenue and our overall results of operations. Additionally, the rescheduling of the summer Olympics to 2021, also due to the COVID-19 pandemic situation, decreased our advertising revenue in 2020 but is expected to increase our advertising revenue in 2021.
Political advertising revenue was $76.9 million for the six months ended June 30, 2020, compared to $4.5 million for the same period in 2019, an increase of $72.4 million, as 2020 is an election year. Of the $72.4 million increase, $28.7 million was attributable to the incremental revenue from Tribune stations we acquired in 2019, and $43.1 million was attributable to our legacy stations. We generally expect an increase in political advertising revenue in 2020 compared to 2019. However, due to business disruptions caused by COVID-19, our revenue from political advertising may be less than we initially anticipated at the beginning of 2020, but the ultimate outcome is unknown at this time.
Distribution revenue was $1.086 billion for the six months ended June 30, 2020, compared to $628.2 million for the same period in 2019, an increase of $458.0 million, or 72.9%. The increase is primarily due to incremental revenue from Tribune stations and other businesses we acquired in 2019 of $376.1 million (including $12.3 million revenue from copyright cable royalty received in 2020) and our current year station acquisitions of $15.9 million. Our legacy stations’ revenue increased by $108.1 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. The increase is partially offset by a decrease in revenue due to station divestitures of $33.2 million and deconsolidation of Marshall of $8.8 million. 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.
40
Digital revenue, representing advertising revenue on our stations’ web and mobile sites and other internet-based revenue, was $103.1 million for the six months ended June 30, 2020, compared to $109.1 million for the same period in 2019, a decrease of $6.0 million, or 5.5%. Our digital businesses’ revenue decreased by $18.9 million primarily due to a decrease in our social media platform and the business disruption caused by COVID-19 since mid-March of 2020. Our legacy stations’ revenue from web and mobile sites also decreased by $2.0 million primarily due to the business disruption caused by COVID-19 since mid-March of 2020. These decreases were partially offset by incremental revenue from Tribune stations and other businesses we acquired in 2019 of $17.3 million, less a decrease in revenue from station divestitures of $2.2 million.
Operating Expenses
Corporate expenses, related to costs associated with the centralized management of our stations, were $88.9 million for the six months ended June 30, 2020, compared to $62.6 million for the same period in 2019, an increase of $26.3 million, or 42.0%. This was primarily attributable to an increase in payroll, bonuses and severance of $7.4 million primarily associated with Tribune’s corporate expenses that wound down towards the end of the first quarter in 2020, an increase in stock-based compensation of $5.7 million due to new equity incentives granted, and an increase in legal fees of $3.9 million primarily attributable to the ongoing litigation inherited from Tribune.
Station direct operating expenses, consisting primarily of news, engineering, programming and station selling, general and administrative expenses (net of trade expense) were $1.178 billion for the six months ended June 30, 2020 compared to $805.4 million for the same period in 2019, an increase of $372.9 million, or 46.3%. This was primarily due to expenses associated with the Tribune stations and other businesses we acquired in 2019 of $372.4 million (including network and programming costs of $248.4 million), and expenses associated with our current year station acquisitions of $13.3 million, partially offset by decreases in expenses from our station divestitures and the deconsolidation of Marshall of $32.1 million and $7.5 million, respectively. In addition, our legacy stations’ programming costs increased by $58.7 million, primarily due to network affiliation renewals and annual increases in our network affiliation costs. These increases were partially offset by a $29.9 million decrease in the operating expenses of our digital products due to lower revenue.
Depreciation of property and equipment was $71.2 million for the six months ended June 30, 2020, compared to $55.5 million for the same period in 2019, an increase of $15.7 million, or 28.2%. The increase was primarily due to incremental depreciation from Tribune stations and other businesses we acquired in 2019 and current year station acquisitions, partially offset by station divestitures, and increased depreciation from newly capitalized assets related to station repacking activities.
Amortization of intangible assets was $140.1 million for the six months ended June 30, 2020, compared to $73.1 million for the same period in 2019. This was primarily due to increased amortization from Tribune stations and other businesses we acquired in 2019 and current year station acquisitions, partially offset by decreases in amortization from certain fully amortized assets and divested stations.
Amortization of broadcast rights was $72.9 million for the six months ended June 30, 2020, compared to $28.3 million for the same period in 2019, an increase of $44.6 million, or 157.8%, The increase was primarily due to incremental amortization from Tribune stations and other businesses we acquired in 2019 and current year station acquisitions, less decreases from station divestitures. This increase was partially offset by a reduction in amortization costs on our legacy stations due to renegotiation of certain film contracts which resulted in reduced distribution rates.
Certain of the Company’s stations, including certain Tribune stations, were repacked in connection with the FCC’s process of repurposing a portion of the broadcast television spectrum for wireless broadband use. These stations have vacated their former channels by the FCC-prescribed deadline of July 13, 2020 and are continuing to spend costs, mainly capital expenditures, to construct and license the necessary technical modifications to operate on their newly assigned channels and to vacate their former channels no later than July 13, 2020. Subject to fund limitations, the FCC reimburses television broadcasters, MVPDs and other parties for costs reasonably incurred due to the repack. During the six months ended June 30, 2020 and 2019, the Company received $38.5 million and $33.6 million, respectively, in reimbursements from the FCC which it recognized as operating income.
In April 2020, we completed a station’s conversion to a VHF channel representing our final relinquishment of spectrum pursuant to the FCC’s incentive auction conducted in 2016-2017. Accordingly, the associated spectrum asset with a carrying amount of $67.2 million and liability to surrender spectrum of $78.0 million, were derecognized, resulting in a non-cash gain on relinquishment of spectrum of $10.8 million. This gain was partially offset by a $3.9 million increase (expense) in the estimated fair value of contingent consideration liability related to a merger and spectrum auction.
41
Income on equity investments, net
Income on equity investments, net was $25.5 million for the six months ended June 30, 2020, compared to a $1.2 million loss on equity investments for the same period in 2019, an increase of $26.6 million, primarily attributable to our 31.3% equity in earnings of TV Food Network, less amortization of basis difference. On September 19, 2019, we acquired a 31.3% ownership stake in TV Food Network through our merger with Tribune.
Pension and other postretirement plans credit, net
Pension and other postretirement plans credit, net was $21.5 million for the six months ended June 30, 2020, compared to $2.8 million for the same period in 2019, an increase of $18.7 million, primarily attributable to the pension plans and other postretirement benefit plans we assumed through our merger with Tribune on September 19, 2019.
Interest Expense, net
Interest expense, net was $183.5 million for the six months ended June 30, 2020, compared to $104.3 million for the same period in 2019, an increase of $79.2 million, or 75.9%. The increase was primarily due to interest incurred on term loans issued on September 19, 2019 and on 5.625% Notes due 2027 issued July 3, 2019 which were both related to the financing of Nexstar's acquisition of Tribune, partially offset primarily by a decrease in interest expense in conjunction with Nexstar's redemption of 6.125% and 5.875% Notes and a decrease in interest expense on our legacy term loans due to the combined effect of reduction in principal and the London Inter-Bank Offered Rate (“LIBOR”).
Loss on Extinguishment of Debt
Loss on extinguishment of debt was $7.5 million for the six months ended June 30, 2020, compared to $3.7 million for the same period in 2019, an increase of $3.8 million, primarily due to an increase in prepayments on our term loans of $350.0 million in 2020 compared to the prior period.
Income Taxes
Income tax expense was $101.8 million for the six months ended June 30, 2020 compared to $43.1 million for the same period in 2019. The effective tax rates were 28.5% and 25.2% for each of the respective periods. The increase in the effective tax rate between the two periods was primarily due to nondeductible goodwill written off as a result of divestitures and a decrease in the deduction for excess tax benefits. The Company recognized an income tax expense of $8.1 million attributable to nondeductible goodwill written off as a result of divestitures, or a 2.3% increase to the effective tax rate. Additionally, the Company recognized a decrease in the excess tax benefit related to stock-based compensation of $2.3 million, or a 2.3% increase to the effective tax rate. These increases were offset by a 0.8% decrease in the impact of permanent differences on the effective rate.
42
Liquidity and Capital Resources
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, for instance, uncertainties surrounding the business outlook caused by Coronavirus Disease 2019 (“COVID-19”). In December 2019, COVID-19 was reported and has spread globally, including to every state in the United States. In March 2020, the World Health Organization declared COVID-19 a pandemic and the United States government declared a national emergency with respect to COVID-19. COVID-19 has created and may continue to create significant uncertainty in global financial markets, which may reduce demand for our advertising, retransmission, and digital services, impact the productivity of our workforce, reduce our access to capital, and harm our business and results of operations.
The disruptions caused by COVID-19 had an adverse impact on our business and our financial results mostly in the first part of the second quarter in 2020. This was followed by a significant improvement in our financial results in the remaining part of the second quarter in 2020 as certain areas throughout the United States permitted the re-opening of non-essential businesses. As of June 30, 2020, we remained profitable. Our current year results were also higher than our prior year results primarily due to contribution from our acquisition of Tribune in September 2019. As of June 30, 2020, there have been no material changes in our customer mix, including our advertisers, multichannel video programming distributors and online video distributors. The disruptions from COVID-19 did not have a material impact on the Company’s liquidity. As of June 30, 2020, the Company’s unrestricted cash on hand amounted to $664.6 million and the Company had positive working capital of $720.5 million, both increased from the December 31, 2019 levels of $232.1 million and $404.2 million, respectively. As of June 30, 2020, the Company was in compliance with its financial covenants contained in the amended credit agreements governing its senior secured credit facilities. The Company believes it has sufficient unrestricted cash on hand and has availability to access additional cash up to $139.7 million and $3.0 million under the respective Nexstar and Mission revolving credit facilities (with a maturity date of October 2023) to meet its business operating requirements, its capital expenditures and to continue to service its debt for at least the next 12 months as of the filing date of this Quarterly Report on Form 10-Q. The Company also believes its leverage is well positioned to withstand the current challenges as the nearest maturity of its outstanding debt will not occur until October 2023. The Company will continue to evaluate its liquidity, its best use of operating cash flow and the market conditions to determine if further steps are necessary.
Overview
The following tables present summarized financial information management believes is helpful in evaluating the Company’s liquidity and capital resources (in thousands):
|
|
Six Months Ended June 30, |
|
|||||
|
|
2020 |
|
|
2019 |
|
||
Net cash provided by operating activities |
|
$ |
717,298 |
|
|
$ |
236,400 |
|
Net cash provided by (used in) investing activities |
|
|
321,852 |
|
|
|
(36,856 |
) |
Net cash used in financing activities |
|
|
(606,594 |
) |
|
|
(264,735 |
) |
Net increase in cash, cash equivalents and restricted cash |
|
$ |
432,556 |
|
|
$ |
(65,191 |
) |
Cash paid for interest |
|
$ |
171,348 |
|
|
$ |
98,103 |
|
Income taxes paid, net of refunds |
|
$ |
7,686 |
|
|
$ |
52,419 |
|
|
|
As of June 30, |
|
|
As of December 31, |
|
||
|
|
2020 |
|
|
2019 |
|
||
Cash, cash equivalents and restricted cash |
|
$ |
681,234 |
|
|
$ |
248,678 |
|
Long-term debt, including current portion |
|
|
8,038,068 |
|
|
|
8,492,588 |
|
Unused revolving loan commitments under senior secured credit facilities (1) |
|
|
142,662 |
|
|
|
142,662 |
|
(1) |
Based on covenant calculations as of June 30, 2020, all of the $139.7 million and $3.0 million unused revolving loan commitments under the respective Nexstar and Mission senior secured credit facilities were available for borrowing. |
43
Cash Flows – Operating Activities
Net cash flows provided by operating activities increased by $480.9 million during the six months ended June 30, 2020, compared to the same period in 2019. This was primarily due to increases in revenue (excluding trade) of $732.0 million, distributions from our equity investments in TV Food Network of $197.1 million, an increase in source of cash resulting from timing of accounts receivable collections of $109.6 million, and an increase in source of cash resulting from lower tax payments of $44.7 million. These increases were partially offset by an increase in our corporate, direct operating and selling, general and administrative expense (excluding non-cash transactions) of $388.1 million, an increase in cash paid for interest of $73.2 million, an increase in payments for broadcast rights of $72.6 million and a use of cash resulting from timing of payments to our vendors of $75.9 million.
Cash Flows – Investing Activities
Net cash flows provided by investing activities were $321.9 million during the six months ended June 30, 2020, compared to net cash flows used in investing activities of $36.9 million in the same period in 2019. In 2020, we sold two television stations and our sports betting information website business for $349.9 million and $12.9 million in cash, respectively. We also received $98.0 million of cash proceeds from settlement of litigation between Sinclair and Tribune, which we acquired in September 2019. These increases were reduced by the cash payments we made to acquire two television stations and certain non-license assets for total cash consideration payments of $63.2 million. Our capital expenditures during the six months ended June 30, 2020 were $115.7 million, an increase of $44.2 million compared to the same period in 2019, primarily due to increased capital expenditure requirements from Tribune stations and other businesses we acquired in September 2019, partially offset by station divestitures. Other activity included an increase in reimbursements from the FCC for station repack costs of $4.9 million.
Cash Flows – Financing Activities
Net cash flows used in financing activities increased by $341.9 million during the six months ended June 30, 2020, compared to the same period in 2019.
In 2020, we made payments on the outstanding principal balance of our term loans of $470.3 million (including $430.0 million in prepayments), paid dividends to our common stockholders of $51.0 million ($0.56 per share during each quarter), repurchased common shares of $72.6 million, paid cash for taxes in exchange for shares of common stock withheld of $6.8 million resulting from net share settlements of certain stock-based compensation, and paid for finance lease and software obligations of $6.3 million.
In 2019, we made payments on the outstanding principal balance of our term loans of $203.6 million, paid dividends to our common stockholders of $41.3 million ($0.45 per share each quarter), paid cash for taxes in exchange for shares of common stock withheld of $9.8 million resulting from net share settlements of certain stock-based compensation, completed our acquisition of the noncontrolling interest of station KHII for a cash payment of $6.4 million, paid for finance lease and software obligations of $5.0 million and received proceeds from the exercise of stock options of $1.5 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 June 30, 2020, the Company had total combined debt of $8.0 billion, net of financing costs and discounts, which represented 78.7% 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 June 30, 2020 (in thousands):
|
|
Total |
|
|
2020 |
|
|
2021-2022 |
|
|
2023-2024 |
|
|
Thereafter |
|
|||||
Nexstar senior secured credit facility |
|
$ |
5,198,049 |
|
|
$ |
24,267 |
|
|
$ |
203,021 |
|
|
$ |
2,079,125 |
|
|
$ |
2,891,636 |
|
Mission senior secured credit facility |
|
|
225,099 |
|
|
|
1,143 |
|
|
|
4,571 |
|
|
|
219,385 |
|
|
|
- |
|
Shield senior secured credit facility |
|
|
21,238 |
|
|
|
575 |
|
|
|
3,903 |
|
|
|
16,760 |
|
|
|
- |
|
5.625% Notes due 2024 |
|
|
900,000 |
|
|
|
- |
|
|
|
- |
|
|
|
900,000 |
|
|
|
- |
|
5.625% Notes due 2027 |
|
|
1,785,000 |
|
|
|
- |
|
|
|
- |
|
|
|
- |
|
|
|
1,785,000 |
|
|
|
$ |
8,129,386 |
|
|
$ |
25,985 |
|
|
$ |
211,495 |
|
|
$ |
3,215,270 |
|
|
$ |
4,676,636 |
|
We make semiannual interest payments on our 5.625% Notes due 2024 on February 1 and August 1 of each year. We make semiannual interest payments on the 5.625% Notes due 2027 on January 15 and July 15 of each year. Interest payments on our, Mission’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.
44
The terms of our, Mission’s and Shield’s senior secured credit facilities, as well as the indentures governing our 5.625% Notes due 2024 and 5.625% Notes due 2027, limit, but do not prohibit us, Mission 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 $142.7 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 June 30, 2020. 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. As discussed above, the ultimate outcome of the COVID-19 pandemic is uncertain at this time and may significantly impact our future operating performance, liquidity and financial position. Any adverse impact of the COVID-19 pandemic may cause us to seek alternative sources of funding, including accessing capital markets, subject to market conditions. Such alternative sources of funding may not be available on commercially reasonable terms or at all.
On March 30, 2020, Mission entered into an asset purchase agreement to acquire certain assets of the three television stations currently owned by Marshall: KMSS serving the Shreveport, Louisiana market, KPEJ serving the Odessa, Texas market and KLJB serving the Davenport, Iowa market. The purchase price for the acquisition is approximately $49.0 million, which will be applied against Marshall’s existing loans payable to Mission on a dollar-for-dollar basis. The purchase price is subject to customary adjustments. The proposed acquisition was approved by the Bankruptcy Court for the Southern District of Texas but is also subject to FCC and other customary approvals and is expected to close in 2020.
On July 8, 2020, Nexstar assigned to Mission its option to purchase the CW affiliate WPIX in the New York, NY market from Scripps. On the same date, Mission notified Scripps of its exercise of the option for a purchase price of $75.0 million, subject to customary adjustments, plus accrued interest in accordance with the option agreement. Mission expects to fund this acquisition through a new borrowing that is also expected to be guaranteed by Nexstar. The proposed acquisition is pending the execution of a purchase agreement and is also subject to FCC approval and other customary conditions and Mission expects it to close at the end of 2020. This acquisition will allow the Company entrance into this market. Nexstar previously acquired WPIX through a merger with Tribune but simultaneously sold the station to Scripps on September 19, 2019. Under Nexstar’s sale agreement with Scripps, Nexstar was granted an assignable option to purchase the station.
On July 15, 2020, Nexstar entered into a definitive agreement to acquire the assets of WDKY-TV, the Fox affiliate in the Lexington, KY market, from Sinclair for $18.0 million in cash, subject to working capital adjustments. The purchase price is expected to be funded through cash on hand. The proposed acquisition is subject to FCC approval and other customary conditions and Nexstar expects it to close at the end of 2020. This acquisition will allow Nexstar entrance into this market.
On July 24, 2020, our Board of Directors declared a quarterly cash dividend of $0.56 per share of our Class A common stock. The dividend is payable on August 21, 2020 to stockholders of record on August 7, 2020.
Debt Covenants
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 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 June 30, 2020, we were in compliance with our financial covenant. We believe Nexstar, Mission, 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 5.625% Notes due 2024 and 5.625% Notes due 2027 for a period of at least the next 12 months from June 30, 2020.
Off-Balance Sheet Arrangements
As of June 30, 2020, 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.
45
As of June 30, 2020, we have outstanding standby letters of credit with various financial institutions amounting to $23.7 million, of which $20.3 million was assumed from the 2019 Tribune acquisition primarily in support of the worker’s compensation insurance program. The outstanding balance of standby letters of credit is deducted against our unused revolving loan commitment under our senior secured credit facility and would not be available for withdrawal.
Summarized Financial Information
Nexstar Broadcasting’s (a wholly-owned subsidiary of Nexstar and herein referred to as the “Issuer”) 5.625% Notes due 2024 and 5.625% Notes due 2027 are fully and unconditionally guaranteed (the “Guarantees”), jointly and severally, by Nexstar (“Parent”), Mission (a consolidated VIE) and certain of Nexstar Broadcasting’s restricted subsidiaries (collectively, the “Guarantors” and, together with the Issuer, the “Obligor Group”). The Guarantees are subject to release in limited circumstances upon the occurrence of certain customary conditions set forth in the indentures governing the 5.625% Notes due 2024 and the 5.625% Notes due 2027. The Issuer’s 5.635% Notes due 2024 and 5.625% Notes due 2027 are not registered with the SEC.
The following combined summarized financial information is presented for the Obligor Group after elimination of intercompany transactions between Parent, Issuer and Guarantors in the Obligor Group and amounts related to investments in any subsidiary that is a non-guarantor. This information is not intended to present the financial position or results of operations of the consolidated group of companies in accordance with U.S. GAAP.
Summarized Balance Sheet Information (in thousands) – Summarized balance sheet information as of June 30, 2020 and December 31, 2019 of the Obligor Group is as follows:
|
June 30, 2020 |
|
|
December 31, 2019 |
|
||
Current assets - external |
$ |
1,500,711 |
|
|
$ |
1,291,730 |
|
Current assets - due from consolidated entities outside of Obligor Group |
|
174,190 |
|
|
|
171,344 |
|
Total current assets |
$ |
1,674,901 |
|
|
$ |
1,463,074 |
|
Noncurrent assets - external(1) |
|
10,409,213 |
|
|
|
10,869,745 |
|
Noncurrent assets - due from consolidated entities outside of Obligor Group |
|
305,457 |
|
|
|
92,494 |
|
Total noncurrent assets |
$ |
10,714,670 |
|
|
$ |
10,962,239 |
|
Total current liabilities |
$ |
799,539 |
|
|
$ |
904,811 |
|
Total noncurrent liabilities |
$ |
10,485,945 |
|
|
$ |
10,733,488 |
|
Noncontrolling interests |
$ |
6,391 |
|
|
$ |
6,250 |
|
(1) |
Excludes Nexstar Broadcasting’s equity investments of $1.307 billion and $1.477 billion as of June 30, 2020 and December 31, 2019, respectively, in unconsolidated investees. These unconsolidated investees do not guarantee the 5.625% Notes due 2024 and 5.625% Notes due 2027. For additional information on equity investments, refer to Note 6 to our Condensed Consolidated Financial Statements. |
Summarized Statements of Operations Information for the Obligor Group (in thousands):
|
Six Months Ended |
|
|
|
June 30, 2020 |
|
|
Net revenue - external |
$ |
1,960,219 |
|
Net revenue - from consolidated entities outside of Obligor Group |
|
14,455 |
|
Total net revenue |
|
1,974,674 |
|
Costs and expenses - external |
|
1,434,477 |
|
Costs and expenses - to consolidated entities outside of Obligor Group |
|
40,221 |
|
Total costs and expenses |
|
1,474,698 |
|
Income from operations |
$ |
499,976 |
|
Net income |
$ |
229,577 |
|
Net income attributable to Obligor Group |
$ |
229,577 |
|
Income on equity method investments |
$ |
25,510 |
|
46
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, and income taxes. We base our estimates on historical experience and on various other assumptions that we believe to be reasonable under the circumstances, including the effects of the COVID-19 pandemic on our estimates and assumptions, 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, 2019. Management believes that as of June 30, 2020, there has been no material change to this information.
Recent Accounting Pronouncements
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.
47
ITEM 3. |
Quantitative and Qualitative Disclosures About Market Risk |
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, 2019.
The term loan borrowings at June 30, 2020 under the Company’s senior secured credit facilities bear interest rates ranging from 1.91% to 2.91%, 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 June 30, 2020 level, the Company’s annual interest expense would increase and cash flow from operations would decrease by approximately $54.4 million, based on the outstanding balances of the Company’s senior secured credit facilities as of June 30, 2020. An increase of 50 basis points in LIBOR would result in a $27.2 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 $8.8 million. Since the onset of the COVID-19 pandemic, LIBOR has dropped significantly, and may be more volatile in the future, which could potentially impact our total interest expense. Our 5.625% Notes due 2024 and 5.625% Notes due 2027 are fixed rate debt obligations and therefore are not exposed to market interest rate changes. As of June 30, 2020, 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. However, the COVID-19 pandemic has created great uncertainty about the path of the economy and society in the years ahead. Recent supply and demand shocks and dramatic changes in fiscal policy may lead to higher levels of inflation in future periods.
ITEM 4. |
Controls and Procedures |
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 June 30, 2020, 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. Nexstar has not experienced any significant impact to its internal controls over financial reporting despite the fact that most of its employees are working remotely due to the COVID-19 pandemic. Nexstar is continually monitoring and assessing the COVID-19 situation on its internal controls to minimize the impact on their design and operating effectiveness.
48
PART II. OTHER INFORMATION
ITEM 1. |
Legal Proceedings |
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. See Part I, Item 1, Note 15, “Commitments and Contingencies” for detailed discussion of ongoing litigation.
ITEM 1A. |
Risk Factors |
Except as set forth below, as of June 30, 2020, there have been no material changes to the risk factors that were previously disclosed in Item 1A in the Company’s Annual Report on Form 10-K for the year ended December 31, 2019 filed with the SEC on March 2, 2020. We have also updated the risk factor related to COVID-19 pandemic that was previously identified in the first quarter of 2020 as follows:
Risks Related to Our Operations
Our business, results of operations, financial condition, cash flows and stock price have been and may continue to be adversely affected by pandemics, epidemics or other public health emergencies, such as the recent outbreak of COVID-19.
Our business, results of operations, financial condition, cash flows and stock price have been and may continue to be adversely affected by the COVID-19 outbreak. In March 2020, the World Health Organization characterized COVID-19 as a pandemic, and the President of the United States declared the COVID-19 outbreak a national emergency. The outbreak has resulted in governments in the U.S. and around the world implementing increasingly stringent measures to help control the spread of the virus, including quarantines, “shelter in place” and “stay at home” orders, travel restrictions, business curtailments, school closures, and other measures.
We are considered an essential industry, as defined by the U.S. Department of Homeland Security. Although we have continued to operate our facilities to date consistent with federal guidelines and state and local orders, the outbreak of COVID-19 and any preventive or protective actions taken by governmental authorities have had and may continue to have a material adverse effect on our workforce and operations, customers (e.g. advertisers and advertising agencies) and supply chain. The impact of COVID-19 significantly reduced the demand for television advertising in the second quarter of 2020 and has had, and may continue to have, a material adverse impact on our financial condition, results of operations and cash flows in the second half of 2020 and/or in the future. The extent to which COVID-19 may adversely impact our business in the future depends on future developments, which are highly uncertain and unpredictable, depending upon the severity and duration of the outbreak and the effectiveness of actions in the United States taken to contain or mitigate its effects. Any resulting financial impact cannot be estimated reasonably at this time, but may materially adversely affect our business, results of operations, financial condition and cash flows. Even after the COVID-19 pandemic has subsided, we may experience materially adverse impacts to our business due to any resulting economic recession or depression. Additionally, concerns over the economic impact of COVID-19 have caused extreme volatility in financial and other capital markets, which has and may continue to adversely impact our stock price and our ability to access capital markets.
Our liquidity could also be negatively impacted if these conditions continue for a significant period of time and we may be required to pursue additional sources of financing to obtain working capital to meet our business operating requirements, our capital expenditures and to continue to service our debt. Capital and credit markets have been disrupted by the crisis and our ability to obtain any required financing on reasonable terms or at all is not guaranteed and largely dependent upon evolving market conditions and other factors. Depending on the continued impact of the crisis, further actions may be required to improve the Company’s cash position, working capital and capital structure. Our credit rating could also be negatively affected, which could also impact our liquidity, our financial condition and our ability to obtain financing.
A sustained economic downturn may also result in the carrying values of our major assets, including goodwill, indefinite-lived intangible assets, long-lived assets and equity investments exceeding their fair value, which may require us to recognize an impairment to those assets. A sustained downturn in the financial markets and related pension asset values may have the effect of increasing our pension funding obligations in order to ensure that our qualified pension plans continue to be adequately funded, which may divert cash flow from other uses.
To the extent the COVID-19 pandemic adversely affects our business and financial results, it may also have the effect of heightening many of the other risks described in our Annual Report on Form 10-K for the year ended December 31, 2019, such as those relating to our products and financial performance.
49
ITEM 2. |
Unregistered Sales of Equity Securities and Use of Proceeds |
None.
ITEM 3. |
Defaults Upon Senior Securities |
None.
ITEM 4. |
Mine Safety Disclosures |
None.
ITEM 5. |
Other Information |
None.
50
ITEM 6. |
Exhibits |
Exhibit No. |
|
Description |
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 June 30, 2020 from this Quarterly Report on Form 10-Q, formatted in iXBRL (Inline eXtensible Business Reporting Language).* |
104 |
|
Cover Page Interactive Data File (formatted as Inline XBRL and contained in Exhibit 101). |
* |
Filed herewith |
51
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.
NEXSTAR MEDIA GROUP, INC. |
||
|
|
|
|
|
/S/ PERRY A. SOOK |
By: |
|
Perry A. Sook |
Its: |
|
President and Chief Executive Officer (Principal Executive Officer) |
|
|
|
|
|
/S/ THOMAS E. CARTER |
By: |
|
Thomas E. Carter |
Its: |
|
Chief Financial Officer (Principal Accounting and Financial Officer) |
Dated: August 6, 2020